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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED: APRIL 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER -
MCK COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1555163
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
117 KENDRICK STREET, NEEDHAM, MA 02494
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 454-6100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $0.001
PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of May 31, 2001, was approximately $28,688,283 based upon the last
sales price reported for such date on The Nasdaq National Market. For purposes
of this disclosure, shares of Common Stock held by persons who hold more than 5%
of the outstanding shares of Common Stock and shares held by officers and
directors of the registrant, have been excluded in that such persons may be
deemed to be affiliates. This determination is not necessarily conclusive.
At May 31, 2001 the registrant had outstanding 20,180,325 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement to be filed
pursuant to Regulation 14A for the Registrant's 2001 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Annual Report
on Form 10-K
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TABLE OF CONTENTS
PAGE
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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS........................... 2
PART I..................................................................... 2
ITEM 1. BUSINESS.................................................... 2
ITEM 2. PROPERTIES.................................................. 20
ITEM 3. LEGAL PROCEEDINGS........................................... 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 21
PART II.................................................................... 22
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 22
ITEM 6. SELECTED HISTORICAL CONDENSED FINANCIAL INFORMATION......... 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 40
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE........................................ 40
PART III................................................................... 40
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 40
ITEM 11. EXECUTIVE COMPENSATION...................................... 40
ITEM 12. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL
OWNERS...................................................... 40
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 40
PART IV.................................................................... 40
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K......................................................... 40
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................. F-1
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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain forward-looking statements
(within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended) that involve
risks and uncertainties. Forward-looking statements include, without limitation,
statements containing the words "anticipates," "believes," "expects," "intends,"
"future" and words of similar import which express management's belief,
expectations or intentions regarding the future performance of MCK
Communications, Inc. and its subsidiaries (hereafter, collectively, "we," "us,"
"our," "MCK" or the "Company"). Actual results and the timing of certain events
could differ materially from those projected in the forward-looking statements
as a result of a number of factors. For a discussion of important factors that
could affect the Company's results, please refer to the Business section and to
the financial statement line item discussions and Factors Affecting Future
Operating Results and Stock Price set forth in Management's Discussion and
Analysis of Financial Condition and Results of Operations discussed elsewhere in
this Annual Report on Form 10-K.
PART I
ITEM 1. BUSINESS
OVERVIEW
MCK Communications is a leading provider of products that deliver
distributed voice communications by enabling businesses to extend the
functionality and applications of their business telephone systems from the main
office to outlying offices, remote call centers, teleworkers and mobile
employees over public and private networks. Business telephone systems consist
of private branch exchange ("PBX") systems and key systems ("KTS"). Whereas key
systems are used in medium and small businesses or smaller locations within
larger companies, PBX's are the most commonly used telephone systems in
corporations. PBX's deliver such features as 3- or 4-digit internal dialing,
conferencing, call transfer and call forwarding. PBX's also generally support a
range of telephony applications such as voicemail, automatic call distribution,
auto attendant, call accounting and interactive voice response.
Our EXTender products cost-effectively deliver a unified enterprise-wide
voice network by enabling the voice switch to function as a company-wide voice
server that transmits call function and applications to distributed locations
over the company's existing data networks. This enables a company to provide the
same telephony functionality to all locations while reducing their total cost of
ownership. Savings are achieved by leveraging current investments in voice and
data equipment, flexibility of network choice for lowered communications service
cost and streamlined network administration through the utilization of industry
standard network management techniques.
Our products also provide companies the flexibility of combining the power
of service providers network services such as mobile services to expand the
range of services provided to their workforce. In addition, our products provide
companies flexible choices for managing their path to the future by leveraging
their current infrastructure investments while taking advantage of next
generation "nextgen" telephony systems (i.e., IP switches), applications (i.e.,
unified messaging) and devices (i.e., IP phones) to provide employees enriched
telephony experiences. Our recording gateway products are used within a variety
of telephony-based applications and enable our customers to convert digital PBX
signals into standard analog audio output so that calls can be easily and
cost-effectively recorded for future use.
We market and distribute our products through an international network of
indirect distributors, resellers, equipment providers, system integrators,
service providers and, to a lesser extent, through direct sales. We are
headquartered in Needham, Massachusetts and have development centers in Allen,
Texas and Calgary, Canada. We also maintain a sales and marketing office in the
United Kingdom. We outsource our manufacturing to three contract manufacturers.
One manufacturer provides full turnkey services including material procurement,
final assembly, test, shipment to our customers, and warranty services. Other
manufacturers provide us with printed circuit assemblies which we then assemble
and test prior to shipping to
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our customers. Our customer support efforts focus on complementing our
distribution partners' offerings thereby providing end customers with world
class servicing. Our sales force and marketing efforts are primarily directed at
supporting our indirect distribution channels and developing brand awareness.
INDUSTRY BACKGROUND
Most businesses today have deployed separate networks to support voice and
data communications. As they evolve to unite their geographically distributed
locations such as branch or satellite locations and an increasingly virtual
workforce, new demands are being placed on the traditionally localized voice
communications networks. While data networks have evolved to meet this challenge
by offering high-speed remote data access and a high degree of interoperability
among data systems and components, telephony systems and voice networks have
remained largely centralized and proprietary. Consequently, providing
cost-effective, company-wide services and applications to all locations and
employees can be a significant challenge.
Businesses depend on company-wide communication to ensure critical internal
collaboration, provide suitable levels of customer service, and maintain
operational efficiency and productivity by sharing resources throughout the
company. The shift to a more distributed voice environment results from a number
of factors. These include the lowering cost of communications, competitive
advantage of being nearer to key customers, suppliers and partners and the
competition for qualified employees. In order to retain employees and comply
with expanding environmental regulation, many companies are also implementing
large-scale telecommuting programs.
In trying to address these needs, companies are increasingly challenged by
the need to integrate voice and data networks across multiple locations. As the
business environment becomes more competitive, unified voice communications will
become increasingly important. These factors are driving demand for solutions
that deliver an integrated network environment with all the features and
applications found at headquarters distributed to distant locations as well as
to virtual and/or mobile employees.
Enterprise Data Networks
Initially, data networks were built to inter connect mainframe computers
that served a single office location. They were accessible by a limited number
of users and were often too costly for small organizations. Over the past 20
years, advances in open-systems, computer processing and networking technology
have altered this centralized model to deliver cost-effective, high-speed
distributed information processing and communications by using a distributed
client-server architecture. This enables companies to deploy equipment from
multiple vendors that is interoperable across local area network ("LANs"), or
wide area networks ("WANs"), using standard communication protocols,
internetworking technologies, and industry-standard system management platforms.
These same developments have also facilitated widespread data access through the
deployment of remote access equipment capable of extending the reach of data
networks beyond corporate locations over public and private networks.
Historically, branch offices and telecommuters accessed corporate data
networks over a variety of circuit-based networks that were designed for voice
service. These circuit-based networks are dedicated point-to-point connections
that require companies to constantly maintain sufficient bandwidth to meet their
maximum communications requirements. New packet-based networks, deployed over
the past decade, divide all types of data, including voice, into packets that
can be simultaneously transmitted and reassembled into their original form at
their final destination. These packet-based networks are more efficient in their
use of available bandwidth than traditional circuit-based networks, thus
minimizing network capacity constraints and management requirements.
As a result of the growing demand for high-bandwidth applications, such as
Internet and intranet access, service providers are migrating from existing
circuit-based networks to packet-based networks. The ability of packet-based
networks to increase bandwidth availability and network efficiency, lower
operating costs and simplify network administration has led service providers to
make significant investments in packet-based networks in the public
communications infrastructure. These service providers are creating new service
offerings over private managed networks and public networks, such as the
Internet, and are using new
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technologies, such as Quality of Service and firewalls, to ensure speed, quality
and security. Deployment of packet-based networks and widespread access is
enabling companies to realize tremendous productivity gains due to increased
collaboration, internal communication and sharing of resources. Examples of
specific benefits include company-wide e-mail capabilities, company-wide access
to files and applications that run on a corporate server and ease of access for
remote workers.
Enterprise Voice Networks
Enterprise telephony systems are generally based on a circuit-based
architecture and corporate telephone equipment known as private branch
exchanges. Given the mission critical nature of voice communications and related
applications, enterprise voice systems have been architected with numerous
built-in fault tolerant and redundancy features and are designed to deliver
99.999% up-time reliability. In addition to delivering reliable voice service,
PBXs have the capability to serve as the platform for more than 500 critical
voice features and applications, including:
- voicemail systems
- unified messaging systems that create a single interface for accessing
voicemail, e-mail and fax messages
- automatic call distribution systems
- auto-attendant systems
- directories
- call accounting software
- least-cost routing applications
- interactive voice response systems
The PBX is also responsible for delivering features and capabilities such
as:
- phone numbering plans
- 3 or 4 digit internal dialing
- call transferring, conferencing and forwarding
- receptionist call screening
Despite the reliability and functionality of centralized circuit-based
voice networks, the features, applications and inter-connectivity of traditional
PBX systems and their proprietary architectures make it difficult to integrate
them with other systems and applications. Furthermore, they cannot be
cost-effectively networked or extended to outlying and/or smaller offices and
teleworkers. A number of factors have created this deficiency. PBX-based
telephone systems are bandwidth constrained making them poor at networking, not
easily integrated with other traffic types, such as data and video, and the
quality of their voice transmission degrades beyond a limited distance. In
addition, the high cost associated with deploying a PBX system and its supported
voice applications typically makes them prohibitively expensive for smaller
locations. Accordingly, companies seeking to extend voice services to outlying
locations and/or incorporate new applications have traditionally had the
following voice options, all of which have significant limitations:
- Key Systems. Key systems have functionality similar to PBXs but have
been cost-effectively architected to service small office environments.
They lack the full feature set and scalability of more expensive
PBX-based telephone systems. Key systems have limited interoperability
with PBX systems, and consequently function as stand-alone voice systems
with separate voice applications. This creates a less than professional
image due to dissimilar functionalities, inefficiencies and network
management complexities in a multi-office environment.
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- IP PBXs. Recently introduced voice switches from voice and data
networking vendors, such as LAN and Windows NT-server based PBXs, are
based on data standards and tend to be more open. Although providing new
alternatives, they lack the full feature set of the traditional PBXs,
have limited ability to network with the proprietary, circuit-switched
PBXs, limit business reach either to a LAN or nextgen network environment
and provide less than the 99.999% service availability typically expected
by the customer. As a result, they fall far short of business
expectations.
- Centrex. Centrex is a business telephone service that is offered by
local telephone companies from their central offices. While Centrex
offers many of the same features as PBXs, its effectiveness is
constrained by phone companies' capacity, its lack of interoperability
with PBXs, its geographic limitations and its reliance upon the local
phone company for service and support. Adding new services for a Centrex
provider is time consuming, expensive, cumbersome and provisioning
complexity can often prohibit customer acceptance.
- Off-Premises Extension. An Off-Premises Extension is a dedicated
telephone line that originates from a PBX and extends a subset of PBX
features and applications to remote users. These offerings cannot support
digital telephone sets, and require an expensive dedicated leased line or
private network connection.
The inability of these solutions to fully network with the PBX has caused
businesses to deploy separate voice networks for their outlying offices and
telecommuters, limiting the effectiveness of company communications and
increasing the burden on systems administrators. In addition, companies seeking
to extend voice applications to telecommuters presently have no cost-effective,
full-featured solutions.
Enterprise Voice Evolution
As business organizations decentralize, distributed voice networks are
becoming increasingly important. While data networks have evolved to meet this
critical business requirement, there is similar need for a suitable voice
solution that cost-effectively utilizes the company's voice systems and its
features and applications to offer company-wide voice applications to all
employees. This includes employees at smaller outlying offices, telecommuters
and mobile workers. Furthermore, in order to lower costs and simplify network
administration, companies are increasingly demanding that distributed voice and
data services be offered over the same centrally-managed communications
infrastructure. This convergence of voice and data is made possible by
technology that can convert voice transmissions into packets of data and
advances in Quality of Service which enable the transmission of voice over
private managed data networks and public data networks, such as the Internet.
As a result of their reliability, the wide variety of applications
supported and the size of their installed base, proprietary, circuit-switched
PBXs are pervasive in the enterprise arena and are likely to remain entrenched
as the central system delivering enterprise voice on which new applications are
developed and deployed for many years to come. However, businesses are looking
to IP-enable their present systems to support taking advantage of their data
networks and lower communications costs as well as to take advantage of emerging
access networks in support of an increasingly virtual workforce.
To support emerging access networks, a solution needs to packetize both the
voice traffic and PBX signaling information. This signaling information is
proprietary to each type of PBX system and is the language by which the systems
deliver features and applications to the user via the proprietary handset. To
address the sizeable installed base, solutions must support the breadth of
diverse signaling protocols. They must also offer a centrally-managed interface
to the main system and have the capability of packetizing and transmitting voice
and signaling information over both traditional circuit-based data networks and
emerging packet networks.
IP PBX vendors are experiencing introductory success in targeting the KTS
environment and smaller scale-enterprise networks. However, vendors have found a
key barrier to acceptance is the inability to interoperate with legacy
environments. To address this need a solution must enable an enterprise to
leverage
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its existing applications and interoperate with legacy switches and desksets
while incorporating new IP switches. This provides an enterprise flexibility to
manage its migration path.
In taking a closer look at the enterprise telephony application
environment, applications traditionally have sat behind the PBX and are
historically proprietary. Over the last few years, applications have become
"open" and sit behind a LAN or managed Intranet. On a smaller degree, this
openness has allowed some applications to move out of the enterprise and into a
"hosted model". Solutions which support both Customer Premise Equipment ("CPE")
and network based applications provide another example of enabling an enterprise
to have choices for their migration path.
Over the next 5 to 10 years, co-existence, or hybrid solutions, will
prevail. This will allow an enterprise to leverage their existing
infrastructures while having flexible choices for experiencing new solutions.
Resulting solutions will support new platforms inter working with legacy
switches and applications, support legacy and IP voice terminals, support
feature richness through digital line interfaces to preserve the user experience
as well as support CPE and service providers network environments.
MCK ENABLES THE DISTRIBUTED ENTERPRISE
MCK is a player in this enterprise voice transformation because of our
unique physical position in the network. Our systems connect to the PBX,
speaking most legacy protocols, and also connect to the network, speaking
traditional or nextgen IP protocols. MCK is laying a solid foundation for the
future by minimizing the impact of changing technology, bridging the gaps and
allowing enterprises to evolve their voice capabilities via the path of their
choice.
MCK solutions enable end users to access their company's voice system from
anywhere -- outlying offices, telework offices, and while on the road -- while
preserving the experience they have come to expect. This experience includes:
four digit dialing, calling party display, call waiting/forwarding/transfer,
conference calling, etc. over any network and thru any telephony enabled device.
Supporting the broadest range of protocols, networks and devices, MCK
solutions fulfill the market need for widespread interoperability, creating a
more "open" enterprise by enabling business quality voice anytime, anywhere,
over any network. Our solutions support Alcatel, Avaya, Ericsson, Iwatsu, NEC,
Nitsuko, Nortel, and Toshiba, representing over 80% of the U.S. installed PBX
base. They also provide users choices in access networks (e.g., analog, IP,
ISDN, T1...) and devices (e.g., analog, digital, mobile or IP phones). With the
business appeal of an "appearance of one" that is seamlessly connected in a
virtual community, an enterprise becomes a unified company for its employees and
callers.
In addition, our products reduce the total cost of ownership by: allowing
enterprises to utilize their existing investments in voice and data equipment;
allowing enterprises to eliminate voice network charges for traffic between
offices by utilizing data networks in a toll bypass situation; streamlining
network administration through the utilization of industry standard network
management techniques; and providing enterprises the flexibility of choosing
their migration path.
When many companies talk about convergence, they refer to voice and data
and/or voice over IP. At MCK, we're committed to a more "open" enterprise by
delivering convergence along three dimensions. We:
- Extend enterprise voice to distant locations through voice over data
networks
- Bundle with service providers to unite CPE and network services to
deliver new value added services
- Bridge technology gaps between existing and nextgen applications,
switches and services to enable enterprises' managed migration from
legacy to nextgen systems.
Key to enabling this three-fold power of convergence is the ability to preserve
end user interfaces while providing access to the widest array of new
experiences. The following are the key attributes of our solution:
Full-Featured Remote Voice Access. Our solutions provide the features
and applications of enterprise telephone systems to employees at outlying
offices, teleworkers and mobile workers over circuit, packet and wireless
networks. Our solutions allow these distributed workers to utilize voice
switch
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features such as 3 or 4 digit internal dialing, call transferring and
conferencing. They also give employees access to company chosen telephony
applications such as voicemail, unified messaging, auto attendant,
directories and automated call distribution. Extending these voice
applications to outlying employees increases productivity, facilitates
internal collaboration and delivers to external callers transparent access
to all telephone extensions throughout an enterprise.
Digital Line Extension Technology. The features and applications of
the voice switch reside on its digital line or user side. We have developed
proprietary software and hardware interfaces that extract the voice and
voice system signaling information from the user side of the switch. Our
switch-side or gateway products then packetize and transmit this
information to client-side or remote products over existing data networks.
Utilizing this captured information, our remote products mimic the digital
line side of the PBX, thereby transparently connecting the user's digital
telephone set to the main voice system. Based on the protocol expertise and
intellectual property we developed over the past decade, our products
enable companies to deploy effective extended voice solutions without
significant reconfigurations or upgrades to their existing enterprise voice
systems.
Similarly, our products enable employees at satellite or branch
offices, teleworkers and mobile employees to use their digital telephone
sets and existing user interfaces to seamlessly connect with their
company's voice system. Using our digital line extension technology, we are
also working with a number of companies to enable digital telephone sets to
interface with next generation corporate voice systems such as IP-PBXs and
network-based voice systems and applications. This digital line extension
technology also enables us to terminate multiple types of telephone sets,
including a variety of third-party digital telephone sets, analog telephone
sets and IP-based telephone sets, off traditional and/or nextgen voice
systems using MCK gateway products.
Packet Voice Architecture. Our extensive experience in packetizing
voice, voice signaling information and voice applications enables us to
deliver a complete distributed voice solution over traditional
circuit-based, packet-based and wireless networks. Utilizing our
proprietary Remote Voice Protocol("RVP") software platform and our
standardized hardware architecture, we packetize, compress, encode,
transmit and decode voice over networks such as asynchronous transfer mode,
or ("ATM"), digital subscriber line, or DSL, fiber, frame relay, IP,
integrated services digital network, or ("ISDN"), leased line, T-1,
fractional T-1 and traditional telephone networks. In addition to
supporting RVP, we are adding support for a number of evolving industry
standard voice protocols, including GR-303, H.323, SIP and MGCP, to enable
our products to interface with next generation voice equipment located in
both the enterprise and the network infrastructure of service providers.
Our products packetize voice along with the most diverse range of signaling
protocols and transmit them over the broadest range of circuit, packet and
wireless networks while offering centralized management to simplify network
administration. This enables enterprises and service providers broad
business reach alternatives.
We are evolving this technology to enable enterprises to incorporate
new IP switches which interoperate with legacy switches, desksets and
applications. Our support of the broadest range of signaling protocols
creates a more open enterprise by providing enterprises migration
alternatives.
Lower Cost Solution. Our products provide a cost-effective solution,
lowering costs in the following areas:
- Transmission. Our products lower transmission costs by consolidating
voice and data traffic over a single network, eliminating local loop
service charges through toll bypass and enabling remote users to
utilize volume-based, corporate long distance rates.
- Management. Our products provide telecom managers the ability to
centrally manage our remote devices using Telnet, hypertext mark-up
language("HTML"), and simple network management protocol("SNMP"), with
graphical user interfaces. Our customers can use these remote
monitoring and diagnostic capabilities to solve problems on-line,
thereby reducing the time and cost associated with dispatching a
technician to a remote site.
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- Equipment. Our products enable companies to utilize their existing
capital investment in enterprise voice systems, voice applications and
data networks, thereby eliminating the need to expend significant
additional capital on disparate, incompatible solutions such as key
systems.
- Facilities. Our products allow companies to reduce physical facility
costs and infrastructure investments by enabling employees to work
effectively outside of standard company locations.
Compatibility with Leading voice switch Manufacturers. We have worked
with Alcatel, Avaya, Ericsson, Iwatsu NEC, Nitsuko, Nortel and Toshiba to
develop interfaces between our RVP software platform and their primary
voice communications systems. These manufacturers have tested and validated
in their labs that our RVP platform is interoperable with their primary
switching products, including 4400/4200 (Alcatel), DEFINITY (Avaya),
MD110/BP250 (Ericsson), ADIX (Iwatsu), DEFINITY (Avaya), NEAX
1000/2000/2400 (NEC), 1-Series (Nitsuko), Meridian (Nortel), Norstar
(Nortel) and Strata DK (Toshiba) equipment.
STRATEGY
Our strategy is to create a more "open" enterprise by being the leading
provider of distributed voice solutions that enable businesses to unleash the
power of their enterprise by connecting disparate voice networks. In pursuing
this goal, we follow a three-prong strategy which enables enterprises to
experience greater value from their voice systems. Historically, our
business-quality remote voice solutions allowed corporations to extend the
features and applications of the proprietary, circuit-based PBXs across
distances to branch offices, remote call centers, and teleworkers using circuit
networks. We have evolved this capability to work with the majority of
enterprise voice systems as well as packet-based and wireless networks. By
packetizing the voice and switch signaling, we enable the convergence of voice
and data on a single data network. This enables enterprises to extend their
business reach while providing the same voice functionality at all locations.
The second prong of our strategy is to bundle with service providers to unite
CPE with network services to offer businesses outsourced, value added voice
services. Since our products are architected to support the broadest range of
business voice protocols over the greatest range of networks, they enable
service providers, such as Worldcom, to offer PBX Extension as a value-added
service offering over their full range of packet, wireless and circuit-based
networks. The third prong to our strategy is to provide systems which allow
enterprises ease of evolving their systems from traditional, circuit-based voice
switches and applications to nextgen switch, applications, and devices. Acting
as pure packet processing engines, our products break down the closed system
environment found in today's enterprise voice infrastructure by hooking
protocols together to serve as the "bridge" between legacy voice equipment and
next-generation networks and applications enabling disparate systems to
interoperate. This allows enterprises a managed migration path by incorporating
emerging technologies and nextgen systems without having to throw out existing
infrastructure investments.
As the voice infrastructure evolves over the next five to ten years, we
believe that legacy and nextgen systems will co-exist. However, in time, we
believe that the proprietary, circuit-switched PBX will begin to be replaced
with next-generation IP-based CPE or "network-hosted voice" solutions located on
the network outside of the company's premise. Concurrently, we envision
associated voice applications migrating from a proprietary, customer-owned model
to a standards-based model either managed by the customer or hosted by service
providers.
As MCK's distributed voice solutions continue to enable more "openness" and
push control out to the edge of the network, end-users will gain access to full
business functionality from any edge device by simply dialing into a gateway and
passing authentication. Over time, users will be provided a range of
applications and services from which to choose their own defined experience.
Ultimately we believe in voice communications enabled via an infrastructure
accessible as easily as today's electric power yet tapped into on an
individual's own terms.
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The following are the principle elements of our business strategy to become
the industry-standard bridge for voice networks and applications:
Extend enterprise voice through PBX extension. Corporations continue
to invest in PBX infrastructures. To date, we have been providing remote
voice solutions that deliver seamless voice calls and associated features
and applications such as voice mail, unified messaging, call accounting and
4-digit dialing over either circuit-switched (traditional telephone
network) or packet-switched (data network) environments. For packet-based
networks, our suite of EXTender products has been architected to work with
virtually any network, including T1, xDSL, ATM and cable, using packet
voice and Voice-over-IP protocols, and have been designed to accommodate
the more complex requirements for delivering high-quality enterprise voice
features.
Our Gateway family of products is a corporate site solution that
interfaces with the line side of the PBX. These products packetize and
transcode voice and signaling, and support the transmission of
business-quality voice applications to and from remote client devices. At
the remote site, we offer a line of client products that interface with
with the Gateways over virtually any network type. More than 250,000
EXTender ports are deployed today in many Fortune 5000 companies including
General Electric, United Airlines, Waterhouse Securities and Xerox.
Bundle with wire-line and wireless service providers and application
service providers ("ASPs") to unite CPE and network services to deliver
value-added applications and services. We continue to invest significant
resources into our relationships with service providers, such as Worldcom,
to deliver value-added services for integrated voice and data
communications. We are also in trials with a number of wireless service
providers to deliver PBX extension to mobile workers using their cellular
handset as the client device.
Bridge technology gaps between existing and nextgen switches,
applications, devices and networks to enable enterprises managed
migration. As rich, full-featured voice applications transition from
proprietary, closed networks to open protocols over converged
next-generation networks, whether enterprise or service provider based, our
ability to hook protocols together and bridge between the proprietary, PBX-
based voice infrastructure and these new applications will create the
openness that has been missing in enterprise voice. We recognize the
inherent value in the PBX and its ability to deliver rich applications such
as unified messaging, voice mail, interactive voice response and call
recording, among others. As new and different applications emerge that are
based on standards-based IP protocols, we plan to work to provide
enterprises with an effective migration path to enable the use of these new
applications that are independent of the switch and location, while
preserving their investments in digital telephone sets, the traditional
user interface.
Endorse and drive the adoption of emerging IP-based and
next-generation network protocols by serving as the normalizer for uniting
disparate systems. The adoption of open, standards-based technologies will
facilitate the speed of next-generation network deployment. To address
this, we are working with a number of regional and national organizations
including the National Convergence Alliance, DSL Forum, Softswitch
Consortium, and the appropriate standards bodies. In addition, to address
the need for IP-enabled products that work with any network, we are
architecting our products to support the leading Internet Protocols
including H.323, Media Gateway Control Protocol ("MGCP") and Session
Interface Protocol ("SIP").
Leverage our unique capability of digital line side extension and set
termination. We plan to continue working to provide business users with
ways to access new, feature-rich voice applications such as unified
messaging, interactive voice response and call recording by using the
digital set or IP phone set as the application user interface. By pushing
delivery of the application away from the traditional voice infrastructure,
enterprise customers will be able to take advantage of the latest voice
applications without having to retrain users or replace existing digital
phone set equipment. In addition, enterprise customers will be able to take
advantage of network-based services, which are delivering voice
applications independent of traditional CPE, available at the push of a
button from a digital set.
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Expand distribution, marketing and technology relationships. We
expect to continue establishing distribution, marketing and technology
relationships with OEMs, service providers and distribution channel
partners to further penetrate our target markets and develop our products.
We have development, marketing and distribution relationships with Alcatel,
Avaya, Ericsson, Iwatsu, NEC, Nitsuko and Toshiba and distribution
relationships with Nortel's major channel partners such as Ameritech, Bell
Canada, BellSouth, GTE/Verizon, SBC and Williams Communications. We have
also established a number of other important distribution channel
relationships with companies like Anixter, Sprint North Supply and
Tech-Data. We expect to continue working with our channel partners to focus
on major corporate accounts. In addition, we plan to continue building
additional channels, both in the U.S. and international markets, to expand
the distribution of our products.
Continue to target Fortune 5000 corporations. Our systems presently
are used by corporations such as American Express, Arthur Anderson, Avis,
BancOne, Bank of America, Bear Stearns, Bloomberg, Circuit City, Compaq,
Fidelity Investments, Merrill Lynch, Morgan Stanley, Oracle, Pepsico,
Prudential, Ratheon, United, US Postal Service, Whirlpool, among others. We
intend to continue to focus our distribution strategies on Fortune 5000
corporations. These organizations have made substantial capital investments
in their existing enterprise voice systems and have significant numbers of
locations and desire to support telecommuters. Accordingly, these companies
have the most to gain from an integrated voice network. We are well
positioned to target the Fortune 5000 market because our products interface
with the majority of enterprise systems installed in North America. We will
work with our existing and new partners to increase the market opportunity
for, and drive market acceptance of, our products.
TECHNOLOGY
We have developed expertise in digital line extension and the packetization
of voice for transmission over data networks to address the technology
challenges of extending the features and applications of enterprise voice
systems to distributed locations as well as enable a more "open" enterprise.
Another key component of our technological advantage is the flexible software
and hardware architecture upon which we build our solutions. We will continue to
invest significant resources to maintain and extend our technological advantage.
Digital Line Extension Technology
The rich features and applications of enterprise voice systems are accessed
through the proprietary user or digital line side of the voice switch. These
line-side interfaces enable the delivery of the features and applications of
enterprise voice systems to digital telephone sets. As a result of our years of
experience in working with major PBX voice equipment, we have gained a
significant understanding of these line-side interfaces and have developed
line-side software interfaces to a number of today's enterprise voice systems.
In addition to our software interfaces, we have developed a hardware subsystem
capable of duplicating the electrical interfaces of Alcatel, Avaya, Ericsson,
Iwatsu, NEC, Nitsuko, Nortel and Toshiba systems. These line-side software and
hardware interfaces extract the voice and the signaling information required to
interface with PBX and KTS systems and, using our RVP software platform,
packetize this voice and signaling information for transmission over data
networks to our access products. We have developed messaging software that
transmits this voice and signaling information from our access products to the
digital telephone sets of the manufacturers that we support, thereby
transparently connecting these sets to the PBX or KTS.
Delivery of Packet Voice with Remote Voice Protocol
To deliver voice over data networks, solutions must convert voice into
packet form and then transmit these voice packets alongside data packets.
Despite the advantages of simultaneous transmission of voice and data, there are
also a number of technological challenges to delivering voice over data networks
because audio quality can be distorted by jitter and latency associated with
congestion on the data network.
Our proprietary software platform, RVP, packetizes, compresses and encodes
circuit voice and signaling information for secure transmission over data
networks. We have implemented both industry standard and proprietary voice
prioritization and voice fragmentation techniques that use bandwidth efficiently
while also
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ensuring that delay sensitive voice packets are delivered with the quality
expected from voice. Much of this technology revolves around our core expertise
in developing software that runs on standard digital signal processors, which
are required for encoding voice for transmission over bandwidth constrained
networks. In particular, we have designed and implemented the following software
features in our products to improve the quality of packet voice transmission,
minimize system delay and jitter, and utilize bandwidth efficiently:
- Voice Compression. We integrate a number of industry standard voice
coding algorithms, including G.711, G.726, G.729A and G.723.1, that
compress voice to reduce the total bandwidth required for transmission.
- Echo Cancellation. We deliver echoless voice by integrating industry
standard acoustic echo cancellation technology, known as G.165 and F.168,
to which we have made proprietary enhancements.
- Silence Detection. Our proprietary silence detection technology
eliminates unnecessary transmission of voice packets during the periods
of silence that occur in normal conversation, freeing bandwidth for other
uses.
- Comfort Noise. We incorporate technology that inserts comfort noise
during periods of silence so that users do not inadvertently think that
the phone call is no longer active.
- Jitter Buffering Techniques. Our products adapt to the real-time
irregularities in network transmission and ensure all traffic reaches its
endpoint at the appropriate time by introducing delay that is
unrecognizable to the user.
- Dual Tone Multi-Frequency or ("DTMF") Processing Technology. Dual tone
multi-frequency tones are generated by depressing buttons on digital
telephone sets, enabling the digital telephone set to recognize dialed
numbers used for outbound calls and for applications such as voicemail.
Our proprietary technology improves the transmission of these tones over
packet networks.
We have significant experience in transmitting packet voice over both
low-speed, traditional telephone networks and higher speed, broadband networks.
We have developed network interfaces for the delivery of distributed voice over
traditional telephone and ISDN connections and have incorporated third-party
network devices to support T-1, leased line and frame relay networks. In
addition, to deliver data alongside our packet voice transmission, we have
expertise in terminating dial-up networking connections and bridging standard
data traffic.
In addition to supporting our proprietary protocol, RVP, and its ability to
extract and translate legacy, proprietary signaling, we are incorporating
support for a number of evolving industry standard protocols, such as GR-303,
H.323, SIP and MGCP. This will enable our products to not only interface with
the large and diverse installed base of voice systems but with next generation
enterprise voice systems and applications as well as terminate IP-based
telephone sets. Supporting both legacy and nextgen protocols enable our products
to foster an open enterprise as well as interface with voice equipment and
applications located in the network infrastructure of service providers and
application service providers.
Product Architecture
We develop our products using a combination of proprietary and commercial
hardware and software subsystems. Our product architecture enables these
subsystems to be configured and adapted in order to deliver a broad range of
enterprise voice product solutions, thereby minimizing product development
cycles and maximizing manufacturing efficiency. Our products are fully
compatible with the large installed base of telephone systems from Alcatel,
Avaya, Ericsson, Iwatsu, NEC, Nitsuko, Nortel and Toshiba, and require no design
modifications or upgrades to these systems or their respective digital telephone
sets.
We have designed a standard hardware architecture that serves as a common
platform for our software modules. We use industry standard digital signal
processors and programmable logic devices to build a standard hardware platform
that can be software modified to support different applications or telephone
systems without requiring a hardware change. We have also architected our
products with a variety of standard
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telephony and data network interfaces to ensure that we can transmit packet
voice over the multiple network environments currently available.
All of our products share a common software library of functional modules
that comprise our digital line interface software subsystem and our RVP software
platform. Our digital line interface software subsystem is responsible for the
interface to the proprietary software located on the digital line of the legacy
voice switch. This software subsystem has been designed to emulate a majority of
the business markets' telephone systems without requiring a change to our
hardware architecture. This flexible software architecture also enables us to
easily add software support for new enterprise voice systems. Our RVP software
platform is responsible for packetizing voice and signaling information, as well
as conditioning these voice packets for transmission over data networks. RVP has
been engineered to enable new features to be easily and quickly introduced in
parallel to its existing capabilities.
All the software for our IP EXTender 4000, EXTender 6000 for branch offices
and gateway product lines runs on the VxWorks real-time operating system from
Wind River Systems. This industry standard operating system provides our
engineers with a standard development environment in which to design new
proprietary software applications and easily incorporate third-party software
applications. A standard development environment such as VxWorks allows for the
rapid prototyping and application development necessary for our products that
serve as platforms for future applications.
PRODUCTS
We have worked with Alcatel, Avaya, Ericsson, Iwatsu, NEC, Nitsuko, Nortel
and Toshiba to develop interfaces between the proprietary software of these
leading enterprise voice vendors and our RVP software platform and standard
hardware architecture. We generally enter into contracts with these vendors
which provide us access to their proprietary software and grant us rights to
develop, manufacture and sell products which interface with each vendor's
equipment. As a result of these relationships, we have developed substantial
expertise in understanding and interfacing with their proprietary systems. These
manufacturers have tested and validated in their own labs that our RVP platform
is interoperable with a variety of their equipment. Currently, our EXTender
series of products is compatible with the following PBX systems: 4400/4200
(Alcatel); DEFINITY (Avaya); MD110/BP250 (Ericsson); ADIX (Iwatsu); NEAX
1000/2000/2400 (NEC); 1-Series (Nitsuko); Meridian (Nortel); Norstar (Nortel);
and Strata DK (Toshiba).
The EXTender solution consists of the following component parts:
- Gateways. Devices located near the voice switch, PBX or KTS, that extend
the signaling along with the voice traffic and applications to our
remotely located client devices; and
- Clients. Single or multi-user remotely based, CPE devices that service
outlying offices, teleworkers and mobile workers.
Our EXTender series of products enables companies to provide the
functionality of enterprise voice systems and all of their supported
applications to users who traditionally have not had access to the company's
telephone system and its voice applications because of the limitations of
current systems. Our products enable the main telephone system to act as a
server that distributes features and applications any and all locations over
networks such as ATM, DSL, fiber, frame relay, IP, ISDN, leased line, T-1,
fractional T-1, wireless and traditional telephone connections. Employees can
utilize digital telephone sets identical to the sets deployed at company
headquarters and access the central voice system for applications such as
voicemail, automated call distribution, auto attendant, directories and
interactive voice response, and features such as 3 or 4 digit internal dialing,
conferencing and call forwarding. By enabling all employees, regardless of
location, to have access to a company-wide system, our EXTender solutions create
a single, unified voice network.
PBX Gateway Products
Our PBX gateway products, located at the company's PBX site, interface with
the line side of the switch and create extensions of voice and telephony
applications to our clients or remotes.
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- PBXgateway II. The PBXgateway II supports up to 24 simultaneous users
connected via both our multi-user and single-user client devices.
Depending upon the software version of the product, the PBXgateway II
will transmit voice over a wide variety of data networks including ATM,
DSL, fiber, frame relay, IP, ISDN, leased line, T-1 and fractional T-1
connections. It also has available internal network termination
optionals.
- PBXgateway. The PBXgateway supports our multi-user and IP-based single
user client devices and is available in both 8 and 12 port versions. Like
the PBXgateway II, the PBXgateway will transmit voice over a wide variety
of data networks including ATM, DSL, fiber, frame relay, IP, ISDN, leased
line, T-1 and fractional T-1 connections.
- Mobility Gateway. The Mobility Gateway allows a cellular handset to act
as a fully functioning digital handset. Using a cellular handset, a user
can send and receive calls through the PBX as well as access all of the
company's voice applications -- even when the user is "on the road". This
enables a user to handle a call just as if they were sitting at their
desk in the office. This includes call hold, transfer, conferencing,
4-digit dialing, auto attendant, directories as well as receiving calls
via the cellular handset. This ability to receive calls is more powerful
than a "findme" capability since the PBX treats the cell phone as if it
were a digital deskset. The Mobility Gateway bridges the call traffic
directly to the cellular handset through the enterprise voice switch. For
instance, if "no answer", the voice mail system responds giving the user
the convenience of one voice mailbox to check. This solution requires no
terminating client device.
When the product is configured to support IP-based networks, the PBXgateway
extends the functionality of the company's PBX to a variety of our multi-user
and single-user IP products, including the EXTender 6000 for branch offices and
the IP EXTender 4000 Clients. The PBXgateway can support up to simultaneous
users across any of these products over multiple network types. All of our
Gateways can be centrally administered over a Telnet connection, an in-band RVP
connection, or with SNMP and HTML interfaces. As part of our strategy, we are
positioning this product as a platform to deliver new applications and services
to our clients, utilizing both new software components.
PBX Client Devices
Our multi-user or branch office products connect remote offices to the
company's telephone system over data networks.
- EXTender 6000 for branch offices. EXTender 6000 for branch offices is a
multi-user product that is available in both 8 and 12 port
configurations. The EXTender 6000 for branch offices located at the
remote office connects to our PBXgateway product located at the company's
PBX site. The product has dual external network interfaces that allow for
multiple connection options over a wide variety of data networks
including ATM, DSL, fiber, frame relay, IP, ISDN, leased line, T-1 and
fractional T-1 connections. It also provides redundancy capability. An
optional analog card is also available, which provides local dialing
capabilities and emergency 911 access. The EXTender 6000 for branch
offices can be centrally administered over a Telnet connection, an
in-band RVP connection, or with SNMP or HTML interfaces. The product's
ability to dynamically allocate bandwidth between multiple users allows
for flexible configurations and bandwidth conservation. The product is
designed using a standard 19-inch, rack-mountable form factor so multiple
units can be deployed in parallel to service larger outlying offices.
Our single-user product line enables teleworkers and geographically
distributed call center agents to connect to the company's main telephone system
and data network via a PBXgateway over public and private networks.
- EXTender 1000. The EXTender 1000 supports both voice and data over a
single POTS telephone line. The product contains a built-in,
industry-standard 56 kilobits per second, or Kbps, modem which enables
the user to access the corporate data network and supports standard
Windows-based, dial-up networking technology. The remote user's personal
computer and full-featured digital telephone set
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plug into the product, which terminates and multiplexes voice and data over a
single telephone line. The EXTender 1000 unit is situated at the remote location
and connects to either another EXTender 1000 unit or a PBXgateway II located at
the company's PBX site.
- EXTender 3000. The EXTender 3000 supports both voice and data over an
integrated services digital network, or ISDN, connection. An integrated
services digital network connection is composed of two 64 Kbps channels
that each can deliver a separate network connection. With its built-in
network interface, the EXTender 3000 enables the remote user to connect a
digital telephone set and a personal computer into the EXTender 3000. The
EXTender 3000 unit situated at the remote location is connected to either
another EXTender 3000 unit or a PBXgateway II located at the company's
PBX site. There are two versions of the EXTender 3000:
- EXTender 3000 S/T. The EXTender 3000S/T utilizes a serial data
connection and offer simultaneous voice and data multiplexed over a
single channel. The second channel is available for analog devices
such as a fax, additional phone or a modem. It incorporates a
standard Windows-based, dial-up networking technology to enable the
user to set up a dial-up network connection to a remote access
server.
- EXTender 3000 E. The EXTender 3000E offers dedicated voice over
one channel and a 64 Kbps Ethernet data connection on the second
channel. The EXTender 3000E uses an Ethernet port and bridging
technology to enable simultaneous voice and data network access
capabilities. In addition, standard hardware compression technology
is utilized to significantly enhance data throughput. When not used
for Ethernet data, the second channel is available as an analog
port, supporting a fax, additional phone or modem.
- EXTender 4000. The EXTender 4000 delivers voice extension over any IP
network. The product sits behind an external network termination device
and delivers IP-based voice over data networks. The IP EXTender 4000
connects to a PBXgateway product located at the corporate site.
Other Products
- Recording Interface. Our Recording Interface converts digital voice from
proprietary PBXs into a standard audio output so that voice calls can be
recorded on any voice logger or recording device. We offer 3
configurations that support from 2 to 48 lines, and are modular in
nature, allowing for easy expansion to accommodate more users. Our
Recording Interface is compatible with the following voice systems:
DEFINITY (Avaya); Meridian (Nortel); Norstar (Nortel); DMS Centrex
(Nortel); CallCenter (Aspect); NEAX (NEC); and HiCom (Siemens).
SALES AND MARKETING
We primarily sell our products through an indirect distribution system that
includes the following channels: OEMs, ILECs, systems integrators and
distributors, telecom and datacom VARs, and service providers. We support our
sales channels with our own internal sales professionals as well as marketing
programs, lead generation, educational programs, field technical support and
telephone technical support. At April 30, 2001, our sales team was composed of a
vice president of worldwide sales, 6 channel sales managers, 19 regional sales
managers, 8 systems engineers, 6 inside sales specialists, and 2 sales
administrators. Our multi-channel strategy enables us to create end-user demand
for our products and services, and access corporate opportunities identified by
our channel partners, while also allowing the enterprise customers to choose the
reseller that is most appropriate for delivering those products and services to
them. Our primary distribution channels include:
OEMs.................................... Alcatel, Ascom, Avaya, Brooktrout,
Comverse, Dictaphone, Ericsson, Iwatsu,
NEC, Nitsuko, Nortel, Toshiba
ILECs................................... Ameritech, Bell Canada, Bellsouth, GTE/
Verizon, PacBell, SBC, Southwestern
Bell,
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Systems Integrators and Distributors.... Anixter, Calayst, Dacon, IBM Global
Services, One Nation Technology,
Solunet, Sprint North Supply, Tech Data,
VodaOne, Williams Communications
Telecom and Datacom VARs................ CDW, Frantel, GBH, IKON, NACR, Northwest
Extension, PB Exchange, Ronco,
TeleCommute Solutions
Service Providers....................... WorldCom
Our channel sales managers work at a corporate level with all of our
largest channel partners in developing sales and marketing plans that are
implemented at the field levels. These channel sales managers are primarily
responsible for driving business through the Alcatel, Avaya, Ericsson, Iwatsu,
NEC, Nortel and Toshiba channels. They also work with our regional territory
managers on large sales opportunities and national accounts. We have channel
managers located in Boston, Dallas, London and Montreal.
Our regional sales managers provide support to all of the channels in their
geographic territory. They work closely with our channel partners, participating
in end-user briefings, proposals, product training sessions, end-user seminars,
trade shows and other demand generating activities. In addition, regional sales
managers are involved in generating and qualifying end-user leads that are
closed in partnership with our indirect channels. We have regional sales
managers located in Atlanta, Boston, Chicago, Dallas, Los Angeles, Nashville,
Phoenix, Seattle, Calgary, Toronto, and London.
Our field-based systems engineers, located in Boston, Denver, Newark,
London and Toronto, provide our channels with technical training and perform
pre- and post-sale technical support for our channels and end-user customers.
All of our systems engineers have in-depth industry experience and product
expertise. They assist our channel partners with proposals, configurations,
requests for quotations and executive briefings, and perform other consultative
duties.
Our distribution channels are responsible for identifying potential
business customers, selling our products as part of complete solutions, and
installing and supporting the equipment at end-user sites. We generally
establish relationships with our most significant distribution channels through
written distribution agreements that provide pricing, discounts, and terms and
conditions under which they may purchase our products for resale. These
agreements are generally non-exclusive, may be terminated at will and do not
prevent our resellers from carrying competing lines or require our resellers to
attain specific sales levels. A number of our distribution channels resell our
products without written agreements, with terms determined on a purchase order
basis. We provide significant sales, marketing, training and technical support
to our channels.
Sales outside of the United States accounted for 15.3% and 18.4% of sales
in fiscal year 2000 and 2001, respectively. We sell globally through Alcatel,
Avaya, NEC and Toshiba. In addition, we have a distribution arrangements with
over 15 other international distributors.
We focus our marketing efforts on awareness generation, lead generation and
sales support activities. Our marketing audience includes existing and
prospective customers, channel partners, trade and business press, industry
analysts and others who are influential in the industry.
We participate in approximately 20 trade shows annually, taking advantage
of joint marketing opportunities with our resellers and channel partners
whenever possible. Trade show efforts include shows in the telecommunications,
teleworking, CTI, networking, call center and service provider industries. We
participate in many seminars with our resellers, as well as all major PBX user
group events and industry-related conferences. We use direct marketing programs
to generate awareness and qualified leads. Many campaigns are executed in
conjunction with our resellers, customized with their messages and contact
information and then mailed to their prospect and customer lists. Additionally,
we dedicate significant marketing resources to public relations activities,
generation of product and partner press releases, speaking opportunities,
by-lined articles, product reviews, customer success stories and editorial
coverage.
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To support our sales channels, we prepare training materials,
presentations, collateral, cost-justification tools, competitive analysis, case
studies, product configurations, fact sheets, product introduction kits and
distributor success guides. Our web site serves as an information source for end
users, prospects and channel partners, as well as a lead generation and
configuration tool as well as customer service resource. Our regional sales
managers and systems engineers regularly visit our reseller offices and conduct
product and technical training. Our marketing database and sales force
automation system currently contains over 17,000 records that can be segmented
and are marketed to regularly.
CUSTOMER SUPPORT
A high level of customer support and service is critical to developing
long-term relationships with our major distribution channels and end-user
customers. The majority of our service and support activities are related to
installation support and initial network configuration issues. In North America,
we also offer a variety of comprehensive and flexible maintenance and support
programs including basic product warranty, installation services, 24 hour a day,
7 day a week remote telephone support and onsite maintenance services. Our
products are architected with support in mind. For example, our branch products
are engineered with remote monitoring, management and diagnostic capabilities so
that problems can be diagnosed on-line, thereby reducing the time and costs
associated with dispatching a technician to a remote site.
A number of our distribution partners support our products. These
distribution partners provide installation, onsite maintenance and telephone
support services to our end users. To complement this service infrastructure, we
have engaged Vital Network Services, an outsourced technical support and
customer services organization, to provide fee-based telephone support,
installation and onsite maintenance services. We sell these services directly
and indirectly to end users. To date, our revenues attributable to customer
service and support services have been immaterial. We provide high-level,
back-up technical support and engineering assistance for both our distribution
partners and Vital Network Services. We have established strict escalation
guidelines with both our distribution channels and Vital Network Services to
ensure that the appropriate technical resources and management attention within
our company are focused on problems that are not solved in a timeframe
commensurate with the problem's priority.
At April 30, 2001, we employed 13 people in customer support. Although we
may augment our Boston, Dallas and Calgary-based support staff, we do not intend
to recruit our own direct field service and support organization.
CUSTOMERS
We sell substantially all of our products through independent channel
partners. The following is a representative list of our indirect channel
partners who have purchased products from us during 12 months ending April 30,
2001:
Alcatel Ericsson Positron
Ameritech Frantel SBC
Anixter GBH Sprint North Supply
Avaya GTE Tech Data
BC Tel IBM Global Services Teleswitch
Bell Canada Nitsuko Toshiba
BellSouth NEC Voda One
Dacon PLC Northwest Extension Williams Communications
Dictaphone PB Exchange WorldCom
For the fiscal year ended April 30, 2001, Avaya (formerly Lucent
Technologies) accounted for 24.1% of our revenues, and our ten largest
customers, including Avaya, accounted for 63.2% of our revenues. For the fiscal
year ended April 30, 2000, Avaya accounted for 45.6% of our revenues, and our 10
largest customers, including Avaya, accounted for 76.1% of our revenues. No
other customer represented over 10% of our revenues in either period.
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RESEARCH AND DEVELOPMENT
To maintain our technology leadership position, we focus our research and
development efforts on improving the functionality and performance of our
existing products and designing new products that address customer needs and
changes in the marketplace. We have assembled a team of experienced hardware and
software engineers with capabilities in both networking and telecommunications.
Our engineering expertise includes significant understanding of:
- the digital line or user side of proprietary enterprise voice systems
- digital audio technology, such as echo cancellation and voice compression
algorithms
- voice enabling signaling
- voice over packet networks including IP telephony
- data network and telephony interfaces
- network diagnostic and management frameworks
At April 30, 2001, we employed 60 people in our engineering organization,
and intend to continue to affordably expand all functional areas of the
engineering organization. We perform research and product development activities
at our principal offices in Needham, Massachusetts, as well as at our Allen,
Texas and Calgary, Alberta development facilities.
Our research and development process is driven by market demand. Product
development begins with a comprehensive functional product specification based
on input from all functional groups and levels within our company. In addition,
we value feedback from our end-user customers and distribution channel partners,
and have incorporated a significant amount of customer-requested functionality
in our products. We are also active in industry bodies and standards committees
and utilize information from these organizations in our product development
process. Finally, we have maintained an ongoing dialogue and established
technology relationships with a number of PBX and KTS manufacturers,
internetworking vendors, broadband equipment suppliers and service providers. We
will continue to focus our efforts with these companies to develop products that
meet specific market requirements in growth sectors.
We intend to continue enhancing the functionality of our existing EXTender
and PBXgateway systems by expanding the range of products and client devices
supported as well as expanding the range of connectivity services by
incorporating trunk side interfaces, including IP network survivability through
failover support to public-switched network, and expanding support of remote
management and provisioning. This will further differentiate our products from
the competition while broadening our addressable market. We will focus our new
products' efforts on bundling with incumbent Service Providers' network services
with emphasis on mobile environments and we will continue to bridge the gap
between legacy and nextgen switches, devices and applications. Specifically for
the later, we will enable IP switch and telephony application providers, whether
CPE or network based, to distribute their systems' functionality to the broadest
installed base of endpoints. This will not only give vendors a stronger solution
equation, but provide enterprises more flexibility to manage their path to
nextgen environments.
PRODUCT VALIDATION LABORATORY
Over the past two years, we have hired the personnel and purchased the
equipment necessary to build and improve our product validation laboratory. Of
the 60 people in our engineering organization, 7 are dedicated full time to our
product validation laboratory. Their efforts are focused on ensuring world class
product quality. At both our Needham, Massachusetts and Calgary, Alberta
development facilities, we have constructed state of the art laboratories with
equipment from such vendors as ADC Kentrox, Alcatel, Ascend, Cisco, Copper
Mountain, CopperCom, Efficient Networks, Ericsson, IBM, Iwatsu, Jetstream,
Avaya, NEC, Netopia, Newbridge, Nitsuko, Nortel Networks, Packeteer, Paradyne,
Sylantro and Toshiba.
Our Calgary, Alberta facility system tests the product line and validates
our product's integration with the major voice switches, applications and
desksets that we support. We conduct extensive product testing to
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ensure that our equipment meets the high standards for voice quality and
reliability associated with mission critical systems such as PBXs. We also
conduct extensive tests on the embedded systems within our product line as well
as on all the features and functions.
Our Needham, Massachusetts facility tests system interoperability. The
ability to deliver traffic within multiple network environments and to
interoperate with equipment from numerous vendors has become a key component to
the success of communications equipment companies. Because no communications
equipment product can be validated independently of the network within which it
operates or independently from the equipment with which it interfaces, this lab
conducts extensive tests of our product line operating within multiple network
environments and interacting with equipment from numerous equipment vendors. We
conduct extensive tests that measure device performance, quality of service and
voice prioritization within multiple network environments and across a range of
network conditions. Our facilities contain extensive telephony and data
equipment and network circuits to conduct these tests.
By combining the capabilities of our two facilities, we have implemented a
product validation procedure that enables us to deliver high quality voice
equipment that works within multiple network environments, is compatible with
most widely deployed network equipment and is capable of adapting to a wide
range of network conditions. Furthermore, the engineers in our product
validation laboratory work continually with validation engineers at other
equipment companies in order to compile feedback and recommendations to improve
our products.
MANUFACTURING
We outsource our manufacturing to three contract manufacturers. Mack
Technologies, located in Westford, Massachusetts, manufactures our Gateway
products as well as our EXTender 6000 for branch offices and EXTender 4000
clients. They are ISO 9002 certified and provide full turnkey services,
including material procurement, final assembly, testing, shipment to our
customers and warranty repair. Electronic Manufacturing Group, located in
Calgary, Alberta, manufactures our EXTender 1000 and 3000 product lines. OEM
Worldwide, located in Watertown, South Dakota, manufactures our recording
interface product line. Both Electronic Manufacturing Group and OEM Worldwide
provide us with printed circuit assemblies. We then complete the final assembly,
testing and inspection of these printed circuit assemblies at our Allen, Texas
facility. We are ISO 9001 certified.
We design and develop the key components, including printed circuit boards
and software, for all of our products. In addition, we determine the components
that are incorporated in our products and select the appropriate suppliers of
these components. We design the tests and specify the testing equipment for the
product testing performed at Mack Technologies and at our facility in Allen,
Texas.
We use a rolling six-month forecast based upon anticipated product orders
to determine our material requirements. Lead times for the materials and
components that we order vary significantly and depend on factors such as
specific supplier, contract terms and demand for a component at a given time.
We, along with our contract manufacturers, may terminate our contracts without
cause at any time. At that time, the terminating party must honor all open
purchases.
COMPETITION
We compete in a new, rapidly evolving and highly competitive and fragmented
industry that is subject to increasing product, market and technology changes
brought about by the introduction of new technologies, the deployment of
broadband networks and changes in the regulatory environment. We believe that
the main competitive factors in our market are the following:
- technology partnerships, particularly with the major PBX manufacturers
and service providers
- system reliability and performance
- sales and distribution capability
- price/performance characteristics
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- access to third-party technology
- conformance to industry standards
- brand name recognition
- ease of deployment and use
- timeliness of product introductions
- product features and breadth
- customer relationships
- technical support and service
- pace of enterprise voice evolution
We believe our success in competing with other manufacturers of
communications products depends primarily on:
- our ability to enter into and maintain key technology, business
development and distribution relationships with third-party
manufacturers, distributors, resellers, system integrators and service
providers in our market segment
- our engineering, marketing and sales skills
- the price, quality and reliability of our products
- our delivery and service capabilities
Our principal competitors include large telecommunications manufacturers
such as Nortel and Avaya. Nortel's 6150 product line competes against our
Gateway and EXTender 6000 products and their Home Office II product competes
against our EXTender 3000 product line. Avaya's R300 product competes against
our Gateway and EXTender 6000 products. It is likely that a number of other
public and private companies are developing next generation network access
products that target the branch office and telecommuting marketplaces. For
example, Intel announced its iPOD product line which will be available later
this year and will provide PBX extension capabilities to branch offices. We
expect competition to intensify in the future and new competitors to emerge.
Many of our competitors are substantially larger than we are and have
significantly greater financial, sales and marketing, technical, manufacturing
and other resources, more established distribution channels and stronger
relationships with service providers. These competitors may be able to respond
more rapidly to new or emerging technologies and changes in customer
requirements or devote greater resources to the development, promotion and sale
of their products than we can. Furthermore, we believe some of our competitors
may offer aggressive sales terms, including financing alternatives, which we may
not be able to match. These competitors may enter our existing or future markets
with solutions that may be less expensive, provide higher performance or
additional features or be introduced earlier than our solutions. Given the
market opportunity, we expect that other companies may enter our market with
better products and technologies. If any technology that is competing with ours
is more reliable, has better quality, is less expensive or has other advantages
over our technology, the demand for our products could decrease.
We expect our competitors to continue to improve the performance of their
current products and introduce new products or new technologies. Successful new
product introductions or enhancements by our competitors could reduce the sales
or market acceptance of our products, perpetuate intense price competition or
make our products obsolete. To be competitive, we must continue to invest
significant resources in research and development, sales and marketing and
customer support. We cannot be sure that we will have sufficient resources to
make these investments or that we will be able to make the technological
advances necessary to remain competitive.
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Increased competition is likely to result in price reductions, reduced
gross margins and loss of market share. Our failure to compete successfully
against current or future competitors could seriously harm our business,
financial condition and results of operations.
INTELLECTUAL PROPERTY
Our success and ability to compete is dependent in part upon our
proprietary technology. We rely on a combination of copyright, trademark, trade
secret and other intellectual property law, nondisclosure agreements and other
protective measures to protect our proprietary rights. We also utilize
unpatented proprietary knowledge and trade secrets, and employ various methods
to protect our trade secrets and knowledge. We presently have no patents. We
have one provisional patent application pending on a system for and method of
extending a PBX phone port to an external phone device.
We believe our intellectual property rights are significant and that the
loss of all or a substantial portion of such rights could have a material
adverse effect on our business, financial condition and results of operations.
There can be no assurance that our intellectual property protection measures
will be sufficient to prevent misappropriation of our technology. Some of our
contractual arrangements provide third parties with access to our source code
and other intellectual property upon the occurrence of specified events. Such
access could enable these third parties to use our intellectual property and
source code to develop and manufacture competing products, which would adversely
affect our performance and ability to compete. In addition, we cannot be certain
that others will not independently develop substantially equivalent intellectual
property, gain access to our trade secrets or intellectual property, or disclose
our intellectual property or trade secrets. Furthermore, the laws of many
foreign countries do not protect our intellectual property to the same extent as
the laws of the United States. From time to time, we may desire or be required
to renew or to obtain licenses from others in order to develop and market
commercially viable products effectively. There can be no assurances that any
necessary licenses will be available on reasonable terms, if at all.
The communications industry is characterized by the existence of a large
number of patents and frequent claims and related litigation regarding patent
and other intellectual property rights. In particular, leading companies in the
communications markets have extensive patent portfolios. From time to time,
third parties may assert exclusive patent, copyright, trademark and other
intellectual property rights to technologies and related standards that are
important to us. We expect that we may increasingly be subject to infringement
claims as the number of products and competitors in the market for our
technology grows and the functionality of products overlaps. Although we have
not been a party to any litigation asserting claims that allege infringement of
intellectual property rights, we may be a party to litigation in the future. In
addition, third parties may assert claims or initiate litigation against us or
our manufacturers, suppliers, OEMs, technology partners or customers alleging
infringement of their proprietary rights with respect to our existing or future
products.
We may in the future initiate claims or litigation against third parties
for infringement of our proprietary rights to determine the scope and validity
of our proprietary rights. Any such claims, with or without merit, could be
time-consuming, result in costly litigation and diversion of technical and
management personnel or require us to develop non-infringing technology or enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on acceptable terms, if at all.
EMPLOYEES
At April 30, 2001, we had a total of 186 employees, of which 60 were in
research and development, 80 were in sales, marketing, business development and
customer support, 19 were in manufacturing and operations, and 27 were in
finance and administration. None of our employees is represented by a labor
union. We have not experienced any work stoppages and consider relations with
our employees to be good.
ITEM 2. PROPERTIES
We currently lease approximately 48,000 square feet of space at our
headquarters in Needham, Massachusetts under a lease that expires in March 2007.
We have concurrently sub-let 15,000 square feet of
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this space for a term of 3 years to an unrelated third party and believe the
additional space will not impact our operating results until we occupy the
space. We also lease approximately 12,500 square feet at our development center
in Calgary, Alberta under a lease that expires in October 2005 and 16,700 square
feet at our applications business unit in Allen, Texas that expires in August
2004.
ITEM 3. LEGAL PROCEEDINGS
On May 3, 2000, Joan Lockhart, the Company's former Vice President of
Marketing, filed a complaint in Massachusetts State Court against the Company.
In the complaint, captioned Joan Lockhart v. MCK Communications, Inc.,
(Middlesex Superior Court), Ms. Lockhart asserts a claim for breach of contract
against the Company based on her allegations that the Company failed to comply
with the terms of her employment agreement and a certain restricted stock
agreement executed by and between the Company and Ms. Lockhart. Ms. Lockhart
seeks approximately $30,000 in severance pay as well as approximately $1,000,000
in damages. On June 5, 2000, the Company filed its answer denying the material
allegations of Ms. Lockhart's complaint. The trial of this action is scheduled
for July 23, 2001. We are unable at this time to estimate the probability of a
favorable or unfavorable outcome or to estimate the amount of any losses in the
event of an unfavorable outcome.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET PRICE FOR COMMON STOCK. The following table sets forth for the
periods indicated the high and low closing prices for the Common Stock, as
reported by NASDAQ:
FISCAL QUARTER ENDED HIGH LOW
- -------------------- ------- --------
July 31, 2000............................................... $36.625 $18.0625
October 31, 2000............................................ 38.125 14.0625
January 31, 2001............................................ 21.25 4.3906
April 30, 2001.............................................. 6.8125 1.75
HOLDERS OF RECORD. As of May 31, 2001, there were approximately 125
holders of record of our common stock and 20,180,325 shares of Common Stock
outstanding.
DIVIDEND POLICY. To date, the Company has not paid any cash dividends on
its Common Stock. The Company currently anticipates that it will retain any
available funds to finance the growth and operation of its business and does not
anticipate paying any cash dividends in the foreseeable future.
ITEM 6. SELECTED HISTORICAL CONDENSED FINANCIAL INFORMATION
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and are qualified by reference to the Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Report. The statement
of operations data set forth below for the years ended April 30, 1999, 2000 and
2001, and the balance sheet data at April 30, 2000, 2001, are derived from, and
are qualified by reference to, the audited Consolidated Financial Statements of
MCK Communications, Inc. included elsewhere herein. The statement of operations
data set forth below for the years ended April 30, 1997 and 1998 and the balance
sheet data at April 30, 1997, 1998 and 1999 are derived from audited
Consolidated Financial Statements of MCK Communications, Inc. not included
herein.
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YEARS ENDED APRIL 30,
----------------------------------------------------------------
1997 1998 1999 2000 2001
---------- ---------- ---------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATIONS DATA:
Revenues..................................... $ 5,921 $ 7,876 $ 14,270 $ 25,082 $ 38,220
Cost of goods sold........................... 2,313 2,800 5,390 9,455 15,287
---------- ---------- ---------- ----------- -----------
Gross profit................................. 3,608 5,076 8,880 15,627 22,933
Operating expenses:
Research and development (excluding
amortization of stock based compensation
of $0, $0, $175, $1,558 and $830 in 1997,
1998, 1999, 2000 and 2001,
respectively)............................ 815 1,758 3,349 4,876 9,232
Sales and marketing (excluding amortization
of stock based compensation of $0, $0,
$110, $1,853 and $1,005 in 1997, 1998,
1999, 2000 and 2001, respectively........ 1,145 2,191 3,888 7,817 13,820
General and administrative (excluding
amortization of stock based compensation
of $0, $0, $120, $1,234 and $1,067 in
1997, 1998, 1999, 2000 and 2001,
respectively)............................ 607 1,485 1,617 2,475 4,646
Amortization of stock based compensation... -- -- 406 4,645 2,902
Amortization of goodwill and other
intangibles(1)........................... -- -- -- -- 4,588
Write-off of in-process research and
development(2)........................... -- -- -- -- 3,694
Restructuring.............................. -- -- -- -- 597
Transaction-related charge................. 493 -- -- -- --
---------- ---------- ---------- ----------- -----------
Total operating expenses............ 3,060 5,434 9,260 19,813 39,479
---------- ---------- ---------- ----------- -----------
Income (loss) from operations................ 548 (358) (380) (4,186) (16,546)
Other income (expense)....................... (343) (595) (207) 758 3,617
---------- ---------- ---------- ----------- -----------
Income (loss) before income tax provision
(benefit) and dividends on redeemable
preferred stock of subsidiary.............. 205 (953) (587) (3,428) (12,929)
Income tax provision (benefit)............... 302 -- -- 100 (1,130)
Dividends on redeemable preferred stock of
subsidiary................................. 133 160 197 97 --
---------- ---------- ---------- ----------- -----------
Net loss..................................... (230) (1,113) (784) (3,625) (11,799)
Dividends on redeemable preferred stock...... 1,011 1,220 1,966 1,285 --
---------- ---------- ---------- ----------- -----------
Net loss applicable to common shares......... $ (1,241) $ (2,333) $ (2,750) $ (4,910) $ (11,799)
========== ========== ========== =========== ===========
Basic and diluted net loss per common
share...................................... $ (0.39) $ (0.67) $ (0.71) $ (0.44) $ (0.61)
Shares used in computing basic and diluted
net loss per common share.................. 3,188,152 3,476,282 3,881,526 11,144,565 19,213,239
Pro forma basic and diluted loss per common
share...................................... (0.31)
Shares used in computing pro forma basic and
diluted loss per common share.............. 15,268,368
CONSOLIDATED BALANCE SHEET DATA:
Cash and equivalents(1)(2)................. 3,228 1,867 3,285 75,724 54,802
Working capital(1)(2)...................... 4,965 3,545 5,578 78,288 58,444
Total assets(1)(2)......................... 6,517 5,665 9,428 87,194 90,397
Long term debt............................. 5,000 5,000 2,500 -- --
Redeemable preferred stock................. 18,069 19,449 28,205 -- --
Total stockholders' equity
(deficit)(1)(2).......................... (17,568) (20,050) (24,040) 80,946 82,860
- ---------------
(1) See footnote 16 on page F-17
(2) See footnote 17 on page F-18
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and the related notes included elsewhere in
this prospectus.
OVERVIEW
MCK Communications is a leading provider of products that enable businesses
to unleash the power of their voice communications systems by:
- extending the functionality and applications of their business telephone
systems from the main office to outlying offices, remote call centers,
teleworkers and mobile employees over public and private networks
- bundling with service providers to unite customer premise equipment
("CPE") and network services to deliver new outsourced, value added
services
- bridging technology gaps between existing and next generation ("nextgen")
applications (i.e., unified messaging), IP switches and devices (i.e., IP
telephones) to enable enterprises ease of technology migration.
This combination enables a more open enterprise. We market and distribute our
products through an international network of indirect resellers and equipment
providers and, to a lesser extent, through direct sales. We are headquartered in
Needham, Massachusetts, have development centers in Allen, Texas and Calgary,
Canada, and maintain a sales and marketing office in the United Kingdom.
From our inception in 1989 through 1993, we were a small company based in
Calgary, Canada that designed and marketed a number of niche, voice products
targeted at the oil industry. Commencing in 1993, we altered our business focus
and began developing remote voice access products for enterprise telephone
systems by using the technology derived from this initial business. These
efforts led to the development of our EXTender product line. During the period
from 1993 through 1995, our operating activities related primarily to
establishing a research and development organization, developing and testing
prototype designs, and developing OEM relationships. We shipped our first remote
voice access product, the EXTender 1000, in 1995. Since then we focused our
research and development efforts on developing additional remote voice access
products and product enhancements, and more recently creating technologies to
enable a more "open" enterprise. In addition, we established a product
validation laboratory, built international indirect sales channels, developed
additional technology relationships, and established our sales, marketing and
customer support organizations.
Through the fiscal year ended April 30, 1999, our revenues consisted
primarily of product sales of our single-user remote voice access products and,
to a lesser degree, our recording interface gateways products. In April 1999, we
released our first multi-user remote voice access products, the EXTender 6000
for branch offices and the PBXgateway, and we are presently developing
additional products that operate over broadband and wireless networks. For the
foreseeable future, we anticipate that substantially all of our revenues will be
attributable to sales of our access and gateway products, with sales of
recording interface gateways representing a decreasing percentage of our
revenues. Among our access and gateway products, we believe that the multi-user
products and next generation single-user products will represent a substantial
and increasing percentage of our revenues, while the sales of our existing
single-user products may decline as a percentage of our revenues. To date we
have generated minimal service and maintenance revenues. We do not expect
maintenance or service revenues to be a significant portion of our revenues.
Periodically, we have received non-recurring engineering fees, although such
fees have not been material to date.
For the fiscal years ended April 30, 2000 and 2001, Avaya (formerly Lucent
Technologies) accounted for approximately 45.6% and 24.1%, respectively of our
revenues. However, during the last six months of our fiscal year ended April 30,
2001, sales to Avaya fell to $2.1 million or 12.8% of our business compared to
$7.1 million or 32.5% of our business in the previous six month period. The
revenue shortfall from Avaya was
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not offset by revenue contributions from other channels and had an adverse
effect on our business. We believe the reduction in revenues from Avaya is
related to a change in their inventory carrying policy, a slow down in their
overall business and their release of internally developed competitive products.
Additionally, a weak economy has lead to a slow down in capital spending which
has also had a negative impact on our business. We expect the trend of lower
Avaya revenues to continue until the implementation of their new inventory
carrying policy is complete and their business recovers. However, there can be
assurance that revenue from Avaya will return to previous levels. We cannot
currently predict when capital spending will rebound to previous levels.
We recognize product revenues upon shipment to the customer. We routinely
analyze and establish, as necessary, reserves at the time of shipment for
product returns and allowances, which amounts, to date, have not been
significant. Service revenues are recognized as the services are performed.
Maintenance revenues are deferred and recognized over the period of the
contract.
Our cost of goods sold consists primarily of purchased finished products
from Mack Technologies and purchased subassemblies from EMG and OEM Worldwide.
We incur additional costs to test and assemble these subassemblies for shipment
to our customers. Cost of goods sold also includes certain manufacturing
overhead costs, primarily facilities and related depreciation. Additionally, our
cost of goods sold includes costs related to maintenance and support services
provided to our distribution channels and end users through Vital Network
Services, a third-party support provider.
Research and development expenses consist primarily of salaries and related
personnel costs and contract engineering, purchased software and prototype
expenses related to the design, development, enhancement and testing of our
products. As of April 30, 2001, all research and development costs have been
expensed as incurred. We will continue to enhance existing products and fund new
product development initiatives targeted at the growing service provider and
next generation equipment manufacturer market segments. We expect research and
development expenses to increase in both real dollars and as a percentage of
revenue in future periods. We also expect to increase our expenditures on our
product validation laboratories that test the interoperability of our products
with enterprise voice systems and other products. This competency continues to
be critical to our business as we develop additional products that function over
circuit, packet and wireless networks in conjunction with third-party data
equipment.
Sales and marketing expenses consist primarily of salaries, commissions and
related personnel expenses for those engaged in the sales, marketing and support
of products as well as related trade show, promotional and public relations
expenses. We primarily sell our products through an indirect distribution system
that includes the following channels: OEMs and private label partners, ILECs,
systems integrators and distributors, telecom and datacom VARs and service
providers. Our sales force and marketing efforts are primarily directed at
developing brand awareness and supporting our indirect distribution channels. We
intend to pursue sales and marketing campaigns to deepen penetration with
existing partners and selectively expand to new distribution channels. As
revenues increase, we expect sales and marketing headcount and associated
expenses to increase accordingly.
General and administrative expenses consist primarily of salaries and
related personnel expenses for executive, accounting and administrative
personnel, professional fees and other general corporate expenses. We expect
that general and administrative expenses will remain relatively constant during
fiscal year 2002.
Stock based compensation expenses resulted from the granting of restricted
stock and stock options to employees and directors with exercise prices per
share determined to be below the deemed fair values per share for financial
reporting purposes of our common stock at dates of grant. The deferred
compensation is being amortized to expense over the vesting period of the
individual options, generally four years. At April 30, 2001, deferred
compensation to be amortized in future periods amounted to $1.6 million. The
amortization of existing deferred stock-based compensation is expected to impact
our reported results of operations through the July 2003 quarter.
Amortization of goodwill and other intangibles. In June 2000, we acquired
all of the outstanding stock of Digital Techniques Incorporated Holding "DTIH"
and its subsidiary Digital Techniques, Inc. "DTI" and
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certain other assets for $12.7 million in cash and stock valued at $10.9
million. The acquisition provided us with technologies to expand our current
line of distributed voice products, development rights to additional protocols
and an expanded customer base. In conjunction with the acquisition, we recorded
goodwill and certain intangible assets resulting from the excess of purchase
price over the fair value of the tangible assets acquired. Goodwill and
intangibles will be amortized over a period of 5 years and will impact our
operating results through fiscal year 2005.
Other (income) expense, net consists primarily of interest expense related
to our subordinated debt, offset by interest income, and foreign exchange gains
or losses related to the effects of the Canadian/U.S. exchange rate on
intercompany transactions.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated as a percentage of revenues.
YEARS ENDED APRIL 30,
-----------------------
1999 2000 2001
----- ----- -----
Revenues.................................................... 100.0% 100.0% 100.0%
Cost of goods sold.......................................... 37.8 37.7 40.0
----- ----- -----
Gross profit................................................ 62.2 62.3 60.0
Operating expenses:
Research and development.................................. 23.5 19.4 24.2
Sales and marketing....................................... 27.3 31.2 36.1
General and administrative................................ 11.3 9.9 12.2
Amortization of stock based compensation.................. 2.8 18.5 7.6
Amortization of goodwill and other intangibles............ -- -- 12.0
Write-off of in-process research and development.......... -- -- 9.7
Restructuring............................................. -- -- 1.5
----- ----- -----
Total operating expenses.......................... 64.9 79.0 103.3
----- ----- -----
Loss from operations........................................ 2.7 16.7 43.3
Other (income) expense, net................................. 1.5 (3.0) (9.5)
----- ----- -----
Loss before income tax provision (benefit) and dividends on
redeemable preferred stock of subsidiary.................. 4.1 13.7 33.8
Income tax provision (benefit).............................. -- 0.4 (2.9)
----- ----- -----
Net loss before dividends on subsidiary redeemable preferred
stock..................................................... 4.1% 14.1% 30.9%
===== ===== =====
Fiscal years ended April 30, 2000 and 2001
Revenues. Revenues increased from $25.1 million for the fiscal year ended
April 30, 2000 to $38.2 million for the fiscal year ended April 30, 2001, an
increase of $13.1 million or 52.4%. This increase was primarily due to the
increased sales of our remote voice access products, and our multi-user remote
voice products in particular. The multi-user remote voice products accounted for
approximately $19.6 million or 51.4% of revenues during the year ended April 30,
2001, compared to $12.1 million or 48.3% of revenues in the year ended April 30,
2000. Secondarily, revenues for fiscal 2001 increased by approximately $7.4
million due to our acquisition of DTI in June of 2000. Lucent Technologies, a
significant customer that has accounted for more than 40% of our revenues over
the past two years, divested its PBX unit into a standalone business named
Avaya. Revenue from Avaya declined from $7.1 million during the first six months
of fiscal 2001 to $2.1 million during the last six months of fiscal 2001. This
decrease in revenue had an adverse affect on our operating results. We believe
the reduction in revenues from Avaya is directly related to a slow down of
Avaya's overall business. We expect the trend of lower Avaya revenues to
continue until we have seen the completion of their inventory model transition
and a strengthening of their core business. We also believe that the recent slow
down in the economy has had a negative impact on capital spending, which has had
an adverse
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effect on our business. Additionally, both Avaya and Nortel introduced
competitive products during fiscal 2001, which could further reduce our market
share and revenue in future periods. We will continue leveraging our
distribution channels to drive revenue. However, our revenues and gross profit
could be harmed if we need to reduce our prices to remain competitive.
Cost of goods sold. Cost of goods sold increased from $9.5 million for the
fiscal year ended April 30, 2000 to $15.3 million for the fiscal year ended
April 30, 2001, an increase of $5.8 million or 61.7%. This increase was
primarily related to the increase in volume of units shipped. Gross profit
decreased from 62.3% for the year ended April 30, 2000 to 60.0% for the year
ended April 30, 2001. The decrease in gross profit was primarily attributable to
a $500,000 write down of inventory related to the discontinuance of certain non-
strategic products as well as increased costs of certain components such as
flash memory, general pricing pressures in the market and, to a lesser extent,
start-up manufacturing costs associated with our 24-port gateway and cost
reduced EXTender 4000 products. We expect our gross profit will continue to be
under pressure due to an overall weakness in the economy, increased competition,
and rising costs of certain components.
Research and development. Research and development expenses increased from
$4.9 million for the fiscal year ended April 30, 2000 to $9.2 million for the
fiscal year ended April 30, 2001, an increase of $4.4 million or 89.3%. This
increase was due primarily to increases in staffing, the addition of DTI's
development team, the manufacturing of prototype units for our 24-port gateway
and cost reduced EXTender 4000 products, and, to a lesser extent, related
overhead costs. For the year ended April 30, 2000 and 2001, research and
development expenses increased as a percentage of revenues from 19.4% to 24.2%
as a result of increased spending and lower than expected revenues in the second
half of the year.
Sales and marketing. Sales and marketing expenses increased from $7.8
million for the fiscal year April 30, 2000 to $13.8 million for the fiscal year
ended April 30, 2001, an increase of $6.0 million or 76.8%. This increase was
primarily due to increases in staffing of both sales and marketing personnel,
the addition of DTI's sales force, the write-off of $500,000 of accounts
receivable due to the bankruptcy of a reseller, and, to a lesser extent,
increased marketing activities in support of more diversified distribution. For
the year ended April 30, 2000 and 2001, sales and marketing expenses increased
as a percentage of revenues from 31.2% to 36.1% as a result of increased
spending and lower than expected revenues in the second half of the year.
General and administrative. General and administrative expenses increased
from $2.5 million for the fiscal year ended April 30, 2000 to $4.6 million for
the fiscal year ended April 30, 2001, an increase of $2.2 million or 87.7%. This
increase was primarily due to increases in staffing in our accounting and human
resources groups to support our growth and reporting requirements as a public
company, the addition of DTI staff, fees associated with the recruiting and
hiring of our new Chief Executive Officer, and, to a lesser extent, professional
service costs. For the year ended April 30, 2000 and 2001, general and
administrative expenses increased as a percentage of revenues from 9.9% to 12.2%
as a result of increased spending and lower than expected revenues in the second
half of the year.
Amortization of stock-based compensation. In connection with the grant of
certain stock options to employees prior to our initial public offering on
October 22, 1999, we recorded deferred compensation expense of $9.7 million, net
of cancellations of certain options. The amount recorded represents the
difference between the deemed fair value of the common stock for financial
reporting purposes and the exercise price of these options at the date of grant
or cancellation. Deferred compensation is presented as a reduction of
stockholders' equity and is amortized over the vesting period of the applicable
options, generally four years. We recorded $4.6 million and $2.9 million of
stock-based compensation expense in the fiscal years ended April 30, 2000 and
2001, respectively.
Amortization of goodwill and other intangibles. In conjunction with the
acquisition of DTIH, we recorded goodwill and certain intangible assets
resulting from the excess of purchase price over the fair value of the tangible
assets acquired. Goodwill and intangibles are being amortized over a period of 5
years and will impact our operating results through fiscal 2005. During the year
ended April 30, 2001, we recorded $4.6 million of amortization expense related
to goodwill and intangibles.
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29
Write-off of in-process research and development. During fiscal 2001 we
allocated $694,000 of the $23.6 million purchase price for the DTIH acquistion
and 100% of the Entrata acquisition price to in-process research and
development. We did not incur any such charges in fiscal 2000. In-process
research and development represents ongoing acquired research and development
projects which have yet to reach technological feasibility and would have no
probable alternative future use. We used independent professional valuation
consultants to assess and allocate values for the DTIH acquisition. With regard
to Entrata, it was estimated that the non-exclusive license we purchased was
less than 50% complete and would require ap