<PAGE>
As filed with the Securities and Exchange Commission on December 21, 1999.
File No. 333-87885
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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PRE-EFFECTIVE
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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TELAXIS COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 3679 04-2751645
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
20 Industrial Drive East
South Deerfield, MA 01373-0109
(413) 665-8551
(Address, including ZIP code, and telephone number, including area code, of
registrant's principal executive offices)
John L. Youngblood
President and Chief Executive Officer
TELAXIS COMMUNICATIONS CORPORATION
20 Industrial Drive East
South Deerfield, MA 01373-0109
(413) 665-8551
(Name, address, including ZIP code, and telephone number, including area code,
of agent for service)
Copies to:
DAVID L. LOUGEE, ESQ. WILLIAM R. KOLB, ESQ.
JEFFREY L. DONALDSON, ESQ. JOHN D. HANCOCK, ESQ.
Mirick, O'Connell, DeMallie & Lougee, Foley, Hoag & Eliot llp
llp One Post Office Square
100 Front Street Boston, MA 02109
Worcester, Massachusetts 01608-1477 (617) 832-1000
(508) 791-8500
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed
maximum Amount of
Title of each class of aggregate registration
securities to be registered offering price fee
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<S> <C> <C>
Common Stock, $.01 par value...................... $73,600,000 $21,682.00(1)
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</TABLE>
(1) A fee of $20,141.10 was paid with the initial filing of this Registration
Statement with the Commission on September 27, 1999. A supplemental fee of
$1,540.90 is being paid in connection with this filing.
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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 this 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>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 21, 1999
4,000,000 Shares
[Logo of Telaxis Communications Corporation]
Common Stock
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Prior to this offering, there has been no public market for our common stock.
The initial public offering price of the common stock is expected to be between
$14.00 and $16.00 per share. We have applied to list our common stock on The
Nasdaq Stock Market's National Market under the symbol "TLXS."
The underwriters have an option to purchase a maximum of 600,000 additional
shares to cover over-allotments of shares.
Investing in our common stock involves risks. See "Risk Factors" on page 6.
<TABLE>
<CAPTION>
Underwriting
Discounts and Proceeds to
Price to Public Commissions Telaxis
--------------- ------------- -----------
<S> <C> <C> <C>
Per share.................................. $ $ $
Total...................................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about , 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston
Banc of America Securities LLC
CIBC World Markets
The date of this prospectus is , 2000
<PAGE>
[Graphic depiction of our point-to multipoint architecture showing a picture of
our access hub equipment and a picture of our customer premises equipment. The
graphic shows hub equipment installed on a building sending and receiving
information to and from customer premises equipment installed at a home, a small
business, a multiple dwelling unit and institutions. The graphic contains the
heading "Addressing the demand for broadband access" and the subheading
"Enabling high-speed Internet access and electronic commerce."]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 6
Special Note Regarding Forward-
Looking Statements................. 14
Use of Proceeds..................... 15
Dividend Policy..................... 15
Capitalization...................... 16
Dilution............................ 18
Selected Financial Data............. 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 20
Business............................ 29
</TABLE>
<TABLE>
<CAPTION>
Page
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<S> <C>
Management....................... 40
Material Relationships and
Related-Party Transactions...... 48
Principal Stockholders........... 51
Description of Capital Stock..... 53
Shares Eligible for Future Sale.. 57
Underwriting..................... 59
Notice to Canadian Residents..... 61
Legal Matters.................... 62
Experts.......................... 62
Where You Can Find More
Information..................... 62
Index to Financial Statements.... F-1
</TABLE>
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You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
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Dealer Prospectus Delivery Obligation
Until , 2000 (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
is in addition to the dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to its unsold allotments or subscriptions.
------------
"Telaxis Communications," "Telaxis" and the Telaxis logo are our trademarks.
All other trademarks or service marks appearing in this prospectus are
trademarks or service marks of the respective companies that own them.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus carefully.
Telaxis Communications Corporation
We develop and supply high-speed, or broadband, wireless access equipment
used by network service providers to deliver integrated voice, video and data
services to business and residential subscribers. Our products provide a high
performance alternative to other access technologies, such as traditional
copper wires, digital subscriber lines and cable modems, that connect the
network service provider and the subscriber. Our products enable high-speed
Internet access, electronic commerce, remote access, telecommuting and
extensions of corporate networks to branch offices.
Our product line consists of wireless transmitter and receiver equipment
that is installed outdoors in a circular geographic service area, or cell. Each
cell has a hub at its center that transmits and receives network traffic to and
from customer premises equipment, or CPE units, installed at multiple
subscriber locations. This cell-based arrangement is commonly referred to as
point-to-multipoint architecture. Using our point-to-multipoint products,
network service providers can enter markets quickly and economically, and then
expand their networks by adding CPE units as the number of subscribers grows.
We have developed two families of broadband point-to-multipoint wireless
access products. Our modular hubs and CPE units can be rapidly tailored for
competitive site demonstrations and initial commercial deployments. These
modular products address a network service provider's need to offer new
services and enter new markets quickly. Our planar hubs and CPE units, based on
a printed circuit board design, can be mass-produced using low-cost, highly
automated manufacturing techniques. These planar products address a network
service provider's need for cost-effective deployment to many subscribers.
We sell our products primarily to network system integrators, such as
Newbridge Networks and Motorola, which include our products in broadband
wireless systems sold to network service providers. Our products have been
successfully demonstrated at more than 40 sites worldwide over the last four
years. We believe this experience is unmatched by any other supplier of
broadband point-to-multipoint wireless access equipment. As a result of these
demonstrations, our products have been selected, either directly or by network
system integrators, for commercial deployment by network service providers,
including:
. American Wireless
. Korea Telecom
. BellSouth Movicom
. Maxlink Communications
. Telenordia
. Formus
Our objective is to be the leading developer and supplier of broadband
point-to-multipoint wireless access equipment for use by network service
providers worldwide. Our strategy to accomplish this objective is to:
. Penetrate the global market with our two product families
. Capitalize upon our early customer acceptance
. Expand strategic relationships with network system integrators
. Reduce product costs while increasing performance and adding
functionality
. Leverage technology partnerships
. Establish brand identity
3
<PAGE>
Our principal executive offices and manufacturing facilities are located at
20 Industrial Drive East, South Deerfield, Massachusetts 01373-0109. Our
telephone number is (413) 665-8551. Our web site is located at
www.telaxiscomm.com. Information contained in our web site is not incorporated
by reference into this prospectus, and you should not consider information
contained in our web site as part of this prospectus. Our company was
incorporated in Massachusetts in 1982.
The Offering
Common stock offered..............
4,000,000 shares
Common stock outstanding after
this offering.................... 15,271,426 shares
Use of proceeds...................
For general corporate purposes and for
potential acquisitions.
Proposed Nasdaq National Market TLXS
symbol...........................
The number of shares to be outstanding after the offering is based on the
number of shares of common stock outstanding as of September 30, 1999 (as
adjusted to give retroactive effect to a 1 for 2 reverse stock split approved
by our stockholders and effective on December 16, 1999) and gives effect to the
conversion of all outstanding shares of our preferred stock into 10,488,440
shares of common stock upon the closing of this offering. This number excludes:
. 1,720,427 shares that we may issue upon the exercise of options
outstanding as of September 30, 1999 at a weighted average exercise
price of $1.62 per share
. 2,327,534 shares available for issuance upon the exercise of options
which have been or may be granted after September 30, 1999 under our
active stock plans
. 1,229,695 shares that we may issue upon the exercise of warrants
outstanding as of September 30, 1999 at a weighted average exercise
price of $1.18 per share
4
<PAGE>
Summary Financial Data
(in thousands, except per share data)
The following tables summarize our financial data. The statement of
operations data reflect only our continuing operations. You should read our
financial statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The pro forma balance sheet data reflect
the conversion of our currently outstanding redeemable preferred stock into
common stock upon the closing of this offering. The pro forma as adjusted
balance sheet data reflect our sale of 4,000,000 shares of common stock in this
offering at an assumed initial public offering price of $15.00 per share, after
deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
-------------------------- -----------------------
1996 1997 1998 1998 1999
------- ------- -------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Sales...................... $ 201 $ 1,733 $ 2,386 $ 1,447 $ 5,504
Gross margin (loss)........ (306) (1,022) (5,131) (1,873) 401
Operating loss............. (1,829) (6,726) (13,172) (7,932) (5,441)
Loss from continuing
operations................ $(2,239) $(6,712) $(11,253) $(7,076) $(5,947)
Basic and diluted loss per
share from
continuing operations..... $ (4.15) $(14.16) $ (22.87) $(14.38) $(11.14)
Shares used in computing
basic and diluted
loss per share............ 540 474 492 492 534
Pro forma basic and diluted
loss per share from
continuing operations(1).. $ (1.78) $ (0.76)
Shares used in computing
pro forma basic
and diluted loss per
share(1).................. 6,319 7,833
</TABLE>
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(1) For an explanation of these computations, see Note 1 to our financial
statements.
<TABLE>
<CAPTION>
September 30, 1999
-----------------------------------
Pro Forma
Actual Pro Forma As Adjusted
----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................. $ 12,158 $12,158 $66,958
Working capital........................... 12,372 12,372 67,172
Total assets.............................. 25,958 25,958 80,758
Long-term debt and capital lease
obligations, net of current portion...... 1,602 1,602 1,602
Redeemable preferred stock................ 47,793 -- --
Total stockholders' (deficit) equity...... (31,399) 16,394 71,194
</TABLE>
Except where we state otherwise, the information we present in this
prospectus:
. reflects the discontinuation of our millimeter-wave products business
segment
. reflects the amendment of our charter to increase the authorized number
of shares of common stock to 100,000,000 shares and change our name to
"Telaxis Communications Corporation" from "Millitech Corporation"
. reflects a one for two reverse stock split of our common stock effective
December 16, 1999
. assumes that the underwriters do not exercise their option to purchase
600,000 additional shares after the closing of this offering
5
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk. The risks and
uncertainties described below are not the only ones that we face. Additional
risks and uncertainties not presently known to us or that we currently believe
are immaterial also may impair our business operations. If any of the following
risks occurs, our business, operating results and financial condition could be
seriously harmed. In addition, the trading price of our common stock could
decline due to any of these risks, and you may lose all or part of your
investment.
Risks Related To Our Business
We have incurred substantial losses and may not be profitable in the future.
Our continuing operations have not achieved profitability. We cannot predict
whether we will become profitable. Our failure to achieve profitability within
the time frame that investors expect may cause the market price of our common
stock to decline. We had losses from continuing operations of $5.9 million in
the nine months ended September 30, 1999, $11.3 million in 1998 and $6.7
million in 1997. As a result of losses from continuing and discontinued
operations, at September 30, 1999, we had an accumulated deficit of $32.9
million. We have generated relatively small amounts of product sales. We do not
believe that our sales growth rates are sustainable because those rates are
calculated from a small revenue base. In addition, we intend to increase
expenditures in all areas, including manufacturing and engineering, research
and development, and sales and marketing, in order to execute our business
strategy. As a result, we expect to continue to incur significant quarterly
losses for at least the next several quarters.
Our sales and operating results in future periods are likely to fluctuate
significantly and may fail to meet or exceed the expectations of securities
analysts or investors, causing our stock price to fall.
Our quarterly sales and operating results are difficult to predict and may
continue to fluctuate significantly from quarter to quarter. If our quarterly
sales or operating results fall below the expectations of securities analysts
or investors, the price of our common stock could fall substantially.
Our quarterly results may fluctuate for several reasons, including the
following:
. the timing and size of orders for our products
. the mix of our product sales, which we expect will shift over time
generally toward our less profitable customer premises equipment units
. the hiring and loss of personnel, particularly in manufacturing and
sales and marketing, including significant recruiting bonuses or other
hiring expenses
. our lengthy sales cycle, which typically ranges from six to 18 months,
making it difficult for us to predict our future business operations and
make plans for the future
. our manufacturing capacity constraints and our ability to fulfill orders
. the timing of our investments in additional manufacturing capacity
. unforeseen additional charges related to our discontinued operations
6
<PAGE>
We have only recently focused on the broadband point-to-multipoint wireless
access market and, as a result, it is difficult to predict our future prospects
in this market.
Historically, our operations focused on a business segment that we
discontinued in August 1999. We classify the results of that segment as a
discontinued operation in our financial statements. We shipped our first
prototype broadband point-to-multipoint wireless access equipment for trial in
1995. However, the commercial market for these products did not emerge until
recently. We received the first volume order for our broadband point-to-
multipoint wireless access products in June 1999. Accordingly, you have limited
financial data that you can use to evaluate our future prospects in the
broadband point-to-multipoint wireless access market. You should evaluate our
prospects in light of the risks, expenses and challenges we will encounter
because of our recent focus on this market.
We depend upon a small number of network system integrators and the loss of one
or more of them would limit our ability to generate sales.
We depend on a small number of network system integrators to market, sell,
install, finance and support broadband point-to-multipoint wireless access
systems that include our products. Our network system integrators' failure to
accomplish these tasks successfully would harm our sales and operating results.
One network system integrator, Newbridge Networks, accounted for 81% of our
sales in the nine months ended September 30, 1999 and Newbridge Networks,
Convergence Communications and Nexsatel accounted for 68% of our sales in 1998.
These sales related primarily to site demonstrations and initial commercial
deployments. We have no long-term purchase commitments or exclusive purchase
agreements with these or any other customers. Because there are a relatively
small number of network system integrators with the resources and technical
expertise necessary to offer broadband point-to-multipoint wireless access
systems, and because these network system integrators extensively test and
evaluate products such as ours before making a purchase decision, we may be
unable to replace our network system integrators quickly. Moreover, because we
may be able to supply only a few network system integrators, we may be unable
to reduce our dependence on a few customers. Our network system integrators
could stop purchasing products from us because our products do not meet their
needs, because they cannot sell broadband point-to-multipoint wireless access
solutions profitably or for other reasons, such as a corporate reorganization,
acquisition or other transaction that alters their strategic focus. Newbridge
Networks has recently publicly disclosed that it has deployed a comprehensive
strategic action plan which may include the sale of the company. We do not
control our network system integrators and have little, if any, influence over
their strategic decisions. Those decisions could limit our prospects in ways we
cannot predict. If our customers reduce orders for our products, we could lose
sales and suffer damage to our reputation in the industry.
The failure of our network system integrators to sell broadband point-to-
multipoint wireless access solutions that include our products would harm our
sales and operating results.
Even if our products meet all of our network system integrators' needs,
other factors may impede the success of their broadband point-to-multipoint
wireless access solutions. For example, installation costs may be high and
difficult to reduce. In addition, our network system integrators may not have
or use the financial, marketing and other resources necessary to ensure that
their solutions will succeed in the marketplace. For example, network service
providers may insist that network system integrators provide extensive
financing for the deployment of large broadband point-to-multipoint wireless
access networks, and our network system integrators may be unwilling or unable
to provide the necessary financial resources. Without providing financing, our
network system integrators may be unable to sell systems containing our
products, which would harm our sales and operating results.
We may not be able to manufacture our products as quickly as our customers
require, which could cause us to lose sales.
Currently, we are unable to manufacture products as quickly as our customers
require. This manufacturing constraint could cause us to lose sales, damage our
reputation, incur financial liabilities and jeopardize our long-term prospects.
If we receive any substantial order in the near future, we may be unable to
fulfill the order
7
<PAGE>
on a timely basis. We currently have a single line of assembly, and equipment
downtime at any stage of the assembly process would halt production. We believe
we will need to build additional manufacturing capacity in the near future.
We have only limited experience dealing with the type of highly specialized,
third-party manufacturers we will need to engage, and our failure to obtain
satisfactory performance from third-party manufacturers could cause us to lose
sales.
We believe we will need to engage third-party manufacturers to supplement
our manufacturing capacity. Few, if any, third-party manufacturers have the
technical capabilities to meet our quality standards and production goals.
Therefore, it may be difficult and time-consuming to identify and engage an
appropriate third-party manufacturer. Any third-party manufacturer we engage
may not perform to our expectations. We will have little, if any, control over
their performance. Their failure to meet our expectations in any respect could
cause us to lose sales and harm our reputation. Moreover, we have limited
experience dealing with third-party manufacturers and may encounter unforeseen
problems that are costly, time-consuming and difficult to resolve. If we are
unable to engage a third-party manufacturer, we will need to build additional
manufacturing facilities of our own.
Our products include single-source components, and our inability to obtain
these components would halt production and could hurt our sales and operating
results.
We currently purchase a number of important components, including electronic
filters, semiconductor devices, circuit boards, frequency references and
housings, from single-source suppliers for which alternative sources are not
readily available. Any delay or interruption in the supply of these components
could impair our ability to deliver our products and could reduce our sales.
Any of our single-source suppliers could enter into exclusive agreements with
or be acquired by our competitors, increase their prices, refuse to sell their
products, discontinue products or go out of business. Even if alternative
suppliers are available to us, identifying them is difficult and time-
consuming, and they may not meet our quality standards. We may not be able to
obtain sufficient quantities of these components on the same or substantially
the same terms. Consolidations among our suppliers could result in other sole-
source supply situations. An increase in the cost of these components could
make our products less competitive and lower our margins.
As our customers enter new markets, we sometimes have to adapt our products
rapidly to the frequency and regulatory requirements that exist in those
markets, and we may incur significant costs making the necessary modifications.
Each of our products is designed for a specific range of frequencies.
Because different governments license different portions of the frequency
spectrum for the broadband wireless access market, and because network service
providers license a multitude of specific frequencies, we sometimes have to
adapt our products rapidly to use different frequencies. This design process
can be difficult and time-consuming, and could therefore increase our costs and
cause delays in the delivery of products to our customers.
We may be unable to achieve the continuing cost reductions and technological
improvements required for our products to remain competitive.
We expect that market conditions, particularly falling prices for competing
broadband access solutions, will force us to reduce our prices over time. If we
do not continue to reduce our product costs, we will continue to incur
operating losses. In order to reduce product costs, we must use low-cost,
automated manufacturing techniques, increase manufacturing volume and improve
yield. Low-cost automated manufacturing of products such as ours has not been
demonstrated to be feasible in high volumes. We may not have and may not be
able to acquire the experience, technical know-how and other resources to
achieve these goals.
Our products have been purchased primarily by network system integrators for
site demonstrations and for sales to network service providers for initial
commercial deployments. Before our network system integrators commit to future
orders for our products, they may establish additional product specifications,
manufacturing parameters or other conditions of sale that we cannot meet. Our
failure or unwillingness to meet those specifications, parameters or conditions
could cause us to lose sales.
8
<PAGE>
We expect to expand our operations significantly, and our failure to manage our
expansion could harm our business.
We are rapidly and significantly expanding our operations, including the
number of our employees, the geographic scope of our activities and our product
offerings. Our failure to manage growth effectively could harm our business.
This expansion has placed a significant strain on all of our resources. To
manage our growth, we must hire, train and manage significant numbers of
qualified employees, particularly engineering, sales, marketing and
manufacturing personnel. In addition, we are reassigning or retraining
approximately 20 employees from our discontinued operations to work in our
continuing operations and we are converting facilities from our discontinued
operations for use in our continuing operations. We expect that this hiring,
training and conversion process will be difficult and time-consuming.
We expect to continue to derive a substantial portion of our sales from
international sources, and difficulties associated with international
operations could harm our business.
We sell substantially all of our products to domestic and foreign network
system integrators, which offer systems including our products to network
service providers on a global basis. We believe our products are primarily used
by network service providers outside the United States. Sales outside the
United States frequently involve additional risks and difficulties, including:
. licenses, tariffs and other trade barriers imposed on products such as
ours
. political and economic instability
. compliance with a wide variety of complex laws and treaties relating to
telecommunications equipment
If our network system integrators suffer losses as a result of any of these
factors in connection with foreign deployments, they could seek to renegotiate
terms or otherwise pass those losses on to us. Either outcome could cause our
operating results to suffer.
The loss of John Youngblood or any of our other executive officers or other key
employees could harm our business.
Our executive officers and key employees and in particular John Youngblood,
our President and Chief Executive Officer, are crucial to our future success,
and the loss of their services could seriously impair our ability to implement
our business plan successfully. If we lost the services of any of these
individuals, we might lack needed leadership, experience, industry expertise
and technical expertise, and we would have to devote substantial resources to
finding a replacement. Until we found a suitable replacement, our management
team would be incomplete, which could harm our business.
Our future success will depend in part on our ability to protect our
proprietary product and manufacturing process designs, and if we do not enforce
and protect our intellectual property, we could lose any competitive advantage
we have.
Our success depends to a significant degree upon the preservation and
protection of our product and manufacturing process designs and other
proprietary technology. Our intellectual property rights, and our ability to
enforce those rights, may be inadequate to prevent others from using our
technology or substantially similar technology they may independently develop.
The use of that technology by others could eliminate any competitive advantage
we have, cause us to lose sales and otherwise harm our business. To protect our
proprietary technology, we generally limit access to our technology, treat
portions of our technology as trade secrets and obtain confidentiality or non-
disclosure agreements from persons with access to our technology. We have also
obtained and applied for patents in the United States and other countries, and
we rely on protections available under copyright and trademark law. These steps
may be inadequate to provide the protection we need. A significant portion of
our proprietary technology is know-how, and employees with know-how may depart
before transferring their know-how to other employees. Moreover, the laws of
other countries where we market our products may afford even less protection
for our intellectual property. If we resort to legal proceedings to enforce our
intellectual property rights, the proceedings could be burdensome and costly,
even if we were to prevail.
9
<PAGE>
Claims by others that we have violated their intellectual property rights could
prevent the sale of our products, cause us to pay damages and otherwise harm
our business.
If we were to discover that any of our products violated the intellectual
property rights of a third party, we might be unable to redesign our product to
avoid violating their rights, and we might be unable to obtain a license on
commercially reasonable terms to use their intellectual property. We may be
prevented from continuing to sell that product, which could cause us to lose
sales. For instance, we have received a letter claiming that we may owe patent
license fees for wafers we purchased for research and development purposes not
involving our continuing operations. We do not conduct comprehensive patent
searches to determine whether the technology used in our products infringes any
patents, and any searching we do conduct would not reveal technology covered by
confidential patent applications. Any claim that we infringe or otherwise
violate the intellectual property rights of others could cause us to incur
substantial costs defending against the claim, even if the claim is invalid,
and could distract our management from our business. Furthermore, a party
making a claim could obtain a judgment that requires us to pay substantial
damages. A judgment could also include an injunction or other court order that
could prevent us from selling our products. Any of these events could harm our
business.
RISKS RELATED TO OUR INDUSTRY
The broadband point-to-multipoint wireless access industry is new and its
future is uncertain. If significant demand for this technology does not
develop, our business will be harmed.
Broadband point-to-multipoint wireless access technology is new and unproven
in the marketplace. This technology may prove unsuitable for widespread
commercial deployment, in which case it is unlikely we could generate enough
sales to obtain and sustain profitability. Many factors will influence the
success or failure of broadband wireless access technology, including:
. its capacity to handle growing demands for faster transmission of
increasing amounts of video, voice and data
. its cost-effectiveness and performance compared to other forms of
broadband access, whose prices and performance continue to improve
. its reliability and security
. whether the products can be manufactured in sufficient volume
. its suitability for a sufficient number of geographic regions
. the availability of sufficient frequencies for network service providers
to deploy products at commercially reasonable rates
. the availability of sufficient site locations for network service
providers to install products at commercially reasonable rates
. safety and environmental concerns regarding broadband wireless
transmissions
Many competing technologies may serve our target market, and if the broadband
point-to-multipoint technology upon which our products is based does not
succeed as a solution for broadband access, we would not be able to sustain or
grow our business.
Broadband point-to-multipoint wireless access solutions are also competing
with other high-speed solutions such as digital subscriber lines, cable, fiber,
other high-speed wire, satellite and point-to-point wireless technologies. Many
of these alternative technologies can take advantage of existing installed
infrastructure and have achieved significantly greater market acceptance and
penetration than broadband point-to-multipoint wireless access technologies.
Moreover, current broadband point-to-multipoint wireless access technology has
inherent technical limitations that may inhibit its widespread adoption in many
areas, including the need for line-of-sight installation and reduced
communication distance in bad weather. We expect broadband point-to-
10
<PAGE>
multipoint access technologies to face increasing competitive pressures from
both current and future alternative technologies. In light of these factors,
many network service providers may be reluctant to invest heavily in broadband
point-to-multipoint wireless access solutions and, accordingly, the market for
these solutions may fail to develop or may develop more slowly than we expect.
Either outcome would harm our business.
The broadband point-to-multipoint wireless access industry is intensely
competitive, and our failure to compete effectively could hurt our sales and
operating results.
The market for broadband point-to-multipoint wireless access equipment is
rapidly evolving and highly competitive. A number of large telecommunications
equipment suppliers, such as Alcatel, Ericsson and Nortel Networks, as well as
a number of smaller companies, have developed or are developing products that
compete with ours. Many of our competitors are substantially larger than we are
and have significantly greater financial, sales, marketing, distribution,
technical, manufacturing and other resources. These competitors may make
strategic acquisitions or establish cooperative relationships among themselves
or with third parties to increase their ability to gain market share rapidly.
We expect to face increasing competitive pressures from both current and future
competitors in the markets we serve.
Compliance with domestic and foreign laws, regulations and industry standards
may be difficult and may harm our sales and results of operations.
If our products do not comply with all of the legal and regulatory
requirements and standards that apply in a jurisdiction, we may face liability
for any violation and may be unable to offer our products in that jurisdiction.
These requirements and standards vary widely among jurisdictions, and we may be
unable to obtain necessary approvals for the marketing and sale of our
products, which could cause us to lose sales or could otherwise render our
business unprofitable. In the United States, the Telecommunications Act of 1996
significantly altered the regulatory environment for the communications
industry, and both the United States Congress and the Federal Communications
Commission continue to monitor and respond to the effects of that legislation.
For example, the FCC is considering changes to its regulations relating to
access to telephone lines, the ability of third parties to install equipment at
a network service provider's central location and the compatibility
requirements for equipment that runs on telephone lines. A reversal of the
general trend toward deregulation in the telecommunications industry could harm
network service providers, and thereby harm our business.
RISKS RELATED TO THIS OFFERING AND OWNERSHIP OF OUR COMMON STOCK
The market price of our common stock is likely to be volatile and you may not
be able to resell your shares at or above the initial public offering price.
The market price of our common stock could fluctuate significantly for many
reasons, including the following:
. our financial performance or the performance of our competitors
. technological innovations or other trends in our industry
. successes or failures at significant product evaluations or site
demonstrations
. the introduction of new products by us or our competitors
. the arrival or departure of key personnel
. acquisitions, strategic alliances or joint ventures involving us or our
competitors
. changes in estimates of our performance or recommendations by securities
analysts
. decisions by major participants in the communications industry
. decisions by investors to de-emphasize investment categories, groups or
strategies that include our company or industry
. market conditions in the industry, the financial markets and the economy
as a whole
11
<PAGE>
In addition, the stock market has recently experienced extreme price and
volume fluctuations. These fluctuations are often unrelated to the operating
performance of particular companies. These broad market fluctuations may cause
declines in the market price of our common stock. When the market price of a
company's stock drops significantly, stockholders often institute securities
class action lawsuits against the company. A lawsuit against us could cause us
to incur substantial costs and could divert the time and attention of our
management and other resources.
Future sales of common stock by our existing stockholders could cause our stock
price to fall.
If our stockholders sell substantial amounts of common stock in the public
market, including shares that we may issue upon the exercise of outstanding
options and warrants, the market price of our common stock could fall. The
perception among investors that these sales will occur could produce the same
effect. After this offering, we will have approximately 15,271,000 shares of
common stock outstanding. The shares we are selling in this offering will be
freely tradeable in the public market. If we take into account the lock-up
agreements executed by our existing stockholders, the remaining shares of
common stock outstanding after this offering will be available for sale in the
public market as follows:
<TABLE>
<CAPTION>
Percent of Total
Shares
Number of Shares Outstanding Date of Availability for Sale
---------------- ---------------- -----------------------------
<C> <C> <S>
% , 2000 (date of this prospectus) to
, 2000 (90 days after the date of this
prospectus)
, 2000 (90 days after the date of this
prospectus) to
, 2000 (180 days after the date of this
prospectus), in some cases under Rule 144
, 2000 (180 days after the date of this
prospectus), in some cases
under Rule 144
At various times after , 2000
</TABLE>
Our underwriters could waive the selling restrictions imposed by the lock-up
agreements at any time, which could accelerate the resale of outstanding shares
of common stock. In addition, at September 30, 1999, there were outstanding
warrants to purchase 1,229,695 shares and options to purchase 1,720,427 shares
not restricted by lock-up agreements. The shares that we may issue upon
exercise of the warrants will become available for sale in the public market
under Rule 144 and the shares that we may issue upon exercise of the options
will become available for sale in the public market upon vesting and after we
file a registration statement covering those shares. We intend to file a
registration statement for this purpose as promptly as practicable after this
offering. In addition, some of our securityholders have rights to require us to
register their shares for resale in the public market. For a more detailed
description, see "Description of Capital Stock--Registration Rights," "Shares
Eligible for Future Sale" and "Underwriting."
We have anti-takeover defenses that could delay or prevent an acquisition of
our company, which could depress our stock price or lessen any premium over
market price that an acquirer might otherwise pay.
Our articles of organization and by-laws and Massachusetts law contain
provisions that might enable our management to resist a takeover of our
company. These provisions could discourage, delay or prevent a change in
control of our company or an acquisition of our company at a price that many
stockholders may find attractive. These provisions may also discourage proxy
contests and make it more difficult for our stockholders to elect directors and
take other corporate actions. The existence of these provisions could limit the
price that investors might be willing to pay in the future for shares of our
common stock. For a description of these provisions, see "Description of
Capital Stock--Anti-takeover Provisions of Massachusetts Law and Our Articles
of Organization and By-Laws."
12
<PAGE>
If we cannot raise additional capital we may need on acceptable terms, we may
not achieve our business goals.
If we do not have sufficient capital to fund our operations, we may be
forced to discontinue product development, reduce our sales and marketing
efforts, forego attractive business opportunities and lose the ability to
respond to competitive pressures. Any of these outcomes could harm our
business. We expect that the net proceeds from this offering, cash on hand and
borrowings under our credit facility will be sufficient to meet our working
capital and capital expenditure needs for at least the next 12 months. After
that, we may need to raise additional funds, and additional financing may not
be available on favorable terms, if at all. We may also require additional
capital to acquire or invest in complementary businesses or products or obtain
the right to use complementary technologies. If we issue additional equity
securities to raise funds, the ownership percentage of our existing
stockholders would be reduced. New investors may demand rights, preferences or
privileges senior to those of existing holders of our common stock.
The net tangible book value of shares purchased in this offering will be
substantially lower than the initial public offering price.
The initial public offering price will significantly exceed the net tangible
book value per share of our common stock. Accordingly, if you purchase common
stock in this offering, you will incur immediate and substantial dilution of
your investment. If outstanding options or warrants are exercised, you will
incur additional dilution.
13
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Business," contains forward-looking statements.
These statements relate to future events or our future financial performance,
and involve known and unknown risks, uncertainties, and other factors that may
cause our actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance
or achievements expressed or implied by these forward-looking statements. These
risks and other factors include those listed under "Risk Factors" and elsewhere
in this prospectus. In some cases, you can identify forward-looking statements
by terminology such as "may," "will," "should," "expects," "intends," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," "continue," or
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 the risks
outlined under "Risk Factors." 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. 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.
14
<PAGE>
USE OF PROCEEDS
We expect to receive net proceeds of approximately $54.8 million from the
sale of 4,000,000 shares of common stock, or approximately $63.2 million from
the sale of 4,600,000 shares if the underwriters exercise their over-allotment
option in full, assuming an initial public offering price of $15.00 per share
and after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us.
We intend to use the net proceeds of this offering primarily for general
corporate purposes. We may also use a portion of the net proceeds to acquire
complementary businesses, products and technologies or to establish joint
ventures that we believe will complement our current or future business.
However, we have no specific plans, agreements or commitments to do so and are
not currently engaged in any negotiations for any acquisition or joint venture.
Pending our use of these proceeds, we will invest the net proceeds in short-
term, interest-bearing, investment-grade securities. The amounts that we
actually expend for general corporate purposes will vary significantly
depending on a number of factors, including future sales growth and the amount
of cash we generate from operations, if any.
DIVIDEND POLICY
We have never declared or paid any cash dividends. We currently intend to
retain any future earnings to fund the development and growth of our business.
In addition, under our credit facilities, we generally cannot pay dividends
without our creditors' consent. Therefore, we currently do not anticipate
paying cash dividends in the foreseeable future.
15
<PAGE>
CAPITALIZATION
The following table presents:
. our actual capitalization as of September 30, 1999
. our pro forma capitalization as of September 30, 1999, after adjustment
for:
(a) the conversion of our currently outstanding redeemable preferred
stock into 10,488,440 shares of common stock upon the closing of
this offering
(b) the amendments of our charter
. our pro forma as adjusted capitalization as of September 30, 1999, which
adjusts for our sale of 4,000,000 shares of common stock at an assumed
initial public offering price of $15.00 per share, after deducting
estimated underwriting discounts and commissions and estimated offering
expenses payable by us
You should read the following table in conjunction with our financial
statements and accompanying notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of September 30, 1999
-----------------------------------
Pro Forma
Actual Pro Forma As Adjusted
----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Lines of credit and current maturities of long-term debt.... $ 1,286 $ 1,286 $ 1,286
======== ======== ========
Current maturities of capital lease obligations............. $ 771 $ 771 $ 771
======== ======== ========
Long-term debt:
Long-term debt, net of current portion.................... $ 1,066 $ 1,066 $ 1,066
Capital lease obligations, net of current portion......... 536 536 536
-------- -------- --------
Total long-term debt, net of current portion............ 1,602 1,602 1,602
-------- -------- --------
Redeemable preferred stock, $.01 par value; issued in
classes A, B, D and E; 22,080,000 total shares authorized
and 20,976,881 total shares issued and outstanding, actual;
no shares authorized, issued or outstanding, pro forma and
pro forma as adjusted...................................... 47,793 -- --
Stockholders' (deficit) equity:
Preferred stock, $.01 par value; 4,500,000 shares authorized
and no shares issued or outstanding, actual, pro forma and
pro forma as adjusted...................................... -- -- --
Common stock, $.01 par value; 36,000,000 shares authorized
and 782,986 shares issued and outstanding, actual;
100,000,000 authorized, pro forma and pro forma as
adjusted; 11,271,426 shares issued and outstanding, pro
forma; 15,271,426 shares issued and outstanding, pro
forma as adjusted........................................ 8 112 152
Additional paid-in capital................................ 1,911 49,600 104,360
Note receivable........................................... (281) (281) (281)
Accumulated deficit....................................... (32,859) (32,859) (32,859)
Unearned compensation..................................... (178) (178) (178)
-------- -------- --------
Total stockholders' (deficit) equity.................... (31,399) 16,394 71,194
-------- -------- --------
Total capitalization.................................... $ 17,996 $ 17,996 $ 72,796
======== ======== ========
</TABLE>
16
<PAGE>
The foregoing information excludes the following shares as of September 30,
1999:
. 1,720,427 shares that we may issue upon the exercise of options
outstanding as of September 30, 1999 at a weighted average exercise price
of $1.62 per share
. 2,327,534 shares available for issuance upon the exercise of options
which have been or may be granted after September 30, 1999 under our
active stock plans
. 1,229,695 shares that we may issue upon the exercise of warrants
outstanding as of September 30, 1999 at a weighted average exercise price
of $1.18 per share
17
<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted by the
difference between the public offering price per share of our common stock and
the pro forma as adjusted net tangible book value per share of our common stock
immediately after this offering. Our pro forma net tangible book value at
September 30, 1999 was approximately $16.4 million, or $1.46 per share of
common stock. Pro forma net tangible book value per share represents total
tangible assets less total liabilities, divided by the pro forma number of
shares of common stock outstanding at September 30, 1999, and assumes the
conversion of our currently outstanding shares of redeemable preferred stock
into 10,488,440 shares of common stock upon the closing of this offering.
Assuming our sale of 4,000,000 shares of common stock at an assumed initial
public offering price of $15.00 per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us, our pro forma as adjusted net tangible book value at September 30, 1999
would have been $71.2 million, or $4.66 per share. This represents an immediate
increase in pro forma net tangible book value of $3.20 per share to existing
stockholders and an immediate dilution of $10.34 per share to new investors, or
approximately 68.9% of the assumed initial public offering price of $15.00 per
share. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $15.00
Pro forma net tangible book value per share at September 30,
1999.......................................................... $1.46
Increase per share attributable to new investors............... 3.20
-----
Pro forma as adjusted net tangible book value per share after the
offering........................................................ 4.66
------
Dilution per share to new investors.............................. $10.34
======
</TABLE>
The following table shows, on a pro forma as adjusted basis at September 30,
1999, the number of shares of common stock purchased from us, the total
consideration paid to us and the average price paid per share by existing
stockholders and by new investors purchasing common stock in this offering,
after adjustment for:
. the conversion of our currently outstanding shares of redeemable
preferred stock into common stock
. our sale of 4,000,000 shares of common stock at an assumed initial
public offering price of $15.00 per share, before deducting estimated
underwriting discounts and commissions and estimated offering expenses
payable by us
<TABLE>
<CAPTION>
Average
Shares Purchased Total Consideration Price
------------------ -------------------- Per
Number Percent Amount Percent Share
---------- ------- ------------ ------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 11,271,426 73.8% $ 48,991,000 44.9% $ 4.35
New investors................... 4,000,000 26.2% 60,000,000 55.1% $15.00
---------- ----- ------------ -----
Total......................... 15,271,426 100.0% $108,991,000 100.0%
========== ===== ============ =====
</TABLE>
This discussion assumes no exercise of any stock options or warrants
outstanding as of September 30, 1999. At that date, there were 1,720,427 shares
that we may issue upon the exercise of outstanding options at a weighted
average exercise price of $1.62 per share and 1,229,695 shares that we may
issue upon the exercise of outstanding warrants at a weighted average exercise
price of $1.18. If holders exercise these outstanding options or warrants,
there will be further dilution of $0.51 per share to new investors.
Additionally, there were 2,327,534 shares available for issuance upon the
exercise of options which have been or may be granted under our active stock
plans after September 30, 1999.
18
<PAGE>
SELECTED FINANCIAL DATA
You should read the following selected financial data with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements and notes appearing elsewhere in this prospectus. The
following statement of operations data reflect only our continuing operations,
which had minimal operating activity during the years ended December 31, 1994
and 1995. The statement of operations data for the years ended December 31,
1996, 1997 and 1998 and the balance sheet data at December 31, 1997 and 1998
are derived from the financial statements and notes audited by
PricewaterhouseCoopers LLP appearing elsewhere in this prospectus. The
statement of operations data for the years ended December 31, 1994 and 1995 and
the balance sheet data as of December 31, 1994, 1995 and 1996 are derived from
financial statements not appearing in this prospectus. The statement of
operations data for the nine months ended September 30, 1998 and September 30,
1999 and balance sheet data as of September 30, 1999 are unaudited. In our
opinion, all necessary adjustments, which consist only of normal recurring
adjustments, have been included to present fairly the unaudited nine-month
results, which should be read with our financial statements and notes appearing
elsewhere in this prospectus. Historical results are not necessarily indicative
of results that may be expected for any future period. We have never declared
or paid any cash dividends.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
-------------------------------------- -----------------------
1994 1995 1996 1997 1998 1998 1999
----- ----- ------- ------- -------- ----------- -----------
(unaudited) (unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Sales................... $ -- $ -- $ 201 $ 1,733 $ 2,386 $ 1,447 $ 5,504
Cost of sales........... -- -- 507 2,755 7,517 3,320 5,103
----- ----- ------- ------- -------- ------- -------
Gross margin (loss)..... -- -- (306) (1,022) (5,131) (1,873) 401
Operating expenses
Research and
development, net..... -- -- 598 3,926 4,993 3,888 3,368
Selling and
marketing............ -- -- 353 667 1,006 619 710
General and
administrative....... -- -- 572 1,111 2,042 1,552 1,717
Stock compensation
cost................. -- -- -- -- -- -- 47
----- ----- ------- ------- -------- ------- -------
Total operating
expenses............ -- -- 1,523 5,704 8,041 6,059 5,842
----- ----- ------- ------- -------- ------- -------
Operating loss.......... -- -- (1,829) (6,726) (13,172) (7,932) (5,441)
Other income (expense).. -- -- (410) (626) 757 (171) (506)
----- ----- ------- ------- -------- ------- -------
Loss from continuing
operations before
income taxes........... -- -- (2,239) (7,352) (12,415) (8,103) (5,947)
Income tax benefit...... -- -- -- (640) (1,162) (1,027) --
----- ----- ------- ------- -------- ------- -------
Loss from continuing
operations............. -- -- $(2,239) $(6,712) $(11,253) $(7,076) $(5,947)
Basic and diluted loss
per share from
continuing operations.. -- -- $ (4.15) $(14.16) $ (22.87) $(14.38) $(11.14)
Shares used in computing
basic and diluted
loss per share......... -- -- 540 474 492 492 534
Pro forma basic and
diluted loss per share
from continuing
operations(1).......... $ (1.78) $ (0.76)
Shares used in computing
pro forma basic
and diluted loss per
share(1)............... 6,319 7,833
</TABLE>
- ---------------------
(1) For an explanation of these computations, see Note 1 to our financial
statements.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------- September 30,
1994 1995 1996 1997 1998 1999
------- ------- ------- -------- -------- -------------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 1,078 $ 1,071 $ 1,213 $ 10,294 $ 2,635 $ 12,158
Working capital......... 3,694 3,962 3,266 8,439 3,271 12,372
Total assets............ 11,597 12,016 10,728 20,059 14,955 25,958
Long-term debt and
capital lease
obligations,
net of current
portion................ 2,385 1,929 3,257 1,690 1,047 1,602
Redeemable preferred
stock.................. 12,467 12,467 12,465 25,425 32,793 47,793
Total stockholders'
deficit................ (7,258) (6,693) (9,560) (14,998) (24,591) (31,399)
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our financial
statements and the accompanying notes.
Overview
We develop and supply broadband point-to-multipoint wireless access
equipment used by network service providers to deliver integrated voice, video
and data services to business and residential subscribers. We sell our products
primarily to network system integrators, which include our products in
broadband wireless systems sold to network service providers. We have developed
two families of broadband point-to-multipoint wireless access products. Our
modular hubs and CPE units can be rapidly tailored for competitive site
demonstrations and initial commercial deployments. These modular products
address a network service provider's need for accelerated time-to-market. Our
planar hubs and CPE units, based on a printed circuit board design, can be
mass-produced using low-cost, highly automated manufacturing techniques. These
planar products address a network service provider's need for cost-effective
deployment to many subscribers.
We commenced operations in 1982 and have derived the significant majority of
our sales from our millimeter-wave products business segment. Millimeter waves
are electromagnetic waves having wavelengths between one and ten millimeters.
In August 1999, we adopted a plan to focus all of our resources on our
broadband point-to-multipoint wireless access business segment and to dispose
of the millimeter-wave products segment. We decided to dispose of this segment
because it would have required us to reallocate financial and management
resources from the more attractive broadband point-to-multipoint wireless
access business segment. As a result, we have presented the operations of the
millimeter-wave products segment as a discontinued operation in our financial
statements. The following management's discussion and analysis focuses on our
ongoing broadband point-to-multipoint wireless access business.
Our first prototype broadband point-to-multipoint wireless access equipment
was evaluated in a trial in 1995. Before receiving our first volume order for
equipment in June 1999, virtually all of our shipments of products were for
site demonstrations and initial commercial deployments. To date, we have
assembled all of our products in-house. We will use third-party manufacturers
to supplement our manufacturing capacity.
We intend to increase expenditures in all areas, including manufacturing and
engineering, research and development, and sales and marketing. These increases
in operating expenses are not always apparent from our historical financial
statements. As our sales continue to grow, our operating expenses as a
percentage of sales will decrease even though we will significantly increase
amounts spent on research and development, selling and marketing, and general
and administrative. This spending will support expansion of our production and
design areas, greater recruiting efforts, and a larger customer support
organization to address the continuing growth in the market for broadband
wireless access equipment.
For the nine months ended September 30, 1999, approximately 84% of our sales
were to customers located outside of the United States, and we expect that
sales to customers located outside of the United States will continue to be
significant. To date, international sales have been denominated solely in U.S.
dollars and, accordingly, we have not been exposed to fluctuations in non-U.S.
currency exchange rates.
20
<PAGE>
Results of Operations
The following table provides continuing operations data as a percentage of
sales for the periods presented. The percentages may not add due to rounding.
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, September 30,
-------------------------- ---------------
1996 1997 1998 1998 1999
-------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Sales.......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.................. 252.2 159.0 315.0 229.4 92.7
-------- ------ ------ ------ ------
Gross margin (loss)............ (152.2) (59.0) (215.0) (129.4) 7.3
Operating expenses
Research and development,
net......................... 297.5 226.5 209.3 268.7 61.2
Selling and marketing........ 175.6 38.5 42.2 42.8 12.9
General and administrative... 284.6 64.1 85.6 107.3 31.2
Stock compensation cost...... -- -- -- -- 0.8
-------- ------ ------ ------ ------
Total operating expenses... 757.8 329.1 337.0 418.7 106.1
-------- ------ ------ ------ ------
Operating loss................. (910.0) (388.1) (552.1) (548.2) (98.9)
Other income (expense)......... (204.0) (36.1) 31.7 (11.8) (9.2)
-------- ------ ------ ------ ------
Loss from continuing operations
before income taxes........... (1,113.9) (424.2) (520.3) (560.0) (108.0)
Income tax benefit............. -- (36.9) (48.7) (71.0) --
-------- ------ ------ ------ ------
Loss from continuing
operations.................... (1,113.9)% (387.3)% (471.6)% (489.0)% (108.0)%
</TABLE>
Nine Months Ended September 30, 1998 and 1999
Sales
Sales increased 280% from $1.5 million for the nine months ended September
30, 1998 to $5.5 million for the nine months ended September 30, 1999. This
increase primarily reflects the increase in sales of our planar products from
$357,000 in 1998 to $4.2 million in 1999.
Cost of Sales
Cost of sales consists of component and material costs, direct labor costs,
warranty costs, overhead related to manufacturing our products and customer
support costs. Cost of sales increased 55% from $3.3 million for the nine
months ended September 30, 1998 to $5.1 million for the nine months ended
September 30, 1999. This increase was attributable primarily to increased
shipments of our planar products. Gross margins were negative 129% for the nine
months ended September 30, 1998 and were 7% for the nine months ended September
30, 1999. This improvement was attributable primarily to increased shipments of
our higher margin planar products and a significant shipment of modular
products at favorable pricing terms.
Research and Development Expenses
Research and development expenses consist primarily of personnel and related
costs associated with our product development efforts. These include costs for
development of products and components, test equipment and related facilities.
Our gross research and development expenses decreased 6% from $4.4 million for
the nine months ended September 30, 1998 to $4.1 million for the nine months
ended September 30, 1999. Of this decrease $300,000 is attributable to the
reassignment of a group of engineers to a customer support function and
$200,000 reflects the elimination of a senior management position. Net of these
changes our research and development costs actually increased by $100,000. Some
of our customers have provided funding to offset our development costs for
specific products. Net of these reimbursements, our research and development
expenses decreased 13% from $3.9 million for the nine months ended September
30, 1998 to $3.4 million for the nine months ended September 30, 1999.
21
<PAGE>
Selling and Marketing Expenses
Selling and marketing expenses consist of employee salaries and benefits,
consultant fees, and expenses for advertising, travel, technical assistance,
trade shows, and promotional and demonstration materials. Selling and marketing
expenses increased 15% from $619,000 for the nine months ended September 30,
1998 to $710,000 for the nine months ended September 30, 1999. We added
personnel to our customer support group which cost approximately $700,000 and
we increased marketing efforts in targeting key accounts. Partially offsetting
the cost of these efforts was approximately $600,000 of savings from the
reduction of senior management and staff as we relocated our sales function
from Texas to Massachusetts. Our selling and marketing expenses as a percentage
of sales decreased from 43% for the nine months ended September 30, 1998 to 13%
for the nine months ended September 30, 1999. This was the result of increasing
sales by 280% while only adding three personnel to our selling and marketing
organization.
General and Administrative Expenses
General and administrative expenses consist primarily of executive,
administrative, human resources, quality assurance, management information
systems and finance related costs. General and administrative expenses
increased 11% from $1.6 million for the nine months ended September 30, 1998 to
$1.7 million for the nine months ended September 30, 1999. In the nine months
ended September 30, 1999, we incurred expenditures of approximately $360,000
for recruiting and relocation, and we also continued spending on our new
management information system. However, these costs were partially offset by
the reassignment of personnel to selling and marketing.
Other Income (Expense)
Other income (expense) consists of interest earned on cash and cash
equivalents offset by interest expense and miscellaneous non-operating
expenses. Total other expense increased 196% from $171,000 for the nine months
ended September 30, 1998 to $506,000 for the nine months ended September 30,
1999. Interest income decreased by $145,000 in 1999 as a result of lower
invested cash balances. Additionally, interest expense increased by $190,000
due to amortization of $267,000 for a discount on subordinated promissory
notes.
Income Tax Benefit
In the nine months ended September 30, 1998, we have recorded an income tax
benefit in continuing operations because the loss from continuing operations
offsets income from discontinued operations. No tax benefit has been recorded
in the nine months ended September 30, 1999 due to the uncertainty in deducting
current losses against future taxable income.
Years Ended December 31, 1996, 1997 and 1998
Sales
Sales increased $1.5 million from $201,000 in 1996 to $1.7 million in 1997.
Sales increased 38% from 1997 to $2.4 million in 1998. The increase in sales
from 1996 to 1997 was attributable to increased sales of modular products as
well as sales of individual modules. The increase in sales from 1997 to 1998
reflects $200,000 from an increase in sales of modular products as well as
$500,000 from sales of our newly-introduced planar products.
Cost of Sales
Cost of sales increased by $2.2 million from $507,000 in 1996 to $2.8
million in 1997. Cost of sales increased $4.8 million from 1997 to $7.5 million
in 1998. The increase in cost of sales from 1996 to 1997 was attributable to
increased shipments of modular products as well as shipments of individual
modules. The increase in cost of sales from 1997 to 1998 was attributable to
increased shipments of modular products as well as shipments of our newly-
introduced planar products. Gross margins were negative 152% in 1996, negative
59% in 1997, and negative 215% in 1998. These negative gross margins resulted
from the inefficiencies of low volume orders designed and manufactured to
encourage site demonstrations of our products and demonstrate the viability of
broadband point-to-multipoint wireless technology. We also developed automated
manufacturing processes and added capacity and personnel in anticipation of
future volume orders for our products. In 1998,
22
<PAGE>
we incurred a charge of $1.1 million to write off obsolete inventory. We
purchased various components and materials for certain equipment designs in
advance of production in order to accelerate development and testing for rapid
product deployment. Higher costs were incurred for low volume purchases and
accelerated deliveries from suppliers to support the accelerated development
schedules. During a review of the value of the total material costs for certain
products compared to the estimated future selling prices, we recorded a reserve
to reduce selected inventory amounts to their expected net realizable value.
While we will continue to periodically review the costs of our materials
compared to the estimated future selling prices, future reserves are not
expected to be significant as the majority of our material purchases are now in
greater quantities and in support of production schedule requirements.
Research and Development Expenses
Our gross research and development expenses increased $3.4 million from
$598,000 in 1996 to $4.0 million in 1997. Gross research and development
expenses increased 50% from 1997 to $6.0 million in 1998. The increase from
1996 to 1997 reflected significant investments to develop our modular products
and adapt them for different frequency ranges. The increase from 1997 to 1998
reflected significant investments to develop our planar products and adapt our
modular products for additional frequency ranges. These activities required us
to substantially increase the size of our research and development staff by
52%, from 29 personnel at the end of 1997 to 44 at the end of 1998. Net of
customer reimbursements, our research and development expenses increased $3.3
million from $598,000 in 1996 to $3.9 million in 1997. Net research and
development increased 27% from 1997 to $5.0 million in 1998.
Selling and Marketing Expenses
Selling and marketing expenses increased 89% from $353,000 in 1996 to
$667,000 in 1997. Selling and marketing expenses increased 51% from 1997 to
$1.0 million in 1998. The increase in selling and marketing expenses from 1996
to 1997 was attributable to our increased efforts to expand our presence in the
broadband wireless access marketplace and initiate contacts with various
network system integrators and network service providers. Approximately
$600,000 of the increase in selling and marketing expenses from 1997 to 1998
was attributable to our hiring of additional key personnel to enhance our
relationships with major customers and prospects. From 1996 through 1998, we
invested significantly in installation and demonstration of our equipment at
various locations worldwide.
General and Administrative Expenses
General and administrative expenses increased 94% from $572,000 in 1996 to
$1.1 million in 1997. General and administrative expenses increased 83% from
1997 to $2.0 million in 1998. The increase from 1996 to 1997 resulted from our
intensified recruiting efforts. Also, travel costs increased, as our executives
worked to promote the company and increase our recognition in the
telecommunications industry. The increase in general and administrative
expenses from 1997 to 1998 was attributable to the reconfiguration of
facilities to expand our manufacturing and engineering operations. In addition,
we began to implement a new integrated financial and management information
system.
Other Income (Expense)
Total other expense increased 53% from $410,000 in 1996 to $626,000 in 1997.
Total other expense changed from $626,000 in expense in 1997 to $757,000 in
income in 1998. The increase in other expense from 1996 to 1997 was
attributable to additional interest incurred on $3 million of subordinated
notes and additional borrowings under our bank line of credit. The change in
other expense from 1997 to other income in 1998 was primarily due to the
recognition of $997,000 in income related to the termination of a development
contract with a customer. Interest expense in 1998 was $210,000 lower than in
1997 due to repayment of the subordinated notes and bank line of credit.
Interest income increased by $193,000 due to proceeds invested from a private
placement completed in October 1997.
Income Tax Benefit
We have recorded an income tax benefit in continuing operations because the
loss from continuing operations offsets income from discontinued operations.
For 1997, the income tax benefit from continuing operations is net of
additional tax expense of $264,000, due to an increase in the valuation
allowance recorded against deferred tax assets.
23
<PAGE>
Quarterly Results of Operations
The following table provides, for the periods presented, continuing
operations data derived from our statement of operations in dollars and as a
percentage of sales. The statement of operations data have been derived from
our unaudited financial statements. In management's opinion, these statements
have been prepared on substantially the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial information for
the periods presented. This information should be read with our financial
statements and notes appearing elsewhere in this prospectus. The operating
results in any quarter are not necessarily indicative of the results that may
be expected for any future period.
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30,
1998 1998 1998 1998 1999 1999 1999
--------- -------- --------- -------- --------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Sales .................. $ 414 $ 623 $ 410 $ 939 $ 1,177 $ 1,585 $ 2,742
Cost of sales .......... 1,164 835 1,322 4,196 1,650 1,162 2,291
------- ------- ------- ------- ------- ------- -------
Gross margin (loss) .... (750) (212) (912) (3,257) (473) 423 451
Operating expenses
Research and
development
expenditures.......... 1,384 1,445 1,567 1,583 1,054 1,548 1,512
Research and
development
reimbursement......... -- -- (508) (478) (120) (306) (320)
------- ------- ------- ------- ------- ------- -------
Research and
development, net .... 1,384 1,445 1,059 1,105 934 1,242 1,192
Selling and marketing
...................... 181 288 149 388 318 164 228
General and
administrative ....... 517 554 481 490 372 636 709
Stock compensation
cost.................. -- -- -- -- -- -- 47
------- ------- ------- ------- ------- ------- -------
Total operating
expenses ............ 2,082 2,287 1,689 1,983 1,624 2,042 2,176
------- ------- ------- ------- ------- ------- -------
Operating loss ......... (2,832) (2,499) (2,601) (5,240) (2,097) (1,619) (1,725)
Other income (expense)
Interest expense ...... (127) (132) (112) (102) (68) (109) (384)
Income from contract
cancellation.......... -- -- -- 997 -- -- --
Interest income ....... 118 66 16 33 17 8 30
------- ------- ------- ------- ------- ------- -------
Total other income
(expense) ........... (9) (66) (96) 928 (51) (101) (354)
------- ------- ------- ------- ------- ------- -------
Loss from continuing
operations before
income taxes .......... (2,841) (2,565) (2,697) (4,312) (2,148) (1,720) (2,079)
Income tax benefit ..... 191 464 372 135 -- -- --
------- ------- ------- ------- ------- ------- -------
Loss from continuing
operations ............ $(2,650) $(2,101) $(2,325) $(4,177) $(2,148) $(1,720) $(2,079)
As a Percentage of
Sales(1):
Sales .................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales .......... 281.2 134.0 322.4 446.9 140.2 73.3 83.6
------- ------- ------- ------- ------- ------- -------
Gross margin (loss) .... (181.2) (34.0) (222.4) (346.9) (40.2) 26.7 16.4
Operating expenses
Research and
development
expenditures ......... 334.3 231.9 382.2 168.5 89.5 97.7 55.1
Research and
development
reimbursement......... -- -- (123.9) (50.9) (10.2) (19.3) (11.7)
------- ------- ------- ------- ------- ------- -------
Research and
development, net .... 334.3 231.9 258.3 117.7 79.4 78.4 43.4
Selling and marketing
...................... 43.7 46.2 36.3 41.3 27.0 10.3 8.3
General and
administrative ....... 124.9 88.9 117.3 52.2 31.6 40.1 25.9
Stock compensation
cost.................. -- -- -- -- -- -- 1.7
------- ------- ------- ------- ------- ------- -------
Total operating
expenses ............ 502.9 367.1 412.0 211.1 138.0 128.8 79.4
------- ------- ------- ------- ------- ------- -------
Operating loss ......... (684.1) (401.1) (634.4) (558.0) (178.2) (102.1) (62.9)
Other income (expense)
Interest expense ...... (30.7) (21.2) (27.3) (10.9) (5.8) (6.9) (14.0)
Income from contract
cancellation ......... -- -- -- 106.2 -- -- --
Interest income ....... 28.5 10.6 3.9 3.5 1.4 0.5 1.1
------- ------- ------- ------- ------- ------- -------
Total other income
(expense) ........... (2.2) (10.6) (23.4) 98.8 (4.3) (6.4) (12.9)
------- ------- ------- ------- ------- ------- -------
Loss from continuing
operations before
income taxes .......... (686.2) (411.7) (657.8) (459.2) (182.5) (108.5) (75.8)
Income tax benefit ..... 46.1 74.5 90.7 14.4 -- -- --
------- ------- ------- ------- ------- ------- -------
Loss from continuing
operations ............ (640.1)% (337.2)% (567.1)% (444.8)% (182.5)% (108.5)% (75.8)%
</TABLE>
- ---------------------
(1) Percentages may not add due to rounding.
24
<PAGE>
Our past sales and results of operations have fluctuated significantly from
quarter to quarter, and we expect these fluctuations to continue in the future.
The following discussion highlights significant events that have impacted our
sales and financial results for the seven quarters in the period ended
September 30, 1999.
Our sales have increased each quarter beginning in the quarter ended
December 31, 1998. This increase was attributable primarily to increased
shipments of our planar products. Cost of sales has generally increased
primarily as a result of the increase in units shipped. We also incurred a
charge of $1.1 million in the quarter ended December 31, 1998 to write off
obsolete inventory. Before the quarter ended June 30, 1999, we generally had
negative gross margins. These negative gross margins reflect substantial
discounts provided to encourage site demonstrations of our products and
demonstrate the viability of broadband point-to-multipoint wireless access
technology. Our gross margins improved significantly in each quarter in 1999
when compared to the corresponding quarter in 1998. This improvement was
attributable primarily to the increased shipments of our higher-margin planar
products. We had a positive gross margin of 17% in the quarter ended September
30, 1999. Our total operating expenses decreased as a percentage of sales in
each quarter beginning in the quarter ended December 31, 1998. This decrease
reflects the reduction of senior management positions as we reorganized our
sales, research and development, and administrative functions in the quarter
ended December 31, 1998. In addition, some of our customers have provided
funding to offset our development costs for specific products. Our operating
loss decreased as a percentage of sales in each quarter beginning in the
quarter ended December 31, 1998. The change from other expense to other income
in the quarter ended December 31, 1998 was the result of the recognition of
$1.0 million of other income related to the termination of a development
contract with a customer.
The following table provides, for the periods presented, a summary of our
discontinued operations financial data derived from our statement of
operations.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------ -----------------------
1996 1997 1998 1998 1999
------- ------- ------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales........................ $13,467 $14,686 $12,211 $9,554 $ 6,518
Gross margin................. 3,188 5,742 5,899 4,844 2,464
Income (loss) from
discontinued operations
before income taxes......... (202) 2,246 2,886 2,550 258
Income tax expense
(benefit)................... (328) 904 1,162 1,027 0
Loss on disposition of MMWP
segment..................... -- -- -- -- (1,900)
------- ------- ------- ------ -------
Income (loss) from
discontinued operations..... $ (530) $ 1,342 $ 1,724 $1,523 $(1,642)
</TABLE>
Discontinued operations for the years ended December 31, 1996, 1997 and 1998
Sales increased $1.2 million from $13.5 million in 1996 to $14.7 million in
1997. This increase was attributable to our success in securing large orders
for very specialized programs with a few major customers. Sales decreased by
$2.5 million from 1997 to 1998 due to a decline in work performed on some large
contracts with major customers. Our gross margin and income from discontinued
operations improved in both 1997 and 1998 as we benefited from our experience
in the design and manufacture of very technical systems and components in the
millimeter wave frequencies.
Discontinued operations for the nine months ended September 30, 1998 and 1999
The decline in sales experienced in the nine months ended September 30, 1998
continued through the fourth quarter of 1998. Sales declined further to $6.5
million for the nine months ended September 30, 1999 as a result of the decline
in the worldwide demand for the types of millimeter wave products sold by this
business segment. Gross margins remained significantly favorable at 37% for the
nine months ended September 30, 1999 as the size of the business was reduced to
remain profitable. A decision was made to dispose of this segment in
25
<PAGE>
August of 1999, and a provision of $1.9 million is reflected in the September
30, 1999 results of operations. This amount includes a $300,000 reserve for
operating losses during the phaseout period, and a $1.6 million reserve for the
assets to be disposed of.
Liquidity and Capital Resources
Since 1997, we have financed our operations primarily through the sale of
redeemable preferred stock and, to a much lesser extent, from cash generated by
our discontinued operations. We have also issued subordinated notes and used
equipment lease financing and bank lines of credit to provide cash. Our line of
credit and long term debt agreements in effect at September 30, 1999 contain
certain financial covenants of which the most restrictive are the maintenance
of a minimum debt-to-equity ratio and various profitability requirements. The
1997 and 1998 events of default disclosed in the footnotes to the financial
statements relate to the late reporting of audited year end financial results
and failure to meet a profitability requirement. The line of credit related to
the 1997 default was fully repaid and not renewed. We raised net proceeds of
$12.8 million in 1997, $7.3 million in 1998 and $14.9 million in 1999 from the
issuance of redeemable preferred stock.
At September 30, 1999, we had cash and cash equivalents of $12.2 million. At
September 30, 1999, we had $500,000 of bank borrowings under our line of credit
facility.
Cash used in operating activities for the nine months ended September 30,
1999 was $5.1 million compared to $5.0 million for the nine months ended
September 30, 1998. Cash used in operating activities was $8.5 million in 1998,
$426,000 in 1997 and $1.8 million in 1996. Cash used in operating activities
has primarily represented funding of our net losses.
Cash used in investing activities for the nine months ended September 30,
1999 was $1.6 million compared to $3.4 million for the nine months ended
September 30, 1998. Cash used in investing activities was $3.7 million in 1998
and $817,000 in 1997. In each period, these amounts related primarily to the
purchase of equipment used in our manufacturing and research and development
activities. Cash provided by investing activities was $28,000 in 1996 and
resulted from the sale of certain property and equipment, net of additional
equipment purchases.
Cash provided by financing activities for the nine months ended September
30, 1999 was $16.2 million compared to cash used by financing activities of
$1.2 million in the nine months ended September 30, 1998. The financing
activities for the nine months ended September 30, 1999 consisted of the sale
of redeemable preferred stock and the issuance of term notes collateralized by
equipment. Cash provided by financing activities was $4.5 million in 1998 and
$10.3 million in 1997. In each of these years, financing activities consisted
primarily of the issuance of redeemable preferred stock. Cash provided by
financing activities was $1.9 million in 1996 and resulted from borrowings
under a bank line of credit and proceeds from the issuance of term notes.
Our future cash requirements will depend upon a number of factors, including
the timing and level of research and development activities and sales and
marketing campaigns, and our ability to significantly increase our
manufacturing volumes. We believe that our cash and cash equivalent balances
and the proceeds from this offering will provide sufficient capital to fund our
operations for at least 12 months. Thereafter, we may require additional
capital to fund our operations. In addition, from time to time we evaluate
opportunities to acquire complementary technologies or companies. Should we
identify any of these opportunities, we may need to raise additional capital to
fund the acquisitions and our operations. There can be no assurance that
financing will be available to us on favorable terms or at all.
Year 2000 Issues
Many currently installed computer systems, software products and other
devices do not properly recognize dates after December 31, 1999. This "year
2000" problem could result in product failures, system failures or
miscalculations causing disruptions of operations. If the computer systems,
software products and devices upon which we rely do not correctly process dates
after December 31, 1999, our business could be adversely affected.
26
<PAGE>
State of Readiness--Products. We have reviewed all of our products and their
components to determine whether they are date-sensitive. Based on our review,
we do not believe there are any date-sensitive features in any of our products
or their components. Accordingly, we believe our products, as well as our
inventories of product components, are year 2000 compliant.
State of Readiness--Third Parties. Because we depend on third parties, such
as single source suppliers, network system integrators and contract
manufacturers, we are assessing their year 2000 compliance. We have circulated
written surveys to our material component suppliers regarding their internal
year 2000 compliance. We have received and reviewed completed surveys from a
majority of our component suppliers. We are pursuing the suppliers that have
not responded to our survey for more information regarding their year 2000
compliance. The suppliers who responded to our survey stated that they believe
they are year 2000 compliant or will be year 2000 compliant by December 31,
1999. We have also had discussions regarding year 2000 compliance with our
network system integrator customers and selected third-party manufacturers we
may engage, but have not received definite assurances that year 2000 problems
will not materially affect their ability to do business with us. We do not
believe we will know by December 31, 1999 the year 2000 readiness of all third
parties with which we do business.
State of Readiness--Internal Systems. We have completed our evaluation of
all of our internal systems for year 2000 compliance. These systems include our
information technology systems, such as our financial systems, enterprise
resource planning systems, network hardware, server and PC operating systems,
and core software applications, including our design software. These systems
also include our non-information technology systems, such as our telephone
switches, security systems, and office and facilities equipment. In most cases,
we obtained these systems from third parties, and our evaluation consisted of
inquiries made to vendors to determine whether their products were year 2000
compliant. As a result of our evaluation, we replaced desktop computers and
upgraded and tested our network software and several software applications. We
believe that our critical internal systems are now year 2000 compliant.
Costs of Remediation. We estimate that the total costs that we incurred in
order to comply with year 2000 requirements was approximately $30,000. This
amount represents only our costs of upgrading or replacing software and
hardware ahead of schedule in order to obtain year 2000 compliant versions. We
do not separately track the internal costs of our year 2000 remediation
efforts. These costs consist primarily of payroll expenses for our information
systems personnel and selected research and development personnel.
Risks and Contingency Plans--Products. Despite our review, our products may
contain year 2000 defects or use components with year 2000 defects. Our
contingency plan is to re-design our products to be year 2000 compliant or to
use year 2000 compliant components. This redesign process could be difficult
and time-consuming, and the associated costs may be material. If components are
not year 2000 compliant, we would have to replace our inventories of those
components, and compliant alternatives may not be readily available. Moreover,
we have represented to our customers that our products are year 2000 compliant.
If our products are not year 2000 compliant, we could be liable for the damages
caused by our erroneous representation, and we could also lose sales. These
liabilities or lost sales could be significant, which could harm our business.
Risks and Contingency Plans--Third Parties. We do not know the year 2000
readiness of our material suppliers that have not completed our survey.
Moreover, the suppliers who returned our surveys may have been mistaken or
untruthful in responding to the survey. If year 2000 problems disrupt the
operations of our suppliers, we may be unable to obtain necessary components
for our products. Because we lack alternative suppliers for many components, we
are unable to develop contingency plans. Similarly, year 2000 problems that
affect our network system integrators, or their network service provider
customers, could cause them to reduce or defer purchases or deployments of our
products. Because we depend on and have little or no control over our network
system integrators, we are unable to develop contingency plans. We cannot
predict the impact that year 2000 problems will have on our business
relationships with other third parties, and do not have specific contingency
plans for those third parties. These problems could harm our business.
27
<PAGE>
Risks and Contingency Plans--Internal Systems. Because we believe our
internal systems are year 2000 compliant, we have not developed and do not
intend to develop any specific contingency plans for year 2000 problems that
may arise with these systems. If we encounter a year 2000 problem with a
critical system, the problem could severely disrupt our operations, damage our
reputation, distract us from planned business activities and cause us to incur
significant expenses to remedy the problem.
Worst Case Scenario. We believe that our worst case scenario would be the
inability of one or more of our key suppliers to deliver materials necessary
for us to manufacture our products. This could lead to lost sales, which could
harm our reputation and could prevent our products from gaining the market
acceptance we need to be successful.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS No. 131"), which establishes
standards for reporting information about operating segments in interim and
annual financial reporting. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 is effective for fiscal years beginning after December 15, 1997.
SFAS No. 131 did not have a material effect on our financial statements.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 is effective for
fiscal years beginning after December 15, 1998 and provides guidance over
accounting for computer software developed or obtained for internal use
including the requirement to capitalize and amortize specified costs. We have
adopted the provisions of SOP 98-1 for our six month period ended June 30,
1999.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities (SFAS No.
133), which establishes accounting and reporting standards for derivative
instruments and hedging activities. The statement requires recognition of all
derivatives at fair value in the financial statements. FASB Statement No. 137,
Accounting for Derivative Instruments and Hedging Activities Deferral of the
Effective Date of FASB Statement No. 133, an amendment of FASB Statement No.
133, defers implementation of SFAS No. 133 until fiscal years beginning after
June 15, 2000. We have reviewed SFAS No. 133 and believe that, upon
implementation, the standard will not have a significant effect on our
financial statements.
Disclosures About Market Risk
The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates. This
discussion contains forward-looking statements that are exposed to risks and
uncertainties. Actual results could vary materially as a result of a number of
factors, including those discussed in "Risk Factors."
As of September 30, 1999, we had cash and cash equivalents of $12.2 million.
Substantially all of these amounts consisted of highly liquid investments with
remaining maturities at the date of purchase of less than 90 days. These
investments are exposed to interest rate risk and will decrease in value if
market interest rates increase. A hypothetical increase or decrease in market
interest rates by 10 percent from the September 30, 1999 rates would cause the
fair value of these short-term investments to decline by an insignificant
amount. Due to the short duration of these investments, an immediate increase
in interest rates would not have a material effect on our financial condition
or results of operations. Declines in interest rates over time will, however,
reduce our interest income.
We do not own any material equity investments. Therefore, we do not
currently have any direct equity price risk.
Currently, all sales to international customers are denominated in United
States dollars and, accordingly, we are not currently exposed to foreign
currency exchange rate risks.
28
<PAGE>
BUSINESS
Overview
We develop and supply broadband wireless access equipment. Using our
products, network service providers can deliver integrated voice, video and
data services to their customers to enable high-speed Internet access,
electronic commerce and remote access. We design our products so network
service providers can enter markets quickly and economically, and then expand
their networks efficiently as the number of subscribers grows.
Industry Background
The Growing Demand for Broadband Communications
The amount of data being transmitted over the Internet and private
communications networks is increasing rapidly due to the growing number of
users accessing these networks and the increasing range of data-intensive
activities for which they use these networks. Businesses increasingly use the
Internet to enhance their reach to customers and suppliers with applications
such as electronic commerce, supply chain management, web hosting, global
marketing and customer support. Businesses are also using the Internet to
create data networks among corporate sites, remote offices and telecommuters in
order to facilitate employee communications, e-mail, file sharing, and research
and analysis. Consumers use the Internet to communicate, collect and publish
information, conduct retail purchases and access online entertainment. These
network-based business and consumer activities require the transmission of
increasingly large amounts of data quickly and reliably. As a result, broadband
access is becoming increasingly important.
Deregulation and Competition are Driving Deployment of Broadband Access
Technologies
Global telecommunications deregulation is creating significant competition
among providers of advanced communications services, thereby accelerating the
deployment of broadband access technologies. In the United States, incumbent
telephone companies such as Ameritech, Bell Atlantic, BellSouth, GTE, Pacific
Bell, SBC Communications and US West were, until recently, the exclusive
providers of the copper wire connections between their network backbones and
subscribers, commonly known as the "last mile." The federal Telecommunications
Act of 1996 intensified the competitive environment in the United States by
requiring telephone companies to lease portions of their networks, including
the last mile, to competing carriers. Additionally, telephone companies and
cable operators are seeking to expand their service offerings by entering each
others' markets. Similar deregulation and competition are occurring in many
regions of the world. To compete in this environment, many network service
providers seek to differentiate themselves and maximize revenue per subscriber
by offering integrated voice, video and data services, which require broadband
access.
Developing Regions are Installing Communications Infrastructure
In many parts of the world, communication services are either inadequate or
non-existent due to the lack of existing infrastructure. A number of countries,
such as Argentina and Columbia, in developing regions have privatized their
state-owned telecommunications monopolies and recently opened their markets to
competitive network service providers. In constructing new networks, many
network service providers deploy broadband access technologies to expand the
services they offer and maximize revenue.
Traditional Network Access Solutions Have Limitations
To meet the growing demand for high-speed data transmission, many network
service providers have installed high-speed fiber optic transmission equipment,
switches and routers in the Internet backbone and in interoffice networks.
While the network backbone is capable of delivering data at very high speeds, a
bottleneck exists in the last mile, which was originally built to provide
traditional analog telephone service.
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<PAGE>
Along the fiber optic network backbone, data moves at speeds up to 10 billion
bits per second, or 10 Gbps. Subscribers have traditionally connected to the
backbone using dial-up analog modems, which transmit data at rates up to 56.6
thousand bits per second, or 56.6 Kbps, or using integrated services digital
network, or ISDN, modems, which transmit data at rates up to 128 Kbps. At these
modem speeds, several minutes are often required to access a media-rich web
site, and several hours may be required to transfer or download large files.
This bottleneck frustrates subscribers and limits the capability of network
service providers to satisfy the demand for high-speed Internet access,
multimedia entertainment, real-time telecommuting and branch office inter-
networking. Additionally, the continued growth in both the number of analog
modem users and their time spent connected to the Internet compounds the
congestion experienced on many networks.
Where subscribers require higher-speed connections, network service
providers have traditionally deployed copper-based T1 services in the United
States and E1 services internationally. A T1 line is a high-capacity, dedicated
telecommunications line which can support data transmission rates of up to 1.5
million bits per second, or 1.5 Mbps, which is 26.5 times the speed of analog
modems. An E1 line can support data transmission rates of up to 2.0 Mbps, or 35
times the speed of analog modems. Although T1 and E1 services have met the
broadband access needs of many large businesses, these services are either
unavailable to or prohibitively expensive for many small businesses, remote
offices, telecommuters and consumers.
Alternative Access Solutions are Emerging
Because analog and ISDN modem technologies do not satisfy the high-speed
access needs of many subscribers, and T1 or E1 access is often unavailable or
prohibitively expensive, alternative access solutions have been developed such
as:
DSL. Digital subscriber line, or DSL, technology improves the data
transmission rate of a telephone company's existing copper wire network.
However, most deployments offer either high-speed asymmetrical services or
slower symmetrical services. Asymmetrical data rates provide higher
transmission speeds from the network to the subscriber and lower speeds from
the subcriber to the network. Symmetrical data rates provide equal transmission
speeds to and from the subscriber. DSL transmission rates are limited by the
length and quality of available copper wires.
Cable. Two-way cable modems enable asymmetrical data services to be
delivered over a network originally designed to provide television service to
residential subscribers. Cable networks connect to the home using coaxial
cable, which has greater transmission capacity than the copper wires used by
telephone companies. However, these networks often are costly to upgrade for
two-way data services.
Fiber. Fiber offers the highest data transmission rate of any access
solution, but is the most costly to deploy. Corporations and institutions use
fiber connections where critical operations require these data rates.
Satellite. Broadband satellite solutions enable asymmetrical, two-way access
services. These solutions use broadcast satellite technology for high-speed
transmissions from the network service provider to the subscriber, but use
slower wire-based connections to transmit data from the subscriber to the
network service provider. The data rate available to each subscriber in a
service area decreases as usage increases.
Point-to-Point Wireless. Point-to-point wireless technology enables
symmetrical data services using a dedicated link between a subscriber and a
network. However, the network service provider must install dedicated equipment
at each end of a link for each new subscriber. Therefore, economies of scale
are limited.
30
<PAGE>
Broadband Point-to-Multipoint Wireless. Broadband point-to-multipoint
wireless technology provides higher-speed symmetrical access than all other
alternative broadband solutions except high-cost dedicated links using fiber or
point-to-point wireless. Broadband point-to-multipoint wireless access
technology also offers the following advantages:
. Rapid Deployment. Network service providers can initiate service quickly
because they are not required to install copper wire, cable or fiber.
. Low-cost Market Entry. Network service providers can initiate service
economically with one hub and a small number of CPE units.
. Economies of Scale. Network service providers can add subscribers
rapidly and cost-effectively, as each installed hub can support many CPE
units.
The chart below compares the data transmission rates to and from the
subscriber that can be achieved using the broadband access solutions discussed
above.
[CHART SHOWING BROADBAND ACCESS DATA RATES]
Mass Deployment of Broadband Point-to-Multipoint Solutions Presents Challenges
Broadband point-to-multipoint wireless access equipment typically must be
tailored for frequency requirements that vary from country to country and
within each country. A further complication is caused by the lack of universal
standards for equipment specifications and protocols. As a result, suppliers of
broadband point-to-multipoint wireless access equipment face challenges in
achieving economies of scale and developing cost-effective products suitable
for deployment to many subscribers.
Conventional industry practice is to build broadband point-to-multipoint
wireless access equipment using multiple modules connected by small metal pipes
and wires. This approach requires considerable hand assembly and tuning and is
not suited to automated manufacturing. Therefore, assembly is often outsourced
to low-cost labor environments, which greatly reduces the ability to deliver
tailored products in a timely fashion.
An opportunity exists to substantially reduce the cost of broadband point-
to-multipoint wireless access equipment by integrating the functionality of
multiple conventional modules onto printed circuit boards, thereby enabling the
use of low-cost manufacturing processes. However, major technical difficulties
have plagued the development and production of printed circuit boards that
operate at high frequencies and at high data rates because they typically
generate distorted or unwanted signals.
31
<PAGE>
The Telaxis Solution
Our solution consists of two product families that enable both the adoption
and growth of broadband wireless access for a diverse range of markets and
applications worldwide. Our modular products address a network service
provider's need for rapid time-to-market. Our planar products address a network
service provider's need for cost-effective deployment to many subscribers.
Modular products for rapid time-to-market
Our modular products feature a flexible architecture that enables us to
deliver a tailored solution in as little as four to six weeks for network
service provider site demonstrations and initial stages of deployment. This
allows network service providers using our modular products to be among the
first to offer broadband wireless services in new markets. We are able to
achieve rapid turnaround for the following reasons:
. Extensive Design Expertise and Database. Our 17 years of experience in
millimeter-wave design and manufacturing provides us with an extensive
database of circuit designs that we can readily simulate and modify.
. Flexible Platform. We have developed a flexible multiple module
architecture that enables us to modify our products rapidly to address
different frequencies, customer interfaces and performance requirements.
. Proven Modules. Through successful demonstrations in more than 40 site
demonstrations over the past four years, we have developed a large
number of transmitters, receivers and other modules that we can quickly
reproduce in our automated manufacturing facility.
. Integrated Facilities. Our integrated design and manufacturing
facilities allow us to produce a custom circuit from concept to
completion in a matter of days.
Planar products for cost-effective mass deployment
Large-scale commercial buildouts by network service providers require cost-
effective products. Our planar products integrate the functionality of multiple
conventional modules onto printed circuit boards, thereby enabling the use of
low-cost automated manufacturing processes. We believe we are the only provider
of broadband point-to-multipoint wireless access equipment that has
successfully implemented these manufacturing techniques. As a result, we are
able to offer products suitable for deployment to many subscribers with the
following benefits over our modular products:
. Lower cost
. Greater reliability
. Smaller size
Strategy
Our objective is to be the leading worldwide provider of broadband point-to-
multipoint wireless access equipment. Our strategy to accomplish this objective
is to:
Penetrate the global market with our two product families. Our strategy is
to secure new customer relationships by delivering tailored products to network
system integrators and network service providers more rapidly than our
competitors. Once network service providers and network system integrators use
our modular products in successful site demonstrations and initial deployments,
we are strategically positioned to sell them our cost-effective planar products
for deployment to many subscribers.
Capitalize upon our early customer acceptance. We shipped our first
broadband point-to-multipoint access prototype in 1995. Our equipment has been
successfully demonstrated in more than 40 site demonstrations worldwide. We
believe this experience is unmatched by any other supplier. As a result of
these site demonstrations, our products have been selected, either directly or
by network system integrators, for initial commercial deployment by many
network service providers. We intend to build upon this acceptance of our
products to become the primary provider of broadband point-to-multipoint
wireless access equipment to these and other network service providers as they
deploy commercial buildouts.
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<PAGE>
Expand strategic relationships with network system integrators. We believe
successful deployment of broadband wireless access equipment requires close
working relationships with network system integrators. We have established
relationships with Newbridge Networks, Motorola and Hughes Network Systems
Europe for product marketing, development and supply. Our relationships with
key industry leaders offer us insight into market requirements and deployment
trends, which shapes development of our long-term product strategy. We intend
to build upon our existing relationships and establish new relationships with
network system integrators to increase distribution of our products and build
brand awareness.
Reduce product costs while increasing performance and adding
functionality. We continue to reduce the cost and improve the reliability of
our planar products by integrating various components directly into the circuit
board design. We are also developing a CPE unit with an antenna integrated into
its aluminum enclosure, which will significantly reduce product cost and size.
In order to reduce our customers' installation costs, we are developing
products with simple cabling and mounting hardware.
Leverage technology partnerships. We have established a relationship with
the University of Massachusetts to design proprietary millimeter-wave
integrated circuits to achieve higher levels of integration and reduce costs.
We have a joint design and manufacturing relationship with California Amplifier
to combine our complementary expertise in designing and manufacturing low-cost
wireless products. We intend to continue to partner with other technology
developers to maintain and enhance our technology leadership position.
Establish brand identity. We intend to establish brand awareness with
network service providers and to build upon our position in the broadband
point-to-multipoint wireless access equipment market. Historically, our
products have been sold primarily under private label by prominent network
system integrators. In the future, we will increasingly brand or co-brand our
products to build name recognition. In addition, we plan to invest in a broad
range of marketing programs, including participation in trade shows,
advertising in print publications, direct marketing to major customers and web-
based marketing.
Products
We have two product families, consisting of modular products which can be
rapidly tailored for new markets and planar products for cost-effective
deployment to many subscribers. Our modular and planar product families consist
of hub and CPE equipment that is installed outdoors in a circular geographic
service area, or cell. Our products provide capacity for data rates several
times the rates supported by today's modem technology. We believe that the
highest symmetrical data rate available with today's point-to-multipoint modem
technology is 35 Mbps. Our products operate at various frequencies ranging from
24 gigahertz, or GHz, to 44 GHz, and are available with a range of interfaces,
including hybrid fiber coax, or HFC, and Digital Audio Visual Council, or
DAVIC.
CPE Products.
We have concentrated our development efforts on the CPE unit. Because
multiple CPE units are supported by each hub, cost reduction of the CPE unit
has the most significant impact on the ability of a network service provider to
deploy broadband access services to its customers on a cost-effective basis.
Our modular CPE units address our customers' need for rapid time-to-market, and
our planar CPE units address their need for cost-effective deployment to many
subscribers.
Modular CPE. Our modular CPE unit can be quickly adapted to meet the
individual frequency, performance and interface requirements of a network
service provider. This product is currently available with DAVIC or HFC
interfaces. [Photograph of our modular CPE]
Planar CPE. Our planar CPE unit is a highly integrated unit using single-
board, planar architecture that enables highly automated, cost-effective
manufacturing. These units enable network service providers to lower their
costs of deployment in commercial service buildouts. This product is currently
available with a DAVIC interface and we are developing an HFC interface.
[Photograph of our planar CPE]
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<PAGE>
We are also developing a planar CPE unit that incorporates a proprietary
antenna and is designed to achieve significant size and cost reductions. This
CPE unit is designed to address the low-cost, high volume consumer market
segment if it emerges.
Hub Products
Each hub provides two-way connectivity to multiple CPE units out to a range
of approximately two to three miles.
Modular hub. Our modular hub can be quickly adapted to meet the performance
and interface requirements of a network service provider. This hub has the
flexibility to accommodate various combinations of transmitter or receiver
modules within a single housing. Antennas can be included within the housing or
attached externally. This hub is available with DAVIC or HFC interfaces.
[Photograph of our modular hub]
Planar hub. Our planar hub consists of separate transmitter and receiver
units that are deployed together to provide two-way connectivity. The receiver
unit works in conjunction with one or more transmitter units to form a hub. The
planar hub unit enables network service providers to lower their costs of
deployment in commercial service buildouts. The planar hub is available with
DAVIC or HFC interfaces. [Photograph of our planar hub]
Technology
Our 17 years of experience in millimeter-wave technology is the foundation
for our capability in the broadband point-to-multipoint wireless market. Our
products transmit and receive signals at various frequencies ranging from 24
GHz to 44 GHz and interface with modems that operate at frequencies below 2
GHz. A key element of our competitive advantage stems from our ability to
integrate millimeter-wave and microwave semiconductor devices and other
electronic components onto a single printed circuit board inside an aluminum
enclosure which is a functioning element of the overall product. The result is
an integrated outdoor unit using planar architecture that enables highly
automated, cost-effective manufacturing.
Millimeter-wave technology uses frequencies that are ten times higher than
microwave technology, resulting in electronic components that are ten times
smaller. The higher frequency causes greater signal interference between
components, depending on their location and spacing on the circuit board. The
small size of the components and the need to place them precisely on the
circuit board present challenges for the design, development and manufacturing
of millimeter-wave products.
Historically, hand tuning of each unit was required to prevent the products
from transmitting excessively distorted or unwanted signals that could
interfere with other radios or electronic equipment, which is prohibited by
governmental agencies worldwide. Our years of experience in developing products
that operate at high frequencies enable us to minimize excessively distorted or
unwanted signals and eliminate the need for hand tuning during the
manufacturing process. Furthermore, our automated processes are highly
repeatable, thereby minimizing mechanical misalignments in the placement of
components onto printed circuit boards. These misalignments contribute directly
to the creation of distorted and unwanted signals.
In order to integrate millimeter-wave and microwave technologies into an
outdoor unit using planar architecture, we have developed additional expertise
in several areas, including:
. Micro-controller adaptation. We design interface circuits and software
to incorporate micro-controllers into our products. These micro-
controllers provide our products a high degree of functionality,
including automatic adaptation to changing operating environments.
. Antennas. We design antennas and other sophisticated waveguide-based
components to reduce the size, cost and complexity of the packaging of
our products, while improving performance.
. Reference oscillators. We design and integrate reference oscillators
onto our printed circuit boards to minimize signal distortion and to
reduce cost.
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<PAGE>
. Microwave translation circuits. We design and integrate microwave
translation circuits enabling our products to interface with various
modems.
. Power supplies. We have a development program underway to integrate
power supplies onto our printed circuit boards to reduce cost and
increase reliability.
. Material selection and mechanical assemblies. We select materials and
design mechanical assemblies using the aluminum enclosure as a functional
part of the product. This has enabled us to minimize unwanted signal
interference while protecting our electronic components from damage.
The accompanying photograph contrasts the physical architecture of our
planar and modular CPE units.
[Photograph contrasting our planar and modular CPE units]
Customers
We sell our products primarily to network system integrators, including
Newbridge and Motorola Networks. The network system integrators in turn
develop complete broadband network solutions for their customers, the network
service providers. Occasionally, we sell our products directly to network
service providers. Our equipment has been successfully demonstrated at more
than 40 sites worldwide over the last four years. We believe this experience
is unmatched by any other supplier of broadband point-to-multipoint wireless
access equipment. As a result of these demonstrations, we have been selected,
either directly or by network system integrators, to supply equipment for
commercial deployment by network service providers, including:
<TABLE>
<S> <C>
. Home Telephone
. American Wireless
. Korea Telecom
. BellSouth Movicom
. Maxlink Communications
. Central Texas Communications
. South Central Telecom
. Convergence Communications
. Telenordia
. Formus
. Tri-Corners Telecom
</TABLE>
. Gateway Telecom
For the nine months ended September 30, 1999, sales to Newbridge Networks
represented 81% of sales and sales to Convergence Communications represented
11% of sales. For the year ended December 31, 1998, sales to Newbridge
Networks represented 30% of sales, sales to Convergence Communications
represented 26% of sales, and sales to Nexsatel, an affiliate of Formus,
represented 12% of sales.
Network System Integrator Relationships
We have established relationships with four network system integrators to
facilitate the deployment of our products and to meet the requirements of
network service providers. In June 1999, three of these network system
integrators introduced solutions that include our products at the Supercomm
trade show in Atlanta.
. Newbridge Networks. We have entered into product development and
reseller agreements with Newbridge Networks. In these agreements, we
agreed to develop, manufacture, and sell products to Newbridge Networks.
In addition, we provided a warranty for our products and an intellectual
property indemnity. Through this relationship, our equipment has been
evaluated in site demonstrations in North America, South America, Asia
and Europe. As a result of these site demonstrations, Newbridge Networks
has selected our equipment for commercial deployment in Canada,
Argentina and the United States.
. Motorola. Motorola has deployed our equipment in site demonstrations in
North America and Asia. We are currently developing equipment for
commercial deployment in the United States.
. Hughes Network Systems Europe. We have entered into a joint marketing
and sales agreement with Hughes Network Systems Europe. In this
agreement, we agreed to work together with Hughes Network
35
<PAGE>
Systems Europe to develop and pursue new business opportunities using our
products and products of Hughes Network Systems Europe. Through this
relationship, our equipment has undergone site demonstrations in North
America and Europe.
. LG Information & Communications. We have entered into an agreement with
LG Information & Communications for the development of demonstration
equipment for potential deployment in Korea.
Manufacturing
Conventional industry practice is to build point-to-multipoint wireless
access equipment using multiple modules connected by small metal pipes and
wires. This approach has evolved from the more mature microwave industry, where
hand assembly and hand tuning is common due to low volume production. We have
developed extensive expertise in automated assembly and testing of printed
circuit board, planar products that operate at frequencies many times higher
than those used in the microwave industry. We have focused this experience on
the development of manufacturing strategies for high-volume production of cost-
effective broadband wireless access products for deployment to many
subscribers.
Concurrent process development. We develop our automated manufacturing
processes concurrently with the design and development of our millimeter-wave
products. These concurrent activities facilitate the design of products that
can be manufactured with very high tolerances, thereby minimizing unwanted and
distorted signals and eliminating the need for hand tuning.
Automated component assembly. Our automated manufacturing technology enables
the repeated, high-precision placement and attachment of small chips, and the
bonding of wires between the chips and the printed circuit board. In the
production of millimeter-wave devices, this high precision is the critical
requirement to minimize distorted and unwanted signals and to achieve
acceptable performance.
Final assembly and test. Our final assembly and automated test facility is
designed for pilot production runs ranging from several hundred to a few
thousand units. We use these pilot production runs to validate our
manufacturing processes in a carefully controlled environment at our
facilities. For high-volume production, we are supplementing our manufacturing
capacity by establishing relationships with development and manufacturing
partners. We have entered into a joint design and manufacturing agreement with
California Amplifier. In this agreement, California Amplifier has agreed to
manufacture our existing CPE units, to assist us in designing improvements to
lower the cost of our existing CPE units, and to manufacture the redesigned CPE
units.We are committed to purchase at least 50,000 CPE units by December 31,
2001 and we have to pay a penalty for every CPE unit below 50,000 we do not
buy. However, we have the right to terminate this agreement and avoid the
penalty if the price of the redesigned CPE units does not meet specified
targets.
Marketing, Sales and Customer Service
Marketing
The global communications equipment industry is dominated by a limited
number of network system integrators. As a result, we focus our marketing
efforts on network system integrators and their customers, the network service
providers. Our marketing activities target technical experts and product
managers who heavily influence purchase decisions. Additionally, we coordinate
with our network system integrator partners to support their marketing
programs. We regularly provide them with design information, technical data and
promotional material to enable their sales forces to promote our products.
We build brand awareness through several promotional programs, including the
following:
. Participation in trade shows
. Speaking at industry forums
. Web-based communication and promotion
. Publication of press releases
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<PAGE>
Sales
Our sales approach is to start by building a technical relationship with the
network system integrator. Typically, a senior executive from our technical
organization initiates discussions regarding a potential partnership. We then
assign an account manager to coordinate our efforts and focus our resources on
developing the relationship. This account manager aligns our engineering teams
and managers with their counterparts in the network system integrator's
organization to provide highly responsive technical and operational support
during site demonstrations of our equipment. After successful demonstration of
our products, we often adapt them for incorporation into the network system
integrator's broadband point-to-multipoint wireless systems. We support the
network system integrator in site demonstrations with network service
providers. The objective of these site demonstrations is the adoption of our
equipment for deployment to many subscribers.
Customer Service
A key element of our sales approach is to be highly responsive to customers'
needs. We provide customer service in the following areas:
. System engineering. We provide engineering support for system site
demonstrations, site surveys, specification development, integration of
third-party equipment, installation and follow-on test support.
. Problem resolution. We provide prompt responses to customer problem
reports, including telephone support, field service, and repair or
replacement of equipment.
. Field support. Our customer service personnel are on call to provide
global field support. We provide field support primarily for site
demonstrations and initial deployments.
. Repairs. We maintain a repair center staffed with technicians who work
directly with our quality assurance team to analyze failures and repair
equipment.
Currently, we conduct all customer support activities from our South
Deerfield, Massachusetts headquarters. Customer support is ancillary to the
sale of our products and is not currently considered to be a separate revenue-
generating line of business. As network buildouts progress, we intend to
establish support centers closer to our major customer deployments.
Research and Development
The goal of our development activities is to reduce the cost and increase
the functionality of our products, while adapting them to the frequency and
interface specifications required for new markets. Our experience in
millimeter-wave and microwave technologies enables us to develop cost-effective
broadband point-to-multipoint wireless access products. We continue to advance
our core competencies and to extend these core competencies to meet rapidly
changing market needs. We are pursuing several development projects, including:
. Adapting our products to additional frequencies
. Developing additional modem interfaces
. Integrating microwave components into planar architectures
. Improving our products to reduce deployment costs
. Integrating the antenna into the aluminum enclosure
. Developing proprietary semiconductor devices
Our multidisciplinary research and development team consists of engineers
and scientists whose specialities include microwave engineering, millimeter-
wave engineering, electrical engineering, mechanical engineering, chemistry,
physics, computer science and materials science. We also maintain close working
relationships with the University of Massachusetts and various technical
organizations.
Competition
The market for broadband point-to-multipoint wireless access equipment is
rapidly evolving and highly competitive. A number of large telecommunications
equipment suppliers, such as Alcatel, Ericsson and Nortel Networks, as well as
a number of smaller companies, have developed or are developing products that
compete with ours. Many of our competitors are substantially larger than we are
and have significantly greater financial, sales, marketing, distribution,
technical, manufacturing and other resources. These competitors may make
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<PAGE>
strategic acquisitions or establish cooperative relationships among themselves
or with third parties to increase their ability to gain market share rapidly.
We expect to face increasing competitive pressures from both current and future
competitors in the markets we serve.
The rapid technological developments within the network equipment industry
result in frequent changes to our group of competitors. The principal
competitive factors in our market include:
. Product availability
. Relationships with network system integrators and network service
providers
. Product performance, features and inter-operability
. Product development speed
. Price
. Ability to manufacture and distribute products
. Technical support and customer service
. Brand recognition
Broadband point-to-multipoint wireless access solutions are also competing
with other high-speed solutions such as digital subscriber lines, cable, fiber,
other high-speed wire, satellite and point-to-point wireless technologies. Many
of these alternative technologies can take advantage of existing installed
infrastructure and have achieved significantly greater market acceptance and
penetration than broadband point-to-multipoint wireless access technologies. We
expect to face increasing competitive pressures from both current and future
technologies in the broadband access market.
Intellectual Property
Our success depends to a significant degree upon the preservation and
protection of our product and manufacturing process designs and other
proprietary technology. Although we employ a variety of intellectual property
in the development and manufacturing of our products, we believe that none of
our intellectual property is individually critical to our current operations.
However, taken as a whole, we believe our intellectual property rights are
significant. To protect our proprietary technology, we generally limit access
to our technology, treat portions of our technology as trade secrets and obtain
confidentiality or non-disclosure agreements from persons with access to our
technology. All of our employees have signed our standard confidentiality
agreement. This agreement prohibits the employees from disclosing our
confidential information, technology developments, and business practices and
from disclosing any confidential information entrusted to us by other parties.
All of our consultants who have access to our confidential information have
signed an agreement requiring them to keep confidential and not disclose our
non-public, confidential information.
To date, we have been granted one material United States patent. This patent
relates to our antenna and transceiver designs and will remain in force until
October, 2015. In addition, we have two United States patent applications
pending. We have counterpart patents pending in three international
jurisdictions. We plan to continue to pursue intellectual property protection
in foreign countries (primarily in the form of international patents) in
instances where the technology covered is considered important enough to
justify the added expense. We also rely on protections available under
copyright and trademark law.
Our intellectual property rights, and our ability to enforce those rights,
may be inadequate to prevent others from using our technology or substantially
similar technology they may independently develop. The use of that technology
by others could eliminate any competitive advantage we have, cause us to lose
sales and otherwise harm our business. A significant portion of our proprietary
technology is know-how, and employees with know-how may depart before
transferring their know-how to other employees. Moreover, the laws of other
countries where we market our products may afford even less protection for our
intellectual property. If we resort to legal proceedings to enforce our
intellectual property rights, the proceedings could be burdensome and costly,
even if we were to prevail.
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<PAGE>
Facilities
We lease approximately 78,000 square feet of facilities comprised of three
buildings in South Deerfield, Massachusetts. One building is used for
engineering and a second for manufacturing. The third building is used for
manufacturing and is being included in the sale of our millimeter-wave products
segment. The term of the lease for the two facilities that we will continue to
use expires in September 2000. We also lease approximately 4,200 square feet in
Richardson, Texas, which is used for engineering. We believe that our existing
facilities are adequate to meet our current requirements and that suitable
space will be available as needed.
Employees
On September 30, 1999, we had 169 employees in our continuing operations,
including approximately 86 in manufacturing, 44 in engineering, 10 in quality
assurance, 8 in sales, marketing and customer service and 21 in finance and
administration. We are not a party to any collective bargaining agreement. We
believe that relations with our employees are good.
Legal Proceedings
We are not currently a party to any material legal proceedings.
39
<PAGE>
MANAGEMENT
Directors and Executive Officers
Our directors, executive officers and key employees are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Albert E. Paladino, 67 Chairman of the Board of Directors
Sc.D.(1)...............
John L. Youngblood, 58 President, Chief Executive Officer and Director
Ph.D.(1)...............
Mervyn N. FitzGerald.... 54 Senior Vice President, Operations
Ransom D. Reynolds...... 56 Senior Vice President, Business Development
Dennis C. Stempel....... 36 Vice President, Chief Financial Officer and Treasurer
David L. Renauld........ 33 Vice President, Legal and Corporate Affairs, Secretary and Clerk
Kenneth R. Wood(2)...... 45 Vice President, Engineering
Robert F. Browning(2)... 42 Vice President, Manufacturing
Allan M. Doyle, 69 Director
Jr.(1)(3)..............
Robert C. Fleming(1).... 43 Director
James W. Fordyce(3)..... 56 Director
David A. Norbury........ 48 Director
Matthew S. Robison...... 38 Director
</TABLE>
- ---------------------
(1) Member of the compensation committee
(2) Key employee
(3) Member of the audit committee
Dr. Albert E. Paladino has been our Chairman of the Board since January 1992
and a director since March 1984. Since December 1998, he has been a private
investor. He was a General Partner of Advanced Technology Ventures, a venture
capital firm, from 1981 through 1998. He is a member of the board of directors
of TranSwitch Corporation, a publicly-traded developer of semiconductor
solutions for the communications markets, and RF Micro Devices, a publicly-
traded manufacturer of radio frequency integrated circuit components. He is
also Chairman of Onex Communications Corporation, a developer of semiconductor
solutions for the emerging converged communications networks. Dr. Paladino
holds a B.S. and an M.S. in engineering from Alfred University and an Sc.D. in
materials science from the Massachusetts Institute of Technology.
Dr. John L. Youngblood has been our Chief Executive Officer and a director
since June 1992, and our President since March 1993. From August 1991 to June
1992, he was a management consultant. From May 1991 to August 1991, Dr.
Youngblood served as Executive Vice President of IMO Industries, a manufacturer
of analytical and optical instruments, electronic and mechanical controls, and
power transmission products. From January 1985 to May 1991, he held various
positions, including Chairman, Chief Executive Officer and President, at
Kollmorgen Corporation, a publicly-traded manufacturer of high-performance
electronic motion control products. He holds a B.S. in electrical engineering
from the University of Texas at Arlington, and both an M.S. and a Ph.D. in
electrical engineering from Oklahoma State University.
Mervyn N. FitzGerald has been our Senior Vice President, Operations since
September 1999. From September 1996 to September 1999, Mr. FitzGerald served as
Vice President, Operations and Customer Service for the broadband wireless
access division of Nortel Networks, a provider of communications products and
services. From February 1995 to September 1996, he served as General Manager of
AlliedSignal Canada, a Canadian subsidiary of Allied Signal Inc., a diversified
aerospace manufacturer. From February 1992 to February 1995, he served as Vice
President, Operations for C-MAC Industries, a contract manufacturing company.
Mr. FitzGerald holds a B.S. in applied nuclear and solid state physics from
Polytechnic of the South Bank in London, England.
Ransom D. Reynolds has been our Senior Vice President, Business Development
since February 1993. From May 1987 to February 1993, Mr. Reynolds served as
Director of the electro-optical division of Kollmorgen Corporation. He holds a
B.S. in physics from Southwest Texas State University and an M.B.A. from the
University of Houston.
40
<PAGE>
Dennis C. Stempel has been our Vice President, Chief Financial Officer and
Treasurer since April 1999. From November 1998 to April 1999, Mr. Stempel
served as our Director of Finance. From April 1996 to November 1998, he served
as a controller at Pratt & Whitney, a division of United Technologies
Corporation and a manufacturer of aircraft engines and space propulsion
systems. From March 1993 to April 1996, he served as the Director of Finance
for Anocoil Corporation, a manufacturer of lithographic printing plates. He
worked for Coopers & Lybrand from 1989 to 1993, including serving as a
certified public accountant from 1992 to 1993. Mr. Stempel holds a B.S. in
accounting from the University of Massachusetts.
David L. Renauld has been our Vice President, Legal and Corporate Affairs
and Secretary since November 1999. He has been our Clerk since May 1999. From
January 1997 to November 1999, he was an attorney with Mirick, O'Connell,
DeMallie & Lougee, LLP, a law firm in Worcester, Massachusetts. From September
1991 to December 1996, he was an attorney with Richards, Layton & Finger, a law
firm in Wilmington, Delaware. Mr. Renauld holds a B.A. in Mathematics/Arts from
Siena College and a J.D. from Cornell University.
Kenneth R. Wood has been our Vice President, Engineering since December
1997. From April 1990 to December 1997, he was our Senior Microwave Engineer
and Program Manager. Mr. Wood holds a B.S. in electrical engineering from the
University of Pretoria and an M.S. in microwaves from the University of London.
Robert F. Browning has been our Vice President, Manufacturing since July
1996. From December 1992 to July 1996, he served first as our manager and then
as our Director of Manufacturing. Mr. Browning holds a B.S. in electrical
engineering from Western New England College.
Allan M. Doyle, Jr. has been a director since March 1984. From 1964 to May
1996, Mr. Doyle served as a member of the board of directors of Kollmorgen
Corporation. Before his retirement in 1990, he served as Vice Chairman of the
board of directors of Kollmorgen, and before that he served as Chief Financial
Officer. From 1990 to 1993, Mr. Doyle was an Associate Professor of Management
at Union College. Mr. Doyle holds a B.A. in industrial administration from
Union College and an M.B.A. from the Columbia University School of Business.
Robert C. Fleming has been a director since November 1997. Since November
1995, he has been a General Partner of Prism Venture Partners, a venture
capital firm. From July 1993 to November 1995, he was a General Partner of
Norwest Venture Capital, also a venture capital firm. Mr. Fleming holds an A.B.
in engineering from Dartmouth College and an M.B.A. from the Wharton School.
James W. Fordyce has been a director since June 1987. He has served as a
General Partner of Prince Ventures, a venture capital firm, since 1981. Mr.
Fordyce holds a B.A. in English literature from the University of Pennsylvania,
a Master's degree in Politics, Philosophy and Economics from Oxford University,
and an M.B.A. from the Harvard Business School.
David A. Norbury has been a director since September 1999. He has been
President, Chief Executive Officer and a director of RF Micro Devices since
September 1992. Mr. Norbury holds a B.S. in electrical engineering from the
University of Michigan, an M.S. in electrical engineering from Stanford
University and an M.B.A. from Santa Clara University.
Matthew S. Robison has been a director since November 1997. Mr. Robison has
served as Vice President and Senior Technology Analyst for Ferris, Baker Watts,
an investment banking firm, since January 1999. From January 1997 to January
1999, Mr. Robison was a General Partner at Botti Brown Asset Management, an
asset management firm. From October 1994 to January 1997, Mr. Robison served as
Vice President and Research Analyst for Montgomery Securities. Mr. Robison
currently serves as a director of Anaren Microwave, a publicly-traded
manufacturer of wireless, satellite and electronics products. Mr. Robison holds
a B.S. from the University of Denver.
41
<PAGE>
Our board of directors is divided into three classes, with one class of
directors elected each year at the annual meeting of stockholders for a three-
year term of office. Messrs. Fleming and Doyle will serve in the class whose
terms expire in 2000. Messrs. Robison and Fordyce will serve in the class whose
terms expire in 2001. Drs. Youngblood and Paladino and Mr. Norbury will serve
in the class whose terms expire in 2002. Our executive officers are elected
annually by the directors and serve at the discretion of the directors. There
are no family relationships among our directors and executive officers.
Committees of the Board of Directors
We have a compensation committee, consisting of Drs. Youngblood and
Paladino, and Messrs. Doyle and Fleming. The compensation committee:
. reviews the compensation and benefits of our executive officers and
recommends stock option grants under our stock option plans
. makes recommendations to the board of directors regarding compensation
matters
We have an audit committee, consisting of Messrs. Doyle and Fordyce. The
audit committee:
. reviews and evaluates our audit and control functions
. reviews the results and scope of the audit and other services provided
by our independent auditors
. makes recommendations to the board of directors regarding the selection
of independent auditors
We have a finance and executive committee, consisting of Drs. Paladino and
Youngblood and Mr. Fleming. The finance and executive committee:
. maintains continuity between the board of directors and our executive
officers
. acts on behalf of the board of directors between meetings but refers any
major decisions to the full board of directors
Director Compensation
After this offering, we will pay all non-employee directors:
. a $10,000 annual retainer for serving on the board
. a $2,000 annual retainer for serving as chairman of a standing committee
of the board
. $1,000 for each board meeting attended in person
. $500 for each committee meeting attended in person
We will also reimburse our non-employee directors for reasonable expenses
incurred in attending meetings of the board of directors and its committees.
In addition to cash compensation, we intend to grant:
. a non-qualified stock option to purchase 12,000 shares of our common
stock that vests in three equal annual installments beginning on the
date of grant to each new non-employee director elected or appointed to
the board
. a fully vested, non-qualified stock option to purchase 9,000 shares of
our common stock to each incumbent non-employee director immediately
following each annual meeting of stockholders, as long as the director
has served at least one year before the date of the annual meeting
In January 1998, we granted:
. an option to purchase 4,500 shares of common stock at $1.00 per share to
Dr. Paladino, Messrs. Doyle, Fordyce and Jasper A. Welch, Jr. (a former
director), our four non-employee directors who had served for at least
one year before our 1997 annual stockholders meeting
42
<PAGE>
. an option to purchase 6,000 shares of our common stock at $1.00 per
share to Messrs. Robison and Fleming, the two newly appointed non-
employee directors
. an option to purchase 26,775 shares of our common stock at $1.00 per
share to Dr. Paladino in recognition of his active role in the
management and financing activities of our company.
The option granted to Mr. Fleming was issued to Prism Venture Partners, the
venture capital firm of which Mr. Fleming is a general partner.
In May 1998, we granted an additional option to purchase 4,500 shares of our
common stock at $1.00 per share to Dr. Paladino, Messrs. Doyle, Fordyce and
Welch, our four non-employee directors who had served for at least one year
before our 1998 annual stockholders meeting.
In 1998, we paid Dr. Paladino $60,000 for his services as Chairman of the
Board. During 1998, we did not pay our directors any other cash compensation
for their services as directors except for reimbursement of the reasonable
expenses they incurred in attending meetings of the board of directors and its
committees.
In May 1999, we granted an option to purchase 4,500 shares of our common
stock at $1.00 per share to Dr. Paladino, Messrs. Doyle, Fordyce, Robison and
Welch and Prism Venture Partners. In August 1999, we granted Dr. Paladino an
option to purchase 40,000 shares of our common stock at $2.50 per share and an
additional option to purchase 10,099 shares of our common stock at $4.50 per
share, both in recognition of his active role in the management and financing
activities of our company. In September 1999, we granted an option to purchase
6,000 shares of our common stock at $4.50 per share to Mr. Norbury as a newly
appointed director.
Compensation Committee Interlocks and Insider Participation
The board of directors has a compensation committee consisting of four of
our directors. Dr. Youngblood, our President and Chief Executive Officer,
served as a member of our compensation committee during 1998. Dr. Youngblood
participated in discussions regarding the compensation of our executive
officers. None of our executive officers or members of our board of directors
serves as a member of the board of directors or compensation committee of any
other entity that has an executive officer serving as a member of our board of
directors or compensation committee, except that Dr. Paladino serves as a
member of the board of directors and of the compensation committee of RF Micro
Devices, of which Mr. Norbury, one of our directors, is President and Chief
Executive Officer.
Executive Compensation
Summary Compensation. The following table summarizes the compensation earned
for services rendered to us in all capacities during 1998 by our Chief
Executive Officer and our only other executive officer who earned more than
$100,000 in salary and bonus during 1998. We refer to these executives as our
"named executive officers" elsewhere in this prospectus. The compensation
summarized in this table does not include medical, group life insurance, or
other plan benefits that are available generally to all of our salaried
employees or perquisites or other personal benefits that do not in the
aggregate exceed the lesser of $50,000 or 10% of the officer's salary and
bonus.
43
<PAGE>
Summary Compensation Table
For 1998
<TABLE>
<CAPTION>
Long-Term
Compensation
---------------------
Annual Compensation Awards
------------------- ---------------------
Securities Underlying
Name and Principal Position Salary ($) Options (#)
- --------------------------- ------------------- ---------------------
<S> <C> <C>
John L. Youngblood................... $216,825 100,000
President and Chief Executive
Officer
Ransom D. Reynolds................... 142,543 70,000
Senior Vice President, Business
Development
</TABLE>
Option Grants in 1998. The following table provides information regarding
all options granted to our named executive officers in 1998. Amounts reported
in the last two columns of the table represent hypothetical values that the
holder could realize by exercising the options immediately before their
expiration, assuming the value of our common stock appreciates at the specified
compounded annual rates over the terms of the options. These numbers are
calculated based on the SEC's rules and do not represent our estimate of future
stock price growth. Actual gains, if any, on stock option exercises and common
stock holdings will depend on the timing of exercise and the future performance
of our common stock. We may not achieve the rates of appreciation assumed in
this table, and the named executive officers may not receive the calculated
amounts. This table does not take into account any appreciation in the price of
our common stock from the date of grant to the current date. The values shown
are net of the option exercise price, but do not include deductions for taxes
or other expenses associated with the exercise.
Option Grants in 1998
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------
Potential Realizable
Value at Assumed
Annual Rates of
Number of Percent of Stock Price
Securities Total Options Appreciation for
Underlying Granted to Exercise Option Term
Options Employees in Price Expiration --------------------
Name Granted (#) Fiscal Year (%) ($/Share) Date 5% ($) 10% ($)
- ---- ----------- --------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
John L. Youngblood...... 75,000 10.1% $1.00 01/05/08 $ 47,167 $ 119,530
25,000 3.4 1.00 02/25/08 15,722 39,843
Ransom D. Reynolds...... 70,000 9.4 1.00 01/05/08 44,022 111,561
</TABLE>
All options were granted at fair market value on the date of grant as
determined by our board of directors. The board of directors determined the
fair market value of our common stock based on various factors, including the
illiquid nature of an investment in our common stock, recent sales of
redeemable preferred stock, our limited operating history and our future
prospects.
Each of these options vests over a four-year period, vesting as to 20% of
the shares that may be purchased under the option on the date of grant and as
to an additional 20% on each anniversary of the date of grant until the option
has fully vested. These options become fully vested upon the occurrence of any
of the following events:
. a merger or consolidation of our company with any other company
. the sale of substantially all of our assets
. the sale of more than 50% of our outstanding stock to an unrelated
person or group
All options granted to the named executive officers in 1998 terminate on the
earliest of:
. three months after the date of termination of the executive's employment
if he ceases to be employed by us except as a result of his death or
disability
44
<PAGE>
. one year after his death or disability
. 10 years from the date of grant
In August 1999, we granted an additional option to Dr. Youngblood to
purchase 90,000 shares at $2.50 per share and an additional option to Mr.
Reynolds to purchase 40,000 shares at $2.50 per share. These options otherwise
have the same terms as the options granted to these individuals in 1998.
Fiscal Year-End Option Values. The following table provides information
regarding the value of all unexercised options held by the named executive
officers at the end of 1998. The value of unexercised in-the-money options
represents the difference between the fair market value of our common stock on
December 31, 1998 and the option exercise price, multiplied by the number of
shares underlying the option. There was no public trading market for our common
stock on December 31, 1998. Accordingly, in this table and this table only, we
have assumed that the fair market value of our common stock on December 31,
1998 was $15.00, the assumed initial public offering price. Neither named
executive officer exercised any options in 1998.
1998 Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Shares
of Common Stock Value of Unexercised
Underlying Unexercised In-the-Money
Options at Fiscal Options at
Year-End (#) Fiscal Year-End ($)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John L. Youngblood.......... 207,500 105,000 2,905,000 1,470,000
Ransom D. Reynolds.......... 48,000 67,000 672,000 938,000
</TABLE>
Employment Agreement and Change-of-Control Provisions
In January 1994, we entered into an employment agreement with Dr.
Youngblood. Dr. Youngblood's employment agreement had an original term of 24
months and now renews automatically on a quarterly basis, provided that Dr.
Youngblood's employment has not terminated before the renewal date. Dr.
Youngblood's annual compensation was initially set at an annual base salary of
$190,000, and has since been increased to his current annual base salary of
$220,000. We currently furnish Dr. Youngblood with a company automobile at our
expense. Dr. Youngblood is entitled to receive severance payments for a minimum
of six months and a maximum of 24 months after termination of his employment
depending on the circumstances under which his employment terminates. If we
terminate Dr. Youngblood's employment for cause, he will not be entitled to
severance payments. The maximum 24-month severance period will only apply if we
terminate Dr. Youngblood's employment without cause after we undergo a "change
of control" that was not approved by a majority of our board of directors. A
"change of control" is defined in Dr. Youngblood's agreement to include any
transaction that results in a person or group holding 50% or more of the
combined voting power of our outstanding securities or changes to our board of
directors that result in the persons who were either directors on the date of
Dr. Youngblood's employment agreement or their nominated successors no longer
comprising a majority of the board.
Substantially all unvested options held by Dr. Youngblood and Mr. Reynolds
will vest and become immediately exercisable upon the occurrence of any of the
following events:
. our merger or consolidation with another company,
. the sale of substantially all of our assets to another company
. the sale of more than 50% of our outstanding capital stock to an
unrelated person or group
45
<PAGE>
Stock Plans
We currently maintain the three stock plans described below. We refer to
these stock plans as the "active stock plans" elsewhere in this prospectus.
<TABLE>
<CAPTION>
Shares or Options
Outstanding Shares Available for
Shares or Options Issued Issuance Under
Adoption Expiration Reserved Under Plan as of Plan as of
Plan Name Date Date Under Plan September 30, 1999 September 30, 1999
--------- -------- ---------- ---------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
1996 Stock
Plan..... 01/26/96 01/26/06 300,000 133,500 160,500
1997 Stock
Plan..... 06/11/97 06/11/07 1,850,000 1,432,966 417,034
1999 Stock
Plan..... 09/13/99 09/13/09 1,750,000 -- 1,750,000
</TABLE>
In addition to the active stock plans, there are a total of approximately
258,950 shares that may be purchased under options issued under our 1986 Stock
Option Plan, 1987 Stock Plan and 1988 Stock Plan. Although those three plans
have expired and no new options, stock or other stock rights may be issued
under those plans, the outstanding options under those plans will remain
outstanding until their expiration or exercise.
The 1986 Plan provided for the grant of incentive stock options to
employees, including officers and directors who are employees. The other stock
plans provide for the grant of incentive stock options to employees and non-
qualified stock options and stock awards to employees, directors and
consultants. Additionally, the 1996, 1997 and 1999 Stock Plans provide for the
grant of stock appreciation rights to employees, directors and consultants.
The compensation committee of the board of directors administers the stock
plans and recommends to the board of directors the terms of stock rights
granted, including the exercise price, the number of shares that may be
purchased under individual option awards and the vesting period of options. The
exercise price of incentive stock options cannot be lower than 100% of the fair
market value of the common stock on the date of grant and, in the case of
incentive stock options granted to holders of more than 10% of our voting
power, not less than 110% of the fair market value. The term of an incentive
stock option cannot exceed ten years, and the term of an incentive stock option
granted to a holder of more than 10% of our voting power cannot exceed five
years. Stock purchase rights may be issued either alone, in addition to, or in
tandem with other awards granted under the stock plans and/or cash awards made
outside of the stock plans. Incentive stock options granted under our stock
plans generally become exercisable over a four-year period, with 20% of the
shares that may be purchased under the option vesting on the date of grant and
20% vesting on each anniversary of the date of grant until fully vested.
The board of directors may amend, modify or terminate the stock plans at any
time as long as the amendment, modification or termination does not impair the
rights of plan participants under outstanding options or other stock rights.
We intend to file, after the effective date of this offering, a Registration
Statement on Form S-8 to register up to approximately shares of common
stock reserved for issuance under the stock plans described above. The
Registration Statement will become effective automatically upon filing. After
the Registration Statement has been filed, shares issued under the stock plans
may be sold in the open market, unless the sale is limited by the provisions of
Rule 144 applicable to affiliates or the lock-up agreements.
Our 401(k) Plan
In 1990, we adopted a 401(k) plan for our employees. The plan is governed by
the Employee Retirement Income Security Act of 1974. All of our employees who
are at least 18 years old may make salary reduction contributions under the
plan. Employees must have six months of qualified service to qualify for all
other contributions under the plan. In general, a participant may contribute up
to 15% of his or her annual
46
<PAGE>
compensation. We may elect to make both matching contributions and
discretionary contributions under the plan. In recent years, we have made
matching contributions equal to up to 60% of the participant's contributions.
Any discretionary profit-sharing contributions we may make in a year would be
allocated to plan participants based on the proportion that the participant's
compensation for the year bears to the compensation of all participants for the
year. We did not make any discretionary contributions in 1998. Total employee
and employer contributions under the plan for any participant may not exceed
the lesser of 25% of compensation or $30,000. Participants are immediately
vested in their voluntary contributions under the plan and vest in all other
contributions under the plan based on their years of service. Participants are
fully vested after four years of qualified service. We may modify, amend or
terminate the plan as permitted by the Employee Retirement Income Security Act
of 1974. If we terminate the plan, participants will become fully vested in
their account balances under the plan.
Our Incentive Compensation Plan
Each year, we adopt an incentive compensation plan for our employees.
Compensation available under the plan consists of both cash and stock options
calculated according to a formula based on our achievement of specified key
operating objectives. Typically, the plan has a component for management and
key employees and a separate component for other employees. Consultants and
advisors may also be eligible to participate under the plan. We did not make
any payments under our 1998 incentive compensation plan.
47
<PAGE>
MATERIAL RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS
The following is a description of transactions since January 1, 1996 to
which we have been a party and in which the amount involved exceeded $60,000
and any director, executive officer or holder of more than five percent of our
capital stock had or will have a direct or indirect material interest.
Since January 1, 1996, we have issued preferred stock, promissory notes,
and warrants as follows:
. 10% Note Financing. On September 25, 1996 and July 31, 1997, we issued
an aggregate of $3,000,000 in principal amount of 10% subordinated
convertible notes due September 1998 and July 1999, respectively. As
part of this transaction, we issued warrants to the participating
investors to purchase an aggregate of 900,000 shares of our common stock
at an exercise price of $1.00 per share.
. Class D Financing. On November 21, 1997 and December 18, 1997, we issued
an aggregate of 7,200,000 shares of our Class D redeemable preferred
stock at a purchase price of $1.80 per share. As a result of the one for
two reverse split of our common stock effective December 16, 1999, every
two shares of this preferred stock convert into one share of common
stock.
. Class E Financing. On October 27, 1998, November 13, 1998, December 29,
1998, and September 17, 1999, we issued an aggregate of 9,941,508 shares
of our Class E redeemable preferred stock at a purchase price of $2.25
per share. As a result of the one for two reverse split of our common
stock effective December 16, 1999, every two shares of this preferred
stock convert into one share of common stock.
. 9.75% Note Financing. On April 15, 1999 and July 16, 1999, we issued an
aggregate of $2,000,000 in principal amount of 9.75% subordinated
promissory notes due on the earlier of December 31, 1999 or the date we
sell equity securities for at least $5,000,000. As part of this
transaction, we issued warrants to the participating investors to
purchase an aggregate of 200,000 shares of our common stock at an
exercise price of $1.00 per share.
Our executive officers, directors and 5% stockholders participated in the
foregoing transactions as follows:
<TABLE>
<CAPTION>
10% Note Class D Class E 9.75% Note
Financing Financing Financing Financing
------------------- --------- --------- ------------------
Number Number of Number of Number
Principal of Class D Class E Principal of
Purchaser Amount Warrants Shares Shares Amount Warrants
--------- ---------- -------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Directors and executive
officers:
Albert E. Paladino...... $ 25,000 7,500 14,088 39,692 $ 8,250 825
John L. Youngblood...... 30,000 9,000 16,906 13,949 4,000 400
Ransom D. Reynolds...... 30,000 9,000 16,906 8,889 -- --
Allan M. Doyle, Jr. .... 25,000 7,500 14,088 6,595 -- --
James W. Fordyce........ 102,485 30,745 57,755 25,154 3,000 300
Five percent
stockholders:
SVE Star Ventures
Group.................. -- -- 1,497,689 3,744,015 400,000 40,000
Prism Venture Partners
I, L.P. ............... -- -- 1,666,667 711,111 600,000 60,000
Alliance Technology
Ventures Group......... -- -- -- 2,248,889 306,000 30,600
Techgains Group......... -- -- 555,556 1,006,754 210,000 21,000
Axiom Venture Partners
II, L.P. .............. -- -- 1,111,112 412,916 240,000 24,000
Spring Point Group...... -- -- 555,556 655,614 -- --
Prince Venture Partners
II Limited
Partnership............ 375,000 112,500 211,333 409,594 200,000 20,000
United of Omaha Life
Insurance Company...... 1,000,000 300,000 563,555 -- -- --
</TABLE>
Mr. Fleming, a member of our board of directors, is affiliated with Prism
Venture Partners I, L.P. Mr. Fordyce, a member of our board of directors, is
affiliated with Prince Venture Partners II Limited Partnership.
The SVE Star Ventures Group is comprised of five affiliated entities --
Star Growth Enterprise, SVE Star Ventures Enterprises No. V, SVM Star Ventures
Management GmbH No. 3, SVE Star Ventures
48
<PAGE>
Managementgesellschaft mbH Nr. 3 & Co. Betelligungs KG Nr. 2, and SVE Star
Ventures Enterprises No. VII. Collectively, these entities beneficially own 5%
or more of our capital stock.
The Alliance Technology Venture Group is comprised of two affiliated
entities -- Alliance Technology Ventures II, L.P. and ATV II Affiliates Fund,
L.P. Collectively, these entities beneficially own 5% or more of our capital
stock.
The Techgains Group is comprised of three affiliated entities - Technology
Associates Management Co., Ltd., Techgains International Corp., and Techgains
Corp. Collectively, these entities beneficially own 5% or more of our capital
stock.
The Spring Point Group is comprised of two affiliated entities - Spring
Point Partners L.P. and Spring Point Offshore Fund. Collectively, these
entities beneficially own 5% or more of our capital stock.
In September 1999, we agreed to issue 112,500 shares of common stock to
Mervyn N. FitzGerald, our Senior Vice President, Operations, for a purchase
price of $2.50 per share. In connection with this issuance of shares, we will
loan Mr. FitzGerald the $281,250 purchase price. The interest rate on the loan
will be the applicable federal rate, and the loan must be repaid upon Mr.
FitzGerald's sale of the shares. These shares will vest 20% on the date of
issuance and as to an additional 20% on the next four anniversaries of the date
of issuance. The unvested shares may be repurchased at a price of $2.50 per
share upon Mr. FitzGerald's termination of employment. All unvested shares will
immediately vest upon the occurrence of any of the following events:
. our merger or consolidation with another company
. the sale of substantially all of our assets to another company
. the sale of more than 50% of our outstanding capital stock to an unrelated
person or group
Sale of Contraband Detection System Business. In June 1996, we sold the
assets, contracts and documentation relating to our contraband detection
systems business to Millimetrix LLC, a company controlled by Dr. G. Richard
Huguenin. At the time of the sale, Dr. Huguenin was one of our directors and
executive officers. We received the following as consideration for this
business:
. $606,873 in cash
. a $250,000 promissory note, payable over time
. 19.9% of the ownership of Millimetrix
. the right to receive royalty payments
As part of the transaction, we granted Millimetrix a license to use
intellectual property related to the business and the right to acquire the
licensed intellectual property if agreed conditions were met. Millimetrix also
assumed operating leases related to the business, agreed to lease space from
us, and hired some of our employees.
In connection with the sale, Dr. Huguenin resigned as one of our directors
and executive officers and surrendered all of his outstanding stock options. At
the same time, we repurchased 206,666 shares of our common stock from Dr.
Huguenin for $103,333 and granted him a non-qualified stock option to purchase
135,000 shares of common stock at an exercise price of $1.00 per share.
Millimetrix failed to perform its obligations in connection with this
transaction, and we have obtained a judgment against it in the amount of
approximately $378,000. In October 1999, we renegotiated that transaction with
Millimetrix and involved Millivision, L.L.C., a joint venture between
Millimetrix and one other entity. We released Millimetrix and Dr. Huguenin from
substantially all claims, including the $378,000 judgment, and Millimetrix
released any claims to the intellectual property relating to our contraband
detection systems business. We granted Millivision a license to use the
intellectual property related to that business. Millivision agreed to pay us
royalties in the minimum amount of $200,000. Millimetrix, Millivision and Dr.
Huguenin also agreed not to compete with us with respect to broadband wireless
telecommunications equipment.
49
<PAGE>
Our Policy on Interested Transactions
We have adopted a policy whereby contracts and business arrangements with
our officers, directors or stockholders, entities they own in whole or in part,
or entities for whom they serve as officers, directors, trustees or members
must be on an arm's-length basis and approved by the board of directors. Our
articles of organization and by-laws require approval of the contract or
transaction by a majority of the independent directors who have no interest in
the contract or transaction.
50
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table provides information regarding the beneficial ownership
of our outstanding common stock as of September 30, 1999, and as adjusted to
reflect our sale of common stock in this offering, by:
. each person or group that we know owns more than 5% of the common stock,
. each of our directors,
. each of our executive officers, and
. all of our directors and executive officers as a group.
Beneficial ownership is determined under rules of the SEC and includes
shares over which the indicated beneficial owner exercises voting and/or
investment power. Shares of common stock that we may issue upon the exercise of
options or warrants currently exercisable or exercisable within 60 days of
September 30, 1999 are deemed outstanding for computing the percentage
ownership of the person holding the options or warrants but are not deemed
outstanding for computing the percentage ownership of any other person. Except
as we otherwise indicate, we believe the beneficial owners of the common stock
listed below, based on information furnished by them, have sole voting and
investment power over the number of shares listed opposite their names. Unless
we otherwise indicate, the address for each stockholder below is c/o Telaxis
Communications Corporation, 20 Industrial Drive East, South Deerfield,
Massachusetts 01373-0109.
The following table and footnotes reflect the conversion of our preferred
stock into common stock. Due to the one for two reverse split of our common
stock effective December 16, 1999, every two shares of preferred stock convert
into one share of common stock.
<TABLE>
<CAPTION>
Shares Issuable Number of Shares
pursuant to Beneficially Owned Percentage of
Warrants and Options (Including the Shares Outstanding
Exercisable within Number of Shares ----------------------
60 days of shown in the Before After
Name of Beneficial Owner September 30, 1999 first column) Offering Offering
- ------------------------ -------------------- ------------------ --------- ---------
<S> <C> <C> <C> <C>
SVE Star Ventures 40,000 2,834,217 25.2% 18.5
Group(1)...............
Possart Strasse No. 9
81679 Munich, Germany
Prism Venture Partners 60,000 1,254,389 11.1 8.2
I, L.P.................
c/o Prism Venture
Management, Inc.
100 Lowder Brook Drive,
Suite 2500
Westwood, MA 02090
Robert C. Fleming(2).... 0 1,254,389 11.1 8.2
Alliance Technology 30,600 1,155,044 10.3 7.5
Ventures Group(3)......
8995 Westside Parkway,
Suite 200
Alpharetta, GA 30004
Techgains Group(4)...... 21,000 802,155 7.1 5.2
2378 West 239th Street
Torrance, CA 90501
Axiom Venture Partners 24,000 786,014 7.0 5.1
II, L.P................
City Place II--17th
Floor
185 Asylum Street
Hartford, CT 06103
James W. Fordyce(5)..... 32,545 673,011 6.0 4.4
Spring Point Group(6)... 0 605,585 5.4 4.0
1 Montgomery Street,
Suite 3300
San Francisco, CA 94104
Prince Venture Partners 132,500 585,511 5.2 3.8
II Limited
Partnership............
10 South Wacker Drive,
Suite 2575
Chicago, IL 60606
United of Omaha Life 300,000 581,777 5.0 3.7
Insurance Company......
c/o Mutual of Omaha
Insurance Company
Mutual of Omaha Plaza
Omaha, NE 68175
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Shares Issuable Number of Shares
pursuant to Beneficially Owned Percentage of
Warrants and Options (Including the Shares Outstanding
Exercisable within Number of Shares ---------------------
60 days of shown in the Before After
Name of Beneficial Owner September 30, 1999 first column) Offering Offering
- ------------------------ -------------------- ------------------ --------- ---------
<S> <C> <C> <C> <C>
John L. Youngblood...... 267,400 282,827 2.5 1.8
Albert E. Paladino...... 50,099 121,150 1.1 *
Mervyn N.
FitzGerald(7).......... 0 112,500 1.0 *
Ransom D. Reynolds...... 85,000 97,897 * *
Allan M. Doyle, Jr...... 9,000 32,841 * *
Dennis C. Stempel....... 14,000 15,111 * *
David A. Norbury........ 2,000 13,111 * *
Matthew S. Robison...... 5,500 11,055 * *
David L. Renauld........ 5,000 6,000 * *
All executive officers
and directors as a
group
(11 persons)........... 530,544 2,619,892 22.2 16.6
</TABLE>
- ---------------------
* Less than 1%.
(1) Represents (a) 1,111,111 shares held by Star Growth Enterprise, (b)
517,992 shares held by SVE Star Ventures Enterprises No. V, (c) 489,426
shares held by SVM Star Ventures Management GmbH Nr. 3, (d) 91,963 shares
held by SVE Star Ventures Management GmbH Nr. 3 & Co. Betelligungs KG Nr.
2, (e) 583,724 shares held by SVE Star Ventures Enterprises No. VII and
(f) warrants held by SVE Star Ventures Enterprises No. VII to purchase
40,000 shares of common stock.
(2) Mr. Fleming is a general partner and co-manager of Prism Venture Partners
I, L.P. The shares listed represent the 1,254,389 shares beneficially
held by Prism Venture Partners I, L.P. Mr. Fleming disclaims beneficial
ownership of the shares beneficially held by Prism Venture Partners I,
L.P., except for his pecuniary interest in those shares. Mr. Fleming's
address is the same as the address of Prism Venture Partners I, L.P.
(3) Represents (a) 1,102,222 shares held by Alliance Technology Ventures II,
L.P., (b) warrants held by Alliance Technology Ventures II, L.P. to
purchase 30,000 shares of common stock, (c) 22,222 shares held by ATV II
Affiliates Fund, L.P. and (d) warrants held by ATV II Affiliates Fund,
L.P. to purchase 600 shares of common stock.
(4) Represents (a) 28,377 shares held by Technology Associates Management
Co., Ltd., (b) a warrant to purchase 1,000 shares held by Technology
Associates Management Co., Ltd., (c) 300,000 shares held by Techgains
International Corp., (d) a warrant held by Techgains International Corp.
to purchase 10,000 shares of common stock, (e) 452,778 shares held by
Techgains Corp. and (f) a warrant held by Techgains Corp. to purchase
10,000 shares of common stock.
(5) Mr. Fordyce is a general partner of Prince Venture Partners II Limited
Partnership. The shares listed represent (a) 585,511 shares beneficially
held by Prince Venture Partners II Limited Partnership, (b) 54,954 shares
held by Mr. Fordyce, (c) 1,500 shares that we may issue upon exercise of
stock options held by Mr. Fordyce within 60 days of September 30, 1999
and (d) warrants held by Mr. Fordyce to purchase 31,045 shares of common
stock. Mr. Fordyce disclaims beneficial ownership of the shares
beneficially held by Prince Venture Partners II Limited Partnership,
except for his pecuniary interest in those shares.
(6) Represents 407,807 shares held by Spring Point Partners L.P. and 197,778
shares held by Spring Point Offshore Fund.
(7) Of the shares held by Mr. FitzGerald, 90,000 may be repurchased by us.
See "Material Relationships and Related-Party Transactions."
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, we will be authorized to issue up to
100,000,000 shares of common stock, $.01 par value, and 4,500,000 shares of
undesignated preferred stock, $.01 par value. As of September 30, 1999, there
were 782,986 shares of common stock outstanding held of record by 119
stockholders and 20,976,881 shares of redeemable preferred stock held by 85
stockholders. Upon the closing of this offering, these shares of redeemable
preferred stock will automatically convert into 10,488,440 shares of common
stock at a ratio of one share of common stock for every two shares of preferred
stock due to the December 16, 1999 reverse stock split. Following this
offering, there will be 15,271,426 shares of common stock outstanding, or
15,871,426 shares if the underwriters exercise their over-allotment option in
full, assuming no exercise of outstanding options or warrants.
Common Stock
The holders of common stock are entitled to one vote per share on all
matters to be voted on by stockholders. When a quorum is present at a meeting,
the holders of a majority of the common stock present or represented and voting
on a matter will decide any matter to be voted on by the stockholders except
where a class vote is required by law or the articles of organization or where
a larger vote is required by law or the articles of organization. Elections are
determined by a plurality of the votes cast by stockholders entitled to vote at
the election. The holders of common stock are entitled to receive ratably any
dividends the board of directors declares, after payment of any preferential
dividends to the holders of preferred stock. Dividends are non-cumulative. If
we are liquidated, dissolved or wound up, the holders of common stock will be
entitled to share pro rata all assets remaining after payment of liabilities
and liquidation preferences of any outstanding shares of preferred stock.
Holders of common stock have no preemptive rights or rights to convert their
common stock into any other securities. There are no redemption or sinking fund
provisions applicable to the common stock. All outstanding shares of common
stock are fully paid and non-assessable, and the shares of common stock to be
issued in this offering will be fully paid and non-assessable. The rights,
preferences and privileges of holders of common stock may be adversely affected
by the rights, preferences and privileges of holders of preferred stock that
the board of directors may designate and issue in the future. As of September
30, 1999, there were 4,190,337 shares of common stock reserved for issuance
upon the exercise of options and warrants. On that date, there were outstanding
stock options to purchase an aggregate of 1,720,427 shares of common stock and
warrants to purchase an aggregate of 1,229,695 shares of common stock.
Preferred Stock
Upon the closing of this offering, our articles of organization will
authorize our board of directors, without any action by our stockholders, to
issue up to 4,500,000 shares of undesignated, or "blank check," preferred stock
in one or more classes or series. The board also has the authority to fix the
designations, powers, preferences, privileges and relative, participating,
optional or special rights and the qualifications, limitations or restrictions
of any preferred stock, including dividend rights, conversion rights, voting
rights, terms of redemption and liquidation preferences, any or all of which
may be greater than the rights of the common stock. The board of directors,
without stockholder approval, can issue preferred stock with voting, conversion
or other rights that could adversely affect the voting power and other rights
of the holders of common stock. Our board could quickly issue preferred stock
with terms that could delay or prevent a change in control of our company or
make removal of our management more difficult. Additionally, the issuance of
preferred stock may decrease the market price of the common stock. We have no
plans to issue any preferred stock.
Warrants
As of September 30, 1999, there were warrants outstanding to purchase a
total of 1,229,695 shares at a weighted average exercise price of $1.18 per
share. These warrants expire on various dates from December 21, 2000 to July
30, 2007.
53
<PAGE>
Registration Rights
After this offering, the holders of shares of common stock and warrants
to purchase shares of common stock, or their permitted transferees, will be
entitled to register those shares under the Securities Act. These registration
rights are contained in four agreements, one with some of our stockholders
(currently covering shares and warrants to purchase shares) and
three separate agreements with three of our lenders (in the aggregate covering
shares and warrants to purchase shares). As described below, the
agreement with our stockholders provides for both demand registration rights
and piggyback registration rights while the agreements with our lenders only
provide for piggyback registration rights.
Demand Registration Rights. At any time after six months following the
closing of this offering, the holders of at least 40% of the registrable
securities under the agreement with our stockholders may require that we use
our diligent best efforts to register some or all of those registrable
securities under the Securities Act at our expense on two occasions. In
addition, the holders of at least 20% of the registrable securities under the
agreement with our stockholders may require that we use our diligent best
efforts to register some or all of those registrable securities under the
Securities Act on Form S-2 or S-3 or similar short-form registration, as long
as we are eligible to use a short-form registration and the value of the
securities to be registered is reasonably anticipated to exceed $1,000,000.
Only the first two short-form registrations will be at our expense. Limitations
and conditions may be imposed on registrable securities that are included in a
registration.
Piggyback Registration Rights. If we propose to register any of our
securities under the Securities Act for our own account or for the account of
any of our stockholders, holders of registrable securities under each of the
four agreements granting registration rights are entitled, with limitations and
conditions, to receive notice of that registration and to include registrable
securities in that registration at our expense. One of the limitations is the
ability of any underwriter of any of those offerings to reduce the number of
shares proposed to be registered in view of market conditions.
We intend to file, promptly after the effective date of this offering, a
registration statement on Form S-8 to register up to approximately shares
of common stock reserved for issuance under our stock plans. The registration
statement will become effective automatically upon filing. After the
registration statement has been filed, shares issued under the stock plans may
be sold in the open market, unless the sale is limited by the provisions of
Rule 144 applicable to our affiliates or the lock-up agreements. For more
information, see "Shares Eligible for Future Sale."
Anti-takeover Provisions of Massachusetts Law and Our Articles or Organization
and By-Laws
Provisions of Massachusetts law and our articles or organization and by-laws
may discourage takeover attempts not previously approved by our board of
directors, including takeovers that some stockholders may deem to be in their
best interest. These provisions may inhibit temporary fluctuations in the
market price of our common stock that might otherwise result from actual or
rumored takeover attempts. These provisions could also delay or frustrate the
removal of incumbent directors or the assumption of control by stockholders,
even if it would be beneficial to our stockholders. These provisions could also
discourage or make more difficult a merger, tender offer or proxy contest, even
if it would be beneficial to stockholders, and could depress the market price
of our common stock. Our board of directors believes that these provisions are
appropriate to protect the interests of our stockholders. Our board of
directors has no present plans to adopt any other measures or devices which may
have an anti-takeover effect.
Classified Board of Directors. Our articles of organization provide for a
board of directors that is divided into three classes. The first class of
directors will hold office until the first annual meeting of stockholders
following this offering, the second class of directors will hold office until
the second annual meeting of stockholders following this offering, and the
third class of directors will hold office until the third annual meeting of
stockholders following this offering. After each annual meeting, the directors
elected at that meeting will serve a three-year term. Stockholders may remove
our directors only for cause.
54
<PAGE>
Meetings of Stockholders. Our by-laws provide that annual meetings of
stockholders will be held at the date, time and place, either within or outside
the Commonwealth of Massachusetts, as the board of directors may determine. A
special meeting of the stockholders may be called only by our President, our
board of directors, or the holders of at least 30% of our outstanding voting
stock.
Amendment of By-Laws. Our articles of organization and by-laws provide that
the by-laws may be amended or repealed by the board of directors or by the
stockholders. An amendment by stockholders requires the affirmative vote of the
holders of at least 75% of the outstanding capital stock entitled to vote
generally at the meeting.
This system of electing directors, the ability of stockholders to remove
directors only for cause and the inability of stockholders holding less than
30% of the outstanding voting stock to call a special meeting may discourage
someone from making a tender offer or otherwise attempting to obtain control of
our company and may maintain the incumbency of the board of directors.
Massachusetts Statutory Business Combination Provision. The provisions of
Chapter 110F of the Massachusetts General Laws, an anti-takeover law, will
apply to us after this offering has been completed. In general, this statute
prohibits a Massachusetts corporation with more than 200 stockholders of record
from engaging in a "business combination" with an "interested stockholder" for
a period of three years after the date of the transaction in which the person
becomes an interested stockholder, unless:
. before that date, the board of directors approved either the business
combination or the transaction that resulted in the stockholder's
becoming an interested stockholder,
. the interested stockholder acquires 90% of the outstanding voting stock
of the corporation (excluding shares held by affiliates of the
corporation) at the time the stockholder becomes an interested
stockholder, or
. the business combination is approved by both the board of directors and
holders of two-thirds of the outstanding voting stock of the corporation
(excluding shares held by the interested stockholder).
A "business combination" includes a merger, consolidation, stock or asset
sales, and other specified transactions involving the corporation or any direct
or indirect majority-owned subsidiary of the corporation resulting in a
financial benefit to the interested stockholder. Generally, an "interested
stockholder" is:
. a person who, alone or together with affiliates and associates, owns
five percent or more of the corporation's voting stock, or 15% or more
in the case of persons eligible to file a Schedule 13G under the
Securities Exchange Act,
. an affiliate or associate of the corporation who at any time within the
three-year period preceding the date of the transaction owned five
percent or more of the corporation's voting stock, or 15% or more in the
case of persons eligible to file a Schedule 13G under the Securities
Exchange Act, or
. the affiliates and associates of any affiliate or associate of the
corporation.
A person is not an "interested stockholder" if its ownership of shares in
excess of the five percent or fifteen percent limitation is the result of
action taken solely by us, but the person will become an "interested
stockholder" if the person thereafter acquires additional shares of voting
stock, except as a result of further corporate action not caused, directly or
indirectly, by the person. We may at any time elect not to be governed by
Chapter 110F by amending our articles of organization or by-laws by a vote of a
majority of the stockholders entitled to vote. This amendment would not be
effective for 12 months and would not apply to a business combination with any
person who became an interested stockholder before the adoption of the
amendment.
In addition, Massachusetts General Laws Chapter 110D, entitled "Regulation
of Control Share Acquisitions," provides, in general, that any stockholder of a
Massachusetts corporation with more than 200 stockholders of record who
acquires voting stock of the corporation in a "control share acquisition" may
not vote the shares so acquired (or shares acquired within 90 days before or
after the "control share acquisition") unless a majority of the other
stockholders of the corporation entitled to vote so authorize. In general, a
55
<PAGE>
"control share acquisition" includes the acquisition by any person of
beneficial ownership of shares which, when added to all other shares
beneficially owned by the person, would entitle the person to vote:
. between 20% and 33 1/3%,
. between 33 1/3% and 50%, or
. more than 50% of the outstanding voting stock of the corporation.
A "control share acquisition" generally does not include, for example, the
acquisition of shares directly from the issuing corporation. In addition,
Chapter 110D permits a corporation to provide in its articles of organization
or by-laws that the corporation may redeem, for fair value, all of the shares
acquired in a control share acquisition if the interested stockholder does not
deliver a control share acquisition statement or if the interested stockholder
delivers a control share acquisition statement but the stockholders of the
corporation do not authorize voting rights for those shares.
Massachusetts General Laws Chapter 156B, Section 50A, requires that
publicly-held Massachusetts corporations that have not "opted out" of Section
50A have a classified board of directors consisting of three classes as nearly
equal in size as possible. Section 50A also provides that directors who are
classified may be removed by the stockholders only for cause. Our articles of
organization reflect the requirements of Section 50A.
Limitations on Liability and Indemnification
Our articles of organization limit the liability of our directors as
permitted by Massachusetts law. No director will be personally liable to us or
our stockholders for monetary damages resulting from his or her conduct as a
director except liability for:
. breach of the director's duty of loyalty
. acts or omissions not in good faith or which involved intentional
misconduct or knowing violations of law
. unlawful distributions and loans to insiders
. transactions from which the director personally received a benefit in
money, property or services to which the director was not legally
entitled
Our by-laws provide that we will indemnify any person made a party to a
proceeding because he or she was or is a director, officer, employee or other
agent of ours and that we may advance or reimburse reasonable expenses incurred
by him or her before the final disposition of the proceeding if he or she
undertakes to repay those expenses if he or she is adjudicated to be not
entitled to indemnification. In addition, we have the right, before a final
adjudication, to compromise and settle a proceeding and pay expenses, if a
compromise and settlement of a proceeding is in our best interests. The
provisions of our by-laws that would provide for indemnification of directors
for liabilities arising under the Securities Act are, in the opinion of the
SEC, against public policy as expressed in the Securities Act and are therefore
unenforceable.
We maintain a liability insurance policy, which may insure our directors and
officers against liability they may incur for serving in their capacities as
directors and officers.
We believe that the limitation of liability provisions in our articles or
organization, the indemnification provisions in our by-laws and our liability
insurance policy will facilitate our ability to continue to attract and retain
qualified individuals to serve as directors and officers.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is Registrar and
Transfer Company.
The Nasdaq Stock Market's National Market Listing
We will apply for inclusion of our common stock on The Nasdaq Stock Market's
National Market under the symbol "TLXS."
56
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has been no public market for our common stock.
The market price of our common stock could drop if our existing stockholders
sell large numbers of shares of our common stock in the public market or if
investors perceive that sales of large numbers of shares could occur. These
factors could also make it more difficult to raise funds through future
offerings of common stock.
After this offering, there will be outstanding 15,271,426 shares of common
stock, or 15,871,426 shares if the underwriters exercise their over-allotment
option in full, assuming no exercise of outstanding options or warrants. Of
these shares, the 4,000,000 shares sold in this offering, or 4,600,000 shares
if the underwriters exercise their over-allotment option in full, will be
freely tradable without restriction under the Securities Act except for any
shares purchased by our "affiliates" as defined in Rule 144 under the
Securities Act. The remaining 11,271,426 shares are "restricted securities"
within the meaning of Rule 144. The restricted securities may not be sold
unless they are registered under the Securities Act or are sold under an
exemption from registration, such as the exemption provided by Rule 144.
Our executive officers, directors and a majority of our other
securityholders have entered into lock-up agreements in which they have agreed
that, for a period of 180 days after the date of this prospectus, they will not
offer, sell, contract to sell, pledge or otherwise dispose of any shares of our
common stock, or any securities convertible into or exchangeable or exercisable
for any shares of our common stock, or publicly disclose their intention to
make any offer, sale, contract, pledge or disposal, without the prior written
consent of Credit Suisse First Boston Corporation. In addition, we have agreed
in the underwriting agreement that, for a period of 180 days after the date of
this prospectus, we will not offer, sell, contract to sell, pledge or otherwise
dispose of any shares of our common stock, or any securities convertible into
or exchangeable or exercisable for any shares of our common stock, or publicly
disclose our intention to make any offer, sale, contract, pledge or disposal,
without the prior written consent of Credit Suisse First Boston Corporation,
unless the transaction is specifically permitted in the underwriting agreement.
We have similarly agreed that, with limited exceptions, we will not file a
registration statement with the SEC or publicly disclose our intention to do
so. Credit Suisse First Boston Corporation may, at any time and without notice,
waive any of the terms of these lock-up agreements.
Under these lock-up agreements, our outstanding shares of common stock will
be available for sale in the public market as follows:
<TABLE>
<CAPTION>
Percent of
Number Total
of Shares
Shares Outstanding Date of Availability for Sale
------ ----------- ----------------------------------------------------------
<C> <C> <S>
, 2000 (date of this prospectus) to , 2000 (90
days after the date of this prospectus)
, 2000 (90 days after the date of this prospectus) to
, 2000 (180 days after the date of this prospectus),
in some cases under Rule 144
, 2000 (180 days after the date of this prospectus),
in some cases under Rule 144
At various times after , 2000
</TABLE>
In addition, as of September 30, 1999, there were outstanding options to
purchase 1,720,427 shares of common stock and warrants to purchase 1,229,695
shares of common stock. Of these options and warrants, the sale of will be
limited by lock-up agreements. After the expiration of the lock-up agreements,
of these options and warrants will be vested and exercisable, assuming no
prior exercise, cancellation or expiration.
57
<PAGE>
Rule 144. In general, beginning 90 days after the date of this prospectus
any person (or persons whose shares are aggregated) who has beneficially owned
shares for at least one year is entitled under Rule 144 to sell, within any
three-month period, a number of shares that does not exceed the greater of:
. 1% of the then-outstanding shares of common stock, which will equal
approximately 153,000 shares immediately after this offering
. the average weekly trading volume in the common stock during the four
calendar weeks immediately preceding the date on which the seller files
a notice of the sale on Form 144 with the SEC
Requirements relating to notice, manner of sale and the availability of
current public information about us must also be met for sales under Rule 144.
Rule 144(k). A person (or persons whose shares are aggregated) who has not
been our affiliate at any time during the three months immediately preceding a
sale, and who has beneficially owned the shares for at least two years, would
be entitled to sell the shares under Rule 144(k) without regard to the volume
limitations, notice requirements and other conditions of Rule 144.
Rule 701. In general, each of our directors, officers, employees,
consultants or advisors who purchased shares from us before the date of this
prospectus in connection with a compensatory stock plan or other written
compensatory agreement will be eligible to sell those shares under Rule 701 in
the public market 90 days after the date of this prospectus in reliance on Rule
144, but without complying with all of the restrictions of Rule 144, such as
the holding period. In addition, Rule 701 will apply to shares of common stock
we issue upon exercise of the options we granted before the effective date of
this offering.
As soon as practicable after this offering, we intend to file a registration
statement under the Securities Act to register approximately shares of
common stock available for issuance under our stock plans. The registration
statement will become effective upon filing. Shares issued under our stock
plans after the effective date of the registration statement will be available
for sale in the open market restricted in some cases by the lock-up agreements
and, for affiliates, only after meeting the conditions and restrictions of Rule
144.
For a description of the registration rights of our securityholders, see
"Description of Capital Stock--Registration Rights."
58
<PAGE>
UNDERWRITING
Under the terms and conditions contained in an underwriting agreement dated
, 2000, we have agreed to sell to the underwriters named below, for whom
Credit Suisse First Boston Corporation, Banc of America Securities LLC and CIBC
World Markets Corp. are acting as representatives, the following respective
numbers of shares of common stock:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation.............................
Banc of America Securities LLC.....................................
CIBC World Markets Corp............................................
---------
Total............................................................ 4,000,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 600,000 additional shares at the initial public offering price
less the underwriting discounts and commissions. The option may be exercised
only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share on
the sales to other broker/dealers. After the initial public offering, the
public offering price, concession and discount to broker/dealers may be changed
by the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts
and Commissions
paid by us............. $ $ $ $
Expenses payable by us.. $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
Two employees of CIBC World Markets Corp., including the research analyst
that will cover us, own redeemable preferred stock that will convert into
shares of common stock upon completion of this offering. The employees
purchased the stock on the same terms as the other participants in the private
placements of stock which occurred in November and December 1997 and in
September 1999. In the aggregate, these employees purchased 0.39% of the stock
sold in the 1997 private placement and 0.17% of the stock sold in the 1999
private placement.
We and our executive officers, directors and a majority of our other
securityholders have agreed not to offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or, in our case, file with the
Securities and Exchange Commission a registration statement under the
Securities Act relating to, any shares of common stock or securities
convertible into or exchangeable or exercisable for any common stock, or
publicly disclose the intention to make any offer, sale, contract, pledge,
disposition or filing, without the prior written consent of Credit Suisse First
Boston Corporation for a period of 180 days after the date of this prospectus,
with exceptions for outstanding stock options and warrants.
59
<PAGE>
The underwriters have reserved for sale, at the initial public offering
price, up to 200,000 shares of common stock for business partners, employees,
directors and other persons associated with us who may wish to purchase common
stock in this offering. The number of shares available for sale to the general
public in this offering will be reduced by the number of reserved shares
purchased. Any reserved shares not purchased will be offered by the
underwriters to the general public on the same terms as the other shares.
A limited number of shares may be made available via the Internet to
customers of one or more underwriters participating in this offering. If any
underwriter uses the Internet to make offers and sales, a copy of our
preliminary prospectus in electronic format will be made available on a web
site maintained by the underwriter or through a hosting arrangement entered
into by the underwriter with a third party. After the prospectus is made
available, the underwriter will accept conditional offers to purchase shares
from its customers that complete and pass an online eligibility profile. Some
underwriters may require that a customer have a minimum account balance in
order to participate in the offering. All conditional offers to purchase shares
must be reconfirmed by the customer or they will not be accepted. Conditional
offers may be withdrawn at any time before the customer receives a notice of
acceptance from the underwriter. If the demand for shares from customers
submitting online conditional offers exceeds the amount of shares available for
Internet distribution, the underwriter will use a random allocation method to
distribute shares to customers. There are no plans to direct shares to
particular purchasers via the Internet.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be
required to make.
We will apply to list our common stock on The Nasdaq Stock Market's National
Market under the symbol "TLXS."
Before this offering, there has been no public market for our common stock.
The initial public offering price was determined by negotiation between us and
the representatives. The principal factors considered in determining the public
offering price included:
. the information in this prospectus and otherwise available to the
representatives
. the history of and the prospects for the industry in which we compete
. the ability of our management
. the prospects for our future earnings
. the present state of our development and our current financial condition
. the general condition of the securities markets at the time of this
offering
. the recent market prices of, and the demand for, publicly-traded common
stock of generally comparable companies
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids under Regulation M under the
Exchange Act.
. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Syndicate covering transactions involve purchases of common stock in the
open market after the distribution has been completed in order to cover
syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a syndicate covering transaction to
cover syndicate short positions.
60
<PAGE>
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may occur
on The Nasdaq Stock Market's National Market or otherwise and, if commenced,
may be discontinued at any time.
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made under securities laws which will vary depending on
the relevant jurisdiction, and which may require resales to be made under
available statutory exemptions or under a discretionary exemption granted by
the Canadian securities regulatory authority that has jurisdiction. Purchasers
are advised to seek legal advice prior to any resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase
confirmation will represent to us and the dealer from whom the purchase
confirmation is received that:
. the purchaser is entitled under the provincial securities laws that
apply to the purchaser to purchase the common stock without the benefit
of a prospectus qualified under these securities laws
. the purchaser is purchasing as principal and not as agent if the
purchaser is not allowed to purchase as agent under the provincial
securities laws that apply to the purchaser
. the purchaser has reviewed the text above under "Resale Restrictions"
Rights of Action of Ontario Purchasers
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named in
this prospectus may be located outside Canada and, as a result, it may not be
possible for Canadian purchasers to serve process within Canada upon the issuer
or these persons. All or a substantial portion of the assets of the issuer and
these persons may be located outside Canada and, as a result, it may not be
possible to satisfy a judgment against the issuer or these persons in Canada or
to enforce a judgment obtained in Canadian courts against the issuer or these
persons outside Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by the purchaser under this offering. This report must be
in the form attached to British Columbia Securities Commission Blanket Order
BOR #95/17, a copy of which may be obtained from us. Only one report must be
filed for common stock acquired on the same date and under the same prospectus
exemption.
61
<PAGE>
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult with their own legal and
tax advisors about the tax consequences of an investment in the common stock in
their particular circumstances and about the eligibility of the common stock
for investment by the purchaser under Canadian legislation.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Mirick, O'Connell, DeMallie & Lougee, LLP, Worcester,
Massachusetts. Partners and associates in the firm own an aggregate of 18,250
shares of common stock and have options to purchase an additional 8,625 shares
of common stock. The execution and delivery of the underwriting agreement for
this offering will be passed upon for the underwriters by Foley, Hoag & Eliot
LLP, Boston, Massachusetts.
EXPERTS
PricewaterhouseCoopers LLP, independent accountants, have audited the
financial statements of Telaxis Communications Corporation as of December 31,
1997 and 1998, and for each of the three years in the period ended December 31,
1998 which are included in this prospectus and registration statement. Our
financial statements are included in this prospectus in reliance on the report
of PricewaterhouseCoopers LLP, given on their authority as experts in auditing
and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1. This
prospectus, which forms a part of the registration statement, does not contain
all of the information included in the registration statement and its exhibits.
References in this prospectus to any contract or other document are not
necessarily complete and, if we filed the contract or document as an exhibit to
the registration statement, you should refer to the exhibit for more
information. You may review a copy of the registration statement, including
exhibits and schedules filed with it, at the SEC's public reference facilities
in Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the regional offices of the SEC located at 7 World Trade Center, Suite
1300, New York, New York 10048, and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. You may also obtain copies of the
materials from the Public Reference Section of the SEC, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You will have to pay a
fee to the SEC for the copies. The SEC maintains a web site
(http://www.sec.gov) that contains reports, proxy and information statements
and other information regarding companies that file electronically with the
SEC.
We intend to furnish our stockholders with annual reports containing
financial statements audited by independent certified public accountants and
will make available quarterly reports containing unaudited summary financial
information for each of the first three quarters of each fiscal year.
62
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations and Comprehensive Loss............................ F-4
Statements of Changes in Stockholders' Deficit............................. F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Telaxis Communications Corporation
In our opinion, the accompanying balance sheets and the related statements
of operations and comprehensive loss, of changes in stockholders' deficit and
of cash flows present fairly, in all material respects, the financial position
of Telaxis Communications Corporation (formerly known as Millitech Corporation,
the "Company") at December 31, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of Telaxis Communications
Corporation'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 generally accepted auditing standards 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
Hartford, Connecticut March 5, 1999, except for Note 2
as to which the date is August 24, 1999,
Note 19 as to which the date is
October 18, 1999, and Note 20
as to which the date is December 16, 1999
F-2
<PAGE>
TELAXIS COMMUNICATIONS CORPORATION
BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31, Pro Forma
------------------ September 30, September 30,
1997 1998 1999 1999
-------- -------- ------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets
Cash and cash equivalents.... $ 10,294 $ 2,635 $ 12,158 $ 12,158
Accounts receivable, less
allowance for doubtful
accounts ($210 in 1997; $368
in 1998 and $273 in 1999)... 2,744 3,013 1,366 1,366
Contracts in process......... 85 139 -- --
Inventories.................. 3,162 3,093 4,722 4,722
Net assets to be disposed
of.......................... -- -- 1,811 1,811
Other current assets......... 96 97 277 277
-------- -------- -------- --------
Total current assets....... 16,381 8,977 20,334 20,334
Property, plant and
equipment, net.............. 3,430 5,922 5,446 5,446
Patents and intangible
assets, net of accumulated
amortization................ 121 -- -- --
Other assets................. 127 56 178 178
-------- -------- -------- --------
Total assets............... $ 20,059 $ 14,955 $ 25,958 $ 25,958
======== ======== ======== ========
Liabilities, Redeemable
Preferred Stock and
Stockholders' (Deficit) Equity
Current liabilities
Lines of credit.............. $ 1,500 $ -- $ 500 $ 500
Accounts payable............. 2,268 2,209 3,663 3,663
Customer prepayments......... 1,028 204 183 183
Accrued expenses............. 1,968 2,060 2,020 2,020
Income taxes payable......... 53 41 39 39
Current maturities of long-
term debt................... 508 379 786 786
Current maturities of capital
lease obligations........... 617 813 771 771
-------- -------- -------- --------
Total current liabilities.. 7,942 5,706 7,962 7,962
Long-term debt................. 729 350 1,066 1,066
Capital lease obligations...... 961 697 536 536
-------- -------- -------- --------
Total liabilities.......... 9,632 6,753 9,564 9,564
-------- -------- -------- --------
Commitments and contingencies
Redeemable Preferred Stock
Redeemable preferred stock,
Class A, $.01 par value;
$3.25 redemption value;
authorized 3,090,323 shares
(3,270,000 in 1997); issued
and outstanding 3,045,696
shares...................... 9,899 9,899 9,899 --
Redeemable preferred stock,
Class B, $.01 par value;
$3.25 redemption value;
authorized 789,677 shares
(1,250,000 in 1997); issued
and outstanding 789,677
shares...................... 2,566 2,566 2,566 --
Redeemable preferred stock,
Class C, $.01 par value;
authorized 0 shares (400,000
in 1997); none issued ...... -- -- -- --
Redeemable preferred stock,
Class D, $.01 par value;
$1.80 redemption value;
authorized 7,200,000 shares;
issued and outstanding
7,200,000 shares............ 12,960 12,960 12,960 --
Redeemable preferred stock,
Class E, $.01 par value;
$2.25 redemption value;
authorized 11,000,000 shares
in 1999 and 4,000,000 shares
in 1998; issued and
outstanding 9,941,508
shares...................... -- 7,368 22,368 --
-------- -------- -------- --------
25,425 32,793 47,793
Stockholders' (Deficit) Equity
(See Note 20)
Preferred stock, $.01 par
value; 4,500,000 shares
authorized in 1999; none
issued...................... -- -- -- --
Common stock, $.01 par value;
authorized 36,000,000 shares
in 1999, 25,000,000 shares
in 1998 and 20,000,000
shares in 1997; issued and
outstanding 782,986 shares
in 1999, 987,920 shares in
1998 and 983,394 shares in
1997........................ 10 10 8 123
Additional paid-in capital... 733 669 1,911 49,589
Note receivable.............. -- -- (281) (281)
Accumulated deficit.......... (15,741) (25,270) (32,859) (32,859)
Unearned compensation........ -- -- (178) (178)
-------- -------- -------- --------
Total stockholders'
(deficit) equity.......... (14,998) (24,591) (31,399) 16,394
-------- -------- -------- --------
Total liabilities,
redeemable preferred stock
and stockholders'
(deficit) equity.......... $ 20,059 $ 14,955 $ 25,958 $ 25,958
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
TELAXIS COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
-------------------------- -----------------------
1996 1997 1998 1998 1999
------- ------- -------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Sales..................... $ 201 $ 1,733 $ 2,386 $ 1,447 $ 5,504
Cost of sales............. 507 2,755 7,517 3,320 5,103
------- ------- -------- ------- -------
Gross margin (loss)....... (306) (1,022) (5,131) (1,873) 401
Operating expenses
Research and development,
net..................... 598 3,926 4,993 3,888 3,368
Selling and marketing.... 353 667 1,006 619 710
General and
administrative.......... 572 1,111 2,042 1,552 1,717
Stock compensation cost.. -- -- -- -- 47
------- ------- -------- ------- -------
Total operating
expenses................ 1,523 5,704 8,041 6,059 5,842
------- ------- -------- ------- -------
Operating loss............ (1,829) (6,726) (13,172) (7,932) (5,441)
------- ------- -------- ------- -------
Other income (expense)
Interest expense......... (423) (683) (473) (371) (561)
Income from contract
cancellation............ -- -- 997 -- --
Interest income.......... 13 40 233 200 55
Other.................... -- 17 -- -- --
------- ------- -------- ------- -------
Total other income
(expense)............... (410) (626) 757 (171) (506)
------- ------- -------- ------- -------
Loss from continuing
operations before income
taxes.................... (2,239) (7,352) (12,415) (8,103) (5,947)
Income tax benefit........ -- (640) (1,162) (1,027) --
------- ------- -------- ------- -------
Loss from continuing
operations............... (2,239) (6,712) (11,253) (7,076) (5,947)
------- ------- -------- ------- -------
Discontinued operations:
Income (loss) from
operations of MMWP
segment, net of taxes of
$328, $904, $1,162,
$1,027 (unaudited) and
$0 (unaudited) for the
years ended December 31,
1996, 1997, and 1998 and
for the nine months
ended September 30, 1998
and 1999, respectively.. (530) 1,342 1,724 1,523 258
Loss on disposition of
MMWP segment, including
provision of $300
(unaudited) for
operating losses during
the phase-out period,
net of $0 (unaudited)
for taxes............... -- -- -- -- (1,900)
------- ------- -------- ------- -------
Income (loss) from
discontinued operations.. (530) 1,342 1,724 1,523 (1,642)
------- ------- -------- ------- -------
Net loss and comprehensive
loss..................... $(2,769) $(5,370) $ (9,529) $(5,553) $(7,589)
======= ======= ======== ======= =======
Basic and diluted earnings
(loss) per share from:
Continuing operations.... $ (4.15) $(14.16) $ (22.87) $(14.38) $(11.14)
======= ======= ======== ======= =======
Discontinued operations.. $ (0.98) $ 2.83 $ 3.50 $ 3.10 $ (3.07)
======= ======= ======== ======= =======
Net loss................. $ (5.13) $(11.33) $ (19.37) $(11.28) $(14.21)
======= ======= ======== ======= =======
Shares used in computing
basic and diluted
earnings (loss) per
share.................... 540 474 492 492 534
======= ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
TELAXIS COMMUNICATIONS CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Additional
----------------- Paid-in Note Unearned Accumulated
Shares Amount Capital Receivable Compensation Deficit Total
--------- ------ ---------- ---------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1995................... 1,092,860 $ 11 $ 898 $ (7,602) $ (6,693)
Exercise of common stock
options................ 11,500 -- 5 5
Treasury stock acquired
and retired............ (206,666) (2) (101) (103)
Net loss................ (2,769) (2,769)
--------- ---- ------ ----- ---- -------- --------
Balances, December 31,
1996................... 897,694 9 802 -- (10,371) (9,560)
Exercise of common stock
options................ 85,700 1 42 43
Other................... (111) (111)
Net loss................ (5,370) (5,370)
--------- ---- ------ ----- ---- -------- --------
Balances, December 31,
1997................... 983,394 10 733 -- (15,741) (14,998)
Exercise of common stock
options................ 4,526 -- 2 2
Other................... (66) (66)
Net loss................ (9,529) (9,529)
--------- ---- ------ ----- ---- -------- --------
Balances, December 31,
1998................... 987,920 10 669 -- (25,270) (24,591)
Sale of common stock.... 225,000 2 504 (281) (225) -- --
Issuance of preferred
stock warrants......... -- -- 140 -- -- -- 140
Issuance of common stock
warrants............... -- -- 266 -- -- -- 266
Exercise of common stock
options................ 330,552 3 170 173
Exercise of warrants.... 22,500 -- 11 11
Amortization of unearned
compensation........... 47 47
Other................... 144 144
Net loss................ (7,589) (7,589)
Reverse stock split (See
Note 20)............... (782,986) (7) 7 -- -- -- --
--------- ---- ------ ----- ---- -------- --------
Balances, September 30,
1999 (unaudited)....... 782,986 $ 8 $1,911 $(281) (178) $(32,859) $(31,399)
========= ==== ====== ===== ==== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
TELAXIS COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
------------------------- -----------------------
1996 1997 1998 1998 1999
------- ------- ------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities
Net loss................... $(2,769) $(5,370) $(9,529) $(5,553) $(7,589)
Adjustments to reconcile
net loss to net cash
utilized by operating
activities:
Depreciation and
amortization.............. 1,176 1,563 2,076 1,425 2,072
Loss on disposition of MMWP
segment................... -- -- -- -- 1,900
Non-cash compensation
expense................... -- -- -- -- 225
Gain on sale of property
and equipment............. (241) -- -- -- --
Deferred income taxes...... 322 277 -- -- --
Changes in assets and
liabilities
Accounts receivable....... 1,240 (161) (269) 477 229
Contracts in process...... (68) 449 (54) (46) 23
Inventories............... (866) 220 69 (2,132) (3,577)
Other current assets...... 41 31 (1) (142) (149)
Accounts payable and
accrued expenses......... (927) 1,911 32 1,873 1,804
Customer prepayments...... 427 601 (824) (913) (10)
Income taxes payable...... (134) 53 (13) (3) (2)
------- ------- ------- ------- -------
Net cash utilized by
operating activities..... (1,799) (426) (8,513) (5,014) (5,074)
------- ------- ------- ------- -------
Cash flows from investing
activities
Additions to property and
equipment................. (556) (778) (3,706) (3,409) (1,487)
Proceeds from sale of
property and equipment.... 642 -- -- -- --
Reduction (addition) to
other assets.............. (58) (39) 20 (7) (74)
------- ------- ------- ------- -------
Net cash provided
(utilized) by investing
activities............... 28 (817) (3,686) (3,416) (1,561)
------- ------- ------- ------- -------
Cash flows from financing
activities
Proceeds from note
payable................... 2,000 -- -- -- 2,000
Net (repayment) borrowing
under line of credit...... 1,500 500 (1,500) (300) 500
Proceeds from long-term
debt...................... -- 1,000 -- -- 1,420
Repayments of long-term
debt and capital lease
obligations............... (1,415) (994) (1,264) (951) (862)
Issuance of common stock
upon exercise of options
and warrants.............. 6 43 2 2 184
Issuance of redeemable
preferred stock........... -- 9,917 7,368 -- 12,950
Stock issuance costs....... -- (111) (66) -- (34)
Redemption of preferred
stock..................... (3) -- -- -- --
Treasury stock acquired and
retired................... (103) -- -- -- --
Addition to other assets... (72) (31) -- -- --
------- ------- ------- ------- -------
Net cash provided
(utilized) by financing
activities............... 1,913 10,324 4,540 (1,249) 16,158
------- ------- ------- ------- -------
Net increase (decrease) in
cash and cash equivalents.. 142 9,081 (7,659) (9,679) 9,523
Cash and cash equivalents at
beginning of period........ 1,071 1,213 10,294 10,294 2,635
------- ------- ------- ------- -------
Cash and cash equivalents at
end of period.............. $ 1,213 $10,294 $ 2,635 $ 615 $12,158
======= ======= ======= ======= =======
Supplemental disclosure of
cash flow information
Cash paid (received) during
the period for
Income taxes paid (net of
cash refunds received).... $ 167 $ (62) $ -- $ -- $ (55)
Interest paid.............. 423 615 240 368 291
Non-cash investing and
financing activities:
Equipment acquired under
capital lease agreements.. 130 1,781 689 689 438
Conversion of notes and
accrued interest to
preferred stock........... -- 3,043 -- -- --
Issuance of preferred stock
for subordinated
promissory note........... -- -- -- -- 2,000
Note received for issuance
of common stock........... -- -- -- -- 281
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
TELAXIS COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
We develop and supply broadband point-to-multipoint wireless access
equipment used by network service providers to deliver integrated voice, video
and data services to business and residential customers. We sell our products
primarily to network system integrators that include our products in broadband
wireless systems sold to network service providers.
We commenced operations in 1982 and have derived the significant majority of
our sales from our millimeter-wave products business segment. In August 1999,
we adopted a plan to focus all of our resources on our broadband point-to-
multipoint wireless access business segment and to dispose of the millimeter-
wave products segment. As a result, we have presented the operations of the
millimeter-wave products segment as a discontinued operation in our financial
statements (see Note 2).
The following is a summary of significant accounting policies:
Unaudited Interim Financial Data
The financial information as of September 30, 1999 and for the nine months
ended September 30, 1998 and 1999 is unaudited. In the opinion of management,
the interim financial information includes all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of the results
for the interim periods. The results of operations for the nine months ended
September 30, 1999 are not necessarily indicative of the results to be expected
for any future period.
Unaudited Pro Forma Balance Sheet
The outstanding shares of the Company's preferred stock Series A, B, D and E
automatically convert to common stock upon a public offering resulting in gross
proceeds of at least $15,000,000 and with an offering price of $9.75, $9.75,
$9.75, and $4.50 per share, respectively. These conversions have been reflected
in the unaudited pro forma balance sheet as of September 30, 1999.
Cash and Cash Equivalents
The Company considers highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents.
Revenue Recognition
Sales under short-term contracts and for stock items are recognized when
deliveries are made. Sales under cost-reimbursement contracts are recorded as
costs are incurred and include estimated earned fees in the proportion that
costs incurred to date bear to total estimated costs.
Sales under certain fixed-price and fixed-price incentive contracts are
recorded utilizing the percentage of completion method, in which costs and
estimated gross margin are recorded as the work is performed. Income is accrued
based upon the percentage that costs incurred to date bear to estimated total
costs after giving effect to the most recent estimates of costs and funding at
completion.
Fees under certain contracts may be increased or decreased under cost or
performance incentive provisions which measure actual performance against
established targets or specific criteria. Incentive fee awards or penalties are
included in sales or cost of sales at the time the amounts can be reasonably
determined.
F-7
<PAGE>
TELAXIS COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
As some contracts extend over one or more years, revisions in cost and
profit estimates during the course of the work are reflected in the accounting
period in which the facts which require the revision become known. At the time
a loss on a contract becomes known, the entire amount of the estimated ultimate
loss on the contract is accrued.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash, cash equivalents and trade accounts
receivable. The Company places its cash investments with high-quality financial
institutions. The Company extends credit to its customers based on an
evaluation of the customer's financial condition and history and generally does
not require collateral. The Company has historically incurred minimal credit
losses. Approximately 24% and 27% of accounts receivable at December 31, 1997
and 1998 are due from customers who each comprise more than 10% of the total
outstanding accounts receivable. At September 30, 1999, approximately 98% of
accounts receivable was due from one customer.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Comprehensive Income
Effective January 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income. For
the years ended December 31, 1996, 1997 and 1998 and for the nine months ended
September 30, 1998 and 1999, comprehensive loss equaled net loss.
Research and Development
The Company incurs research and development costs in the exploration of
commercially viable applications of its millimeter-wave and microwave
technology.
The Company also incurs research and development costs under customer-funded
contracts. Costs of approximately $1,640,000 and $1,727,000 are recorded net of
the associated customer funding of $67,000 and $986,000 in the years ended
December 31, 1997 and 1998, respectively. Costs of approximately $978,000
(unaudited) and $664,000 (unaudited) are shown net of the associated customer
funding of $508,000 (unaudited) and $746,000 (unaudited) for the nine months
ended September 30, 1998 and 1999 respectively. There were no customer-funded
contracts in the year ended December 31, 1996. Significant terms of customer-
funded research and development arrangements include granting the customer a
non-exclusive, royalty-free right and license to use and distribute the product
and its related sales and technical literature that is developed by the Company
under the agreement. The Company is not obligated to repay any of the funds
received under these contracts.
Inventories
Inventories are stated at the lower of cost (average cost method) or market.
During 1998, the Company recorded a related reserve of approximately $1,068,000
to adjust inventory to its net realizable value.
F-8
<PAGE>
TELAXIS COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed
using the straight-line method based upon the estimated useful lives of the
assets as follows:
<TABLE>
<CAPTION>
Asset Life
----- -------------
<S> <C>
Machinery and equipment........................................ 5 to 7 years
Furniture and fixtures......................................... 7 to 10 years
Leasehold improvements......................................... 5 to 10 years
Equipment under capital leases................................. 5 to 7 years
</TABLE>
Leasehold improvements and equipment under capital leases are amortized over
the lesser of the life of the lease or the useful lives of the improvements or
equipment.
When assets are sold or retired, the related cost and accumulated
depreciation are removed from their respective accounts and any resulting gain
or loss is included in income.
Patents and Intangible Assets
Patents and intangible assets are recorded at cost and are amortized using
the straight-line method over 10 years.
Under FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, the Company reviews long-
lived assets and certain identifiable intangibles for impairment at each
reporting date based on the expected future cash flows of the assets compared
to the carrying value of the asset. To the extent that such carrying value
exceeds expected future cash flows, a writedown in intangibles is recorded. The
Company recorded charges of $125,000 and $76,664 for the years ended December
31, 1997 and 1998, respectively, as a result of its decision to reduce the
carrying value of certain patents held by the Company. This charge is included
as a component of general and administrative expenses.
Income Taxes
Deferred tax assets and liabilities are computed annually for differences
between the financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted tax
laws and rates applicable to periods in which the differences are expected to
affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
Income tax expense (benefit) is the tax payable or refundable for the period
plus or minus the change during the period in deferred tax assets and
liabilities. An income tax benefit is recorded in the Company's continuing
operations to the extent that the loss from continuing operations offsets
income from discontinued operations.
F-9
<PAGE>
TELAXIS COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Earnings Per Share
Earnings per share has been computed by dividing the loss from continuing
operations, income (loss) from discontinued operations and net loss by the
weighted average common shares outstanding. No effect has been given to the
exercise of common stock options, stock warrants, convertible notes, and
redeemable preferred stock, since the effect would be antidilutive on
continuing operations for all reporting periods. Pro forma basic and diluted
loss per share have been computed assuming the conversion of all outstanding
shares of redeemable preferred stock into common shares, as if the shares had
converted immediately upon their issuance. The following table presents the
calculation of historical and pro forma per share amounts (in thousands, except
per share data):
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
-------------------------- -----------------------
1996 1997 1998 1998 1999
------- ------- -------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Historical:
Loss from continuing
operations.............. $(2,239) $(6,712) $(11,253) $(7,076) $(5,947)
======= ======= ======== ======= =======
Weighted average shares
of common stock
outstanding............. 540 474 492 492 534
======= ======= ======== ======= =======
Basic and diluted loss
per share from
continuing operations... $ (4.15) $(14.16) $ (22.87) $(14.38) $(11.14)
======= ======= ======== ======= =======
Income (loss) from
discontinued
operations.............. $ (530) $ 1,342 $ 1,724 $ 1,523 $(1,642)
======= ======= ======== ======= =======
Weighted average shares
of common stock
outstanding............. 540 474 492 492 534
======= ======= ======== ======= =======
Basic and diluted income
(loss) per share from
discontinued
operations.............. $ (0.98) $ 2.83 $ 3.50 $ 3.10 $ (3.07)
======= ======= ======== ======= =======
Net loss................. $(2,769) $(5,370) $ (9,529) $(5,553) $(7,589)
======= ======= ======== ======= =======
Weighted average shares
of common stock
outstanding............. 540 474 492 492 534
======= ======= ======== ======= =======
Basic and diluted net
loss per share.......... $ (5.13) $(11.33) $ (19.37) $(11.28) $(14.21)
======= ======= ======== ======= =======
Pro Forma (unaudited):
Weighted average shares
of common stock
outstanding............. 492 534
Pro forma adjustment to
reflect weighted average
effect of assumed
conversion of
outstanding redeemable
preferred stock into
common stock............ 5,827 7,299
-------- -------
Weighted average shares
used to compute pro
forma basic and diluted
loss per share.......... 6,319 7,833
======== =======
Pro forma basic and
diluted loss per share
from continuing
operations.............. $ (1.78) $ (0.76)
======== =======
</TABLE>
F-10
<PAGE>
TELAXIS COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Derivative Instruments
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, which establishes accounting and reporting standards for
derivative instruments and hedging activities. The statement requires
recognition of all derivatives at fair value in the financial statements. FASB
Statement No. 137, Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133, an
amendment of FASB Statement No. 133, defers implementation of Statement No.
133 until fiscal years beginning after June 15, 2000. The Company has reviewed
Statement No. 133 and believes that, upon implementation, the standard will
not have a significant effect on its financial statements.
Reclassification
Certain 1996, 1997 and 1998 amounts have been reclassified to conform to
the current year's presentation.
2. Discontinued Operations
In August 1999, the Board of Directors voted and authorized management to
dispose of the Company's millimeter-wave products (MMWP) business segment.
This segment consists of the development and manufacture of millimeter-wave
components and assemblies, including antennas and quasi-optical products,
multiplexer products, and passive waveguide products.
Accordingly, the Company has restated its historical financial statements
to present the MMWP segment's operating results as a discontinued operation.
The results of the MMWP operations, including provisions for termination
costs, employee benefits, losses during the phase-out period of $300,000 and
an estimated loss on disposal of $1,600,000 resulting from the write-down of
inventory and equipment, have been segregated from continuing operations and
reported as a separate line item in the statement of operations and
comprehensive loss. The Company anticipates selling the MMWP business segment
by January 31, 2000.
The assets and liabilities of the MMWP segment at September 30, 1999,
consisting primarily of accounts receivable, inventories, equipment, accounts
payable and accrued expenses, have been segregated as net assets to be
disposed of in the amount of $1,811,000 (unaudited) in the accompanying
balance sheet.
Sales for the MMWP segment were $13,467,000, $14,686,000, $12,211,000,
$9,554,000 (unaudited) and $6,517,000 (unaudited) for the years ended December
31, 1996, 1997 and 1998 and for the nine months ended September 30, 1998 and
1999, respectively.
3. Contracts in Process
Contracts in process consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------ September 30,
1997 1998 1999
-------- -------- -------------
(unaudited)
<S> <C> <C> <C>
Costs and estimated profit or loss on
uncompleted contracts.................. $ 10,618 $ 13,488 $--
Less billings to date................... (10,533) (13,349) --
-------- -------- ----
$ 85 $ 139 $--
======== ======== ====
</TABLE>
Unbilled amounts are recorded on a percentage of completion method and are
recoverable upon shipment of the product, presentation of billings, or
completion of the contract.
F-11
<PAGE>
TELAXIS COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------- September 30,
1997 1998 1999
------ ------ -------------
(unaudited)
<S> <C> <C> <C>
Work in process.................................. $ 997 $ 918 $2,332
Parts and subassemblies.......................... 2,165 2,175 2,390
------ ------ ------
$3,162 $3,093 $4,722
====== ====== ======
</TABLE>
5. Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------- September 30,
1997 1998 1999
------- -------- -------------
(unaudited)
<S> <C> <C> <C>
Machinery and equipment................... $ 7,841 $ 10,962 $ 9,139
Furniture and fixtures.................... 622 740 675
Leasehold improvements.................... 1,508 1,980 1,778
Equipment under capital leases............ 2,785 3,469 3,055
------- -------- -------
12,756 17,151 14,467
Less accumulated depreciation and
amortization............................. (9,326) (11,229) (9,201)
------- -------- -------
$ 3,430 $ 5,922 $ 5,446
======= ======== =======
</TABLE>
The net book value of all equipment under capital leases was approximately
$1,581, $1,487 and $1,134 (unaudited) at December 31, 1997 and 1998, and
September 30, 1999, respectively.
Depreciation expense for the years ended December 31, 1996, 1997 and 1998
was $1,101, $1,393 and $1,903, respectively. Depreciation expense for the nine
months ended September 30, 1998 and 1999 was $1,349 (unaudited) and $1,790
(unaudited), respectively.
6. Accrued Expenses
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------- September 30,
1997 1998 1999
------ ------ -------------
(unaudited)
<S> <C> <C> <C>
Accrued payroll, commissions and related
expenses..................................... $ 909 $1,002 $ 736
Accrued warranty expense...................... 342 492 580
Accrued contract costs........................ 647 334 244
Other accrued expenses........................ 70 232 160
Accrued loss on disposition of MMWP segment... -- -- 300
------ ------ ------
$1,968 $2,060 $2,020
====== ====== ======
</TABLE>
7. Lines of Credit
Lines of credit at December 31, 1997 consisted of a collateralized line of
credit of $1,500,000. Collateral for the line of credit consisted of all assets
of the Company. The maximum amount that could be borrowed
F-12
<PAGE>
TELAXIS COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
under this agreement was limited to 80% of bank-approved domestic accounts
receivable plus 75% of bank-approved international accounts receivable.
Interest accrued at the rate of prime plus 1%. (Prime was 8.5% at December 31,
1997.) The line of credit expired on October 31, 1998 and was not renewed by
the Company.
In August 1999, the Company entered into a revolving line of credit
agreement with a bank. The agreement provides for an initial borrowing of up to
$1,000,000, which is increased by $500,000 upon the Company's raising an
additional $3,000,000 in stockholders' equity and increased by $500,000 upon
receipt of a machinery and equipment appraisal, for a total amount available of
$2,000,000. Interest is payable on the outstanding balance of the line at prime
plus 1%. Prime was 8.25% at September 30, 1999. The line is collateralized by
all assets of the Company and expires on August 19, 2000. The agreement
requires the Company to comply with certain covenants, including net income and
tangible net worth. At September 30, 1999, $500,000 (unaudited) was outstanding
under this line of credit.
In connection with the revolving line of credit agreement, the bank received
a warrant to purchase 44,445 shares of the Company's Series E preferred stock
at $2.25 per share (see Note 20). The warrants were recorded at their fair
market value of $71,699 resulting in debt issuance costs of $71,699. These
costs will be amortized over the one year term of the line of credit. The
warrant expires in August 2006.
8. Notes Payable
In April 1999, the Company received $1,000,000 (unaudited) in proceeds from
subordinated promissory notes to certain preferred shareholders, common
stockholders, officers and directors as bridge financing. The notes bear
interest at 9.75% and are payable at the earlier of December 31, 1999 or the
sale of equity securities of the Company of at least $5,000,000. The note
holders received warrants for the purchase of 200,000 shares (unaudited) of the
Company's common stock at an exercise price of $.50 per share (see Note 20).
The warrants were recorded at their fair value of $72,012 resulting in a
discount to the notes of $72,012. This discount was fully amortized as interest
expense when the notes were refinanced in September 1999. The warrants expire
in July 2007.
In July 1999, the Company received an additional $1,000,000 (unaudited) in
proceeds from subordinated promissory notes issued to certain preferred
stockholders, common stockholders, officers and directors as bridge financing.
The notes bear interest at 9.75% and are to be paid in full on the earlier of
December 31, 1999 or the sale of the Company's equity securities having an
aggregate sales price of at least $5,000,000. The note holders received
warrants for the purchase of 200,000 shares (unaudited) of the Company's common
stock at $.50 per share (see Note 20). The warrants were recorded at their fair
value of $178,712 resulting in a discount to the notes of $178,712. This
discount was fully amortized as interest expense when the notes were refinanced
in September 1999. The warrants expire in July 2007.
In September 1999, the $2,000,000 (unaudited) in subordinated promissory
notes were exchanged for $2,000,000 (unaudited) in Class E preferred stock.
F-13
<PAGE>
TELAXIS COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
9. Long-Term Debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
December
31,
------------ September 30,
1997 1998 1999
------ ---- -------------
(unaudited)
<S> <C> <C> <C>
Uncollateralized subordinated note, due
December 2000, quarterly principal payments
of $87,500 with interest at 10% (see Note
13).......................................... $1,138 $700 $ 612
Uncollateralized subordinated note, due June
2003, monthly principal payments of $8,333
with interest at 10% (see Note 13)........... 99 29 375
Collateralized equipment notes, due April
2003, monthly principal and interest payments
of $24,695, with interest at 7.8%............ -- -- 941
------ ---- ------
1,237 729 1,928
Less unamortized debt discount................ -- -- (76)
Less current portion.......................... (508) (379) (786)
------ ---- ------
$ 729 $350 $1,066
====== ==== ======
</TABLE>
The maturities of long-term debt outstanding are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(unaudited)
<S> <C> <C>
1999.............................................. $379 $ 786
2000.............................................. 350 502
2001.............................................. -- 364
2002.............................................. -- 276
---- ------
$729 $1,928
==== ======
</TABLE>
During 1997, the Company issued subordinated convertible notes totaling
$1,000,000. In conjunction with these notes, the Company issued a total of
600,000 common stock warrants (see Note 20). In 1997, the $1,000,000
subordinated convertible notes and $2,000,000 subordinated convertible notes
issued previously, together with accrued interest of $43,000, were converted
into 1,690,656 shares of Class D redeemable preferred stock (see Notes 13 and
14).
The subordinated note due June 2003 and the line of credit (Note 7) contain
debt covenant requirements related to financial ratios, including a quick
ratio, debt-to-equity ratio and debt service coverage. The Company was in
default of certain of these covenants as of and for the years ended December
31, 1997 and 1998. The lenders of the line of credit have waived the defaults
as of and for the year ended December 31, 1997. The line of credit expired and
was not renewed in 1998. The lenders of the subordinated note have waived the
default as of and for the year ended December 31, 1998 and through the year
ending December 31, 1999.
In May 1999, the Company entered into a senior loan and security agreement
which provides for the issuance of up to $2,000,000 in promissory notes. As of
September 30, 1999, $941,000 (unaudited) in promissory notes were outstanding
against this agreement. The notes are collateralized by machinery, equipment,
intangible and other assets of the Company. The notes require an additional
interest compensation payment at the end of the term of the notes. The payment,
at the option of the Company, is either 12.5% of the original principal of the
note, or six months of payments in the amount of 2.43% of the original
principal of the note. In conjunction with these notes, the Company issued
44,445 (unaudited) Class E preferred stock warrants which expire in May 2006
(see Notes 14 and 20). The warrants were recorded at their fair value of
$68,787 resulting in a discount to the notes of $68,787. This discount will be
amortized over the term of the notes of four years.
F-14
<PAGE>
TELAXIS COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
In June 1999, the Company paid the balance of its uncollateralized
subordinated note due June 1999 and issued a new uncollateralized subordinated
note due June 2003 to the same lender totaling $400,000 (unaudited). The
previous note due June 1999 required monthly payments of $5,833 with interest
at 10%. In conjunction with the new note due June 2003, the Company issued
40,000 (unaudited) common stock warrants that expire July 2007 (see Notes 14
and 20). The warrants were recorded at their fair value of $14,977 resulting in
a discount to the note of $14,977. This discount will be amortized over the
term of the note of four years. The Company also extended the duration of the
lender's outstanding Class A preferred stock warrants to June 2003.
10. Leases
The Company leases its operating facility and certain equipment under
operating and capital leases which extend through 2003. Certain leases include
renewal options.
Future minimum annual lease payments under these lease agreements at
December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Operating Capital
Year ending Leases Leases
----------- --------- -------
<S> <C> <C>
1999...................................................... $ 659 $ 864
2000...................................................... 242 585
2001...................................................... 149 340
2002...................................................... 91 123
2003...................................................... 60 --
------ ------
Future minimum lease payments............................. $1,201 1,912
======
Less amount representing interest......................... (402)
------
Present value of net minimum lease payments............... 1,510
Less current portion...................................... (813)
------
Long-term portion......................................... $ 697
======
</TABLE>
The Company has a ten-year operating lease for its primary operating
facility. The building lease requires the Company to pay utilities, insurance,
maintenance costs and real estate taxes. The building is leased from a
preferred stockholder.
In addition, the Company leases equipment under various leases for periods
ranging from one to five years. Some of these leases contain options to
purchase the equipment at the termination of the lease at a price equal to fair
market value.
Total rental expense charged to operations under operating leases was
approximately $439,000, $521,000, $624,000, $361,000 (unaudited) and $405,000
(unaudited) for the years ended December 31, 1996, 1997 and 1998 and for the
nine months ended September 30, 1998 and 1999, respectively.
11. Incentive Compensation Plan
The Company maintains an incentive compensation plan. All payouts are at the
Board of Directors' discretion. No compensation expense was recognized under
this plan for the years ended December 31, 1996, 1997 and 1998 or for the nine
months ended September 30, 1998 and 1999.
F-15
<PAGE>
TELAXIS COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
12. Income Taxes
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1997 1998
---- ----- -------
<S> <C> <C> <C>
Continuing operations:
Current tax expense
(benefit):
Federal................. $-- $ 3 $ --
State................... -- (16) --
---- ----- -------
-- (13) --
---- ----- -------
Deferred tax expense
(benefit):
Federal................. -- (529) (981)
State................... -- (98) (181)
---- ----- -------
-- (627) (1,162)
---- ----- -------
Income tax benefit related
to continuing
operations............... -- (640) (1,162)
---- ----- -------
Discontinued operations:
Current tax expense:
Federal................. $-- $ 763 $ 981
State................... 6 141 181
---- ----- -------
6 904 1,162
---- ----- -------
Deferred tax expense:
Federal................. 304 -- --
State................... 18 -- --
---- ----- -------
322 -- --
---- ----- -------
Income tax expense related
to discontinued
operations............... 328 904 1,162
---- ----- -------
Total income tax
expense................ $328 $ 264 $ --
==== ===== =======
</TABLE>
The provision for income taxes differs from the amount computed utilizing
the federal statutory rate of 34% as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
---------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Federal statutory rate.. (34.0)% (34.0)% (34.0)%
State taxes, net of
federal effect......... (6.2) (4.3) (7.6)
Other................... (0.6) 7.6 (2.2)
Change in valuation
allowance.............. 54.3 35.9 43.8
----- ----- -----
13.5% 5.2% 0.0%
===== ===== =====
</TABLE>
F-16
<PAGE>
TELAXIS COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to deferred tax
assets (liabilities) at December 31, 1997 and 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1998
------------------ -------------------
Current Noncurrent Current Noncurrent
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Inventory reserves................... $ 263 $ -- $ 1,134 $ --
Vacation liability................... 130 -- 173 --
Warranty............................. 75 -- 198 --
Allowance for reserve accounts....... 84 -- 148 --
Accrued contract costs............... 157 -- 121 --
Other................................ 117 (38) 253 (85)
Investment........................... -- -- -- (173)
Depreciation......................... -- 110 -- 138
Tax credit carryovers................ -- 226 -- 383
Net operating loss carryforwards..... -- 4,223 -- 7,231
----- ------- ------- -------
Gross deferred tax benefit........... 826 4,521 2,027 7,494
Valuation allowance.................. (826) (4,521) (2,027) (7,494)
----- ------- ------- -------
$ -- $ -- $ -- $ --
===== ======= ======= =======
</TABLE>
At December 31, 1998, the Company has approximately $18,996 ($11,563 in
1997) of net operating loss carryforwards and $288 ($200 in 1997) of investment
and research and development tax credit carryforwards available for federal
income tax purposes. There are approximately $14,584 of net operating losses
($6,999 in 1997) and approximately $96 in investment and research and
development tax credit carryforwards available in 1998 ($12 in 1997) for state
tax purposes.
Expiration of these carryforwards commenced in 1998 and will continue
through 2013. It is possible that the net operating loss carryforward amounts
that may be used in a single year may be limited.
13. Preferred Stock
The Company has issued and outstanding Class A, B, D and E preferred stock
(see Note 20). Each of the classes has redemption rights, a liquidation
preference, conversion rights, and dividend rights:
. Each Class A, B, D and E share may be converted at the option of the
holder into a share of common stock at a price of $3.25, $3.25, $1.80
and $2.25, respectively. Conversion would occur automatically upon a
public offering resulting in gross proceeds of at least $15,000,000 and
with an offering price of at least $9.75, $9.75, $9.75 and $4.50 per
share for the Class A, B, D, and E shares, respectively. Each Class D
and E share would automatically be converted into common stock upon the
conversion of 90% or more of the authorized stock of the class.
. The Class A, B, D and E shares have a liquidation preference in the
amount of $3.25, $3.25, $1.80 and $2.25, respectively, plus all declared
and unpaid dividends.
. The holders of Class A, B, D and E shares are entitled to receive, when
and as declared by the Board of Directors, non-cumulative annual cash
dividends of $.26, $.26, $.144 and $.18 per share, respectively. No
dividends have been declared by the Board of Directors.
. Certain of the classes of preferred stock have liquidation rights,
voting rights and cash dividend rights in preference to the other
preferred stock.
During 1997, the stockholders authorized 400,000 shares of preferred stock
to be known as Class C preferred stock. The Class C shares are entitled to one
vote per share at any stockholders' meeting. During
F-17
<PAGE>
TELAXIS COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
1998, the stockholders reduced the authorized shares of Class C to zero and at
December 31, 1998, there were no Class C preferred shares outstanding.
During 1997, the Company issued 7,200,000 shares of Class D preferred stock
at $1.80 per share for an aggregate of $12,960,000 (see Note 20). As part of
the Class D preferred stock issue, the holders of the Company's subordinated
convertible notes agreed to convert the principal amount of $3,000,000 and
accrued interest of $43,000 into 1,690,656 shares of Class D preferred stock
(see Notes 9 and 20). The balance of the proceeds, equal to $9,917,000, was
received in cash.
During 1998, the Company issued 3,274,841 shares of Class E preferred stock
at $2.25 per share for an aggregate of $7,368,000 (see Note 20). In September
1999, the Company issued 6,666,667 (unaudited) shares of its Series E preferred
stock for $15,000,000 (unaudited), prior to issuance expenses (see Note 20). Of
the total proceeds, approximately $2,000,000 (unaudited) was used to retire the
$2,000,000 (unaudited) in subordinated promissory notes from the bridge
financings, resulting in approximately $13,000,000 (unaudited) of net proceeds.
The Company shall offer to redeem the Class A and Class B preferred shares
at the rate of 20% per year at $3.25 per share, plus an amount equal to all
declared and unpaid dividends. All Class A and Class B redemptions can be
waived at the option of two-thirds of the respective Class A or Class B
preferred stockholders. As part of the agreement in 1998 to issue Class E
preferred stock, the Class A and Class B preferred stockholders elected to
postpone their redemption rights until 2003.
On October 21, 2003 and on the first and second anniversaries thereof, the
Company shall offer to redeem from each Class D and Class E preferred holder, a
maximum of one-third, two-thirds and one hundred percent, respectively, of the
total number of shares held by each stockholder at a price equal to the greater
of $1.80 and $2.25, respectively, plus all declared and unpaid dividends, or
the fair market value as determined by the Board of Directors (see Note 20).
The Class D preferred stockholders agreed to postpone their redemption from
2002 to 2003, as part of the 1998 Class E preferred stock issuance.
The aggregate amounts of potential required future redemptions as of
December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Class A Class B Class D Class E
------------- ------------- -------------- -------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999............... -- $ -- -- $ -- -- $ -- -- $ --
2000............... -- -- -- -- -- -- -- --
2001............... -- -- -- -- -- -- -- --
2002............... -- -- -- -- -- -- -- --
2003............... 609 1,980 158 513 2,400 4,320 1,092 2,456
Thereafter......... 2,437 7,919 632 2,053 4,800 8,640 2,183 4,912
----- ------ --- ------ ----- ------- ----- ------
3,046 $9,899 790 $2,566 7,200 $12,960 3,275 $7,368
===== ====== === ====== ===== ======= ===== ======
</TABLE>
F-18
<PAGE>
TELAXIS COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
14. Stock Warrants
The Company has issued stock warrants for its preferred and common stock as
follows:
<TABLE>
<CAPTION>
Class A Class E
Preferred Stock Preferred Stock Common Stock
------------------- --------------- --------------------
Exercise
Exercise Number Price Exercise
Number of Price Per of Per Number of Price Per
Shares Share Shares Share Shares Share
--------- --------- ------ -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Exercisable at December
31, 1995............... 28,000 $3.25 -- -- 125,000 $0.50
Granted................. -- -- -- -- 1,200,000 0.50
------ ----- ------ ----- --------- -----
Exercisable at December
31, 1996............... 28,000 3.25 -- -- 1,325,000 0.50
Granted................. -- -- -- -- 600,000 0.50
------ ----- ------ ----- --------- -----
Exercisable at December
31, 1997............... 28,000 3.25 -- -- 1,925,000 0.50
Granted................. -- -- -- -- -- --
------ ----- ------ ----- --------- -----
Exercisable at December
31, 1998............... 28,000 3.25 -- -- 1,925,000 0.50
Granted................. -- -- 88,890 $2.25 440,000 0.50
Exercised .............. -- -- -- -- (22,500) 0.50
------ ----- ------ ----- --------- -----
Exercisable at September
30, 1999 (unaudited)
(See Note 20).......... 28,000 $3.25 88,890 $2.25 2,342,500 $0.50
====== ===== ====== ===== ========= =====
</TABLE>
The Company issued 1,200,000, 600,000, and 40,000 (unaudited) common stock
warrants during 1996, 1997 and the nine months ended September 30, 1999 in
conjunction with subordinated convertible debt of $2,000,000 and $1,000,000 and
a subordinated note of $400,000, respectively (see Notes 9 and 20). In
addition, 400,000 common stock warrants were issued during the nine months
ended September 30, 1999 in conjunction with the bridge financing (see Notes 7
and 20).
The outstanding common stock warrants have an exercise price of $.50 and
expire as follows (see Note 20):
<TABLE>
<CAPTION>
Expiration
Number of Warrants Date
------------------ --------------
<S> <C>
102,500....................................................... December 2000
1,200,000..................................................... September 2006
840,000....................................................... July 2007
</TABLE>
The outstanding Class A preferred stock warrants have an exercise price of
$3.25 and expire in June 2003 (see Notes 8 and 20). The outstanding Class E
preferred stock warrants have an exercise price of $2.25 and expire in May 2006
(see Notes 9 and 20).
15. Stock Options and Common Stock Issued
The Company has stock option plans that provide for the granting of options
to employees, directors and consultants (see Note 20). The plans permit the
granting of options to purchase a maximum of 2,327,534 shares of common stock
at prices and require that the options be exercisable at the prices and at the
times as determined by the Board of Directors, not to exceed ten years from
date of issuance.
As of December 31, 1998, 2,405,955 options are available for issuance under
these plans. However, the Class D preferred stockholders' agreement limits the
number of additional options that may be issued without the approval of the
Class D stockholders. As of December 31, 1998, under this agreement,
approximately 881,000 of the total 2,405,955 options available may be granted
by the Board of Directors without approval by the Class D stockholders. The
stock options for employees generally have a vesting requirement of four years
whereby 20% of the options granted vest at the time of issuance and the
remainder vest at a rate of 20% per year on the anniversary date of the
issuance.
F-19
<PAGE>
TELAXIS COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The aggregate stock option transactions for these plans are as follows:
<TABLE>
<CAPTION>
Number of Weighted average
Shares exercise price
--------- ----------------
<S> <C> <C>
Balance, December 31, 1995..................... 983,300 $0.50
Granted...................................... 375,000 0.50
Exercised.................................... (11,500) 0.50
Canceled or expired.......................... (366,900) 0.50
--------- -----
Balance, December 31, 1996..................... 979,900 0.50
Granted...................................... 410,000 0.50
Exercised.................................... (85,700) 0.50
--------- -----
Balance, December 31, 1997 (745,700
exercisable).................................. 1,304,200 0.50
Granted...................................... 1,880,773 0.50
Exercised.................................... (4,526) 0.50
Canceled or expired.......................... (705,728) 0.50
--------- -----
Balance, December 31, 1998 (1,355,006
exercisable).................................. 2,474,719 0.50
Granted...................................... 1,177,973 1.41
Exercised.................................... (330,552) 0.53
Canceled or expired.......................... (153,286) 0.50
--------- -----
Balance, September 30, 1999 (1,252,473
exercisable)(unaudited) (See Note 20)......... 3,168,854 $0.84
========= =====
</TABLE>
The weighted average contractual life of options outstanding at December 31,
1998 is 6.8 years.
Additionally, the Company has options outstanding at December 31, 1998 to
purchase 2,000 shares of the Company's common stock for $1.00 per share and
270,000 shares of the Company's common stock for $.50 per share (see Note 20).
The option to purchase 2,000 shares was granted to a consultant under a
restricted stock purchase agreement. The option to purchase 270,000 shares was
granted in 1996 under the terms of a sales agreement (see Note 19).
During the nine months ended September 30, 1999, the Company issued 225,000
(unaudited) shares of restricted common stock at $1.25 per share to an officer
in exchange for a note receivable (see Note 20). The note bears interest at
6.25% and matures in September 2009. In the event the individual is no longer
employed by the Company, the Company retains the right to repurchase the
shares. This repurchase right expires at a rate of 20% upon sale and 20% per
year each anniversary date of the issuance. The Company recognized $225,000 in
unearned compensation for the difference between the fair value of the stock
and the purchase price in this transaction. For the nine months ended September
30, 1999, the Company recognized $46,875 (unaudited) in compensation expense.
The Company granted options to non-employees during the nine months ended
September 30, 1999 and accordingly recognized $225,000 (unaudited) in non-cash
compensation expense.
F-20
<PAGE>
TELAXIS COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock-based
compensation plans. Had compensation cost for the Company's stock option plans
been determined under SFAS No. 123, Accounting for Stock-Based Compensation,
the Company's pro forma net loss and net loss per share would have been as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1996 1997 1998
------- ------- -------
(in thousands, except
per share data)
<S> <C> <C> <C>
Net loss:
As reported..................................... $(2,769) $(5,370) $(9,529)
Pro forma....................................... (2,795) (5,412) (9,662)
Net loss per share:
As reported..................................... (5.13) (11.33) (19.37)
Pro forma....................................... (5.18) (11.42) (19.64)
</TABLE>
The above pro forma effects may not be representative of the effects for
future years, as option grants typically vest over several years and additional
options are generally granted each year.
The fair value of each option grant has been estimated on the date of grant
using the minimum value pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate........................... 6.84% 6.47% 5.58%
Expected life..................................... 8 years 8 years 8 years
Volatility........................................ 0% 0% 0%
Dividend yield.................................... -- -- --
</TABLE>
The weighted average fair value of those options granted in 1996, 1997 and
1998 was $0.21, $0.20 and $0.18, respectively.
16. Common and Preferred Stock Reserved (see Note 20)
During 1998, the stockholders authorized an additional 5,000,000 shares of
common stock.
As a result of the outstanding preferred stock, outstanding stock warrants,
stock option plans and restricted stock purchase agreement, the Company has
reserved 18,700,073 shares of common stock at December 31, 1997 and 22,263,841
shares at December 31, 1998, and 28,000 shares of Class A preferred stock at
December 31, 1997 and 1998.
During the nine months ended September 30, 1999, the stockholders voted to
authorize 4,500,000 (unaudited) shares of preferred stock $.01 par value, to
increase the authorized shares of the Series E preferred stock to 11,000,000
(unaudited) and to increase the authorized shares of common stock to 36,000,000
(unaudited).
17. Segment Information
During 1998, the Company adopted the provisions of FASB Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information. FASB
Statement No. 131 establishes standards for disclosures about operating
segments, products and services, geographic areas and major customers.
F-21
<PAGE>
TELAXIS COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Prior to the Company's decision to discontinue its millimeter-wave products
(MMWP) business segment (see Note 2), the Company developed and manufactured
products in two business segments, the MMWP and broadband wireless access (BWA)
segments. As a result of this decision, the Company now operates in only the
BWA segment. Products of the BWA segment include hub and customer premises
equipment.
The BWA segment's sales by country are (in thousands):
<TABLE>
<CAPTION>
Year ended Nine months ended
December 31, September 30,
------------------ -----------------------
1996 1997 1998 1998 1999
---- ------ ------ ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
United States..................... $173 $ 225 $1,153 $ 431 $ 862
Canada............................ 1 -- 713 566 4,579
Other countries................... 27 1,508 520 450 63
---- ------ ------ ------ ------
$201 $1,733 $2,386 $1,447 $5,504
==== ====== ====== ====== ======
</TABLE>
The Company's research and production facilities and accompanying long-lived
assets are located in the United States.
Sales to individual customers in excess of 10% of total BWA segment revenues
are presented in the following table (in thousands):
<TABLE>
<CAPTION>
Year ended Nine months ended
December 31, September 30,
------------------ -----------------------
1996 1997 1998 1998 1999
---- ------ ------ ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Individual customers in excess
of 10% of revenues:
Customer A.................... $ 20 $ -- $ -- $ -- $ --
Customer B.................... 95 -- -- -- --
Customer C.................... 59 -- -- -- --
Customer D.................... 27 674 -- -- --
Customer E.................... -- 584 -- -- --
Customer F.................... -- -- 296 296 --
Customer G.................... -- -- 614 -- 612
Customer H.................... -- -- 713 566 4,458
Customer I ................... -- -- -- 316 --
---- ------ ------ ------ ------
201 1,258 1,623 1,178 5,070
Other customers................ -- 475 763 269 434
---- ------ ------ ------ ------
Total sales.................... $201 $1,733 $2,386 $1,447 $5,504
==== ====== ====== ====== ======
</TABLE>
18. Employee Savings and Profit-Sharing Plan
The Company sponsors an employee savings and profit-sharing plan for all
employees. Full-time employees become eligible for participation after one-half
year of service. The Company provides a 50% matching of employee contributions,
up to a maximum of $2,000 ($1,750 in 1997). An additional contribution is
determined at the discretion of the Board of Directors.
The Company's contributions to this plan amounted to approximately $132,000,
$147,000 and $191,000 for the years ended December 31, 1996, 1997 and 1998 and
$158,000 (unaudited) and $199,000 (unaudited) for the nine months ended
September 30, 1998 and 1999, respectively.
F-22
<PAGE>
TELAXIS COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
19. Related-Party Transactions
The Company had sales to a preferred stockholder of approximately $728,000,
$1,028,000 and $953,000 during 1996, 1997 and 1998, and $752,000 (unaudited)
and $1,084,000 (unaudited) for the nine months ended September 30, 1998 and
1999, respectively. Included in accounts receivable at December 31, 1997 and
1998 are approximately $378,000 and $160,000 due from these sales. These
transactions comprise subcontracts associated with the preferred stockholder's
contracts with the U.S. Government, and are contracted under federal
contracting guidelines. The sales and related accounts receivable from this
customer are included in discontinued operations.
The Company holds a promissory note receivable of $250,000 as the result of
a 1996 license and sales agreement with a limited liability company established
and partly owned by a former stockholder/employee. The Company also owns a
19.9% interest in the company. At December 31, 1997 and 1998, the Company has
reserved for the entire amount due on the note receivable of approximately
$213,000 and $200,000, respectively, and has no value assigned to its 19.9%
interest in the limited liability company. The Company has obtained a judgment
against the limited liability company in the amount of approximately $378,000.
In October 1999, the Company renegotiated that transaction with Millimetrix and
involved Millivision, L.L.C., a joint venture between Millimetrix and one other
entity. The Company released Millimetrix and Dr. Huguenin from substantially
all claims, including the $378,000 judgment, and Millimetrix released any
claims to the intellectual property relating to the Company's contraband
detection systems business. Millivision agreed to pay the Company royalties in
the minimum amount of $200,000. Millimetrix, Millivision and Dr. Huguenin also
agreed not to compete with the Company with respect to broadband wireless
telecommunications equipment.
20. Subsequent Events
On October 13, 1999, the stockholders voted to change the name of the
Company from Millitech Corporation to Telaxis Communications Corporation. In
addition, the shareholders voted to increase the authorized shares of common
stock to 100,000,000.
On December 16, 1999, the stockholders voted to effect a one for two reverse
stock split effective as of that date. The terms of the then outstanding
preferred stock, preferred stock warrants, common stock options and common
stock warrants provide for a similar one for two adjustment on their conversion
and exercise prices, respectively. The September 30, 1999 balance sheet and the
accompanying shares outstanding and per share earnings (loss) amounts for the
years ended December 31, 1998, 1997 and 1996 and for the nine months ended
September 30, 1999 and 1998 have been adjusted to reflect this reverse stock
split.
F-23
<PAGE>
[Graphic depiction of our two families of broadband point-to-multipoint wireless
access products. This includes two photographs, one labeled "Modular Products"
with a description that reads "Rapidly tailored for competitive trials and
initial commercial deployments". The second photograph is labeled "Planar
Products" with a description that reads "Mass-produced using low-cost, highly
automated manufacturing techniques".]
<PAGE>
[Logo of Telaxis Communications Corporation]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses (other than the underwriting
compensation expected to be incurred) in connection with the offering described
in this Registration Statement. All of the amounts (except the SEC Registration
Fee, the NASD Filing Fee and The Nasdaq Stock Market's National Market Listing
Fee) are estimates.
<TABLE>
<S> <C>
SEC Registration Fee................................................ $ 21,682
NASD Filing Fee..................................................... 7,745
The Nasdaq Stock Market's National Market Listing Fee............... 95,000
Blue Sky Fees and Expenses.......................................... 7,500
Printing and Engraving Costs........................................ 100,000
Legal Fees and Expenses............................................. 350,000
Accounting Fees and Expenses........................................ 350,000
Transfer Agent and Registrar Fees and Expenses...................... 10,000
Miscellaneous....................................................... 58,073
----------
Total............................................................. $1,000,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers.
Section 67 of Chapter 156B of the Massachusetts General Laws, or the
Massachusetts Business Corporation Law (the "MBCL"), provides that the
indemnification of directors, officers, employees and other agents of a
corporation, and persons who serve at its request as directors, officers,
employees or other agents of another organization, or who serve at its request
in any capacity with respect to any employee benefit plan, may be provided by
it to whatever extent shall be specified in or authorized by (i) the articles
of organization or (ii) a by-law adopted by the stockholders or (iii) a vote
adopted by the holders of a majority of the shares of stock entitled to vote on
the election of directors. Except as the articles of organization or by-laws
otherwise require, indemnification of any such persons who are not directors of
the corporation may be provided by it to the extent authorized by the
directors. Such indemnification may include payment by the corporation of
expenses incurred in defending a civil or criminal action or proceeding in
advance of the final disposition of such action or proceeding, upon receipt of
an undertaking by the person indemnified to repay such payment if he shall be
adjudicated not to be entitled to indemnification, which undertaking may be
accepted without reference to the financial ability of such person to make
repayment. Any such indemnification may be provided although the person to be
indemnified is no longer an officer, director, employee or agent of the
corporation or of such other organization or no longer serves with respect to
any such employee benefit plan. Section 67 further provides that no
indemnification shall be provided for any person with respect to any matter as
to which he shall have been adjudicated in any proceeding not to have acted in
good faith in the reasonable belief that his action was in the best interest of
the corporation or, to the extent that such matter relates to service with
respect to any employee benefit plan, in the best interests of the participants
or beneficiaries of such employee benefit plan.
The Company's by-laws provide that the Company shall indemnify each person
who is, or shall have been, a director, officer, employee or agent of the
Company, or who is serving or shall have served, at the request of the Company,
as a director or officer of another organization or in any capacity with
respect to any employee benefit plan of the Company, against all liabilities
and expenses (including judgments, fines, penalties, amounts paid or to be paid
in settlement and reasonable attorney's fees) imposed upon or incurred by any
such person in connection with or arising out of claims made, or any action,
suit or proceeding threatened or brought against him or in which he may be
involved by reason of any action taken omitted by him as a director, officer,
employee or agent, or as a result of any service with respect to any such
employee benefit plan.
II-1
<PAGE>
Section 13(b)(1 1/2) of Chapter 156B of the MBCL permits a corporation to
include in its articles of organization a provision eliminating or limiting the
personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, provided that such
provision shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 61 or
62 of the MBCL (relating to unlawful payment of dividends, unlawful stock
purchase and redemption and loans to insiders) or (iv) for any transaction from
which the director derived an improper personal benefit. Article VI of the
Company's Articles of Organization provides that the Company's directors shall
not be liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director, expect in the circumstances set forth
in the MBCL.
Section 67 of the MBCL also affords a Massachusetts corporation the power to
obtain insurance on behalf of its directors and officers against liabilities
incurred by them in those capacities. The Company currently maintains a
directors and officers liability insurance policy.
The Underwriting Agreement filed as Exhibit 1.1 provides that the
Underwriters named therein will indemnify and hold harmless the Company and
each director, officer or controlling person of the Company from and against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"), and the Underwriting Agreement provides that
such Underwriters will contribute to certain liabilities of such persons under
the Securities Act.
Item 15. Recent Sales of Unregistered Securities.
The Company has issued or sold the following unregistered securities within
the past three years:
. an aggregate of 6,666,667 shares of Class E preferred stock at $2.25 per
share in September 1999 to 47 accredited investors;
. a warrant to purchase 44,445 shares of Class E preferred stock at $2.25
per share in August 1999 to a commercial lender;
. warrants to purchase an aggregate of 100,000 shares of common stock at
$1.00 per share in July 1999 to 12 accredited investors;
. a warrant to purchase 20,000 shares of common stock at $1.00 per share
in June 1999 to one accredited investor;
. a warrant to acquire 44,445 shares of Class E preferred stock at $2.25
per share in May 1999 to a lease financing company;
. warrants to purchase an aggregate of 100,000 shares of common stock at
$1.00 per share in April 1999 to 14 accredited investors;
. an aggregate of 3,274,841 shares of Class E preferred stock at $2.25 per
share in October, November and December 1998 to 32 accredited investors;
. an aggregate of 7,200,000 shares of Class D preferred stock at $1.80 per
share in November and December 1997 to 38 accredited investors;
. warrants to acquire an aggregate of 900,000 shares of common stock at
$1.00 per share in September 1996 and July 1997 to 23 accredited
investors;
. an aggregate of 11,250 shares of common stock at $1.00 per share in
September 1999 to one accredited investor upon the exercise of warrants
held by that individual that were issued in September 1996 and July
1997;
. stock options to purchase an aggregate of 1,270,067 shares of common
stock at an exercise price of $1.00 between October 1, 1996 and May 18,
1999 to a total of 189 consultants, employees and directors under the
Company's 1997 stock plan;
. stock options to purchase an aggregate of 277,112 shares of common stock
at an exercise price of $2.50 between July 14, 1999 and August 2, 1999
to a total of 11 consultants, employees and directors under the
Company's 1997 stock plan;
II-2
<PAGE>
. stock options to purchase an aggregate of 185,943 shares of common stock
at an exercise price of $4.50 between August 24, 1999 and September 13,
1999 to a total of 177 consultants, employees and directors under the
Company's 1997 stock plan;
. 112,500 shares of restricted common stock at $2.50 per share under our
1997 Stock Plan to one employee in September 1999;
. an aggregate of 213,889 shares at prices ranging from $1.00 to $2.50 to
our employees, directors and consultants upon the exercise of options
held by those individuals and issued under one or more of our stock
plans;
. stock options to purchase an aggregate of 69,000 shares of common stock
at an exercise price of $8.00 in November 1999 to a total of 7 employees
under the Company's 1997 Stock Plan; and
. stock options to purchase an aggregate of 118,750 shares of common stock
at an exercise price of $12.60 in December 1999 to a total of 53
consultants and employees under the Company's 1997 Stock Plan.
The foregoing numbers relating to our common stock have been adjusted to
reflect the one for two reverse stock split which became effective on December
16, 1999. As a result of the reverse stock split, every two shares of our
preferred stock will convert into one share of our common stock upon the
closing of this offering
Each of the sales described above were completed without registration under
the Securities Act in reliance upon one or more of the following exemptions:
. Section 4(2) of the Securities Act or Rule 506 of Regulation D
promulgated under the Securities Act for transactions not involving a
public offering; or
. Rule 701 promulgated under the Securities Act with respect to certain of
the options and shares of common stock issued to the Company's
employees, directors and consultants.
None of the sales of the securities issued by the Company have involved the
use of an underwriter, and no commissions were paid in connection with the sale
of any of the securities issued by the Company.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Restated Articles of Organization of the Company, as amended.***
3.2 Amended and Restated By-laws of the Company.**
4.1 Form of certificate evidencing ownership of Common Stock of the
Company.***
5.1 Form of Opinion of Mirick, O'Connell, DeMallie & Lougee, LLP.***
10.1 1986 Stock Plan of the Company.
10.2 1987 Stock Plan of the Company.
10.3 1988 Stock Plan of the Company.
10.4 1996 Stock Plan of the Company.
10.5 1997 Stock Plan of the Company.
10.6 1999 Stock Plan of the Company.
10.7 Employment Agreement by and between the Company and John L. Youngblood
dated January 25, 1994.
10.8 Reseller Agreement by and between the Company and Newbridge Networks
Corporation dated August 7, 1998.**+
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.9 Professional Services Agreement by and between the Company and
Newbridge Networks Corporation dated August 7, 1998.**+
10.10 Revised Purchase Order by and between the Company and Motorola dated
September 20, 1999.**+
10.11 Supply Agreement by and between the Company and California Amplifier,
Inc. dated October 14, 1999.**+
10.12 Lease by and between the Company and Edward J. O'Leary-Raymond M.
Vincunas Partnership dated January 16, 1990.**
10.13 Lease by and between the Company and Lloyd C. Green and Mildred E.
Green dated June 30, 1998.**
10.14 Revolving Line of Credit Agreement by and between the Company and
Boston Federal Savings Bank dated August 20, 1999.
10.15 Fourth Amended and Restated Registration Rights Agreement dated
September 17, 1999.**
10.16 Registration Rights Agreement by and between the Company and Boston
Federal Savings Bank dated August 20, 1999.
10.17 Registration Rights Agreement by and between the Company and Phoenix
Leasing Incorporated dated May 19, 1999.**
10.18 Purchase Agreement by and between the Company and Massachusetts
Technology Development Corporation dated June 1988.**
10.19 First Amendment to the Purchase Agreement by and between the Company
and Massachusetts Technology Development Corporation dated December
28, 1988.***
10.20 Second Amendment to the Purchase Agreement by and between the Company
and Massachusetts Technology Development Corporation dated June 17,
1999.***
10.21 Employee Stock Purchase Agreement by and between the Company and
Mervyn Fitzgerald dated September 16, 1999.***
10.22 Tax Agreement by and between the Company and Mervyn Fitzgerald dated
September 16, 1999.***
23.1 Consent of PricewaterhouseCoopers LLP.***
23.2 Consent of Mirick, O'Connell, DeMallie & Lougee, LLP (incorporated in
the Opinion as filed as Exhibit 5.1 above).***
24.1 Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ---------------------
All non-marked Exhibits listed above were filed with the Commission on
September 27, 1999.
* To be filed by amendment.
** Filed with Amendment No. 1.
*** Filed with this Amendment No. 2.
+ Confidential treatment requested as to certain portions of this Exhibit.
(b) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
All other financial statement schedules have been omitted because they are
not required, not applicable, or the information to be included in the
financial statement schedules is included in the Financial Statements or the
notes thereto.
II-4
<PAGE>
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance on Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it is declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Boston, Commonwealth of Massachusetts, on December 20,1999.
Telaxis Communications Corporation
By: /s/ John L. Youngblood*
----------------------------------
John L. Youngblood
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ John L. Youngblood* President, Chief Executive December 20, 1999
______________________________________ Officer and Director
John L. Youngblood
/s/ Dennis C. Stempel Vice President, Chief December 20, 1999
______________________________________ Financial Officer,
Dennis C. Stempel Treasurer, and Principal
Accounting Officer
/s/ Albert E. Paladino* Director December 20, 1999
______________________________________
Albert E. Paladino
/s/ Allan M. Doyle, Jr.* Director December 20, 1999
______________________________________
Allan M. Doyle, Jr.
/s/ Robert C. Fleming* Director December 20, 1999
______________________________________
Robert C. Fleming
/s/ James W. Fordyce* Director December 20, 1999
______________________________________
James W. Fordyce
/s/ David A. Norbury* Director December 20, 1999
______________________________________
David A. Norbury
/s/ Matthew S. Robison* Director December 20, 1999
______________________________________
Matthew S. Robison
</TABLE>
* By Dennis C. Stempel, attorney-in-fact pursuant to a Power of Attorney
previously filed.
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Restated Articles of Organization of the Company, as amended.***
3.2 Amended and Restated By-laws of the Company.**
4.1 Form of certificate evidencing ownership of Common Stock of the
Company.***
5.1 Form of Opinion of Mirick, O'Connell, DeMallie & Lougee, LLP.***
10.1 1986 Stock Plan of the Company.
10.2 1987 Stock Plan of the Company.
10.3 1988 Stock Plan of the Company.
10.4 1996 Stock Plan of the Company.
10.5 1997 Stock Plan of the Company.
10.6 1999 Stock Plan of the Company.
10.7 Employment Agreement by and between the Company and John L. Youngblood
dated January 25, 1994.
10.8 Reseller Agreement by and between the Company and Newbridge Networks
Corporation dated August 7, 1998.**+
10.9 Professional Services Agreement by and between the Company and
Newbridge Networks Corporation dated August 7, 1998.**+
10.10 Revised Purchase Order by and between the Company and Motorola dated
September 20, 1999.**+
10.11 Supply Agreement by and between the Company and California Amplifier,
Inc. dated October 14, 1999.**+
10.12 Lease by and between the Company and Edward J. O'Leary-Raymond M.
Vincunas Partnership dated January 16, 1990.**
10.13 Lease by and between the Company and Lloyd C. Green and Mildred E.
Green dated June 30, 1998.**
10.14 Revolving Line of Credit Agreement by and between the Company and
Boston Federal Savings Bank dated August 20, 1999.
10.15 Fourth Amended and Restated Registration Rights Agreement dated
September 17, 1999.**
10.16 Registration Rights Agreement by and between the Company and Boston
Federal Savings Bank dated August 20, 1999.
10.17 Registration Rights Agreement by and between the Company and Phoenix
Leasing Incorporated dated May 19, 1999.**
10.18 Purchase Agreement by and between the Company and Massachusetts
Technology Development Corporation dated June 1988.**
10.19 First Amendment to the Purchase Agreement by and between the Company
and Massachusetts Technology Development Corporation dated December
28, 1988.***
10.20 Second Amendment to the Purchase Agreement by and between the Company
and Massachusetts Technology Development Corporation dated June 17,
1999.***
10.21 Employee Stock Purchase Agreement by and between the Company and
Mervyn Fitzgerald dated September 16, 1999.***
10.22 Tax Agreement by and between the Company and Mervyn Fitzgerald dated
September 16, 1999.***
23.1 Consent of PricewaterhouseCoopers LLP.***
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
23.2 Consent of Mirick, O'Connell, DeMallie & Lougee, LLP (incorporated in
the Opinion as filed as Exhibit 5.1 above).***
24.1 Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ---------------------
All non-marked Exhibits listed above were filed with the Commission on
September 27, 1999.
* To be filed by amendment.
** Filed with Amendment No. 1.
*** Filed with this Amendment No. 2.
+ Confidential treatment requested as to certain portions of this Exhibit.
<PAGE>
Exhibit 3.1
FEDERAL IDENTIFICATION
NO. 04-2751645
------------------
The Commonwealth of Massachusetts
William Francis Galvin
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
RESTATED ARTICLES OF ORGANIZATION
(General Laws, Chapter 156B, Section 74)
We, John L. Youngblood , *President
-------------------------------------------------------------
and David L. Renauld ,*Clerk
-------------------------------------------------------------
of Millitech Corporation ,
--------------------------------------------------------------------------
(Exact name of corporation)
located at South Deerfield Research Park, P.O. Box 109, South Deerfield, MA
----------------------------------------------------------------
01373,
-----
(Street address of corporation Massachusetts)
do hereby certify that the following Restatement of the Articles of Organization
was duly adopted at a meeting held on October 13 , 1999 by a vote of
----------------- ------
the directors/or:
833,922 shares of Common Stock of 1,623,972 shares outstanding,
- -------
2,708,134 shares of Class A Preferred Stock of 3,045,696 shares outstanding,
- --------- ------------------------- ------------
(type, class & series, if any)
743,756 shares of Class B Preferred Stock of 789,677 shares outstanding, and
- ------- ------------------------- ----------
(type, class & series, if any)
6,864,898 shares of Class D Preferred Stock of 7,200,000 shares outstanding,
- --------- ------------------------ -----------
(type, class & series, if any)
9,557,110 shares of Class E Preferred Stock of 9,941,508 shares outstanding,
- ---------
** being at least two-thirds of each type, class or series outstanding and
entitled to vote thereon and of each type, class or series of stock whose rights
are adversely affected thereby:
ARTICLE I
The name of the corporation is:
Telaxis Communications Corporation
ARTICLE II
The purpose of the corporation is to engage in the following business
activities:
See Attached.
*Delete the inapplicable words. **Delete the inapplicable clause.
Note: If the space provided under any article or item on this form is
insufficient, additions shall be set forth on separate 8 1/2 x 11 sheets of
paper with a left margin of at least 1 inch. Additions to more than one article
may be made on a single sheet so long as each article requiring each addition is
clearly indicated.
<PAGE>
ARTICLE III
State the total number of shares and par value, if any, of each class of stock
which the corporation is authorized to issue:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
WITHOUT PAR VALUE WITH PAR VALUE
- -----------------------------------------------------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common: Common: 100,000,000 $.01
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
Class A 3,090,323 $.01
Preferred: Preferred: Class B 789,677 $.01
- -----------------------------------------------------------------------------------------
Class C 0 $.01
Class D 7,200,000 $.01
- -----------------------------------------------------------------------------------------
Class E 11,000,000 $.01
Undesignated 4,500,000 $.01
- -----------------------------------------------------------------------------------------
</TABLE>
ARTICLE IV
If more than one class of stock is authorized, state a distinguishing
designation for each class. Prior to the issuance of any shares of a class, if
shares of another class are outstanding, the corporation must provide a
description of the preferences, voting powers, qualifications, and special or
relative rights or privileges of that class and of each other class of which
shares are outstanding and of each series then established within any class.
See Attached.
ARTICLE V
The restrictions, if any, imposed by the Articles of Organization upon the
transfer of shares of stock of any class are:
None.
ARTICLE VI
**Other lawful provisions, if any, for the conduct and regulation of the
business and affairs of the corporation, for its voluntary dissolution, or for
limiting, defining, or regulating the powers of the corporation, or of its
directors or stockholders, or of any class of stockholders:
See Attached.
**if there are no provisions state "None".
Note: The preceding six (6) articles are considered to be permanent and may ONLY
be changed by filing appropriate Articles of Amendment.
<PAGE>
ARTICLE VII
The effective date of the restated Articles of Organization of the corporation
shall be the date approved and filed by the Secretary of the Commonwealth. If a
later effective date is desired, specify such date which shall not be more than
thirty days after the date of filing.
ARTICLE VIII
The information contained in Article VIII is not a permanent part of the
Articles of Organization.
a. The street address (post office boxes are not acceptable) of the principal
office of the corporation in Massachusetts is:
South Deerfield Research Park, South Deerfield, MA 01373
b. The name, residential address and post office address of each director and
officer of the corporation is as follows:
<TABLE>
<CAPTION>
NAME RESIDENTIAL ADDRESS POST OFFICE ADDRESS
<S> <C> <C>
President: John L. Youngblood 29366 Duberry Ridge 29366 Duberry Ridge
Boerne, TX 78015 Boerne, TX 78015
Treasurer: Dennis C. Stempel 18 Independence Road 18 Independence Road
Feeding Hills, MA 01030 Feeding Hills, MA 01030
Clerk: David L. Renauld 40 Barnes Road 40 Barnes Road
No. Brookfield, MA 01535 No. Brookfield, MA 01535
Directors: Albert E. Paladino 12 Wachusett Road 12 Wachusett Road
Chestnut Hill, MA 02167 Chestnut Hill, MA 02167
Allan M. Doyle, Jr. 17 Soo-Nipi Park Road 17 Soo-Nipi Park Road
New London, NH 03257 New London, NH 03257
Robert C. Fleming 7 Cider Hill Lane 7 Cider Hill Lane
Sherborn, MA 01770 Sherborn, MA 01770
Matthew S. Robison 3204 Caves Road 3204 Caves Road
Owings Mills, MD 21117 Owings Mills, MD 21117
James W. Fordyce 370 Lake Avenue 370 Lake Avenue
Greenwich, CT 06830 Greenwich, CT 06830
David A. Norbury 6705 Polo Farms Drive 6705 Polo Farms Drive
Summerfield, NC 27358 Summerfield, NC 27358
John L. Youngblood 29366 Duberry Ridge 29366 Duberry Ridge
Boerne, TX 78015 Boerne, TX 78015
</TABLE>
c. The fiscal year (i.e., tax year) of the corporation shall end on the last day
of the month of: December
d. The name and business address of the resident agent, if any, of the
corporation is: N/A
**We further certify that the foregoing Restated Articles of Organization affect
no amendments to the Articles of Organization of the corporation as heretofore
amended, except amendments to the following articles. Briefly describe
amendments below:
See Attached.
SIGNED UNDER THE PENALTIES OF PERJURY, this 13th/ day of October, 1999,
------- ------- --
/s/ John L. Youngblood , *President
- -------------------------------------------------------------------
John L. Youngblood
/s/ David L. Renauld , *Clerk
- -------------------------------------------------------------------
David L. Renauld
*Delete the inapplicable words. **If there are no amendments, state `None'.
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
RESTATED ARTICLES OF ORGANIZATION
(General Laws, Chapter 156B, Section 74)
================================================
I hereby approve the within Restated Articles of Organization and, the filing
fee in the amount of $64,400 having been paid, said articles are deemed to
have been filed with me this 14th day of October, 1999.
Effective Date: 10-14-99
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
Photocopy of document to be sent to:
David L. Renauld, Esquire
- --------------------------------------------
Mirick, O'Connell, DeMallie & Lougee, LLP
100 Front Street
- --------------------------------------------
Worcester, MA 01608-1477
- --------------------------------------------
Telephone: (508) 791-8500
----------------------------------
<PAGE>
ARTICLE II
----------
Purposes
--------
To develop, manufacture, market, sell and service devices, components,
subsystems and systems operating in the millimeter and submillimeter wavelength
regions of the electromagnetic spectrum.
To carry on any manufacturing, mercantile, selling, management, service or
other business, operation or activity which may be lawfully carried on by a
corporation organized under the Business Corporation Law of the Commonwealth of
Massachusetts, whether or not related to those referred to in the foregoing
paragraph.
<PAGE>
ARTICLE IV
----------
Capital Stock
-------------
The total number of shares of all classes of stock which the corporation
shall have authority to issue is One Hundred Twenty-Six Million Five Hundred
Eighty Thousand (126,580,000) shares, consisting of One Hundred Million
(100,000,000) shares of Common Stock, par value $.01 per share (the "Common
Stock"), and Twenty-Six Million Five Hundred Eighty Thousand (26,580,000) shares
of Preferred Stock, par value $.01 per share (the "Preferred Stock").
COMMON STOCK
------------
Section 1. Voting Rights. Subject to the relative rights and preferences
--------- -------------
of any shares of preferred stock authorized and issued hereunder, the holders of
shares of Common Stock shall be entitled to one vote for each share so held with
respect to all matters voted on by the shareholders of the corporation.
Section 2. Liquidation Rights. Subject to the prior and superior right of
--------- ------------------
any shares of preferred stock authorized and issued hereunder, upon any
voluntary or involuntary liquidation, dissolution or winding up of the affairs
of the corporation, the holders of Common Stock shall be entitled to receive
that portion of the remaining funds to be distributed. Such funds shall be paid
to the holders of Common Stock on the basis of the number of shares of Common
Stock held by each of them.
Section 3. Dividends. Subject to the relative rights and preferences of
--------- ---------
any shares of preferred stock authorized and issued hereunder, dividends may be
paid on the Common Stock as and when declared by the Board of Directors.
Section 4. Residual Rights. All rights accruing to the outstanding shares
--------- ---------------
of the corporation not expressly provided for to the contrary herein shall be
vested in the Common Stock.
PREFERRED STOCK
---------------
Section 1. Classes and Series of Preferred Stock. The Preferred Stock may
--------- -------------------------------------
from time to time be divided into and issued in classes and series within a
class. The different classes and series of Preferred Stock shall be established
and designated, and the variations in the relative rights and preferences as
between the different classes and series shall be fixed and determined, by the
Board of Directors as hereinafter provided. In all other respects all shares of
Preferred Stock shall be identical.
2
<PAGE>
Section 2. Designation of Class by Board of Directors. The Board of
--------- ------------------------------------------
Directors is hereby expressly authorized, subject to the provisions of these
Restated Articles of Organization, to establish classes of Preferred Stock, with
or without series, in accordance with applicable law and to fix and determine by
vote providing for the issue of such class:
(a) the number of shares constituting that class and series within that
class and the distinctive designation of that class and/or any series
and whether additional shares of that class and/or series may be
issued;
(b) whether any dividends shall be paid on shares of that class and/or
series, and, if so, the dividend rate on the shares of that class
and/or series; whether dividends shall be cumulative and, if so, from
which date or dates, and the relative rights of priority, if any, of
payment of dividends on shares of that class and/or series;
(c) whether shares of that class and/or series shall have voting rights in
addition to the voting rights provided by law and, if so, the terms of
such voting rights;
(d) whether shares of that class and/or series shall be convertible into
shares of Common Stock or another security and, if so, the terms and
conditions of such conversion, including provisions for adjustment of
the conversion rate in such events as the Board of Directors shall
determine;
(e) whether or not the shares of that class and/or series shall be
redeemable and, if so, the terms and conditions of such redemption,
including the date or dates upon or after which they shall be
redeemable and the amount per share payable in case of redemption,
which amount may vary under different conditions and at different
redemption dates; and whether that class and/or series shall have a
sinking fund for the redemption or purchase of shares of that class
and/or series and, if so, the terms and amount of such sinking fund;
(f) whether, in the event of purchase or redemption of the shares of that
class and/or series, any shares of that class and/or series shall be
restored to the status of authorized but unissued shares or shall have
another specified status;
(g) the rights of the shares of that class and/or series in the event of
the sale, conveyance, exchange or transfer of all or substantially all
of the property and assets of the corporation, or the merger or
consolidation of the corporation into or with any other corporation,
or the merger of any other corporation into it, or the voluntary or
involuntary liquidation, dissolution or winding up of the corporation,
and the relative rights of priority, if any, of shares of that class
and/or series to payment in any such event;
3
<PAGE>
(h) whether the shares of that class and/or series shall carry any
preemptive right in or preemptive right to subscribe for any
additional shares of that class or series or any shares of any other
class of stock which may at any time be authorized or issued, or any
bonds, debentures or other securities convertible into shares of stock
of any class of the corporation, or options or warrants carrying
rights to purchase such shares or securities;
(i) whether the shares of that class and/or series shall carry any
registration rights and the terms and conditions of such registration;
and
(j) any other designation, preferences, voting powers, qualifications, and
special or relative rights or privileges of the shares of that class
and/or series.
The Board of Directors may from time to time increase the number of shares
of any class or series of Preferred Stock already created by providing that any
unissued shares of Preferred Stock shall constitute part of such class or
series, and/or may decrease (but not below the number of shares thereof then
outstanding) the number of shares of any class or series of Preferred Stock
already created by providing that any unissued shares previously assigned to
such class or series shall no longer constitute part thereof.
Section 3. Residual Rights. All rights accruing to the outstanding shares
--------- ---------------
of capital stock of the corporation not expressly provided for to the contrary
in the Restated Articles of Organization with respect to the existing class or
series of Preferred Stock or in any subsequent designations with respect to any
other class or series of Preferred Stock shall be vested in the Common Stock.
CLASS A PREFERRED STOCK
-----------------------
Section 1. Designation. Three Million Ninety Thousand Three Hundred
--------- -----------
Twenty-Three (3,090,323) shares of Preferred Stock are hereby designated as
"Class A Preferred Stock" (the "Class A Preferred").
Section 2. Liquidation Rights. In the event of any voluntary or
--------- ------------------
involuntary liquidation, dissolution or winding up of the affairs of the
corporation, the holders of each share of Class A Preferred shall be entitled to
receive, prior and in preference to any distribution of any of the assets or
surplus funds of the corporation to the holders of the Class C Preferred and the
holders of the Common Stock of the corporation by reason of their ownership
thereof, an amount equal to three dollars and twenty-five cents ($3.25) per
share plus an amount equal to all declared but unpaid dividends to and including
the date full payment shall be tendered to the holder of the Class A Preferred
with respect to such liquidation, dissolution or winding up.
All of the preferential amounts to be paid to the holders of the Class A
Preferred under this Section 2 shall be paid or set apart for payment before the
payment or setting apart for payment of any amount for, or the distribution of
any assets of the corporation to, the holders of
4
<PAGE>
the Class C Preferred or the holders of the Common Stock in connection with such
liquidation, dissolution or winding up. After the payment or the setting apart
of payment to the holders of the Class A Preferred of the preferential amounts
so payable to them, the holders of the Class C Preferred and the holders of the
Common Stock shall be entitled to receive all remaining assets of the
corporation.
If the assets or surplus funds to be distributed to the holders of the
Class A Preferred are insufficient to permit the payment to such holders of
their full preferential amount, the assets and surplus funds legally available
for distribution shall be distributed ratably among the holders of the Class A
Preferred in proportion to the full preferential amount each such holder is
otherwise entitled to receive.
A consolidation or merger of the corporation or a sale of all or
substantially all of the assets of the corporation shall be regarded as a
liquidation, dissolution or winding up of the affairs of the corporation within
the meaning of this Section 2; provided, however, that each holder of Class A
-------- -------
Preferred shall have the right to elect the benefits of the provisions of
Section 3(d) (vii) hereof in lieu of receiving payment in liquidation,
dissolution or winding up of the corporation pursuant to this Section 2.
Section 3. Conversion. The holders of the Class A Preferred shall have
--------- ----------
conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Class A Preferred shall be
----------------
convertible, without the payment of any additional consideration by the holder
thereof and at the option of the holder thereof, at any time after the date of
issuance of such share, at the office of the corporation or any transfer agent
for the Class A Preferred, into such number of fully paid and nonassessable
shares of Common Stock as is determined by dividing three dollars and
twenty-five cents ($3.25) by the Conversion Price, determined as hereinafter
provided, in effect at the time of conversion. The Conversion Price at which
shares of Common Stock shall be deliverable upon conversion without the payment
of any additional consideration by the holder thereof (the "Conversion Price")
shall initially be three dollars and twenty-five cents ($3.25) per share of
Common Stock. Such initial Conversion Price shall be subject to adjustment, in
order to adjust the number of shares of Common Stock into which the Class A
Preferred is convertible, as hereinafter provided.
(b) Automatic Conversion. Each share of Class A Preferred shall
--------------------
automatically be converted into shares of Common Stock at the then effective
Conversion Price upon the closing of a firm commitment underwritten public
offering pursuant to an effective registration statement under the Securities
Act of 1933, as amended, covering the offer and sale of Common Stock for the
account of the corporation to the public at a public offering price of at least
$4.50 per share (with such amount to be appropriately adjusted in the event of
any stock dividend, stock distribution or subdivision as provided in
subparagraph (d)(vi) hereof) and having an aggregate offering price to the
public resulting in gross proceeds to the corporation of not less than
$15,000,000 (in the event of which offering, the person(s) entitled to receive
the Common Stock issuable upon such conversion of the Class A Preferred shall
not be deemed to have converted that Class A Preferred until immediately prior
to the closing of such offering).
5
<PAGE>
Each person who holds of record Class A Preferred immediately prior to such
automatic conversion shall be entitled to all dividends which have accrued to
the time of the automatic conversion, but not paid on the Class A Preferred,
pursuant to Section 6 hereof. Such dividends shall be paid to all such holders
within 30 days of the automatic conversion.
(c) Mechanics of Conversion. No fractional shares of Common Stock
-----------------------
shall be issued upon conversion of the Class A Preferred. In lieu of any
fractional shares to which the holder would otherwise be entitled, the
corporation shall pay cash equal to such fraction multiplied by the then
effective Conversion Price. Before any holder of Class A Preferred shall be
entitled to convert the same into full shares of Common Stock, he shall
surrender the certificate or certificates therefor, duly endorsed, at the office
of the corporation or of any transfer agent for the Class A Preferred, and shall
give written notice to the corporation at such office that he elects to convert
the same and shall state therein his name or the name or names of his nominees
in which he wishes the certificate or certificates for shares of Common Stock to
be issued. The corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Class A Preferred, or to his nominee or
nominees, a certificate or certificates for the number of shares of Common Stock
to which he shall be entitled as aforesaid, together with cash in lieu of any
fraction of a share. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of the
shares of Class A Preferred to be converted, and the person or persons entitled
to receive the shares of Common Stock issuable upon conversion shall be treated
for all purposes as the record holder or holders of such shares of Common Stock
on such date.
(d) Adjustments to Conversion Price for Diluting Issues.
(i) Special Definitions. For purposes of this Section 3(d), the
-------------------
following definitions shall apply:
(1) "Option" shall mean rights, options, or warrants to
------
subscribe for, purchase or otherwise acquire either Common Stock or Convertible
Securities.
(2) "Original Issue Date" shall mean the date on which a
share of Class A Preferred was first issued.
(3) "Convertible Securities" shall mean any evidences of
indebtedness, shares (other than Common Stock, Class A Preferred or Class B
Preferred) or other securities directly or indirectly convertible into or
exchangeable for Common Stock.
(4) "Additional Shares of Common Stock" shall mean all
shares of Common Stock issued (or, pursuant to Section 3(d)(iii) hereof, deemed
to be issued) by the corporation after the Original Issue Date, other than
shares of Common Stock issued or issuable:
(A) upon conversion of shares of Class A Preferred or
of Class B Preferred;
6
<PAGE>
(B) to officers or employees of, or consultants to,
the corporation pursuant to the corporation's 1983 Incentive Stock Option Plan,
1984 Incentive Stock Option Plan, 1986 Incentive Stock Option Plan, 1987 Stock
Plan, 1988 Stock Plan, 1996 Stock Plan or pursuant to action by the Board of
Directors prior to March 28, 1984, and pursuant to a stock purchase or option
plan or other employee or director stock incentive or compensation program
(collectively, the "Plans") approved by a majority of the representatives of the
Class A Preferred on the Board of Directors;
(C) by way of dividend or other distribution of shares
of Common Stock excluded from the definition of Additional Shares of Common
Stock by the foregoing clauses (A) and (B) or this clause (C) or on shares of
Common Stock so excluded; or
(D) with the approval of a majority of the
representatives of the Class A Preferred and Class B Preferred on the Board of
Directors, which shares have been designated by said majority to be excepted
from the definition of "Additional Shares of Common Stock" contained herein.
(ii) No Adjustment of Conversion Price. No adjustment in the
---------------------------------
number of shares of Common Stock into which the Class A Preferred is convertible
shall be made, by adjustment in the Conversion Price of Class A Preferred in
respect of the issuance of Additional Shares of Common Stock or otherwise,
unless the consideration per share for an Additional Share of Common Stock
issued or deemed to be issued by the corporation is less than the Conversion
Price in effect on the date of, and immediately prior to, the issue of such
Additional Share.
(iii) Issue of Securities Deemed Issue of Additional Shares of
--------------------------------------------------------
Common Stock.
- ------------
(1) Options and Convertible Securities. In the event the
----------------------------------
corporation at any time or from time to time after the Original Issue Date shall
issue any Options or Convertible Securities or shall fix a record date for the
determination of holders of any class of securities entitled to receive any such
Options or Convertible Securities, then the maximum number of shares (as set
forth in the instrument relating thereto without regard to any provisions
contained therein for a subsequent adjustment of such number) of Common Stock
issuable upon the exercise of such Options or, in the case of Convertible
Securities and Options therefor, the conversion or exchange of such Convertible
Securities, shall be deemed to be Additional Shares of Common Stock issued as of
the time of such issue or, in case such record date shall have been fixed, as of
the close of business on such record date, provided that Additional Shares of
Common Stock shall not be deemed to have been issued unless the consideration
per share (determined pursuant to Section 3(d)(v) hereof), of such Additional
Shares of Common Stock would be less than the Conversion Price in effect on the
date of and immediately prior to such issue, or such record date, as the case
may be, and provided further that in any such case in which Additional Shares of
Common Stock are deemed to be issued:
7
<PAGE>
(A) no further adjustment in the Conversion Price
shall be made upon the subsequent issue of Convertible Securities or shares of
Common Stock upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(B) if such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for any increase in the
consideration payable to the corporation, or decrease in the number of shares of
Common Stock issuable, upon the exercise, conversion or exchange thereof, the
Conversion Price computed upon the original issue thereof (or upon the
occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon any such increase or decrease becoming
effective, be re-computed to reflect such increase or decrease insofar as it
affects such Options or the rights of conversion or exchange under such
Convertible Securities;
(C) upon the expiration of any such Options or any
rights of conversion or exchange under such Convertible Securities which shall
not have been exercised, the Conversion Price computed upon the original issue
thereof (or upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon such expiration, be
re-computed as if:
(I) in the case of Convertible Securities or
Options for Common Stock, the only Additional Shares of Common Stock issued were
the shares of Common Stock, if any, actually issued upon the exercise of such
Options or the conversion or exchange of such Convertible Securities and the
consideration received therefor was the consideration actually received by the
corporation for the issue of all such Options, whether or not exercised, plus
the consideration actually received by the corporation upon such exercise, or
for the issue of all such Convertible Securities which were actually converted
or exchanged, plus the additional consideration, if any, actually received by
the corporation upon such conversion or exchange, and
(II) in the case of Options for Convertible
Securities, only the Convertible Securities, if any, actually issued upon the
exercise thereof were issued at the time of issue of such Options, and the
consideration received by the corporation for the Additional Shares of Common
Stock deemed to have been then issued was the consideration actually received by
the corporation for the issue of all such Options, whether or not exercised,
plus the consideration deemed to have been received by the corporation
(determined pursuant to Section 3(d)(v) hereof) upon the issue of the
Convertible Securities with respect to which such Options were actually
exercised;
(D) no readjustment pursuant to clause (B) or (C)
above shall have the effect of increasing the Conversion Price to an amount
which exceeds the lower of (i) the Conversion Price on the original adjustment
data, or (ii) the Conversion Price that would have resulted from any issuance of
Additional Shares of Common Stock between the original adjustment date and such
readjustment date;
8
<PAGE>
(E) in the case of any Options which expire by their
terms not more than 30 days after the date of issue thereof, no adjustment of
the Conversion Price shall be made until the expiration or exercise of all such
Options, whereupon such adjustment shall be made in the same manner provided in
clause (C) above; and
(F) if such record date shall have been fixed and such
Options or Convertible Securities are not issued on the date fixed therefor, the
adjustment previously made in the Conversion Price which became effective on
such record date shall be canceled as of the close of business on such record
date, and thereafter the Conversion Price shall be adjusted pursuant to this
subparagraph 3(d)(iii) as of the actual date of their issuance.
(2) Stock Dividends, Stock Distributions and Subdivisions.
-----------------------------------------------------
In the event the corporation at any time or from time to time after the Original
Issue Date shall declare or pay any dividend or make any other distribution on
the Common Stock payable in Common Stock, or effect a subdivision of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in Common Stock), then and in any such event, Additional
Shares of Common Stock shall be deemed to have been issued:
(A) in the case of any such dividend or distribution,
immediately after the close of business on the record date for the determination
of holders of any class of securities entitled to receive such dividend or
distribution, or
(B) in the case of any such subdivision, at the close
of business on the date immediately prior to the date upon which such corporate
action becomes effective.
If such record date shall have been fixed and such dividend shall not have
been fully paid on the date fixed therefor, the adjustment previously made in
the Conversion Price which became effective on such record date shall be
canceled as of the close of business on such record date, and thereafter the
Conversion Price shall be adjusted pursuant to this subparagraph 3(d)(iii) as of
the time of actual payment of such dividend.
(iv) Adjustment of Conversion Price Upon Issuance of Additional
----------------------------------------------------------
Shares of Common Stock. In the event the corporation shall issue Additional
- ----------------------
Shares of Common Stock (including Additional Shares of Common Stock deemed to be
issued pursuant to Section 3(d) (iii) hereof, but excluding Additional Shares of
Common Stock issued pursuant to Section 3(d)(iii)(2), which event is dealt with
in Section 3(d)(vi) hereof) without consideration or for a consideration per
share less than the Conversion Price in effect on the date of and immediately
prior to such issue, then and in such event, such Conversion Price shall be
reduced, concurrently with such issue in order to increase the number of shares
of Common Stock into which the Class A Preferred is convertible, to a price
(calculated to the nearest cent) determined by multiplying such Conversion Price
by a fraction (x) the numerator of which shall be (1) the number of shares of
Common Stock outstanding immediately prior to such issue (including shares of
Common Stock issuable upon conversion of any outstanding Class A Preferred,
Class B Preferred or Convertible Securities), plus (2) the number of shares of
Common Stock which the aggregate
9
<PAGE>
consideration received by the corporation for the total number of Additional
Shares of Common Stock so issued would purchase at such Conversion Price, and
(y) the denominator of which shall be (1) the number of shares of Common Stock
outstanding immediately prior to such issue (including shares of Common Stock
issuable upon conversion of any outstanding Class A Preferred, Class B Preferred
or Convertible Securities), plus (2) the number of such Additional Shares of
Common Stock so issued, provided that the Conversion Price shall not be so
reduced at such time if the amount of such reduction would be an amount less
than $0.05, but any such amount shall be carried forward and reduction with
respect thereto made at the time of and together with any subsequent reduction
which, together with such amount and any other amount or amounts so carried
forward, shall aggregate $0.05 or more.
(v) Determination of Consideration. For purposes of this
------------------------------
Section 3(d), the consideration received by the corporation for the issue of any
Additional Shares of Common Stock shall be computed as follows:
(1) Cash and Property. Such consideration shall:
-----------------
(A) insofar as it consists of cash, be computed at the
aggregate amount of cash received by the corporation excluding amounts paid or
payable for accrued interest or accrued dividends;
(B) insofar as it consists of property other than
cash, be computed at the fair value thereof at the time of such issue, as
determined in good faith by the Board of Directors; and
(C) in the event Additional Shares of Common Stock are
issued together with other shares or securities or other assets of the
corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (A) and (B) above, as
determined in good faith by the Board of Directors.
(2) Options and Convertible Securities. The consideration
----------------------------------
per share received by the corporation for Additional Shares of Common Stock
deemed to have been issued pursuant to Section 3(d)(iii)(1) above, relating to
Options and Convertible Securities shall be determined by dividing
(x) the total amount, if any, received or receivable
by the corporation as consideration for the issue of such Options or Convertible
Securities, plus the minimum aggregate amount of additional consideration (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such consideration until such
subsequent adjustment occurs) payable to the corporation upon the exercise of
such Options or the conversion or exchange of such Convertible Securities, or in
the case of Options for Convertible Securities, the exercise of such Options for
Convertible Securities and the conversion or exchange of such Convertible
Securities, by
10
<PAGE>
(y) the maximum number of shares of Common Stock (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such number until such
subsequent adjustment occurs) issuable upon the exercise of such Options or the
conversion or exchange of such Convertible Securities.
(vi) Adjustment for Dividends, Distributions, Subdivisions,
------------------------------------------------------
Combinations or Consolidation of Common Stock.
- ---------------------------------------------
(1) Stock Dividends, Distributions or Subdivisions. In the
----------------------------------------------
event the corporation shall issue Additional Shares of Common Stock pursuant to
Section 3(d)(iii)(2) hereof in a stock dividend, stock distribution or
subdivision, the Conversion Price in effect immediately prior to such stock
dividend, stock distribution or subdivision shall, concurrently with the
effectiveness of such stock dividend, stock distribution or subdivision, be
proportionately decreased.
(2) Combination or Consolidations. In the event the
-----------------------------
outstanding shares of Common Stock shall be combined or consolidated, by
reclassification or otherwise, into a lesser number of shares of Common Stock,
the Conversion Price in effect immediately prior to such combination or
consolidation shall, concurrently with the effectiveness of such combination or
consolidation, be proportionately increased.
(vii) Adjustment for Merger or Reorganization. In case of any
---------------------------------------
consolidation or merger of the corporation with or into another corporation or
the conveyance of all or substantially all of the assets of the corporation to
another corporation, each share of Class A Preferred shall thereafter be
convertible into the number of shares of stock or other securities or property
to which a holder of the number of shares of Common Stock of the corporation
deliverable upon conversion of such Class A Preferred would have been entitled
upon such consolidation, merger or conveyance; and, in any such case,
appropriate adjustment (as determined by the Board of Directors) shall be made
in the application of the provisions herein set forth with respect to the rights
and interest thereafter of the holders of the Class A Preferred, to the end that
the provisions set forth herein (including provisions with respect to changes in
and other adjustments of the Conversion Price) shall thereafter be applicable,
as nearly as reasonably may be, in relation to any shares of stock or other
property thereafter deliverable upon the conversion of the Class A Preferred.
Each holder of Class A Preferred upon the occurrence of a capital
reorganization, merger or consolidation of the corporation or the sale of all or
substantially all its assets and properties as such events are more fully set
forth in the first paragraph of this Section 3(d)(vii), shall have the option of
electing treatment of his shares of Class A Preferred under either this
Section 3(d)(vii) or Section 2 hereof, notice of which election shall be
submitted in writing to the corporation at its principal offices no later than
five (5) days before the effective date of such event.
(e) No Impairment. The corporation will not, by amendment of its
-------------
Restated Articles of Organization or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the
11
<PAGE>
observance or performance of any of the terms to be observed or performed
hereunder by the corporation but will at all times in good faith assist in the
carrying out of all the provisions of this Section 3 and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of the Class A Preferred against impairment.
(f) Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Conversion Price pursuant to this Section 3,
the corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder of
Class A Preferred a certificate setting forth such adjustment or readjustment
and showing in detail the facts upon which such adjustment or readjustment is
based. The corporation shall, upon the written request at any time of any
holder of Class A Preferred, furnish or cause to be furnished to such holder a
like certificate setting forth (i) such adjustments and readjustments, (ii) the
Conversion Price at the time in effect, and (iii) the number of shares of Common
Stock and the amount, if any, of other property which at the time would be
received upon the conversion of Class A Preferred.
(g) Notice of Record Date. In the event of (i) any taking by the
---------------------
corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend which is the same as cash dividends paid in
previous quarters) or other distribution, or (ii) any capital reorganization of
the corporation, any reclassification or recapitalization of the capital stock
of the corporation, any merger or consolidation of the corporation, and any
transfer of all or substantially all of the assets of the corporation to any
other corporation, or any other entity or person, or any voluntary or
involuntary dissolution, liquidation or winding up of the corporation, the
corporation shall mail to each holder of Class A Preferred at least 20 days
prior to the record date specified therein, a notice specifying (A) the date on
which any such record is to be taken for the purpose of such dividend or
distribution and a description of such dividend or distribution, (B) the date on
which any such reorganization, reclassification, transfer, consolidation,
merger, dissolution, liquidation or winding up is expected to become effective,
and (C) the time, if any, that is to be fixed, as to when the holders of record
of Common Stock (or other securities) shall be entitled to exchange their shares
of Common Stock (or other securities) for securities or other property
deliverable upon such reorganization, reclassification, transfer, consolidation,
merger, dissolution, liquidation or winding up.
(h) Common Stock Reserved. The corporation shall reserve and keep
---------------------
available out of its authorized but unissued Common Stock such number of shares
of Common Stock as shall from time to time be sufficient to effect conversion of
the Class A Preferred.
Section 4. Redemption. (a) There shall be a five-year period (the
--------- ----------
"Redemption Period") for each share of the Class A Preferred commencing five
years after April 20, 1994 for any Class A Preferred issued on or prior to that
date and commencing five years after the date of issuance for any Class A
Preferred issued subsequent to April 20, 1994. On the commencement date of the
Redemption Period for each share of the Class A Preferred eligible for
redemption and on the first, second, third and fourth anniversaries thereof, the
corporation shall offer to each holder of shares of Class A Preferred eligible
for redemption to redeem a maximum of twenty percent
12
<PAGE>
(20%), forty percent (40%), sixty percent (60%), eighty percent (80%) and one
hundred percent (100%), respectively, of the total number of shares of Class A
Preferred held by such holder prior to the commencement of the Redemption Period
with respect to such Class A Preferred, at a price of three dollars and twenty-
five cents ($3.25) per share, plus an amount equal to all declared but unpaid
dividends payable in accordance with Section 6 hereof on each share of Class A
Preferred tendered for redemption; provided, that any shares of Class A
Preferred redeemed hereunder in any previous years shall reduce the maximum
amount of Class A Preferred which the corporation may be requested to redeem in
any then current year. The corporation shall offer to redeem shares of Class A
Preferred eligible for redemption by giving written notice thereof to each
holder of shares of Class A Preferred eligible for redemption, which notice
shall state the number of shares of Class A Preferred eligible to be redeemed by
such holder and shall specify a redemption date not less than forty-five (45)
days nor more than sixty (60) days after the date of such written notice. Any
holder of shares of Class A Preferred eligible to be redeemed may redeem such
shares by giving written notice thereof to the corporation, and to each other
holder of shares of Class A Preferred, no less than 15 days prior to the
redemption date specified in the corporation's written offer of redemption, and
by surrendering to the corporation on or before the redemption date the share
certificates for the number of shares of Class A Preferred to be redeemed. If
less than all of the shares represented by such certificates are redeemed, a new
certificate shall be issued for the unredeemed shares as promptly as possible.
Notwithstanding the foregoing, the holders of sixty-six and two-thirds percent
(66 2/3%) or more of the Class A Preferred shall have the right to postpone for
a specified period of time or waive such rights of redemption of all holders by
written notice to the corporation and to all such holders given at least fifteen
(15) days prior to the scheduled date of redemption.
(b) In the event of a sale of all or substantially all the assets of
the corporation, then the corporation shall offer to each holder of shares of
Class A Preferred to redeem not less than all the shares of Class A Preferred
held by such holder on the date the corporation fixes as the date to mail or
otherwise send out its offer of redemption, at a redemption price of three
dollars and twenty-five cents ($3.25) per shares plus an amount equal to all
declared but unpaid dividends payable in accordance with Section 6 hereof on
each such share of Class A Preferred tendered for redemption. The corporation
shall offer to redeem shares of Class A Preferred by giving written notice
thereof to each holder of shares of Class A Preferred, which notice shall be
sent not less than twenty (20) days before the scheduled date of consummation of
the transaction described above. Such notice of redemption shall state the
number of shares of Class A Preferred eligible to be redeemed by such holder and
shall specify a redemption date not less than twenty (20) days nor more than
sixty (60) days after the date of such written notice. Any holder of shares of
Class A Preferred may redeem such shares by giving written notice thereof to the
corporation not less than ten (10) days prior to the redemption date specified
in the corporation's written offer of redemption, and by surrendering to the
corporation on or before the redemption date the share certificates for the
number of shares of Class A Preferred to be redeemed.
13
<PAGE>
Section 5. Voting Rights.
--------- -------------
(a) The holders of shares of Class A Preferred shall be entitled to
notice of any shareholders' meeting and to vote upon any matter submitted to a
shareholder for a vote, as though the Common Stock, the Class A Preferred, the
Class B Preferred and the Class C Preferred constitute a single class of stock,
except with respect to those matters on which the Massachusetts Corporation Law
requires that a vote must be by a separate class or classes or by separate
series. For all votes other than votes by a separate class or series, holders of
Class A Preferred shall have that number of votes per share as is equal to the
number of shares of Common Stock into which each such share of Class A Preferred
held by such holder is then convertible, provided, however, that at any time, if
the number of shares of Common Stock into which the Class A Preferred is
convertible is increased as a result of an adjustment of the Conversion Price,
all as set forth in Section 3 above, the holders of Class A Preferred shall have
that number of votes equal to the number of shares of Common Stock into which
such Class A Preferred is convertible.
(b) The holders of Class A Preferred, the holders of Class B
Preferred, the holders of the Class C Preferred and the holders of Common Stock
shall be entitled to vote upon the election of directors on the following basis:
So long as at least 50,000 shares of Class A Preferred and Class B Preferred,
collectively, shall be outstanding, the holders of Class A Preferred and Class B
Preferred issued and outstanding, voting as a single class, are entitled to
elect three directors; and the holders of Class A Preferred, Class B Preferred,
Class C Preferred and Common Stock and any other capital stock having voting
rights are entitled to elect all other members of the Board of Directors.
Section 6. Dividend Rights.
--------- ---------------
(a) The holders of the then outstanding shares of Class A Preferred
shall be entitled to receive, when and as declared by the Board Directors, out
of funds legally available therefor, non-cumulative cash dividends at the annual
rate of $.26 per share payable at a rate of $.065 per share per calendar
quarter. The corporation's obligation to pay such dividends shall commence after
the first calendar quarter when the corporation's net after tax income,
calculated in accordance with generally accepted accounting principles, exceeds
five times such quarterly dividend on all then outstanding Class A Preferred,
Class B Preferred and Class C Preferred and on all then outstanding shares of
any other class of preferred stock of the corporation.
(b) Notwithstanding any provisions in Section 6(a) hereof, dividends
which have been declared on the Class A Preferred but not been paid prior to an
automatic conversion pursuant to Section 3(b) hereof shall be payable within 30
days of the Closing, as defined in Section 3(b), to each person who holds of
record Class A Preferred immediately prior to the automatic conversion.
Section 7. Covenants. So long as at least 50,000 shares of Class A
--------- ---------
Preferred shall be outstanding (as adjusted for all subdivisions and
combinations), the corporation shall not,
14
<PAGE>
without first obtaining the affirmative vote or written consent of not less than
sixty-six percent (66%) of such outstanding shares of Class A Preferred:
(a) amend or repeal any provision of, or add any provision to, the
corporation's Restated Articles of Organization or By-Laws if such action would
alter or change the preferences, rights, privileges or powers of, or the
restrictions provided for the benefit of, the Class A Preferred generally except
with respect to any class or any series of preferred stock of the corporation
created by the Board of Directors pursuant to a Certificate of Designation in
accordance with the provisions of these Revised Articles of Organization so long
as shares of the class or series created do not have any preference or priority
as to dividends or assets superior to the Class A Preferred;
(b) reclassify any Common Stock into shares having any preference or
priority as to dividends or assets superior to or on a parity with any such
preference or priority of the Class A Preferred;
(c) pay or declare any dividend or distribution on any shares of
Common Stock or apply any of its assets to the redemption, retirement, purchase
or other acquisition directly or indirectly, through subsidiaries, if any, or
otherwise, of any shares of Common Stock except from officers, directors or
employees of or consultants to the corporation upon termination of employment
and except pursuant to the corporation's rights of first refusal; or
(d) create any other class or classes of stock or series of preferred
stock having any preference or priority as to dividends or assets superior to
any such preference or priority of the Class A Preferred; or
(e) authorize any merger or consolidation of the corporation with or
into any other corporation or entity (except into or with a wholly-owned
subsidiary corporation with the requisite shareholder approval), or authorize
the sale of substantially all of the assets of the corporation.
CLASS B PREFERRED STOCK
-----------------------
Section 1. Designation. Seven Hundred Eighty-Nine Thousand Six Hundred
--------- -----------
Seventy-Seven (789,677) shares of Preferred Stock are hereby designated as
"Class B Preferred Stock" (the "Class B Preferred").
Section 2. Liquidation Rights. In the event of any voluntary or
--------- ------------------
involuntary liquidation, dissolution or winding up of the affairs of the
corporation, the holders of each share of Class B Preferred shall be entitled to
receive, prior and in preference to any distribution of any of the assets or
surplus funds of the corporation to the holders of the Class A Preferred, the
holders of the Class C Preferred and the holders of the Common Stock of the
corporation by reason of their ownership thereof, an amount equal to three
dollars and twenty-five cents ($3.25) per share plus an amount equal to all
declared but unpaid dividends to and including the date full payment shall
15
<PAGE>
be tendered to the holder of the Class B Preferred with respect to such
liquidation, dissolution or winding up.
All of the preferential amounts to be paid to the holders of the Class B
Preferred under this Section 2 shall be paid or set apart for payment before the
payment or setting apart for payment of any amount for, or the distribution of
any assets of the corporation to, the holders of the Class A Preferred, the
holders of the Class C Preferred or the holders of the Common Stock in
connection with such liquidation, dissolution or winding up. After the payment
or the setting apart of payment to the holders of the Class B Preferred of the
preferential amounts so payable to them, the holders of the Class A Preferred,
the holders of the Class C Preferred and the holders of the Common Stock shall
be entitled to receive all remaining assets of the corporation.
If the assets or surplus funds to be distributed to the holders of the
Class B Preferred are insufficient to permit the payment to such holders of
their full preferential amount, the assets and surplus funds legally available
for distribution shall be distributed ratably among the holders of the Class B
Preferred in proportion to the full preferential amount each such holder is
otherwise entitled to receive.
A consolidation or merger of the corporation or a sale of all or
substantially all of the assets of the corporation shall be regarded as a
liquidation, dissolution or winding up of the affairs of the corporation within
the meaning of this Section 2; provided, however, that each holder of Class B
-------- -------
Preferred shall have the right to elect the benefits of the provisions of
Section 3(d)(vii) hereof in lieu of receiving payment in liquidation,
dissolution or winding up of the corporation pursuant to this Section 2.
Section 3. Conversion. The holders of the Class B Preferred shall have
--------- ----------
conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Class B Preferred shall be
----------------
convertible, without the payment of any additional consideration by the holder
thereof and at the option of the holder thereof, at any time after the date of
issuance of such share, at the office of the corporation or any transfer agent
for the Class B Preferred, into such number of fully paid and nonassessable
shares of Common Stock as is determined by dividing three dollars and twenty-
five cents ($3.25) by the Conversion Price, determined as hereinafter provided,
in effect at the time of conversion. The Conversion Price at which shares of
Common Stock shall be deliverable upon conversion without the payment of any
additional consideration by the holder thereof (the "Conversion Price") shall
initially be three dollars and twenty-five cents ($3.25) per share of Common
Stock. Such initial Conversion Price shall be subject to adjustment, in order
to adjust the number of shares of Common Stock into which the Class B Preferred
is convertible, as hereinafter provided.
(b) Automatic Conversion. Each share of Class B Preferred shall
--------------------
automatically be converted into shares of Common Stock at the then effective
Conversion Price upon the closing of a firm commitment underwritten public
offering pursuant to an effective registration statement under the Securities
Act of 1933, as amended, covering the offer and sale of Common Stock for the
account of the corporation to the public at a public offering price of at
16
<PAGE>
least $4.50 per share (with such amount to be appropriately adjusted in the
event of any stock dividend, stock distribution or subdivision as provided in
subparagraph (d)(vi) hereof) and having an aggregate offering price to the
public resulting in gross proceeds to the corporation of not less than
$15,000,000 (in the event of which offering, the person(s) entitled to receive
the Common Stock issuable upon such conversion of the Class B Preferred shall
not be deemed to have converted that Class B Preferred until immediately prior
to the closing of such offering). Each person who holds of record Class B
Preferred immediately prior to such automatic conversion shall be entitled to
all dividends which have accrued to the time of the automatic conversion, but
not paid on the Class B Preferred, pursuant to Section 6 hereof. Such dividends
shall be paid to all such holders within 30 days of the automatic conversion.
(c) Mechanics of Conversion. No fractional shares of Common Stock
-----------------------
shall be issued upon conversion of the Class B Preferred. In lieu of any
fractional shares to which the holder would otherwise be entitled, the
corporation shall pay cash equal to such fraction multiplied by the then
effective Conversion Price. Before any holder of Class B Preferred shall be
entitled to convert the same into full shares of Common Stock, he shall
surrender the certificate or certificates therefor, duly endorsed, at the office
of the corporation or of any transfer agent for the Class B Preferred, and shall
give written notice to the corporation at such office that he elects to convert
the same and shall state therein his name or the name or names of his nominees
in which he wishes the certificate or certificates for shares of Common Stock to
be issued. The corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Class B Preferred, or to his nominee or
nominees, a certificate or certificates for the number of shares of Common Stock
to which he shall be entitled as aforesaid, together with cash in lieu of any
fraction of a share. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of the
shares of Class B Preferred to be converted, and the person or persons entitled
to receive the shares of Common Stock issuable upon conversion shall be treated
for all purposes as the record holder or holders of such shares of Common Stock
on such date.
(d) Adjustments to Conversion Price for Diluting Issues.
---------------------------------------------------
(i) Special Definitions. For purposes of this Section 3(d), the
-------------------
following definitions shall apply:
(1) "Option" shall mean rights, options, or warrants to
------
subscribe for, purchase or otherwise acquire either Common Stock or Convertible
Securities.
(2) "Original Issue Date" shall mean the date on which a
-------------------
share of Class B Preferred was first issued.
(3) "Convertible Securities" shall mean any evidences of
----------------------
indebtedness, shares (other than Common Stock, Class A Preferred or Class B
Preferred) or other securities directly or indirectly convertible into or
exchangeable for Common Stock.
17
<PAGE>
(4) "Additional Shares of Common Stock" shall mean all
---------------------------------
shares of Common Stock issued (or, pursuant to Section 3(d)(iii) hereof, deemed
to be issued) by the corporation after the Original Issue Date, other than
shares of Common Stock issued or issuable:
(A) upon conversion of shares of Class A Preferred or
of Class B Preferred;
(B) to officers or employees of, or consultants to,
the corporation pursuant to the corporation's 1983 Incentive Stock Option Plan,
1984 Incentive Stock Option Plan, 1986 Incentive Stock Option Plan, 1987 Stock
Plan, 1988 Stock Plan, 1996 Stock Plan or pursuant to action by the Board of
Directors prior to March 15, 1991, and pursuant to a stock purchase or option
plan or other employee or director stock incentive or compensation program
(collectively, the "Plans") approved by a majority of the representatives of the
Class A Preferred and Class B Preferred on the Board of Directors;
(C) by way of dividend or other distribution of shares
of Common Stock excluded from the definition of Additional Shares of Common
Stock by the foregoing clauses (A) and (B) or this clause (C) or on shares of
Common Stock so excluded; or
(D) with the approval of a majority of the
representatives of the Class A Preferred and Class B Preferred on the Board of
Directors, which shares have been designated by said majority to be excepted
from the definition of "Additional Shares of Common Stock" contained herein.
(ii) No Adjustment of Conversion Price. No adjustment in the
number of shares of Common Stock into which the Class B Preferred is convertible
shall be made, by adjustment in the Conversion Price of Class B Preferred in
respect of the issuance of Additional Shares of Common Stock or otherwise,
unless the consideration per share for an Additional Share of Common Stock
issued or deemed to be issued by the corporation is less than the Conversion
Price in effect on the date of, and immediately prior to, the issue of such
Additional Share.
(iii) Issue of Securities Deemed Issue of Additional Shares of
--------------------------------------------------------
Common Stock.
- ------------
(1) Options and Convertible Securities. In the event the
----------------------------------
corporation at any time or from time to time after the Original Issue Date shall
issue any Options or Convertible Securities or shall fix a record date for the
determination of holders of any class of securities entitled to receive any such
Options or Convertible Securities, then the maximum number of shares (as set
forth in the instrument relating thereto without regard to any provisions
contained therein for a subsequent adjustment of such number) of Common Stock
issuable upon the exercise of such Options or, in the case of Convertible
Securities and Options therefor, the conversion or exchange of such Convertible
Securities, shall be deemed to be Additional Shares of Common Stock issued as of
the time of such issue or, in case such record date shall have been
18
<PAGE>
fixed, as of the close of business on such record date, provided that Additional
Shares of Common Stock shall not be deemed to have been issued unless the
consideration per share (determined pursuant to Section 3(d)(v) hereof), of such
Additional Shares of Common Stock would be less than the Conversion Price in
effect on the date of and immediately prior to such issue, or such record date,
as the case may be, and provided further that in any such case in which
Additional Shares of Common Stock are deemed to be issued:
(A) no further adjustment in the Conversion Price
shall be made upon the subsequent issue of Convertible Securities or shares of
Common Stock upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(B) if such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for any increase in the
consideration payable to the corporation, or decrease in the number of shares of
Common Stock issuable, upon the exercise, conversion or exchange thereof, the
Conversion Price computed upon the original issue thereof (or upon the
occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon any such increase or decrease becoming
effective, be re-computed to reflect such increase or decrease insofar as it
affects such Options or the rights of conversion or exchange under such
Convertible Securities;
(C) upon the expiration of any such Options or any
rights of conversion or exchange under such Convertible Securities which shall
not have been exercised, the Conversion Price computed upon the original issue
thereof (or upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon such expiration, be
re-computed as if:
(I) in the case of Convertible Securities or
Options for Common Stock, the only Additional Shares of Common Stock issued were
the shares of Common Stock, if any, actually issued upon the exercise of such
Options or the conversion or exchange of such Convertible Securities and the
consideration received therefor was the consideration actually received by the
corporation for the issue of all such Options, whether or not exercised, plus
the consideration actually received by the corporation upon such exercise, or
for the issue of all such Convertible Securities which were actually converted
or exchanged, plus the additional consideration, if any, actually received by
the corporation upon such conversion or exchange, and
(II) in the case of Options for Convertible
Securities, only the Convertible Securities, if any, actually issued upon the
exercise thereof were issued at the time of issue of such Options, and the
consideration received by the corporation for the Additional Shares of Common
Stock deemed to have been then issued was the consideration actually received by
the corporation for the issue of all such Options, whether or not exercised,
plus the consideration deemed to have been received by the corporation
(determined pursuant to Section 3(d)(v) hereof) upon the issue of the
Convertible Securities with respect to which such Options were actually
exercised;
19
<PAGE>
(D) no readjustment pursuant to clause (B) or (C)
above shall have the effect of increasing the Conversion Price to an amount
which exceeds the lower of (i) the Conversion Price on the original adjustment
data, or (ii) the Conversion Price that would have resulted from any issuance of
Additional Shares of Common Stock between the original adjustment date and such
readjustment date;
(E) in the case of any Options which expire by their
terms not more than 30 days after the date of issue thereof, no adjustment of
the Conversion Price shall be made until the expiration or exercise of all such
Options, whereupon such adjustment shall be made in the same manner provided in
clause (C) above; and
(F) if such record date shall have been fixed and such
Options or Convertible Securities are not issued on the date fixed therefor, the
adjustment previously made in the Conversion Price which became effective on
such record date shall be canceled as of the close of business on such record
date, and thereafter the Conversion Price shall be adjusted pursuant to this
subparagraph 3(d)(iii) as of the actual date of their issuance.
(2) Stock Dividends, Stock Distributions and Subdivisions.
-----------------------------------------------------
In the event the corporation at any time or from time to time after the Original
Issue Date shall declare or pay any dividend or make any other distribution on
the Common Stock payable in Common Stock, or effect a subdivision of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in Common Stock), then and in any such event, Additional
Shares of Common Stock shall be deemed to have been issued:
(A) in the case of any such dividend or distribution,
immediately after the close of business on the record date for the determination
of holders of any class of securities entitled to receive such dividend or
distribution, or
(B) in the case of any such subdivision, at the close
of business on the date immediately prior to the date upon which such corporate
action becomes effective.
If such record date shall have been fixed and such dividend shall
not have been fully paid on the date fixed therefor, the adjustment previously
made in the Conversion Price which became effective on such record date shall be
canceled as of the close of business on such record date, and thereafter the
Conversion Price shall be adjusted pursuant to this subparagraph 3(d)(iii) as of
the time of actual payment of such dividend.
(iv) Adjustment of Conversion Price Upon Issuance of Additional
----------------------------------------------------------
Shares of Common Stock. In the event the corporation shall issue Additional
- ----------------------
Shares of Common Stock (including Additional Shares of Common Stock deemed to be
issued pursuant to Section 3(d)(iii) hereof, but excluding Additional Shares of
Common Stock issued pursuant to Section 3(d)(iii)(2), which event is dealt with
in Section 3(d)(vi) hereof) without consideration or for a consideration per
share less than the Conversion Price in effect on the date of and immediately
prior to such issue, then and in such event, such Conversion Price shall be
reduced, concurrently
20
<PAGE>
with such issue in order to increase the number of shares of Common Stock into
which the Class B Preferred is convertible, to a price (calculated to the
nearest cent) determined by multiplying such Conversion Price by a fraction (x)
the numerator of which shall be (1) the number of shares of Common Stock
outstanding immediately prior to such issue (including shares of Common Stock
issuable upon conversion of any outstanding Class A Preferred, Class B Preferred
or Convertible Securities), plus (2) the number of shares of Common Stock which
the aggregate consideration received by the corporation for the total number of
Additional Shares of Common Stock so issued would purchase at such Conversion
Price, and (y) the denominator of which shall be (1) the number of shares of
Common Stock outstanding immediately prior to such issue (including shares of
Common Stock issuable upon conversion of any outstanding Class A Preferred,
Class B Preferred or Convertible Securities), plus (2) the number of such
Additional Shares of Common Stock so issued, provided that the Conversion Price
shall not be so reduced at such time if the amount of such reduction would be an
amount less than $0.05, but any such amount shall be carried forward and
reduction with respect thereto made at the time of and together with any
subsequent reduction which, together with such amount and any other amount or
amounts so carried forward, shall aggregate $0.05 or more.
(v) Determination of Consideration. For purposes of this Section
------------------------------
3(d), the consideration received by the corporation for the issue of any
Additional Shares of Common Stock shall be computed as follows:
(1) Cash and Property. Such consideration shall:
-----------------
(A) insofar as it consists of cash, be computed at the
aggregate amount of cash received by the corporation excluding amounts paid or
payable for accrued interest or accrued dividends;
(B) insofar as it consists of property other than
cash, be computed at the fair value thereof at the time of such issue, as
determined in good faith by the Board of Directors; and
(C) in the event Additional Shares of Common Stock are
issued together with other shares or securities or other assets of the
corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (A) and (B) above, as
determined in good faith by the Board of Directors.
(2) Options and Convertible Securities. The consideration
----------------------------------
per share received by the corporation for Additional Shares of Common Stock
deemed to have been issued pursuant to Section 3(d)(iii)(1) above, relating to
Options and Convertible Securities shall be determined by dividing
(x) the total amount, if any, received or receivable
by the corporation as consideration for the issue of such Options or Convertible
Securities, plus the minimum aggregate amount of additional consideration (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such
21
<PAGE>
consideration until such subsequent adjustment occurs) payable to the
corporation upon the exercise of such Options or the conversion or exchange of
such Convertible Securities, or in the case of Options for Convertible
Securities, the exercise of such Options for Convertible Securities and the
conversion or exchange of such Convertible Securities, by
(y) the maximum number of shares of Common Stock (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such number until such
subsequent adjustment occurs) issuable upon the exercise of such Options or the
conversion or exchange of such Convertible Securities.
(vi) Adjustment for Dividends, Distributions, Subdivisions,
-----------------------------------------------------
Combinations or Consolidation of Common Stock.
- ---------------------------------------------
(1) Stock Dividends, Distributions or Subdivisions. In the
----------------------------------------------
event the corporation shall issue Additional Shares of Common Stock pursuant to
Section 3(d)(iii)(2) hereof in a stock dividend, stock distribution or
subdivision, the Conversion Price in effect immediately prior to such stock
dividend, stock distribution or subdivision shall, concurrently with the
effectiveness of such stock dividend, stock distribution or subdivision, be
proportionately decreased.
(2) Combination or Consolidations. In the event the
-----------------------------
outstanding shares of Common Stock shall be combined or consolidated, by
reclassification or otherwise, into a lesser number of shares of Common Stock,
the Conversion Price in effect immediately prior to such combination or
consolidation shall, concurrently with the effectiveness of such combination or
consolidation, be proportionately increased.
(vii) Adjustment for Merger or Reorganization. In case of any
---------------------------------------
consolidation or merger of the corporation with or into another corporation or
the conveyance of all or substantially all of the assets of the corporation to
another corporation, each share of Class B Preferred shall thereafter be
convertible into the number of shares of stock or other securities or property
to which a holder of the number of shares of Common Stock of the corporation
deliverable upon conversion of such Class B Preferred would have been entitled
upon such consolidation, merger or conveyance; and, in any such case,
appropriate adjustment (as determined by the Board of Directors) shall be made
in the application of the provisions herein set forth with respect to the rights
and interest thereafter of the holders of the Class B Preferred, to the end that
the provisions set forth herein (including provisions with respect to changes in
and other adjustments of the Conversion Price) shall thereafter be applicable,
as nearly as reasonably may be, in relation to any shares of stock or other
property thereafter deliverable upon the conversion of the Class B Preferred.
Each holder of Class B Preferred upon the occurrence of a capital
reorganization, merger or consolidation of the corporation or the sale of all or
substantially all its assets and properties as such events are more fully set
forth in the first paragraph of this Section 3(d)(vii),
22
<PAGE>
or Section 2 hereof, notice of which election shall be submitted in writing to
the corporation at its principal offices no later than five (5) days before the
effective date of such event.
(e) No Impairment. The corporation will not, by amendment of its
-------------
Restated Articles of Organization or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the corporation but
will at all times in good faith assist in the carrying out of all the provisions
of this Section 3 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Class B Preferred against impairment.
(f) Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Conversion Price pursuant to this Section 3,
the corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder of
Class B Preferred a certificate setting forth such adjustment or readjustment
and showing in detail the facts upon which such adjustment or readjustment is
based. The corporation shall, upon the written request at any time of any holder
of Class B Preferred, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustments and readjustments, (ii) the
Conversion Price at the time in effect, and (iii) the number of shares of Common
Stock and the amount, if any, of other property which at the time would be
received upon the conversion of Class B Preferred.
(g) Notice of Record Date. In the event of (i) any taking by the
---------------------
corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend which is the same as cash dividends paid in
previous quarters) or other distribution, or (ii) any capital reorganization of
the corporation, any reclassification or recapitalization of the capital stock
of the corporation, any merger or consolidation of the corporation, and any
transfer of all or substantially all of the assets of the corporation to any
other corporation, or any other entity or person, or any voluntary or
involuntary dissolution, liquidation or winding up of the corporation, the
corporation shall mail to each holder of Class B Preferred at least 20 days
prior to the record date specified therein, a notice specifying (A) the date on
which any such record is to be taken for the purpose of such dividend or
distribution and a description of such dividend or distribution, (B) the date on
which any such reorganization, reclassification, transfer, consolidation,
merger, dissolution, liquidation or winding up is expected to become effective,
and (C) the time, if any, that is to be fixed, as to when the holders of record
of Common Stock (or other securities) shall be entitled to exchange their shares
of Common Stock (or other securities) for securities or other property
deliverable upon such reorganization, reclassification, transfer, consolidation,
merger, dissolution, liquidation or winding up.
(h) Common Stock Reserved. The corporation shall reserve and keep
---------------------
available out of its authorized but unissued Common Stock such number of shares
of Common Stock as shall from time to time be sufficient to effect conversion of
the Class B Preferred.
23
<PAGE>
Section 4. Redemption. (a) There shall be a five-year period (the
--------- ----------
"Redemption Period") for each share of the Class B Preferred commencing five
years after the date of issuance for any Class B Preferred or on March 28, 1999,
whichever is later. On the commencement date of the Redemption Period for each
share of the Class B Preferred eligible for redemption and on the first, second,
third and fourth anniversaries thereof, the corporation shall offer to each
holder of shares of Class B Preferred eligible for redemption to redeem a
maximum of twenty percent (20%), forty percent (40%), sixty percent (60%),
eighty percent (80%) and one hundred percent (100%), respectively, of the total
number of shares of Class B Preferred held by such holder prior to the
commencement of the Redemption Period with respect to such Class B Preferred, at
a price of three dollars and twenty-five cents ($3.25) per share, plus an amount
equal to all declared but unpaid dividends payable in accordance with Section 6
hereof on each share of Class B Preferred tendered for redemption; provided,
that any shares of Class B Preferred redeemed hereunder in any previous years
shall reduce the maximum amount of Class B Preferred which the corporation may
be requested to redeem in any then current year. The corporation shall offer to
redeem shares of Class B Preferred eligible for redemption by giving written
notice thereof to each holder of shares of Class B Preferred eligible for
redemption, which notice shall state the number of shares of Class B Preferred
eligible to be redeemed by such holder and shall specify a redemption date not
less than forty-five (45) days nor more than sixty (60) days after the date of
such written notice. Any holder of shares of Class B Preferred eligible to be
redeemed may redeem such shares by giving written notice thereof to the
corporation, and to each other holder of shares of Class B Preferred, no less
than 15 days prior to the redemption date specified in the corporation's written
offer of redemption, and by surrendering to the corporation on or before the
redemption date the share certificates for the number of shares of Class B
Preferred to be redeemed. If less than all of the shares represented by such
certificates are redeemed, a new certificate shall be issued for the unredeemed
shares as promptly as possible. Notwithstanding the foregoing, the holders of
sixty-six and two-thirds percent (66 2/3%) or more of the Class B Preferred
shall have the right to postpone for a specified period of time or waive such
rights of redemption of all holders by written notice to the corporation and to
all such holders given at least fifteen (15) days prior to the scheduled date of
redemption.
(b) In the event of a sale of all or substantially all the assets of
the corporation, then the corporation shall offer to each holder of shares of
Class B Preferred to redeem not less than all the shares of Class B Preferred
held by such holder on the date the corporation fixes as the date to mail or
otherwise send out its offer of redemption, at a redemption price of three
dollars and twenty-five cents ($3.25) per share plus an amount equal to all
declared but unpaid dividends payable in accordance with Section 6 hereof on
each such share of Class B Preferred tendered for redemption. The corporation
shall offer to redeem shares of Class B Preferred by giving written notice
thereof to each holder of shares of Class B Preferred, which notice shall be
sent not less than twenty (20) days before the scheduled date of consummation of
the transaction described above. Such notice of redemption shall state the
number of shares of Class B Preferred eligible to be redeemed by such holder and
shall specify a redemption date not less than twenty (20) days nor more than
sixty (60) days after the date of such written notice. Any holder of shares of
Class B Preferred may redeem such shares by giving written notice thereof to the
corporation not less than ten (10) days prior to the redemption date specified
in the corporation's
24
<PAGE>
written offer of redemption, and by surrendering to the corporation on or before
the redemption date the share certificates for the number of shares of Class B
Preferred to be redeemed.
Section 5. Voting Rights.
--------- -------------
(a) The holders of shares of Class B Preferred shall be entitled to
notice of any shareholders' meeting and to vote upon any matter submitted to a
shareholder for a vote, as though the Common Stock, the Class A Preferred, the
Class B Preferred and the Class C Preferred constitute a single class of stock,
except with respect to those matters on which the Massachusetts Corporation Law
requires that a vote must be by a separate class or classes or by separate
series. For all votes other than votes by a separate class or series, holders of
Class B Preferred shall have that number of votes per share as is equal to the
number of shares of Common Stock into which each such share of Class B Preferred
held by such holder is then convertible, provided, however, that at any time, if
the number of shares of Common Stock into which the Class B Preferred is
convertible is increased as a result of an adjustment of the Conversion Price,
all as set forth in Section 3 above, the holders of Class B Preferred shall have
that number of votes equal to the number of shares of Common Stock into which
such Class B Preferred is convertible.
(b) The holders of Class A Preferred, the holders of Class B
Preferred, the holders of Class C Preferred and the holders of Common Stock
shall be entitled to vote upon the election of directors on the following basis:
So long as at least 50,000 shares of Class A Preferred and Class B Preferred,
collectively, shall be outstanding, the holders of Class A Preferred and Class B
Preferred issued and outstanding, voting as a single class, are entitled to
elect three directors; and the holders of Class A Preferred, Class B Preferred,
Class C Preferred and Common Stock and any other capital stock having voting
rights are entitled to elect all other members of the Board of Directors.
Section 6. Dividend Rights.
--------- ---------------
(a) The holders of the then outstanding shares of Class B Preferred
shall be entitled to receive, when and as declared by the Board Directors, out
of funds legally available therefor, non-cumulative cash dividends at the annual
rate of $.26 per share payable at a rate of $.065 per share per calendar
quarter. The corporation's obligation to pay such dividends shall commence after
the first calendar quarter when the corporation's net after tax income,
calculated in accordance with generally accepted accounting principles, exceeds
five times such quarterly dividend on all then outstanding Class A Preferred,
Class B Preferred and Class C Preferred and on all then outstanding shares of
any other class of preferred stock of the corporation.
(b) Notwithstanding any provisions in Section 6(a) hereof, dividends
which have been declared on the Class B Preferred but not been paid prior to an
automatic conversion pursuant to Section 3(b) hereof shall be payable within 30
days of the conversion, as defined in Section 3(b), to each person who holds of
record Class B Preferred immediately prior to the automatic conversion.
25
<PAGE>
Section 7. Covenants. So long as at least 50,000 shares of Class A
--------- ---------
Preferred and Class B Preferred, collectively, shall be outstanding (as adjusted
for all subdivisions and combinations), the corporation shall not, without first
obtaining the affirmative vote or written consent of not less than sixty-six
percent (66%) of such outstanding shares of Class A Preferred and Class B
Preferred, collectively:
(a) amend or repeal any provision of, or add any provision to, the
corporation's Restated Articles of Organization or By-Laws if such action would
alter or change the preferences, rights, privileges or powers of, or the
restrictions provided for the benefit of, the Class A Preferred and/or Class B
Preferred generally except with respect to any class or any series of preferred
stock of the corporation created by the Board of Directors pursuant to a
Certificate of Designation in accordance with the provisions of these Revised
Articles of Organization so long as the shares of the class or series created do
not have any preference or priority as to dividends or assets superior to the
Class A Preferred and/or Class B Preferred;
(b) reclassify any Common Stock into shares having any preference or
priority as to dividends or assets superior to or on a parity with any such
preference or priority of the Class A Preferred and/or Class B Preferred;
(c) pay or declare any dividend or distribution on any shares of
Common Stock or apply any of its assets to the redemption, retirement, purchase
or other acquisition directly or indirectly, through subsidiaries, if any, or
otherwise, of any shares of Common Stock except from officers, directors or
employees of or consultants to the corporation upon termination of employment
and except pursuant to the corporation's rights of first refusal; or
(d) create any other class or classes of stock or series of preferred
stock having any preference or priority as to dividends or assets superior to
any such preference or priority of the Class A Preferred and/or Class B
Preferred; or
(e) authorize any merger or consolidation of the corporation with or
into any other corporation or entity (except into or with a wholly-owned
subsidiary corporation with the requisite shareholder approval), or authorize
the sale of substantially all of the assets of the corporation.
CLASS C PREFERRED STOCK
-----------------------
Section 1. Designation. No (0) shares of Preferred Stock are hereby
--------- -----------
designated as "Class C Preferred Stock" (the "Class C Preferred Stock").
Section 2. Liquidation Rights. In the event of any voluntary or
--------- ------------------
involuntary liquidation, dissolution or winding up of the affairs of the
corporation, the holders of each share of Class C Preferred shall be entitled to
receive, prior and in preference to any distribution of any of the assets or
surplus funds of the corporation to the holders of the Common Stock of the
corporation by reason of their ownership thereof, but after any distributions
upon any voluntary or involuntary liquidation, dissolution or winding up of the
affairs of the corporation to holders of
26
<PAGE>
the Class A Preferred and Class B Preferred as provided in these Restated
Articles of Organization, an amount equal to twelve dollars and fifty cents
($12.50) per share plus an amount equal to all declared but unpaid dividends to
and including the date full payment shall be tendered to the holder of the Class
C Preferred with respect to such liquidation, dissolution or winding up.
All of the preferential amounts to be paid to the holders of the Class C
Preferred under this Section 2 shall be paid or set apart for payment before the
payment or setting apart for payment of any amount for, or the distribution of
any assets of the corporation to, the holders of the Common Stock in connection
with such liquidation, dissolution or winding up. After the payment or the
setting apart of payment to the holders of the Class C Preferred of the
preferential amounts so payable to them, the holders of the Common Stock shall
be entitled to receive all remaining assets of the corporation.
If the assets or surplus funds to be distributed to the holders of the
Class C Preferred are insufficient to permit the payment to such holders of
their full preferential amount, the assets and surplus funds legally available
for distribution shall be distributed ratably among the holders of the Class C
Preferred in proportion to the full preferential amount each such holder is
otherwise entitled to receive.
A consolidation or merger of the corporation or a sale of all or
substantially all of the assets of the corporation shall be regarded as a
liquidation, dissolution or winding up of the affairs of the corporation within
the meaning of this Section 2.
Section 3. Conversion. The holders of the Class C Preferred shall have
--------- ----------
conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Class C Preferred shall be
----------------
convertible, without the payment of any additional consideration by the holder
thereof and at the option of the holder thereof, at any time after the date of
issuance of such share, at the office of the corporation or any transfer agent
for the Class C Preferred, into one (1) fully paid and nonassessable share of
Common Stock.
(b) Automatic Conversion. Each share of Class C Preferred shall
--------------------
automatically be converted into one share of Common Stock upon the closing of a
firm commitment underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended, covering
the offer and sale of Common Stock for the account of the corporation to the
public at a public offering price of at least $9.75 per share and having an
aggregate offering price to the public resulting in gross proceeds to the
corporation of not less than $15,000,000 (in the event of which offering, the
person(s) entitled to receive the Common Stock issuable upon such conversion of
the Class C Preferred shall not be deemed to have converted that Class C
Preferred until immediately prior to the closing of such offering). Each person
who holds of record Class C Preferred immediately prior to such automatic
conversion shall be entitled to all dividends which have accrued to the time of
the automatic
27
<PAGE>
conversion, but not paid on the Class C Preferred, pursuant to Section 6 hereof.
Such dividends shall be paid to all such holders within 30 days of the automatic
conversion.
(c) Mechanics of Conversion. Before any holder of Class C Preferred
-----------------------
shall be entitled to convert the same into shares of Common Stock, he shall
surrender the certificate or certificates therefor, duly endorsed, at the office
of the corporation or of any transfer agent for the Class C Preferred, and shall
give written notice to the corporation at such office that he elects to convert
the same and shall state therein his name or the name or names of his nominees
in which he wishes the certificate or certificates for shares of Common Stock to
be issued. The corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Class C Preferred, or to his nominee or
nominees, a certificate or certificates for the number of shares of Common Stock
to which he shall be entitled as aforesaid. Such conversion shall be deemed to
have been made immediately prior to the close of business on the date of such
surrender of the shares of Class C Preferred to be converted, and the person or
persons entitled to receive the shares of Common Stock issuable upon conversion
shall be treated for all purposes as the record holder or holders of such shares
of Common Stock on such date.
(d) No Impairment. The corporation will not, by amendment of its
-------------
Restated Articles of Organization or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the corporation but
will at all times in good faith assist in the carrying out of all the provisions
of this Section 3 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Class C Preferred against impairment.
(e) Notice of Record Date. In the event of (i) any taking by the
---------------------
corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend which is the same as cash dividends paid in
previous quarters) or other distribution, or (ii) any capital reorganization of
the corporation, any reclassification or recapitalization of the capital stock
of the corporation, any merger or consolidation of the corporation, and any
transfer of all or substantially all of the assets of the corporation to any
other corporation, or any other entity or person, or any voluntary or
involuntary dissolution, liquidation or winding up of the corporation, the
corporation shall mail to each holder of Class C Preferred at least 20 days
prior to the record date specified therein, a notice specifying (A) the date on
which any such record is to be taken for the purpose of such dividend or
distribution and a description of such dividend or distribution, (B) the date on
which any such reorganization, reclassification, transfer, consolidation,
merger, dissolution, liquidation or winding up is expected to become effective,
and (C) the time, if any, that is to be fixed, as to when the holders of record
of Common Stock (or other securities) shall be entitled to exchange their shares
of Common Stock (or other securities) for securities or other property
deliverable upon such reorganization, reclassification, transfer, consolidation,
merger, dissolution, liquidation or winding up.
28
<PAGE>
(f) Common Stock Reserved. The corporation shall reserve and keep
---------------------
available out of its authorized but unissued Common Stock such number of shares
of Common Stock as shall from time to time be sufficient to effect conversion of
the Class C Preferred.
Section 4. Redemption. The Class C Preferred shall be redeemable only
--------- ----------
upon the mutual agreement of the holders thereof and the corporation. The
corporation shall have no obligation to redeem any shares of the Class C
Preferred.
Section 5. Voting Rights.
--------- -------------
(a) The holders of shares of Class C Preferred shall be entitled to
notice of any shareholders' meeting and to vote upon any matter submitted to a
shareholder for a vote, as though the Common Stock, the Class A Preferred, the
Class B Preferred and the Class C Preferred constitute a single class of stock,
except with respect to those matters on which the Massachusetts Corporation Law
requires that a vote must be by a separate class or classes or by separate
series. For all votes, holders of Class C Preferred shall have one vote per
share.
(b) The holders of Class A Preferred, the holders of the Class B
Preferred, the holders of Class C Preferred and the holders of Common Stock
shall be entitled to vote upon the election of directors on the following basis:
So long as at least 50,000 shares of Class A Preferred and Class B Preferred,
collectively, shall be outstanding, the holders of Class A Preferred and Class B
Preferred issued and outstanding, voting as a single class, are entitled to
elect three directors; and the holders of Class A Preferred, Class B Preferred,
Class C Preferred and Common Stock and any other capital stock having voting
rights are entitled to elect all other members of the Board of Directors.
Section 6. Dividend Rights. The holders of the then outstanding shares of
--------- ---------------
Class C Preferred shall be entitled to receive, when and as declared by the
Board Directors, out of funds legally available therefor, non-cumulative cash
dividends at the annual rate of $1.00 per share payable at a rate of $.25 per
share per calendar quarter. The corporation's obligation to pay such dividends
shall commence after the first calendar quarter when the corporation's net after
tax income, calculated in accordance with generally accepted accounting
principles, exceeds five times such quarterly dividend on all then outstanding
Class A Preferred, Class B Preferred and Class C Preferred and on all then
outstanding shares of any other class of preferred stock of the corporation.
CLASS D PREFERRED STOCK
Section 1. Designation. Seven Million Two Hundred Thousand (7,200,000)
---------- -----------
shares of the corporation's authorized but unissued shares of Preferred Stock
are hereby designated as "Class D Preferred Stock". Such Class D Preferred
Stock (the "Class D Preferred") shall have the relative rights and preferences
set forth below.
29
<PAGE>
Section 2. Liquidation Rights.
---------- ------------------
(a) Payment to Holders of Class D Preferred Stock Upon Liquidation.
--------------------------------------------------------------
In the event of any voluntary or involuntary liquidation, dissolution or
winding-up of the affairs of the corporation, the holder of each share of Class
D Preferred shall be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the corporation to the
holders of the Class A Preferred, the Class C Preferred and the Common Stock of
the corporation by reason of their ownership thereof, an amount equal to (i)
$1.80 per share of Class D Preferred plus (ii) an amount equal to all declared
but unpaid dividends to and including the date full payment shall be tendered to
the holder of the Class D Preferred with respect to such liquidation,
dissolution or winding-up.
All of the preferential amounts to be paid to the holders of the Class D
Preferred under this Section 2(a) shall be paid or set apart for payment before
the payment or setting apart for payment of any amount for, or the distribution
of any assets of the corporation to, the holders of the Class A Preferred, Class
C Preferred and Common Stock in connection with such liquidation, dissolution or
winding-up. If the assets or surplus funds to be distributed to the holders of
the Class B Preferred and the Class D Preferred are insufficient to permit the
payment to such holders of their full preferential amount, the assets and
surplus funds legally available for distribution shall be distributed ratably
among the holders of Class D Preferred and Class B Preferred in proportion to
the full preferential amount each such holder is otherwise entitled to receive.
(b) Payment to Holders of Class D Preferred and Common Stock. After
--------------------------------------------------------
the payment or the setting apart of payment to the holders of the Class A
Preferred, the Class B Preferred, the Class C Preferred and the Class D
Preferred of the preferential amounts so payable to them, all remaining assets
of the corporation shall be distributed among the holders of the Class D
Preferred and the holders of the Common Stock ratably in proportion to the
number of shares of Class D Preferred and Common Stock (and, in the case of
Class D Preferred, the number of shares of Common Stock into which each such
share of Class D Preferred held by such holder could be converted on the record
date for the determination of rights of stockholders to distributions under this
Section 2) held by them.
(c) No Liquidation Preference After Conversion. Upon conversion of
------------------------------------------
shares of Class D Preferred into shares of Common Stock pursuant to Section 3
below, the holder of such Common Stock shall not be entitled to any preferential
payment or distribution in case of any liquidation, dissolution or winding-up of
corporation, but shall share ratably in any distribution of the assets of the
corporation to all holders of Common Stock.
(d) Distributions Other than Cash. Whenever the distribution provided
-----------------------------
for in this Section 2 shall be payable in property other than cash, the value of
such distribution shall be the fair market value of such property as determined
in good faith by the Board of Directors of the corporation.
30
<PAGE>
(e) Merger as Liquidation, etc. The merger or consolidation of the
--------------------------
corporation into or with another corporation (other than a wholly-owned
subsidiary of this corporation in a merger in which this corporation is the
surviving corporation and its Articles of Organization remain unchanged), or the
sale of all or substantially all of the assets of the corporation (other than to
a wholly-owned subsidiary of this corporation) shall be deemed to be a
liquidation, dissolution or winding-up of the corporation for purposes of this
Section 2 unless the holders of at least 51% of the then outstanding shares of
Class D Preferred (voting as a single class) elect to the contrary by giving
written notice thereof to the corporation at least three days before the
effective date of such event. If such notice is given, the provisions of
Section 3(f) shall apply. The amount deemed distributed to the holders of Class
D Preferred upon any such merger or consolidation shall be the cash or the value
of the property, rights or securities distributed to such holders by the
acquiring person, firm or other entity. The value of such property, rights or
other securities shall be determined in good faith by the Board of Directors of
the corporation.
(f) Notice and Opportunity to Exercise Conversion Rights.
----------------------------------------------------
Notwithstanding anything to the contrary that may be inferred from the
provisions of this Section 2, each holder of shares of Class D Preferred shall
be entitled to receive notice from the corporation pursuant to Section 3(i)
hereof of any proposed liquidation, dissolution or winding-up of the corporation
at least 20 days prior to the date on which any such liquidation, dissolution or
winding-up of the corporation is scheduled to occur and, at any time prior to
any such liquidation, dissolution or winding-up of the corporation, to convert
any or all of such holder's shares of Class D Preferred into shares of Common
Stock pursuant to Section 3 hereof.
Section 3. Conversion. The holders of the Class D Preferred shall have
---------- ----------
conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Class D Preferred shall be
-----------------
convertible, without the payment of any additional consideration by the holder
thereof and at the option of the holder thereof, at any time after the date of
issuance of such share, at the office of the corporation or any transfer agent
for the Class D Preferred, into such fully paid and nonassessable shares of
Common Stock, as is determined by dividing one dollar and eighty cents ($1.80)
by the Conversion Price, determined as hereinafter provided, in effect at the
time of conversion. The Conversion Price at which shares of Common Stock shall
be deliverable upon conversion without the payment of any additional
consideration by the holder thereof (the "Conversion Price") shall initially be
one dollar and eighty cents ($1.80) per share of Common Stock. Such initial
Conversion Price shall be subject to adjustment, in order to adjust the number
of shares of Common Stock into which the Class D Preferred is convertible, as
hereinafter provided.
(b) Automatic Conversion.
--------------------
(i) Upon Qualifying Public Offerings. Each share of Class D
--------------------------------
Preferred shall automatically be converted into shares of Common Stock at the
then effective Conversion Price upon the closing of a firm commitment
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended, covering the offer and sale of
Common Stock for the account of the corporation to the public at a public
31
<PAGE>
offering price of at least $4.50 per share (with such amount to be appropriately
adjusted in the event of any stock dividend, stock distribution or subdivision
as provided in subparagraph (e) hereof and having an aggregate offering price to
the public resulting in gross proceeds to the corporation of not less than
$15,000,000 (in the event of which offering, the person(s) entitled to receive
the Common Stock issuable upon such conversion of the Class D Preferred shall
not be deemed to have converted that Class D Preferred until immediately prior
to the closing of such offering). Each person who holds of record Class D
Preferred immediately prior to such automatic conversion shall be entitled to
all dividends which have accrued to the time of the automatic conversion, but
have not been paid on the Class D Preferred, pursuant to Section 6 hereof. Such
dividends shall be paid to all such holders within 30 days of the automatic
conversion.
(ii) Upon Conversion of 90% of Class D Preferred. Each share
-------------------------------------------
of Class D Preferred then outstanding shall automatically be converted into
shares of Common Stock at the then effective Conversion Price, upon the
conversion of ninety percent (90%) or more of the authorized Class D Preferred.
Such conversion shall be deemed to have occurred on the date upon which the
aggregate number of shares of Class D Preferred which have been converted to
Common Stock equals or exceeds ninety percent (90%) of the authorized Class D
Preferred.
(c) Mechanics of Conversion. No fractional shares of Common Stock
-----------------------
shall be issued upon conversion of the Class D Preferred. In lieu of any
fractional shares to which the holder would otherwise be entitled, the
corporation shall pay cash equal to such fraction multiplied by the then
effective Conversion Price. Before any holder of Class D Preferred shall be
entitled to convert the same into full shares of Common Stock, he shall
surrender the certificate or certificates therefor, duly endorsed, at the office
of the corporation or of any transfer agent for the Class D Preferred, and shall
give written notice to the corporation at such office that he elects to convert
the same and shall state therein his name or the name or names of his nominees
in which he wishes the certificate or certificates for shares of Common Stock to
be issued. The corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Class D Preferred, or to his nominee or
nominees, a certificate or certificates for the number of shares of Common Stock
to which he shall be entitled as aforesaid, together with cash in lieu of any
fraction of a share. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of the
shares of Class D Preferred to be converted, and the person or persons entitled
to receive the shares of Common Stock issuable upon conversion shall be treated
for all purposes as the record holder or holders of such shares of Common Stock
on such date.
(d) Adjustments to Conversion Price for Diluting Issues.
---------------------------------------------------
(i) Special Definitions. For purposes of this Section 3(d),
-------------------
the following definitions shall apply:
(1) "Option" shall mean rights, options, or warrants
------
to subscribe for, purchase or otherwise acquire either Common Stock or
Convertible Securities.
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<PAGE>
(2) "Original Issue Date" shall mean the date on which
-------------------
the first share of Class D Preferred to be issued was issued.
(3) "Convertible Securities" shall mean any evidences
----------------------
of indebtedness, shares (other than Common Stock, Class A Preferred, Class B
Preferred, Class C Preferred or Class D Preferred) or other securities directly
or indirectly convertible into or exchangeable for Common Stock.
(4) "Additional Shares of Common Stock" shall mean all
---------------------------------
shares of Common Stock issued (or, pursuant to Section 3(d)(iii) hereof, deemed
to be issued) by the corporation after the Original Issue Date, other than:
(A) shares of Common Stock issued or issuable
upon conversion of shares of Class A Preferred, Class B Preferred, Class C
Preferred or Class D Preferred;
(B) up to 3,381,533 shares of Common Stock issued
or issuable to officers or employees of, or consultants to, the corporation
pursuant to the corporation's 1983 Incentive Stock Option Plan, 1984 Incentive
Stock Option Plan, 1986 Incentive Stock Option Plan, 1987 Stock Plan, 1988 Stock
Plan, 1996 Stock Plan or 1997 Employee Incentive Stock Option Plan
(appropriately adjusted to take account of any stock split, stock dividend,
combination of shares or the like), and such number of shares of Common Stock as
are issued or issuable pursuant to additional stock options approved by the
Board of Directors including the representative of Class D Preferred on the
Board of Directors;
(C) shares of Common Stock issued by way of
dividend or other distribution on shares of Common Stock excluded from the
definition of Additional Shares of Common Stock by the foregoing clauses (A) and
(B) or this clause (C) or on shares of Common Stock so excluded; or
(D) shares of Common Stock issued with the
approval of a majority of the representatives of the Class D Preferred on the
Board of Directors, which shares have been designated by said majority to be
excepted from the definition of "Additional Shares of Common Stock" contained
herein.
(ii) No Adjustment of Conversion Price. No adjustment in
---------------------------------
the number of shares of Common Stock into which the Class D Preferred is
convertible shall be made, by adjustment in the Conversion Price of Class D
Preferred in respect of the issuance of Additional Shares of Common Stock or
otherwise, unless the consideration per share for an Additional Share of Common
Stock issued or deemed to be issued by the corporation is less than the
Conversion Price in effect on the date of, and immediately prior to, the issue
of such Additional Share.
33
<PAGE>
(iii) Issue of Securities Deemed Issue of Additional Shares
-----------------------------------------------------
of Common Stock.
- ---------------
(1) Options and Convertible Securities. In the event
----------------------------------
the corporation at any time or from time to time after the Original Issue Date
shall issue any Options or Convertible Securities or shall fix a record date for
the determination of holders of any class of securities entitled to receive any
such Options or Convertible Securities, then the maximum number of shares (as
set forth in the instrument relating thereto without regard to any provisions
contained therein for a subsequent adjustment of such number) of Common Stock
issuable upon the exercise of such Options or, in the case of Convertible
Securities and Options therefor, the conversion or exchange of such Convertible
Securities, shall be deemed to be Additional Shares of Common Stock issued as of
the time of such issue or, in case such record date shall have been fixed, as of
the close of business on such record date, provided that Additional Shares of
Common Stock shall not be deemed to have been issued unless the consideration
per share (determined pursuant to Section 3(d)(v) hereof), of such Additional
Shares of Common Stock would be less than the Conversion Price in effect on the
date of and immediately prior to such issue, or such record date, as the case
may be, and provided further that in any such case in which Additional Shares of
Common Stock are deemed to be issued:
(A) no further adjustment in the Conversion Price
shall be made upon the subsequent issue of Convertible Securities or shares of
Common Stock upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(B) if such Options or Convertible Securities by
their terms provide, with the passage or time or otherwise, for any increase in
the consideration payable to the corporation, or decrease in the number of
shares of Common Stock issuable, upon the exercise, conversion or exchange
thereof, the Conversion Price computed upon the original issue thereof (or upon
the occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon any such increase or decrease becoming
effective, be recomputed to reflect such increase or decrease insofar as it
affects such Options or the rights of conversion or exchange under such
Convertible Securities;
(C) upon the expiration of any such Options or
any rights of conversion or exchange under such Convertible Securities which
shall not have been exercised, the Conversion Price computed upon the original
issue thereof (or upon the occurrence of a record date with respect thereto),
and any subsequent adjustments based thereon, shall, upon such expiration, be
recomputed as if:
(I) in the case of Convertible Securities or
Options for Common Stock, the only Additional Shares of Common Stock issued were
the shares of Common Stock, if any, actually issued upon the exercise of such
Options or the conversion or exchange of such Convertible Securities and the
consideration received therefor was the consideration actually received by the
corporation for the issue of all such Options, whether or not exercised, plus
the consideration actually received by the corporation upon such exercise, or
for the issue of all such Convertible Securities which were actually converted
or
34
<PAGE>
exchanged, plus the additional consideration, if any, actually received by the
corporation upon such conversion or exchange, and
(II) in the case of Options for Convertible
Securities, only the Convertible Securities, if any, actually issued upon the
exercise thereof were issued at the time of issue of such Options, and the
consideration received by the corporation for the Additional Shares of Common
Stock deemed to have been then issued was the consideration actually received by
the corporation for the issue of all such Options, whether or not exercised,
plus the consideration deemed to have been received by the corporation
(determined pursuant to Section 3(d)(v) hereof) upon the issue of the
Convertible Securities with respect to which such Options were actually
exercised;
(D) no readjustment pursuant to clause (B) or (C)
above shall have the effect of increasing the Conversion Price to an amount
which exceeds the lower of (i) the Conversion Price on the original adjustment
date, or (ii) the Conversion Price that would have resulted from any issuance of
Additional Shares of Common Stock between the original adjustment date and such
readjustment date;
(E) in the case of any Options which expire by
their terms not more than 30 days after the date of issue thereof, no adjustment
of the Conversion Price shall be made until the expiration or exercise of all
such Options, whereupon such adjustment shall be made in the same manner
provided in clause (C) above; and
(F) if such record date shall have been fixed and
such Options or Convertible Securities are not issued on the date fixed
therefor, the adjustment previously made in the Conversion Price which became
effective on such record date shall be canceled as of the close of business on
such record date and thereafter the Conversion Price shall be adjusted pursuant
to this subparagraph 3(d)(iii) as of the actual date of their issuance.
(2) Stock Dividends, Stock Distributions and
----------------------------------------
Subdivisions. In the event the corporation at any time or from time to time
- ------------
after the Original Issue Date shall declare or pay any dividend or make any
other distribution on the Common Stock payable in Common Stock, or effect a
subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in Common Stock), then and in any such
event, Additional Shares of Common Stock shall be deemed to have been issued:
(A) in the case of any such dividend or
distribution, immediately after the close of business on the record date for the
determination of holders of any class of securities entitled to receive such
dividend or distribution, or
(B) in the case of any such subdivision, at the
close of business on the date immediately prior to the date upon which such
corporate action becomes effective.
35
<PAGE>
If such record date shall have been fixed and such dividend shall not have
been fully paid on the date fixed therefor, the adjustment previously made in
the Conversion Price which became effective on such record date shall be
canceled as of the close of business on such record date, and thereafter the
Conversion Price shall be adjusted pursuant to this subparagraph 3(d)(iii) as of
the time of actual payment of such dividend.
(iv) Adjustment of Conversion Price Upon Issuance of
-----------------------------------------------
Additional Shares of Common Stock. In the event the corporation shall issue
- ---------------------------------
Additional Shares of Common Stock (including Additional Shares of Common Stock
deemed to be issued pursuant to Section 3(d)(iii) hereof, but excluding
Additional Shares of Common Stock issued pursuant to Section 3(d)(iii)(2), which
event is dealt with in Section 3(e) hereof) without consideration or for a
consideration per share less than the Conversion Price in effect on the date of
and immediately prior to such issue, then and in such event, such Conversion
Price shall be reduced, concurrently with such issue in order to increase the
number of shares of Common Stock into which the Class D Preferred is
convertible, to a price (calculated to the nearest cent) determined by
multiplying such Conversion Price by a fraction (x) the numerator of which shall
be (1) the number of shares of Common Stock outstanding immediately prior to
such issue (including shares of Common Stock issuable upon conversion of any
outstanding Class A Preferred, Class B Preferred, Class C Preferred, Class D
Preferred or Convertible Securities) plus (2) the number of shares of Common
Stock which the aggregate consideration received by the corporation for the
total number of Additional Shares of Common Stock so issued would purchase at
such Conversion Price, and (y) the denominator of which shall be (1) the number
of shares of Common Stock outstanding immediately prior to such issue (including
shares of Common Stock issuable upon conversion of any outstanding Class A
Preferred, Class B Preferred, Class C Preferred, Class D Preferred or
Convertible Securities), plus (2) the number of such Additional Shares of Common
Stock so issued, provided that the Conversion Price shall not be so reduced at
such time if the amount of such reduction would be an amount less than $0.05,
but any such amount shall be carried forward and reduction with respect thereto
made at the time of and together with any subsequent reduction which, together
with such amount and any other amount or amounts so carried forward, shall
aggregate $0.05 or more.
(v) Determination of Consideration. For purposes of this
------------------------------
Section 3(d), the consideration received by the corporation for the issue of any
Additional Shares of Common Stock shall be computed as follows:
(1) Cash and Property. Such consideration shall:
-----------------
(A) insofar as it consists of cash, be computed
at the aggregate amount of cash received by the corporation excluding amounts
paid or payable for accrued interest or accrued dividends;
(B) insofar as it consists of property other than
cash, be computed at the fair value thereof at the time of such issue, as
determined in good faith by the Board of Directors; and
36
<PAGE>
(C) in the event Additional Shares of Common
Stock are issued together with other shares or securities or other assets of the
corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (A) and (B) above, as
determined in good faith by the Board of Directors.
(2) Options and Convertible Securities. The
----------------------------------
consideration per share received by the corporation for Additional Shares of
Common Stock deemed to have been issued pursuant to Section 3(d)(iii)(1) above,
relating to Options and Convertible Securities shall be determined by dividing
(x) the total amount, if any, received or
receivable by the corporation as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such
consideration until such subsequent adjustment occurs) payable to the
corporation upon the exercise of such Options or the conversion or exchange of
such Convertible Securities, or in the case of Options for Convertible
Securities, the exercise of such Options for Convertible Securities and the
conversion or exchange of such Convertible Securities, by
(y) the maximum number of shares of Common Stock
(as set forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such number until
such subsequent adjustment occurs) issuable upon the exercise of such Options or
the conversion or exchange of such Convertible Securities.
(e) Adjustment for Dividends, Distributions, Subdivisions,
------------------------------------------------------
Combinations or Consolidations of Common Stock.
- ----------------------------------------------
(i) Stock Dividends, Distributions or Subdivisions. In the
----------------------------------------------
event the corporation shall issue Additional Shares of Common Stock pursuant to
Section 3(d)(iii)(2) hereof in a stock dividend, stock distribution or
subdivision, the Conversion Price in effect immediately prior to such stock
dividend, stock distribution or subdivision shall, concurrently with the
effectiveness of such stock dividend, stock distribution or subdivision, be
proportionately decreased.
(ii) Combinations or Consolidations. In the event the
------------------------------
outstanding shares of Common Stock shall be combined or consolidated, by
reclassification or otherwise, into a lesser number of shares of Common Stock,
the Conversion Price in effect immediately prior to such combination or
consolidation shall, concurrently with the effectiveness of such combination or
consolidation, be proportionately increased.
(f) Adjustment for Merger or Reorganization. In case of any
---------------------------------------
consolidation or merger of the corporation with or into another corporation or
the conveyance of all or substantially all of the assets of the corporation to
another corporation, each share of Class D Preferred shall thereafter be
convertible into the number of shares of stock or other securities or property
to which a holder of the number of shares of Common Stock of the corporation
37
<PAGE>
deliverable upon conversion of such Class D Preferred would have been entitled
upon such consolidation, merger or conveyance; and, in any such case,
appropriate adjustment (as determined by the Board of Directors) shall be made
in the application of the provisions herein set forth with respect to the rights
and interest thereafter of the holders of the Class D Preferred, to the end that
the provisions set forth herein (including provisions with respect to changes in
and other adjustments of the Conversion Price) shall thereafter be applicable,
as nearly as reasonably may be, in relation to any shares of stock or other
property thereafter deliverable upon the conversion of the Class D Preferred.
Each holder of Class D Preferred upon the occurrence of a capital
reorganization, merger or consolidation of the corporation or the sale of all
or, substantially all its assets and properties as such events are more fully
set forth in the first paragraph of this Section 3(f), shall have the option of
electing treatment of his shares of Class D Preferred under either this Section
3(f) or Section 2 hereof, notice of which election shall be submitted in writing
to the corporation at its principal offices no later than five (5) days before
the effective date of such event.
(g) No Impairment. The corporation will not, by amendment of its
-------------
Restated Articles of Organization or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the corporation but
will at all times in good faith assist in the carrying out of the provisions of
this Section 3 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Class D Preferred against impairment.
(h) Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Conversion Price pursuant to this Section 3,
the corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder of
Class D Preferred a certificate setting forth such adjustment or readjustment
and showing in detail the facts upon which such adjustment or readjustment is
based. The corporation shall, upon the written request at any time of any
holder of Class D Preferred, furnish or cause to be furnished to such holder a
like certificate setting forth (i) such adjustments and readjustments, (ii) the
Conversion Price at the time in effect, and (iii) the number of shares of Common
Stock and the amount if any, of other property which at the time would be
received upon the conversion of Class D Preferred.
(i) Notice of Record Date. In the event of (i) any taking by the
---------------------
corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend which is the same as cash dividends paid in
previous quarters) or other distribution, or (ii) any capital reorganization of
the corporation, any reclassification or recapitalization of the capital stock
of the corporation, any merger or consolidation of the corporation, and any
transfer of all or substantially all of the assets of the corporation to any
other corporation, or any other entity or person, or any voluntary or
involuntary dissolution, liquidation or winding-up of the corporation, the
corporation shall mail to each holder of Class D Preferred at least 20 days
prior to the record date specified therein, a notice specifying (A) the date on
which any such record is to be taken for the purpose of such
38
<PAGE>
dividend or distribution and a description of such dividend or distribution, (B)
the date on which any such reorganization, reclassification, transfer,
consolidation, merger, dissolution, liquidation or winding-up is expected to
become effective, and (C) the time if any, that is to be fixed, as to when the
holders of record of Common Stock (or other securities) shall be entitled to
exchange their shares of Common Stock (or other securities) for securities or
other property deliverable upon such reorganization, reclassification, transfer,
consolidation, merger, dissolution liquidation or winding-up.
(j) Common Stock Reserved. The corporation shall reserve and keep
---------------------
available out of its authorized but unissued Common Stock such number of shares
of Common Stock as shall from time to time be sufficient to effect conversion of
the Class D Preferred.
Section 4. Redemption.
---------- ----------
(a) On November 21, 2002 (the "Commencement Date") and on the first
and second anniversaries thereof, the corporation shall offer to redeem from
each holder of shares of Class D Preferred a maximum of thirty-three and a third
percent (33 1/3%), sixty-six and two-thirds percent (66 2/3%) and one hundred
percent (100%), respectively, of the total number of shares of Class D Preferred
held by such shareholder prior to the Commencement Date, at a price for each
share tendered for redemption equal to the greater of (i) $1.80 plus an amount
equal to all declared but unpaid dividends payable in accordance with Section 6
hereof or (ii) the fair market value per share (the "Redemption Price");
provided, that any shares of Class D Preferred redeemed hereunder in any
previous years shall reduce the maximum amount of Class D Preferred which the
corporation may be requested to redeem in any then current year. Fair market
value shall mean the fair market value per share as determined in good faith by
the Board of Directors, provided that if holders of more than fifty percent of
the outstanding Class D Preferred disagree with such determination, the fair
market value shall be determined (i) by an independent investment banking firm
mutually selected by such holders and the Board of Directors, or (ii) failing
such agreement within thirty days, by two such firms, one selected by the Board
of Directors and one by such holders, or (iii) failing agreement by such two
firms within thirty days, by a third such firm mutually selected by such firms.
The fees of all such investment banking firms shall be borne in equal halves by
the corporation and such holders. The corporation shall provide access to all
such information as is reasonably necessary for such firms to determine fair
market value. The corporation shall offer to redeem shares of Class D Preferred
by giving written notice thereof to each holder of shares of Class D Preferred
eligible for redemption, which notice shall state the number of shares of Class
D Preferred eligible to be redeemed by such holder and shall specify a
redemption date not less than forty-five (45) days nor more than sixty (60) days
after the date of such written notice. Any holder of shares of Class D
Preferred eligible to be redeemed may redeem such shares by giving written
notice thereof to the corporation, and to each other holder of shares of Class D
Preferred, no less than 15 days prior to the redemption date specified in the
corporation's written offer of redemption, and by surrendering to the
corporation on or before the redemption date the share certificates for the
number of shares of Class D Preferred to be redeemed. If fewer than all of the
shares represented by such certificates are redeemed, one or more new
certificates shall be issued for the unredeemed shares as promptly as possible.
Notwithstanding the foregoing, the holders of more
39
<PAGE>
than fifty percent (50%) of all Class D Preferred in the aggregate shall have
the right to postpone for a specified period of time or waive such rights of
redemption of all holders by written notice to the corporation and to all such
holders given at least fifteen (15) days prior to the scheduled date of
redemption.
(b) In the event of a sale of all or substantially all the assets of
the corporation, then the corporation shall offer to redeem not fewer than all
the shares of Class D Preferred held by all holders of shares of Class D
Preferred on the date the corporation fixes as the date to mail or otherwise
send out its offer of redemption, at the Redemption Price. The corporation
shall offer to redeem shares of Class D Preferred by giving written notice
thereof to each holder of shares of such Class D Preferred, which notice shall
be sent not less than twenty (20) days before the scheduled date of consummation
of the transaction described above. Such notice of redemption shall state the
number of shares of Class D Preferred eligible to be redeemed by such holder and
shall specify a redemption date not less than twenty (20) days nor more than
sixty (60) days after the date of such written notice. Any holder of shares of
Class D Preferred may redeem such shares by giving written notice thereof to the
corporation not less than ten (10) days prior to the redemption date specified
in the corporation's written offer of redemption, and by surrendering to the
corporation on or before the redemption date the share certificates for the
number of shares of such Class D Preferred to be redeemed.
Section 5. Voting Rights.
---------- -------------
(a) The holders of shares of Class D Preferred shall be entitled to
notice of any shareholders' meeting and to vote upon any matter submitted to the
shareholders for a vote, as though the Common Stock, the Class A Preferred, the
Class B Preferred, the Class C Preferred and the Class D Preferred constituted a
single class of stock, except with respect to those matters on which the
Massachusetts Corporation Law requires that a vote must be by a separate class
or classes or by separate series. For all votes, holders of each class of Class
D Preferred Stock shall have that number of votes per share as is equal to the
number of shares of Common Stock into which each such share of Class D Preferred
held by such holder is convertible on the record date for the determination of
stockholders entitled to vote at the meeting or on the date of any written
consent.
(b) The holders of Class D Preferred, shall be entitled to vote upon
the election of directors on the following basis: So long as at least 50,000
shares of Class D Preferred shall be outstanding, the holders of Class D
Preferred issued and outstanding, voting as a single class, shall be entitled to
one director.
Section 6. Dividend Rights.
---------- ---------------
(a) The holders of the then outstanding shares of Class D Preferred
shall be entitled to receive, when and as declared by the Board Directors, out
of funds legally available therefor, non-cumulative cash dividends at the annual
rate of $.144 per share payable at a rate of $.036 per share per calendar
quarter. The corporation's obligation to pay such dividends shall commence
after the first calendar quarter when the corporation's net after tax income,
calculated
40
<PAGE>
in accordance with generally accepted accounting principles, exceeds five times
such quarterly dividend on all then outstanding Class D Preferred and on all
then outstanding shares of any other class of preferred stock of the
corporation.
(b) Notwithstanding any provisions in Section 6(a) hereof, dividends
which have been declared on any Class D Preferred but have not been paid prior
to an automatic conversion pursuant to Section 3(b) hereof shall be payable
within 30 days of the Closing, as defined in Section 3(b), to each person who
holds of record Class D Preferred immediately prior to the automatic conversion.
(c) When and as dividends are declared payable in cash, property or
shares of the corporation's capital stock on shares of Common Stock, the
corporation shall (except as otherwise provided in Section 3) declare at the
same time and pay to each holder of Class D Preferred a dividend equal to the
dividend which would have been payable to such holder if the shares of Class D
Preferred held by such holder had been converted into Common Stock on the record
date for the determination of holders of Common Stock entitled to receive such
dividend.
Section 7. Covenants. So long as at least 50,000 shares of Class D
---------- ---------
Preferred shall be outstanding, the corporation shall not, without first
obtaining the affirmative vote or written consent of not less than sixty-six
percent (66%) of the outstanding shares of Class D Preferred:
(a) amend or repeal any provision of, or add any provision to, the
corporation's Restated Articles of Organization or By-Laws if such action would
alter or change the preferences, rights, privileges or powers of, or the
restrictions provided for the benefit of, Class D Preferred generally;
(b) reclassify any Common Stock into shares having any preference or
priority as to dividends or assets superior to or on a parity with any such
preference or priority of the Class D Preferred;
(c) pay or declare any dividend or distribution on any shares of
Common Stock or apply any of its assets to the redemption, retirement, purchase
or other acquisition directly or indirectly, through subsidiaries, if any, or
otherwise, of any shares of Common Stock except from officers, directors or
employees of or consultants to the corporation upon termination of employment
and except pursuant to the corporation's rights of first refusal;
(d) create any other class or classes of stock or series of capital
stock;
(e) authorize any merger or consolidation of the corporation with or
into any other corporation or entity (except into or with a wholly-owned
subsidiary corporation with the requisite shareholder approval), or authorize
the sale of substantially all of the assets of the corporation; or
(f) voluntarily liquidate, dissolve or wind up.
41
<PAGE>
CLASS E PREFERRED STOCK
Section 1. Designation. Eleven Million (11,000,000) shares of the
--------- -----------
corporation's authorized but unissued shares of Preferred Stock are hereby
designated as "Class E Preferred Stock". Such Class E Preferred Stock (the
"Class E Preferred") shall have the relative rights and preferences set forth
below.
Section 2. Liquidation Rights.
--------- ------------------
(a) Payment to Holders of Class E Preferred Stock Upon Liquidation.
--------------------------------------------------------------
In the event of any voluntary or involuntary liquidation, dissolution or
winding-up of the affairs of the corporation, the holder of each share of Class
E Preferred shall be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the corporation to the
holders of the Class A Preferred and the Common Stock of the corporation by
reason of their ownership thereof, an amount equal to (i) $2.25 per share of
Class E Preferred plus (ii) an amount equal to all declared but unpaid dividends
to and including the date full payment shall be tendered to the holder of the
Class E Preferred with respect to such liquidation, dissolution or winding-up.
All of the preferential amounts to be paid to the holders of the Class E
Preferred under this Section 2(a) shall be paid or set apart for payment before
the payment or setting apart for payment of any amount for, or the distribution
of any assets of the corporation to, the holders of the Class A Preferred and
Common Stock in connection with such liquidation, dissolution or winding-up. If
the assets or surplus funds to be distributed to the holders of the Class B
Preferred, the Class D Preferred and the Class E Preferred are insufficient to
permit the payment to such holders of their full preferential amount, the assets
and surplus funds legally available for distribution shall be distributed
ratably among the holders of Class E Preferred, Class D Preferred and Class B
Preferred in proportion to the full preferential amount each such holder is
otherwise entitled to receive.
(b) Payment to Holders of Class E Preferred, Class D Preferred and
--------------------------------------------------------------
Common Stock. After the payment or the setting apart of payment to the holders
- ------------
of the Class A Preferred, the Class B Preferred, the Class D Preferred and the
Class E Preferred of the preferential amounts so payable to them, all remaining
assets of the corporation shall be distributed among the holders of the Class E
Preferred, the Class D Preferred and the holders of the Common Stock ratably in
proportion to the number of shares of Class D Preferred, Class E Preferred and
Common Stock (and, in the case of Class D Preferred and the Class E Preferred,
the number of shares of Common Stock into which each such share of Class D
Preferred or Class E Preferred, as the case may be, held by such holder could be
converted on the record date for the determination of rights of stockholders to
distributions under this Section 2) held by them.
(c) No Liquidation Preference After Conversion. Upon conversion of
------------------------------------------
shares of Class E Preferred into shares of Common Stock pursuant to Section 3
below, the holder of such Common Stock shall not be entitled to any preferential
payment or distribution in case of any
42
<PAGE>
liquidation, dissolution or winding-up of corporation, but shall share ratably
in any distribution of the assets of the corporation to all holders of Common
Stock.
(d) Distributions Other than Cash. Whenever the distribution
-----------------------------
provided for in this Section 2 shall be payable in property other than cash, the
value of such distribution shall be the fair market value of such property as
determined in good faith by the Board of Directors of the corporation.
(e) Merger as Liquidation, etc. The merger or consolidation of the
--------------------------
corporation into or with another corporation (other than a wholly-owned
subsidiary of this corporation in a merger in which this corporation is the
surviving corporation and its Articles of Organization remain unchanged), or the
sale of all or substantially all of the assets of the corporation (other than to
a wholly-owned subsidiary of this corporation) shall be deemed to be a
liquidation, dissolution or winding-up of the corporation for purposes of this
Section 2 unless the holders of at least 51% of the then outstanding shares of
Class E Preferred (voting as a single class) elect to the contrary by giving
written notice thereof to the corporation at least three days before the
effective date of such event. If such notice is given, the provisions of
Section 3(f) shall apply. The amount deemed distributed to the holders of Class
E Preferred upon any such merger or consolidation shall be the cash or the value
of the property, rights or securities distributed to such holders by the
acquiring person, firm or other entity. The value of such property, rights or
other securities shall be determined in good faith by the Board of Directors of
the corporation.
(f) Notice and Opportunity to Exercise Conversion Rights.
----------------------------------------------------
Notwithstanding anything to the contrary that may be inferred from the
provisions of this Section 2, each holder of shares of Class E Preferred shall
be entitled to receive notice from the corporation pursuant to Section 3(i)
hereof of any proposed liquidation, dissolution or winding-up of the corporation
at least 20 days prior to the date on which any such liquidation, dissolution or
winding-up of the corporation is scheduled to occur and, at any time prior to
any such liquidation, dissolution or winding-up of the corporation, to convert
any or all of such holder's shares of Class E Preferred into shares of Common
Stock pursuant to Section 3 hereof.
Section 3. Conversion. The holders of the Class E Preferred shall have
--------- ----------
conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Class E Preferred shall be
----------------
convertible, without the payment of any additional consideration by the holder
thereof and at the option of the holder thereof, at any time after the date of
issuance of such share, at the office of the corporation or any transfer agent
for the Class E Preferred, into such fully paid and nonassessable shares of
Common Stock, as is determined by dividing two dollars and twenty-five cents
($2.25) by the Conversion Price, determined as hereinafter provided, in effect
at the time of conversion. The Conversion Price at which shares of Common Stock
shall be deliverable upon conversion without the payment of any additional
consideration by the holder thereof (the "Conversion Price") shall initially be
two dollars and twenty-five cents ($2.25) per share of Common Stock. Such
initial Conversion Price shall be subject to adjustment, in order to adjust the
number of shares of Common Stock into which the Class E Preferred is
convertible, as hereinafter provided.
43
<PAGE>
(b) Automatic Conversion.
--------------------
(i) Upon Qualifying Public Offerings. Each share of Class E
--------------------------------
Preferred shall automatically be converted into shares of Common Stock at the
then effective Conversion Price upon the closing of a firm commitment
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended, covering the offer and sale of
Common Stock for the account of the corporation to the public at a public
offering price of at least $4.50 per share (with such amount to be appropriately
adjusted in the event of any stock dividend, stock distribution or subdivision
as provided in subparagraph (e) hereof) and having an aggregate offering price
to the public resulting in gross proceeds to the corporation of not less than
$15,000,000 (in the event of which offering, the person(s) entitled to receive
the Common Stock issuable upon such conversion of the Class E Preferred shall
not be deemed to have converted that Class E Preferred until immediately prior
to the closing of such offering). Each person who holds of record Class E
Preferred immediately prior to such automatic conversion shall be entitled to
all dividends which have accrued to the time of the automatic conversion, but
have not been paid on the Class E Preferred, pursuant to Section 6 hereof. Such
dividends shall be paid to all such holders within 30 days of the automatic
conversion.
(ii) Upon Conversion of 90% of Class E Preferred. Each share of
-------------------------------------------
Class E Preferred then outstanding shall automatically be converted into shares
of Common Stock at the then-effective Conversion Price, upon the conversion of
ninety percent (90%) or more of the authorized Class E Preferred. Such
conversion shall be deemed to have occurred on the date upon which the aggregate
number of shares of Class E Preferred which have been converted to Common Stock
equals or exceeds ninety percent (90%) of the authorized Class E Preferred.
(c) Mechanics of Conversion. No fractional shares of Common Stock
-----------------------
shall be issued upon conversion of the Class E Preferred. In lieu of any
fractional shares to which the holder would otherwise be entitled, the
corporation shall pay cash equal to such fraction multiplied by the then
effective Conversion Price. Before any holder of Class E Preferred shall be
entitled to convert the same into full shares of Common Stock, he shall
surrender the certificate or certificates therefor, duly endorsed, at the office
of the corporation or of any transfer agent for the Class E Preferred, and shall
give written notice to the corporation at such office that he elects to convert
the same and shall state therein his name or the name or names of his nominees
in which he wishes the certificate or certificates for shares of Common Stock to
be issued. The corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Class E Preferred, or to his nominee or
nominees, a certificate or certificates for the number of shares of Common Stock
to which he shall be entitled as aforesaid, together with cash in lieu of any
fraction of a share. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of the
shares of Class E Preferred to be converted, and the person or persons entitled
to receive the shares of Common Stock issuable upon conversion shall be treated
for all purposes as the record holder or holders of such shares of Common Stock
on such date.
44
<PAGE>
(d) Adjustments to Conversion Price for Diluting Issues.
---------------------------------------------------
(i) Special Definitions. For purposes of this Section 3(d),
-------------------
the following definitions shall apply:
(1) "Option" shall mean rights, options, or warrants
------
to subscribe for, purchase or otherwise acquire either Common Stock or
Convertible Securities.
(2) "Original Issue Date" shall mean the date on which
-------------------
the first share of Class E Preferred to be issued was issued.
(3) "Convertible Securities" shall mean any evidences
----------------------
of indebtedness, shares (other than Common Stock, Class A Preferred, Class B
Preferred, Class D Preferred or Class E Preferred) or other securities directly
or indirectly convertible into or exchangeable for Common Stock.
(4) "Additional Shares of Common Stock" shall mean all
---------------------------------
shares of Common Stock issued (or, pursuant to Section 3(d)(iii) hereof, deemed
to be issued) by the corporation after the Original Issue Date, other than:
(A) shares of Common Stock issued or issuable
upon conversion of shares of Class A Preferred, Class B Preferred, Class D
Preferred or Class E Preferred;
(B) up to 3,355,507 shares of Common Stock issued
or issuable to officers or employees of, or consultants to, the corporation
pursuant to the corporation's 1983 Incentive Stock Option Plan, 1984 Incentive
Stock Option Plan, 1986 Incentive Stock Option Plan, 1987 Stock Plan, 1988 Stock
Plan, 1996 Stock Plan or 1997 Stock Plan (appropriately adjusted to take account
of any stock split, stock dividend, combination of shares or the like), and such
number of shares of Common Stock as are issued or issuable pursuant to
additional stock options approved by the Board of Directors including the
representative of Class D Preferred on the Board of Directors; or
(C) shares of Common Stock issued by way of
dividend or other distribution on shares of Common Stock excluded from the
definition of Additional Shares of Common Stock by the foregoing clauses (A) and
(B) or this clause (C) or on shares of Common Stock so excluded; or
(D) shares of Common Stock issued with the
approval of a majority of the representatives of the Class D Preferred on the
Board of Directors, which shares have been designated by said majority to be
excepted from the definition of "Additional Shares of Common Stock" contained
herein.
45
<PAGE>
(ii) No Adjustment of Conversion Price. No adjustment in
---------------------------------
the number of shares of Common Stock into which the Class E Preferred is
convertible shall be made, by adjustment in the Conversion Price of Class E
Preferred in respect of the issuance of Additional Shares of Common Stock or
otherwise, unless the consideration per share for an Additional Share of Common
Stock issued or deemed to be issued by the corporation is less than the
Conversion Price in effect on the date of, and immediately prior to, the issue
of such Additional Share.
(iii) Issue of Securities Deemed Issue of Additional Shares
-----------------------------------------------------
of Common Stock.
- ---------------
(1) Options and Convertible Securities. In the event
----------------------------------
the corporation at any time or from time to time after the Original Issue Date
shall issue any Options or Convertible Securities or shall fix a record date for
the determination of holders of any class of securities entitled to receive any
such Options or Convertible Securities, then the maximum number of shares (as
set forth in the instrument relating thereto without regard to any provisions
contained therein for a subsequent adjustment of such number) of Common Stock
issuable upon the exercise of such Options or, in the case of Convertible
Securities and Options therefor, the conversion or exchange of such Convertible
Securities, shall be deemed to be Additional Shares of Common Stock issued as of
the time of such issue or, in case such record date shall have been fixed, as of
the close of business on such record date, provided that Additional Shares of
Common Stock shall not be deemed to have been issued unless the consideration
per share (determined pursuant to Section 3(d)(v) hereof), of such Additional
Shares of Common Stock would be less than the Conversion Price in effect on the
date of and immediately prior to such issue, or such record date, as the case
may be, and provided further that in any such case in which Additional Shares of
Common Stock are deemed to be issued:
(A) no further adjustment in the Conversion Price
shall be made upon the subsequent issue of Convertible Securities or shares of
Common Stock upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(B) if such Options or Convertible Securities by
their terms provide, with the passage or time or otherwise, for any increase in
the consideration payable to the corporation, or decrease in the number of'
shares of Common Stock issuable, upon the exercise, conversion or exchange
thereof, the Conversion Price computed upon the original issue thereof (or upon
the occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon any such increase or decrease becoming
effective, be recomputed to reflect such increase or decrease insofar as it
affects such Options or the rights of conversion or exchange under such
Convertible Securities;
(C) upon the expiration of any such Options or
any rights of conversion or exchange under such Convertible Securities which
shall not have been exercised, the Conversion Price computed upon the original
issue thereof (or upon the occurrence of a record date with respect thereto),
and any subsequent adjustments based thereon, shall, upon such expiration, be
re-computed as if:
46
<PAGE>
(I) in the case of Convertible Securities or
Options for Common Stock, the only Additional Shares of Common Stock issued were
the shares of Common Stock, if any, actually issued upon the exercise of such
Options or the conversion or exchange of such Convertible Securities and the
consideration received therefor was the consideration actually received by the
corporation for the issue of all such Options, whether or not exercised, plus
the consideration actually received by the corporation upon such exercise, or
for the issue of all such Convertible Securities which were actually converted
or exchanged, plus the additional consideration, if any, actually received by
the corporation upon such conversion or exchange, and
(II) in the case of Options for Convertible
Securities, only the Convertible Securities, if any, actually issued upon the
exercise thereof were issued at the time of issue of such Options, and the
consideration received by the corporation for the Additional Shares of Common
Stock deemed to have been then issued was the consideration actually received by
the corporation for the issue of all such Options, whether or not exercised,
plus the consideration deemed to have been received by the corporation
(determined pursuant to Section 3(d)(v) hereof) upon the issue of the
Convertible Securities with respect to which such Options were actually
exercised;
(D) no readjustment pursuant to clause (B) or (C)
above shall have the effect of increasing the Conversion Price to an amount
which exceeds the lower of (i) the Conversion Price on the original adjustment
date, or (ii) the Conversion Price that would have resulted from any issuance of
Additional Shares of Common Stock between the original adjustment date and such
readjustment date;
(E) in the case of any Options which expire by
their terms not more than 30 days after the date of issue thereof, no adjustment
of the Conversion Price shall be made until the expiration or exercise of all
such Options, whereupon such adjustment shall be made in the same manner
provided in clause (C) above; and
(F) if such record date shall have been fixed and
such Options or Convertible Securities are not issued on the date fixed
therefor, the adjustment previously made in the Conversion Price which became
effective on such record date shall be canceled as of the close of business on
such record date and thereafter the Conversion Price shall be adjusted pursuant
to this subparagraph 3(d)(iii) as of the actual date of their issuance.
(2) Stock Dividends, Stock Distributions and
----------------------------------------
Subdivisions. In the event the corporation at any time or from time to time
- ------------
after the Original Issue Date shall declare or pay any dividend or make any
other distribution on the Common Stock payable in Common Stock, or effect a
subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in Common Stock), then and in any such
event, Additional Shares of Common Stock shall be deemed to have been issued:
47
<PAGE>
(A) in the case of any such dividend or
distribution, immediately after the close of business on the record date for the
determination of holders of any class of securities entitled to receive such
dividend or distribution, or
(B) in the case of any such subdivision, at the
close of business on the date immediately prior to the date upon which such
corporate action becomes effective.
If such record date shall have been fixed and such dividend shall not have
been fully paid on the date fixed therefor, the adjustment previously made in
the Conversion Price which became effective on such record date shall be
canceled as of the close of business on such record date, and thereafter the
Conversion Price shall be adjusted pursuant to this subparagraph 3(d)(iii) as of
the time of actual payment of such dividend.
(iv) Adjustment of Conversion Price Upon Issuance of
-----------------------------------------------
Additional Shares of Common Stock. In the event the corporation shall issue
- ---------------------------------
Additional Shares of Common Stock (including Additional Shares of Common Stock
deemed to be issued pursuant to Section 3(d) (iii) hereof, but excluding
Additional Shares of Common Stock issued pursuant to Section 3(d)(iii)(2), which
event is dealt with in Section (3)(e) hereof) without consideration or for a
consideration per share less than the Conversion Price in effect on the date of
and immediately prior to such issue, then and in such event, such Conversion
Price shall be reduced, concurrently with such issue in order to increase the
number of shares of Common Stock into which the Class E Preferred is
convertible, to a price (calculated to the nearest cent) determined by
multiplying such Conversion Price by a fraction (x) the numerator of which shall
be (1) the number of shares of Common Stock outstanding immediately prior to
such issue (including shares of Common Stock issuable upon conversion of any
outstanding Class A Preferred, Class B Preferred, Class D Preferred, Class E
Preferred or Convertible Securities) plus (2) the number of shares of Common
Stock which the aggregate consideration received by the corporation for the
total number of Additional Shares of Common Stock so issued would purchase at
such Conversion Price, and (y) the denominator of which shall be (1) the number
of shares of Common Stock outstanding immediately prior to such issue (including
shares of Common Stock issuable upon conversion of any outstanding Class A
Preferred, Class B Preferred, Class D Preferred, Class E Preferred or
Convertible Securities), plus (2) the number of such Additional Shares of Common
Stock so issued, provided that the Conversion Price shall not be so reduced at
such time if the amount of such reduction would be an amount less than $0.05,
but any such amount shall be carried forward and reduction with respect thereto
made at the time of and together with any subsequent reduction which, together
with such amount and any other amount or amounts so carried forward, shall
aggregate $0.05 or more.
(v) Determination of Consideration. For purposes of this
------------------------------
Section 3(d), the consideration received by the corporation for the issue of any
Additional Shares of Common Stock shall be computed as follows:
(1) Cash and Property. Such consideration shall:
-----------------
48
<PAGE>
(A) insofar as it consists of cash, be computed
at the aggregate amount of cash received by the corporation excluding amounts
paid or payable for accrued interest or accrued dividends;
(B) insofar as it consists of property other than
cash, be computed at the fair value thereof at the time of such issue, as
determined in good faith by the Board of Directors; and
(C) in the event Additional Shares of Common
Stock are issued together with other shares or securities or other assets of the
corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (A) and (B) above, as
determined in good faith by the Board of Directors.
(2) Options and Convertible Securities. The
----------------------------------
consideration per share received by the corporation for Additional Shares of
Common Stock deemed to have been issued pursuant to Section 3(d)(iii)(1) above,
relating to Options and Convertible Securities shall be determined by dividing
(x) the total amount, if any, received or
receivable by the corporation as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such
consideration until such subsequent adjustment occurs) payable to the
corporation upon the exercise of such Options or the conversion or exchange of
such Convertible Securities, or in the case of Options for Convertible
Securities, the exercise of such Options for Convertible Securities and the
conversion or exchange of such Convertible Securities, by
(y) the maximum number of shares of Common Stock
(as set forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such number until
such subsequent adjustment occurs) issuable upon the exercise of such Options or
the conversion or exchange of such Convertible Securities.
(e) Adjustment for Dividends, Distributions, Subdivisions,
------------------------------------------------------
Combinations or Consolidations of Common Stock.
- ----------------------------------------------
(i) Stock Dividends, Distributions or Subdivisions. In the
----------------------------------------------
event the corporation shall issue Additional Shares of Common Stock pursuant to
Section 3(d)(iii)(2) hereof in a stock dividend, stock distribution or
subdivision, the Conversion Price in effect immediately prior to such stock
dividend, stock distribution or subdivision shall, concurrently with the
effectiveness of such stock dividend, stock distribution or subdivision, be
proportionately decreased.
(ii) Combinations or Consolidations. In the event the
------------------------------
outstanding shares of Common Stock shall be combined or consolidated, by
reclassification or otherwise, into a lesser number of shares of Common Stock,
the Conversion Price in effect immediately prior to
49
<PAGE>
such combination or consolidation shall, concurrently with the effectiveness of
such combination or consolidation, be proportionately increased.
(f) Adjustment for Merger or Reorganization. In case of any
---------------------------------------
consolidation or merger of the corporation with or into another corporation or
the conveyance of all or substantially all of the assets of the corporation to
another corporation, each share of Class E Preferred shall thereafter be
convertible into the number of shares of stock or other securities or property
to which a holder of the number of shares of Common Stock of the corporation
deliverable upon conversion of such Class E Preferred would have been entitled
upon such consolidation, merger or conveyance; and, in any such case,
appropriate adjustment (as determined by the Board of Directors) shall be made
in the application of the provisions herein set forth with respect to the rights
and interest thereafter of the holders of the Class E Preferred, to the end that
the provisions set forth herein (including provisions with respect to changes in
and other adjustments of the Conversion Price) shall thereafter be applicable,
as nearly as reasonably may be, in relation to any shares of stock or other
property thereafter deliverable upon the conversion of the Class E Preferred.
Each holder of Class E Preferred upon the occurrence of a capital
reorganization, merger or consolidation of the corporation or the sale of all
or, substantially all its assets and properties as such events are more fully
set forth in the first paragraph of this Section 3(f), shall have the option of
electing treatment of his shares of Class E Preferred under either this Section
3(f) or Section 2 hereof, notice of which election shall be submitted in writing
to the corporation at its principal offices no later than five (5) days before
the effective date of such event.
(g) No Impairment. The corporation will not, by amendment of its
-------------
Restated Articles of Organization or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the corporation but
will at all times in good faith assist in the carrying out of the provisions of
this Section 3 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Class E Preferred against impairment.
(h) Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Conversion Price pursuant to this Section 3,
the corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder of
Class E Preferred a certificate setting forth such adjustment or readjustment
and showing in detail the facts upon which such adjustment or readjustment is
based. The corporation shall, upon the written request at any time of any
holder of Class E Preferred, furnish or cause to be furnished to such holder a
like certificate setting forth (i) such adjustments and readjustments, (ii) the
Conversion Price at the time in effect, and (iii) the number of shares of Common
Stock and the amount if any, of other property which at the time would be
received upon the conversion of Class E Preferred.
(i) Notice of Record Date. In the event of (i) any taking by the
---------------------
corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof
50
<PAGE>
who are entitled to receive any dividend (other than a cash dividend which is
the same as cash dividends paid in previous quarters) or other distribution, or
(ii) any capital reorganization of the corporation, any reclassification or
recapitalization of the capital stock of the corporation, any merger or
consolidation of the corporation, and any transfer of all or substantially all
of the assets of the corporation to any other corporation, or any other entity
or person, or any voluntary or involuntary dissolution, liquidation or winding-
up of the corporation, the corporation shall mail to each holder of Class E
Preferred at least 20 days prior to the record date specified therein, a notice
specifying (A) the date on which any such record is to be taken for the purpose
of such dividend or distribution and a description of such dividend or
distribution, (B) the date on which any such reorganization, reclassification,
transfer, consolidation, merger, dissolution, liquidation or winding-up is
expected to become effective, and (C) the time if any, that is to be fixed, as
to when the holders of record of Common Stock (or other securities) shall be
entitled to exchange their shares of Common Stock (or other securities) for
securities or other property deliverable upon such reorganization,
reclassification, transfer, consolidation, merger, dissolution, liquidation or
winding-up.
(j) Common Stock Reserved. The corporation shall reserve and keep
---------------------
available out of its authorized but unissued Common Stock such number of shares
of Common Stock as shall from time to time be sufficient to effect conversion of
the Class E Preferred.
Section 4. Redemption.
--------- ----------
(a) On October 21, 2003 (the "Commencement Date") and on the first
and second anniversaries thereof, the corporation shall offer to redeem from
each holder of shares of Class E Preferred a maximum of thirty-three and a third
percent (33 1/3%), sixty-six and two-thirds percent (66 2/3%) and one hundred
percent (100%), respectively, of the total number of shares of Class E Preferred
held by such shareholder prior to the Commencement Date, at a price for each
share tendered for redemption equal to the greater of (i) $2.25 plus an amount
equal to all declared but unpaid dividends payable in accordance with Section 6
hereof and (ii) the fair market value per share (the "Redemption Price");
provided, that any shares of Class E Preferred redeemed hereunder in any
previous years shall reduce the maximum amount of Class E Preferred which the
corporation may be requested to redeem in any then current year. Fair market
value shall mean the fair market value per share as determined in good faith by
the Board of Directors, provided that if holders of more than fifty percent
(50%) of the outstanding Class E Preferred disagree with such determination, the
fair market value shall be determined (i) by an independent investment banking
firm mutually selected by such holders and the Board of Directors, or (ii)
failing such agreement within thirty days, by two such firms, one selected by
the Board of Directors and one by such holders, or (iii) failing agreement by
such two firms within thirty days, by a third such firm mutually selected by
such firms. The fees of all such investment banking firms shall be borne in
equal halves by the corporation and such holders. The corporation shall provide
access to all such information as is reasonably necessary for such firms to
determine fair market value. The corporation shall offer to redeem shares of
Class E Preferred by giving written notice thereof to each holder of shares of
Class E Preferred eligible for redemption, which notice shall state the number
of shares of Class E Preferred eligible to be redeemed by such holder and shall
specify a redemption date not less than forty-five (45) days
51
<PAGE>
nor more than sixty (60) days after the date of such written notice. Any holder
of shares of Class E Preferred eligible to be redeemed may redeem such shares by
giving written notice thereof to the corporation, and to each other holder of
shares of Class E Preferred, no less than 15 days prior to the redemption date
specified in the corporation's written offer of redemption, and by surrendering
to the corporation on or before the redemption date the share certificates for
the number of shares of Class E Preferred to be redeemed. If fewer than all of
the shares represented by such certificates are redeemed, one or more new
certificates shall be issued for the unredeemed shares as promptly as possible.
Notwithstanding the foregoing, the holders of more than fifty percent (50%) of
all Class E Preferred in the aggregate shall have the right to postpone for a
specified period of time or waive such rights of redemption of all holders by
written notice to the corporation and to all such holders given at least fifteen
(15) days prior to the scheduled date of redemption.
(b) In the event of a sale of all or substantially all the assets of
the corporation, the corporation shall offer to redeem not fewer than all the
shares of Class E Preferred held by all holders of shares of Class E Preferred
on the date the corporation fixes as the date to mail or otherwise send out its
offer of redemption, at the Redemption Price. The corporation shall offer to
redeem shares of Class E Preferred by giving written notice thereof to each
holder of shares of such Class E Preferred, which notice shall be sent not less
than twenty (20) days before the scheduled date of consummation of the
transaction described above. Such notice of redemption shall state the number
of shares of Class E Preferred eligible to be redeemed by such holder and shall
specify a redemption date not less than twenty (20) days nor more than sixty
(60) days after the date of such written notice. Any holder of shares of Class
E Preferred may redeem such shares by giving written notice thereof to the
corporation not less than ten (10) days prior to the redemption date specified
in the corporation's written offer of redemption, and by surrendering to the
corporation on or before the redemption date the share certificates for the
number of shares of such Class E Preferred to be redeemed.
Section 5. Voting Rights. The holders of shares of Class E Preferred
--------- -------------
shall be entitled to notice of any shareholders' meeting and to vote upon any
matter submitted to the shareholders for a vote, as though the Common Stock, the
Class A Preferred, the Class B Preferred, the Class D Preferred and the Class E
Preferred constituted a single class of stock, except with respect to those
matters on which the Massachusetts Corporation Law requires that a vote must be
by a separate class or classes or by separate series. For all votes, holders of
Class E Preferred Stock shall have that number of votes per share as is equal to
the number of shares of Common Stock into which each such share of Class E
Preferred held by such holder is convertible on the record date for the
determination of stockholders entitled to vote at the meeting or on the date of
any written consent.
Section 6. Dividend Rights.
--------- ---------------
(a) The holders of the then outstanding shares of Class E Preferred
shall be entitled to receive, when and as declared by the Board Directors, out
of funds legally available therefor, non-cumulative cash dividends at the annual
rate of $.18 per share payable at a rate of $.045 per share per calendar
quarter. The corporation's obligation to pay such dividends shall
52
<PAGE>
commence after the first calendar quarter when the corporation's net after tax
income, calculated in accordance with generally accepted accounting principles,
exceeds five times such quarterly dividend on all then outstanding Class E
Preferred and on all then outstanding shares of all other classes of preferred
stock of the corporation.
(b) Notwithstanding any provisions in Section 6(a) hereof, dividends
which have been declared on any Class E Preferred but have not been paid prior
to an automatic conversion pursuant to Section 3(b) hereof shall be payable
within 30 days of the Closing, as defined in Section 3(b), to each person who
holds of record Class E Preferred immediately prior to the automatic conversion.
(c) When and as dividends are declared payable in cash, property or
shares of the corporation's capital stock on shares of Common Stock, the
corporation shall (except as otherwise provided in Section 3) declare at the
same time and pay to each holder of Class E Preferred a dividend equal to the
dividend which would have been payable to such holder if the shares of Class E
Preferred held by such holder had been converted into Common Stock on the record
date for the determination of holders of Common Stock entitled to receive such
dividend.
Section 7. Covenants. So long as at least 50,000 shares of Class E
--------- ---------
Preferred shall be outstanding, the corporation shall not, without first
obtaining the affirmative vote or written consent of not less than sixty-six
percent (66%) of the outstanding shares of Class E Preferred:
(a) amend or repeal any provision of, or add any provision to, the
corporation's Restated Articles of Organization or By-Laws if such action would
alter or change the preferences, rights, privileges or powers of, or the
restrictions provided for the benefit of, Class E Preferred generally;
(b) reclassify any Common Stock into shares having any preference or
priority as to dividends or assets superior to or on a parity with any such
preference or priority of the Class E Preferred;
(c) pay or declare any dividend or distribution on any shares of
Common Stock or apply any of its assets to the redemption, retirement, purchase
or other acquisition directly or indirectly, through subsidiaries, if any, or
otherwise, of any shares of Common Stock except from officers, directors or
employees of or consultants to the corporation upon termination of employment
and except pursuant to the corporation's rights of first refusal;
(d) create any other class or classes of stock or series of capital
stock;
(e) authorize any merger or consolidation of the corporation with or
into any other corporation or entity (except into or with a wholly-owned
subsidiary corporation with the requisite shareholder approval), or authorize
the sale of substantially all of the assets of the corporation; or
(f) voluntarily liquidate, dissolve or wind up.
53
<PAGE>
ARTICLE VI
----------
OTHER LAWFUL PROVISIONS
-----------------------
(a) The corporation may carry on any business, operation or activity
referred to in Article 2 to the same extent as might an individual, whether as
principal, agent, contractor or otherwise, and either alone or in conjunction or
a joint venture or other arrangement with any corporation, association, trust,
firm or individual.
(b) The corporation may carry on any business, operation or activity
through a wholly or partly owned subsidiary.
(c) The corporation may be a partner in any business enterprise which
it would have the power to conduct by itself.
(d) the directors may make, amend or repeal the bylaws in whole or in
part, except with respect to any provision thereof which by law or the bylaws
requires action by the stockholders.
(e) Meetings of the stockholders may be held anywhere in the United
States.
(f) No stockholder shall have any right to examine any property or
any books, accounts or other writings of the corporation if there is reasonable
ground for belief that such examination will for any reason be adverse to the
interests of the corporation, and a vote of the directors refusing permission to
make such examination and setting forth that in the opinion of the directors
such examination would be adverse to the interests of the corporation shall be
prima facie evidence that such examination would be adverse to the interests of
the corporation. Every such examination shall be subject to such reasonable
regulations as the directors may establish in regard thereto.
(g) The directors may specify the manner in which the accounts to the
corporation shall be kept and may determine what constitutes net earnings,
profits and surplus, what amounts, if any, shall be declared as dividends.
Unless the board of directors otherwise specifies, the excess of the
consideration for any share of its capital stock with par value issued by it
over such par value shall be paid-in surplus. The board of directors may
allocate to capital stock less than all of the consideration for any share of
its capital stock without par value issued by it, in which case the balance of
such consideration shall be paid-in surplus. All surplus shall be available for
any corporate purpose, including the payment of dividends.
(h) The purchase or other acquisition or retention by the corporation
of shares of its own capital stock shall not be deemed a reduction of its
capital stock. Upon any reduction of capital or capital stock, no stockholder
shall have any right to demand any distribution from the
54
<PAGE>
corporation, except as and to the extent that the stockholders shall have
provided at the time of authorizing such reduction.
(i) The directors shall have the power to fix from time to time their
compensation. No person shall be disqualified from holding any office by reason
of any interest. In the absence of fraud, any director, officer or stockholder
of this corporation individually, or any individual having any interest in any
concern which is a stockholder of this corporation, or any concern in which any
of such directors, officers, stockholders or individuals has any interest, may
be a party to, or may be pecuniary or otherwise interested in, any contract,
transaction or other act of this corporation, and
(1) such contract, transaction or act shall not be in any way
invalidated or otherwise affected by that fact;
(2) no such director, officer, stockholder or individual shall
be liable to account to this corporation for any profit or
benefit realized through any such contract, transaction or
act; and
(3) any such director of this corporation may be counted in
determining the existence of a quorum at any meeting of the
directors or of any committee thereof which shall authorize
any such contract, transaction or act, and may vote to
authorize the same;
provided, however, that any contract, transaction or act in which any director
or officer of this corporation is so interested individually or as a director,
officer, trustee or member of any concern which is not a subsidiary or affiliate
of this corporation, or in which any directors or officers are so interested as
holders, collectively, of a majority of shares of capital stock or other
beneficial interest at the time outstanding in any concern which is not a
subsidiary or affiliate of this corporation, shall be duly authorized or
ratified by a majority of the directors who are not so interested, to whom the
nature of such interest has been disclosed and who have made any findings
required by law;
the term "interest" including personal interest and interest as a
director, officer, stockholder, shareholder, trustee, member or
beneficiary of any concern;
the term "concern" meaning any corporation, association, trust,
partnership, firm, person or other entity other than this corporation;
and
the phrase "subsidiary or affiliate" meaning a concern in which a
majority of the directors, trustees, partners or controlling persons
is elected or appointed by the directors of this corporation, or is
constituted of the directors or officers of this corporation.
To the extent permitted by law, the authorizing or ratifying vote of the holders
of a majority of the shares of each class of the capital stock of this
corporation outstanding and entitled to vote for directors at any annual meeting
or a special meeting duly called for the purpose (whether
55
<PAGE>
such vote is passed before or after judgment rendered in a suit with respect to
such contract, transaction or act) shall validate any contract, transaction or
act of this corporation, or of the board of directors or any committee thereof,
with regard to all creditors and other claimants under this corporation;
provided, however, that
A. with respect to the authorization or ratification of contractors,
transactions or acts in which any of the directors, officers or
stockholders of this corporation have an interest, the nature of
such contracts, transactions or acts and the interest of any
director, officer or stockholder therein shall be summarized in
the notice of any such annual or special meeting, or in a
statement or letter accompanying such notice, and shall be fully
disclosed at any such meeting;
B. the stockholders so voting shall have made any findings required
by law;
C. stockholders so interested may vote at any such meeting except to
the extent otherwise provided by law; and
D. any failure of the stockholders to authorize or ratify such
contract, transaction or act shall not be deemed in any way to
invalidate the same or to deprive this corporation, its
directors, officers or employees of its or their right to proceed
with such contract, transaction or act.
No contract, transaction or act shall be avoided by reason of any provision of
this paragraph (i) which would be valid but for such provision or provisions.
(j) The corporation shall have all powers granted to corporations by
the laws of The Commonwealth of Massachusetts, provided that no such power shall
include any activity inconsistent with the Business Corporation Law or the
general laws of said Commonwealth.
(k) The corporation eliminates the personal liability of each member
of its board of directors to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that the foregoing
shall not eliminate the liability of a director (i) for any breach of such
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 61 or 62 of Chapter 156B of the
Massachusetts General Laws, or (iv) for any transaction from which such director
derived an improper personal benefit.
(l) The Directors of the corporation shall be classified with respect
to the time for which they shall severally hold office by dividing them into
three classes, each consisting of one-third, or as equal in number as possible,
of the whole number of the Board of Directors, and all Directors shall hold
office until their successors are chosen and qualified, or until their earlier
death, resignation, or removal. The Board of Directors has adopted a vote
designating, from among its members, Directors to serve as Directors of the
first class ("Class I Directors") who will hold office until the annual meeting
in 2000 and until their successors are duly elected and qualified, Directors of
the second class ("Class II Directors") who will hold office until the
56
<PAGE>
annual meeting in 2001 and until their successors are duly elected and
qualified, and Directors of the third class ("Class III Directors") who will
hold office until the annual meeting in 2002 and until their successors are duly
elected and qualified. At each annual meeting beginning in 2000, the successors
to the class of Directors whose term expires at that meeting shall be elected to
hold office for a term continuing until the annual meeting held in the third
year following the year of their election and until their successors are duly
elected and qualified.
57
<PAGE>
DESCRIPTION OF AMENDMENTS
-------------------------
Article I was amended to change the name of the corporation from "Millitech
Corporation" to "Telaxis Communications Corporation."
Article III was amended to increase the authorized Common Stock of the
corporation from 36,000,000 shares to 100,000,000 shares.
Article IV was amended to
(a) incorporate the preferences, voting powers, qualifications, and
special or relative rights or privileges of the Class E Preferred
Stock of the corporation effected by the Certificate of Vote of
Directors Establishing a Series of a Class of Stock as filed with the
Massachusetts Secretary of State and effective October 26, 1998 (as
amended by the Certificate of Amendment as filed with the
Massachusetts Secretary of State and effective May 19, 1999 and by the
Certificate of Vote of Directors Establishing a Series of a Class of
Stock as filed with the Massachusetts Secretary of State and effective
August 18, 1999),
(b) reflect the changes in the authorized capital of the corporation
described above, and
(c) amend the automatic conversion provisions of Section 3(b) of the
description of the rights of each of Class A Preferred Stock, Class B
Preferred Stock and Class D Preferred Stock by reducing the minimum
public offering price upon an initial public offering of the Company's
stock required to trigger automatic conversion from $9.75 per share to
$4.50 per share (the same minimum public offering price contained in
the Class E Preferred Stock terms).
Article VI was amended to classify the Board of Directors of the corporation
into three classes, as nearly equal in number as possible, with the terms of
Class I directors expiring in 2000, the terms of Class II directors expiring in
2001, and the terms of Class III directors expiring in 2002.
<PAGE>
<TABLE>
<CAPTION>
THE COMMONWEALTH OF MASSACHUSETTS
- ------------------
Examiner WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
ARTICLES OF AMENDMENT
(General Laws, Chapter 156B, Section 72)
- ------------------
<S> <C>
Name Approved
We, John L. Youngblood , *President/Vice President,
and David L. Renauld , *Clerk/*Assistant Clerk,
of Telaxis Communications Corporation
(Exact name of corporation)
located at: 20 Industrial Drive East, South Deerfield, MA 01373
--------------------------------------------------------------------------------
(Street address of corporation in Massachusetts)
certify that these Articles of Amendment affecting articles numbered:
4
--------------------------------------------------------------------------------
(Number those articles 1, 2, 3, 4, 5 and/or 6 being amended)
of the Articles or Organization were duly adopted at a meeting held on December 16, 1999 by vote of:
1,193,542 shares of Common Stock of 1,635,340 shares outstanding,
2,628,408 shares of Class A Preferred Stock of 3,045,696 shares outstanding, and
--------------------------------------------------------------------------------
(type, class & series, if any)
724,134 shares of Class B Preferred Stock of 789,677 shares outstanding, and
--------------------------------------------------------------------------------
(type, class & series, if any)
6,484,116 shares of Class D Preferred Stock of 7,200,000 shares outstanding, and
--------------------------------------------------------------------------------
(type, class & series, if any)
9,705,306 shares of Class E Preferred Stock of 9,941,508 shares outstanding
C [_] /1/**being at least a majority of each type, class or series outstanding and entitled to vote thereon:
P [_]
M [_]
R.A. [_]
*Delete the inapplicable words. **Delete the inapplicable clause.
/1/For amendments adopted pursuant to Chapter 156B, Section 70.
/2/For amendments adopted pursuant to Chapter 156B, Section 71.
NOTE: IF THE SPACE PROVIDED UNDER ANY ARTICLE OR ITEM ON THIS FORM IS INSUFFICIENT, ADDITIONS SHALL BE SET
FORTH ON
one side only of separate 8 1/2 x 11 sheets of paper with a left margin of at least 1 inch. Additions to more
than one
- ------------------
P.C. article may be made on a single sheet so long as each article requiring each addition is clearly indicated.
</TABLE>
<PAGE>
To change the number of shares and the par value (if any) of any type, class or
series of stock which the corporation is authorized to issue, fill in the
following:
The total presently authorized is:
<TABLE>
<CAPTION>
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- -------------------------------------------------------------------------------------------------------------------
Common Common:
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Preferred: Preferred:
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Change the total authorized to:
<TABLE>
<CAPTION>
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- -------------------------------------------------------------------------------------------------------------------
Common Common:
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Preferred: Preferred:
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
To replace the first paragraph under Article IV, Capital Stock in its
entirety with the following two paragraphs:
The total number of shares of all classes of stock which the
corporation shall have authority to issue is One Hundred Twenty- Six Million
Five Hundred Eighty Thousand (126,580,000) shares, consisting of One Hundred
Million (100,000,000) shares of Common Stock, par value $.01 per share (the
"Common Stock"), and Twenty-Six Million Five Hundred Eighty Thousand
(26,580,000) shares of Preferred Stock, par value $.01 per share (the "Preferred
Stock").
At the same time as the filing of the Articles of Amendment in which
this text is contained with the Secretary of State of the Commonwealth of
Massachusetts becomes effective (the "Effective Time"), each two (2) shares of
the corporation's common stock, par value $.01 per share (the "Old Common
Stock"), issued and outstanding or held in the treasury of the corporation
immediately prior to the Effective Time, will be automatically combined,
reclassified as and converted into one (1) share of common stock, par value $.01
per share, of the corporation (the "New Common Stock"). Any stock certificate
that, immediately prior to the Effective Time, represented shares of the Old
Common Stock will, from and after the Effective Time, automatically and without
the necessity of presenting the same for exchange, represent the number of
shares of the New Common Stock as equals the product obtained by multiplying the
number of shares of Old Common Stock represented by such certificate immediately
prior to the Effective Time by one-half (0.5).
<PAGE>
The foregoing amendment(s) will become effective when these Articles of
Amendment are filed in accordance with General Laws, Chapter 156B, Section 6
unless these articles specify, in accordance with the vote adopting the
amendment, a later effective date not more than thirty days after such filing,
in which event the amendment will become effective on such later date.
Later effective date: .
SIGNED UNDER THE PENALTIES OF PERJURY, this 16th day of December, 1999.
------- -------- --
/s/ John L.Youngblood , *President,
- ------------------------------------------------------------------
John L. Youngblood
/s/ David L. Renauld , *Clerk.
- ------------------------------------------------------------------
David L. Renauld
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
ARTICLES OF AMENDMENT
(General Laws, Chapter 156B, Section 72)
I hereby approve the within Articles of Amendment, and the filing
fee in the amount of $__________ having been paid, said article is
deemed to have been filed with me this __________ day of
_______________, 19__.
Effective date:
----------------------------------------------------
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
PHOTOCOPY OF DOCUMENT TO BE SENT TO:
David L. Renauld, Esq.
----------------------------------
Telaxis Communications Corporation
20 Industrial Drive East
----------------------------------
South Deerfield, MA 01373
Telephone: (413) 665-8551
--------------------------
<PAGE>
Telaxis (TM)
COMMUNICATIONS
NUMBER SHARES
TC
COMMON STOCK CUSIP 879202 10 9
SEE REVERSE FOR CERTAIN DEFINITIONS
TELAXIS COMMUNICATIONS CORPORATION
INCORPORATED UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
This Certifies That
is owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF $.01 PAR VALUE EACH OF
________________ ____________________
____________________ TELAXIS COMMUNICATIONS CORPORATION _______________________
________________ ____________________
transferable on the books of the Corporation in person or by attorney upon
surrender of this certificate duly endorsed or assigned. This certificate and
the shares represented hereby are subject to the laws of the Commonwealth of
Massachusetts, and to the Articles of Organization and By-laws of the
Corporation, as now or hereafter amended. This certificate is not valid until
countersigned and registered by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
DATED:
[SEAL]
/s/ John L. Youngblood /s/ Dennis C. Stempel
President and Chief Executive Officer Vice President, Chief Financial
Officer, Treasurer, and
Principal Accounting Officer
COUNTERSIGNED AND REGISTERED:
REGISTRAR AND TRANSFER COMPANY
BY TRANSFER AGENT
AND REGISTRAR
AUTHORIZED SIGNATURE
<PAGE>
TELAXIS COMMUNICATIONS CORPORATION
THIS CORPORATION IS AUTHORIZED TO ISSUE COMMON STOCK AND PREFERRED STOCK WHICH
HAVE DIFFERENT PREFERENCES, VOTING POWERS, QUALIFICATIONS AND RIGHTS ALL AS SET
FORTH IN THIS CORPORATION'S ARTICLES OF ORGANIZATION. THIS CORPORATION WILL
FURNISH A COPY OF SAID PREFERENCES, POWERS, QUALIFICATIONS AND RIGHTS TO THE
HOLDER OF THIS CERTIFICATE WITHOUT CHARGE UPON WRITTEN REQUEST TO THE CLERK OF
THE CORPORATION.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT...................Custodian...............
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform Gifts to Minors
JT TEN _ as joint tenants with right
of survivorship and not as Act................................
tenants in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value Received, _______________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------- Shares
of the stock represented by the within Certificate, and do hereby irrevocably
constitute and appoint________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation, with
full power of substitution in the premises.
DATED: _______________________
____________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT, OR ANY CHANGE WHATEVER.
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST BE
GUARANTEED BY A COMMERCIAL BANK OR TRUST
COMPANY OR A MEMBER FIRM OF A NATIONAL OR
REGIONAL OR OTHER RECOGNIZED STOCK EXCHANGE
IN CONFORMANCE WITH A SIGNATURE GUARANTEE
MEDALLION PROGRAM.
<PAGE>
EXHIBIT 5.1
-----------
[LETTERHEAD OF MIRICK, O'CONNELL, DEMALLIE & LOUGEE, LLP]
__________________, 2000
Telaxis Communications Corporation
20 Industrial Drive East
South Deerfield, MA 01373
Re: Telaxis Communications Corporation
----------------------------------
Ladies and Gentlemen:
We have acted as counsel to Telaxis Communications Corporation, a
Massachusetts corporation (the "Company"), in connection with the preparation
and filing of a registration statement (including the preliminary prospectus
contained therein, the "Registration Statement") on Form S-1 (File No. 333-
87885) with the Securities and Exchange Commission relating to the registration
of ____________________ shares of Common Stock of the Company, par value $.01
per share (the "Common Stock"), under the Securities Act of 1933, as amended.
At your request, this opinion is being furnished to you.
In rendering this opinion, we have examined and relied upon executed
originals or copies of executed originals of the following:
1. The Registration Statement;
2. The Amended and Restated Articles of Organization of the Company, as
amended to date;
3. The Amended and Restated By-laws of the Company, as amended to date; and
4. Such other certificates, documents, resolutions and instruments we have
deemed necessary or advisable for the purpose of this opinion.
In our examination of the above documents, instruments and agreements, we
have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such latter documents. For purposes of
<PAGE>
Telaxis Communications Corporation
__________________, 1999
Page 2
this opinion we have relied upon records of public officials and upon certain
statements of the Company contained in the documents set forth or referred to
above, which we have not independently verified, and nothing has come to our
attention leading us to question the accuracy of such information. We have not
made any independent review or investigation of any other agreements,
instruments, governmental rules or regulations, orders, writs, judgments or
decrees by which the Company or any of its properties may be bound, nor have we
made any independent investigation as to the existence of actions, suits,
investigations or proceedings, if any, pending or threatened against the Company
or any of its properties.
We have made such examination of Massachusetts and federal laws as we have
deemed relevant for purposes of this opinion, and we have not made any review of
the laws of any other state or jurisdiction. Accordingly, we express no opinion
on the laws of any state or jurisdiction other than the United States and the
Commonwealth of Massachusetts.
Based upon and subject to the foregoing, we are of the opinion that the
Common Stock has been duly authorized and, when issued and delivered as
described in the Registration Statement against payment described therein, will
be validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the heading "Legal
Matters" therein. This opinion may not be relied upon or used for any other
purpose or by any other person without our prior written consent.
Very truly yours,
MIRICK, O'CONNELL, DEMALLIE & LOUGEE, LLP
<PAGE>
EXHIBIT 10.19
First Amendment
to
Purchase Agreement
dated June 1988
between Massachusetts Technology
Development Corporation
and
Millitech Corporation
This document (the "Amendment") dated December 28, 1988 is entered into
between Massachusetts Technology Development Corporation ("MTDC") and Millitech
Corporation (the "Company"). It amends the above-captioned Purchase Agreement
(the "Original Purchase Agreement", as amended, the "Agreement").
1. Section 1 of the Original Purchase Agreement is amended by adding a
new section 1.3 as follows:
1.3 Additional Investment.
(a) On the date hereof MTDC is loaning the company the sum of
$100,000 (the "New Loan"). The New Loan and the Loan are
sometimes referred to collectively as the "Loans". The New Loan
is evidenced by a Demand Subordinated Promissory Note (in the
form attached hereto as Exhibit A (the "New Note"). The New Notes
and the Note are sometimes collectively referred to as the
"Notes".
(b) On the date hereof the Company is issuing to MTDC a stock
purchase warrant (the "New Warrant") to subscribe for and
purchase 8000 shares of the Company's 8% Convertible Preferred
Stock. As used in the Original Purchase Agreement, the term
"Warrant" shall include New Warrant.
2. The Company reaffirms as of the date hereof the Representations and
Warranties set forth in Section 4 of the Original Purchase Agreement
with the modifications set forth on Exhibit B attached hereto.
<PAGE>
3. MTDC reaffirms as of the date hereof the Representations and
Warranties set forth in Section 5 of the Original Purchase Agreement.
4. Section 7.23 of the Original Purchase Agreement is amended so as to
substitute the word "Notes" for the word "Note" wherever appearing.
5. Section 7.24 of the Original Purchase Agreement is amended by
substituting the word "Warrants" for "Warrant" wherever appearing.
6. Sections 8.12, 10, and 12 of the Original Purchase Agreement are
amended by substituting the word "Notes" for the word "Notes" wherever
appearing.
IN WITNESS WHEREOF, the Company and MTDC have caused this amendment to be
executed as an instrument under seal by their proper officers duly authorized
the 28/th/ day of December, 1988.
MILLITECH CORPORATION
By: /s/ Erik H. van der Kaay
--------------------------------
Title: Erik H. van der Kaay, President
(Corporate Seal)
Attest:/s/ David L. Lougee
-------------------
Clerk
MASSACHUSETTS TECHNOLOGY
DEVELOPMENT CORPORATION
By: /s/ John T. Hodgman
--------------------
<PAGE>
THE FOLLOWING IS A SUMMARY OF THE INFORMATION PROVIDED
IN THE EXHIBITS OF THE FIRST AMENDMENT TO THE PURCHASE AGREEMENT.
FURTHER INFORMATION WILL BE FURNISHED UPON REQUEST.
Exhibit B
---------
Schedule 4.2
------------
A list of the holders of the Company's common stock and preferred
stock. In addition, a list of outstanding rights, options, warrants or
agreements concerning the Company's capital stock. These lists are outdated.
Schedule 4.3
------------
A list of subsidiaries of the Company. The only subsidiary identified
is MilliTech International Sales Corporation, which is inactive.
Schedule 4.4
------------
A statement that the Company furnished MTDC with its 1988 Unaudited
Financial Statements and its 1989 projections.
Schedule 4.6
------------
A list of liens held against the Company as of the date of the
Amendment.
Schedule 4.7
------------
A list of the Company's patents and trademarks as of the date of the
Amendment.
Schedule 4.11
-------------
A list of the Company's material contracts and loans as of the date
of the Amendment.
Schedule 4.12
-------------
A list of the Company's transactions with Affiliates as of the date of
the Amendment.
<PAGE>
EXHIBIT 10.20
SECOND AMENDMENT TO
PURCHASE AGREEMENT
------------------
This Second Amendment to Purchase Agreement (this "Amendment") dated as of
June 17, 1999 is between MILLITECH CORPORATION, a Massachusetts corporation
("Millitech"), and MASSACHUSETTS TECHNOLOGY DEVELOPMENT CORPORATION, a body
politic and corporate and a public instrumentality of the Commonwealth of
Massachusetts ("MTDC").
A. Millitech and MTDC entered into a Purchase Agreement, dated as of June
1988 (the "Original Agreement").
B. Millitech and MTDC have heretofore amended the Original Agreement
pursuant to a First Amendment, dated December 28, 1988 (the Original Agreement,
as heretofore amended, is hereinafter referred to as the "Purchase Agreement").
C. Millitech and MTDC desire to further amend the Purchase Agreement in
connection with the extension by MTDC to Millitech of a new credit of $400,000
on the date hereof.
NOW, THEREFORE, the parties hereto, each in consideration of the acts and
promises of the other and for other good and valuable consideration paid, the
receipt and sufficiency of which are hereby acknowledged, agree as follows:
1. Section 1 of the Purchase Agreement is hereby amended by adding
thereto a new section 1.4 as follows:
1.4 1999 Investment.
---------------
(a) On June 17, 1999, MTDC is loaning the Company the sum of
$400,000 (the "1999 Loan"). The 1999 Loan, the New Loan and the Loan
are sometimes referred to collectively as the "Loans." The 1999 Loan
is evidenced by a Subordinated Promissory Note, dated June 17, 1999
(the "1999 Note"). The 1999 Note, the New Note and the Note are
sometimes referred to collectively as the "Notes."
(b) On June 17, 1999, the Company is issuing to MTDC a stock
purchase warrant to subscribe for and purchase 40,000 shares of the
Company's Common Stock and is extending the duration of the
outstanding Class A Preferred Stock Purchase Warrant.
2. The first sentence of Section 4.2 of the Purchase Agreement is hereby
replaced in its entirety with the following:
<PAGE>
The authorized capital stock of the Company consists of (a) 36,000,000
shares of Common Stock, $.01 par value, of which 1,000,360 shares have
been issued and are outstanding, (b) 3,090,323 shares of Class A
Preferred Stock, $.01 par value, of which 3,045,696 shares are issued
and outstanding, (c) 789,677 shares of Class B Preferred Stock, $.01
par value, of which 789,677 shares are issued and outstanding, (d) 0
shares of Class C Preferred Stock, $.01 par value, of which no shares
are issued and outstanding, (e) 7,200,000 shares of Class D Preferred
Stock, of which 7,200,000 are issued and outstanding, (f) 8,000,000
shares of Class E Preferred Stock, of which 3,274,841 shares are
issued and outstanding, and (g) 7,500,000 shares of undesignated
Preferred Stock.
3. The first sentence of Section 4.11 of the Purchase Agreement is hereby
replaced in its entirety with the following:
All contracts and agreements, written or oral, which are of material
importance to the business of the Company or any Subsidiary are legal,
valid and binding obligations of the Company and, to the Company's
knowledge, of the other parties thereto. The Company has performed all
of its material obligations under such contracts required to be
performed to date and is not in material default under any of those
contracts. The Company has not received notice from any other party to
those contracts that such other party believes the Company is in
breach or default thereunder.
4. Section 7.6.1 of the Purchase Agreement is hereby amended by (a)
deleting therefrom the number "90" and inserting in lieu thereof the number
"120" and (b) deleting therefrom the last textual paragraph in its entirety.
5. Section 7.11 of the Purchase Agreement is hereby amended by deleting
therefrom the words "Erik van der Kaay" and inserting in lieu thereof the words
"John L. Youngblood (or another individual reasonably acceptable to MTDC)."
6. The text of Section 7.12 of the Purchase Agreement is hereby replaced
in its entirety with the following:
Maintain at the Company's expense insurance on the life of the chief
executive officer of the Company in an amount at least equal to the
outstanding amount of the Loans.
7. The text of Section 7.23 of the Purchase Agreement is hereby replaced
in its entirety with the following:
2
<PAGE>
The Company shall comply with the affirmative covenants set
forth in this Section 7 until the payment in full of the
Notes; provided, however, that compliance with such
affirmative covenants may be waived from time to time by the
holder of the Notes acting alone.
8. Section 7.24 of the Purchase Agreement is hereby deleted.
9. Section 8.6 of the Purchase Agreement is hereby amended by adding a
new clause (e) at the end thereof (before the period) as follows: "or (e)
investments made for cash management purposes approved by vote of two-thirds of
the acting Board of Directors of the Company."
10. Section 8.9 of the Purchase Agreement is hereby amended by deleting
therefrom the number "$750,000" and inserting in lieu thereof the number
"$1,250,000."
11. Section 8.11 of the Purchase Agreement is hereby amended by deleting
therefrom the number "$60,000" and inserting in lieu thereof the number
"$125,000."
12. The text of Section 8.12 of the Purchase Agreement is hereby replaced
in its entirety with the following:
The Company shall comply with the negative covenants set
forth in this Section 8 until the payment in full of the
Notes; provided, however, that compliance with such negative
covenants may be waived from time to time by the holder of
the Notes acting alone.
13. The street address of MTDC set forth in Section 12.7 of the Purchase
Agreement is hereby replaced with 148 State Street. The notice address for
Mirick, O'Connell, DeMallie & Lougee set forth in Section 12.7 of the Purchase
Agreement is hereby changed to: Mirick, O'Connell, DeMallie & Lougee, LLP, 100
Front Street, Worcester, MA 01608, Attn: David L. Renauld.
14. Schedules 4.1A, 4.1B, 4.2, 4.3, 4.6, 4.7, 4.8, 4.12, and 7.19 to the
Purchase Agreement are hereby replaced with the same numbered schedules attached
to this Amendment. Schedule 4.11 to the Purchase Agreement is hereby deleted.
15. Except as herein expressly modified, all other provisions of the
Purchase Agreement shall remain unchanged, are in full force and effect, and are
hereby ratified and confirmed.
16. This Amendment shall be governed by and construed in accordance with
the internal laws of the Commonwealth of Massachusetts without regard to
principles of conflicts of laws.
3
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Second Amendment to
Purchase Agreement as an instrument under seal as of the date first set forth
above.
Attest: MILLITECH CORPORATION
/s/ David L. Renauld By: /s/ Dennis C. Stempel
- ------------------------- -------------------------
Name: David L. Renauld Name: Dennis C. Stempel
Title: Clerk Title: Vice President and CFO
MASSACHUSETTS TECHNOLOGY
DEVELOPMENT CORPORATION
By: /s/ John F. Hodgman
-------------------------
Name: John F. Hodgman
Title: President, MTDC
4
<PAGE>
THE FOLLOWING IS A SUMMARY OF THE INFORMATION PROVIDED IN THE
SCHEDULES OF THE SECOND AMENDMENT TO THE PURCHASE AGREEMENT.
FURTHER INFORMATION WILL BE FURNISHED UPON REQUEST.
Schedules 4.1A and 4.1B
-----------------------
A copy of the Company's Articles of Organization and By-laws. Both of these
documents are outdated.
Schedule 4.2
------------
The capitalization of the Company. This is outdated.
Schedule 4.3
------------
A list of the Company's equity investments as of the date of the Amendment.
Schedule 4.6
------------
A list of liens held against the Company as of the date of the Amendment.
Schedule 4.7
------------
A list of the Company's intellectual property as of the date of the
Amendment.
Schedule 4.8
------------
A list of litigation the Company is actively involved in as of the date of
the Amendment.
Schedule 4.12
-------------
A list of agreements between the Company and Associates as of the date of
the Amendment.
Schedule 7.19
-------------
A list of the Company's Noncompetition, Nondisclosure and Inventions
Agreements as of the date of the Amendment.
5
<PAGE>
EXHIBIT 10.21
EMPLOYEE STOCK PURCHASE AGREEMENT
---------------------------------
This Employee Stock Purchase Agreement (this "Agreement") is made as of
---------
September 16, 1999 by and between Millitech Corporation, a Massachusetts
corporation (the "Company") and Mervyn FitzGerald ("Purchaser").
------- ---------
WHEREAS, the Company desires to issue and Purchaser desires to purchase
Common Stock of the Company on the terms and conditions hereinafter set forth.
NOW, THEREFORE, it is agreed between the parties as follows:
1. Purchaser hereby agrees to purchase from the Company, and the Company
agrees to sell to the Purchaser, 225,000 shares of its Common Stock for a
purchase price of $1.25 per share, payable in accordance with the terms of a
Promissory Note, dated as of September 16, 1999, from Purchaser to the Company a
form of which is attached as Exhibit A. The closing hereunder shall occur at
---------
the offices of the Company on the date of this Agreement or at such other time
and place as the parties may mutually agree.
2. All of the shares of the Company's Common Stock being purchased by
Purchaser pursuant to this Agreement (hereinafter sometimes collectively
referred to as the "Stock") shall be subject to the repurchase right (the
-----
"Repurchase Right") set forth in this Section 2.
----------------
(a) If the Purchaser shall cease to be employed by the Company, then
the Company may repurchase from Purchaser (or his personal representative, as
the case may be) all non-vested Stock at the purchase price per share set forth
in Section 1 (the "Repurchase Price") at any time within sixty (60) days after
the date Purchaser ceases to be so employed. For the purposes of this Agreement,
45,000 shares of Stock shall be deemed vested as of the date of this Agreement
and 45,000 shares of the Stock shall become vested each year on the anniversary
date of this Agreement. Upon (i) the completion of a merger or consolidation of
the Company with any other entity wherein the Company is not the surviving
entity, (ii) the sale of substantially all of the Company's assets to another
entity, or (iii) the sale or transfer of more than 50% of the outstanding
capital stock of the Company to an unrelated person or group of persons acting
collectively in one or a series of transactions, all non-vested Stock will be
immediately vested. All vested Stock shall be subject to the First Refusal right
set forth in Section 3.
(b) If the Purchaser:
(i) files a voluntary petition under any bankruptcy or
insolvency law or a petition for the appointment of a receiver or makes an
assignment for the benefit of creditors;
(ii) is subjected involuntarily to such a petition or assignment
or to an attachment or other legal or equitable interest with respect to his
shares of stock and such involuntary petition or assignment or attachment is not
discharged within 60 days after its date; or
<PAGE>
(iii) is required to transfer his shares of stock by operation of
law (other than death of the Stockholder) or by order or decree of any court; or
(iv) shall die or become permanently disabled;
then the Company shall have the option, exercisable at any time during the
period of sixty (60) days after receiving notice thereof, to purchase all or any
portion of the non-vested Stock owned by the Purchaser (or his personal
representative, as the case may be) for the Repurchase Price and upon the terms
as set forth in Section 4. If within sixty (60) days after receipt of the
notice, the Company does not elect to purchase all or any portion of the non-
vested Stock then the Repurchase Right shall cease with respect to such shares.
Failure of the Company to elect to purchase said shares under this Section shall
not affect the right to purchase the same shares under Section 3(a) in the event
of a proposed sale, assignment, transfer, exchange, pledge or other disposition
by or to any receiver, petitioner, assignee, transferee or other person
obtaining an interest in said shares.
(c) Nothing in this Agreement shall affect in any manner whatsoever
the right or power of the Company, or a parent or subsidiary of the Company, to
terminate Purchaser's employment, for any reason, with or without cause.
3. (a) Purchaser shall not sell or otherwise transfer any shares of
Stock unless prior to any sale or other transfer thereof, Purchaser (or his
personal representative, as the case may be) shall provide the Company with
written notice, in the manner provided in Section 12, describing the number of
shares of Stock intended to be sold or transferred, the price and the general
terms of the proposed sale or transfer.
(b) The Company shall have the right (the "First Refusal Right") at
any time within sixty (60) days after the notice required by Section 3(a) to
purchase from Purchaser (or his personal representative, as the case may be) up
to but not exceeding the number of shares of the Stock specified in, and at the
price (the "First Refusal Price") and upon the general terms specified in such
notice.
(c) If the First Refusal Right is not exercised with respect to some
or all the shares of the Stock specified in the notice required by Section 3(a),
then for a period of 120 days, Purchaser (or his personal representative, as the
case may be) shall be free to sell, or otherwise transfer up to but not
exceeding the number of shares of the Stock specified in the notice required by
Section 3(a), minus the number of shares of the Stock with respect to which the
First Refusal Right was exercised, at a price and upon general terms no more
favorable to purchasers or transferees thereof than specified in the notice
required by Section 3(a).
(d) In the event that any shares of the Stock which are free to be
sold or otherwise transferred under the terms of Section 3(c) are not sold or
otherwise transferred within said 120-day period, such shares of the Stock shall
again be subject to the First Refusal Right and Purchaser (or his personal
representative, as the case may be) shall comply with all the
<PAGE>
provisions of this Section 3 prior to selling or otherwise transferring any such
shares of the Stock.
(e) Failure to exercise the First Refusal Right with respect to any
shares of the Stock shall not constitute a waiver of the First Refusal Right
with respect to any other shares of the Stock.
(f) The First Refusal Right shall continue after the death or
termination of the employment of Purchaser with the Company for any reason, or
no reason, and shall terminate only upon the closing of an underwritten public
offering pursuant to an effective registration statement under the Securities
Act of 1933, as amended, covering the offer and sale of shares of Common Stock
of the Company to the public at a public offering price of not less than $4.50
per share (as adjusted for stock splits, stock dividends, distributions or
subdivisions) and resulting in gross proceeds to the Company of not less than
Fifteen Million Dollars ($15,000,000).
4. The Repurchase Right and the First Refusal Right shall be exercised by
written notice signed by an officer of the Company and delivered or mailed as
provided in Section 12. The Repurchase Price and the First Refusal Price shall
be payable first in cancellation of all or a portion of any outstanding
indebtedness and interest thereon of Purchaser to the Company represented by the
Note and then in cash (by check) or both.
5. The Company may assign its rights under Sections 2 and 3.
6. If, from time to time during the term of the Repurchase Right or the
First Refusal Right:
(a) There is any stock dividend or liquidating dividend of cash
and/or property, stock split or other change in the character or amount of any
of the outstanding securities of the Company; or
(b) There is any consolidation or merger where the Company is the
survivor unless such consolidation or merger is with a publicly-owned
corporation and the aggregate market value of the securities or other property
the stockholders of the Company receive is in excess of Fifteen Million Dollars
($15,000,000)].
then, in such event, any and all new, substituted or additional securities or
other property (other than cash) to which Purchaser is entitled by reason of his
ownership of Stock shall be immediately subject to the Repurchase Right or the
First Refusal Right, as the case may be, and be included in the word "Stock" for
all purposes of the Repurchase Right and the First Refusal Right with the same
force and effect as the shares of Stock subject to the Repurchase Right and the
First Refusal Right under the terms of Sections 2 and 3. While the total
Repurchase Price shall remain the same after each such event, the Repurchase
Price per share of Stock upon exercise of the Repurchase Right shall be
appropriately adjusted. Stock acquired as provided in clauses (a) or (b) above
shall be deemed to have been acquired at the time of acquisition of the Stock on
which such Stock was distributed.
<PAGE>
7. All certificates representing any shares of Stock subject to the
provisions of this Agreement shall have endorsed thereon the following legends:
(a) "Any disposition of any interest in the securities represented by
this certificate is subject to restrictions, and the securities represented by
this certificate are subject to a repurchase right and a first refusal right
contained in a certain agreement between the record holder hereof and the
corporation, a copy of which will be mailed to any holder of this certificate
without charge within 5 days of receipt by the corporation of a written request
therefor."
(b) Any legend required to be placed thereon by federal or state
securities laws.
8. Purchaser acknowledges that Purchaser is aware that the Stock to be
issued to him by the Company pursuant to this Agreement has not been registered
under the Securities Act of 1933, as amended. In this connection, Purchaser
warrants and represents to the Company as follows:
(a) Purchaser is purchasing the Stock solely for Purchaser's own
account for investment and not with a view to or for sale or distribution of the
Stock or any portion thereof and not with any present intention of selling,
offering to sell or otherwise disposing of or distributing the Stock or any
portion thereof. Purchaser also represents that the entire legal and beneficial
interest of the Stock Purchaser is purchasing is being purchased for, and will
be held for the account of, the Purchaser only and neither in whole nor in part
for any other person.
(b) Purchaser has heretofore discussed the Company and its plans,
operations and financial condition with its officers and that Purchaser has
heretofore received all such information as Purchaser deems necessary and
appropriate to enable Purchaser to evaluate the financial risk inherent in
making an investment in the Stock of the Company and Purchaser further
represents and warrants that Purchaser has received satisfactory and complete
information concerning the business and financial condition of the Company in
response to all inquiries in respect thereof.
(c) Purchaser realizes that the purchase of the Stock will be a
highly speculative investment and that Purchaser is able, without impairing
Purchaser's financial condition, to hold the Stock for an indefinite period of
time and to suffer a complete loss on the investment.
(d) The Company has disclosed to Purchaser in writing:
(i) the sale of the Stock which it is purchasing has not been
registered under the Securities Act of 1933, as amended (the "Act"), and the
Stock must be held indefinitely unless a transfer of them is subsequently
registered under the Act or an exemption from such registration is available;
<PAGE>
(ii) the share certificate representing the Stock will be
stamped with the legends restricting transfer specified in this Agreement
between the Company and the Purchaser; and
(iii) the Company will make a notation in its records of the
aforementioned restrictions on transfer and legends.
(e) Purchaser understands that the Stock are restricted securities
within the meaning of Rule 144 promulgated under the Act; that the exemption
from registration under Rule 144 will not be available in any event for at least
one year from the date of sale of the Stock to Purchaser, and even then will not
be available unless (i) a public trading market then exists for the Stock of the
Company, (ii) adequate current public information concerning the Company is then
available to the public, (iii) Purchaser has been the beneficial owner and
Purchaser has paid the full purchase price for the Stock at least one year prior
to the sale, and (iv) other terms and conditions of Rule 144 are complied with;
and that any sale of the Stock may be made by it only in limited amounts in
accordance with such terms and conditions, as amended from time to time.
(f) Without in any way limiting its representations set forth above,
Purchaser further agrees that Purchaser shall in no event make any disposition
of all or any portion of the Stock which Purchaser is purchasing unless and
until:
(i) There is then in effect a Registration Statement under the
Act covering such proposed disposition and such disposition is made in
accordance with said Registration Statement; or
(ii) (A) Purchaser shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, (B)
Purchaser shall have furnished the Company with an opinion of counsel to the
effect that such disposition will not require registration of such shares under
the Act, and (C) such opinion of counsel shall have been concurred in by counsel
for the Company and the Company shall have advised Purchaser of such
concurrence.
9. The Company shall not be required (a) to transfer on its books any
shares of Stock of the Company which shall have been sold or transferred in
violation of any of the provisions set forth in this Agreement or (ii) to treat
as owner of such shares or to accord the right to vote as such owner or to pay
dividends to any transferee to whom such shares shall have been so transferred.
In the event of a sale of Stock by Purchaser pursuant to Section 3(c), Purchaser
shall furnish to the Company proof that such sale was made in compliance with
the provisions of Section 3(c) as to price and general terms of such sale.
10. Subject to the provisions of this Agreement, Purchaser shall, during
the term of this Agreement, exercise all rights and privileges of a shareholder
of the Company with respect to the Stock.
<PAGE>
11. The parties agree to execute such further instruments and to take such
further action as may reasonably be necessary to carry out the intent of this
Agreement.
[In addition, Purchaser shall execute and deliver to the Company the Stock
Assignment Separate from Certificate attached as Exhibit B and the Joint Escrow
---------
Instructions attached as Exhibit C.]
---------
12. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by certified mail with postage and fees prepaid,
addressed to the other party at his address hereinafter shown below his
signature or at such other address as such party may designate by ten days'
advance written notice to the other party.
13. This Agreement shall inure to the benefit of the successors and
assigns of the Company and be binding upon Purchaser and its heirs, executors,
administrators, successors and assigns.
14. This Agreement shall be governed by and interpreted under the laws of
the Commonwealth of Massachusetts.
15. This Agreement may be executed simultaneously in any number of
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement under seal as
of the day and year first above written.
MILLITECH CORPORATION
/s/ John L. Youngblood
--------------------------------
By: John L. Youngblood
Title: President
PURCHASER:
/s/ Mervyn FitzGerald
--------------------------------
Mervin Fitzgerald
Address:
6934 Rocky Top Circle
Dallas, TX 75252
<PAGE>
EXHIBIT A
TO
EMPLOYEE STOCK PURCHASE AGREEMENT
TERM NOTE
$281,250
South Deerfield, Mass.
September 16, 1999
FOR VALUE RECEIVED, Mervyn FitzGerald, of 6934 Rocky Top Circle, Dallas, TX
(the "Borrower") promises to pay to the order of Millitech Corporation, a
Massachusetts corporation having its principal place of business at South
Deerfield, Massachusetts (the "Company"), or order, at the Company's offices,
the principal sum of Two Hundred Eighty-One Thousand Two Hundred Fifty and
00/100 DOLLARS ($281,250), in lawful money of the United States of America, with
interest on the unpaid balance hereof at the rates and in the manner hereafter
provided.
The unpaid principal of this Note from time to time outstanding shall bear
interest, payable annually in arrears, computed on the basis of the actual
number of days elapsed over a year assumed to have 360 days, at a rate per annum
equal to 6.25%.
Commencing on September 15, 2000 and continuing on the same day of each
succeeding year thereafter, the Borrower agrees to pay interest on this Note.
The entire indebtedness evidenced by this Note, if not earlier paid, shall be
due and payable on September 15, 2009.
The occurrence of any one or more of the following events is an Event of
Default under this Note:
(a) Failure of the Borrower to pay, perform or observe any of its
obligations contained in (i) this Note, or (ii) the Employee Stock Purchase
Agreement dated as of the date of this Note (the "Agreement"), or (iii) any
other document delivered to the Company in connection with this Note; or
(c) The death of the Borrower or the involvement of the Borrower in
any financial difficulties as evidenced by
(i) his insolvency within the meaning of the Massachusetts
Uniform Commercial Code; or
(ii) an assignment for the benefit of his creditors; or
(iii) the appointment of a receiver, trustee, custodian,
liquidator or conservator of his assets not vacated or set
aside within sixty (60) days; or
(iv) the commencement by him of proceedings under any federal or
state law
<PAGE>
relating to bankruptcy, insolvency or relief of debtors; or
(v) the commencement against him of proceedings under any
federal or state law relating to bankruptcy, insolvency or
relief of debtors if the proceedings are not dismissed
within sixty (60) days after the date on which commenced.
If an Event of Default occurs the Company may, to the extent permitted by
law and without notice to the Borrower, declare the unpaid principal balance and
accrued interest to be due immediately without notice, presentment, demand,
protest or other notice of dishonor of any kind, all of which are expressly
waived. If the Company declares the unpaid principal balance and accrued
interest to be due the Company shall accept tender of any un-vested Stock as
payment at the rate of $1.25 per share. The Borrower agrees to pay all
reasonable costs, including but not limited to attorneys' fees, incurred by the
Company in connection with collecting or enforcing any obligation of the
Borrower to the Company. No course of dealing by the Company and no delay in
exercising any right under this Note will operate as a waiver by the Company of
its rights, and a waiver of a right on one occasion may not be construed as a
waiver of the right on a future occasion.
While no Event of Default exists each payment under this Note will be
applied first to interest then due and then to principal. When an Event of
Default exists any payments will be applied to interest and/or principal as
determined by the Company in its discretion. The Borrower may, at any time and
without penalty, prepay any part or all of the unpaid principal balance of this
Note in multiples of $1,000.00.
Whenever any installment of principal or interest due under this Note shall
not be paid within ten (10) days of its due date, the Borrower shall pay in
addition thereto as a late charge, five percent (5%) of the amount of such
installment.
Any deposits or other sums at any time credited by or due from the Company
to the Borrower, any endorser or guarantor hereof, may at all times be held and
treated as collateral for the payment of this Note and any and all other
liabilities (direct or indirect, absolute or contingent, sole, joint or several,
secured or unsecured, due or to become due, now existing or hereafter arising)
of any such maker to the Company. The Company may apply or set-off such deposits
or other sums against such liabilities at any time.
The Borrower and each guarantor, endorser or other person now or hereafter
liable for the payment of any of the indebtedness evidenced by this Note,
severally agrees, by making, guaranteeing or endorsing this Note or by making
any agreement to pay any of the indebtedness evidenced by this Note, to waive
presentment for payment, protest and demand, notice of protest, demand and of
dishonor and nonpayment of this Note, and consents, on one or more occasions,
without notice or further assent (a) to the substitution, exchange or release of
the collateral, if any, securing this Note or any part thereof at any time, (b)
to the acceptance or release by the holder or holders hereof at any time of any
additional collateral or security for or other guarantors of this Note, (c) to
the modification or amendment, at any time and from time to time, of this Note,
the Agreement or any instrument securing this Note at the request of any person
<PAGE>
liable hereon, (d) to the granting by the holder hereof of any extension of the
time for the performance of the agreements, covenants and conditions contained
in this Note, the Agreement or any other instrument securing this Note, at the
request of any person liable hereon, and (e) to any and all forbearances and
indulgences whatsoever. Such consent shall not alter nor diminish the liability
of any person.
The Borrower agrees to pay all reasonable expenses or costs, including
attorneys' fees and costs of collection, which may be incurred by the Company in
connection with the enforcement of any obligations hereunder or representation
with respect to bankruptcy or insolvency proceedings.
This Note is issued under and pursuant to the Agreement to which Agreement
reference is hereby made for a statement of such terms and the respective rights
of the Borrower and the holder of this Note, which Agreement is incorporated
herein by reference thereto.
The Borrower agrees that the proceeds (net of 3/rd/ party commissions) from
the sale of the Stock subject to the Agreement will be applied to reduce the
principal of this Note.
Executed as a sealed instrument as of the 16th day of September, 1999.
/s/ [ILLEGIBLE] /s/ Mervyn FitzGerald
- ------------------ -------------------------
Witness Mervyn FitzGerald
<PAGE>
EXHIBIT B
TO
EMPLOYEE STOCK PURCHASE AGREEMENT
---------------------------------
STOCK ASSIGNMENT SEPARATE FROM CERTIFICATE
------------------------------------------
FOR VALUE RECEIVED Mervyn FitzGerald hereby sells, assigns and transfers
unto _____________________________ (______) shares of Common Stock of Millitech
Corporation, a Massachusetts corporation, standing in the undersigned's name on
the books of said corporation represented by Certificate No. 217, and does
hereby irrevocably constitute and appoint David L. Renauld, Clerk of Millitech
Corporation, or his duly elected successor, attorney to transfer the said stock
on the books of the said corporation with full power of substitution in the
premises.
Dated:
Signature: /s/ Mervyn FitzGerald
----------------------------
Mervyn FitzGerald
<PAGE>
EXHIBIT C
TO
EMPLOYEE STOCK PURCHASE AGREEMENT
---------------------------------
JOINT ESCROW INSTRUCTIONS
-------------------------
September 16, 1999
David L. Renauld, Clerk
Millitech Corporation
South Deerfield Research Park
P. O. Box 209
South Deerfield, MA 01373
Dear Sirs:
As Escrow Agent for both Millitech Corporation, a Massachusetts corporation
(the "Corporation"), and Mervyn Fitzgerald ("Buyer"), you are hereby authorized
and directed to hold the documents delivered to you pursuant to the terms of
that certain Employee Stock Purchase Agreement (including the Note attached
thereto as Exhibit A) (the "Agreement"), dated as of September, 1999, to which a
copy of these Joint Escrow Instructions is attached as Exhibit C, in accordance
with the following instructions:
1. In the event the Corporation and/or any assignee of the Corporation
(referred to collectively for convenience as the "Corporation") shall elect to
exercise the Repurchase Right or the First Refusal Right set forth in the
Agreement, the Corporation shall give to Buyer and you a written notice
specifying the number of shares of stock to be purchased, the purchase price,
and the time for a closing thereunder at the principal office of the
Corporation. Buyer and the Corporation hereby irrevocably authorize and direct
you to close the transaction contemplated by such notice in accordance with the
terms of said notice.
2. At the closing, you are directed (a) to date the stock assignment
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver same, together with the certificate
evidencing the shares of stock to be transferred to the Corporation against the
simultaneous delivery to you of the purchase price (by check) for the number of
shares of stock being purchased pursuant to the exercise of the Repurchase Right
or the First Refusal Right.
<PAGE>
3. In the event of a sale of stock by Buyer in compliance with the
provisions of the Agreement permitting such sale upon failure of the Corporation
to exercise the First Refusal Right with respect to such stock, the Corporation
and the Buyer shall give you written notice stating that satisfactory
arrangements have been made for application of the proceeds of such sale
pursuant to the Agreement and authorizing you to deliver the number of shares of
stock being transferred, together with the certificate evidencing the shares of
stock being transferred, in accordance with the terms of such written notice.
4. Buyer irrevocably authorizes the Corporation to deposit with you any
certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as referred to in the Agreement.
Buyer does hereby irrevocably constitute and appoint you as his attorney-in-fact
and agent for the term of this escrow to execute with respect to such securities
all documents necessary or appropriate to make such securities negotiable and
complete any transaction contemplated in this Agreement, including but not
limited to any appropriate filing with state securities officials. Subject to
the provisions of this Section 4, Buyer shall exercise all rights and privileges
of a shareholder of the Corporation while the stock is held by you.
5. This escrow shall terminate upon termination of the Agreement in
accordance with the provisions of the Agreement or upon exercise in full of the
Repurchase Right or the First Refusal Right.
6. If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to Buyer, you
shall deliver all of same to Buyer and shall be discharged of all further
obligations hereunder.
7. Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties.
8. You shall be obligated only for the performance of such duties as are
specifically set forth in this Agreement and may rely and shall be protected in
relying or refraining from acting on any instrument reasonably believed by you
to be genuine and to have been signed or presented by the proper party or
parties. You shall not be personally liable for any act you may do or omit to do
hereunder as Escrow Agent or as attorney-in-fact for Buyer while acting in good
faith and in the exercise of your own good judgment, and any act done or omitted
by you pursuant to the advice of your own attorneys shall be conclusive evidence
of such good faith.
9. You are hereby expressly authorized to disregard any and all warnings
given by any of the parties or by any other person or corporation, excepting
only orders or process of courts of law, and are hereby expressly authorized to
comply with and obey orders, judgments or decrees of any court. In case you obey
or comply with any such order, judgment or decree of any court, you shall not be
liable to any of the parties or to any other person, firm or corporation by
reason of such compliance, notwithstanding any such order, judgment or decree
being subsequently reversed, modified, without jurisdiction.
<PAGE>
10. You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
11. You shall not be liable for the limiting of any rights under the
Statute of Limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.
12. Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be Clerk of the Corporation or if you shall resign by written
notice to each party. In the event of any such termination, the Corporation
shall appoint your successor as Clerk of the Corporation as successor Escrow
Agent.
13. If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions, the necessary parties shall join in
furnishing such instruments.
14. It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or right of possession of the securities held
by you hereunder, you are authorized and directed to retain in your possession
without liability to anyone all or any part of said securities until such
dispute shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.
15. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties thereunto entitled at the
following addresses, or at such other addresses as a party may designate by ten
days' advance written notice to each of the other parties.
CORPORATION: Millitech Corporation
South Deerfield Research Park
P. O. Box 209
South Deerfield, MA 01373
Attention: John L. Youngblood, President
BUYER: Mervyn FitzGerald
6934 Rocky Top Circle
Dallas, TX 75252
ESCROW AGENT: Clerk
David L. Renauld
Mirick, O'Connell, DeMallie & Lougee, llp
100 Front Street
Worcester, MA 01608-1477
<PAGE>
16. By signing these Joint Escrow Instructions, you become a party only
for the purpose of said Joint Escrow Instructions; you do not become a party to
the Agreement.
17. You shall be entitled to employ such legal counsel and other experts
as you may deem necessary properly to advise you in connection with your
obligations hereunder, you may rely upon the advice of such counsel, and you may
pay such counsel reasonable compensation therefor.
18. This instrument shall be binding upon and inure to the benefit of the
parties, and their respective successors and permitted assigns.
Very truly yours,
MILLITECH CORPORATION
/s/ John L. Youngblood
-----------------------------
By: John L. Youngblood
Title: President
BUYER
/s/ Mervyn FitzGerald
-----------------------------
Mervyn FitzGerald
ESCROW AGENT
/s/ David L. Renauld
-----------------------------
David L. Renauld, Clerk
Millitech Corporation
<PAGE>
EXHIBIT 10.22
TAX AGREEMENT
September 16, 1999
This Agreement is between Mervyn FitzGerald of 6934 Rocky Top Circle,
Dallas, TX 75252 ("FitzGerald") and Millitech Corporation, a Massachusetts
corporation of P. O. Box 209, South Deerfield Research Park, South Deerfield, MA
01373 (the "Company").
WHEREAS FitzGerald is a valued employee of Millitech and Millitech desires
to motivate FitzGerald to exert his best efforts on behalf of Millitech through
stock ownership.
Millitech agrees with FitzGerald that Millitech will grant a cash bonus to
FitzGerald equal to the amount of federal and state taxes FitzGerald is required
to pay due to the issuance of a stock grant to FitzGerald pursuant to an
Employee Stock Purchase Agreement between FitzGerald and Millitech of even date
hereof (the "Agreement"). Such bonus to be grossed up to include the taxes on
such bonus amount and payable no later than January 15, 2000.
Additionally, Millitech shall annually on the anniversary date hereof grant
to Fitzgerald a bonus (grossed up to include the tax thereon) in an amount equal
to the interest due on the Note issued pursuant to the Agreement.
In witness whereof the parties have executed this Agreement as of the date
first above written.
MILLITECH CORPORATION
By: /s/ John L. Youngblood
-----------------------------
John Youngblood, President
/s/ Mervyn FitzGerald
---------------------------------
Mervyn FitzGerald
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated March 5, 1999, except for Note 2 as to which the date is
August 24, 1999, Note 19 as to which the date is October 18, 1999, and Note 20
as to which the date is December 16, 1999, relating to the financial statements
of Telaxis Communications Corporation (formerly known as Millitech
Corporation), which appears in such Registration Statement. We also consent to
the references to us under the headings "Experts" and "Selected Financial Data"
in such Registration Statement.
PricewaterhouseCoopers LLP
Hartford, Connecticut
December 20, 1999
