-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OcSaM/f5GBWujPjXQGHhizYx5wq0abM8xnAvx5aHD1h1cz8A/LelA9NU17CSoA4p OW4SMK3afJCrcKKZmVdIHA== 0000912057-96-022557.txt : 19961015 0000912057-96-022557.hdr.sgml : 19961015 ACCESSION NUMBER: 0000912057-96-022557 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19961011 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FAXSAV INC CENTRAL INDEX KEY: 0001010677 STANDARD INDUSTRIAL CLASSIFICATION: TELEGRAPH & OTHER MESSAGE COMMUNICATIONS [4822] IRS NUMBER: 113025769 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-09613 FILM NUMBER: 96642159 BUSINESS ADDRESS: STREET 1: 399 THORNALL ST CITY: EDISON STATE: NJ ZIP: 08837 BUSINESS PHONE: 9089062000 S-1/A 1 S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 11, 1996 REGISTRATION NO. 333-09613 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM S-1 AMENDMENT NO. 3 TO REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ FAXSAV INCORPORATED (Exact Name of Registrant as Specified in its Charter) DELAWARE 4822 11-3025769 (State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer of Incorporation or Organization) Classification Code) Identification Number)
399 THORNALL STREET, EDISON, NEW JERSEY 08837 (908) 906-2000 (Address, including Zip Code, and Telephone Number, including Area Code, of Registrant's Principal Executive Offices) ------------------------------ THOMAS F. MURAWSKI President and Chief Executive Officer FaxSav Incorporated 399 Thornall Street Edison, New Jersey 08837 (908) 906-2000 (Name, Address, including Zip Code, and Telephone Number, including Area Code, of Agent for Service) ------------------------------ COPIES TO: Richard R. Plumridge, Esq. Gordon H. Hayes, Jr., Esq. Michael A. Conza, Esq. Testa, Hurwitz & Thibeault, LLP Brobeck, Phleger & Harrison LLP High Street Tower, 125 High Street 1301 Avenue of the Americas Boston, Massachusetts 02110 New York, New York 10019 (617) 248-7575 (212) 581-1600
-------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. -------------------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / -------------------------- CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM AGGREGATE OFFERING AMOUNT OF TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED PRICE (1) REGISTRATION FEE Common stock, par value $0.01 per share.................. $13,800,000 $4,182 (1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a). A fee in the amount of $10,469 was paid upon the filing of this Registration Statement on August 6, 1996.
-------------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROSPECTUS 1,500,000 SHARES [LOGO] COMMON STOCK ------------------ All of the 1,500,000 shares of Common Stock offered hereby are being sold by FaxSav Incorporated ("FaxSav" or the "Company"). Prior to this offering, there has been no public market for the Common Stock. See "Underwriting" for a discussion of the factors considered in determining the initial public offering price. The Common Stock has been approved for quotation on The Nasdaq National Market under the symbol "FAXX." ------------------------ THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING AT PAGE 6. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Underwriting Price to Discounts Proceeds to Public and Commissions(1) Company(2) Per Share...................... $8.00 $0.56 $7.44 Total(3)....................... $12,000,000 $840,000 $11,160,000
(1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) Before deducting estimated expenses of $1,000,000 payable by the Company. (3) The Company has granted the Underwriters a 30-day option to purchase up to an aggregate of 225,000 additional shares of Common Stock on the same terms and conditions as set forth above, solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to the Company will be $13,800,000, $966,000 and $12,834,000, respectively. ------------------------ The shares of Common Stock offered by this Prospectus are offered by the Underwriters subject to prior sale, to withdrawal, cancellation or modification of the offer without notice, to delivery to and acceptance by the Underwriters and to certain other conditions. It is expected that delivery of the certificates for the shares of Common Stock will be made at the offices of Lehman Brothers Inc., New York, New York on or about October 17, 1996. ------------------------ LEHMAN BROTHERS ALEX. BROWN & SONS INCORPORATED October 11, 1996 [A THREE PAGE FOLD OUT GRAPHIC REPRESENTATION OF ICONS REPRESENTING EACH OF THE COMPANY'S SERVICE OFFERINGS ACCOMPANIED WITH THE FOLLOWING TEXT.] faxLAUNCHER: Enables customers to fax documents created in any Windows application directly from an Internet-connected computer desktop through the FaxSav network to fax machines worldwide. faxLAUNCHER also supports documents scanned through several types of sheet-fed scanners. faxMAILER: Enables customers to transmit messages from e-mail packages over the Internet to the FaxSav network for delivery to fax machines worldwide. faxSCAN: Enables customers to send documents scanned in any TWAIN-compliant scanner over the internet to the FaxSav network for delivery to fax machines worldwide. faxSAV Plus: A "virtual real-time" service which is designed to provide reliable delivery of facsimile transmissions at substantially reduced costs. The Company utilizes a combination of its traditional telephony-based network and its growing Internet-based network to delivery faxSAV PLUS transmissions to fax machines worldwide. faxSAV: The core fax-to-fax service provided by the Company is a real-time fax transmission service that is delivered through the Company's telephony-based network. The faxSAV service is accessed by customers through the installation of a faxSAV Connector, which is provided by FaxSav free of charge with no installation cost to the customer. E-Z LIST: An easy to use fax-to-fax broadcast service which enables customers to send the same fax message to multiple recipients by transmitting a single fax message to the FaxSav network and identifying a specific list of fax addresses previously stored in the Company's customer database.] ------------------------ The Company intends to furnish its stockholders with annual reports containing audited financial statements and an opinion thereon expressed by an independent public accounting firm and with quarterly reports for the first three quarters of each year containing unaudited interim financial information. "faxSAV" and "faxSAV Assured" are registered trademarks of the Company. The Company has filed trademark registration applications for "faxLauncher," "faxMailer," "faxScan" and a service mark application for "EZ-List." This Prospectus also includes trademarks and trade names of companies other than FaxSav Incorporated. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS (I) ASSUMES NO EXERCISE OF THE OVER-ALLOTMENT OPTION GRANTED TO THE UNDERWRITERS, (II) GIVES EFFECT TO A ONE-FOR-NINE REVERSE STOCK SPLIT OF THE COMMON STOCK EFFECTED ON OCTOBER 7, 1996 OFFERING, (III) REFLECTS THE FILING UPON THE CLOSING OF THIS OFFERING OF THE SIXTH AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF THE COMPANY, WHICH AMONG OTHER THINGS, CHANGES THE AUTHORIZED NUMBER OF SHARES OF CAPITAL STOCK OF THE COMPANY, AND (IV) REFLECTS, UPON THE CLOSING OF THE OFFERING, THE CONVERSION OF ALL OUTSTANDING SHARES OF ALL SERIES OF THE COMPANY'S PREFERRED STOCK INTO AN AGGREGATE OF 7,791,981 SHARES OF COMMON STOCK. THE COMPANY FaxSav Incorporated ("FaxSav" or the "Company") designs, develops and markets a variety of business-to-business facsimile transmission services, including fax-to-fax, desktop-to-fax, enhanced fax and broadcast fax services. FaxSav's services are designed to reduce the cost of sending an international fax while making the process of sending an international fax easier and less time-consuming. Through the use of its integrated Internet-based and telephony-based network and its proprietary software, the Company enables its customers to send documents and images to fax machines worldwide at rates substantially below the international rates charged by traditional long distance carriers. Customers are offered Internet advantaged pricing for facsimile transmissions to targeted markets worldwide while continuing to use their traditional fax machines. In addition, the Company has developed easy to use software enabling customers to transmit documents directly from their computer desktops. FaxSav has built a customer base consisting of over 7,200 customers with international fax needs. In addition, there currently are more than 1,000 registered users of the Company's desktop software. In 1995, the Company transmitted more than 20.4 million minutes of facsimile messages yielding revenues of $11.6 million. During the first six months of 1996, FaxSav transmitted 13.8 million minutes of facsimile messages yielding revenues of $7.4 million, as compared to 9.0 million minutes and $5.0 million in revenue for the same six month period in 1995. The Company historically has provided low cost facsimile services by utilizing pre-negotiated volume based arrangements with various telephony common carriers. To significantly enhance the cost effectiveness of the Company's transmission services, in early 1996 FaxSav began to deploy a global Internet-based network of nodes that enable it to bypass the long distance carriers' networks when sending faxes to or from international areas serviced by these nodes. In June 1996, FaxSav began to utilize this integrated network for commercial transmission of faxes over the Internet. FaxSav has deployed Internet nodes in Bermuda, France, Germany, Hong Kong, South Korea and the United Kingdom and plans to deploy additional Internet nodes in key international telecommunications markets by the end of 1997 to enable the Company to route a majority of its customers' traffic through the Internet. The Company believes that this planned global Internet infrastructure, which is designed to integrate seamlessly with its existing telephony-based network, will enable the Company to bypass long distance carrier networks for transmissions originating and terminating in countries where such nodes have been deployed, thereby reducing its customers' international transmission costs. FaxSav believes that this integrated global network will enable the Company to emerge as a leading supplier of comprehensive, low cost global facsimile services. The Company's services are targeted to customers with international facsimile transmission requirements. FaxSav offers a variety of services designed to meet the individual business requirements of its customers, including real-time, "virtual real-time" (immediate delivery attempt following receipt of the customer's document by the FaxSav network) and broadcast services. Specifically, customers may utilize: FAXSAV, a real-time fax transmission through FaxSav's telephony-based network; FAXSAV ASSURED, a "virtual real-time" enhanced delivery service option which shifts the responsibility for repetitive completion attempts to the FaxSav network; FAXSAV EZ-LIST, a fax-to-fax broadcast service which allows a message to be faxed to multiple recipients by a single transmission to the FaxSav network; FAXSAV PLUS, the Company's new "virtual real-time" service which utilizes a combination of FaxSav's traditional telephony-based network and 3 its growing Internet-based network; and, FAXSAV FOR INTERNET, a suite of services enabling customers to send faxes directly from their computer desktops (either through e-mail or a Windows software application) to fax machines worldwide. FaxSav also provides customized solutions designed for high volume fax applications. Access to the FaxSav network is accomplished easily and does not require any initial investment, installation expense or change in business practices by the customer. Customers connect to the FaxSav network by simply plugging the FAXSAV CONNECTOR, a small proprietary device, between their fax machine and the telephone jack. In the first half of 1996, FaxSav further expanded customer access options by introducing desktop software which can easily be installed on Internet-connected personal computers and which enables customers to send documents and images directly to fax machines worldwide. Customers can deploy FaxSav's services at individual fax machines or desktop locations, across departments or throughout organizations using this modular installation approach. The Company sells its services through multiple sales channels, including direct mail and telemarketing programs, a direct field sales force, an agent and dealer distribution network and promotional activities. FaxSav was incorporated in Delaware on November 29, 1989 under the name Digitran Corporation and changed its name to FaxSav Incorporated on February 28, 1996. The Company's executive offices are located at 399 Thornall Street, Edison, New Jersey 08837 and its telephone number is (908) 906-2000. The Company's Internet address is http://www.faxsav.com. THE OFFERING
Common Stock offered by the Company......................... 1,500,000 shares Common Stock to be outstanding after the offering.............. 9,670,490 shares(1) Use of proceeds................... Expansion of Internet network infrastructure, repayment of existing short-term indebtedness and for general corporate purposes, including working capital. The Company may use a portion of the net proceeds to acquire businesses, services, products or technologies complementary to the Company's current business. See "Use of Proceeds." Nasdaq National Market symbol..... FAXX
- --------- (1) Excludes 1,238,619 shares of Common Stock issuable upon the exercise of stock options outstanding at August 31, 1996 with a weighted average exercise price of $0.58 per share. Excludes 555,556 shares of Common Stock available for issuance as of August 31, 1996 pursuant to the Company's 1996 Stock Option/Stock Issuance Plan of which stock options exercisable for 22,222 shares of Common Stock were granted subsequent to August 31, 1996, with an exercise price equal to the initial public offering price. Also excludes 138,385 shares of Common Stock issuable upon exercise of warrants with a weighted average exercise price of $2.77 per share. See "Management--1996 Stock Option/Stock Issuance Plan," and Notes 7 and 8 of Notes to Financial Statements. 4 SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT SHARE DATA)
SIX MONTHS ENDED JUNE YEAR ENDED DECEMBER 31, 30,(1) -------------------------------------- ------------------------- 1993 1994 1995 1995 1996 ----------- ----------- ------------ ----------- ------------ STATEMENT OF OPERATIONS DATA: Revenues...................................... $ 2,580 $ 3,449 $ 11,649 $ 5,017 $ 7,445 Operating loss................................ (3,298) (3,552) (4,127) (1,983) (3,469) Net loss...................................... (3,260) (3,493) (4,085) (1,885) (3,432) Net loss per common and equivalent share...... $ (5.99) $ (6.39) $ (7.46) $ (3.44) $ (6.17) Weighted average common and equivalent shares outstanding(2).............................. 543,953 546,500 547,444 547,444 555,923 Pro forma net loss per common and equivalent share(2).................................... $ (0.44) $ (0.40) ------------ ------------ ------------ ------------ Shares used in computing pro forma net loss per common and equivalent share(2).......... 9,243,484 8,609,119 ------------ ------------ ------------ ------------
AS OF JUNE 30, 1996(1) ------------------------- ACTUAL AS ADJUSTED(3) --------- -------------- BALANCE SHEET DATA: Working capital....................................................................... $ 793 $ 10,953 Total assets.......................................................................... 7,916 17,576 Total long-term debt.................................................................. 569 569 Total stockholders' equity............................................................ 3,058 13,218
- --------- (1) See Note 2 of Notes to Financial Statements: "Summary of Significant Accounting Policies -- Interim Financial Information (Unaudited)." (2) See Note 2 of Notes to Financial Statements: "Summary Of Significant Accounting Policies -- Pro Forma Net Loss Per Common and Equivalent Share" and "-- Net Loss Per Common and Equivalent Share." (3) Adjusted to give effect to the sale of 1,500,000 shares of Common Stock offered hereby at the initial public offering price and the application of the net proceeds therefrom. See "Use of Proceeds." ------------------- THIS PROSPECTUS CONTAINS CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY. PROSPECTIVE INVESTORS ARE CAUTIONED THAT SUCH STATEMENTS ARE ONLY PREDICTIONS AND THAT ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING SUCH STATEMENTS, PROSPECTIVE INVESTORS SHOULD SPECIFICALLY CONSIDER THE VARIOUS FACTORS IDENTIFIED IN THIS PROSPECTUS, INCLUDING THE MATTERS SET FORTH UNDER THE CAPTION "RISK FACTORS," WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. 5 RISK FACTORS IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE PURCHASING SHARES OF COMMON STOCK OFFERED HEREBY. HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT. From its inception in 1989 through the six-month period ended June 30, 1996, the Company has experienced significant operating losses. The Company incurred operating losses of $3.3 million, $3.6 million and $4.1 million during the years ended December 31, 1993, 1994 and 1995, respectively, and $3.5 million during the six months ended June 30, 1996. The Company currently anticipates incurring further operating losses as it attempts to expand its business and there can be no assurance that its future operations will generate positive operating income. As of June 30, 1996, the Company had an accumulated deficit of $21.0 million. The Company has generated net operating loss ("NOL") carryforwards for income tax purposes of approximately $16.1 million through December 31, 1995. These NOL carryforwards have been recorded as a deferred tax asset of approximately $5.2 million. Based upon the Company's history of operating losses and presently known factors, management has determined that it is more likely than not that the Company will be unable to generate sufficient taxable income prior to the expiration of these NOL carryforwards and has accordingly reduced its deferred tax assets to zero with a full valuation allowance. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." QUARTERLY FLUCTUATIONS; POSSIBLE VOLATILITY OF STOCK PRICE. The Company may in the future experience significant quarter to quarter fluctuations in its results of operations, which may result in volatility in the price of the Company's Common Stock. Quarterly results of operations may fluctuate as a result of a variety of factors, including demand for the Company's services, the introduction of new services and service enhancements by the Company or its competitors, market acceptance of new services, the mix of revenues between Internet-based versus telephony-based deliveries, the timing of significant marketing programs, the number and timing of the hiring of additional personnel, competitive conditions in the industry and general economic conditions. The Company's revenues are difficult to forecast. Shortfalls in revenues may adversely and disproportionately affect the Company's results of operations because a high percentage of the Company's operating expenses are relatively fixed, and planned expenditures, such as the anticipated expansion of the Company's Internet infrastructure, are based primarily on sales forecasts. In addition, the stock market in general has experienced extreme price and volume fluctuations, as evidenced by the fluctuations in the Nasdaq National Market in July 1996, which have affected the market price of securities of many companies in the telecommunications and technology industries and which have been unrelated to the operating performance of such companies. These market fluctuations may adversely affect the market price of the Company's Common Stock. Accordingly, the Company believes that period to period comparisons of results of operations are not necessarily meaningful and should not be relied upon as an indication of future results of operations. There can be no assurance that the Company will be profitable in any future quarter. Due to the foregoing factors, it is likely that in one or more future quarters the Company's operating results will be below the expectations of public market analysts and investors. Such an event would have a material adverse effect on the price of the Company's Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Quarterly Results." DEPENDENCE ON NETWORK INFRASTRUCTURE; NO ASSURANCE OF SUCCESSFUL INTERNET-CAPABLE NODE DEPLOYMENT. The Company's future success will depend in part upon the capacity, reliability and security of its network infrastructure and in particular upon its ability to successfully deploy an international network of Internet-capable facsimile nodes. The Company must continue to expand and adapt its network infrastructure as the number of customers and the volume of traffic they wish to transmit increases. The expansion and adaptation of the Company's network infrastructure will require substantial financial, operational and management resources. There can be no assurance that the Company will be able to expand or adapt its network infrastructure to meet any additional demand on a timely basis, at a commercially reasonable cost, or at all. In addition, the Company anticipates that implementation of its price leadership strategy generally will cause 6 its overall gross profit margin to be reduced until a sufficient number of key international telecommunications markets are serviced by its Internet-capable facsimile nodes. There can be no assurance that the Company will be able to deploy the contemplated Internet-capable facsimile node expansion on a timely basis, at a commercially reasonable cost, or at all. Any failure of the Company to expand its network infrastructure on a timely basis, to adapt it to changing customer requirements or evolving industry standards or to deploy the contemplated Internet-capable facsimile node infrastructure on a timely basis, or at all, would have a material adverse effect on the Company's business, financial condition and results of operations. Further, there can be no assurance that the Company will be able to satisfy the regulatory requirements in each of the countries currently targeted for node deployment, which may prevent the Company from installing Internet-capable facsimile nodes in such countries and may have a material adverse effect on the Company's business, operating results and financial condition. See "Business--The FaxSav Network" and "--Government Regulation." DEPENDENCE ON THE INTERNET AS A FACSIMILE TRANSMISSION MEDIUM. The Company believes that its future success will depend in part upon its ability to significantly expand its base of Internet-capable nodes and route more of its customers' traffic through the Internet. The Company's success is therefore largely dependent upon the viability of the Internet as a medium for the transmission of documents. To date, the Company has transmitted a limited amount of customer traffic over the Internet, and there can be no assurance that the Internet will prove to be a viable communications medium, that document transmission over the Internet will be reliable or that Internet capacity constraints will not develop which inhibit efficient document transmission. The Company accesses the Internet from its Internet-capable nodes by dedicated connection to third party internet service providers. The Company pays fixed monthly fees for such Internet access, regardless of the Company's usage or the volume of its customers' traffic. There can be no assurance that the current pricing structure for access to and use of the Internet will not change unfavorably. If the Internet proves to be an impractical or unreliable medium for document transmissions, if material capacity constraints develop on the Internet or the current Internet pricing structure changes unfavorably, the Company's business, financial condition and results of operations would be materially and adversely affected. NO ASSURANCE OF MARKET ACCEPTANCE. The Company's ability to route existing customers' traffic through the Internet and to sell its FAXSAV PLUS service to new customers may be inhibited by, among other factors, the reluctance of some customers to switch from real-time fax delivery to "virtual real-time" delivery and by widespread concerns over the adequacy of security in the exchange of information over the Internet. The Company currently relies on RSA Data Security, Inc. ("RSA") standard encryption technology to enable the secure transfer of customer documents over the Internet. There can be no assurance that advances in computer capabilities, new discoveries in the field of cryptography or other events or developments will not result in a compromise or breach of the RSA encryption technology or other algorithms used by the Company to protect customer data. If the Company's existing and potential customers do not accept "virtual real-time" delivery through the Internet as a means of sending and receiving documents via fax, or if any compromise of the Company's security were to occur, the Company's business, financial condition and results of operations would be materially and adversely affected. INTENSE COMPETITION. The market for facsimile transmission services is intensely competitive and there are limited barriers to entry. The Company expects that competition will intensify in the future. The Company believes that its ability to compete successfully will depend upon a number of factors, including market presence; the capacity, reliability and security of its network infrastructure; the pricing policies of its competitors and suppliers; the timing of introductions of new services and service enhancements by the Company and its competitors; and industry and general economic trends. The Company's current and prospective competitors generally fall into the following groups: (i) telecommunication companies, such as AT&T Corp. ("AT&T"), MCI Communications Corp., Inc. ("MCI"), Sprint Corp. ("Sprint"), LDDS WorldCom Inc. ("LDDS WorldCom") and the regional Bell operating companies; (ii) telecommunications resellers, such as Frontier Corporation, Biztel Corporation and Eastern Telecom Corporation; (iii) Internet service providers, such as Uunet Technologies, Inc. and 7 NETCOM On-Line Communications Services, Inc., (iv) on-line services providers, such as America Online, Inc. and CompuServe Incorporated and (v) direct fax delivery competitors, including Xpedite Systems, Inc. and Fax International, Inc. Many of these competitors have greater market presence, engineering and marketing capabilities, and financial, technological and personnel resources than those available to the Company. As a result, they may be able to develop and expand their communications and network infrastructures more quickly, adapt more swiftly to new or emerging technologies and changes in customer requirements, take advantage of acquisition and other opportunities more readily, and devote greater resources to the marketing and sale of their products and services than can the Company. Further, the foundation of the Company's telephony network infrastructure consists of the right to use the telecommunications lines of several of the above-mentioned long distance carriers, including LDDS WorldCom and MCI. There can be no assurance that these companies will not discontinue or otherwise alter their relationships with the Company in a manner that would have a material adverse effect upon the Company's business, financial condition and results of operations. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their services to address the needs of the Company's current and prospective customers. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. In addition to direct competitors, many of the Company's larger potential customers may seek to internally fulfill their fax communication needs through the deployment of their own computerized fax communications systems or network infrastructures for intra-company faxing. Increased competition is likely to result in price reductions and could result in reduced gross margins and erosion of the Company's market share, any of which would have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company will be able to compete successfully against current or future competitors or that competitive pressures will not have a material adverse effect on the Company's business, financial condition and results of operations. NO ASSURANCE OF SUCCESSFUL MANAGEMENT OF GROWTH. The Company has rapidly and significantly expanded its operations and anticipates that significant expansion will continue to be required in order to address potential market opportunities. The Company anticipates significantly increasing the size of its sales and marketing efforts following the completion of this offering, and the Company also will be required to increase its customer support staff. There can be no assurance that such expansion will be successfully completed or that it will generate sufficient revenues to cover the Company's expenses. The inability of the Company to promptly address and respond to these circumstances could have a material adverse effect on the Company's business, financial condition and results of operations. RAPID INDUSTRY CHANGE. The telecommunications industry in general, and the facsimile transmission business in particular, are characterized by rapid and continuous technological change. Future technological advances in the telecommunications industry may result in the availability of new services or products that could compete with the facsimile transmission services provided by the Company or reduce the cost of existing products or services, any of which could enable the Company's existing or potential customers to fulfill their fax communications needs more cost efficiently. There can be no assurance that the Company will be successful in developing and introducing new services that meet changing customer needs and respond to technological changes or evolving industry standards in a timely manner, if at all, or that services or technologies developed by others will not render the Company's services noncompetitive. The inability of the Company to respond to changing market conditions, technological developments, evolving industry standards or changing customer requirements, or the development of competing technology or products that render the Company's services noncompetitive would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Services." RISK OF SYSTEM FAILURE; SECURITY RISKS. The Company's operations are dependent on its ability to protect its network from interruption by damage from fire, earthquake, power loss, telecommunications failure, unauthorized entry, computer viruses or other events beyond the Company's control. Most of the Company's current computer hardware and switching equipment, including its processing equipment, is currently located at two sites. There can be no assurance that the Company's existing and planned precautions of 8 backup systems, regular data backups and other procedures will be adequate to prevent significant damage, system failure or data loss. Despite the implementation of security measures, the Company's infrastructure may also be vulnerable to computer viruses, hackers or similar disruptive problems caused by its customers or other Internet users. Persistent problems continue to affect public and private data networks, including computer break-ins and the misappropriation of confidential information. Such computer break-ins and other disruptions may jeopardize the security of information stored in and transmitted through the computer systems of the individuals, businesses and financial institutions utilizing the Company's services, which may result in significant liability to the Company and also may deter potential customers from using the Company's services. Any damage, failure or security breach that causes interruptions or data loss in the Company's operations or in the computer systems of its customers could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE UPON SUPPLIERS; SOLE AND LIMITED SOURCES OF SUPPLY. The Company relies on third parties to supply key components of its network infrastructure, including long distance telecommunications services and telecommunications node equipment, many of which are available only from sole or limited sources. LDDS WorldCom, MCI and Telstra Corporation Limited ("Telstra") are the primary providers of long distance telecommunications services to the Company. Approximately 94%, 91% and 77% of the Company's telecommunications traffic passed through communications lines of LDDS WorldCom and its predecessor companies for the six months ended June 30, 1996 and the years ended 1995 and 1994, respectively. The Company has from time-to-time experienced partial interruptions of service from its telecommunications carriers which have temporarily prevented customers in limited geographical areas from reaching the FaxSav network. There can be no assurance that the Company will not experience partial or complete service interruptions in the future. The fixed term of the Company's contract with LDDS WorldCom expires on October 31, 1996, after which date the contract will continue on a month-to-month basis until renegotiated by the parties or terminated by either party. There can be no assurance that LDDS WorldCom and the Company's other telecommunications providers will continue to provide long distance services to the Company at attractive rates, or at all, or that the Company will be able to obtain such services in the future from these or other long distance providers on the scale and within the time frames required by the Company. Any failure to obtain such services on a timely basis at an affordable cost, or any significant delays or interruptions of service from such carriers, would have a material adverse effect on the Company's business, financial condition and results of operations. All of the faxboards used in the Company's telecommunications nodes are supplied by Brooktrout Technology, Inc. ("Brooktrout"). The Company purchases Brooktrout faxboards on a non-exclusive basis pursuant to purchase orders placed from time-to-time, carries a limited inventory of faxboards and has no guaranteed supply arrangement with Brooktrout. In addition to faxboards, many of the routers, switches and other hardware components used in the Company's network infrastructure are supplied by sole or limited sources on a non-exclusive, purchase order basis. There can be no assurance that Brooktrout or the Company's other suppliers will not enter into exclusive arrangements with the Company's competitors, or cease selling these components to the Company at commercially reasonable prices, or at all. The anticipated expansion of the Company's network infrastructure is expected to place a significant demand on the Company's suppliers, some of which have limited resources and production capacity. In addition, certain of the Company's suppliers, in turn, rely on sole or limited sources of supply for components included in their products. Failure of the Company's suppliers to adjust to meet such increasing demand may prevent them from continuing to supply components and products in the quantities and quality and at the times required by the Company, or at all. The Company's inability to obtain sufficient quantities of sole or limited source components or to develop alternative sources if required could result in delays and increased costs in the expansion of the Company's network infrastructure or in the inability of the Company to properly maintain the existing network infrastructure, which would have a material adverse effect on the Company's business, financial condition and results of operations. LIMITED PROTECTION OF INTELLECTUAL PROPERTY RIGHTS; RISK OF THIRD PARTY CLAIMS OF INFRINGEMENT. The Company's success is dependent upon its proprietary technology. The Company relies primarily on a 9 combination of contract, copyright and trademark law, trade secrets, confidentiality agreements and contractual provisions to protect its proprietary rights. The Company has patent applications pending for its FAXSAV CONNECTOR and for its "e-mail Stamps" security technology incorporated into its FAXMAILER service. There can be no assurance that patents will issue from such applications or that present or future patents will provide sufficient protection to the Company's present or future technologies, services and processes. In addition, there can be no assurance that others will not independently develop substantially equivalent proprietary information or obtain access to the Company's know-how. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's services or to obtain and use information that the Company regards as proprietary. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States. There can be no assurance that the steps taken by the Company to protect its proprietary rights will be adequate or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technologies. The Company is not aware that any of its services, trademarks or other proprietary rights infringe upon valid proprietary rights of third parties. However, the Company received a letter in the third quarter of 1995 stating that the Company's FAXSAV CONNECTOR may be utilizing a call diversion methodology patented by such correspondent. To the Company's knowledge, such third party has not initiated a suit, action, proceeding or investigation relating to any alleged infringement by the Company of such patent. In addition, the Company is aware that another third party has recently brought patent infringement actions against several facsimile service providers. There can be no assurance that these or other third parties will not assert infringement claims against the Company in the future. Patents have been granted recently on fundamental technologies in the communications and desktop software areas, and patents may issue which relate to fundamental technologies incorporated in the Company's services. As patent applications in the United States are not publicly disclosed until the patent issues, applications may have been filed which, if issued as patents, could relate to the Company's services. The Company could incur substantial costs and diversion of management resources with respect to the defense of any claims that the Company has infringed upon the proprietary rights of others, which costs and diversion could have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, parties making such claims could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief which could effectively block the Company's ability to license and sell its services in the United States or abroad. Any such judgment could have a material adverse effect on the Company's business, financial condition and results of operations. In the event a claim relating to proprietary technology or information is asserted against the Company, the Company may seek licenses to such intellectual property. There can be no assurance, however, that licenses could be obtained on terms acceptable to the Company, or at all. The failure to obtain any necessary licenses or other rights could have a material adverse effect on the Company's business, financial condition and results of operations. RISK OF SOFTWARE DEFECTS OR DEVELOPMENT DELAYS. Software-based services and equipment, such as the Company's FAXSAV FOR INTERNET suite of services and the FAXSAV CONNECTOR, may contain undetected errors or failures when introduced or when new versions are released. There can be no assurance that, despite testing by the Company and by current and potential customers, errors will not be found in such software or other releases after commencement of commercial shipments, or that the Company will not experience development delays, resulting in delays in the shipment of software and a loss of or delay in market acceptance, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON KEY PERSONNEL. The Company's future performance depends in significant part upon the continued service of its key technical, sales and senior management personnel, none of whom is bound by an employment agreement. The loss of the services of one or more of the Company's executive officers or other key employees could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's future success also depends on its continuing ability to attract and retain highly qualified technical, sales and managerial personnel. Competition for such personnel is intense, 10 and there can be no assurance that the Company can retain its key technical, sales and managerial employees or that it can attract, assimilate or retain other highly qualified technical, sales and managerial personnel in the future. See "Management." RISKS RELATED TO POTENTIAL ACQUISITIONS. The Company may in the future pursue acquisitions of complementary services or product lines, technologies or businesses, although the Company has no present understandings, commitments or agreements with respect to any such acquisitions. Future acquisitions by the Company could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and amortization expenses related to goodwill and other intangible assets, which could materially adversely affect the Company's business, financial condition and results of operations. In addition, acquisitions involve numerous risks, including difficulties in the assimilation of the operations, technologies, services and products of the acquired companies and the diversion of management's attention from other business concerns. In the event that any such acquisition were to occur, there can be no assurance that the Company's business, financial condition and results of operations would not be materially adversely affected. RELIANCE ON INTERNATIONAL STRATEGIC ALLIANCES. The Company intends to establish and build an international customer base by forming strategic sales and marketing alliances with foreign Internet service providers, telecommunications companies and resellers. There can be no assurance that the Company will be able to form or, if formed, maintain any such strategic alliances. The Company's success in developing an international customer base depends not only on the formation of such alliances but also on the success of these partners and their ability to successfully market the Company's services. The failure to form and maintain such strategic alliances or the failure of these partners to successfully develop and sustain a market for the Company's service will have a material adverse effect on the Company's ability to establish and build an international customer base, which could have a material adverse effect on the Company's business, financial condition and results of operations. GOVERNMENT REGULATION. The Company is subject to regulation by the Federal Communications Commission (the "FCC"), by various state public service and public utility commissions and by various international regulatory authorities. FaxSav is licensed by the FCC as an authorized telecommunications company and is classified as a "non-dominant interexchange carrier." Generally, the FCC has chosen not to exercise its statutory power to closely regulate the charges or practices of non-dominant carriers. Nevertheless, the FCC acts upon complaints against such carriers for failure to comply with statutory obligations or with the FCC's rules, regulations and policies. The FCC also has the power to impose more stringent regulatory requirements on the Company and to change its regulatory classification. There can be no assurance that the FCC will not change the Company's regulatory classification or otherwise subject the Company to more burdensome regulatory requirements. In connection with the anticipated deployment of Internet-capable nodes in countries throughout the world, the Company will be required to satisfy a variety of foreign regulatory requirements. The Company intends to explore and seek to comply with these requirements on a country-by-country basis as the deployment of Internet-capable facsimile nodes continues. There can be no assurance that the Company will be able to satisfy the regulatory requirements in each of the countries currently targeted for node deployment, and the failure to satisfy such requirements may prevent the Company from installing Internet- capable facsimile nodes in such countries. The failure to deploy a number of such nodes could have a material adverse effect on the Company's business, operating results and financial condition. The Company's nodes and its FAXLAUNCHER service utilize RSA encryption technology in connection with the routing of customer documents through the Internet. The export of such encryption technology is regulated by the United States government. The Company is seeking authority for the export of such encryption technology and anticipates that authority will be granted to export such technology worldwide, other than to Cuba, Iran, Libya, North Korea, Sudan and Syria. Nevertheless, there can be no assurance that such authority will be granted or, if granted, that it will not be revoked or modified at any time for any particular jurisdiction or in general. In addition, there can be no assurance that such export controls, either 11 in their current form or as may be subsequently enacted, will not limit the Company's ability to distribute its services outside of the United States or electronically. While the Company takes precautions against unlawful exportation of its software, the global nature of the Internet makes it virtually impossible to effectively control the distribution of its services. Moreover, future Federal or state legislation or regulation may further limit levels of encryption or authentication technology. Any such export restrictions, the unlawful exportation of the Company's services, or new legislation or regulation could have a material adverse effect on the Company's business, financial condition and results of operations. SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial numbers of shares of Common Stock in the public market after this offering could adversely affect the market price of the Common Stock. Upon completion of this offering, the Company will have outstanding 9,670,490 shares of Common Stock. In addition to the 1,500,000 shares of Common Stock offered hereby, as of the effective date of the Registration Statement of which this Prospectus forms a part (the "Effective Date"), there will be 8,170,490 shares of Common Stock outstanding, all of which are "restricted securities" under the Securities Act. Certain stockholders of the Company are subject to lock-up agreements providing generally that they will not offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or any securities convertible or exchangeable into Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of Lehman Brothers Inc., which may be given at any time, without notice, with respect to all or any portion of such shares. Certain other stockholders of the Company are subject to similar restrictions contained in an Investor Rights Agreement. Taking into account the lock-up agreements and notwithstanding possible earlier eligibility for resale under the provisions of Rules 144 and 701, the numbers of shares that will be available for sale in the public market will be as follows. Beginning 90 days after the Effective Date, approximately 6,000 shares of restricted securities will become eligible for resale in the public market. Beginning 180 days after the Effective Date, approximately 6,007,000 additional shares of restricted securities will become eligible for sale in the public market upon expiration of certain lock-up agreements pursuant to Rules 144 and 701 and, as of that date, approximately 5,357,000 of such shares will be subject to certain volume and other resale restrictions pursuant to Rules 144 and 701. The Securities and Exchange Commission has proposed certain amendments to Rule 144 which would reduce the holding period required before shares subject to Rule 144 become eligible for resale in the public market. This proposal, if adopted, would significantly increase the number of shares of the Company's Common Stock eligible for immediate resale following the expiration of the lock-up agreements. The holders of approximately 8,017,000 shares of Common Stock and the holders of warrants to purchase an additional 138,385 shares of Common Stock have the right in certain circumstances to require the Company to register their shares under the Securities Act for resale to the public. If such holders, by exercising their demand registration rights, cause a large number of shares to be registered and sold in the public market, such sales could have an adverse effect on the market price for the Company's Common Stock. If the Company were required to include in a Company-initiated registration shares held by such holders pursuant to the exercise of their piggyback registration rights and shares held by the holders of an additional 83,741 shares of Common Stock with piggyback registration rights, such sales may have an adverse effect on the Company's ability to raise needed capital. The Company intends to file a registration statement on Form S-8 on or shortly after the date of this Prospectus registering a total of approximately 1,794,000 shares of Common Stock subject to outstanding stock options or reserved for issuance under the Company's stock option plans. Shares issued after the effective date of the S-8 will be eligible for resale by non-affiliates in the public market without limitation and by affiliates subject to the requirements set forth in Rule 144, except for the holding period limitation of Rule 144. See "Management--1996 Stock Option/Stock Issuance Plan," "Description of Capital Stock--Registration Rights of Certain Holders," "Shares Eligible for Future Sale" and "Underwriting." NO PRIOR PUBLIC MARKET FOR COMMON STOCK. Prior to this offering, there has been no public market for the Common Stock, and there can be no assurance that an active public market for the Common Stock will develop or be sustained after the offering. The initial public offering price will be determined by negotiations between the Company and the representatives of the Underwriters. See "Underwriting" for a discussion of the factors considered in determining the initial public offering price. 12 ANTITAKEOVER CONSIDERATIONS. The Company's Sixth Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation") authorizes the Board of Directors to issue, without stockholder approval, up to 1,000,000 shares of Preferred Stock with voting, conversion and other rights and preferences that could adversely affect the voting power or other rights of the holders of Common Stock. The Certificate of Incorporation also provides for staggered terms for the members of the Board of Directors. In addition, the Company will be subject to the provisions of Section 203 of the Delaware General Corporation Law, which will generally prohibit the Company from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. The foregoing and other provisions of the Certificate of Incorporation and the Company's By-laws, as amended (the "By-laws") and the application of Section 203 of the Delaware General Corporation Law could have the effect of deterring certain takeovers or delaying or preventing certain changes in control or management of the Company, including transactions in which stockholders might otherwise receive a premium for their shares over then current market prices. See "Description of Capital Stock--Preferred Stock" and "--Delaware Law and Certain Provisions of the Company's Restated Certificate of Incorporation and By-laws." SUBSTANTIAL DILUTION. Purchasers of shares of Common Stock offered hereby will experience immediate and substantial dilution in the net tangible book value of their investment from the initial public offering price. Additional dilution will occur upon exercise of outstanding options and warrants. See "Dilution." 13 USE OF PROCEEDS The net proceeds to the Company from the sale of the 1,500,000 shares of Common Stock offered by the Company are approximately $10,160,000, after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company. The Company currently anticipates that approximately $7.0 million of the net proceeds will be used to fund capital expenditures associated with the planned expansion of its Internet network infrastructure through the end of 1997, however there can be no assurance that actual capital expenditures will not exceed that amount. The remainder of the net proceeds are anticipated to be used for working capital requirements, including increased selling and marketing and research and development efforts, for the repayment of short-term indebtedness as described below and for general corporate purposes. The Company may also use a portion of the net proceeds to fund acquisitions of complementary businesses, products or technologies, although there are no current agreements or negotiations with respect to any such transaction. The Company will use a portion of the net proceeds to repay the outstanding principal amount of, plus accrued interest on, the Company's working capital line of credit. In addition, a portion of the net proceeds will be used to repay the outstanding principal amount of the Company's term loan facility, together with accrued interest, as it comes due. As of August 31, 1996, approximately $0.5 million was outstanding under the working capital line of credit and approximately $0.5 million was outstanding under the term loan facility. The working capital line of credit and the term loan facility, which together constitute the Company's credit facility (the "Credit Facility") with Silicon Valley Bank (the "Bank"), bear interest at the Bank's prime rate plus 0.5% (8.75% at August 31, 1996). The working capital line, which matures in full on April 14, 1997, was utilized for working capital purposes. The term loan facility, which is repayable in equal monthly installments over a three-year period commencing on October 14, 1996, was utilized to finance capital expenditures. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Pending use of the net proceeds for the above purposes, the Company intends to invest the net proceeds in short-term debt instruments, certificates of deposit or direct or guaranteed obligations of the United States. DIVIDEND POLICY The Company to date has not declared or paid dividends on its capital stock. In addition, the Company's Credit Facility with the Bank prohibits the Company from paying dividends without the Bank's consent. The Company intends to retain any earnings to fund future growth and the operation of its business and, therefore, does not anticipate paying any cash dividends in the foreseeable future. The payment of any future dividends will be at the discretion of the Company's Board of Directors and will be based on the Company's future earnings, financial condition, capital requirements and other relevant factors. 14 DILUTION The pro forma net tangible book value of the Company as of June 30, 1996 was approximately $3.1 million or $0.37 per share. "Pro forma net tangible book value per share" is determined by dividing the tangible net worth of the Company (total tangible assets less total liabilities), by the number of shares of pro forma Common Stock outstanding. The number of shares of pro forma Common Stock outstanding gives effect to the one-for-nine reverse stock split of the Common Stock effected on October 7, 1996 and to the conversion of all outstanding shares of all series of the Company's Preferred Stock outstanding as of June 30, 1996 into an aggregate of 7,790,489 shares of Common Stock upon the closing of this offering. Without taking into account any of the changes in such pro forma net tangible book value after June 30, 1996, other than to give effect to the sale of 1,500,000 shares of Common Stock by the Company in this offering (at the initial public offering price, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company), the pro forma net tangible book value of the Company as of June 30, 1996 would have been approximately $13.2 million or $1.37 per share. This represents an immediate increase in pro forma net tangible book value of $1.00 per share to existing stockholders and immediate dilution in pro forma net tangible book value of $6.63 per share to new investors. The following table illustrates this per share dilution: Initial public offering price..................................... $ 8.00 Pro forma net tangible book value before the offering........... $ 0.37 Increase attributable to new investors.......................... 1.00 --------- Pro forma net tangible book value after the offering.............. 1.37 --------- Dilution to new investors......................................... $ 6.63 --------- ---------
The following table summarizes on a pro forma basis as of June 30, 1996, the differences between the existing stockholders and the new investors with respect to the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price per share paid.
SHARES PURCHASED TOTAL CONSIDERATION --------------------- ------------------------ AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- --------- ------------- --------- ------------- Existing stockholders(1)............... 8,168,998 84.5% $ 24,069,350 66.7% $ 2.95 New investors.......................... 1,500,000 15.5% 12,000,000 33.3% $ 8.00 ---------- --------- ------------- --------- Total.............................. 9,668,998 100.0% $ 36,069,350 100.0% ---------- --------- ------------- --------- ---------- --------- ------------- ---------
- --------- (1) Excludes (i) 1,238,619 shares issuable upon the exercise of stock options outstanding as of June 30, 1996 with a weighted average exercise price of $0.58 per share, (ii) 555,556 shares of Common Stock available for issuance as of June 30, 1996 pursuant to the Company's 1996 Stock Option/Stock Issuance Plan and (iii) 139,877 shares of Common Stock issuable upon exercise of warrants outstanding as of June 30, 1996 with a weighted average exercise price of $2.80. See "Management--1996 Stock Option/Stock Issuance Plan" and Notes 7 and 8 of Notes to Financial Statements. 15 CAPITALIZATION The following table sets forth the pro forma capitalization of the Company as of June 30, 1996, and as adjusted to give effect to the sale by the Company of 1,500,000 shares of Common Stock at the initial public offering price, after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company, and the application of the estimated net proceeds therefrom. The financial data in the following table should be read in conjunction with the Company's financial statements and notes thereto included elsewhere in this Prospectus.
AS OF JUNE 30, 1996(1) ----------------------- PRO FORMA PRO FORMA AS ADJUSTED ---------- ----------- (IN THOUSANDS, EXCEPT SHARE DATA) Short-term debt, including current portion of long-term debt.................... $ 780 $ 280 ---------- ----------- ---------- ----------- Long-term debt.................................................................. $ 569 $ 569 ---------- ----------- Stockholders' equity(1): Preferred Stock, $0.01 par value, 1,000,000 authorized; none issued and outstanding................................................................. -- -- Common Stock, $0.01 par value, 40,000,000 authorized; 8,190,387 shares issued and 8,168,998 shares outstanding on a pro forma basis and 9,668,998 shares outstanding on an as adjusted basis(2)...................................... 82 97 Additional paid-in capital...................................................... 23,988 34,133 Accumulated deficit............................................................. (21,012) (21,012) ---------- ----------- Total stockholders' equity.................................................. 3,058 13,218 ---------- ----------- Total capitalization...................................................... $ 3,627 $ 13,787 ---------- ----------- ---------- -----------
- --------- (1) Gives effect to the Company's Sixth Amended and Restated Certificate of Incorporation to be filed upon the closing of the offering. Also gives effect to the automatic conversion, upon the closing of the offering, of all of the outstanding shares of all series of Preferred Stock of the Company. (2) Excludes 1,238,619 shares of Common Stock issuable upon the exercise of stock options outstanding at June 30, 1996 with a weighted average exercise price of $0.58 per share, 22,222 shares of Common Stock issuable upon the exercise of stock options granted after that date at a price equal to the initial public offering price and 139,877 shares of Common Stock issuable upon exercise of warrants outstanding as of June 30, 1996 with a weighted average exercise price of $2.80 per share. See "Management--1996 Stock Option/Stock Issuance Plan" and Notes 7 and 8 of Notes to Financial Statements. 16 SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE DATA) The following selected financial data should be read in conjunction with the Financial Statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Prospectus. The statement of operations data for the years ended December 31, 1993, 1994 and 1995 and the balance sheet data at December 31, 1994 and 1995 are derived from, and are qualified by reference to, the audited financial statements and the related notes thereto included elsewhere in this Prospectus. The statement of operations data for the years ended December 31, 1991 and 1992 and the balance sheet data at December 31, 1991, 1992 and 1993 have been derived from audited financial statements of the Company which are not included in this Prospectus. The selected financial data for the six months ended June 30, 1996 and 1995 is derived from unaudited financial statements of the Company, which are included elsewhere in this Prospectus. The unaudited financial data includes all adjustments (consisting only of normal recurring adjustments) which in the opinion of management of the Company are necessary for a fair presentation of the information set forth therein. The results of operations for the six months ended June 30, 1996 are not necessarily indicative of the results for any future period or for the full year.
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ---------------------------------------------------------- ---------------------- 1991 1992 1993 1994 1995 1995 1996 ---------- ---------- ---------- ---------- ---------- ---------- ---------- STATEMENT OF OPERATIONS DATA: Revenues................................ $ 651 $ 2,421 $ 2,580 $ 3,449 $ 11,649 $ 5,017 $ 7,445 Cost of service......................... 688 2,041 1,856 2,297 7,021 3,107 4,280 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Gross margin............................ (37) 380 724 1,152 4,628 1,910 3,165 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Operating expenses: Network operations and support........ 281 783 742 851 1,183 566 868 Research and development.............. 232 397 628 613 840 399 781 Sales and marketing................... 1,337 993 1,597 2,337 4,238 2,037 3,023 General and administrative............ 1,445 1,187 953 1,031 2,237 844 1,375 Depreciation and amortization......... 31 83 102 181 698 253 587 Other................................. -- -- -- (309) (441) (206) -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total operating expenses............ 3,326 3,443 4,022 4,704 8,755 3,893 6,634 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Operating loss.......................... (3,363) (3,063) (3,298) (3,552) (4,127) (1,983) (3,469) Interest income (expense), net.......... 22 58 23 45 46 72 (8) Other income (expense), net............. 4 21 15 14 (4) 26 45 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Loss before income taxes................ (3,337) (2,984) (3,260) (3,493) (4,085) (1,885) (3,432) Provision for income taxes.............. -- -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net loss................................ $ (3,337) $ (2,984) $ (3,260) $ (3,493) $ (4,085) $ (1,885) $ (3,432) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net loss per common and equivalent share................................. $ (8.79) $ (5.61) $ (5.99) $ (6.39) $ (7.46) $ (3.44) $ (6.17) Weighted average common and equivalent shares outstanding (1)................ 379,687 531,876 543,953 546,500 547,444 547,444 555,923 Pro forma net loss per common and equivalent share (1).................. $ (0.44) $ (0.40) Shares used in computing pro forma net loss per common and equivalent share (1)................................... 9,243,484 8,609,119
DECEMBER 31, --------------------------------------------------------- JUNE 30, 1991 1992 1993 1994 1995 1996 ---------- ---------- ---------- ---------- --------- ---------- BALANCE SHEET DATA: Working capital (deficit)............... $ 596 $2,601 $(354) $ (447) $(1,141) $ 793 Total assets............................ 1,605 3,535 989 2,492 5,132 7,916 Total long-term debt.................... -- -- 321 -- 326 569 Total stockholders' equity (deficit).... 937 2,922 (336) 621 687 3,058
- --------- (1) See Note 2 of Notes to Financial Statements: "Summary Of Significant Accounting Policies -- Pro Forma Net Loss Per Common and Equivalent Share" and "-- Net Loss Per Common and Equivalent Share." 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company derives its revenues from the provision of a variety of facsimile services largely to small to medium sized businesses and professionals involved in international commerce. Through the end of 1995, the Company offered its services exclusively to customers located in the United States. In the first quarter of 1996, the Company began to focus on the broader worldwide market for facsimile services through the introduction of client software to enable faxing from the computer desktop using the Internet as the means to access the FaxSav network. The Company's network in the United States includes interconnection with the existing worldwide telephony network, enabling delivery of facsimile transmissions to virtually any domestic or international destination. The Company has deployed Internet fax nodes in Bermuda, France, Germany, Hong Kong, South Korea and the United Kingdom and plans to install additional Internet nodes in key international telecommunications markets to enable the Company ultimately to route a majority of its customers' traffic through the Internet. The Company charges customers monthly for its services based upon the actual duration (number of minutes) for transmissions originating on facsimile machines or individual facsimile transmission size (number of pages) for transmissions originating on computer desktops. Although the Company does not require its customers to enter into long-term contractual agreements, once customers begin to use the services regularly, they often continue to use the services on a recurring basis. Accordingly, the Company believes that its operating results benefit from the recurring monthly revenue stream from such customers. The Company has experienced a loss rate of customer fax lines of approximately 40% annually, which management believes has been primarily driven by competitive pricing. Due to the recent introduction of the FAXSAV PLUS service and the FAXSAV FOR INTERNET suite of services, which provide more favorable pricing to its customers, the Company anticipates that such loss rate will decrease over time, although there can be no assurance that such rate will not remain constant or increase in the future. The Company's revenue and expense levels have continued to increase, particularly in 1995 and through the six months ended June 30, 1996, as the Company's customer base has expanded and the Company has invested in the design, development and marketing of its newer services, including FAXSAV EZ-LIST, a fax-to-fax broadcast service, and the FAXSAV FOR INTERNET suite of services. On an annual basis, cost of service, general and administrative expenses, network operations and support expenses and sales and marketing expenses decreased as a percentage of revenues in 1995 in comparison to 1994. In the first six months of 1996, cost of service further decreased as a percentage of revenues from the same period in 1995 but operating expenses increased in the 1996 period as a result of the development, promotion and marketing of new services. The Company is seeking to form strategic sales and marketing alliances with foreign Internet service providers, telecommunications companies and resellers. The Company anticipates that these organizations will use their knowledge of the local market, language, customs and regulations, as well as their existing distribution, customer support and billing infrastructures, to establish, grow and properly service an international FaxSav customer base. In return, the Company is offering these organizations either exclusive or non-exclusive rights to market the Company's services in their territories and offering to provide such services at a discount to the Company's retail prices. To date the Company has formed preliminary strategic alliances with companies in Bermuda, Hong Kong, Japan, Korea, Lebanon, the Philippines, Singapore and Taiwan. In addition, the Company has formed a preliminary strategic alliance with a United States corporation regarding activities in Mexico. The Company has entered into non-binding letters of intent and, in some cases, marketing agreements, with respect to these strategic alliances. In addition, the Company is developing a network of commission-based agents to sell the FAXSAV FOR INTERNET suite of services in foreign markets. To date, this network consists of 56 agents representing the Company in 39 foreign markets. A key element of the Company's current business strategy is to offer its FAXSAV PLUS service at prices based on the economics of delivery through an Internet backbone. The Company is currently implementing its FAXSAV PLUS service with a two-tiered pricing structure. Pricing for delivery to the key telecommunications markets currently targeted for Internet node deployment is based on the economics of delivery through 18 a planned Internet backbone, even if the Company has not yet deployed Internet-capable facsimile nodes in such markets. At September 30, 1996, the Company had not yet deployed Internet-capable nodes in 26 of such currently targeted markets. Pricing for delivery to other destinations worldwide continues to be based on the economics of delivery through the Company's telephony-based network, which prices may or may not be reduced in the event that the Company deploys Internet-capable facsimile nodes in such markets. It is anticipated that this pricing strategy, which the Company introduced in the third quarter of 1996, will generally reduce the Company's overall gross profit margin until a sufficient number of telecommunications markets are serviced by the Company's Internet-capable nodes. The Company currently anticipates that, by the end of 1997, it will have deployed Internet-capable nodes in enough key telecommunications markets worldwide to generally improve its overall gross profit margin. The Company currently anticipates that approximately $7 million of the net proceeds of this offering will be used to fund the capital expenditures associated with its planned Internet-capable node expansion. There can be no assurance that the Company will be able to deploy the additional Internet-capable nodes on a timely basis, at a commercially reasonable cost, or at all, or that overall gross margins will improve when anticipated, or at all. Any failure of the Company to deploy the contemplated Internet-capable node infrastructure on a timely basis could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors -- Dependence on Network Infrastructure; No Assurance of Successful Internet-Capable Node Deployment." To date, the Company has financed its cash requirements for operations and investments in equipment primarily through private sales of equity securities, bank borrowings and capital lease financing. The Company has incurred operating losses since its inception in 1989. Based on the Company's anticipated increases in expenses for new product development, deployment of Internet-capable nodes and sales and marketing programs, the Company expects to incur a net operating loss for the year ended December 31, 1996, and it expects to incur losses in the future. This Prospectus contains certain statements of a forward-looking nature relating to future events or the future financial performance of the Company. Prospective investors are cautioned that such statements are only predictions and that actual events or results may differ materially. In evaluating such statements, prospective investors should specifically consider the various factors identified in this Prospectus, including the matters set forth under the caption "Risk Factors," which could cause actual results to differ materially from those indicated by such forward-looking statements. 19 RESULTS OF OPERATIONS The following table sets forth certain operating data as a percentage of total revenues for the periods indicated (subtotals not adjusted for rounding):
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ---------------------------------------- -------------------------- 1993 1994 1995 1995 1996 ------------ ------------ ------------ ------------ ------------ PERCENTAGES OF REVENUES: Revenues.......................................... 100.0% 100.0 % 100.0 % 100.0 % 100.0 % Cost of service................................... 71.9 66.6 60.3 61.9 57.5 ------ ------ ----- ----- ----- Gross margin...................................... 28.1 33.4 39.7 38.1 42.5 ------ ------ ----- ----- ----- Operating expenses: Network operations and support.................. 28.8 24.7 10.2 11.3 11.7 Research and development........................ 24.3 17.8 7.2 8.0 10.5 Sales and marketing............................. 61.9 67.8 36.4 40.6 40.6 General and administrative...................... 36.9 29.9 19.2 16.8 18.5 Depreciation and amortization................... 3.9 5.2 6.0 5.0 7.9 Other........................................... -- (9.0 ) (3.8 ) (4.1 ) -- ------ ------ ----- ----- ----- Total operating expenses...................... 155.8 136.4 75.2 77.6 89.2 ------ ------ ----- ----- ----- Operating loss.................................... (127.7 ) (103.0 ) (35.5 ) (39.5 ) (46.7 ) Interest income (expense), net.................... 0.9 1.3 0.4 1.4 (0.1 ) Other income (expense), net....................... 0.6 0.4 (0.0 ) 0.5 0.6 ------ ------ ----- ----- ----- Loss before income taxes.......................... (126.2 ) (101.3 ) (35.1 ) (37.6 ) (46.2 ) Provision for income taxes........................ -- -- -- -- -- ------ ------ ----- ----- ----- Net loss.......................................... (126.2 )% (101.3 )% (35.1 )% (37.6 )% (46.2 )% ------ ------ ----- ----- ----- ------ ------ ----- ----- -----
SIX MONTHS ENDED JUNE 30, 1995 AND 1996. REVENUES. Revenues, which consist primarily of customer usage charges, grew 48.4% to $7.4 million in the six months ended June 30, 1996 from $5.0 million in the six months ended June 30, 1995 primarily as a result of the continued expansion of the Company's customer base. Commercial introduction of the Company's FAXSAV EZ-LIST broadcast service and FAXSAV FOR INTERNET suite of services was begun in the first quarter of 1996, but the revenues for these services were not significant. In total, revenues from international fax deliveries increased to 86.5% of revenues in the six months ended June 30, 1996 from 82.4% in the same period in 1995. COST OF SERVICE. Cost of service consists of local access charges, leased network backbone circuit costs and long distance domestic and international termination charges. These are primarily variable costs based on actual facsimile volume. Cost of service increased as a result of the increase in facsimile volume for the period but decreased as a percentage of revenues in the six months ended June 30, 1996 to 57.5% from 61.9% in the six months ended June 30, 1995. The Company's costs for international termination charges in the 1996 period were lower as a percentage of revenue as a result of the Company's volume commitment to its major telephony common carrier. NETWORK OPERATIONS AND SUPPORT. Network operations and support costs consist primarily of the expenses of operating and expanding the network infrastructure, monitoring network traffic and quality of service and providing customer support in service installations, fax deliveries and message reporting and billing. Network operations and support costs increased to $0.9 million in the six months ended June 30, 1996 from $0.6 million in the six months ended June 30, 1995 as a result of hiring additional personnel to implement the Internet fax node deployment plan and to support the Company's expanding customer base. These costs increased as a percentage of revenues to 11.7% in the six months ended June 30, 1996 from 11.3% in the same period in 1995. 20 RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of salaries and consulting fees paid to software engineers and development personnel. Research and development expenses increased by 95.9% in the six months ended June 30, 1996 in comparison to the six months ended June 30, 1995 due to the continuing development efforts for enhancements to the Company's Internet desktop-to-fax services both in client software and network enhancements and the continuing development of the Company's FAXSAV EZ-LIST broadcast service. As a percentage of revenues, these expenses increased to 10.5% in the six months ended June 30, 1996 from 8.0% in the six months ended June 30, 1995. SALES AND MARKETING. Sales and marketing expenses consist primarily of salaries and commissions for sales and marketing staffs, promotional material preparation and mailing costs, third party telemarketing charges and agent and dealer commissions. Sales and marketing expenses increased to $3.0 million for the six months ended June 30, 1996 in comparison to $2.0 million in the six months ended June 30, 1995. As a percentage of revenues, these costs were 40.6% in both the 1996 and 1995 periods. During 1996, the Company initiated a program of presenting its FAXSAV FOR INTERNET suite of services at trade shows in the United States and in foreign countries where it plans to deploy Internet fax nodes. The Company also initiated an advertising and promotion campaign to promote its new services and expanded its sales and marketing staff. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of expenses associated with the Company's management, accounting, finance, billing and administrative functions. General and administrative expenses increased to $1.4 million and 18.5% of revenues in the six months ended June 30, 1996 from $0.8 million and 16.8% of revenues in the six months ended June 30, 1995. The increase in total general and administrative expenses and the increase of these expenses as a percentage of revenues result from personnel increases to support the increased customer base, expenses incurred for management information system improvements and management recruiting fees. DEPRECIATION AND AMORTIZATION. Depreciation and amortization amounted to $0.6 million in the six months ended June 30, 1996 in comparison to $0.3 million in the six months ended June 30, 1995, primarily reflecting depreciation of the Company's increased investment in FAXSAV CONNECTORS installed at customer premises to allow access to the FaxSav network. OTHER. Other operating income of $0.2 million for the six months ended June 30, 1995 represents service fees received under a Service Agreement with Telstra which offset various operating expenses incurred in support of the development of Telstra's "WorldFax" service in the U.S. The Agreement expired in 1995. PROVISION FOR INCOME TAXES. The Company had losses for income tax purposes for the six months ended June 30, 1995 and 1996. Accordingly, there was no provision or credit for income taxes for those periods. Any income tax benefits at the Company's expected effective tax rate for these losses has been offset by an expected increase in valuation allowance for deferred tax assets. YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 REVENUES. Revenues grew 33.7% from $2.6 million in 1993 to $3.4 million in 1994 and 237.8% to $11.6 million in 1995 primarily as a result of increases in the number of the Company's customers. This growth in the customer base resulted from the introduction in the second quarter of 1994 of the Company's core fax-to-fax service, FAXSAV; the initiation in the second quarter of 1994 of a direct mail and telemarketing program conducted through third party telemarketing firms, which was expanded through the end of 1994 and in 1995; the development in the third quarter of 1994 of a network of independent agents and dealers selling FaxSav services in addition to other products and services; and an increase in the number of the Company's sales and marketing personnel, particularly in 1995. COST OF SERVICE. Cost of service increased in 1994 and 1995 in comparison to the previous years because of the increased customer base but, as a percentage of revenues, cost of service decreased from 71.9% of revenues in 1993 to 66.6% in 1994 and to 60.3% in 1995. Cost savings from volume discounts on long distance termination charges and more efficient network operations through least cost routing were the significant factors in reducing this cost as a percentage of revenues. 21 NETWORK OPERATIONS AND SUPPORT. Network operations and support costs were $0.7 million and $0.9 million in 1993 and 1994 and increased to $1.2 million in 1995 as a result of hiring additional personnel to support the Company's expanding customer base. Due to increased revenues these costs decreased as a percentage of revenues from 28.8% in 1993 to 24.7% in 1994 and decreased further to 10.2% in 1995. RESEARCH AND DEVELOPMENT. Research and development costs were $0.6 million, $0.6 million, and $0.8 million in 1993, 1994 and 1995, respectively. The increase in 1995 was due to (i) the development efforts for the Company's FAXSAV FOR INTERNET suite of services client software and network enhancements; (ii) the development of the Company's FAXSAV EZ-LIST broadcast service; and (iii) software enhancements to the Company's FAXSAV CONNECTOR. Due to increased revenues, research and development expenses have decreased as a percentage of revenues from 24.3% in 1993 to 17.8% in 1994 and 7.2% in 1995. SALES AND MARKETING. These expenses increased in 1994 to $2.3 million in comparison to $1.6 million in 1993 in connection with the rollout in the United States of the Company's core business service, FAXSAV, beginning in the second quarter of 1994. In 1995, sales and marketing expenses increased to $4.2 million but decreased as a percentage of revenues to 36.4% from 67.8% in 1994 due to increased revenues. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased to $2.2 million in 1995 from $1.0 million in 1994 and 1993, but on a percentage of revenue basis these costs decreased to 19.2% in 1995 from 29.9% in 1994 and 36.9% in 1993 due to increased revenues. The increase in 1995 was due primarily to the hiring of additional personnel to support the Company's expanding customer base. DEPRECIATION AND AMORTIZATION. Depreciation and amortization amounted to $0.1 million in 1993, $0.2 million in 1994 and $0.7 million in 1995. The most significant item causing these increases was depreciation on the Company's increased investment in FAXSAV CONNECTORS which are installed at customer premises to access the FaxSav network. OTHER. Other operating income of $0.3 million in 1994 and $0.4 million in 1995, represents service fees received under a Service Agreement with Telstra which expired in 1995. PROVISION FOR INCOME TAXES. The Company had losses for income tax purposes for the years ended December 31, 1993, 1994 and 1995. Accordingly, there was no provision for income taxes in those years. Any income tax benefits for the Company's operating losses have been offset by an increase in a valuation allowance for deferred tax assets. 22 QUARTERLY RESULTS The following tables set forth certain unaudited quarterly financial information for each of the six quarters ended June 30, 1996. The Company believes that this information has been presented on the same basis as the audited financial statements appearing elsewhere in this Prospectus and in the opinion of management all necessary adjustments (consisting only of normal recurring adjustments) have been included in the amounts stated below to present fairly the unaudited quarterly results when read in conjunction with the audited financial statements of the Company and related notes thereto included elsewhere in this Prospectus. The operating results for any quarter are not necessarily indicative of the operating results for any future period.
THREE MONTHS ENDED ------------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, 1995 1995 1995 1995 1996 1996 ------------- ----------- ----------- ----------- ------------ ----------- (IN THOUSANDS, EXCEPT PERCENTAGE DATA) STATEMENT OF OPERATIONS DATA: Revenues.................................... $ 2,272 $ 2,745 $ 3,300 $ 3,332 $ 3,614 $ 3,831 Cost of service............................. 1,386 1,721 1,975 1,939 2,114 2,166 ------ ----------- ----------- ----------- ------------ ----------- Gross margin................................ 886 1,024 1,325 1,393 1,500 1,665 ------ ----------- ----------- ----------- ------------ ----------- Operating expenses: Network operations and support............ 267 299 332 285 397 471 Research and development.................. 212 188 249 192 315 466 Sales and marketing....................... 871 1,166 1,116 1,084 1,348 1,675 General and administrative................ 410 433 494 900 686 689 Depreciation and amortization............. 103 151 190 255 272 314 Other..................................... (103) (103) (134) (100) -- -- ------ ----------- ----------- ----------- ------------ ----------- Total operating expenses................ 1,760 2,134 2,247 2,616 3,018 3,615 ------ ----------- ----------- ----------- ------------ ----------- Operating loss.............................. (874) (1,110) (922) (1,223) (1,518) (1,950) Interest income (expense), net.............. 36 36 8 (34) (18) 10 Other income (expense), net................. 11 15 20 (51) 18 26 ------ ----------- ----------- ----------- ------------ ----------- Loss before income taxes.................... (827) (1,059) (894) (1,308) (1,518) (1,914) Provision for income taxes.................. -- -- -- -- -- -- ------ ----------- ----------- ----------- ------------ ----------- Net loss.................................... $ (827) $ (1,059) $ (894) $ (1,308) $ (1,518) $ (1,914) ------ ----------- ----------- ----------- ------------ ----------- ------ ----------- ----------- ----------- ------------ ----------- PERCENTAGE OF TOTAL REVENUES: Revenues.................................... 100.0% 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Cost of service............................. 61.0 62.7 59.8 58.1 58.5 56.5 ------ ----------- ----------- ----------- ------------ ----------- Gross margin................................ 39.0 37.3 40.2 41.9 41.5 43.5 ------ ----------- ----------- ----------- ------------ ----------- Operating expenses: Network operations and support............ 11.8 10.9 10.1 8.6 11.0 12.3 Research and development.................. 9.3 6.8 7.6 5.8 8.7 12.2 Sales and marketing....................... 38.3 42.5 33.8 32.5 37.3 43.7 General and administrative................ 18.1 15.8 15.0 27.0 19.0 18.0 Depreciation and amortization............. 4.5 5.5 5.8 7.7 7.5 8.2 Other..................................... (4.5 ) (3.8 ) (4.1 ) (3.0 ) -- -- ------ ----------- ----------- ----------- ------------ ----------- Total operating expenses................ 77.5 77.7 68.2 78.6 83.5 94.4 ------ ----------- ----------- ----------- ------------ ----------- Operating loss.............................. (38.5 ) (40.4 ) (28.0 ) (36.7 ) (42.0 ) (50.9 ) Interest income (expense), net.............. 1.6 1.3 0.2 (1.0 ) (0.5 ) 0.3 Other income (expense), net................. 0.5 0.5 0.6 (1.5 ) 0.5 0.7 ------ ----------- ----------- ----------- ------------ ----------- Loss before income taxes.................... (36.4 ) (38.6 ) (27.2 ) (39.2 ) (42.0 ) (49.9 ) Provision for income taxes.................. -- -- -- -- -- -- ------ ----------- ----------- ----------- ------------ ----------- Net loss.................................... (36.4 )% (38.6 )% (27.2 )% (39.2 )% (42.0 )% (49.9 )% ------ ----------- ----------- ----------- ------------ ----------- ------ ----------- ----------- ----------- ------------ -----------
The Company may in the future experience significant quarter to quarter fluctuations in its results of operations. Such fluctuations may result in volatility in the price of the Company's Common Stock. Quarterly results of operations may fluctuate as a result of a variety of factors, including demand for the Company's services, the introduction of new services and service enhancements by the Company or its 23 competitors, market acceptance of new services, the mix of revenues between Internet-based versus telephony-based delivery, the timing of significant marketing programs, the number and timing of the hiring of additional personnel, competitive conditions in the industry and general economic conditions. The Company's revenues are difficult to forecast. Shortfalls in revenues may adversely and disproportionately affect the Company's results of operations because a high percentage of the Company's operating expenses are relatively fixed, and planned expenditures, such as the anticipated expansion of the Company's Internet infrastructure, are based primarily on sales forecasts. In addition, the stock market in general has experienced extreme price and volume fluctuations, as evidenced by the fluctuations in the Nasdaq National Market in July 1996, which have affected the market price of securities of many companies in the telecommunications and technology industries. These market fluctuations may adversely affect the market price of the Company's Common Stock. Accordingly, the Company believes that period to period comparisons of results of operations are not necessarily meaningful and should not be relied upon as an indication of future results of operations. There can be no assurance that the Company will be profitable in any future quarter. Due to the foregoing factors, it is likely that in one or more future quarters the Company's operating results will be below the expectations of public market analysts and investors. Such an event could have a material adverse effect on the price of the Company's Common Stock. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its cash requirements for operations and investments in equipment primarily through private sales of equity securities, bank borrowings and capital lease financing. Cash flows from the sales of equity securities amounted to $7.9 million in the six months ended June 30, 1996, net of issuance costs, $2.2 million of which were used to repurchase shares of the Company's Series D Preferred Stock from a major stockholder pursuant to a pre-existing option. Cash flows from the sales of equity securities amounted to $4.2 million and $4.1 million in 1995 and 1994, respectively, net of issuance costs. Cash flows associated with bank borrowings amounted to a net repayment of $0.3 million in the six months ended June 30, 1996 and net borrowings of $1.0 million in 1995. Cash flows from financing activities in 1993 primarily consisted of proceeds from the issuance of notes payable amounting to $0.3 million. As a result of operating losses, cash used in operating activities amounted to $2.2 million in the six months ended June 30, 1996 and $3.5 million, $3.2 million and $2.8 million in 1995, 1994 and 1993, respectively. Cash used in investing activities, largely consisting of the purchase of equipment, amounted to $0.9 million in the six months ended June 30, 1996 and $1.3 million, $0.7 million and $0.2 million in 1995, 1994 and 1993, respectively. Beginning in 1994, this equipment primarily consisted of FAXSAV CONNECTORS purchased by the Company for installation at customer locations. Not all FAXSAV CONNECTORS are returned to the Company when service is terminated, therefore some FAXSAV CONNECTORS at former or inactive customers are considered unrecoverable. The Company provides for the estimated book value of such unrecoverable equipment by a charge to operations when the determination is made. In addition, network and computer equipment, amounting to $0.6 million and $0.1 million in 1995 and 1994, respectively, was financed under capital leases. The Company's principal sources of liquidity at June 30, 1996 included cash and cash equivalents of $2.8 million, available financing of approximately $0.7 million under the Credit Facility with the Bank and available lease financing of $0.4 million. In April 1996, the Company amended the Credit Facility to consist of a working capital credit line of $1.0 million and a term facility of $0.8 million to finance capital expenditures. The Credit Facility is limited to a borrowing base determined by the Company's eligible receivables, with approximately $1.3 million available for borrowing thereunder as of June 30, 1996. The term loan facility becomes due and payable in monthly installments over a three-year period, commencing on October 14, 1996, and the working capital credit line becomes due and payable in full on April 14, 1997. The Credit Facility bears interest at the Bank's prime rate plus 0.5%. At June 30, 1996, the Company was in default of certain financial covenants contained in the Credit Facility. On July 31, 1996, the Bank waived these defaults and amended the applicable covenants in the Company's favor, but limited the total outstanding indebtedness under the Credit Facility to $1.0 million until the Company raises additional equity capital. In addition, the Credit Facility, as amended, contains a covenant that this offering must occur or the Company must raise an additional $3.0 million in equity on or before October 30, 1996. 24 The Company anticipates that its capital expenditures will increase significantly for investment in network facilities and to a lesser extent FAXSAV CONNECTORS. As of June 30, 1996, the Company had equipment lease commitments totaling $0.7 million. Through October 1996, the Company is obligated to LDDS WorldCom for a minimum monthly usage commitment of $0.25 million for international long distance service, and through April 1999, is obligated to MCI for a minimum monthly usage commitment for domestic interstate and intra-state service ranging from an average of $0.1 million per month for the first eight months to $0.2 million per month thereafter. Through December 31, 1995, the Company, for income tax purposes, has generated NOL carryforwards of approximately $16.1 million which will expire in the years 2005 through 2010. Use of the NOL carryforwards to offset future taxable income of the Company, if any, will be subject to limitation due to the ownership change provisions of Section 382 of the Internal Revenue Code of 1986, as amended. Additional sales of the Company's equity securities may result in further limitations on the use of NOL carryforwards against taxable income in future years. Based upon the Company's history of operating losses and presently known factors, management has determined that it is more likely than not that the Company will be unable to generate sufficient taxable income prior to the expiration of these NOL carryforwards and has accordingly reduced its deferred tax assets to zero with a full valuation allowance. The Company currently believes that the net proceeds from this offering, together with its current cash and cash equivalents and available bank and lease financing facilities, will be sufficient to meet its anticipated cash needs for working capital and capital expenditure requirements through at least the end of 1997. Thereafter, if the Company does not begin to generate positive cash flows from operations in amounts that are sufficient to satisfy the Company's liquidity requirements, it will be necessary for the Company to raise additional funds through bank facilities, debt or equity offerings or other sources of capital. Additional funding may not be available when needed or on terms acceptable to the Company, which could have a material adverse effect on the Company's business, financial condition and results of operations. 25 BUSINESS GENERAL FaxSav designs, develops and markets a variety of business-to-business facsimile transmission services, including real-time fax-to-fax, desktop-to-fax, enhanced fax and broadcast fax services. The Company has developed proprietary software which enables its customers to specify on a call-by-call basis whether a facsimile transmission will be delivered through FaxSav's real-time, "virtual real-time" or broadcast services. This software, coupled with FaxSav's fax-only network of two interconnected switching nodes in the United States and a growing base of Internet-capable facsimile nodes overseas, automatically delivers each outgoing transmission through the route that provides the lowest cost and the highest transmission quality available on the FaxSav network. Pre-negotiated volume-based arrangements with several telephony common carriers (including LDDS WorldCom, MCI and Telstra) and the cost savings available for transmission through the Internet enable FaxSav to transmit its customers' documents and images to fax machines worldwide at rates that are significantly below the international rates charged by long distance voice carriers. While FaxSav generates cost savings primarily for United States customers transmitting faxes to international destinations, many FaxSav customers also use the Company's services for domestic transmissions where ease of use, rather than cost savings, is the principal motivation. The Company is deploying Internet-capable facsimile nodes in key international telecommunications markets ultimately to enable it to migrate the majority of its customers' traffic off of its telephony-based network and to route it over the Internet. The Company believes that this global Internet backbone, which is designed to seamlessly integrate with FaxSav's existing telephony-based network, will enable the Company to bypass long distance common carriers for transmissions originating and terminating in countries where such nodes have been deployed, thereby further reducing its customers' international transmission costs. FaxSav believes that the combination of its telephony-based network and its growing Internet-based network will enable it to emerge as a leading supplier of comprehensive, low-cost global faxing services. The Company has added Internet capability to its switching nodes in the United States and has deployed one Internet-capable facsimile node in each of Bermuda, France, Germany, Hong Kong, South Korea and the United Kingdom. FaxSav anticipates deploying a sufficient number of additional nodes in key telecommunications markets worldwide by the end of 1997 to enable it to route a majority of its customers' traffic through the Internet. The Company's customer base, revenues and facsimile transmission volume have grown substantially in recent periods. The Company's customer base, which primarily consists of United States businesses in a broad range of industries, has grown from approximately 3,300 customers at December 31, 1994 to approximately 7,200 customers at June 30, 1996, plus over 1,000 registered users of the Company's desktop-to-fax services. The following chart illustrates the Company's revenue growth from the quarter ended June 30, 1994, in which the FAXSAV service was first introduced, through the quarter ended June 30, 1996, separately identifying the domestic and international destination components: [A BAR CHART REPRESENTING THE COMPANY'S REVENUE GROWTH (DOMESTICALLY AND INTERNATIONALLY) FROM JUNE 1994 THROUGH JUNE 1996.] 26 The Company's revenues have increased from $3.4 million for the year ended December 31, 1994 to $11.6 million for the year ended December 31, 1995 and from $5.0 million for the six months ended June 30, 1995 to $7.4 million for the six months ended June 30, 1996. In addition, the minutes of facsimile messages transmitted by FaxSav increased from 6.1 million for the year ended December 31, 1994 to 20.4 million for the year ended December 31, 1995, and from 9.0 million for the six months ended June 30, 1995 to 13.8 million for the six months ended June 30, 1996. INDUSTRY BACKGROUND THE MARKET FOR FACSIMILE SERVICES Technological advances over the past decade have improved the speed and quality of facsimile transmissions and reduced the cost of fax machines to consumers, resulting in a large and increasing worldwide installed base of fax machines. According to industry sources, worldwide sales of new facsimile machines reached approximately 11 million in 1994 and approximately 12.5 million in 1995, and the 1994 worldwide installed base of facsimile machines was approximately 30.7 million. In addition, there recently has been a rapid increase in the installed base of fax-capable personal computers. The proliferation of fax machines and fax capable computers, and improvements in the transmission quality of domestic and international telephone networks, have resulted in facsimile transmission being the preferred means of immediate business-to-business document delivery. TRADITIONAL INTERNATIONAL FACSIMILE TRANSMISSION A facsimile message typically is transmitted by means of a telephone call from one fax machine to another over the voice telephony network. Once a connection has been established between the two machines, the scanned image from the originating fax machine is electronically transmitted to the destination fax machine. Facsimile transmissions historically have been, and substantially all of such transmissions continue to be, implemented on a real-time continuous connection basis using the voice telephony network as a transmission medium. An international facsimile transmission from the United States typically is routed as follows: (i) the sending fax machine accesses the local exchange carrier (an "LEC"), which then routes the fax to the customer's long distance carrier; (ii) the long distance carrier then routes the fax via its voice telephony network to the telephone company of the destination country; and (iii) the foreign telephone company then routes the fax to a local telephone number to which the destination fax machine is attached. In this example, the long distance company will bill the customer to cover the LEC access fee, the fee for use of its voice telephony network and the fee for the connection between the long distance carrier's network and the foreign telephone company, which includes the fee for delivery to the destination fax machine. Based on FCC data, the Company estimates that the average retail price for a minute of international transmission from the United States to a destination outside of North America was approximately $1.20 in 1994, with a majority of this amount being attributable to the average inter-country connection fee. The Company believes, based on the experience of its management team, that such average retail price has not significantly decreased. DOCUMENT DELIVERY OVER THE INTERNET Substantially all inter-country facsimile traffic worldwide is transmitted through voice telephony networks at rates which are largely dictated by the inter-country connection fees. Unlike traditional public and private telecommunications networks, which are individually managed, the Internet is a cooperative interconnection of many such public and private networks which enables businesses, educational institutions, government agencies and individuals to transmit data internationally without incurring inter-country voice telephony connection fees. Although the Internet has been used for a number of years as a medium for the international delivery of documents from computer to computer, substantially all facsimile traffic worldwide continues to originate 27 and terminate on fax machines. The ability to effectively capture the savings enabled by Internet document delivery in the international facsimile market therefore requires the deployment, on a global basis, of a network of Internet-capable facsimile nodes to bridge the gap between the Internet and the fax machine. THE FAXSAV SOLUTION FaxSav is deploying an international network of Internet-capable facsimile nodes designed to provide a reliable means to deliver facsimile transmissions to fax machines worldwide at substantially reduced costs. This planned global Internet backbone, which is designed to seamlessly integrate with FaxSav's existing telephony-based network, will enable the Company to bypass expensive inter-country connection fees for transmissions originating and terminating in countries where such nodes have been deployed. The Company has added Internet capability to its switching nodes in the United States and has deployed one Internet-capable facsimile node in each of Bermuda, France, Germany, Hong Kong, South Korea and the United Kingdom. FaxSav anticipates deploying a sufficient number of additional nodes in key telecommunications markets worldwide by the end of 1997 to enable it to route a majority of its customers' traffic through the Internet. FaxSav, through its integrated Internet and telephony network, provides a comprehensive range of services for the global transmission of documents and images, including real-time fax-to-fax, enhanced fax and broadcast fax services. In addition, to position itself in the emerging desktop-to-fax market, the Company recently introduced several proprietary software products which enable the transmission of documents or images created in any Windows or e-mail application to be routed directly from an Internet-connected computer desktop through the FaxSav network to fax machines worldwide. The FaxSav solution provides substantial ease of use to the customer. Customers may begin transmitting faxes at substantially reduced costs without any upfront investment or complex system installation. FaxSav is quickly and easily installed by the customer and does not require any changes in customer business practices. Customers connect to the FaxSav network by simply installing a FAXSAV CONNECTOR, a small proprietary device that easily plugs between the customer's fax machine and the wall jack, or by simply installing FaxSav's proprietary desktop software on an Internet-connected personal computer. FaxSav's proprietary routing algorithms then automatically deliver each facsimile transmission, through either FaxSav's telephony network or Internet backbone in order to optimize the lowest cost and the highest transmission quality available on the FaxSav network. Additionally, the FaxSav solution is both modular and scalable to meet customer business needs in that it can be easily deployed across multiple fax machines or personal computers within an organization on an unlimited basis. THE FAXSAV STRATEGY FaxSav's objective is to be the leading supplier of low-cost, high quality, reliable business-to-business global faxing services utilizing the Internet as a key transmission medium. FaxSav intends to achieve this position by focusing on the following key elements: DEPLOY GLOBAL INTERNET INFRASTRUCTURE. FaxSav recently began to deploy a network of Internet-capable facsimile nodes in order to capture the cost savings enabled by the Internet for international facsimile transmissions. The Company intends to rapidly deploy this network infrastructure in key telecommunications markets worldwide to capture these cost savings for facsimile traffic both to and from such markets. FaxSav has added Internet capability to its switching nodes in the United States and has deployed one Internet-capable facsimile node in each of Bermuda, France, Germany, Hong Kong, South Korea and the United Kingdom, and anticipates deploying a sufficient number of additional nodes in key telecommunications markets worldwide by the end of 1997 to enable it to route a majority of its customers' traffic through the Internet. ESTABLISH PRICE LEADERSHIP POSITION. FaxSav intends to increase its customer base by offering fax delivery services both in the United States and overseas at substantial savings to traditional telephony pricing. Beginning in the third quarter of 1996, the Company introduced FAXSAV PLUS, a new "virtual real-time" service with pricing based on the economics of delivery through its planned Internet backbone to markets where the Company has not yet deployed Internet-capable facsimile nodes. Pricing for 28 delivery to other destinations worldwide are based on the economics of delivery through the Company's telephony-based network, which prices may or may not be reduced in the event that the Company deploys Internet-capable facsimile nodes in such markets. See "--Services--FAXSAV PLUS." Although this pricing structure will generally reduce the Company's overall gross profit margin until a sufficient number of Internet-capable nodes are deployed, the Company anticipates that this strategy will enable it to rapidly expand its worldwide market presence. RAPIDLY EXPAND WORLDWIDE CUSTOMER BASE. The Company intends to rapidly expand its worldwide customer base by leveraging its price leadership strategy both domestically and internationally. - DOMESTICALLY. FaxSav will intensify its sales and marketing efforts in the United States, including increased direct mail and telemarketing activities and hiring additional personnel in its direct sales group. FaxSav will continually monitor the market response to its price leadership strategy and refine its sales and marketing programs accordingly. - INTERNATIONALLY. The Company intends to establish and build an international customer base by developing a network of commission-based agents to sell the FAXSAV FOR INTERNET suite of services in foreign markets and by forming strategic sales and marketing alliances with foreign Internet service providers, telecommunications companies and resellers. The Company anticipates that these organizations will use their knowledge of the local market, language, customs and regulations, as well as their existing distribution, customer support and billing infrastructures, to establish, grow and properly service an international FaxSav customer base. MAINTAIN TECHNOLOGY LEADERSHIP. The Company has developed significant technological expertise in all key aspects of the facsimile transmission business, including global network design, routing and transmission completion algorithms, database programming and desktop software. The Company intends to maintain its position as a technological leader in the facsimile transmission market. The Company continues to place significant emphasis on the ongoing development of advanced features for its FAXSAV FOR INTERNET suite of services, including the development of client software for faxing from the desktop. The Company's development efforts are focused on new services and applications which are intended to provide easy to use, cost-efficient and reliable business-to-business facsimile transmission services on a worldwide basis. THE FAXSAV NETWORK OVERVIEW TRADITIONAL INTERNATIONAL FACSIMILE TRANSMISSION. Traditional international facsimile transmission (see Figure 1) begins when the originating fax machine places a call over the local telephone network. Because the number dialed has an international prefix, the Local Exchange Carrier ("LEC") switches the call to the sender's long distance carrier (typically AT&T, MCI or Sprint). The long distance carrier ("LDC") delivers the call to the corresponding long distance company (the "PTT") in the country of destination, which in turn completes the call by providing a connection through the local telephone network to the receiving fax machine. Thus a real-time connection is established over the traditional telephony networks, and the originating fax machine sends a data stream, comprising a scanned image, to the receiving fax machine. [GRAPHIC REPRESENTATION OF TRADITIONAL INTERNATIONAL FACSIMILE TRANSMISSION FROM ORIGNIATION THROUGH LOCAL AND LONG DISTANCE NETWORKS TO THE POINT OF DELIVERY.] FIGURE 1. TRADITIONAL INTERNATIONAL FACSIMILE TRANSMISSION 29 FACSIMILE TRANSMISSION VIA FAXSAV'S NETWORK. FaxSav's services, which are targeted at businesses and professionals engaged in international facsimile messaging, are designed to reduce the cost of sending international faxes, and to make the process of sending such faxes easier and less time-consuming. The FaxSav network offers its customers the benefits of increased savings and convenience by bypassing parts or all of the traditional network described above. For example, as shown in Figure 2, an international fax-to-fax message delivered through FaxSav's Internet-based network utilizes the Internet as a delivery medium, bypassing the long distance carriers and thereby avoiding expensive inter-country connection fees. In addition, a customer using the FAXSAV FOR INTERNET suite of services accesses the FaxSav network through its Internet service provider (an "ISP") rather than through the local telephone network; the Company's proprietary software then either routes the call over FaxSav's telephony network or bypasses the long distance carriers and the associated inter-country connection fees by routing the call through FaxSav's Internet-based network. [GRAPHIC REPRESENTATION REPRESENTING FACSIMILE TRANSMISSION AND DELIVERY THROUGH FAXSAV'S SWITCHING/INTERNET NODES FOR FACSIMILES ORIGINATED FROM BOTH THE FAXSAV CONNECTOR AND DESKTOP FAXSAV FOR INTERNET ENVIRONMENTS.] FIGURE 2. FACSIMILE TRANSMISSION VIA THE FAXSAV NETWORK THE FAXSAV NETWORK The FaxSav network is designed to minimize the cost of sending faxes internationally by selecting the optimal route and carrier for each facsimile transmission. Currently FaxSav provides its customers with the ability to reach fax machines worldwide via its telephony-based network. FaxSav's telephony-based services are competitively priced and, on faxes to most international destinations, FaxSav customers are expected to realize substantial savings as compared to the rates charged by traditional long distance carriers. In addition to its telephony-based network, FaxSav is deploying an Internet-based network which is intended to connect the key telecommunications markets worldwide (see Figure 3). FaxSav expects this Internet-based network to complement its telephony-based network and provide the Company with the opportunity to further lower the retail price of its customers' international facsimile transmissions while increasing its market share and, over time, its gross margin. As FaxSav continues to deploy its Internet nodes internationally, it will be able to route an increasing portion of its customers' traffic over the Internet, and by the end of 1997 the Company expects to use its Internet-based network to deliver a majority of such traffic. 30 [LOGO] FIGURE 3. THE PLANNED FAXSAV NETWORK - ------------ * There can be no assurance that the indicated Internet nodes will be deployed by the Company on a timely basis, or at all. See "Risk Factors--Dependence on Network Infrastructure; No Assurance of Successful Internet-Capable Node Deployment." FaxSav believes that the combination of its telephony-based network and its growing Internet-based network is critical to achieving its objective of emerging as the leading provider of comprehensive low-cost global faxing solutions. Therefore FaxSav intends to maintain both a telephony-based and an Internet-based network, and expects to eventually route a majority of its customers' traffic through the Internet. The following example, illustrates the functioning of the planned two-tiered FaxSav network: - A fax originating in New York would access the FaxSav network either through the local telephone company (if the customer uses a fax machine with a FAXSAV CONNECTOR) or the local ISP (if the customer uses an Internet-enabled personal computer with FAXLAUNCHER, FAXSCAN or FAXMAILER). - If the customer has pre-selected FaxSav's real-time delivery service option for faxes to the indicated destination (for example, a fax machine in Germany), FaxSav's switching node in New York would automatically deliver the fax through the most economical route available in FaxSav's telephony-based network. - If the customer has pre-selected one of FaxSav's "virtual real-time" delivery service options for faxes to the indicated destination (for example, a fax machine in Hong Kong where an Internet node is already operational), FaxSav's switching node in New York would automatically deliver the fax through the Internet as the least-cost route to transmit the message. From FaxSav's Hong Kong Internet node, delivery to the ultimate destination would be achieved through the local PTT. - If the customer has pre-selected one of FaxSav's "virtual real-time" delivery service options for faxes to an indicated destination where a FaxSav Internet node has not yet been deployed (for example, a fax machine in Tokyo), FaxSav's switching node in New York would automatically deliver the fax through the most economical route available in FaxSav's two-tiered network. This route may be through the Internet to the Company's Internet node in Hong Kong and from there through a PTT to Tokyo or, alternatively, from FaxSav's switching node in New York directly through the most economical route available in FaxSav's telephony-based network. Once an Internet node is deployed in Japan, the Company's switching node would automatically deliver the fax through the Internet as the least-cost route. 31 NETWORK INFRASTRUCTURE At the core of the FaxSav network are two main switching nodes, installed in New York and Washington, D.C. These switching nodes utilize FaxSav's proprietary messaging software to provide the full range of the Company's service offerings, including real-time and "virtual real-time" fax delivery, least cost fax routing, e-mail to fax conversion, Internet access, broadcast delivery, customer registration and customer query capabilities. Each switching node employs switch-to-host architecture and fully redundant hardware and software, and is interconnected to the other through a private intranet utilizing T1 links. A backup connection is also provided through separate T1 links to the Internet via firewalls. Both switching nodes are installed in secure locations and are supported by uninterruptible power supplies with emergency power generators as further backup. The main switching nodes are connected through the Internet to three separate Internet facsimile nodes overseas, extending access to the Company's service in the markets where such nodes are located. Internet nodes provide "virtual real-time" fax delivery, least-cost fax routing via the best node, e-mail to fax conversion and broadcast delivery capabilities. FaxSav has designed a network-wide redundancy into its nodes, such that if any particular node fails for any reason to complete a transmission, an alternative route through the FaxSav network will automatically be selected. In addition, in the event of an Internet failure, the Internet nodes have a spanning (multiple simultaneous calling) dial backup capability to connect via telephony lines to the nearest node. This node-based and network wide redundancy is designed to allow FaxSav to reliably provide service to its customers without interruption. Additionally, RSA encryption is provided in each Internet node such that each file delivered through FaxSav's Internet nodes is encrypted, addressing security concerns of its customers. In a limited number of instances the Company has experienced a degradation in service to its customers in confined geographical areas caused by network problems of its telecommunications suppliers. In each of these instances, service to the majority of its customers was not degraded due to the redundancy of the FaxSav network equipment and its diverse routing capabilities. The Company has not experienced any significant damage, system failure or data loss, nor has it experienced a breach of its security systems resulting in liability to its customers. The Company does not maintain insurance against these types of potential losses. All nodes are designed for unattended operation, provide a full range of system monitoring and control capability and can be upgraded and maintained remotely. SERVICES FAXSAV FAXSAV, the core fax-to-fax service provided by the Company, is a real-time fax transmission service that is delivered through the Company's telephony-based network. The FAXSAV service is accessed by customers through the installation of a FAXSAV CONNECTOR, a small proprietary device which is plugged between the fax machine and the telephone jack. The FAXSAV CONNECTOR, which is programmable directly from FaxSav headquarters based on the customer's specified needs, automatically identifies each outgoing call which the customer has pre-selected for delivery by the Company and routes the call to the FaxSav network. The FAXSAV CONNECTOR is provided by FaxSav free of charge with no installation cost to the customer. The Company believes that, depending on the volume and destinations of the customer's traffic, the FAXSAV service provides significant savings to customers on fax usage costs in comparison to the international rates charged by the major long distance carriers. FAXSAV customers are charged on a per-minute basis for the transmission time to the destination fax machine, and are billed monthly. The Company also offers customized pricing plans based on the customer's volume of traffic to individual countries. FAXSAV ASSURED FAXSAV ASSURED is a "virtual real-time" enhanced delivery option available to all FAXSAV customers through the FAXSAV CONNECTOR which may be selected for all of the customer's traffic or on a call by call basis. FAXSAV ASSURED shifts the responsibility for repetitive completion attempts to the FaxSav network, thereby reducing indirect costs and increasing the reliability, timeliness and predictability of difficult facsimile deliveries. The standard FAXSAV ASSURED service immediately begins to attempt delivery, and makes multiple 32 attempts for a period of one hour. If the fax has not been successfully completed within that time, the customer is sent a "Non-Delivery" notice. The Company also offers customized FAXSAV ASSURED services to meet customer-specific delivery schedules. FAXSAV EZ-LIST FAXSAV EZ-LIST is an easy to use fax-to-fax broadcast service which utilizes the capabilities of the FAXSAV CONNECTOR to capture the fax message and the customer's list identification number in a single transmission. FAXSAV EZ-LIST enables customers to send the same fax message to multiple recipients by transmitting a single fax message to the FaxSav network and identifying a specific list of fax addresses previously stored in the Company's customer database. FAXSAV EZ-LIST customers are charged on a per-minute basis for the transmission time to each destination fax machine, and are billed monthly. The Company also offers customized pricing plans based on the customer's volume of traffic to individual countries. FAXSAV PLUS In the third quarter of 1996 the Company introduced FAXSAV PLUS, a new "virtual real-time" service which is designed to provide reliable delivery of facsimile transmissions at substantially reduced costs. The Company utilizes a combination of its traditional telephony-based network and its growing Internet-based network to deliver FAXSAV PLUS transmissions to fax machines worldwide. The Company is currently implementing the FAXSAV PLUS service with a two-tiered pricing structure. Pricing for delivery to the key telecommunications markets currently targeted for Internet node deployment is based on the economics of delivery through a planned Internet backbone, even if the Company has not yet deployed Internet-capable facsimile nodes in such markets. At September 30, 1996, the Company had not yet deployed Internet-capable nodes in 26 of such currently targeted markets. Pricing for delivery to other destinations worldwide continues to be based on the economics of delivery through the Company's telephony-based network, which prices may or may not be reduced in the event that the Company deploys Internet-capable facsimile nodes in such markets. The Company estimates that this pricing structure enables reductions of approximately 40% to 70% in the international fax bills of FAXSAV PLUS customers. FAXSAV PLUS customers are charged on a per-minute basis for the transmission time to the destination fax machine, and are billed monthly. FAXSAV FOR INTERNET SUITE OF SERVICES The FAXSAV FOR INTERNET suite of services, introduced in stages during the first half of 1996, enables Internet-connected customers to send faxes directly from their computer desktops, either from their e-mail package or from a Windows software application, through the Internet to fax machines worldwide via the FaxSav network. As of June 30, 1996, there were more than 1,000 registered users of the FAXSAV FOR INTERNET suite of services. The Company's World Wide Web site includes a detailed explanation of these services, installation instructions and service registration forms. Customers are charged on a per-page basis for the FAXSAV FOR INTERNET suite of services and generally are billed in advance of use. The FAXSAV FOR INTERNET suite of services includes the following discrete services: - FAXLAUNCHER enables customers to fax documents created in any Windows application directly from an Internet-connected computer desktop to fax machines worldwide. FAXLAUNCHER also supports documents scanned through sheet-fed scanners manufactured by Visioneer, Inc., Hewlett-Packard Co. or Compaq Computer Corporation. FAXLAUNCHER software is provided to customers in diskette form or it may be downloaded from the Company's World Wide Web site. - FAXMAILER enables customers to transmit messages from e-mail packages over the Internet to the FaxSav network for delivery to fax machines worldwide. FAXMAILER provides the desktop e-mail customer with the ability to reach the fax machine of anyone not yet connected to the Internet without the necessity of creating hard copy and manually sending a fax. Customers may register for the FAXMAILER service through the Company's World Wide Web site. - FAXSCAN enables customers to send documents scanned in any TWAIN-compliant scanner over the Internet to the FaxSav network for delivery to fax machines worldwide. The combination of a scanner and FAXSCAN software puts a virtual fax machine at the desktop for the customer. FAXSCAN software is provided to customers in diskette form. 33 FAXSAV CUSTOM CORPORATE SOLUTIONS FAXSAV CUSTOM CORPORATE SOLUTIONS are specialized services developed by the Company to meet customer needs for specific volume fax applications. FaxSav will custom tailor a software, networking and telecommunications solution designed to provide the customer with additional savings in time and money. CUSTOMER SUPPORT SERVICES The Company believes that customer support is important in differentiating its facsimile delivery services from other delivery approaches. The customer support services provided by the Company include installation assistance on an as-requested basis, facilitation of international fax completion and monitoring the performance of FAXSAV CONNECTORS. The Company currently provides customer support and network/ FAXSAV CONNECTOR monitoring functions 12 hours per day and, beginning in the fourth quarter of 1996, intends to provide such services 24 hours per day, seven days per week. The Company's support personnel respond to telephone inquiries and e-mail inquiries. The Company also provides information about its services and new desktop software upgrades on its World Wide Web site. To provide immediate response to customer inquiries, the Company has developed a wide area network that provides a real-time fax tracking system and allows network operations and customer service personnel to redirect, reschedule or repair fax transmissions that are experiencing completion difficulty. The system accesses fax traffic information via an Oracle database that is updated from the Company's two switching nodes in the United States and provides an on-line connectivity to the Company's master customer database. SALES AND MARKETING DOMESTIC SALES AND MARKETING The Company offers its services in the United States through multiple sales channels which include direct mail and direct response programs, a direct field sales force, an agent and dealer distribution network, and promotional activities at trade shows and on the FaxSav World Wide Web site. The Company's direct mail and direct response efforts are supported by multiple telemarketing firms. The Company compensates its telemarketing firms based on a combination of the number of work-hours dedicated to FaxSav and the number of sales generated. During 1995 the Company increased its sales efforts by creating a direct field sales force to address the specialized faxing needs of major accounts and to manage and support the Company's agent channel. The Company's agent and dealer distribution network consists of organizations which sell office equipment, office supplies and telephony services, as well as independent marketing companies. These agents offer FaxSav services as a companion offering to their other products lines. The Company is also exploring relationships for bundling FAXSAV FOR INTERNET suite of services with the products of computer hardware, software and Internet services companies. The Company has used computer and Internet trade shows as forums to introduce the FAXSAV FOR INTERNET suite of services to prospective customers and partners. The Company's promotions have included the distribution of free software to access its services and free faxing during a trial period and the Company currently offers 10 free pages of faxes to each new subscriber that registers through the Company's World Wide Web home page. The Company has promoted its FAXLAUNCHER software on the World Wide Web since February 1996. Since that time, as of June 30, 1996 approximately 3,000 copies of the FAXSAV FOR INTERNET suite of services have been downloaded and more than 1,000 users have registered with the Company. As of June 30, 1996, FaxSav employed 23 sales and marketing representatives, all in the United States. In connection with its price leadership strategy, the Company intends to intensify all aspects of its domestic sales and marketing efforts, including increased direct mail and telemarketing activities and hiring additional direct sales representatives. See "--The FaxSav Strategy." 34 INTERNATIONAL ALLIANCES In connection with the installation of Internet-capable facsimile nodes in foreign countries, the Company is seeking to form strategic sales and marketing alliances with local Internet service providers, telecommunications companies and resellers. The Company anticipates that these organizations will use their knowledge of the local market, language, customs and regulations, as well as their existing distribution, customer support and billing infrastructures, to establish, grow and properly service an international FaxSav customer base. In return, the Company is offering these organizations either exclusive or non-exclusive rights to market the Company's services in their territories and offering to provide such services at a discount to the Company's retail prices. To date the Company has formed preliminary strategic alliances with companies in Bermuda, Hong Kong, Japan, Korea, Lebanon, the Philippines, Singapore and Taiwan. In addition, the Company has formed a preliminary strategic alliance with a United States corporation regarding activities in Mexico. The Company has entered into non-binding letters of intent and, in some cases, marketing agreements with respect to these strategic alliances. In addition to the strategic alliances, the Company is developing a network of commission-based agents to sell the FAXSAV FOR INTERNET suite of services in foreign markets. To date, this network consists of 56 agents representing the Company in 39 foreign markets. The Company also intends to implement a rebiller program for those agents who have the infrastructure to generate invoices and perform collections. It is anticipated that, under this program, participating agents will be provided detailed billing information on their accounts from which they can create and distribute invoices in the local language and currency, and locally service customer billing inquiries. CUSTOMERS The Company sells its services primarily to small and medium sized businesses with international document transmission needs and, to a lesser extent, to international departments and divisions of larger companies. Customers can install FaxSav's services at individual fax machine or desktop locations, across departments or throughout organizations by simply plugging the FAXSAV CONNECTOR, a small proprietary device, between their fax machine and the telephone jack or by simply installing FaxSav's desktop software on an Internet connected personal computer. Through 1995, all of the Company's customers were located in the United States, and their fax messages to international and domestic destinations accounted for approximately 85% and 15%, respectively, of the Company's total 1995 revenues. In 1996, with the introduction of the FAXSAV FOR INTERNET suite of services, the Company began to expand its customer base to include foreign customers. As of June 30, 1996, the Company had approximately 7,200 customers utilizing its traditional services and more than 1,000 registered users of the Company's desktop services. No single customer accounted for more than 1% of the Company's revenues in 1995 or in the six months ended June 30, 1996. The following is a sampling of the Company's customers, separated into representative industry groups: MANUFACTURING Diasonics Ultrasound, Inc. Enron Oil & Gas Company Integrated Device Technology Inc. International Business Machines Corp. Komatsu America Corp. LSI Logic Corp. Solar Turbines, Inc. Sun Chemical Corp. RETAIL Baskin-Robbins International Co. Chevron Services K Mart Corp. L.A. Gear California, Inc. May Merchandising Company MCA Inc. Warner-Lambert Company SHIPPING American Vanpac Carriers Argents Air Express Ltd. Chemical Tankers of America Inc. International Forwarders Incorporated Msas Cargo International Inc. NYK Line (N.A.), Inc. OTHER The Echo Design Group, Inc. Electronic Distribution Services Incorporated Environmental Systems Research Institute International Union for Conservation The Long-Term Credit Bank of Japan West Deutsche Landesbank 35 COMPETITION The market for facsimile transmission services is intensely competitive and there are limited barriers to entry. The Company expects that competition will intensify in the future. The Company believes that its ability to compete successfully will depend upon a number of factors, including market presence; the capacity, reliability and security of its network infrastructure; the pricing policies of its competitors and suppliers; the timing of introductions of new services and service enhancements by the Company and its competitors; and industry and general economic trends. A key element of the Company's strategy is to expand its market presence by leveraging its price leadership strategy both domestically and internationally. The Company intends to maintain and improve the capacity, reliability and security of its network infrastracture through continued research and development activities and will continue to place significant emphasis on the ongoing development of new services and applications of its existing services. See "-- The FaxSav Strategy." The Company's current and prospective competitors generally fall into the following groups: (i) telecommunication companies, such as AT&T, MCI, Sprint, LDDS WorldCom and the regional Bell operating companies; (ii) telecommunications resellers, such as Frontier Corporation, Biztel Corporation and Eastern Telecom Corporation; (iii) Internet service providers, such as Uunet Technologies, Inc. and NETCOM On-Line Communications Services, Inc.; (iv) on-line services providers, such as America Online, Inc. and CompuServe Incorporated and (v) direct fax delivery competitors, including Xpedite Systems, Inc. and Fax International, Inc. Many of these competitors have greater market presence, engineering and marketing capabilities, and financial, technological and personnel resources than those available to the Company. As a result, they may be able to develop and expand their communications and network infrastructures more quickly, adapt more swiftly to new or emerging technologies and changes in customer requirements, take advantage of acquisition and other opportunities more readily, and devote greater resources to the marketing and sale of their products and services than can the Company. Further, the foundation of the Company's telephony network infrastructure consists of the right to use the telecommunications lines of several of the above-mentioned long distance carriers, including LDDS WorldCom and MCI. There can be no assurance that these companies will not discontinue or otherwise alter their relationships with the Company in a manner that would have a material adverse effect upon the Company's business, financial condition and results of operations. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their services to address the needs of the Company's current and prospective customers. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. In addition to direct competitors, many of the Company's larger potential customers may seek to internally fulfill their fax communication needs through the deployment of their own computerized fax communications systems or network infrastructures for intra-company faxing. Increased competition is likely to result in price reductions and could result in reduced gross margins and erosion of the Company's market share, any of which would have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company will be able to compete successfully against current or future competitors or that competitive pressures will not have a material adverse effect on the Company's business, financial condition and results of operations. INTELLECTUAL PROPERTY The Company's success is dependent upon its proprietary technology. The Company relies primarily on a combination of contract, copyright and trademark law, trade secrets, confidentiality agreements and contractual provisions to protect its proprietary rights. The Company has patent applications pending for its FAXSAV CONNECTOR and for its "e-mail Stamps" security technology incorporated into its FAXMAILER service. There can be no assurance that patents will issue from such applications or that present or future patents will provide sufficient protection to the Company's present or future technologies, products and processes. In addition, there can be no assurance that others will not independently develop substantially equivalent proprietary information or obtain access to the Company's know-how. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's services or 36 to obtain and use information that the Company regards as proprietary. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States. There can be no assurance that the steps taken by the Company to protect its proprietary rights will be adequate or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technologies. The Company is not aware that any of its services, trademarks or other proprietary rights infringe upon valid proprietary rights of third parties. However, the Company received a letter in the third quarter of 1995 stating that the Company's FAXSAV CONNECTOR may be utilizing a call diversion methodology patented by a third party. To the Company's knowledge, such third party has not initiated any suit, action, proceeding or investigation relating to alleged infringement by the Company of such patent. In addition, the Company is aware that another third party has recently brought patent infringement actions against several facsimile service providers. There can be no assurance that these or other third parties will not assert infringement claims against the Company in the future. Patents have been granted recently on fundamental technologies in the communications and desktop software areas, and patents may issue which relate to fundamental technologies incorporated in the Company's services. As patent applications in the United States are not publicly disclosed until the patent issues, applications may have been filed which, if issued as patents, could relate to the Company's services. The Company could incur substantial costs and diversion of management resources with respect to the defense of any claims that the Company has infringed upon the proprietary rights of others, which costs and diversion could have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, parties making such claims could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief which could effectively block the Company's ability to license and sell its services in the United States or abroad. Any such judgment could have a material adverse effect on the Company's business, financial condition and results of operations. In the event a claim relating to proprietary technology or information is asserted against the Company, the Company may seek licenses to such intellectual property. There can be no assurance, however, that licenses could be obtained on terms acceptable to the Company, or at all. The failure to obtain any necessary licenses or other rights could have a material adverse effect on the Company's business, financial condition and results of operations. GOVERNMENT REGULATION The Company is subject to regulation by the FCC, by various state public service and public utility commissions and by various international regulatory authorities. FaxSav is licensed by the FCC as an authorized telecommunications company and is classified as a "non-dominant interexchange carrier." Generally, the FCC has chosen not to exercise its statutory power to closely regulate the charges or practices of non-dominant carriers. Nevertheless, the FCC acts upon complaints against such carriers for failure to comply with statutory obligations or with the FCC's rules, regulations and policies. The FCC also has the power to impose more stringent regulatory requirements on the Company and to change its regulatory classification. There can be no assurance that the FCC will not change the Company's regulatory classification or otherwise subject the Company to more burdensome regulatory requirements. In order to provide intrastate service, the Company is required to obtain various certifications from the public service or public utility commissions of each state, or to register or be found exempt from registration by such commissions. The Company has made the filings and taken the actions it believes are necessary to allow the limited intrastate services that it currently provides. In connection with the anticipated deployment of Internet-capable nodes in countries throughout the world, the Company will be required to satisfy a variety of foreign regulatory requirements. The Company intends to explore and seek to comply with these requirements on a country-by-country basis as the deployment of Internet-capable facsimile nodes continues. There can be no assurance that the Company will 37 be able to satisfy the regulatory requirements in each of the countries currently targeted for node deployment, and the failure to satisfy such requirements may prevent the Company from installing Internet-capable facsimile nodes in such countries. The failure to deploy a number of such nodes could have a material adverse effect on the Company's business, operating results and financial condition. The Company's nodes and its FAXLAUNCHER service utilize RSA encryption technology in connection with the routing of customer documents through the Internet. The export of such encryption technology is regulated by the United States government. The Company is seeking authority for the export of such encryption technology and anticipates that authority will be granted to export such technology worldwide, other than to Cuba, Iran, Libya, North Korea, Sudan and Syria. Nevertheless, there can be no assurance that such authority will be granted or, if granted, that it will not be revoked or modified at any time for any particular jurisdiction or in general. In addition, there can be no assurance that such export controls, either in their current form or as may be subsequently enacted, will not limit the Company's ability to distribute its services outside of the United States or electronically. While the Company takes precautions against unlawful exportation of its software, the global nature of the Internet makes it virtually impossible to effectively control the distribution of its services. Moreover, future Federal or state legislation or regulation may further limit levels of encryption or authentication technology. Any such export restrictions, the unlawful exportation of the Company's services, new legislation or regulation could have a material adverse effect on the Company's business, financial condition and results of operations. EMPLOYEES As of June 30, 1996, the Company had 74 full-time employees, including 11 in research and development, 26 in network operations and support, 23 in sales and marketing and 14 in finance and administration. In addition, at June 30, 1996, the Company was utilizing the services of 4 software engineer consultants. The Company's employees are not covered by any collective bargaining agreements. The Company believes that its relations with its employees are good. FACILITIES The Company's corporate headquarters are located in Edison, New Jersey in facilities consisting of approximately 8,400 square feet of office space occupied under a lease expiring in July 1998. In addition, the Company leases sales offices in the San Francisco and Dallas metropolitan areas. While it believes that these facilities are adequate for its present needs, the Company is continually reviewing its needs and may add facilities in the future. The Company believes that any required additional space would be available on commercially reasonable terms. Finally, in connection with its deployment of Internet-capable facsimile nodes, the Company has entered into, and will continue to enter into, short-term leases in telehousing facilities worldwide. LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings. The initiation of any litigation, including any action claiming infringement by the Company of intellectual property rights, could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors-- Limited Protection of Intellectual Property Rights; Risk of Third Party Claims of Infringement." 38 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of the Company are as follows:
NAME AGE POSITION - ------------------------------ --- -------------------------------------------------- Thomas F. Murawski 51 Chief Executive Officer, President and Chairman of the Board of Directors Thomas C. Mullaney 51 Vice President, Sales and President, Facsimile Services Division Peter S. Macaluso 50 Vice President and Chief Financial Officer George Frylinck 49 Vice President, Marketing James C. Kaufeld 45 Vice President, Engineering Frank Perno 50 Vice President, Operations Jeffrey M. Drazan(1)(2) 37 Director Peter A. Howley(2) 56 Director Gregory Dunfield(1) 49 Director Robert Labant 50 Director
- --------- (1) Member of the Audit Committee. (2) Member of the Compensation Committee. THOMAS F. MURAWSKI joined FaxSav in November 1991, after serving as Executive Vice President of Western Union Corporation, a global telecommunications and financial services company ("Western Union"), where he was President of its Network Services Group. Prior to joining Western Union, Mr. Murawski served twenty-three years with ITT Corporation, a diversified manufacturing and services company ("ITT"). He has held operating responsibilities in the areas of subsidiary and product line management, engineering, sales and marketing for both voice and data-oriented businesses. Mr. Murawski's last position with ITT was President and General Manager of ITT World Communications Inc., an international telecommunications services company. THOMAS C. MULLANEY joined FaxSav in June 1994 after serving from February 1994 to June 1994 as the Chief Operating Officer of Athena Design, Inc., a start-up software company. From January 1991 through February 1994, Mr. Mullaney was self-employed as a marketing consultant to telecommunications companies. Prior to working as a consultant, Mr. Mullaney served eighteen years at MCI, a diversified telecommunications services company. He served MCI as Regional Vice President of Sales and Operations, Vice President of National Sales and Customer Service, Division Vice President Sales and Marketing, as well as Vice President of Carrier and Special Account Sales. PETER S. MACALUSO has been employed by FaxSav since February 1991. From August 1989 to February 1991, he was Vice President of Operations for Century Cellular Corp., a cellular subsidiary of Cellular Communications Inc., a cable television services and cellular phone company. He was employed by Metro Mobile CTS Inc., an independent cellular telephone company ("Metro Mobile"), from May 1985 to December 1988, where his position was Chief Financial Officer. Mr. Macaluso is a certified public accountant and, prior to his employment at Metro Mobile, he was employed by Coopers & Lybrand, an international accounting and management consulting firm. His last position with Coopers & Lybrand was as an Audit Manager. GEORGE FRYLINCK joined FaxSav in November 1992. From November 1990 until Mr. Frylinck joined the Company, he acted as an independent consultant to various telecommunications industry clients. From 1976 to November 1990, he was Senior Vice President of Marketing, Sales and International Operations, at World Communications Inc., a communications services company that was a subsidiary of the Swiss-based TeleColumbus Incorporated. Prior to his experience at World Communications Inc., Mr. Frylinck was the 39 Vice President responsible for establishing and directing marketing and sales functions for International Private Line Services (IPLS) at Western Union and served at ITT, where he held such key management positions as Director of Product Management, International Leased Lines with ITT. JAMES C. KAUFELD joined FaxSav in April 1993 and has over twenty years experience in the design, development and management of telecommunications systems. From January 1989 to April 1993, Mr. Kaufeld was General Manager and Regional Vice President of IEX (a telecommunications consulting firm), with responsibility for sales and product management for the carrier market. Prior to January 1989, Mr. Kaufeld worked at AT&T Bell Laboratories, where he held a variety of management positions and assignments ranging from research into multi-processor operating systems, to the design and development of interactive systems for real-time control of AT&T's long distance network. FRANK PERNO first became employed by FaxSav in January, 1996. From November 1992 to January 1996, he worked at FDC Western Union, where he was responsible for a variety of systems, data and voice communications, Help Desks and field services, along with facility management and database maintenance organizations. From January 1992 to November 1992, Mr. Perno was employed at the Advertising Checking Bureau, Inc., a warranty claims processing company. From 1989 to January 1992, he was employed by Sperry Hutchinson Co., Inc., a consumer promotions company. JEFFREY M. DRAZAN has been a director of the Company since August 1990. Mr. Drazan has been a general partner of Sierra Ventures, a venture capital firm, since 1987. Mr. Drazan also serves as a director of Stratacom Inc., a telecommunications equipment company, Retix, a telecommunications equipment company, and Digital Generation Systems Inc., a multimedia network services company. Mr. Drazan was elected to the Board of Directors in August 1990 pursuant to the terms of a Warrant Purchase Agreement. PETER A. HOWLEY has been a director of the Company since January 1992. Since August 1995, Mr. Howley has served as President, Chief Executive Officer, and Chairman of the Board of Directors of AirPower Communications, Inc., a start-up wireless communications company. From August, 1985 until May, 1994, Mr. Howley served as President, Chief Executive Officer, and Chairman of the Board of Directors of Centex Telemanagement, Inc., a telecommunications management services company. GREGORY DUNFIELD has been a member of the Board of Directors of the Company since February 1994. Since February 1987, Mr. Dunfield has held various management positions with first and second tier U.S. subsidiary companies of Telstra. Currently, Mr. Dunfield serves as Vice President of Telstra Incorporated (USA). ROBERT LABANT has been a director of the Company since June 1996. Since July 1996, Mr. Labant has served as President and Chief Operating Officer of Candle Software Services Corporation, a systems management software company. From February 1995 until July 1996, Mr. Labant worked as a self-employed independent consultant to software companies. For twenty-eight years, until February 1995, Mr. Labant served in various capacities at International Business Machines Corp. ("IBM"). Mr. Labant's last position at IBM was as Senior Vice President and General Manager of North American Operations, and previously he served as Vice President and General Manager of the AS 400 Product Manufacturing and Development Division. Mr. Labant also serves on the Board of Directors of Arkwright Insurance, a mutual insurance company, and on the Board of Overseers of the Amos Tuck School of Business at Dartmouth College. In accordance with the terms of the Company's Certificate of Incorporation, the Board of Directors has been divided into three classes, denominated Class I, Class II and Class III, with members of each Class holding office for staggered three-year terms. Gregg Dunfield is a Class I Director whose term expires at the 1997 annual meeting of stockholders, Robert Labant and Peter A. Howley are Class II Directors whose terms expire at the 1998 annual meeting, and Thomas F. Murawski and Jeffrey M. Drazan are Class III Directors whose terms expire at the 1999 annual meeting (in all cases subject to the election and qualification of their successors or to their earlier death, resignation or removal). At each annual stockholder meeting commencing with the 1997 annual meeting, the successors to the Directors whose terms expire are 40 elected to serve from the time of their election and qualification until the third annual meeting of stockholders following their election and until a successor has been duly elected and qualified. There are no family relationships among any of the directors and executive officers of the Company. The Audit Committee of the Board of Directors reviews, acts on and reports to the Board of Directors with respect to various auditing and accounting matters, including the selection of the Company's auditors, the scope of the annual audits, fees to be paid to the auditors, the performance of the Company's independent auditors and the accounting practices of the Company. The Compensation Committee of the Board of Directors determines the salaries and incentive compensation of the officers of the Company and provides recommendations for the salaries and incentive compensation of the other employees and the consultants of the Company. The Compensation Committee also administers various incentive compensation, stock and benefit plans. EXECUTIVE COMPENSATION The following table sets forth all compensation awarded to, earned by or paid for services rendered to the Company in all capacities during 1995 by (i) the Company's Chief Executive Officer and (ii) the four other most highly compensated executive officers who received compensation in excess of $100,000 (together, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION(1) ANNUAL ---------------- COMPENSATION(1) SECURITIES --------------------- UNDERLYING NAME AND PRINCIPAL POSITIONS SALARY BONUS OPTIONS - ------------------------------------------------------------------------- ---------- --------- ---------------- Thomas F. Murawski, Chief Executive Officer and President.................................. $ 149,220 $ 45,000 253,763 Thomas C. Mullaney, Vice President, Sales and President, Facsimile Services Division....... $ 114,572 $ 37,500 113,334 Peter S. Macaluso, Vice President and Chief Financial Officer............................. $ 99,220 $ 18,750 39,250 George Frylinck, Vice President, Marketing.............................................. $ 99,220 $ 18,750 37,583 James C. Kaufeld, Vice President, Engineering............................................ $ 139,220 $ 15,000 22,238
- --------- (1) Other compensation in the form of perquisites and other personal benefits has been omitted as the aggregate amount of such perquisites and other personal benefits constituted the lesser of $50,000 or 10% of the total annual salary and bonus of the Named Executive Officer for such year. 41 STOCK OPTION INFORMATION The following table sets forth certain information regarding the option grants made pursuant to the Company's 1990 Stock Option Plan during 1995 to each of the Named Executive Officers. OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE NUMBER OF APPRECIATION FOR SECURITIES PERCENTAGE OF OPTION TERM(2) UNDERLYING OPTIONS TOTAL OPTIONS EXERCISE EXPIRATION -------------------- NAME GRANTED GRANTED(1) PRICE DATE 5% 10% - ----------------------------------- ------------------ --------------- ----------- ---------- --------- --------- Thomas F. Murawski................. 253,763 46.7% .225 3/1/05 $ 35,907 $ 91,000 Thomas C. Mullaney................. 35,556 6.5 .225 3/1/05 5,031 12,750 77,778 14.3 .225 5/22/05 11,005 27,890 Peter S. Macaluso.................. 39,250 7.2 .225 3/1/05 5,554 14,075 George Frylinck.................... 37,583 6.9 .225 3/1/05 5,318 13,477 James C. Kaufeld................... 22,238 4.1 .225 3/1/05 3,147 7,975
- --------- (1) Based on an aggregate of 543,012 options granted to employees in fiscal 1995, including options granted to the Named Executive Officers. (2) Amounts represent hypothetical gains that could be achieved for the respective options at the end of the ten-year option term. The assumed 5% and 10% rates of stock appreciation are mandated by rules of the Securities and Exchange Commission and do not represent the Company's estimate of the future market price of the Common Stock. These amounts do not take into account any other appreciation in the price of the Common Stock from the date of grant to the current date. No options were exercised by the Named Executive Officers in 1995. The following table sets forth for each of the Named Executive Officers, certain information concerning the value of unexercised options at the end of 1995: FISCAL YEAR-END OPTION VALUES
NUMBER OF UNEXERCISED NET VALUES OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS(1) -------------------------- ------------------------------ NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---------------------------------------------------------- ----------- ------------- --------------- ------------- Thomas F. Murawski........................................ 122,125 278,763 $ 0 $ 171,290 Thomas C. Mullaney........................................ 13,333 144,444 0 76,500 Peter S. Macaluso......................................... 40,148 39,963 0 26,534 George Frylinck........................................... 38,269 41,842 0 25,369 James C. Kaufeld.......................................... 55,465 32,979 0 15,011
- --------- (1) Based on the estimated fair value of the Company's Common Stock at the end of 1995 ($.90 per share), as determined by the Company's Board of Directors, less the exercise price payable for such shares. 1996 STOCK OPTION/STOCK ISSUANCE PLAN The Company's 1996 Stock Option/Stock Issuance Plan (the "1996 Plan") is intended to serve as the successor equity incentive program to the Company's 1990 Stock Option Plan (the "Predecessor Plan"). The 1996 Plan was adopted by the Board of Directors, effective June 30, 1996, and was approved by the stockholders in August 1996. 1,794,175 shares of Common Stock have been authorized for issuance under the 1996 Plan. This share reserve is comprised of the shares which remained available for issuance under the Predecessor Plan, including the shares subject to outstanding options thereunder plus an additional increase of 555,556 shares. The outstanding options have been incorporated into the 1996 Plan and no further option grants will be made under the Predecessor Plan. The incorporated options will continue to be governed by their existing terms, unless the Plan Administrator elects to extend one or more features of the 1996 Plan to 42 those options. However, the outstanding options under the Predecessor Plan contain substantially the same terms and conditions specified below for the Discretionary Option Grant Program in effect under the 1996 Plan. Of the 1,794,175 shares of Common Stock authorized for issuance under the 1996 Plan, 533,334 are currently available for grant. In no event may any one participant in the 1996 Plan receive option grants or direct stock issuances for more than 300,000 shares in the aggregate. The 1996 Plan is divided into three separate components: (i) the Discretionary Option Grant Program under which eligible individuals may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock at an exercise price not less than 85% of their fair market value on the grant date, (ii) the Stock Issuance Program under which such individuals may, in the Plan Administrator's discretion, be issued shares of Common Stock directly, through the purchase of such shares at a price not less than 85% of their fair market value at the time of issuance or as a bonus tied to the performance of services and (iii) the Automatic Option Grant Program under which option grants will automatically be made at periodic intervals to eligible non-employee Board members to purchase shares of Common Stock at an exercise price equal to 100% of their fair market value on the grant date. The Discretionary Option Grant Program and the Stock Issuance Program will be administered by the Compensation Committee. The Compensation Committee as Plan Administrator will have complete discretion to determine which eligible individuals are to receive option grants or stock issuances, the time or times when such option grants or stock issuances are to be made, the number of shares subject to each such grant or issuance, the status of any granted option as either an incentive stock option or a non-statutory stock option under the Federal tax laws, the vesting schedule to be in effect for the option grant or stock issuance and the maximum term for which any granted option is to remain outstanding. Upon an acquisition of the Company by merger or asset sale, each outstanding option and unvested stock issuance will be subject to accelerated vesting under certain circumstances. Stock appreciation rights are authorized for issuance under the Discretionary Option Grant Program which provide the holders with the election to surrender their outstanding options for an appreciation distribution from the Company equal to the excess of (i) the fair market value of the vested shares of Common Stock subject to the surrendered option over (ii) the aggregate exercise price payable for such shares. Such appreciation distribution may be made, at the sole direction of the Plan Administrator, in cash or in shares of Common Stock. The Plan Administrator has the authority to effect the cancellation of outstanding options under the Discretionary Option Grant Program (including options incorporated from the Predecessor Plan) in return for the grant of new options for the same or different number of option shares with an exercise price per share based upon the fair market value of the Common Stock on the new grant date. Under the Automatic Option Grant Program, each individual who first becomes a non-employee Board member on or after the date the Underwriting Agreement for this offering is executed will receive a 22,222 share option grant on the date such individual joins the Board, provided such individual has not been in the prior employ of the Company. In addition, at each Annual Stockholders Meeting, beginning with the 1997 Annual Meeting, each individual who is to continue to serve as a non-employee Board member after the meeting and has served as a non-employee board member for at least six months will receive an additional option grant to purchase 4,444 shares of Common Stock whether or not such individual has been in the prior employ of the Company. Each automatic grant will have a term of 10 years, subject to earlier termination following the optionee's cessation of Board service. Each automatic option will be immediately exercisable; however, any shares purchased upon exercise of the option will be subject to repurchase should the optionee's service as a non-employee Board member cease prior to vesting in the shares. The initial 22,222 share grant will vest in four equal and successive annual installments over the optionee's period of Board service. Each additional 4,444 share grant will vest upon the optionee's completion of one year of Board service measured from the 43 grant date. However, each outstanding option will immediately vest upon (i) certain changes in the ownership or control of the Company or (ii) the death or disability of the optionee while serving as a Board member. The Board may amend or modify the 1996 Plan at any time. The 1996 Plan will terminate on June 29, 2006, unless sooner terminated by the Board or pursuant to certain other provisions of the Plan. EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS The Company does not presently have any employment contracts in effect with the Chief Executive Officer or any of the other Named Executive Officers. The Compensation Committee as Plan Administrator of the 1996 Plan will have the authority to provide for the accelerated vesting of the shares of Common Stock subject to outstanding options held by the Chief Executive Officer and any other executive officer or the shares of Common Stock subject to direct issuances held by such individual, in connection with certain changes in control of the Company or the subsequent termination of the officer's employment following the change in control event. Each of the Company's directors and officers, with the exception of Mr. Dunfield and Mr. Labant, is party to an agreement with the Company providing for the acceleration of the vesting of options to purchase Common Stock held by such director and officer in the event of the involuntary removal or dismissal (as defined in such agreement) of such director or officer in connection with an acquisition (as defined in such agreement) of the Company. Such agreements may have the effect of delaying or preventing a change in control of the Company, and therefore, could adversely affect the price of the Company's Common Stock. The Company has also agreed to pay Mr. Murawski $12,500 per month, plus all benefits, for up to three months after the termination of his employment without cause. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Company's Compensation Committee consists of two outside directors, Jeffrey Drazan and Peter Howley. Certain members of the Company's Board of Directors have been parties to transactions with the Company. See "Certain Transactions." Although neither Mr. Drazan nor Mr. Howley was an officer or executive of the Company in fiscal year 1995, from October 1991 to November 1991, Mr. Drazan served as interim president of the Company until a successor was found for the individual previously serving in that position. 401(K) PLAN The Company participates in a tax-qualified employee savings and retirement plan (the "401(k) Plan") which covers all of the Company's employees with three months of service who are at least 21 years of age. Pursuant to the 401(k) Plan, employees may elect to reduce their current compensation by up to the statutorily prescribed annual limit and have the amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan permits additional matching contributions by the Company on behalf of all participants in the 401(k) Plan, although as of the date of this Prospectus, the Company has elected not to match participant contributions. The 401(k) Plan is intended to qualify under Section 401 of the Internal Revenue Code of 1986, as amended, so that contributions by employees or by the Company to the 401(k) Plan, and income earned on plan contributions, are not taxable to employees until withdrawn from the 401(k) Plan, and so that contributions by the Company, if any, will be deductible by the Company when made. The trustee under the 401(k) Plan, at the direction of each participant, invests the assets of the 401(k) Plan in a number of investment options. KEY-PERSON LIFE INSURANCE The Company does not maintain key-person life insurance policies on the lives of any of its executive officers. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS The Company's Certificate of Incorporation provides that, except to the extent prohibited by the Delaware General Corporation Law, its directors shall not be personally liable to the Company or its stockholders for monetary damages for any breach of fiduciary duty as directors of the Company. Under 44 Delaware law, the directors have a fiduciary duty to the Company which is not eliminated by this provision of the Certificate of Incorporation and, in appropriate circumstances, equitable remedies such as injunctive or other forms of non-monetary relief will remain available. In addition, each director will continue to be subject to liability under Delaware law for breach of the director's duty of loyalty to the Company, for acts or omissions which are found by a court of competent jurisdiction to be not in good faith or involving intentional misconduct, for knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are prohibited by Delaware law. This provision also does not affect the directors' responsibilities under any other laws, such as the Federal securities laws or state or Federal environmental laws. If commercially feasible, the Company intends to obtain liability insurance for its officers and directors. The Certificate of Incorporation also provides that the Company may indemnify, to the fullest extent permitted by Section 145 of the Delaware General Corporation Law, all of its present and former officers and directors, and any party agreeing to serve as an officer, director or trustee of any entity at the Company's request, in connection with any civil or criminal proceeding threatened or instituted against such party by reason of actions or omissions while serving in such capacity. Indemnification by the Company includes payment of expenses in defense of the indemnified party in advance of any proceeding or final disposition thereof. The rights to indemnification provided in this provision do not preclude the exercise of any other indemnification rights by any party pursuant to any law, agreement or vote of the stockholders or the disinterested directors of the Company. Section 145 of the Delaware General Corporation Law generally allows the Company to indemnify the parties described in the preceding paragraph for all expenses, judgments, fines and amounts in settlement actually paid and reasonably incurred in connection with any proceedings so long as such party acted in good faith and in a manner reasonably believed to be in or not opposed to the Company's best interests and, with respect to any criminal proceedings, if such party had no reasonable cause to believe his or her conduct to be unlawful. Indemnification may only be made by the Company if the applicable standard of conduct set forth in Section 145 has been met by the indemnified party upon a determination made (1) by the Board of Directors by a majority vote of the directors who are not parties to such proceedings (even though less than a quorum), or (2) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (3) by the stockholders. 45 CERTAIN TRANSACTIONS SECURITIES ISSUANCES AND PURCHASES In May 1992, the Company issued an aggregate of 8,329,528 shares of Series C Preferred Stock to investors at a price of $0.60 per share. In January 1994, the Company issued an aggregate of 17,311,021 shares of Series D Preferred Stock to an investor at a price of $0.1733 per share and 1,880,529 shares of Series D Preferred Stock to investors upon conversion of the Company's promissory notes issued in October 1993. In November 1994, the Company issued an aggregate of 7,241,343 shares of Series D Preferred Stock to investors at a price of $0.1733 per share. In January 1995, the Company issued an aggregate of 19,090,900 shares of Series E Preferred Stock to investors at a price of $0.22 per share. In February 1996, the Company issued an aggregate of 15,000,000 shares of Series F Preferred Stock to investors at a price of $0.40 per share. In March 1996, the Company issued an aggregate of 4,999,988 shares of Series F Preferred Stock at a price of $0.40 per share. Each nine shares of Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock will be converted into one share of Common Stock upon the consummation of this offering. The purchasers of the Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock included the following 5% stockholders, executive officers, directors and entities affiliated with directors:
NUMBER OF SHARES OF COMMON STOCK ON AN AS CONVERTED BASIS -------------------- Sierra Ventures (Jeffrey Drazan)(1)..................................... 1,550,599 Telstra Holdings Pty. Limited (Gregory Dunfield)(2)..................... 961,723 Menlo Ventures(3)....................................................... 845,833 Sutter Hill Ventures, a California Limited Partnership.................. 688,497 Coral Partners II, a limited partnership................................ 684,403 Battery Ventures II, L.P................................................ 569,233 Peter Howley............................................................ 124,424 Robert Labant........................................................... 6,944
- --------- (1) Includes 1,128,399 shares of Common Stock held by Sierra Ventures, III ("Sierra III"), a California limited partnership, 5,534 shares of Common Stock held by Sierra Ventures III International L.P. ("Sierra III International"), and 416,667 shares of Common Stock held by Sierra Ventures V ("Sierra V"), a California limited partnership. SV Associates III, L.P. is the General Partner of Sierra III and Sierra III International. SV Associates V, L.P. is the General Partner of Sierra V. Mr. Drazan is a General Partner of SV Associates III, L.P. and SV Associates V, L.P. (2) Does not include 8,655,510 shares of Series D Preferred Stock repurchased from Telstra Incorporated, a subsidiary of Telstra Holdings Pty. Limited, by the Company for an aggregate amount equal to $2,163,877.50. See footnote 3 to the table under "Principal Stockholders." (3) Includes 833,333 shares of Common Stock held by Menlo Ventures VI, L.P. ("Menlo VI") and 12,500 shares of Common Stock held by Menlo Entrepreneurs Fund VI, L.P. ("Menlo Entrepreneurs"). MV Management VI, L.P. is the General Partner of Menlo VI and Menlo Entrepreneurs. In October and November 1993, the Company issued warrants to purchase an aggregate of 21,082 shares of Common Stock with an exercise price of $5.40 per share to Sierra Ventures III (12,905 shares), Sierra International (263 shares), Battery Ventures II, L.P. (6,916 shares) and Peter Howley (998 shares). From June 30, 1993 through August 31, 1996, the Company granted executive officers and directors, or in the case of Telstra Incorporated director nominees, to Telstra Incorporated, a total of 897,889 stock options with exercise prices ranging from $0.225 per share to $3.60 per share. EMPLOYMENT SEVERANCE AGREEMENTS For information regarding employment agreements and severance agreements with executive officers and directors, see "Management--Employment Contracts and Change of Control Arrangements." 46 AGREEMENTS WITH TELSTRA INCORPORATED In March 1996, the Company repurchased 8,655,510 shares of Series D Preferred Stock held by Telstra Incorporated, an indirect wholly-owned subsidiary of Telstra, at a price of $0.25 per share. As a result of such repurchase, certain covenants in favor of Telstra Incorporated contained in the Series D Preferred Stock Purchase Agreement (as amended, the "Telstra Purchase Agreement"), were eliminated, although Telstra Incorporated retained the right to designate one member of FaxSav's Board of Directors (currently, Mr. Dunfield). Such designation right, and all other rights of Telstra Incorporated under the Telstra Purchase Agreement, shall terminate upon the consummation of this offering. In March 1996, Telstra Incorporated and the Company entered into an agreement providing for the acceleration of vesting of all Common Stock options granted to Telstra Incorporated for the participation of its designees on the Company's Board of Directors that are scheduled to vest and become exercisable during the 24-month period following the involuntary removal without cause (as defined in such agreement) of any such director in connection with an acquisition (as defined in such agreement) of the Company. The Company and Telstra Incorporated are parties to a Traffic Agreement, effective November 1994 (the "Traffic Agreement"). Under the terms of the Traffic Agreement, the Company will exclusively use Telstra's (or its nominees) "WorldFax" service for the Company's outbound traffic from the United States provided that such service is offered at a rate which the Company can reasonably demonstrate that it can secure from a recognized service provider for services of equivalent quality on comparable terms over the same time period. The Traffic Agreement has a five year term which began in late 1995, upon the commercial commencement of Telstra's "WorldFax" service in the United States. 47 PRINCIPAL STOCKHOLDERS The following table sets forth certain information with respect to the beneficial ownership of the Common Stock as of August 31, 1996, and as adjusted to reflect the sale of the shares of Common Stock offered hereby, by (i) each person (or group of affiliated persons) who is known by the Company to own beneficially five percent or more of the outstanding shares of Common Stock, (ii) each director of the Company, (iii) each Named Executive Officer, (iv) each current executive officer and (v) all directors and executive officers of the Company as a group.
NUMBER OF SHARES OF PERCENTAGE OF COMMON STOCK OUTSTANDING SHARES BENEFICIALLY ---------------------------------- OWNED(1) BEFORE OFFERING AFTER OFFERING -------------- ----------------- --------------- Entities affiliated with Sierra Ventures (2)...................... 1,998,133 24.4% 20.7% Building 4, Suite 210 3000 Sand Hill Road Menlo Park, California 94025 Telstra Holdings Pty. Limited c/o FaxSav Incorporated (3)......... 978,390 12.0 10.1 399 Thornall Street Edison, NJ Entities affiliated with Menlo Ventures (4)....................... 845,833 10.4 8.8 3000 Sand Hill Road Menlo Park, CA 94025 Battery Ventures II, L.P (5)...................................... 796,847 9.7 8.3 200 Portland Street Boston, MA 02114 Coral Partners II, a limited partnership (6)...................... 690,144 8.4 7.1 60 South Sixth Street Suite 3510 Minneapolis, MN 55402 Sutter Hill Ventures, a California Limited Partnership (7)........ 688,497 8.4 7.1 755 Page Mill Road, Suite A-200 Palo Alto, CA 94304-1005 Thomas F. Murawski (8)............................................ 218,317 2.6 2.2 Jeffrey Drazan (2)................................................ 1,998,133 24.4 20.7 Gregory Dunfield (3).............................................. 978,390 12.0 10.1 Peter A. Howley (9)............................................... 166,445 2.0 1.7 Robert Labant..................................................... 6,944 * * Thomas C. Mullaney (10)........................................... 54,037 * * Peter S. Macaluso (11)............................................ 53,207 * * George Frylinck (12).............................................. 52,022 * * James C. Kaufeld (13)............................................. 66,211 * * All current directors and executive officers as a group (9 persons)........................................................ 3,593,706(14) 41.4 35.3
- --------- * Less than one percent. (1)Gives effect to the shares of Common Stock issuable within 60 days of August 31, 1996 upon the exercise of all options and other rights beneficially owned by the indicated stockholders on that date. Unless otherwise indicated, the persons named in the table have sole voting and sole investment control with respect to all shares beneficially owned. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting and investment power with respect to shares. 48 (2)Includes (i) 1,375,364 shares of Common Stock held by Sierra III, (ii) 13,832 shares of Common Stock held by Sierra III International and (iii) 576,325 shares of Common Stock held by Sierra V. Also, includes warrants to purchase 12,905 shares of Common Stock held by Sierra III and warrants to purchase 263 shares of Common Stock held by Sierra III International. Mr. Drazan, a Director of the Company, is a general partner of an affiliate of Sierra III, Sierra III International and Sierra V and, as such, may be deemed to share voting and investment power with respect to such shares. Mr. Drazan disclaims beneficial ownership of such shares except to the extent of his interest in such shares arising from his interest in Sierra III, Sierra III International and Sierra V. Also includes 19,444 shares of Common Stock issuable to Mr. Drazan upon exercise of stock options. (3)Mr. Dunfield, who is a director of the Company, is a Vice President of Telstra Incorporated, a wholly-owned subsidiary of Telstra Holdings Pty. Limited. Includes 16,667 shares of Common Stock issuable to Telstra Incorporated upon exercise of stock options. Mr. Dunfield disclaims beneficial ownership of all of the foregoing shares. (4)Includes (i) 833,333 shares of Common Stock held by Menlo VI and (ii) 12,500 shares of Common Stock held by Menlo Entrepreneurs. MV Management VI, L.P. is the General Partner of Menlo VI and Menlo Entrepreneurs. (5)Includes warrants to purchase 6,916 shares of Common Stock. ABF Partners II, L.P. is the General Partner of Battery Ventures II, L.P. (6)Coral Management Partners II, Limited Partnership ("Coral Management"), is the General Partner of Coral Partners II. Includes 5,741 shares of Common Stock issuable upon exercise of warrants. Excludes an aggregate of 5,626 shares of Common Stock held, in their individual capacity, by three general partners of Coral Management who share investment and voting power with respect to the shares of Common Stock held by Coral Partners II. The general partners disclaim beneficial ownership of the shares held by Coral Partners II, except as to their proportionate interest therein. (7)Excludes an aggregate of 390,497 shares of Common Stock held, in their individual capacity, by the five general partners of the general partner of Sutter Hill Ventures, a California Limited Partnership ("Sutter Hill"). The five general partners share voting and investment power with respect to the shares held by Sutter Hill. Each of these individuals disclaims beneficial ownership of the shares held by Sutter Hill except as to their proportionate interest therein, and disclaims beneficial ownership of the shares held by the other four individuals. (8)Consists of 218,317 shares of Common Stock issuable upon exercise of stock options. (9)Includes 22,222 shares of Common Stock issuable upon exercise of stock options and 998 shares of Common Stock issuable upon exercise of warrants. (10)Consists of 54,037 shares of Common Stock issuable upon exercise of stock options. (11)Consists of 53,207 shares of Common Stock issuable upon exercise of stock options. (12)Consists of 52,022 shares of Common Stock issuable upon exercise of stock options. (13)Consists of 66,211 shares of Common Stock issuable upon exercise of stock options. (14)See Notes (2) through (13). 49 DESCRIPTION OF CAPITAL STOCK Upon the consummation of this offering, the authorized capital stock of the Company will consist of 40,000,000 shares of Common Stock, $0.01 par value, and 1,000,000 shares of Preferred Stock, $0.01 par value. COMMON STOCK Each holder of Common Stock is entitled to one vote for each share held. Following this offering, the holders of Common Stock, voting as a single class, will be entitled to elect all of the directors of the Company. In all matters other than the election of directors, when a quorum is present at any stockholders' meeting, the affirmative vote of the majority of shares present in person or represented by proxy shall decide any question before such meeting. Directors are elected by a plurality of the votes of the shares present in person or represented by proxy at a stockholders' meeting. The holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. In the event of a liquidation, dissolution or winding up of the Company, holders of Common Stock would be entitled to share in the Company's assets remaining after the payment of liabilities and the satisfaction of any liquidation preference granted to the holders of any outstanding shares of Preferred Stock. Holders of Common Stock have no preemptive or other subscription rights. The shares of Common Stock are not convertible into any other security. The outstanding shares of Common Stock are, and the shares being offered hereby will be, upon issuance and sale, fully paid and nonassessable. At August 31, 1996, there were 8,170,490 shares of Common Stock outstanding (after giving effect to the conversion of all outstanding shares of Preferred Stock into Common Stock) and held of record by 120 stockholders, and options to purchase an aggregate of 1,238,619 shares of Common Stock were also outstanding. See "Management--1996 Stock Option/Stock Issuance Plan." In addition, as of August 31, 1996, warrants to purchase an aggregate of 138,385 shares of Common Stock were outstanding. PREFERRED STOCK Upon the consummation of this offering, the Company will be authorized to issue 1,000,000 shares of Preferred Stock with such voting rights, designations, preferences and rights, and such qualifications, limitations or restrictions thereof, as may be determined by the Board of Directors providing for such series. Although the Company has no current plans to issue any shares of Preferred Stock, the issuance of Preferred Stock or of rights to purchase Preferred Stock could be used to discourage an unsolicited acquisition proposal. In addition, the possible issuance of Preferred Stock could discourage a proxy contest, make more difficult the acquisition of a substantial block of the Company's Common Stock or limit the price that investors might be willing to pay in the future for shares of the Company's Common Stock. The Company believes that the Preferred Stock will provide the Company with increased flexibility in structuring possible future financing and acquisitions, and in meeting other corporate needs that might arise. Having such authorized shares available for issuance will allow the Company to issue shares of Preferred Stock without the expense and delay of a special stockholders' meeting. The authorized shares of Preferred Stock, as well as shares of Common Stock, will be available for issuance without further action by stockholders, unless such action is required by applicable law or the rules of any stock exchange on which the Company's securities may be listed. REGISTRATION RIGHTS OF CERTAIN HOLDERS After this offering, the holders of approximately 8,017,000 shares of Common Stock, and the holders of warrants to purchase an additional 138,385 shares of Common Stock (the "Registrable Securities") will be entitled to certain demand rights with respect to the registration of the Registrable Securities under the Securities Act. Under the terms of the agreement between the Company and the holders of the Registrable Securities, subject to certain restrictions, at any time (a) after the earlier of (i) three (3) months after the effective date of the Registration Statement of which this Prospectus forms a part or (ii) February 1, 1997, the holders of more than 50% of the Registrable Securities, and (b) after this offering is complete, holders proposing to sell Registrable Securities at a reasonably anticipated aggregate offering price to the public (net of any underwriter's discount or commissions) of $10,000,000, are entitled to demand that the Company 50 register their Registrable Securities under the Securities Act. The Company is not required to effect more than two such registrations pursuant to such demand registration rights. In addition, under such agreement, if the Company proposes to register any of its securities under the Securities Act, either for its own account or for the account of other security holders exercising registration rights, subject to certain restrictions, such holders of the Registrable Securities and the holders of 83,741 shares of Common Stock (the "Founders Registrable Securities") are entitled to notice of such registration and are entitled to include their registrable securities therein. The Company is required to include any Registrable Securities or Founders Registrable Securities in an unlimited number of such registrations. Once the Company is eligible to use a Form S-3 registration statement to register shares of Common Stock, subject to certain restrictions, holders of 20% of the Registrable Securities are also entitled to require the Company on two separate occasions in any twelve month period to file a Form S-3 registration statement under the Act at the Company's expense with respect to their Registrable Securities. Registration of Registrable Securities or Founders Registrable Securities pursuant to such rights would result in such shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of such registration. In connection with this offering, the holders of the Registrable Securities and the Founders Registrable Securities have agreed to waive their registration rights until 180 days after the date of this Prospectus. DELAWARE LAW AND CERTAIN PROVISIONS OF THE COMPANY'S RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS The Company is subject to the provisions of Section 203 of the General Corporation Law of Delaware. Section 203 prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A "business combination" includes mergers, assets sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within the past three years has owned, 15% or more of the corporation's voting stock. The Restated Certificate of Incorporation provides for the division of the Board of Directors into three classes as nearly equal in size as possible with staggered three-year terms. See "Management." The staggered terms could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, control of the Company. The By-laws also provide that any action required or permitted to be taken by the stockholders of the Company at an annual meeting or special meeting of stockholders may only be taken if it is properly brought before such meeting and may not be taken by written action in lieu of a meeting. The By-laws further provide that special meetings of the stockholders may only be called by the President of the Company, by the Board of Directors or by stockholders owning a majority of the issued and outstanding capital stock of the Company. The foregoing provisions could have the effect of delaying until the next stockholders meeting stockholder actions which are favored by the holders of a majority of the outstanding voting securities of the Company. These provisions may also discourage another person or entity from making a tender offer for the Company's Common Stock, because such person or entity, even if it acquired a majority of the outstanding voting securities of the Company, would be able to take action as a stockholder (such as electing new directors or approving a merger) only at a duly called stockholders meeting, and not by written consent. The Restated Certificate of Incorporation limits the liability of directors to the maximum extent permitted by the Delaware law. Delaware law provides that a director of a corporation will not be personally liable for monetary damages for breach of such individual's fiduciary duties as a director except for liability (i) for any breach of such director's duty of loyalty to the corporation, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) for unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which a director derives an improper personal benefit. Further, the Restated Certificate of Incorporation contains provisions to indemnify the Company's directors and officers to the fullest extent permitted by Delaware law. The Company believes that indemnification under its Restated Certificate of Incorporation covers at least negligence and gross negligence on the part of 51 an indemnified party and permits the Company to advance expenses incurred by an indemnified party in connection with the defense of any action or proceeding arising out of such party's status or service as a director, officer, employee or other agent of the Company upon an undertaking by such party to repay such advances if it is ultimately determined that such party is not entitled to indemnification. The Company believes that these provisions will assist the Company in attracting and retaining qualified individuals to serve as directors. At present, the Company is not aware of any pending litigation or proceeding involving any director, officer, employee or agent of the Company, where indemnification will be required or permitted. The Company is not aware of any threatened litigation or proceeding that might result in a claim for such indemnification. TRANSFER AGENT AND REGISTRAR Registrar and Transfer Company will act as transfer agent and registrar for the Company's Common Stock. 52 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for the Common Stock of the Company. Future sales of substantial amounts of Common Stock in the public market could adversely affect market prices prevailing from time to time. Sales of substantial amounts of Common Stock of the Company in the public market after the lapse of existing resale restrictions could adversely affect the prevailing market price and the ability of the Company to raise equity capital in the future. Upon completion of this offering, the Company will have outstanding 9,670,490 shares of Common Stock, assuming no exercise of currently outstanding options. In addition to the 1,500,000 shares of Common Stock offered hereby (assuming no exercise of the Underwriters' over-allotment option), as of the Effective Date, there will be 8,170,490 shares of Common Stock outstanding, all of which are "restricted securities" under the Securities Act. Certain stockholders of the Company, holding in the aggregate approximately 7,108,000 shares of Common Stock, are subject to lock-up agreements providing generally that they will not offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or any securities convertible or exchangeable into Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of Lehman Brothers Inc., which may be given at any time, without notice, with respect to all or any portion of such shares. Holders of approximately 1,056,000 additional shares of Common Stock are subject to similar restrictions contained in an Investor Rights Agreement. Taking into account the lock-up agreements and restrictions notwithstanding possible earlier eligibility for resale under the provisions of Rules 144 and 701, the numbers of shares that will be available for sale in the public market will be as follows. Beginning 90 days after the Effective Date, approximately 6,000 shares of restricted securities will become eligible for resale in the public market, subject to compliance with Rules 144 and 701. Beginning 180 days after the Effective Date, approximately 6,007,000 additional shares of restricted securities will become eligible for sale in the public market upon expiration of certain lock-up agreements pursuant to Rules 144 and 701 and, as of that date, approximately 5,357,000 of such shares will be subject to certain volume and other resale restrictions pursuant to Rules 144 and 701. In general, under Rule 144, as currently in effect, any person (or persons whose shares are aggregated) who has beneficially owned his or her restricted securities (as that term is defined in Rule 144) for at least two years is entitled to sell, within any three-month period, a number of such securities that does not exceed the greater of 1% of the then outstanding shares of the Company's Common Stock (approximately 104,000 shares immediately after this offering) or the average weekly trading volume during the four calendar weeks preceding the date on which notice of such sale was filed under Rule 144, provided certain requirements concerning availability of public information, manner of sale and notice of sale are satisfied. A person who is not an affiliate, has not been an affiliate within three months prior to the sale and has beneficially owned the restricted securities for at least three years is entitled to sell such shares under Rule 144(k) without regard to any of the limitations described above. In meeting the two-year and three-year holding periods described above, a holder of Restricted Shares may include under certain circumstances the holding period of a prior owner. The Securities and Exchange Commission has proposed certain amendments to Rule 144 that would reduce by one year the holding periods required for shares subject to Rule 144 to become eligible for resale in the public market. This proposal, if adopted, would increase the number of shares of Common Stock eligible for immediate resale following the expiration of the lock-up agreements described above. No assurance can be given concerning whether or when the proposal will be adopted by the Securities and Exchange Commission. Any employee or director of or consultant to the Company who has been granted options to purchase shares or who has purchased shares pursuant to a written compensatory plan or written contract prior to the effective date of this offering pursuant to Rule 701 will be entitled to rely on the resale provisions of Rule 701, which permits non-affiliates to sell their Rule 701 shares without having to comply with the public information, holding-period, volume-limitation or notice provisions of Rule 144 and permits affiliates to sell their Rule 701 shares without having to comply with the Rule 144 holding period restrictions, in each case commencing 90 days after the date of this Prospectus. 53 The Company intends to file, on or shortly after the date of the Prospectus, a registration statement on Form S-8 under the Securities Act to register shares of Common Stock reserved for issuance under the Predecessor Plan and the 1996 Stock Option/Issuance Plan. Shares issued after the effective date of the S-8 will be eligible for resale by non-affiliates in the public market without limitation and by affiliates subject to the requirements set forth in Rule 144, except for the holding period limitation of Rule 144. Such registration statement will become effective immediately upon filing. As of August 31, 1996, an aggregate of 1,238,619 shares of Common Stock are reserved for issuance under the Predecessor Plan and an additional 555,556 shares of Common Stock were available for future grants under the Company's 1996 Stock Option/ Stock Issuance Plan. The holders of approximately 8,017,000 shares of Common Stock and the holders of warrants to purchase an additional 138,385 shares of Common Stock have the right in certain circumstances to require the Company to register their shares under the Securities Act for resale to the public. If such holders, by exercising their demand registration rights, cause a large number of shares to be registered and sold in the public market, such sales could have an adverse effect on the market price for the Company's Common Stock. If the Company were required to include in a Company-initiated registration shares held by such holders pursuant to the exercise of their piggyback registration rights, such sales may have an adverse effect on the Company's ability to raise needed capital. See "Description of Capital Stock--Registration Rights of Certain Holders." Prior to this offering, there has been no market for the Common Stock of the Company. Future sales of substantial amounts of Common Stock in the public market could adversely effect the market price of the Common Stock. 54 UNDERWRITING Under the terms of, and subject to the conditions contained in, an Underwriting Agreement (the "Underwriting Agreement"), the form of which is filed as an exhibit to the Registration Statement of which this Prospectus is a part, the underwriters named below (the "Underwriters"), for whom Lehman Brothers Inc. and Alex. Brown & Sons Incorporated are acting as Representatives (the "Representatives"), have severally agreed to purchase from the Company, and the Company has agreed to sell to the Underwriters, the aggregate number of shares of Common Stock set forth opposite the name of each Underwriter below:
NUMBER UNDERWRITERS OF SHARES - --------------------------------------------------------------------------------- ---------- Lehman Brothers Inc.............................................................. 505,000 Alex. Brown & Sons Incorporated.................................................. 505,000 Dean Witter Reynolds Inc......................................................... 50,000 A.G. Edwards & Sons, Inc......................................................... 50,000 EVEREN Securities Inc............................................................ 50,000 Lazard Freres & Co. LLC.......................................................... 50,000 PaineWebber Incorporated......................................................... 50,000 J.C. Bradford & Co............................................................... 24,000 Chicago Corporation.............................................................. 24,000 Furman Selz LLC.................................................................. 24,000 Gabelli & Company, Inc........................................................... 24,000 Ladenburg, Thalmann & Co. Inc.................................................... 24,000 Brad Peery Inc................................................................... 24,000 Prime Charter Limited, LTD....................................................... 24,000 Robinson-Humphrey Company, Inc................................................... 24,000 Scott & Stringfellow, Inc........................................................ 24,000 SoundView Financial Group, Inc................................................... 24,000 ---------- Total........................................................................ 1,500,000 ---------- ----------
The Underwriting Agreement provides that the obligations of the Underwriters to purchase shares of Common Stock are subject to certain conditions, and that if any of the shares of Common Stock are purchased by the Underwriters pursuant to the Underwriting Agreement, all shares of Common Stock agreed to be purchased by the Underwriters pursuant to the Underwriting Agreement must be purchased. The Company has been advised that the Underwriters initially propose to offer the shares of Common Stock directly to the public at the public offering price set forth on the cover page of this Prospectus and to certain selected dealers (who may include the Underwriters) at such public offering price less a selling concession not in excess of $0.30 per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $0.10 per share to certain other Underwriters or to certain other brokers or dealers. After the initial public offering, the public offering price, the concession to selected dealers and the reallowance to other dealers may be changed by the Underwriters. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended, and to contribute to payments that the Underwriters may be required to make in respect thereof. The Company has granted to the Underwriters an option to purchase up to an additional 225,000 shares of Common Stock at the public offering price less the underwriting discounts and commissions shown on the cover page of this Prospectus, solely to cover over-allotments, if any. Such option may be exercised at any time until 30 days after the date of this Prospectus. To the extent that the Underwriters exercise such option, each of the Underwriters will be committed, subject to certain conditions, to purchase a number of option shares proportionate to such Underwriter's initial commitment. The Representatives of the Underwriters have informed the Company that the Underwriters do not intend to confirm sales to accounts over which they exercise discretionary authority. 55 The Company, the directors and officers and certain other stockholders of the Company have agreed, with certain limitations and except for the shares of Common Stock to be sold in the offering, not to, directly or indirectly, offer, sell or contract to sell, or otherwise dispose of shares of Common Stock of the Company, or any securities convertible into, or exchangeable for, or any rights to acquire, shares of Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of Lehman Brothers on behalf of the Representatives. Prior to this offering, there has been no public market for the Common Stock. The initial public offering price was determined by negotiation among the Company and the Representatives of the Underwriters. Among the factors considered in determining the initial public offering price, in addition to prevailing market conditions, were the Company's historical performance, capital structure, estimates of the business potential and earnings prospects of the Company, an overall assessment of the Company, an assessment of the Company's management, and the consideration of the above factors in relation to market valuation of companies in related businesses. In February 1996, the Company sold 2,000,000 shares of Series F Preferred Stock to Lehman Brothers Holdings Inc., the parent company of Lehman Brothers Inc., or approximately 10% of all shares of Series F Preferred Stock issued, for a purchase price of $0.40 per share. The Company granted certain registration rights to Lehman Brothers Holdings Inc. in connection with that transaction. In addition, a Senior Vice President of Lehman Brothers Inc. purchased 500,000 shares of Series F Preferred Stock of the Company in February 1996 for a purchase price of $0.40 per share, and has been granted certain registration rights by the Company. The son of such Senior Vice President received 22,727 shares of Series E Preferred Stock by gift in January 1995 from a director of the Company and the son also purchased 2,612 shares of Series F Preferred Stock for a purchase price of $0.40 per share in February 1996 in the Company's private placement and has been granted certain registration rights by the Company. Each nine shares of Series E Preferred Stock and Series F Preferred Stock will be converted to one share of Common Stock upon the consummation of the offering. See "Description of Capital Stock--Registration Rights of Certain Holders." LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Brobeck, Phleger & Harrison LLP, New York, New York. A member of Brobeck, Phleger & Harrison LLP is the beneficial owner of 6,199 shares of Common Stock. Certain legal matters in connection with the offering will be passed upon for the Underwriters by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts. EXPERTS The balance sheets as of December 31, 1995 and 1994 and the related statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1995, included in this Prospectus and Registration Statement, have been included herein in reliance on the report of Coopers and Lybrand L.L.P., independent accountants, given on the authority of that firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission, Washington, D.C. 20549, a Registration Statement on Form S-1, including amendments thereto, under the Securities Act with respect to the Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and such Common Stock, reference is made to the Registration Statement and the exhibits and schedules filed as a part thereof. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete, and, in each instance, if such contract or document is filed as an exhibit, reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference to such exhibit. The Registration Statement, including exhibits and schedules thereto, may be inspected without charge at the Commission's Public Reference Section, Room 1024, 450 Fifth Street, N.W., Washington, D.C. Copies of all or any part of such material may be obtained from such office at prescribed rates. 56 FAXSAV INCORPORATED (FORMERLY DIGITRAN CORPORATION) INDEX TO FINANCIAL STATEMENTS
PAGE ------------ Report of Independent Accountants................................................................... F-2 Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996 (Unaudited)....................... F-3 Statements of Operations for the years ended December 31, 1993, 1994 and 1995 and for the six months ended June 30, 1995 and 1996 (Unaudited).......................................................... F-4 Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and for the six months ended June 30, 1995 and 1996 (Unaudited).......................................................... F-5 Statements of Stockholders' Equity (Deficit) from January 1, 1993 to December 31, 1995 and for the six months ended June 30, 1996 (Unaudited)........................................................ F-6 Notes to Financial Statements (Including Data Applicable to Unaudited Periods)...................... F-7 - F-19
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of FaxSav Incorporated: We have audited the accompanying balance sheets of FaxSav Incorporated (formerly Digitran Corporation) as of December 31, 1994 and 1995, and the related statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of FaxSav Incorporated as of December 31, 1994 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Parsippany, New Jersey March 29, 1996 F-2 FAXSAV INCORPORATED BALANCE SHEETS
DECEMBER 31, -------------------------- 1994 1995 ------------ ------------ JUNE 30, PRO FORMA 1996 NOTES 2 AND 14 ------------ JUNE 30, 1996 (UNAUDITED) -------------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents............................... $ 311,592 $ 552,370 $ 2,788,659 Accounts receivable, less allowances of $90,193, $174,737 and $271,605 (unaudited) as of December 31, 1994, 1995 and June 30, 1996, respectively............ 1,112,726 2,358,052 2,136,651 Prepaid expenses and other current assets............... -- 67,306 156,089 ------------ ------------ ------------ Total current assets.................................. 1,424,318 2,977,728 5,081,399 PROPERTY AND EQUIPMENT, NET............................... 981,895 2,035,779 2,661,678 OTHER ASSETS, NET......................................... 85,879 118,071 172,830 ------------ ------------ ------------ TOTAL..................................................... $ 2,492,092 $ 5,131,578 $ 7,915,907 ------------ ------------ ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable........................................ $ 567,504 $ 304,407 $ 481,004 Accrued expenses and other liabilities.................. 1,258,976 2,661,308 3,027,695 Obligation under capital lease.......................... 45,000 152,593 238,658 Amount outstanding under line of credit................. -- 1,000,000 541,466 ------------ ------------ ------------ Total current liabilities............................. 1,871,480 4,118,308 4,288,823 OBLIGATION UNDER CAPITAL LEASE............................ -- 326,242 444,940 AMOUNT OUTSTANDING UNDER LINE OF CREDIT................... -- -- 124,320 ------------ ------------ ------------ Total liabilities..................................... 1,871,480 4,444,550 4,858,083 ------------ ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Convertible preferred stock, $0.001 par value; aggregate liquidation preference of $31,845,128; Series A, B, C, D, E and F, 80,200,000 shares authorized; 39,679,021; 58,769,921 and 78,769,909 (unaudited) shares issued as of December 31, 1994, 1995 and June 30, 1996, respectively, and 39,679,021; 58,769,921 and 70,114,399 (unaudited) shares outstanding as of December 31, 1994, 1995 and June 30, 1996, respectively, and none issued and outstanding on a pro forma basis........................................... 39,679 58,770 78,770 -- Common stock, $0.01 par value; 40,000,000 shares authorized; 348,742; 348,742; 399,898 (unaudited) and 8,190,387 (unaudited) shares issued as of December 31, 1994, 1995, June 30, 1996 and pro forma, respectively, and 327,353; 327,353; 378,509 (unaudited) and 8,168,998 (unaudited) shares outstanding as of December 31, 1994, 1995, June 30, 1996 and pro forma, respectively.......................................... 3,274 3,274 3,786 $ 81,691 Additional paid-in capital.............................. 14,071,681 18,204,453 23,995,466 23,987,675 Accumulated deficit..................................... (13,494,007) (17,579,454) (21,011,527) (21,011,527) Treasury stock, at cost--21,389 common shares as of December 31, 1994 and 1995 and June 30, 1996 and 8,655,510 (unaudited) preferred shares as of June 30, 1996 and no preferred shares on a pro forma basis..... (15) (15) (8,671) (15) ------------ ------------ ------------ -------------- Total stockholders' equity............................ 620,612 687,028 3,057,824 $ 3,057,824 ------------ ------------ ------------ -------------- -------------- TOTAL..................................................... $ 2,492,092 $ 5,131,578 $ 7,915,907 ------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of the financial statements. F-3 FAXSAV INCORPORATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------- 1993 1994 1995 ------------- ------------- ------------- FOR THE SIX MONTHS ENDED JUNE 30, ---------------------------- 1995 1996 ------------- ------------- (UNAUDITED) (UNAUDITED) REVENUES.............................. $ 2,580,008 $ 3,449,454 $ 11,649,499 $ 5,016,935 $ 7,445,166 COST OF SERVICE....................... 1,855,688 2,297,442 7,020,659 3,106,881 4,280,482 ------------- ------------- ------------- ------------- ------------- GROSS MARGIN.......................... 724,320 1,152,012 4,628,840 1,910,054 3,164,684 OPERATING EXPENSES: Network operations and support...... 742,734 851,281 1,183,119 566,122 867,779 Research and development............ 628,020 613,355 840,083 398,686 780,865 Sales and marketing................. 1,597,527 2,337,089 4,237,787 2,037,127 3,023,302 General and administrative.......... 917,193 991,926 2,042,597 698,665 1,219,012 Depreciation and amortization....... 101,662 180,532 698,236 253,438 586,848 Provision for doubtful accounts..... 35,524 38,721 194,720 145,337 156,300 Other............................... -- (309,375) (440,625) (206,250) -- ------------- ------------- ------------- ------------- ------------- OPERATING LOSS........................ (3,298,340) (3,551,517) (4,127,077) (1,983,071) (3,469,422) ------------- ------------- ------------- ------------- ------------- OTHER INCOME (EXPENSE): Interest income..................... 31,100 47,717 98,408 73,277 59,450 Interest expense.................... (7,899) (2,461) (52,727) (1,322) (67,385) Other............................... 14,772 13,559 (4,051) 25,651 45,284 ------------- ------------- ------------- ------------- ------------- 37,973 58,815 41,630 97,606 37,349 ------------- ------------- ------------- ------------- ------------- NET LOSS.............................. $ (3,260,367) $ (3,492,702) $ (4,085,447) $ (1,885,465) $ (3,432,073) ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Net loss per common and equivalent share............................... $ (5.99) $ (6.39) $ (7.46) $ (3.44) $ (6.17) ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Weighted average common and equivalent shares outstanding.................. 543,953 546,500 547,444 547,444 555,923 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Unaudited pro forma data (Note 2): Pro forma net loss per common and equivalent share.................. $ (0.44) $ (0.40) ------------- ------------- ------------- ------------- Shares used in computing pro-forma net loss per common and equivalent share............................. 9,243,484 8,609,119 ------------- ------------- ------------- -------------
The accompanying notes are an integral part of the financial statements. F-4 FAXSAV INCORPORATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------- 1993 1994 1995 ----------- ----------- ----------- FOR THE SIX MONTHS ENDED JUNE 30, ------------------------ 1995 ----------- 1996 (UNAUDITED) ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss............................................ $(3,260,367) $(3,492,702) $(4,085,447) $(1,885,465) $(3,432,073) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization expense............. 101,662 180,532 698,236 261,247 586,848 Interest to be paid in Series D preferred stock... 4,809 -- -- -- -- Provision for doubtful accounts................... 32,524 38,721 194,720 145,337 156,300 Provision for unrecoverable equipment............. -- 61,559 230,416 68,236 150,000 Gain on sale of property and equipment............ (412) -- -- -- -- Changes in assets and liabilities: Accounts receivable............................... (164,631) (681,161) (1,440,046) (875,721) 65,101 Prepaid expenses and other current assets......... 91,881 (71,688) 48,363 (77,115) (88,783) Other assets...................................... 9,565 (6,851) (63,584) (39,940) (85,731) Accounts payable.................................. 54,372 392,289 (263,097) (3,634) 176,597 Accrued expenses and other liabilities............ 332,291 373,110 1,171,916 511,545 258,478 ----------- ----------- ----------- ----------- ----------- Net cash used in operating activities........... (2,798,306) (3,206,191) (3,508,523) (1,895,510) (2,213,263) ----------- ----------- ----------- ----------- ----------- CASH FLOWS USED IN INVESTING ACTIVITIES: Purchase of property and equipment.................. (247,847) (727,288) (1,267,219) (769,276) (875,703) Proceeds from sale of equipment..................... 4,245 -- -- -- -- ----------- ----------- ----------- ----------- ----------- Net cash used in investing activities........... (243,602) (727,288) (1,267,219) (769,276) (875,703) ----------- ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments made under capital lease obligation........................................ -- (15,000) (135,343) (11,279) (101,309) Borrowings under line of credit..................... -- -- 1,000,000 -- 665,786 Repayments under line of credit..................... -- -- -- -- (1,000,000) Proceeds from issuance of notes payable with warrants.......................................... 321,085 -- -- -- -- Proceeds from issuance of preferred stock, net...... -- 4,121,223 4,151,863 4,151,863 7,924,656 Proceeds from issuance of common stock and exercise of stock options.................................. 1,905 2,584 -- -- -- Treasury stock acquired--preferred.................. -- -- -- -- (2,163,878) ----------- ----------- ----------- ----------- ----------- Net cash provided by financing activities....... 322,990 4,108,807 5,016,520 4,140,584 5,325,255 ----------- ----------- ----------- ----------- ----------- NET (DECREASE) INCREASE IN CASH....................... (2,718,918) 175,328 240,778 1,475,798 2,236,289 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD...... 2,855,182 136,264 311,592 311,592 552,370 ----------- ----------- ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD............ $ 136,264 $ 311,592 $ 552,370 $ 1,787,390 $ 2,788,659 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- SUPPLEMENTAL DISCLOSURE: Cash paid for interest.............................. $ 3,090 $ 2,461 $ 41,685 $ 1,322 $ 62,663 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- NONCASH INVESTING AND FINANCING ACTIVITIES: Equipment acquired under capital lease.............. $ -- $ 60,000 $ 569,178 $ -- $ 306,072 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Conversion of bridge financing...................... $ -- $ 325,894 $ -- $ -- $ -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Issuance of common stock under option pursuant to severance agreement............................... $ -- $ -- $ -- $ -- $ 42,091 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of the financial statements. F-5 FAXSAV INCORPORATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
CONVERTIBLE PREFERRED STOCK COMMON STOCK ADDITIONAL ---------------------- -------------------- PAID-IN ACCUMULATED TREASURY SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK ----------- --------- --------- --------- ------------ ------------- ----------- Balance at December 31, 1992......... 13,246,128 $ 13,246 322,366 $ 3,224 $ 9,646,558 $ (6,740,938) $ (15) Issuance of common stock............. 370 4 329 Exercise of stock options............ 1,747 17 1,555 Net loss............................. (3,260,367) ----------- --------- --------- --------- ------------ ------------- ----------- Balance at December 31, 1993......... 13,246,128 13,246 324,483 3,245 9,648,442 (10,001,305) (15) Conversion of bridge financing....... 1,880,529 1,881 324,013 Issuance of Series D preferred stock.............................. 17,311,021 17,311 2,982,689 Issuance of Series D preferred stock.............................. 7,241,343 7,241 1,247,685 Exercise of stock options............ 2,870 29 2,555 Expense in connection with stock issuances.......................... (133,703) Net loss............................. (3,492,702) ----------- --------- --------- --------- ------------ ------------- ----------- Balance at December 31, 1994......... 39,679,021 39,679 327,353 3,274 14,071,681 (13,494,007) (15) Issuance of Series E preferred stock.............................. 19,090,900 19,091 4,180,828 Expense in connection with stock issuance........................... (48,056) Net loss............................. (4,085,447) ----------- --------- --------- --------- ------------ ------------- ----------- Balance at December 31, 1995......... 58,769,921 58,770 327,353 3,274 18,204,453 (17,579,454) (15) Issuance of Series F preferred stock (unaudited)........................ 19,999,988 20,000 7,979,998 Exercise of stock options (unaudited)........................ 51,156 512 41,579 Treasury stock acquired--Series D preferred stock (unaudited)........ (8,655,510) (2,155,222) (8,656) Expense in connection with stock issuance (unaudited)............... (75,342) Net loss (unaudited)................. (3,432,073) ----------- --------- --------- --------- ------------ ------------- ----------- Balance at June 30, 1996 (unaudited)........................ 70,114,399 78,770 378,509 3,786 23,995,466 (21,011,527) (8,671) Pro forma adjustments (unaudited).... (70,114,399) (78,770) 7,790,489 77,905 (7,791) 8,656 ----------- --------- --------- --------- ------------ ------------- ----------- Pro forma balance, June 30, 1996 (unaudited)........................ -- $ -- 8,168,998 $ 81,691 $ 23,987,675 $ (21,011,527) $ (15) ----------- --------- --------- --------- ------------ ------------- ----------- ----------- --------- --------- --------- ------------ ------------- ----------- TOTAL ----------- Balance at December 31, 1992......... $ 2,922,075 Issuance of common stock............. 333 Exercise of stock options............ 1,572 Net loss............................. (3,260,367) ----------- Balance at December 31, 1993......... (336,387) Conversion of bridge financing....... 325,894 Issuance of Series D preferred stock.............................. 3,000,000 Issuance of Series D preferred stock.............................. 1,254,926 Exercise of stock options............ 2,584 Expense in connection with stock issuances.......................... (133,703) Net loss............................. (3,492,702) ----------- Balance at December 31, 1994......... 620,612 Issuance of Series E preferred stock.............................. 4,199,919 Expense in connection with stock issuance........................... (48,056) Net loss............................. (4,085,447) ----------- Balance at December 31, 1995......... 687,028 Issuance of Series F preferred stock (unaudited)........................ 7,999,998 Exercise of stock options (unaudited)........................ 42,091 Treasury stock acquired--Series D preferred stock (unaudited)........ (2,163,878) Expense in connection with stock issuance (unaudited)............... (75,342) Net loss (unaudited)................. (3,432,073) ----------- Balance at June 30, 1996 (unaudited)........................ 3,057,824 Pro forma adjustments (unaudited).... ----------- Pro forma balance, June 30, 1996 (unaudited)........................ $ 3,057,824 ----------- -----------
The accompanying notes are an integral part of the financial statements. F-6 FAXSAV INCORPORATED NOTES TO FINANCIAL STATEMENTS (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) 1. ORGANIZATION AND NATURE OF OPERATIONS: FaxSav Incorporated, formerly known as Digitran Corporation (the "Company"), was formed in November 1989 to engage in the sale of customized facsimile transmission services. In February 1996, the Company changed its name to FaxSav Incorporated. The Company designs, develops and markets a variety of business-to-business facsimile transmission services, including fax-to-fax, desktop to fax, enhanced fax and broadcast fax services. Through the use of its integrated Internet-based and telephony-based network and its proprietary software, the Company enables its customers to send documents and images to fax machines world wide. In early 1996, the Company began to deploy a global Internet-based network of nodes that enable it to bypass the long distance carriers' networks when sending faxes to or from international areas serviced by these nodes. Most of the Company's revenues to date have been derived from delivering facsimile transmissions to locations outside the United States from customers located throughout the United States. The Company operates in one business segment. The Company is subject to risks common to rapidly growing technology-based companies, including limited operating history, dependence on key personnel, raising equity capital, rapid technological change, competition from substitute products and larger companies, and the successful development and marketing of commercial products and services. The Company requires additional equity capital or financing in the near term to carry out its planned network expansion and to fund anticipated operating losses. In the event the offering contemplated by this Prospectus is not completed, without such additional capital, management believes that the Company's current sources of liquidity are sufficient for it to continue operations through September 30, 1997 after limiting its network expansion and significantly reducing operating expenses to a level that enables the Company to continue serving primarily existing customers. The reduction in operating expenses would include halting research and development activities and substantially reducing sales and marketing expenditures. Fax boards used in the Company's telecommunication network are supplied by one vendor on a non-exclusive basis. Other components of the Company's operating network are supplied by a limited number of vendors, also on a non-exclusive basis. Management believes that other suppliers could be identified to provide this equipment at a competitive price if these suppliers were unable or unwilling to provide such equipment. Operation of the Company's network to date has been dependent upon long distance telecommunication companies transmitting information for the Company. The Company has typically utilized only a limited number of these providers to generate volume discounts. The Company's business strategy is also dependent upon providing this service at the lowest possible cost which is greatly affected by the cost of long distance transmission service. Management believes that its long-distance transmissions could be made at competitive rates with any number of companies providing long distance service. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: A. REVENUE RECOGNITION AND COST OF SERVICE: The Company recognizes revenue as services are provided to customers and records the related cost of service as incurred. Cost of service consists of local access charges, leased network backbone circuit costs and long distance domestic and international termination charges. B. ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and F-7 FAXSAV INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made by management and included in the financial statements are the allowance for bad debts, valuation allowance for deferred tax assets, provision for FAXSAV CONNECTORS and accrual for legal defense. C. INTERIM FINANCIAL INFORMATION (UNAUDITED): The financial statements as of June 30, 1996 and for the six months ended June 30, 1995 and 1996 are unaudited. In the opinion of management of the Company, such unaudited financial statements include all adjustments necessary, which include only normal recurring items, to present fairly the information set forth therein. Results for the interim periods are not necessarily indicative of the results for any other interim period or the full year. D. UNAUDITED PRO FORMA INFORMATION: All of the Company's convertible preferred stock outstanding as of the closing date of an initial public offering will be converted into shares of the Company's common stock at the consent of the holders of the preferred stock. A pro forma balance sheet as of June 30, 1996 would reflect the conversion of all outstanding preferred stock into 7,790,489 (unaudited) shares of common stock with a par value of $0.01, assuming a reverse stock split for common shares of one-for-nine shares. E. NET LOSS PER COMMON AND EQUIVALENT SHARE: Net loss per common and equivalent share is computed using the weighted average number of shares of common stock outstanding. Common equivalent shares from stock options, warrants and preferred stock (except as required by SAB 83 referred to below) are excluded from the computation as the effect is anti- dilutive. Historical earnings per share data do not assume the conversion of the preferred stock into common stock described above which would materially change the Company's capitalization. Fully diluted loss per share is not presented as it would not materially differ from the primary loss per share data. F. PRO FORMA NET LOSS PER COMMON AND EQUIVALENT SHARE: Pro forma net loss per common and equivalent share is based on the weighted average number of shares outstanding during the periods presented, including the effect of a reverse stock split for common shares of one-for-nine shares to take effect prior to the effective date of this registration statement and conversion of all outstanding preferred stock into 7,790,489 shares of common stock (see Note 14). Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No. 83 ("SAB 83"), all shares, options and warrants issued during the twelve months immediately preceding the initial public offering were treated as if they had been outstanding for all periods, using the treasury stock method and assuming a per share price of $8.00, the initial public offering price. Common stock equivalents (i.e., convertible preferred stock and certain stock options and warrants) issued in earlier periods have not been included since the effect would be antidilutive. G. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation of furniture and equipment, except enhanced fax equipment, is calculated using the straight-line method over their estimated useful lives of five years. Enhanced fax equipment is included in equipment and is depreciated over its estimated life of 30 months. Leasehold improvements are amortized using the straight-line method over the lesser of the lease term or the estimated useful life of the related asset. Repairs F-8 FAXSAV INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) and maintenance costs are expensed as incurred; major renewals and betterments are capitalized. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any gain or loss on the disposition is reflected in current operations. H. CASH FLOWS: For purposes of the statement of cash flows, the Company considers short-term investments with a maturity at date of purchase of three months or less to be cash equivalents. I. INCOME TAXES: The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "ACCOUNTING FOR INCOME TAXES". This statement provides an asset and liability approach for deferred taxes that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. J. CONCENTRATION OF CREDIT RISK: Statement of Financial Accounting Standards No. 105, "DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATION OF CREDIT RISK," requires disclosure of any significant off-balance-sheet and credit risk concentrations. Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents and accounts receivable. From time to time, the Company had concentrations of cash in several banks in the form of demand deposits and money market accounts. The Company believes that concentrations of credit risk with respect to trade accounts receivable are limited due to the large number of entities comprising the Company's customer base. K. FINANCIAL INSTRUMENTS: The estimated fair value of the Company's financial instruments, which include cash, cash equivalents, accounts receivable, obligations under capital lease and amounts outstanding under line of credit, approximates their carrying value. The fair value of cash, cash equivalents and accounts receivable approximates their carrying value because their maturity is generally less than one year in duration. The fair value of obligations under capital lease and amounts outstanding under the line of credit was determined using valuation techniques that considered cash flow discounted at current rates. L. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS: For the year ended December 31, 1996, the Company will adopt Statement of Financial Accounting Standards No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF". This standard establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used for long-lived assets and certain identifiable intangibles to be disposed of. The Company will adopt the disclosure provisions of Statement of Financial Accounting Standards No. 123, "ACCOUNTING FOR STOCK BASED COMPENSATION" for the year ending December 31, 1996. Such provisions of this standard will require the Company to disclose the fair value of options granted in 1995 and thereafter and the pro forma effects on net loss and net loss per share for the fair value of options granted. There will be no impact on the Company's results of operations, financial position or liquidity. Management does not expect the adoption of these standards to have a material effect on the Company's financial position or results of operations. F-9 FAXSAV INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) M. LEGAL DEFENSE: The Company accrues the estimated future cost of defending itself against lawsuits or other claims when management has determined, in consultation with its legal counsel, that these matters are probable of assertion against the Company. N. UNRECOVERABLE EQUIPMENT: The Company provides for the estimated book value of FAXSAV CONNECTORS held by former or inactive customers that are considered unrecoverable. It is reasonably possible that the Company's estimate of the book value of unrecoverable equipment would change in the near future due to increases in the number of former or inactive customers. 3. PROPERTY AND EQUIPMENT: Property and equipment, net is comprised of the following:
DECEMBER 31, -------------------------- JUNE 30, 1994 1995 1996 ------------ ------------ ------------ (UNAUDITED) Equipment..................................................... $ 1,128,428 $ 2,725,245 $ 3,852,897 Computer software............................................. 108,370 126,250 174,724 Furniture and fixtures........................................ 17,182 38,962 44,611 Leasehold improvements........................................ 57,153 127,506 127,506 ------------ ------------ ------------ 1,311,133 3,017,963 4,199,738 Less, accumulated depreciation and amortization............... 329,238 982,184 1,538,060 ------------ ------------ ------------ $ 981,895 $ 2,035,779 $ 2,661,678 ------------ ------------ ------------ ------------ ------------ ------------
Certain equipment under capital leases of approximately $60,000, $629,178 and $935,250 (unaudited) at December 31, 1994, 1995 and June 30, 1996, respectively, are included in equipment. At December 31, 1994, 1995 and June 30, 1996, accumulated amortization on equipment under capital leases approximated $2,000, $63,092 and $136,653 (unaudited), respectively. Depreciation and amortization expense for the years ended December 31, 1993, 1994, 1995 and for the six months ended June 30, 1996 amounted to $85,531, $164,908, $666,844 and $555,876 (unaudited). 4. ACCRUED EXPENSES AND OTHER LIABILITIES: Accrued expenses and other liabilities is comprised of the following:
DECEMBER 31, -------------------------- JUNE 30, 1994 1995 1996 ------------ ------------ ------------ (UNAUDITED) Provision for FAXSAV CONNECTORS............................... $ 61,559 $ 291,975 $ 441,975 Accrual for legal defense..................................... -- 400,000 395,000 Accrued carrier charges....................................... 851,909 1,253,820 1,508,979 Accrued salaries, bonuses and commissions..................... 118,000 180,219 140,498 Other......................................................... 227,508 535,294 541,243 ------------ ------------ ------------ $ 1,258,976 $ 2,661,308 $ 3,027,695 ------------ ------------ ------------ ------------ ------------ ------------
F-10 FAXSAV INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) 5. NOTES PAYABLE: In October and November 1993, the preferred stockholders were issued promissory notes for cash, due and payable on December 31, 1993, bearing interest at 8% per annum, for an aggregate amount of $321,085 with warrants for an equivalent number of Series C Preferred Stock for which no value was ascribed. Coincident with the investment in January 1994 by Telstra (See Note 13), the promissory notes and the accrued interest thereon were converted to 1,880,529 shares of Series D Preferred Stock. 6. COMMITMENTS: TELECOMMUNICATIONS LINES The Company has committed to minimum monthly usage levels with certain telecommunications carriers. The commitments require minimum monthly payments up to $400,000, exclusive of usage discounts, through October 1996, $150,000 through December 1996 and $200,000 a month thereafter through July 1998. The Company also leases space under co-locate agreements for certain of its telecommunications equipment. LEASES Total rent expense for office facilities for the years ended December 31, 1993, 1994, 1995 and for the six months ended June 30, 1996 amounted to $171,410, $185,829, $147,516 and $86,727 (unaudited), respectively. The Company leases certain computer equipment pursuant to operating leases which expire through 2000. Rent expense related to these leases for the years ended December 31, 1993, 1994, 1995 and for the six months ended June 30, 1996 amounted to $319,865, $321,474, $247,167 and $96,052 (unaudited), respectively. The Company acquired equipment for $60,000, $569,178 and $306,072 (unaudited) under capital lease obligations during the years ended December 31, 1994, 1995 and during the six months ended June 30, 1996, respectively. Interest paid for capital lease obligations during the year ended December 31, 1995 and the six months ended June 30, 1996 was $20,796 and $27,637, respectively. In February 1995, the Company entered into a Master Equipment Lease ("Master Lease") which provides for the leasing of certain equipment up to $500,000 through December 1995. In February 1996, the Company extended the term of the Master Lease through December 31, 1996 and increased the equipment lease line limit to $1 million. As of December 31, 1995 and June 30, 1996, $486,202 and $616,385, respectively, was outstanding under the equipment lease line. F-11 FAXSAV INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) 6. COMMITMENTS: (CONTINUED) The Company was obligated under these agreements to make the following payments:
DECEMBER 31, 1995 JUNE 30, 1996 ---------------------- ------------------------ OPERATING CAPITAL OPERATING CAPITAL LEASES LEASES LEASES LEASES ---------- ---------- ----------- ----------- (UNAUDITED) (UNAUDITED) 1996................................................. $ 131,775 $ 197,694 $ 73,597 $ 150,681 1997................................................. 81,120 191,067 100,891 301,362 1998................................................. 36,504 171,516 38,260 313,143 1999................................................. 6,895 -- 25,567 27,162 Thereafter........................................... -- -- 6,224 -- ---------- ---------- ----------- ----------- Total minimum lease payments......................... $ 256,294 560,277 $ 244,539 792,348 ---------- ----------- ---------- ----------- Less, amount representing interest................... 81,442 108,750 Less, current principal maturities of obligation under capital lease................................ 152,593 238,658 ---------- ----------- Long-term lease obligation........................... $ 326,242 $ 444,940 ---------- ----------- ---------- -----------
7. CAPITAL STOCK AND WARRANTS (SEE ALSO NOTES 13 AND 14): PREFERRED STOCK As of June 30, 1996, the Company is authorized to issue 1,400,000 shares of Series A Preferred Stock, 4,000,000 shares of Series B Preferred Stock, 8,700,000 shares of Series C Preferred stock, 26,600,000 shares of Series D Preferred Stock, 19,500,000 shares of Series E Preferred Stock and 20,000,000 (unaudited) shares of Series F Preferred Stock (collectively, the Preferred Stock). Holders of the Preferred Stock are entitled to dividends at the rate of $0.075 per share for Series A, $0.10 per share for Series B, $0.06 per share for Series C, $0.01733 per share for Series D, $0.022 per share for Series E and $0.04 (unaudited) per share for Series F when and if declared by the Company's Board of Directors. Such dividends are not cumulative. Holders of the Series A, B, C, D, E and F Preferred Stock are entitled to a liquidation preference per share of $0.75, $1.00, $0.60, $0.1733, $0.22 and $0.40 (unaudited), respectively. Each share of Series A, B, C, D, E and F Preferred Stock may be converted into common stock of the Company as determined by dividing the original issue price of the preferred stock by the conversion price, as defined, and subject to certain adjustments. These preferred shares are subject to automatic conversion upon the earlier of (a) an initial public offering at a price greater than $3.00 per share or (b) the consent of a majority of the then outstanding shares of Preferred Stock. No dividends have been declared on the Preferred Stock to date. During 1991, the Company issued 400,000 shares of Series A Preferred Stock, 3,066,600 shares of Series B Preferred Stock and 182,483 shares of common stock at an aggregate purchase price of $300,000, $3,068,384 and $162,198, respectively. Costs incurred in connection with the issuance of the Series B Preferred Stock amounted to $23,202. During 1992, the Company issued 8,329,528 shares of Series C Preferred Stock at an aggregate purchase price of $4,997,716. Costs incurred in connection with the issuance of the Series C Preferred Stock amounted to $43,810. In January 1994, the Company issued 17,311,021 shares of Series D Preferred Stock to Telstra Incorporated ("Telstra") for an aggregate purchase price of $3,000,000 and 1,880,529 shares of Series D Preferred Stock to certain preferred stockholders upon conversion of the Company's promissory notes (and accrued interest thereon) which were due and payable on December 31, 1993. F-12 FAXSAV INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) 7. CAPITAL STOCK AND WARRANTS (SEE ALSO NOTES 13 AND 14): (CONTINUED) In November 1994, the Company issued 7,241,343 shares of Series D Preferred Stock for an aggregate purchase price of $1,254,926. The shares were issued to certain existing preferred stockholders in several separate transactions. Costs incurred in connection with the issuance of the Series D Preferred Stock amounted to $133,703. In January 1995, the Company issued 19,090,900 shares of Series E Preferred Stock for an aggregate purchase price of $4,199,919. The shares were issued to certain existing as well as new investors. Costs incurred in connection with the issuance of the Series E Preferred Stock amounted to $48,056. In February and March 1996, the Company issued 19,999,988 (unaudited) shares of Series F Preferred Stock for an aggregate purchase price of $7,999,998 (unaudited) to certain existing as well as other new investors in the Company. The Company repurchased 8,655,510 (unaudited) shares of Series D Preferred Stock held by Telstra for $0.25 (unaudited) per share for a total of $2,163,878 (unaudited) on March 18, 1996 from the aforementioned proceeds and will use the remaining funds for working capital purposes. Costs incurred in connection with the issuance of the Series F Preferred Stock amounted to $75,342 (unaudited). F-13 FAXSAV INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) 7. CAPITAL STOCK AND WARRANTS (SEE ALSO NOTES 13 AND 14): (CONTINUED) Preferred stock is comprised of the following:
DECEMBER 31, ------------------------------------------------ 1994 1995 JUNE 30, 1996 ----------------------- ----------------------- ------------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ------------ --------- ------------ --------- ------------ ----------- (UNAUDITED) (UNAUDITED) Series A Convertible Preferred Stock, $.001 par value; preference in liquidation of $.75 per share, $1,050,000 in the aggregate................... 1,400,000 $ 1,400 1,400,000 $ 1,400 1,400,000 $ 1,400 Series B Convertible Preferred Stock, $.001 par value; preference in liquidation of $1.00 per share, $3,516,600 in the aggregate................... 3,516,600 3,516 3,516,600 3,516 3,516,600 3,516 Series C Convertible Preferred Stock, $.001 par value; preference in liquidation of $.60 per share, $4,997,717 in the aggregate................... 8,329,528 8,330 8,329,528 8,330 8,329,528 8,330 Series D Convertible Preferred Stock, $.001 par value; preference in liquidation of $.1733 per share, $3,080,820.... 26,432,893 26,433 26,432,893 26,433 26,432,893 26,433 Series E Convertible Preferred Stock, $.001 par value; preference in liquidation of $.22 per share, $4,199,998 in the aggregate................... -- -- 19,090,900 19,091 19,090,900 19,091 Series F Convertible Preferred Stock, $.001 par value; preference in liquidation of $.40 per share, $14,999,993 in the aggregate (unaudited) -- -- -- -- 19,999,988 20,000 Treasury stock at cost: Series D Convertible Preferred Stock (unaudited) -- -- -- -- (8,655,510) -- ------------ --------- ------------ --------- ------------ ----------- Total............................... 39,679,021 $ 39,679 58,769,921 $ 58,770 70,114,399 $ 78,770 ------------ --------- ------------ --------- ------------ ----------- ------------ --------- ------------ --------- ------------ -----------
F-14 FAXSAV INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) 7. CAPITAL STOCK AND WARRANTS (SEE ALSO NOTES 13 AND 14): (CONTINUED) WARRANTS The Company initially granted warrants to purchase 78,200 shares of Series B Preferred Stock to a firm that had provided the Company with equipment pursuant to a lease agreement. These warrants expire ten years from the date of grant and have an exercise price of $1.00 per share. On October 28, 1993, the Company granted additional warrants, which expire ten years from the date of grant, to this firm to purchase 87,570 shares of Series D Preferred Shares at a price of $0.1733 per share in consideration of the deferral of all payments under the lease agreement in excess of $5,000 per month through January 31, 1994. On July 8, 1993, the Company agreed to grant warrants to purchase 5,556 shares of common stock to another firm providing equipment to the Company under a Master Lease Agreement. The exercise price is $5.40 per share and the warrants expire ten years from the date of grant. On May 5, 1994, the Company granted additional warrants, which expire ten years from the date of grant, to purchase 9,889 shares of common stock at $1.80 per share to this firm in connection with an increase in the equipment covered by the Master Lease Agreement. During October and November 1993, warrants were issued to preferred stockholders to acquire 321,086 shares of Series C Preferred Stock in connection with the issuance of promissory notes for cash by the Company. The exercise price is $0.60 per share and the warrants expire ten years from the date of grant. On July 7, 1995, the Company granted warrants to purchase 28,889 shares of common stock to a bank in connection with the issuance of the working capital line of credit. The exercise price is $1.98 per share and the warrants expire five years from the date of grant. The number and purchase price of the shares may be adjusted by the occurrence of certain events, as defined in the warrant agreements. Upon the conversion of the preferred stock into common stock as described in Note 14, each warrant to acquire shares of preferred stock will be adjusted for the conversion of preferred stock into common stock. Management of the Company has determined that the value of the warrants issued in connection with the above referenced leasing arrangements and credit agreements was DE MINIMIS (an aggregate value of approximately $30,000 for all warrants granted between 1993 and 1995) when the exercise price of the warrant is considered in relation to the estimated fair value of the Company's common stock and preferred stock and, accordingly, no value has been ascribed to such warrants. Such value would have been recorded as a deferred financing cost and amortized over the life of the underlying borrowing facility. 8. STOCK OPTIONS (SEE ALSO NOTE 14): The Company has a stock option plan which, as amended, authorizes up to 12,000,000 shares of common stock to be issued. Under the stock option plan, the Company may grant incentive stock options or nonqualified stock options. The option exercise price of stock options may not be less than 85% of the fair value of a share of common stock on the date of the option grant. The excess, if any, of the fair value of underlying common stock over the exercise price of the option is charged to compensation expense over the vesting period of the option. The shares issuable upon the exercise of incentive stock options, and any nonqualified options granted to employees, generally vest 20% upon completion by the optionee of one year of service and the remaining 80% over 48 equal monthly installments thereafter based on continued service. The shares issuable upon the exercise of nonqualified options except for those granted to employees as noted above, vest over two years from the date of grant. Effective October 1, 1993, the Company was authorized to grant options to purchase up to 411,111 shares of common stock to certain employees under a key employee retention program. On October 1, 1993, the Company granted options to purchase 139,778 shares of common stock at $0.90 per share to employees F-15 FAXSAV INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) 8. STOCK OPTIONS (SEE ALSO NOTE 14): (CONTINUED) who elected to participate in the program. Coincident with the January 1994 sale of stock, employees in the program were granted options to purchase an additional 135,667 shares of common stock at $0.90 per share. The aforementioned options vested on October 31, 1994 unless the employee was no longer with the Company. The balance of available shares (172,060 as of December 31, 1994), including forfeitures, were to be granted upon a sale or merger of the Company. In March 1995, the Company granted the remaining options available to the eligible employees and granted other options to certain key executives. Stock option transactions under the plan are as follows:
INCENTIVE OPTION NONQUALIFIED STOCK AVAILABLE PRICE OPTIONS OPTIONS FOR GRANT PER SHARE ------------ --------- ----------- ------------- December 31, 1992........................................... 15,000 157,661 25,082 $0.72-0.90 Available for Grant....................................... 411,111 Granted................................................... 12,136 162,975 (175,111) 0.90 Exercised................................................. (1,458) (289) -- 0.90 Canceled.................................................. (2,431) (20,128) 22,558 0.72-0.90 ------------ --------- ----------- December 31, 1993........................................... 23,247 300,219 283,640 0.72-0.90 Available for Grant....................................... 188,889 Granted................................................... 23,878 184,566 (208,444) 0.90 Exercised................................................. (2,778) (93) -- 0.90 Canceled.................................................. (43,989) 43,989 0.90 ------------ --------- ----------- December 31, 1994........................................... 44,347 440,703 308,074 0.72-0.90 Available for Grant....................................... 455,556 Granted................................................... 320,430 290,360 (610,790) 0.225-0.90 Exercised................................................. -- -- -- -- Canceled.................................................. -- (28,955) 28,955 0.225-0.90 ------------ --------- ----------- December 31, 1995........................................... 364,777 702,108 181,795 0.225-0.90 Available for Grant--(unaudited).......................... 72,224 Granted--(unaudited)...................................... 111,112 111,778 (222,890) 0.90-3.60 Exercised--(unaudited).................................... -- (51,156) -- 0.225-0.90 Canceled--(unaudited)..................................... -- -- -- -- ------------ --------- ----------- June 30, 1996--(unaudited).................................. 475,889 762,730 31,129 0.225-3.60 ------------ --------- ----------- ------------ --------- -----------
At December 31, 1994, 1995 and June 30, 1996, options for 328,869, 404,833 and 508,747 (unaudited) shares, respectively, were vested and exercisable. Nonqualified options to acquire 367,556 common shares were granted to employees. 9. LINE OF CREDIT: In July 1995, the Company entered into a Credit Agreement (Agreement) with a bank (the Bank). As of December 31, 1995, this Agreement, as amended, comprises a $1,000,000 working capital line of credit which includes a $500,000 sublimit for the issuance of letters of credit. The Agreement provides for certain restrictions and covenants, including the payment of dividends on the Company's common stock and incurring additional indebtedness. As of December 31, 1995, the Company was in default of certain financial covenants, which included requirements with respect to liquidity, net worth, leverage and profitability; however, the Bank waived these defaults. In connection with the Agreement, the Company issued warrants (see Note 8) to the Bank. F-16 FAXSAV INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) 9. LINE OF CREDIT: (CONTINUED) In April 1996, the Company accepted a revised commitment which renewed the $1,000,000 working capital line of credit and extended a $750,000 equipment line of credit (collectively referred to as line of credit). Under the revised Agreement, the working capital line of credit expires in April 1997. Any amounts borrowed under the equipment line of credit are payable in monthly installments over a three-year period commencing in October 1996. The revised Agreement contains the same basic covenants as discussed above. As of June 30, 1996, the Company was in default of certain financial covenants contained in the revised Agreement; however, the Bank waived these defaults and revised the covenants for the period July 31, 1996 until December 31, 1996. The revised agreement limits the total amount outstanding under the line of credit to $1 million until the Company raises additional equity. In addition, the Credit Facility, as amended, contains a covenant that the anticipated public offering of securities must occur or the Company must raise an additional $3 million in equity on or before October 30, 1996. At December 31, 1995 and June 30, 1996, $1,000,000 and $500,000 (unaudited) were outstanding under the working capital line of credit. At June 30, 1996, $165,796 (unaudited) was outstanding under the equipment line of credit. The amounts outstanding under the facilities approximates its fair value due to the short-term nature of the obligations. Interest on advances, if any, are at the Bank's prime rate plus an applicable margin, as defined in the credit agreement, which resulted in a borrowing rate of 10.5% and 8.75% at December 31, 1995 and June 30, 1996, respectively. 10. INCOME TAXES: Inasmuch as the Company continues to incur operating losses and currently pays no income taxes, no provision or benefit for income taxes has been recorded. The income tax benefit at the United States federal statutory rate on the Company's operating loss, for all periods presented, has been eliminated by an increase in the valuation allowance for deferred tax assets and operating losses not recognized. Through December 31, 1995, the Company has generated net operating loss carryforwards for income tax purposes of approximately $16,104,000, which expire through 2010. Net operating loss carryforwards are subject to review and possible adjustment by the Internal Revenue Service and may be limited in the event of certain cumulative changes in the ownership interests of significant stockholders over a three-year period in excess of 50%. The Company believes it has experienced changes in ownership in excess of 50% and that these changes in ownership will affect the Company's ability to utilize its net operating loss carryforwards to offset future taxable income, if any. The components of the Company's deferred tax asset are as follows:
DECEMBER 31, ---------------------------- 1994 1995 ------------- ------------- Operating loss carryforwards................................. $ 3,842,831 $ 5,225,595 Temporary differences........................................ 191,068 436,498 ------------- ------------- 4,033,899 5,662,093 Less--valuation allowance.................................... (4,033,899) (5,662,093) ------------- ------------- $ -- $ -- ------------- ------------- ------------- -------------
F-17 FAXSAV INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) 10. INCOME TAXES: (CONTINUED) In evaluating the realizability of these deferred tax assets, management has considered the market in which the Company operates, the operating losses incurred to date and the operating losses anticipated for the future, and believes that given the significance of this evidence, a full valuation allowance against its deferred tax assets is required as of December 31, 1994 and 1995. 11. 401(K) RETIREMENT PLAN: Effective January 1, 1993, the Company offered a 401(k) retirement plan to its employees. Employees who are at least 21 years of age may become a participant after three months of service. Contributions to the Plan are made on a pre-tax basis through payroll deductions. The Company did not make any matching contributions to the Plan during the years ended December 31, 1994, 1995 and the six months ended June 30, 1996. 12. CONTINGENCIES: The Company is involved in various disputes, claims or legal proceedings and may be included in future actions including infringement on intellectual property rights, related to its normal course of business. In the opinion of management, all such matters are without merit or involve amounts, if disposed of unfavorably, which would not have a material adverse effect on the financial position or results of operations of the Company. 13. TELSTRA AGREEMENTS: On January 18, 1994, the Company and Telstra Incorporated ("Telstra"), a wholly-owned subsidiary of Telstra Holdings Pty. Limited, entered into a Preferred Stock Purchase Agreement which provided for, among other things: (a) the sale and issuance of 17,311,021 shares of Series D Preferred Stock for a purchase price of $3,000,000 ($.1733 per share); (b) the grant of an option, on a one-time basis between January 1, 1996 and December 31, 1996, to acquire 100% of the fully diluted shares of the Company's outstanding common stock not owned by Telstra; (c) Telstra's designation of two of the five numbers of the Company's Board of Directors, whose size may not be increased without Telstra's approval; (d) Telstra's prior approval on certain business decisions of the Company, including business plans, annual budgets, issuance of securities and certain indebtedness; (e) an additional equity investment through the purchase of Series D Preferred Stock at $0.1733 per share of up to $1,250,000, if required by the Company, to be made by the current Preferred Stockholders (exclusive of Telstra) on a pro rata basis no later than January 31, 1995; and (f) under the terms of an amended stockholders agreement, the holders of a majority of the Registerable Securities, as defined, may request, after May 1, 1994, that the Company file a registration statement under the Securities Act of 1933. The proceeds from the issuance of the shares to Telstra were used for working capital and capital expenditures for the purpose of sustaining or expanding the Company's market share. Costs incurred in connection with the issuance of the Series D Preferred Stock amounted to approximately $134,000. On February 1, 1994, the Company and Telstra entered into a Service Agreement whereby the Company will provide management, technical and other services in support of Telstra's "WorldFax" service in the U.S. for a period of 18 months. In consideration for these services, Telstra paid the Company total consideration of $750,000. The Company received $309,375 and $440,625 in 1994 and 1995, respectively, in accordance with the Service Agreement which has been included as other revenue to offset operating expenses incurred in the accompanying statements of operations. On October 31, 1994, the Preferred Stock Purchase Agreement referred to above was amended in connection with the Company's intent to raise additional equity funds. The amended agreement provided for, among other things: (a) termination of Telstra's option to acquire 100% of the fully diluted shares of the F-18 FAXSAV INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) 13. TELSTRA AGREEMENTS: (CONTINUED) Company's common stock; (b) an increase in the size of the Company's Board of Directors to six members upon the closing of additional equity financing of $2 million; (c) Telstra to designate one of the five original members of the Company's Board of Directors if Telstra's ownership were to fall below 20%, subject to adjustments with the approval of Telstra; and (d) if the Company completes an initial public offering of its common stock, it will no longer be subject to certain covenants and agreements with Telstra and Telstra will relinquish approval of the Company's business decisions. In December 1995, the Company and Telstra entered into a Stock Option Agreement which provided for, among other things, an option for the Company to purchase from Telstra, 8,655,510 shares of Series D Preferred Stock at an exercise price of $0.25 per share. Upon exercise of the option Telstra could designate one of the six members of the Company's Board of Directors until the earlier of (a) Telstra's equity ownership in the Company falls below 5% on a fully diluted basis or (b) an initial public offering of the Company's common stock, at which time they will no longer have Board representation. In March 1996, the Company exercised its option to acquire 8,655,510 (unaudited) shares of Series D Preferred Stock at an aggregate purchase price of $2,163,878 (unaudited). 14. OTHER EVENTS (UNAUDITED): In connection with the anticipated public offering of securities, the Company filed an amendment to its Fifth Amended and Restated Certificate of Incorporation to effect a one-for-nine reverse stock split at a par value of $0.01 and to change the authorized number of common shares to 40,000,000. All share and per share amounts in the financial statements have been retroactively restated to reflect the reverse stock split. The Company is also expected to file immediately prior to the closing of the offering its Sixth Amended and Restated Certificate of Incorporation which will change the authorized number of preferred stock. All outstanding shares of preferred stock will convert at the consent of the holders into an aggregate of 7,790,489 shares of common stock. The effect of this conversion has been presented in the accompanying balance sheets and statements of stockholders equity (deficit) on a pro forma basis as of June 30, 1996. F-19 - -------------------------------------------------- -------------------------------------------------- - -------------------------------------------------- -------------------------------------------------- NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
Page --- Prospectus Summary................................. 3 Risk Factors....................................... 6 Use of Proceeds.................................... 14 Dividend Policy.................................... 14 Dilution........................................... 15 Capitalization..................................... 16 Selected Financial Data............................ 17 Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 18 Business........................................... 26 Management......................................... 39 Certain Transactions............................... 46 Principal Stockholders............................. 48 Description of Capital Stock....................... 50 Shares Eligible for Future Sale.................... 53 Underwriting....................................... 55 Legal Matters...................................... 56 Experts............................................ 56 Additional Information............................. 56 Index to Financial Statements...................... F-1
------------------------ UNTIL NOVEMBER 5, 1996 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 1,500,000 SHARES [LOGO] COMMON STOCK -------------- PROSPECTUS OCTOBER 11, 1996 --------------------- LEHMAN BROTHERS ALEX. BROWN & SONS INCORPORATED - -------------------------------------------------- -------------------------------------------------- - -------------------------------------------------- -------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Registrant in connection with the sale of Common Stock being registered. All amounts are estimates except the SEC registration fee, the NASD filing fee and the Nasdaq National Market listing fee.
AMOUNT TO BE PAID ------------ SEC registration fee............................................................ $ 10,469 NASD filing fee................................................................. 3,536 Nasdaq National Market listing fee.............................................. 41,414 Printing and engraving.......................................................... 125,000 Legal fees and expenses......................................................... 275,000 Accounting fees and expenses.................................................... 200,000 Blue sky fees and expenses...................................................... 15,000 Directors and officers liability insurance...................................... 300,000 Transfer agent fees............................................................. 1,000 Miscellaneous................................................................... 28,581 ------------ Total....................................................................... $ 1,000,000 ------------ ------------
- --------- * To be supplied by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law authorizes a court to award or a corporation's Board of Directors to grant indemnification to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Act"). Article IX of the Registrant's Sixth Amended and Restated Certificate of Incorporation provides for indemnification of its directors and officers and permissible indemnification of employees and other agents to the maximum extent permitted by the Delaware General Corporation Law. Reference is also made to Section 10 of the Underwriting Agreement contained in Exhibit 1.1 hereto, which sets forth certain indemnification provisions. The Registrant plans to obtain liability insurance for its officers and directors. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The Registrant has sold and issued the following securities during the past three years: In October 1993, the Registrant issued warrants to purchase 87,570 shares of Series D Preferred Stock at an exercise price of $0.1733 per share to an equipment lessor. In October and November 1993, warrants expiring ten years from the date of grant were issued to certain existing preferred stockholders to acquire 321,086 shares of Series C Preferred Stock with an exercise price of $0.60 per share. In January 1994, the Registrant issued 19,191,550 shares of Series D Preferred Stock to 45 investors at a price of $0.1733 per share. In May 1994, the Registrant issued warrants to purchase 89,000 shares of Common Stock (before giving effect to the one-for-nine reverse stock split to be effected prior to the closing of this offering) at an exercise price of $0.20 to an equipment lessor. In November 1994, the Registrant issued 7,241,343 shares of Series D Preferred Stock to 47 investors at a price of $0.1733 per share. II-1 In January 1995, the Registrant issued 19,090,900 shares of Series E Preferred Stock to 45 investors at a price of $0.22 per share. In July 1995, the Company granted warrants to purchase 176,667 shares of Common Stock (before giving effect to the one-for-nine reverse stock split to be effected prior to the closing of this offering), exercisable for five years from the date of grant at a price of $0.22 per share, to a bank in connection with the issuance of a working capital line of credit. In February and March 1996, the Registrant issued 19,999,988 shares of Series F Preferred Stock to 68 investors at a price of $0.40 per share. In August 1996, the Company issued an aggregate of 13,431 shares of Series C Preferred Stock to six investors upon exercise of Series C Preferred Stock warrants at an exercise price of $0.60 per share. The Registrant from time to time has granted stock options to purchase shares of Common Stock to employees, directors and consultants. The following table sets forth certain information regarding such grants:
RANGE OF NO. OF EXERCISE SHARES PRICES ------------ -------------- 1993 (from June 30, 1993)............................................. 142,555 $0.90 1994.................................................................. 208,444 0.90 1995.................................................................. 610,790 0.225 - 0.90 1996 (through August 31, 1996)........................................ 222,889 0.90 - 3.60
The Registrant from time to time has issued Common Stock to employees, directors and consultants who have exercised their stock options. The following table sets forth certain information regarding such issuances.
RANGE OF NO. OF EXERCISE SHARES PRICES ------------ -------------- 1993 (from June 30, 1993)............................................. 48 $0.90 1994.................................................................. 2,978 0.90 1995.................................................................. -- -- 1996 (through August 31, 1996)........................................ 51,156 0.225 - 0.90
The above securities were offered and sold by the Registrant in reliance upon an exemption from registration under either (i) Section 4(2) of the Securities Act as transactions not involving any public offering or (ii) Rule 701 under the Securities Act. No underwriters were involved in connection with the sales of securities referred to in this Item 15. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
NUMBER DESCRIPTION - --------- ---------------------------------------------------------------------------------------------------- 1.1** Form of Underwriting Agreement. 3.1** Fifth Amended and Restated Certificate of Incorporation of the Registrant. 3.2** Form of Amendment to Fifth Amended and Restated Certificate of Incorporation of the Registrant to be filed prior to the consummation of the public offering. 3.3** Form of Sixth Amended and Restated Certificate of Incorporation of the Registrant to be filed upon the consummation of the public offering. 3.4** By-laws of the Registrant. 3.5** Form of Amendment to By-laws of the Registrant to be in effect upon the consummation of the public offering. 4.1** Specimen Common Stock Certificate.
II-2
NUMBER DESCRIPTION - --------- ---------------------------------------------------------------------------------------------------- 4.2 See Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5 for provisions of the Certificate of Incorporation and Bylaws of the Registrant defining rights of holders of Common Stock of the Registrant. 5.1** Opinion of Brobeck, Phleger & Harrison LLP. 10.1** Fifth Amended and Restated Investor Rights Agreement. 10.2** Amendment and waiver to Fifth Amended and Restated Investor Rights Agreement. 10.3** 1990 Stock Option Plan. 10.4** 1996 Stock Option/Stock Issuance Plan. 10.5** Form of Officer Severance Agreement. 10.6** Form of Director Severance Agreement. 10.7** Telstra Severance Agreement. 10.8+** Telecommunications Services Agreement, between Wiltel, Inc. and the Registrant, dated April 4, 1994. 10.9+** Agreement between MCI Telecommunications Corporation and the Registrant, effective March 1, 1996. 10.10** Lease Agreement, dated May 28, 1992, between Metro Four Associates Limited Partnership, Thornall Associates and the Registrant, as extended and amended to date. 10.11 Credit Agreement, dated July 7, 1995, between the Company and Silicon Valley Bank, as amended to date. 10.12** Letter Agreement, dated November 1, 1994 between Telstra Incorporated and the Registrant. 10.13** Form of Series C Warrant. 10.14** Series B Preferred Stock Warrant between the Registrant and Comdisco, Inc., dated May 30, 1991. 10.15** Series B Preferred Stock Warrant between the Registrant and Comdisco, Inc., dated September 16, 1992. 10.16** Series D Preferred Stock Warrant between the Registrant and Comdisco, Inc., dated October 28, 1993. 10.17** Common Stock Warrant between the Registrant and LTI Ventures Leasing Corp., dated February 15, 1993. 10.18** Common Stock Warrant between the Registrant and LTI Ventures Leasing Corp., dated May 5, 1994. 10.19** Common Stock Warrant between the Registrant and Silicon Valley Bancshares, dated April 6, 1992. 10.20** Common Stock Warrant between the Registrant and Silicon Valley Bancshares, dated July 7, 1995. 11.1** Statement re Computation of Per Share Earnings. 23.1 Consent of Coopers & Lybrand L.L.P. 23.3** Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1). 24.** Power of Attorney. 27.** Financial Data Schedule.
- --------- ** Previously filed. + Confidential treatment granted II-3 (b) Financial Statement Schedule Schedule II--Valuation of Qualifying Accounts Report of Independent Accountants Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in Financial Statements or notes thereto. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the Delaware General Corporation Law, the Certificate of Incorporation of the Registrant, the Underwriting Agreement, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes: (1) That for purposes of determining any liability under the Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant pursuant to Rule 424 (b) (1) or (4), or 497 (h) under the Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) That for the purpose of determining any liability under the Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 3 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in The City of Edison, State of New Jersey, on this 11th day of October, 1996. FAXSAV INCORPORATED By: /s/ PETER S. MACALUSO ----------------------------------- Peter S. Macaluso VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 3 to the Registration Statement has been signed by the following persons in the capacities indicated on October 11, 1996: SIGNATURE TITLE(S) - ------------------------------------------------------ ------------------------------------------------------ By: * - --------------------------------------- Chief Executive Officer, President and Chairman of the Thomas F. Murawski Board (Principal Executive Officer and Director) By: /s/ PETER S. MACALUSO Vice President and Chief Financial Officer (Principal - --------------------------------------- Financial Officer and Principal Accounting Officer) Peter S. Macaluso By: * - --------------------------------------- Director Jeffrey M. Drazan By: * - --------------------------------------- Director Peter A. Howley By: * - --------------------------------------- Director Gregory Dunfield By: * - --------------------------------------- Director Robert Labant *By: /s/ PETER S. MACALUSO - -------------------------------------- Peter S. Macaluso ATTORNEY-IN-FACT
II-5 FAXSAV INCORPORATED SUPPLEMENTAL SCHEDULE VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS ------------------------- BALANCE AT CHARGES TO CHARGES TO BALANCE AT BEGINNING COST AND OTHER END OF OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD ------------ ----------- ------------ ----------- ------------ YEAR ENDED DECEMBER 31, 1993 Provisions for bad debts................ $ 18,948 $ 32,524 $ 37,542(a) $ 37,542(b) $ 51,472 Provision for FAXSAV CONNECTORS......... -- -- -- -- -- Accrual for legal defense............... -- -- -- -- -- Deferred tax asset valuation allowance............................. 1,039,269 -- 1,335,396 -- 2,374,665 ------------ ----------- ------------ ----------- ------------ $ 1,058,217 $ 32,524 $ 1,372,938 $ 37,542 $ 2,426,137 ------------ ----------- ------------ ----------- ------------ ------------ ----------- ------------ ----------- ------------ YEAR ENDED DECEMBER 31, 1994 Provisions for bad debts................ $ 51,472 $ 38,721 $ 45,252(a) $ 45,252(b) $ 90,193 Provision for FAXSAV CONNECTORS......... -- 61,559 -- -- 61,559 Accrual for legal defense............... -- -- -- -- -- Deferred tax asset valuation allowance............................. 2,374,665 -- 1,659,234 -- 4,033,899 ------------ ----------- ------------ ----------- ------------ $ 2,426,137 $ 100,280 $ 1,704,486 $ 45,252 $ 4,185,651 ------------ ----------- ------------ ----------- ------------ ------------ ----------- ------------ ----------- ------------ YEAR ENDED DECEMBER 31, 1995 Provisions for bad debts................ $ 90,193 $ 194,720 $ 20,397(a) $ 130,573(b) $ 174,737 Provision for FAXSAV CONNECTORS......... 61,559 230,416 -- -- 291,975 Accrual for legal defense............... -- 400,000 -- 5,000 395,000 Deferred tax asset valuation allowance............................. 4,033,899 -- 1,628,194 -- 5,662,093 ------------ ----------- ------------ ----------- ------------ $ 4,185,651 $ 825,136 $ 1,648,591 $ 135,573 $ 6,523,805 ------------ ----------- ------------ ----------- ------------ ------------ ----------- ------------ ----------- ------------
- --------- (a) Accounts receivable recoveries (b) Write-offs REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of FaxSav Incorporated: In connection with our audits of the financial statements of FaxSav Incorporated (formerly Digitran Corporation) as of December 31, 1995 and 1994, and for each of the three years in the period ended December 31, 1995, which are included in this Registration Statement, we have also audited the related financial statement schedule listed under Item 16(b) of this Registration Statement. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Parsippany, New Jersey March 29, 1996 EXHIBIT INDEX
NUMBER DESCRIPTION PAGE - --------- --------------------------------------------------------------------------------------------- ----------- 1.1** Form of Underwriting Agreement. 3.1** Fifth Amended and Restated Certificate of Incorporation of the Registrant. 3.2** Form of Amendment to Fifth Amended and Restated Certificate of Incorporation of the Registrant to be filed prior to the consummation of the public offering. 3.3** Form of Sixth Amended and Restated Certificate of Incorporation of the Registrant to be filed upon the consummation of the public offering. 3.4** By-laws of the Registrant. 3.5** Form of Amendment to By-laws of the Registrant to be in effect upon the consummation of the public offering. 4.1** Specimen Common Stock Certificate. 4.2 See Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5 for provisions of the Certificate of Incorporation and Bylaws of the Registrant defining rights of holders of Common Stock of the Registrant. 5.1** Opinion of Brobeck, Phleger & Harrison LLP. 10.1** Fifth Amended and Restated Investor Rights Agreement. 10.2** Amendment and waiver to Fifth Amended and Restated Investor Rights Agreement. 10.3** 1990 Stock Option Plan. 10.4** 1996 Stock Option/Stock Issuance Plan. 10.5** Form of Officer Severance Agreement. 10.6** Form of Director Severance Agreement. 10.7** Telstra Severance Agreement. 10.8+** Telecommunications Services Agreement, between Wiltel, Inc. and the Registrant, dated April 4, 1994. 10.9+** Agreement between MCI Telecommunications Corporation and the Registrant, effective March 1, 1996. 10.10** Lease Agreement, dated May 28, 1992, between Metro Four Associates Limited Partnership, Thornall Associates and the Registrant, as extended and amended to date. 10.11 Credit Agreement, dated July 7, 1995, between the Company and Silicon Valley Bank, as amended to date. 10.12** Letter Agreement, dated November 1, 1994 between Telstra Incorporated and the Registrant. 10.13** Form of Series C Warrant. 10.14** Series B Preferred Stock Warrant between the Registrant and Comdisco, Inc., dated May 30, 1991. 10.15** Series B Preferred Stock Warrant between the Registrant and Comdisco, Inc., dated September 16, 1992. 10.16** Series D Preferred Stock Warrant between the Registrant and Comdisco, Inc., dated October 28, 1993. 10.17** Common Stock Warrant between the Registrant and LTI Ventures Leasing Corp., dated February 15, 1993. 10.18** Common Stock Warrant between the Registrant and LTI Ventures Leasing Corp., dated May 5, 1994. 10.19** Common Stock Warrant between the Registrant and Silicon Valley Bancshares, dated April 6, 1992. 10.20** Common Stock Warrant between the Registrant and Silicon Valley Bancshares, dated July 7, 1995. 11.1** Statement re Computation of Per Share Earnings. 23.1 Consent of Coopers & Lybrand L.L.P. 23.3 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1). 24.** Power of Attorney. 27.** Financial Data Schedule.
- ------------------------ ** Previously filed. + Confidential treatment granted EX-10.11 2 EXHIBIT 10.11 EXHIBIT 10.11 CREDIT AGREEMENT Dated as of July 7, 1995 between DIGITRAN CORPORATION and SILICON VALLEY BANK -------------------------- Line of Credit Loans $1,000,000 -------------------------- CREDIT AGREEMENT TABLE OF CONTENTS Page ---- Preamble Section 1 Line of Credit Loans 1.1 Amount . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Line of Credit Note. . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.3 Requests For Line of Credit Loans . . . . . . . . . . . . . . . . . . . 1 1.4 Borrowing Base . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.5 Maturity Date of Line of Credit Loans . . . . . . . . . . . . . . . . . 1 1.6 Termination of Commitment . . . . . . . . . . . . . . . . . . . . . . . 1 1.7 Commitment Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 2 Interest Rates; Payments and Optional Prepayments 2.1 Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.2 Manner and Place of Payment . . . . . . . . . . . . . . . . . . . . . . 2 2.3 Payments Due on Saturdays, Sundays and Holidays . . . . . . . . . . . . 2 2.4 Optional Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.5 Capital Requirements . . . . . . . . . . . . . . . . . . . . . . . . . 3 Section 3 Security 3.1 Security Interests . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Section 4 Conditions Precedent 4.1 This Agreement, the Note and the Security Instruments . . . . . . . . . 3 4.2 No Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 4.3 Correctness of Representations . . . . . . . . . . . . . . . . . . . . 3 4.4 Opinion of Counsel for the Borrower . . . . . . . . . . . . . . . . . . 3 4.5 Governmental Approvals . . . . . . . . . . . . . . . . . . . . . . . . 3 4.6 Filing of Financing Statements, etc. . . . . . . . . . . . . . . . . . 4 4.7 Supporting Documents . . . . . . . . . . . . . . . . . . . . . . . . . 4 4.8 Loan Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 4.9 Compliance and Borrowing Base Certificates . . . . . . . . . . . . . . 4 4.10 Accounts Receivable Audit . . . . . . . . . . . . . . . . . . . . . . . 4 4.11 Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 5 Representations and Warranties 5.1 Corporate Status . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 5.2 No Violation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 5.3 Corporate Power and Authority . . . . . . . . . . . . . . . . . . . . . 5 5.4 Enforceability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 5.5 Governmental Approvals . . . . . . . . . . . . . . . . . . . . . . . . 5 5.6 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 5 -ii- 5.7 No Material Change . . . . . . . . . . . . . . . . . . . . . . . . . . 6 5.8 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 5.9 Compliance with Other Instruments: Compliance with Law . . . . . . . . 6 5.10 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 5.11 Investment Company Status; Limits on Ability to Incur Indebtedness. . . 6 5.12 Title to Property . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 5.13 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 5.14 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 5.15 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . 7 5.16 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . 7 5.17 Borrowing Base. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 6 Affirmative Covenants 6.1 Maintenance of Existence . . . . . . . . . . . . . . . . . . . . . . . 8 6.2 Taxes and Other Liens . . . . . . . . . . . . . . . . . . . . . . . . . 8 6.3 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 6.4 Financial Statements, Etc. . . . . . . . . . . . . . . . . . . . . . . 8 6.5 Notice of Default. . . . . . . . . . . . . . . . . . . . . . . . . . . 9 6.6 Environmental Matters. . . . . . . . . . . . . . . . . . . . . . . . . 9 6.7 ERISA Information. . . . . . . . . . . . . . . . . . . . . . . . . . . 10 6.8 Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 6.9 Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 6.10 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . 11 6.11 Depository Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . 11 6.12 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 6.13 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 7 Negative Covenants 7.1 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 7.2 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . .11 7.3 Consolidation, Merger or Acquisition . . . . . . . . . . . . . . . . .12 7.4 Disposition of Assets . . . . . . . . . . . . . . . . . . . . . . . . .12 7.5 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 7.6 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 7.7 Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . .13 7.8 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 7.9 Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 7.10 Sale and Leaseback . . . . . . . . . . . . . . . . . . . . . . . . . . 14 7.11 Additional Stock Issuance by Subsidiaries . . . . . . . . . . . . . . 14 7.12 Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . 14 7.13 Quick Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 7.14 Minimum Profitability . . . . . . . . . . . . . . . . . . . . . . . . 14 7.15 Leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 7.16 Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 8 Events of Default 8.1 Events of Default. . . . . . . . . . . . . . . . . . . . . . . . . . . .15 -iii- 8.2 Remedies Upon an Event of Default. . . . . . . . . . . . . . . . . . . .16 Section 9 Definition 9.1 Certain Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . .17 Section 10 Miscellaneous 10.1 Accounting Terms and Definitions. . . . . . . . . . . . . . . . . . . . 23 10.2 Amendments, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 10.3 Notices, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 10.4 No Waiver; Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . 23 10.5 Right of Set-off. . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 10.6 Expenses; Indemnification . . . . . . . . . . . . . . . . . . . . . . . 24 10.7 Binding Effect. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 10.8 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 10.9 Governing law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 10.10 Waiver of Jury Trial. . . . . . . . . . . . . . . . . . . . . . . . . . 25 10.11 Venue, Consent to Service of Process. . . . . . . . . . . . . . . . . . 25 10.12 Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 10.13 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Exhibits A - Line of Credit Note B - Security Agreement C - Compliance Certificate D - Borrowing Base Certificate E - Borrowing Certificate Schedules A - Disclosure Schedule B - Intellectual Property 7.2 Transactions with Affiliates CREDIT AGREEMENT THIS CREDIT AGREEMENT, dated as of July 7, 1995 by and between DIGITRAN CORPORATION, a Delaware corporation with its principal place of business at 379 Thornall Street, Edison, New Jersey 08837 (the "BORROWER") and SILICON VALLEY BANK, a California-chartered bank, with its principal place of business at 3000 Lakeside Drive, P.O. Box 3762, Santa Clara, California 95054 with a loan production office located at Wellesley Office Park, 45 William Street, Wellesley, Massachusetts 02181 doing business under the name Silicon Valley East (the "BANK"). SECTION 1 LINE OF CREDIT LOANS. 1.1 AMOUNT. Subject to and upon the terms and conditions set forth below, the Bank agrees to make loans (each a "LINE OF CREDIT LOAN" and collectively, the "LINE OF CREDIT LOANS") to the Borrower under this Section 1 from time to time to and including the date which is one year from the date set forth above (the "COMMITMENT EXPIRATION DATE"), unless earlier terminated pursuant to Section 1.6, in an aggregate principal amount not to exceed at any one time outstanding the sum of $1,000,000 (the "LINE OF CREDIT COMMITMENT"), subject to the limitation set forth in Section 1.4. Within the limit of the Line of Credit Commitment, the Borrower may borrow, repay and reborrow at any time or from time to time until the Commitment Expiration Date, or the termination of the Line of Credit Commitment, whichever occurs earlier. 1.2 LINE OF CREDIT NOTE. The Line of Credit Loans shall be evidenced by and payable with interest in accordance with the note of the Borrower in the form of attached EXHIBIT A, dated today's date (the "NOTE"). 1.3 REQUESTS FOR LINE OF CREDIT LOANS. Whenever the Borrower desires to obtain a Line of Credit Loan, it shall notify the Bank by telex, telecopy or telephone received no later than 1:00 p.m. (Boston time) one Banking Day before the day on which the requested Line of Credit Loan is to be made. Such notice shall specify the effective date and the amount of such Loan. Each such notice (a "NOTICE OF BORROWING") shall be irrevocable and shall be immediately followed by a written Borrowing Certificate by the Borrower substantially in the form of attached EXHIBIT E, provided, if such written confirmation differs in any material respect from the action taken by the Bank, the records of the Bank shall control absent manifest error. The Bank shall make such Line of Credit Loan by crediting its amount in immediately available funds to the Borrower's regular deposit account with the Bank. 1.4 BORROWING BASE. The Borrower shall not permit, or request any advance hereunder that would cause, the sum of the aggregate unpaid principal amount of all Line of Credit Loans under this Line of Credit Commitment (the "EXTENSIONS OF CREDIT"), to exceed at any time an amount equal to the lesser of (i) the Line of Credit Commitment or (ii) 50% of all Eligible Domestic Accounts Receivable at such time (such lesser amount, the "BORROWING BASE"). 1.5 MATURITY DATE OF LINE OF CREDIT LOANS. All Line of Credit Loans shall mature and the total unpaid principal amount thereunder shall be due and payable on July 7, 1996 (the "MATURITY DATE"), at which time all amounts advanced under this Section 1 shall be immediately due and payable. 1.6 TERMINATION OF COMMITMENT. The Borrower, upon (a) at least two (2) Banking Days' prior written notice to the Bank and (b) the repayment in full of the outstanding principal balance of the Line of Credit Loans (and accrued interest thereon) and the payment in full of any expenses or other fees owed by the Borrower to the Bank under or pursuant to this Agreement, may elect to permanently terminate the Line of Credit Commitment. -2- 1.7 COMMITMENT FEE. The Borrower agrees to pay the Bank a commitment fee (the "Commitment Fee") for the period commencing on the date hereof and including the Maturity Date (or such earlier date as the Line of Credit Commitment shall have been terminated) computed at a rate equal to 1/2 of 1% per annum on the average daily unused portion of the Line of Credit Commitment. Accrued Commitment Fees shall be due and payable quarterly in arrears on the last Banking Day of July and October 1995 and January and April 1996, respectively. SECTION 2 INTEREST RATES; PAYMENTS AND OPTIONAL PREPAYMENTS. 2.1 INTEREST RATES. (a) The Borrower agrees to pay interest on the unpaid principal amount of each Line of Credit Loan for each day from and including the date such Line of Credit Loan was made to but excluding the date the principal on such Line of Credit Loan is due (whether at maturity, by acceleration or otherwise), at a fluctuating rate per annum equal to the Prime Rate plus 2%, which interest rate shall change when the Prime Rate shall change. Such interest shall be payable monthly in arrears on the last day of each month commencing with the first such date hereafter and when the principal amount of such Line of Credit Loan is due (whether at maturity, by acceleration or otherwise). (b) Any overdue principal or other payment with respect to any Extension of Credit, including without limitation any overdue interest to the extent permitted by law, shall, at the Bank's option, bear interest (after as well as before judgment), payable on demand, for each day from and including the date payment was due to but excluding the date of actual payment, at a fluctuating rate per annum equal to the Prime Rate plus five (5) percent per annum. 2.2 MANNER AND PLACE OF PAYMENT. All payments under this Agreement or otherwise in respect of the Line of Credit Loans shall be made not later than 2:00 p.m. (Boston time) on the date when due and shall be made in immediately available funds at the Office of the Bank or by the Borrower's check drawn on the depositary account(s) maintained by the Borrower with the Bank, payable to the Bank or its order. All payments shall be made without setoff, counterclaim, withholding or reduction of any kind whatsoever. Borrower will regularly deposit funds received from its business activities in accounts maintained by the Borrower at Bank's offices in California. Borrower hereby requests and authorizes the Bank to debit any of Borrower's accounts with the Bank, specifically, without limitation, Account Number 07-00347100, for payments of interest and principal due on the Line of Credit Loans and any other obligations owing by the Borrower to the Bank. The Bank will notify the Borrower of all debits which the Bank makes against the Borrower's accounts. Any such debits against the Borrower's accounts in no way shall be deemed a set-off. 2.3 PAYMENTS DUE ON SATURDAYS, SUNDAYS AND HOLIDAYS. Whenever any payment to be made hereunder or under the Note shall be due on a day which is not a Banking Day, such payment may be made on the next succeeding Banking Day, and such extension of time shall be included in computing any interest or fees due. 2.4 OPTIONAL PREPAYMENTS. The Borrower shall have the right to prepay the Line of Credit Loans in whole or in part, without premium or penalty, at any time and from time to time, provided that at the time of the prepayment in full of all Extensions of Credit, the Borrower shall pay all interest accrued on the amount prepaid. Principal amounts repaid or prepaid under the Note or under the Line of Credit Commitment may be reborrowed by the Borrower subject to the terms hereof; PROVIDED, HOWEVER, that any funds repaid or prepaid on or after the earlier to occur of (a) the Commitment Expiration Date or (b) the termination of the Line of Credit Commitment pursuant to Section 1.6 hereof, may not be reborrowed or readvanced thereafter. -3- 2.5 CAPITAL REQUIREMENTS. If the Bank shall determine that the adoption or implementation after the date hereof of any applicable law, rule, regulation or treaty regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Bank (or its applicable lending office) with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of the Bank or any Person controlling the Bank (a "PARENT") as a consequence of its obligations hereunder to a level below that which the Bank (or its Parent) could have achieved but for such adoption, change or compliance (taking into consideration its policies with respect to capital adequacy) by an amount deemed by the Bank to be material, then from time to time, within 15 days after demand by the Bank the Borrower shall pay to the Bank such additional amount or amounts as will compensate the Bank for such reduction. A statement of the Bank claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive absent manifest error; PROVIDED that the determination thereof is made on a reasonable basis. SECTION 3 SECURITY. 3.1 SECURITY INTERESTS. The Borrower agrees to grant to the Bank a security interest in, and a lien on, all right, title and interest of the Borrower in and to all assets of the Borrower and to enter a Security Agreement in favor of the Bank in the form of EXHIBIT B hereto (the "SECURITY AGREEMENT") in order to secure payment and performance of the Borrower's obligations to the Bank under this Agreement, the Note and the other Loan Documents. SECTION 4 CONDITIONS PRECEDENT. The Bank shall not be obligated to make any Extensions of Credit to the Borrower hereunder until the following conditions have been satisfied: 4.1 THIS AGREEMENT, THE NOTE AND THE SECURITY INSTRUMENTS. This Agreement, the borrowings hereunder, the Note, the Security Instruments and all transactions contemplated by this Agreement and the Security Instruments shall have been duly authorized by the Borrower. The Borrower shall have duly executed and delivered to the Bank this Agreement, the Note and the Security Instruments to the Bank in form and substance satisfactory to the Bank and its counsel. 4.2 NO DEFAULT. On the date hereof and on the date of the making of each Extension of Credit, no Default or Event of Default shall have occurred and be continuing. 4.3 CORRECTNESS OF REPRESENTATIONS. On the date hereof and on the date of each Extension of Credit, all representations and warranties made by the Borrower in Section 5 below or otherwise in writing in connection herewith shall be true and correct with the same effect as though such representations and warranties had been made on and as of today's date, except that representations and warranties expressly limited to a certain date shall be true and correct as of that date. 4.4 OPINION OF COUNSEL FOR THE BORROWER. On the date hereof, the Bank shall have received the favorable opinion of Brobeck, Phleger & Harrison, counsel for the Borrower, in form and substance satisfactory to the Bank and its counsel. 4.5 GOVERNMENTAL APPROVALS. On the date hereof and on the date of each Extension of Credit, all necessary approvals, licenses, permissions, registrations or validations of any Governmental Authority required for the execution, delivery, performance or carrying out of the provisions of this Agreement, the Note and the -4- Security Instruments, or for the validity or enforceability of the obligations incurred thereunder (other than the filing of financing statements as required under Section 4.6 below), shall have been obtained and shall be in full force and effect and copies thereof certified by a duly authorized officer of the Borrower to such effect shall have been delivered to the Bank. 4.6 FILING OF FINANCING STATEMENTS, ETC. On or before the making of the Line of Credit Loans, financing statements, and other appropriate documentation relating to the security interests and rights granted pursuant to the Security Instruments, executed and delivered by the Borrower to the Bank, shall have been duly recorded or filed in such manner and in such places as is required by law (including, pursuant to the UCC) to establish, preserve, protect, and perfect such security interests and rights; and all taxes, fees and other charges in connection with the execution, delivery and filing of this Agreement and such financing statements and other appropriate documentation shall have been duly paid. 4.7 SUPPORTING DOCUMENTS. On or before the date hereof, there shall have been delivered to the Bank the following supporting documents: (a) legal existence and corporate good standing certificates with respect to the Borrower dated as of a recent date issued by the Secretary of State for Delaware or other officials; (b) certificates dated as of a recent date with respect to the due qualification of the Borrower to do business in New Jersey issued by the Secretary of State of New Jersey; (c) copies of the corporate charter of the Borrower, certified by the appropriate Secretaries of State or other officials, as in effect on the date hereof; (d) a certificate of the Secretary or Assistant Secretary of the Borrower certifying as to (i) the By-Laws of the Borrower, as in effect on the date hereof; (ii) the incumbency and signatures of the officers of the Borrower who have executed any documents in connection with the transactions contemplated by this Agreement; and (iii) the resolutions of the Board of Directors and, to the extent required by law, the shareholders, of the Borrower authorizing the execution, delivery and performance of this Agreement and the making of the Line of Credit Loans hereunder, and the execution and delivery of the Note; and (e) all other information and documents which the Bank or its counsel may request in connection with the transactions contemplated by this Agreement. 4.8 LOAN FEE. The Borrower shall have paid a nonrefundable fee to the Bank in the amount of $10,000, as well as all actual and reasonable fees and disbursements incurred in connection with the preparation of this Agreement and the other Loan Documents by Sullivan & Worcester, special counsel to the Bank. 4.9 COMPLIANCE AND BORROWING BASE CERTIFICATES. The Borrower shall have furnished to the Bank a Compliance Certificate in the form of attached EXHIBIT C appropriately completed and signed by the chief financial officer of the Borrower, and to the extent the Borrower is requesting an Extension of Credit on the date hereof, a Borrowing Base Certificate in the form of EXHIBIT D hereto appropriately completed and signed by the chief financial officer or president of the Borrower, each of which certificates shall reflect compliance by the Borrower with the requirements of this Credit Agreement. 4.10 ACCOUNTS RECEIVABLE AUDIT. The Bank shall have received the results of an accounts receivable audit satisfactory to the Bank in all respects. -5- 4.11 LEGAL MATTERS. All documents and legal matters incident to the transactions contemplated by this Agreement shall be satisfactory to Sullivan & Worcester, special counsel for the Bank. Each borrowing hereunder shall constitute a representation and warranty by the Borrower to the Bank that all of the conditions specified in this Section 4 have been complied with as of the time of any such Borrower Loan. SECTION 5 REPRESENTATIONS AND WARRANTIES. In order to induce the Bank to enter into this Agreement and to make the contemplated Extensions of Credit, the Borrower hereby represents and warrants as follows (except to the extent qualified by supplemental disclosure set forth on SCHEDULE A hereto) and the following representations and warranties as so qualified shall survive the execution and delivery of this Agreement and any of the Line of Credit Loans: 5.1 CORPORATE STATUS. The Borrower and each of its Subsidiaries (if any) is a duly organized and validly existing corporation in good standing under the laws of the jurisdiction of its incorporation and is duly qualified or licensed as a foreign corporation in good standing in each jurisdiction in which the failure to do so would have a Material Adverse Effect. 5.2 NO VIOLATION. Neither the execution, delivery or performance of this Agreement or any other Loan Document, nor consummation of the contemplated transactions will contravene any law, statute, rule or regulation to which the Borrower or any of its Subsidiaries is subject or any judgment, decree, franchise, order or permit applicable to the Borrower or any of its Subsidiaries, or will conflict or be inconsistent with or will result in any breach of, or constitute a default under, or result in or require the creation or imposition of any Lien (other than the lien created by the Security Instruments) upon any of the property or assets of the Borrower or any of its Subsidiaries pursuant to, any Contractual Obligation of the Borrower or any of its Subsidiaries, or violate any provision of the corporate charter or by-laws of the Borrower or any of its Subsidiaries. 5.3 CORPORATE POWER AND AUTHORITY. The execution, delivery and performance of this Agreement and the other Loan Documents are within the corporate powers of the Borrower and have been duly authorized by all necessary corporate action. 5.4 ENFORCEABILITY. This Agreement and each other Loan Document constitutes a valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and subject to general principles of equity, whether applied in a court of equity or at law. 5.5 GOVERNMENTAL APPROVALS. No order, permission, consent, approval, license, authorization, registration or validation of, or filing with, or exemption by, any Governmental Authority is required to authorize, or is required in connection with, the execution, delivery and performance of this Agreement or any other Loan Document by the Borrower, or the taking of any action contemplated hereby or thereby, except for the filing of UCC-1 financing statements in the appropriate UCC filing offices listed on the Perfection Certificate (as defined in the Security Agreement). 5.6 FINANCIAL STATEMENTS. (a) The Borrower has furnished the Bank with complete and correct copies of the audited consolidated balance sheet of the Borrower and its Subsidiaries as of the Financial Statements Date, and the related audited consolidated statements of income and of cash flows for the fiscal year of the Borrower and its Subsidiaries ended on such date, examined by the Accountants. Such financial statements (including the related schedules and notes) fairly present the consolidated financial condition of the Borrower and its Subsidiaries -6- as of the Financial Statements Date, and the consolidated results of their operations and their consolidated cash flows for the fiscal year then ended. (b) Neither the Borrower nor any of its Subsidiaries has any material liabilities, contingent or otherwise, including liabilities for taxes or any unusual forward or long-term commitments or any Guarantee, which are not disclosed by or included in the above-referenced financial statements or the accompanying notes and there are no unrealized or anticipated losses from any unfavorable commitments of the Borrower or any of its Subsidiaries which may have a Material Adverse Effect. During the period from the Financial Statements Date to the date hereof: (i) there has been no sale, transfer or other disposition by the Borrower or any of its Subsidiaries of any material part of its business or property and no purchase or other acquisition of any business or property (including any capital stock of any Person) material in relation to the consolidated financial condition of the Borrower and its Subsidiaries at the Financial Statements Date; and (ii) neither the Borrower nor any of its Subsidiaries has made a Restricted Payment, or agreed or committed to make a Restricted Payment. (c) All the above-referenced financial statements (including the related schedules and notes) have been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by the Accountants and disclosed therein and, in the case of interim financial statements, subject to normal year-end adjustments and the absence of footnotes and schedules). 5.7 NO MATERIAL CHANGE. Since the Financial Statements Date there has been no development or event, nor to the best knowledge of the Borrower, any prospective development or event, which has had or could have a Material Adverse Effect. 5.8 LITIGATION. There are no actions, suits or proceedings pending or threatened against or affecting the Borrower or any of its Subsidiaries before any Governmental Authority, which in any one case or in the aggregate, if determined adversely to the interests of the Borrower or any Subsidiary thereof, would have a Material Adverse Effect. 5.9 COMPLIANCE WITH OTHER INSTRUMENTS: COMPLIANCE WITH LAW. Neither the Borrower nor any Subsidiary thereof is in default under (a) any Contractual Obligation, where such default could have a Material Adverse Effect, or (b) the terms of any Contractual Obligation relating to any Indebtedness of the Borrower or such Subsidiary in excess of $25,000. Neither the Borrower nor any Subsidiary thereof is in default and or in violation of any applicable statute, rule, writ, injunction, decree, order or regulation of any Governmental Authority having jurisdiction over the Borrower or any Subsidiary thereof which default or violation could have a Material Adverse Effect. 5.10 SUBSIDIARIES. The Borrower has no Subsidiaries at the date hereof. 5.11 INVESTMENT COMPANY STATUS; LIMITS ON ABILITY TO INCUR INDEBTEDNESS. Neither the Borrower nor any of its Subsidiaries is an "investment company" or a company "controlled by" an investment company within the meaning of the Investment Company Act of 1940, as amended. The Borrower is not subject to regulation under any Federal or State statute or regulation which limits its ability to incur Indebtedness. 5.12 TITLE TO PROPERTY. The Borrower and each of its Subsidiaries has good and marketable title to all of its properties and assets, including the properties and assets reflected in the consolidated balance sheet of the Borrower and its Subsidiaries as of the Financial Statements Date, except such as have been disposed of since that date in the ordinary course of business, and none of such properties or assets is subject to any Lien except for (a) Permitted Liens, or (b) a defect in title or other claim other than defects and claims that, in the aggregate, would have no Material Adverse Effect. The Borrower and each of its Subsidiaries enjoys peaceful and undisturbed -7- possession under all leases necessary in any material respect for the operation of its properties and assets, none of which contains any unusual or burdensome provisions which might materially affect or impair such properties or assets. All such leases are valid and subsisting and are in full force and effect. 5.13 ERISA. The Borrower and each member of the Controlled Group have fulfilled their obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and are in compliance in all material respects with the presently applicable provisions of ERISA and the Code, and have not incurred any liability to the PBGC or a Plan under Title IV of ERISA (other than to make contributions or premium payments in the ordinary course). 5.14 TAXES. All tax returns of the Borrower and its Subsidiaries required to be filed have been timely filed, all taxes, fees and other governmental charges (other than those being contested in good faith by appropriate proceedings diligently conducted and with respect to which adequate reserves have been established and, in the case of AD VALOREM taxes or betterment assessments, no proceedings to foreclose any lien with respect thereto have been commenced and, in all other cases, no notice of lien has been filed or other action taken to perfect or enforce such lien) shown thereon which are payable have been paid. The charges and reserves on the books of the Borrower and its Subsidiaries for all income and other taxes are adequate, and the Borrower knows of no additional assessment or any basis therefor. The Federal income tax returns of the Borrower and its Subsidiaries have not been audited within the last three years, all prior audits have been closed, and there are no unpaid assessments, penalties or other charges arising from such prior audits. 5.15 ENVIRONMENTAL MATTERS. (a) The Borrower and each of its Subsidiaries have obtained all Governmental Approvals that are required for the operation of its business under any Environmental Law, except where the failure to so obtain a Governmental Approval would not have a Material Adverse Effect. (b) The Borrower and each of its Subsidiaries are in compliance with all terms and conditions of all required Governmental Approvals and are also in compliance with all terms and conditions of all applicable Environmental Laws, noncompliance with which would have a Material Adverse Effect. (c) There is no civil, criminal or administrative action, suit, demand, claim, hearing, notice of violation, investigation, proceeding, notice or demand letter pending or, to the best knowledge of the Borrower threatened against the Borrower or any Subsidiary thereof relating in any way to the Environmental Laws, and there is no Lien of any private entity or Governmental Authority against any property of the Borrower or any Subsidiary thereof relating in any way to the Environmental Laws. (d) There has been no claim, complaint, notice, or request for information received by the Borrower with respect to any site listed on the National Priority List promulgated pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") 42 USC Section 9601 ET SEQ. or any state list of sites requiring investigation or cleanup with respect to contamination by Hazardous Substances. (e) To the best of the Borrower's knowledge, there has been no release or threat of release of any Hazardous Substance at any Borrower Property which would likely result in liability being imposed upon the Borrower or any Subsidiary thereof, which liability would have a Material Adverse Effect. 5.16 INTELLECTUAL PROPERTY. Schedule B lists all of the copyrights, patents, trademarks and similar rights which are registered with or granted by an agency of the United States ("INTELLECTUAL PROPERTY") owned by the Borrower and its Subsidiaries as of the date hereof, together with information, where applicable, as to registration number, filing date, record owner and remaining life. Except as set forth in SCHEDULE B, the Borrower or a Subsidiary thereof is the absolute owner of all right, title and interest in the Intellectual Property, free and clear of all Liens in favor of other Persons with full right to pledge, sell, assign, transfer and grant a security interest therein. -8- The Borrower and each of its Subsidiaries owns or possesses such Intellectual Property and similar rights necessary for the conduct of its business as now conducted, without any known conflict with the rights of others which would have a Material Adverse Effect. 5.17 BORROWING BASE. Giving effect to any Extensions of Credit to be made as of the date hereof under this Agreement, the aggregate amount of all Extensions of Credit under this Agreement does not exceed the Borrowing Base on the date hereof. SECTION 6 AFFIRMATIVE COVENANTS. The Borrower covenants and agrees that for so long as this Agreement is in effect and until the Note, together with all interest thereon and all other Obligations of the Borrower to the Bank are paid or satisfied in full: 6.1 MAINTENANCE OF EXISTENCE. The Borrower will, and will cause each of its Subsidiaries to, maintain its existence and comply with all applicable statutes, rules and regulations and to remain duly qualified as a foreign corporation, licensed and in good standing in each jurisdiction where such qualification or licensing is required by the nature of its business, the character and location of its property, business, or the ownership or leasing of its property, except where such noncompliance or failure to so qualify would not have a Material Adverse Effect, and the Borrower will, and will cause each of its Subsidiaries to, maintain its properties in good operating condition, and continue to conduct its business as presently conducted. 6.2 TAXES AND OTHER LIENS. The Borrower will, and will cause each of its Subsidiaries to, pay when due all taxes, assessments, governmental charges or levies, or claims for labor, supplies, rent and other obligations made against it which, if unpaid, might become a Lien against the Borrower or such Subsidiary or on its property, except liabilities being contested in good faith and by proper proceedings, as to which adequate reserves are maintained on the books of the Borrower or its Subsidiaries, in accordance with GAAP. 6.3 INSURANCE. The Borrower will, and will cause each of its Subsidiaries to, maintain insurance with financially sound and reputable insurance companies in such amounts and against such risks as is usually carried by owners of similar businesses and properties in the same general areas in which the Borrower and its Subsidiaries operate, provided that in any event the Borrower and its Subsidiaries shall maintain or cause to be maintained (a) insurance against casualty, loss or damage covering all property and improvements of the Borrower and its Subsidiaries in amounts and in respect of perils usually carried by owners of similar businesses and properties in the same general areas in which Borrower and its Subsidiaries operate; (b) comprehensive general liability insurance against claims for bodily injury, death or property damage; and (c) workers' compensation insurance to the extent required by applicable law. In the case of policies referenced in clauses (a) and (b) above, all such insurance shall (i) name the Borrower and the Bank as loss payees and additional insureds as their interests may appear; (ii) provide that no termination, cancellation or material reduction in the amount or material modification to the extent of coverage shall be effective until at least 30 days after receipt by the Bank of notice thereof; and (iii) be reasonably satisfactory in all other respects to the Bank. 6.4 FINANCIAL STATEMENTS, ETC. The Borrower will furnish to the Bank: (a) within twenty-eight (28) days after the end of each calendar month (including the last month of the fiscal year), the unaudited consolidated balance sheet and income statement of the Borrower and its Subsidiaries as at the end of, and for, such month (provided, however, that in the case of financial statements for the last month of any fiscal quarter, such financial statements shall include an income statement for such fiscal quarter), accompanied by a certificate of the chief financial officer of the Borrower to the effect that such financial statements fairly present the consolidated financial condition of the Borrower and its Subsidiaries as of the end of -9- such month, and the consolidated results of their operations for such month, in each case in accordance with GAAP (except for the absence of footnotes) consistently applied (subject to normal year-end audit adjustments); (b) within one hundred five (105) days after the last day of each fiscal year of the Borrower, the audited consolidated balance sheet and income statement and statement of cash flows of the Borrower and its Subsidiaries as at and for the fiscal year then ended, certified by the Accountants (the substance of such report to be satisfactory to the Bank), together with a certificate of the chief financial officer of the Borrower to the effect that such financial statements fairly present the consolidated financial condition of the Borrower and its Subsidiaries as of the end of such fiscal year, and the consolidated results of their operations for such fiscal year, in each case in accordance with GAAP. The Borrower shall indicate on said financial statements all guarantees or unusual forward or long-term commitments made by the Borrower or any Subsidiary thereof; (c) at the time of the delivery of the monthly and yearly financial statements required by paragraphs (a) and (b) above, a Compliance Certificate signed by the chief financial officer or the president of the Borrower in the form attached to this Agreement as EXHIBIT C, appropriately completed; (d) within fifteen (15) days after the end of each fiscal month of the Borrower, (i) a list of the accounts receivable aging and payables aging for the Borrower as of the end of such month in such form as the Bank may prescribe, all in reasonable detail and (ii) a Borrowing Base Certificate signed by the chief financial officer or the president of the Borrower in the form attached to this Agreement as EXHIBIT D appropriately completed; (e) promptly upon the mailing thereof to the shareholders of the Borrower generally, copies of all financial statements, reports, proxy statements and other materials; (f) promptly upon request by the Bank, copies of any management letter provided by the Accountants; (g) promptly upon the filing thereof by the Borrower with the SEC (and in any event within ten (10) days of such filing), copies of any registration statements and reports on Forms 10-K, 10-Q and 8-K (or their equivalents if such forms no longer exist); (h) promptly upon becoming aware of any litigation or other proceeding against the Borrower or any Subsidiary thereof that may have a Material Adverse Effect, notice thereof; and (i) promptly following the request of the Bank, such further information concerning the business, affairs and financial condition or operations of the Borrower and its Subsidiaries as the Bank may reasonably request. 6.5 NOTICE OF DEFAULT. As soon as practicable, and in any event, within three (3) Banking Days of becoming aware of the existence of any condition or event which constitutes a Default, the Borrower will provide the Bank with written notice specifying the nature and period of existence thereof and what action the Borrower is taking or proposes to take with respect thereto. 6.6 ENVIRONMENTAL MATTERS. (a) The Borrower and each of its Subsidiaries shall comply with all terms and conditions of all applicable Governmental Approvals and all applicable Environmental Laws, except where failure to comply would not have a Material Adverse Effect. (b) The Borrower shall promptly notify the Bank should the Borrower become aware of: -10- (i) any spill, release, or threat of release of any Hazardous Substance at or from any Borrower Property or by any Person for whose conduct the Borrower or any Subsidiary thereof is responsible, to the extent the Borrower is required by Environmental Laws to report such to any Governmental Authority; (ii) any action or notice with respect to a civil, criminal or administrative action, suit, demand, claim, hearing, notice of violation, investigation, proceeding, notice or demand letter pending or threatened against the Borrower or any Subsidiary thereof relating in any way to the Environmental Laws, or any Lien of any Governmental Authority or any other Person against any Borrower Property relating in any way to the Environmental Laws; (iii) any claim made or threatened by any Person against the Borrower or any Subsidiary thereof or any property of the Borrower or any Subsidiary thereof relating to damage, contribution, cost recovery compensation, loss or injury resulting from any Hazardous Substance pertaining to such property or the business or operations of the Borrower or such Subsidiary; and (iv) any occurrence or condition on any real property adjoining or in the vicinity of any Borrower Property known to the officers or supervisory personnel of the Borrower or any Subsidiary thereof or other employees having responsibility for the compliance by the Borrower or any Subsidiary thereof with Environmental Laws, without any independent investigation, which does cause, or could cause, such Borrower Property, or any part thereof, to contain Hazardous Substances in violation of any Environmental Laws, or which does cause, or could cause, such Borrower Property to be subject to any restrictions on the ownership, occupancy, transferability or use thereof by the Borrower or any Subsidiary thereof. (c) The Borrower will, and will cause each of its Subsidiaries to, at its own cost and expense, and within such period as may be required by applicable law or regulation, initiate all remedial actions and thereafter diligently prosecute such action as shall be required by law for the cleanup of such Borrower Property, including all removal, containment and remedial actions in accordance with all applicable Environmental Laws and shall further pay or cause to be paid, at no expense to the Bank, all cleanup, administrative, and enforcement costs of applicable Government Authorities which may be asserted against such Borrower Property. 6.7 ERISA INFORMATION. If and when the Borrower or any member of the Controlled Group (a) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, (b) receives notice of complete or partial withdrawal liability under Title IV of ERISA or (c) receives notice from the PBGC under Title IV of ERISA of an intent to terminate or appoint a trustee to administer the Plan, the Borrower shall in each such instance promptly furnish to the Bank a copy of any such notice. 6.8 INSPECTION. The Borrower will, upon the request of the Bank, permit a representative of the Bank to discuss its affairs, finances and accounts with its officers and accountants, at such reasonable times and as often as the Bank may reasonably request and cause each of its Subsidiaries to do so. In addition, the Borrower shall permit a representative of the Bank (including any field examiner or auditor retained by the Bank) to conduct, or cause to be conducted, at the Borrower's expense, an audit of the Borrower's accounts receivable and to make copies of the Borrower's books and records twice during each year commencing on the date hereof and the anniversary of such date, as the case may be, (the "Applicable Date") and ending on the next anniversary of the Applicable Date, provided, however, as long as an Event of Default has occurred and is continuing such audits and may be conducted at more frequent intervals as determined by the Bank. -11- 6.9 USE OF PROCEEDS. The Borrower shall use the proceeds of the borrowings under the Note for the working capital purposes of the Borrower. Without limiting the foregoing, no part of such proceeds will be used for the purpose of purchasing or carrying any "margin security" as such term is defined in Regulation U of the Board of Governors of the Federal Reserve System. 6.10 FURTHER ASSURANCES. The Borrower will, and will cause each of its Subsidiaries to, execute and deliver to the Bank any writings and do all things necessary, effectual or reasonably requested by the Bank to carry into effect the provisions and intent of this Agreement or any other Loan Document. 6.11 DEPOSITORY ACCOUNTS. The Borrower shall maintain its primary operating deposit accounts at the offices of the Bank, and shall deposit a portion (as agreed with the Bank, from time to time) of its excess cash with the Bank in either a demand deposit account, a money market deposit account, or certificates of deposit, or a combination thereof. 6.12 SUBSIDIARIES. The Borrower shall immediately notify the Bank of the organization of any foreign or domestic Subsidiaries of the Borrower. The Bank may require that any Subsidiary with total assets in excess of $25,000) become a party to any of the Loan Documents as guarantors or sureties and/or that the Borrower pledge the stock of any Subsidiary as collateral for the Obligations of the Borrower. 6.13 INTELLECTUAL PROPERTY. The Borrower will promptly inform the Bank of all applications filed by the Borrower for trademarks, patents and copyrights and of all trademarks, patents and copyrights granted on or after the date of this Agreement, and, upon the request of the Bank, will promptly execute and deliver such forms of conditional assignment, mortgage, pledge and similar documents as the Bank may reasonably require so as to ensure that the security interests granted pursuant to the Security Instruments extend to and are perfected in respect of such additional trademarks, patents and copyrights. SECTION 7 NEGATIVE COVENANTS. The Borrower covenants and agrees that for so long as this Agreement is in effect and until the Note, together with all interest thereon and all other Obligations of the Borrower to the Bank are paid or satisfied in full, without the prior written consent of the Bank: 7.1 ERISA. The Borrower will not permit any pension plan maintained by the Borrower or by any member of a "Controlled Group" (ERISA Section 210(c) or ERISA Section 210(d)) of which the Borrower is a member to: (a) engage in any "prohibited transaction" (ERISA Section 2003(c)); (b) fail to report to the Bank a "reportable event" (ERISA Section 4043) within 30 days after its occurrence or as to any reportable event as to which the 30-day notice period requirement of Section 4043(b) of Title IV of ERISA has been waived by the PBGC, within 30 days of such time as the Borrower is requested by the PBGC to notify the PBGC of such reportable event; (c) incur any "accumulated funding deficiency" (ERISA Section 302); (d) terminate its existence at any time in a manner which could result in the imposition of a Lien (in an amount in excess or 5% of the consolidated total assets of the Borrower and its Subsidiaries) on the property of the Borrower or any Subsidiary thereof; or (e) fail to report to the Bank any "complete withdrawal" or "partial withdrawal" by the Borrower or an affiliate from a "multiemployer plan" (ERISA Sections 4203, 4205, and 4001, respectively). The quoted terms are defined in the respective sections of ERISA cited above. 7.2 TRANSACTIONS WITH AFFILIATES. Except for transactions disclosed in Schedule 7.2 attached hereto, the Borrower will not, and will not permit any of its Subsidiaries to, directly or indirectly, pay any funds to or for the account of, make any Investment in, lease, sell, transfer or otherwise dispose of any assets, tangible or intangible, or engage in any transaction in connection with any joint enterprise or other joint arrangement with, any Affiliate of the Borrower, unless such transaction (a) is otherwise permitted under this Agreement, (b) is in the -12- ordinary course of the Borrower's or such Subsidiary's business, and (c) is upon fair and reasonable terms no less favorable to the Borrower or such Subsidiary as those that could be obtained in a comparable arm's length transaction with a Person not an Affiliate. 7.3 CONSOLIDATION, MERGER OR ACQUISITION. The Borrower will not, and will not permit any of its Subsidiaries to, merge or consolidate with or into any other Person, or make any acquisition of the business of any other Person unless it obtains the prior written consent of the Bank; PROVIDED that any Subsidiary may merge into Borrower or any wholly-owned Subsidiary of the Borrower; and PROVIDED FURTHER that the Borrower or a Subsidiary may acquire the business of another Person or merge with another Person as long as (a) no Event of Default has occurred and is continuing or would otherwise result therefrom; (b) the other Person is in the same or a related line of business; (c) the Borrower or the Subsidiary is the surviving corporation, and (d) there would be no resulting change in senior management of the Borrower or the Subsidiary. 7.4 DISPOSITION OF ASSETS. The Borrower will not, and will not permit any of its Subsidiaries to, convey, sell, lease, transfer or otherwise dispose of any of its property, business or assets (including, without limitation, accounts receivable and leasehold assets), whether now owned or hereafter acquired, except: (a) obsolete or worn out property disposed of in the ordinary course of business; (b) the sale or other disposition of any property in the ordinary course of business, PROVIDED that the aggregate book value of all assets (other than inventory) so sold or disposed of in any period of twelve consecutive months shall not exceed 5% of the consolidated total assets of the Borrower and its Subsidiaries as at the beginning of such twelve month period; and (c) the sale of inventory in the ordinary course of business. 7.5 INDEBTEDNESS. The Borrower will not, and will not permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Indebtedness, except: (a) Indebtedness payable to the Bank; (b) existing Indebtedness, including Subordinated Debt, if any, listed on SCHEDULE A hereto and any extensions, renewals or replacements thereof, as long as the principal amount of such Indebtedness is not increased; (c) Subordinated Debt incurred by the Borrower after the date hereof; PROVIDED that, after giving effect to the incurrence of such Subordinated Debt and to the receipt and application of the proceeds thereof, no Default shall have occurred and be continuing; and (d) Purchase Money Indebtedness incurred by the Borrower after the date hereof; PROVIDED that, after giving effect to the incurrence of such Purchase Money Indebtedness and to the receipt and application of the proceeds thereof, no Default shall have occurred and be continuing. 7.6 LIENS. The Borrower will not, and will not permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Lien on any of its properties or assets, except the following (collectively, "PERMITTED LIENS"): (a) Liens for taxes not delinquent or being contested in good faith and by proper proceedings, as to which adequate reserves are maintained on the books of the Borrower or its Subsidiary in accordance with GAAP; -13- (b) carriers', warehousemen's, mechanics', materialmen's or similar liens imposed by law incurred in the ordinary course of business in respect of obligations not overdue, or being contested in good faith and by proper proceedings and as to which adequate reserves with respect thereto are maintained on the books of the Borrower in accordance with GAAP; (c) pledges or deposits in connection with workers' compensation, unemployment insurance and other types of social security legislation; (d) security deposits made to secure the performance of leases, licenses and statutory obligations incurred in the ordinary course of business; (e) Liens in favor of the Bank; (f) existing Liens and any extensions, renewals and replacements thereof, if any, listed on SCHEDULE A hereto; PROVIDED that no such Lien is spread to cover any additional property after the date hereof, and that the amount of the Indebtedness secured thereby is not increased; (g) Purchase Money Security Interests made to secure such Purchase Money Indebtedness incurred pursuant to Section 7.5 (d) hereof; and (h) Financing Statements filed pursuant to the Uniform Commercial Code by the Borrower's lessors under the Borrower's equipment leases. 7.7 RESTRICTED PAYMENTS. The Borrower will not, and will not permit any of its Subsidiaries to, declare or make any Restricted Payment. 7.8 INVESTMENTS. The Borrower will not, and will not permit any of its Subsidiaries to, make, maintain or acquire any Investment in any Person other than: (a) marketable obligations issued or guaranteed by the United States of America having a maturity of one year or less from the date of purchase; (b) certificates of deposit, eurodollar time deposits, commercial paper or any other obligations of the Bank or of any other bank or trust company organized or licensed to conduct a banking business under the laws of the United States or any State thereof and which has (or which is a Subsidiary of a bank holding company which has) publicly traded debt securities rated A or higher by Standard & Poor's Corporation or A-2 or higher by Moody's Investors Service, Inc.; (c) (i) depository accounts at the Bank; and (ii) depository accounts maintained at other banks and listed on SCHEDULE A or that have been disclosed to the Bank in writing subsequent to the date hereof; (d) stock or obligations issued to the Borrower or any Subsidiary thereof in settlement of claims against others by reason of an event of bankruptcy or a composition or the readjustment of debt or a reorganization of any debtor of the Borrower or such Subsidiary; (e) commercial paper with maturities of not more than 90 days having the highest rating then given by Moody's Investors Services, Inc. or Standard & Poor's Corporation; -14- (f) repurchase obligations with a term of not more than seven days for underlying securities of the types described in subparagraph (b) above entered into with the Bank or any of the banks referred to in subparagraph (b) above; and (g) investments made prior to the date hereof by the Borrower in its Subsidiaries, and Investments by such Subsidiaries in the Borrower, whether now existing or hereafter arising. 7.9 LEASES. Neither the Borrower nor any of its Subsidiaries shall during any fiscal year enter into any leases of real or personal property as lessee, except that the Borrower may enter into an operating lease of personal property, if, after giving effect thereto, the aggregate amount of all payments during any one fiscal year (whether or not such payments are termed rent) under all operating leases of personal property to which the Borrower is a party does not exceed $430,000. 7.10 SALE AND LEASEBACK. Neither the Borrower nor any of its Subsidiaries shall enter into any arrangement, directly or indirectly, whereby it shall sell or transfer any property owned by it in order to lease such property or lease other property that the Borrower or any such Subsidiary intends to use for substantially the same purpose as the property being sold or transferred. 7.11 ADDITIONAL STOCK ISSUANCE BY SUBSIDIARIES. The Borrower shall not permit any of its Subsidiaries to issue any additional shares of its capital stock or other equity securities, any options therefor or any securities convertible thereto other than to the Borrower. 7.12 CAPITAL EXPENDITURES. Neither the Borrower nor any of its Subsidiaries shall either purchase or agree to purchase, or incur any obligations for any equipment or other property constituting fixed assets in any fiscal year (excluding leases of real or personal property) where the aggregate of such obligations would exceed $1,270,000. 7.13 QUICK RATIO. The Borrower will not permit the Quick Ratio at the end of any fiscal month ending during the following periods to be less than the ratio set forth below opposite such period: Minimum Relevant Period Quick Ratio --------------- ----------- 12/31/94 through 08/31/95 1.25 to 1 09/30/95 and thereafter 1 to 1 7.14 MINIMUM PROFITABILITY. The Borrower will not permit its Net Loss for its fiscal year ending December 31, 1994 to be greater than ($3,500,000) or its Net Income or Net Loss for any of the following fiscal quarters to be less than or greater than, as the case may be, the amount set forth opposite such fiscal quarter: Fiscal Quarter Ending Net Income --------------------- ---------- 03/31/95 ($1,200,000) 06/30/95 ($1,000,000) 09/30/95 ($850,000) 12/31/95 ($600,000) 03/31/96 and thereafter $1 7.15 LEVERAGE. The Borrower will not permit the ratio of Total Senior Liabilities to Tangible Net Worth at the end of any fiscal month to be greater than 2.10:1. -15- 7.16 TANGIBLE NET WORTH. The Borrower will not permit its Tangible Net Worth at the end of any of the following fiscal quarters to be less than the amount set forth below opposite such fiscal quarter: Minimum Fiscal Quarter Ending Tangible Net Worth --------------------- ------------------ 12/31/94 $500,000 3/31/95 $3,400,000 6/30/95 $2,500,000 9/30/95 $1,700,000 12/31/95 $1,400,000 3/31/96 $1,250,000 SECTION 8 EVENTS OF DEFAULT. 8.1 EVENTS OF DEFAULT. The occurrence of any of the following events shall be an "Event of Default" hereunder: (a) The Borrower shall default in the due and punctual payment of principal or interest on the Note, or shall default in the payment of any other amount due under any Loan Document; or (b) Any representation, warranty or statement made herein or any other Loan Document, or in any certificate or statement furnished pursuant to or in connection herewith or therewith, shall prove to be incorrect, misleading or incomplete in any material respect on the date as of which made or deemed made; or (c) The Borrower shall default in the performance or observance of any term, covenant or agreement on its part to be performed or observed pursuant to Sections 7.3 and 7.13 through 7.16; or (d) The Borrower shall default in the performance or observance of any term, covenant or agreement on its part to be performed or observed pursuant to any of the provisions of this Agreement or any other Loan Document (other than those referred to in paragraphs (a) through (c) above) and such default shall continue unremedied for a period of fifteen (15) days after the occurrence of such default; or (e) Any obligation of the Borrower or any Subsidiary thereof in respect of any Indebtedness (other than the Note) or any Guarantee in excess of $25,000, shall be declared to be or shall become due and payable prior to the stated maturity thereof, or such Indebtedness or Guarantee shall not be paid as and when the same becomes due and payable, or there shall occur and be continuing any default under any instrument, agreement or evidence of indebtedness relating to any such Indebtedness the effect of which is to permit the holder or holders of such instrument, agreement or evidence of indebtedness, or a trustee, agent or other representative on behalf of such holder or holders, to cause such Indebtedness to become due prior to its stated maturity; or (f) The Borrower or a Subsidiary thereof shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the Bankruptcy Code, (iv) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or readjustment of debts, (v) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against -16- it in an involuntary case under the Bankruptcy Code, or (vi) take any corporate action for the purpose of effecting any of the foregoing; or (g) A proceeding or case shall be commenced, without the application or consent of the Borrower or any Subsidiary thereof in any court of competent jurisdiction, seeking (i) its liquidation, reorganization, dissolution or winding-up, or the composition or readjustment of its debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of the Borrower or such Subsidiary or of all or any substantial part of its assets, or (iii) similar relief in respect of the Borrower or such Subsidiary under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of 60 days; or an order for relief against the Borrower or such Subsidiary shall be entered in an involuntary case under the Bankruptcy Code; or (h) A judgment or judgments for the payment of money in excess of $50,000 (net of insurance proceeds) in the aggregate shall be rendered against the Borrower or any Subsidiary thereof and any such judgment or judgments shall not have been vacated, discharged, stayed or bonded pending appeal within thirty (30) days from the entry thereof; or (i) The Borrower or any member of the Controlled Group shall fail to pay when due an amount or amounts aggregating in excess of $100,000 which it is obligated to pay to the PBGC or to a Plan under Title IV of ERISA; or a notice of intent to terminate a Plan or Plans having aggregate Unfunded Liabilities in excess of $100,000 shall be filed under Title IV of ERISA by the Borrower or any member of the Controlled Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any such Plan or Plans or a proceeding shall be instituted by a fiduciary of any such Plan or Plans against the Borrower or any member of the Controlled Group to enforce Sections 515 or 4219(c)(5) of ERISA; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any such Plan or Plans must be terminated; or there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans which could cause the Borrower or one or more members of the Controlled Group to incur a current payment obligation in excess of $100,000; or (j) The Borrower or any Subsidiary thereof shall default in the performance or observance of any term, covenant or agreement on its part to be performed or observed pursuant to any of the provisions of any agreement with the Bank or any instrument delivered in favor of the Bank (other than, in either case, a Loan Document), and such default shall continue unremedied beyond the grace period (in any) provided for therein; or (k) Any Security Instrument shall cease for any reason to be in full force and effect or shall cease to be effective to grant a perfected security interest in the collateral described in such Security Instrument with the priority stated to be granted thereby; or (l) Borrower shall make any payment on account of its Subordinated Debt, except to the extent such payment is expressly permitted hereby or under any subordination agreement entered into with the Bank. 8.2 REMEDIES UPON AN EVENT OF DEFAULT. If any Event of Default shall have occurred and be continuing, the Bank may (a) declare the Line of Credit Commitment terminated (whereupon the Line of Credit Commitment shall be terminated) and/or (b) declare the principal amount then outstanding of, and the accrued interest -17- on, the Line of Credit Loans and commitment fees and all other amounts payable hereunder and under the Note to be forthwith due and payable, whereupon such amounts shall be and become immediately due and payable, without notice (including, without limitation, notice of intent to accelerate), presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Borrower; PROVIDED that in the case of the occurrence of an Event of Default with respect to the Borrower referred to in clauses (f) and (g) of Section 8.1, the Line of Credit Commitment shall be automatically terminated and the principal amount then outstanding of and the accrued interest on the Line of Credit Loans and commitment fees and all other amounts payable hereunder and under the Note shall be and become automatically and immediately due and payable, without notice (including, without limitation, notice of intent to accelerate), presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Borrower. SECTION 9 DEFINITIONS. 9.1 CERTAIN DEFINITIONS. "ACCOUNTANTS" means Coopers & Lybrand, or another accountant firm of national reputation or other certified public accountants selected by the Borrower and approved by the Bank. "AFFILIATE" means, with respect to any specified Person (the "SPECIFIED PERSON"), any Person directly or indirectly controlling, controlled by or under direct or indirect common control with, the Specified Person and, without limiting the generality of the foregoing, includes (i) any director or officer of the Specified Person or any Affiliate of the Specified Person, (ii) any such director's or officer's parent, spouse, child or child's spouse (a "RELATIVE"), (iii) any group acting in concert, of one or more such directors, officers, relatives or any combination thereof (a "GROUP"), (iv) any Person controlled by any such director, officer, relative or group in which any such director, officer, relative or group beneficially owns or holds 5% or more of any class of voting securities or a 5% or greater equity or profits interest and (v) any Person or group which beneficially owns or holds 5% or more of any class of voting securities or a 5% or greater equity or profits interest in the Specified Person. For the purposes of this definition, the term "control" when used with respect to any Specified Person means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Specified Person, whether through the ownership of voting securities, by contract or otherwise. "AGREEMENT" shall mean this Credit Agreement. "BANKING DAY" shall mean any day, excluding Saturday and Sunday and excluding any other day which in the Commonwealth of Massachusetts or the State of California is a legal holiday or a day on which banking institutions are authorized by law to close. "BORROWER PROPERTY" means any real property owned, occupied, or operated by the Borrower or any of its Subsidiaries. "BORROWING BASE" shall have the meaning specified in Section 1.4. "CODE" means the Internal Revenue Code of 1986, as amended, or any successor statute. "COLLATERAL" shall have the meaning given that term in the Security Agreement. "COMMITMENT COMMISSION" shall have the meaning specified in Section 1.7. "COMMITMENT EXPIRATION DATE" shall have the meaning specified in Section 1.1. -18- "CONTRACTUAL OBLIGATION" means, as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound. "CONTROLLED GROUP" means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414 of the Code. "CURRENT LIABILITIES" means, at any time, all liabilities of the Borrower and its Subsidiaries at such time, on a consolidated basis, that would be classified as current liabilities in accordance with GAAP, including, without limitation, all Indebtedness of the Borrower and its Subsidiaries payable on demand or maturing within one year of such time, or renewable at the option of the Borrower or such Subsidiary for a period of not more than one year from such time, and all serial maturity and periodic or installment payments on any Indebtedness, to the extent such payments are required to be made within one year from such time. "DEFAULT" means any condition or event that constitutes an Event of Default or that with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "ELIGIBLE DOMESTIC ACCOUNTS RECEIVABLE" means an account receivable owing to the Borrower which met the following specifications at the time it came into existence and continues to meet the same until it is collected in full: (a) The original stated maturity of the account is not more than 90 days after the invoice date thereof, and the account (regardless of its stated maturity date) does not remain unpaid more than 90 days after such invoice date. (b) The account arose from the performance of services or an outright sale of goods by Borrower, such goods have been shipped to the account debtor, and Borrower has possession of, or has delivered to Bank, shipping and delivery receipts evidencing such shipment. (c) The account is owned solely by the Borrower, and is not subject to any assignment, claim, lien, or security interest, other than a security interest in favor of the Bank. (d) The account is not subject to set-off, credit, allowance or adjustment by the account debtor, except discount allowed for prompt payment; the account is not one as to which the account debtor disputes liability or makes any claim with respect thereto or as to which the Bank believes, in its sole discretion, that there may be a basis for dispute (but only to the extent of the amount subject to such dispute or claim), or which involves an account debtor subject to any insolvency proceeding, or becomes insolvent, or goes out of business. (e) The account arose in the ordinary course of Borrower's business and did not arise from the performance of services or a sale of goods to a supplier or employee of the Borrower. (f) No notice of bankruptcy or insolvency of the account debtor has been received by or is known to the Borrower. (g) The Borrower has pledged any instrument or chattel paper evidencing the account to the Bank pursuant to the provisions of the Security Agreement. -19- (h) Not more than 50% of the aggregate receivables of the account debtor have remained unpaid for a period of more than ninety (90) days from the invoice date. (i) The aggregate accounts receivables from the account debtor (including its Subsidiaries and Affiliates) do not exceed 25% of the total Eligible Accounts Receivable of the Borrower; that portion of the account over the 25% level will be disqualified. (j) The account does not relate to goods placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, or other terms by reason of which the payment by the account debtor may be conditional. (k) The account debtor is not an Affiliate, officer, employee or agent of the Borrower. (l) The account debtor is not a Governmental Authority. (m) The Borrower does not owe any amounts to the account debtor for goods sold, services rendered or otherwise; to the extent that any amounts are so owed, the accounts of such account debtor in an amount equal to the amounts owed by the Borrower to the account debtor shall be disqualified. (n) The Bank has not notified the Borrower that the Bank has determined that an account or account debtor is unsatisfactory for credit reasons (which determination shall not be made unreasonably). (o) The account debtor is a person or entity located in the United States and the account arose out of services rendered or goods delivered in the United States. "ENVIRONMENTAL LAWS" means all federal, state, local and foreign laws, and all regulations, notices or demand letters issued, promulgated or entered thereunder, relating to pollution or protection of the environment and to occupational health and safety, including, without limitation, laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals, or Hazardous Substances into the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata) or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, chemicals or Hazardous Substances. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statutes. "EVENT OF DEFAULT" has the meaning set forth in Section 8. "EXTENSION OF CREDIT" shall have the meaning set forth in Section 1.4. "FINANCIAL STATEMENTS DATE" means December 31, 1994. "GAAP" means accounting principles generally accepted in the United States applied on a consistent basis, "GOVERNMENTAL APPROVALS" shall mean any authorization, consent, order, approval, license, lease, ruling, permit, tariff, rate, certification, validation, exemption, filing or registration by or with, or notice to, any Governmental Authority. "GOVERNMENTAL AUTHORITY" shall mean any federal, state, municipal or other governmental department, commission, board, bureau, agency, court, tribunal or other instrumentality, domestic or foreign, and any arbitrator. -20- "GUARANTEE" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Indebtedness or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise of such Person (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (b) entered into for the purpose of assuring in any other manner the obligee of such Indebtedness or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); PROVIDED that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "HAZARDOUS SUBSTANCES" shall mean all hazardous and toxic substances, wastes or materials, hydrocarbons (including naturally occurring or man-made petroleum and hydrocarbons), flammable explosives, urea formaldehyde insulation, radioactive materials, biological substances, PCBs, pesticides, herbicides and any other kind and/or type of pollutants, or contaminants and/or any other similar substances or materials which, because of toxic, flammable, explosive, corrosive, reactive, radioactive or other properties that may be hazardous to human health or the environment, are included under or regulated by any Environmental Laws. "INDEBTEDNESS" of any Person at any date shall mean, (a) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services (excluding current trade liabilities incurred in the ordinary course of business and payable in accordance with customary practices, but including any class of capital stock of such Person with fixed payment obligations or with redemption at the option of the holder), or which is evidenced by a note, bond, debenture or similar instrument, (b) all obligations of such Person under leases that should be treated as capitalized leases in accordance with GAAP, (c) all obligations of such Person in respect of acceptances issued or created for the account of such Person, and all reimbursement obligations (contingent or otherwise) of such Person in respect of any letters of credit issued for the account of such Person, and (d) all liabilities secured by any Lien on any property owned by such Person even though such Person has not assumed or otherwise become liable for the payment thereof. "INTELLECTUAL PROPERTY" shall have the meaning specified in Section 5.16. "INVESTMENTS" means, with respect to any Person (the "INVESTOR"), (a) any investment by the Investor in any other Person, whether by means of share purchase, capital contribution, purchase or other acquisition of a partnership or joint venture interest, loan, time deposit, demand deposit or otherwise and (b) any Guarantee by the Borrower of any Indebtedness or other obligation of any other Person. "LIEN" means any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), or preference, priority or other security agreement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any lease that should be capitalized in accordance with GAAP, and the filing of a financing statement under the Uniform Commercial Code or comparable law of any jurisdiction), together with any renewal or extension thereof. "LINE OF CREDIT COMMITMENT" shall have the meaning specified in Section 1.1. "LINE OF CREDIT LOANS" shall have the meaning specified in Section 1.1. "LOAN DOCUMENTS" means, collectively, this Agreement, the Note, the Financing Statements, the Security Instruments, and all other agreements and instruments that are from time to time executed in connection with this Agreement, as each of such agreements and instruments may be amended, modified or supplemented from time to time. -21- "MATERIAL ADVERSE EFFECT" means a material adverse effect on (a) the business, operations, property, condition (financial or otherwise) or prospects of the Borrower, or of the Borrower and its Subsidiaries taken as a whole, (b) the ability of the Borrower to perform its obligations under this Agreement, the Note or any of the other Loan Documents, (c) the validity or enforceability of this Agreement, the Note or any of the other Loan Documents, or the rights or remedies of the Bank hereunder or thereunder, or (d) the right of the Bank to enforce the payment of accounts against account debtors in any particular State. "MULTIEMPLOYER PLAN" means at any time an employee pension benefit plan within the meaning of Section 4001(a)(3) of ERISA to which the Borrower or any member of the Controlled Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the Controlled Group during such five year period. "NET INCOME" or "NET LOSS" for any period in respect of which the amount thereof shall be determined, shall mean the aggregate of the consolidated net income (or net loss) after taxes for such period (taken as a cumulative whole) of the Borrower and its Subsidiaries, determined in accordance with GAAP, exclusive of the write-up of any asset. "NOTE" shall have the meaning set forth in Section 1.2. "OBLIGATIONS" shall have the meaning given the term "Secured Obligations" in the Security Agreement. "OFFICE OF THE BANK" shall mean the banking office of the Bank located at 3000 Lakeside Drive, P.O. Box 3762, Santa Clara, California 95054, or such other location of which the Bank shall notify the Borrower. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "PERMITTED LIENS" shall have the meaning set forth in Section 7.6. "PERSON" shall mean and include any individual, firm, corporation, trust or other unincorporated organization or association or other enterprise or any government or political subdivision, agency, department or instrumentality thereof. "PLAN" means any employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is either (a) maintained by the Borrower or any member of the Controlled Group for employees of the Borrower or any member of the Controlled Group or (b) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which the Borrower or any member of the Controlled Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions. "PRIME RATE" shall mean the per annum rate of interest from time to time announced and made effective by the Bank as its Prime Rate (which rate may or may not be the lowest rate available from the Bank at any given time). "PURCHASE MONEY INDEBTEDNESS" shall mean Indebtedness incurred to finance the acquisition of assets or the cost of improvements on real property or leaseholds, in each case in an amount not in excess of the lesser of (a) the purchase price or acquisition cost of said assets or the cost of said improvements and (b) the fair market value of said assets or said improvements on the date of acquisition of said assets or contract for said improvements. -22- "PURCHASE MONEY SECURITY INTEREST" shall mean (a) a security interest securing Purchase Money Indebtedness, which security interest applies solely to the particular assets acquired with the Purchase Money Indebtedness that said Purchase Money Security Interest secures, and (b) the renewal, extension and refunding of such Purchase Money Indebtedness in an amount not exceeding the amount thereof remaining unpaid immediately prior to such renewal, extension or refunding. "QUICK RATIO" means, at any time, all cash and accounts receivable, less reserves for doubtful accounts, of the Borrower and its Subsidiaries at such time, on a consolidated basis, determined in accordance with GAAP, divided by the aggregate of all Current Liabilities at such time. "RESTRICTED PAYMENT" means, with respect to the Borrower or any Subsidiary thereof, (a) any dividend or other distribution on any shares of capital stock of the Borrower or such Subsidiary (except dividends payable solely in shares of capital stock or rights to acquire capital stock of the Borrower, and dividends payable solely to the Borrower), (b) any payment on account of the purchase, redemption, retirement or acquisition of (i) any shares of the capital stock of the Borrower or a Subsidiary thereof or (ii) any option, warrant, convertible security or other right to acquire shares of the capital stock of the Borrower or a Subsidiary thereof, other than, in either case, payments made solely to the Borrower, and (c) any required or optional payment of any principal of, or premium [or interest] on, or any required or optional purchase, redemption or other retirement or other acquisition of any Subordinated Debt. "SEC" means the Securities and Exchange Commission. "SECURITY AGREEMENT" shall have the meaning set forth in Section 3.1. "SECURITY INSTRUMENTS" means, collectively, the Security Agreement and each other instrument or agreement that purports to secure the Obligations of the Borrower to the Bank. "SUBORDINATED DEBT" means Indebtedness of the Borrower that is subordinated to the Indebtedness of the Borrower owing to the Bank either (a) pursuant to a subordination agreement in form and substance satisfactory to the Bank between the Bank and the holder(s) of such Indebtedness, or (b) pursuant to the terms thereof, where the Bank has confirmed in writing that such terms are satisfactory to it. "SUBSIDIARY" means, with respect to any Person, any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other Persons performing similar functions are at the time directly or indirectly owned by such Person. "TANGIBLE NET WORTH" means, at any time, the consolidated stockholders' equity of the Borrower and its Subsidiaries at such time determined in accordance with GAAP, LESS all assets that are reflected on the consolidated balance sheet of the Borrower and its Subsidiaries at such time that would be treated as intangibles under GAAP (including, but not limited, to goodwill, capitalized software and excess purchase costs), PLUS all then outstanding Subordinated Debt. "TOTAL SENIOR LIABILITIES" means, at any time, the consolidated liabilities of the Borrower and its Subsidiaries at such time, determined in accordance with GAAP, LESS all then outstanding Subordinated Debt. "UCC" shall have the meaning given such term in the Security Agreement. "UNFUNDED LIABILITIES" means, with respect to any Plan, at any time, the amount (if any) by which (a) the present value of all benefits under such Plan exceeds (b) the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plan, but only to the extent that such -23- excess represents a potential liability of the Borrower or any member of the Controlled Group to the PBGC or such Plan under Title IV of ERISA. SECTION 10 MISCELLANEOUS. 10.1 ACCOUNTING TERMS AND DEFINITIONS. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all determinations with respect to accounting matters hereunder shall be made, and all financial statements and certificates and reports as to financial matters required to be delivered hereunder shall be prepared, in accordance with GAAP; PROVIDED that if any change in GAAP in itself materially affects the calculation of any financial covenant in this Agreement, the Borrower may by notice to the Bank, or the Bank may by notice to the Borrower, require that such covenant thereafter be calculated in accordance with GAAP as in effect, and applied by the Borrower, immediately before such change in GAAP occurs. If such notice is given, the compliance certificates delivered pursuant to Section 6.4 after such change occurs shall be accompanied by reconciliations of the difference between the calculation set forth therein and a calculation made in accordance with GAAP as in effect from time to time after such change occurs. To enable the ready determination of compliance with the covenants set forth in this Agreement, the Borrower will not change the date on which its fiscal year or any of its fiscal quarters end without the prior consent of the Bank. 10.2 AMENDMENTS, ETC. No amendment or waiver of any provision of this Agreement or the Note, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Bank and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 10.3 NOTICES, ETC. All notices and other communications provided for hereunder shall be in writing and shall be delivered by hand, by a nationally recognized commercial overnight delivery service, by first class mail or by telecopy, delivered, addressed or transmitted, if to the Borrower, at its address at 379 Thornall Street, Edison, New Jersey 08837, Attention: Peter Macaluso, Vice President and CFO, Telecopy No. (908) 906-1113; and if to the Bank, at its address at Wellesley Office Park, 45 William Street, Wellesley, Massachusetts 02181, Attention: Joan S. Parsons, Vice President, Telecopy No. (617) 431-9906; or, as to each party, at such other address as shall be designated by such party in a written notice to the other party. All such notices and communications shall be deemed effective, (a) in the case of hand deliveries, when delivered; (b) in the case of an overnight delivery service, on the next Banking Day after being placed in the possession of such delivery service, with delivery charges prepaid; (c) in the case of mail, three days after deposit in the postal system, first class postage prepaid; and (d) in the case of telecopy notices, when electronic indication of receipt is received, except that notices to the Bank pursuant to the provisions of Section 1.3 shall not be effective until received by the Bank. 10.4 NO WAIVER; REMEDIES. No failure on the part of the Bank to exercise, and no delay in exercising, any right hereunder or under the Note shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder or under the Note preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. 10.5 RIGHT OF SET-OFF. (a) Upon the occurrence and during the continuance of any Event of Default, the Bank is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Bank to or for the credit or the account of the Borrower against any and all of the obligations of the Borrower now or hereafter existing under this Agreement and the Note, irrespective of whether or not the Bank shall have made any demand hereunder and although such obligations may be contingent or unmatured. -24- (b) The Bank agrees promptly to notify the Borrower after any such set-off and application, PROVIDED that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Bank under this Section 10.5 are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Bank may have. 10.6 EXPENSES; INDEMNIFICATION. (a) The Borrower shall pay on demand (i) the reasonable fees and disbursements of counsel to the Bank in connection with the preparation of this Agreement and the preparation or review of each agreement, opinion, certificate and other document referred to in or delivered pursuant hereto; (ii) all out-of-pocket costs and expenses of the Bank in connection with the administration of this Agreement and the other Loan Documents, and any waiver or amendment of any provision hereof or thereof, including without limitation, the reasonable fees and disbursements of counsel for the Bank, and of any field examiner or auditor retained by the Bank as contemplated in Section 6.8; and (iii) if any Event of Default occurs, all costs and expenses incurred by the Bank, including the reasonable fees and disbursements of counsel to the Bank, and of any appraisers, environmental engineers or consultants, or investment banking firms retained by the Bank in connection with such Event of Default or collection, bankruptcy, insolvency and other enforcement proceedings related thereto. The Borrower agrees to pay, indemnify and hold the Bank harmless from, any and all recording and filing fees, and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise or other taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of or the consummation or administration of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement or the other Loan Documents, or any documents delivered pursuant hereto or thereto. (b) The Borrower agrees to indemnify the Bank and its officers and directors and hold the Bank and its officers and directors harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind (including, without limitation, the reasonable fees and disbursements of counsel for the Bank) in connection with any investigative, administrative or judicial proceeding initiated by a third party where the Bank is designated a party thereto, or where the Bank or a representative thereof is required to give testimony or produce evidence or documentation, relating to or arising out of this Agreement or any other Loan Document, or the existence of any Hazardous Substance on, in, or under any Borrower Property, or any violation of any applicable Environmental Laws for which the Borrower or any Subsidiary thereof has any liability or which occurs upon any Borrower Property, or the imposition of any Lien under any Environmental Laws, PROVIDED that the Bank shall not have the right to be indemnified hereunder for its own gross negligence or willful misconduct as determined by a court of competent jurisdiction and provided further that the Bank provides prompt notice to Borrower of any claim against the Bank by a third party. (c) The agreements in this Section 10.6 shall survive the repayment of the Note, and all other amounts payable under this Agreement and the other Loan Documents. 10.7 BINDING EFFECT. This Agreement shall become effective when it shall have been executed by the Borrower and the Bank (provided, however, in no event shall this Agreement become effective until signed by an officer of the Bank in California) and thereafter shall be binding upon and inure to the benefit of the Borrower and the Bank and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Bank. The Bank may assign to any financial institution all or any part of, or any interest (undivided or divided) in, the Bank's rights and benefits under this Agreement or the Note, and to the extent of that assignment such assignee shall have the same rights and benefits against the Borrower hereunder as it would have had if such assignee were the Bank making the Line of Credit Loans hereunder. 10.8 SEVERABILITY. Any provision of this Agreement which is prohibited, unenforceable or not authorized in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition, -25- unenforceability or non-authorization without invalidating the remaining provisions hereof or affecting the validity, enforceability or legality of such provision in any other jurisdiction. 10.9 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS. 10.10 WAIVER OF JURY TRIAL. THE BANK AND THE BORROWER AGREE THAT NEITHER OF THEM NOR ANY ASSIGNEE OR SUCCESSOR SHALL (A) SEEK A JURY TRIAL IN ANY LAWSUIT, PROCEEDING, COUNTERCLAIM OR ANY OTHER ACTION BASED UPON, OR ARISING OUT OF, THIS AGREEMENT, ANY RELATED INSTRUMENTS, ANY COLLATERAL OR THE DEALINGS OR THE RELATIONSHIP BETWEEN OR AMONG ANY OF THEM, OR (B) SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. THE PROVISIONS OF THIS PARAGRAPH HAVE BEEN FULLY DISCUSSED BY THE BANK AND THE BORROWER, AND THESE PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS. NEITHER THE BANK NOR THE BORROWER HAS AGREED WITH OR REPRESENTED TO THE OTHER THAT THE PROVISIONS OF THIS PARAGRAPH WILL NOT BE FULLY ENFORCED IN ALL INSTANCES. 10.11 VENUE, CONSENT TO SERVICE OF PROCESS. THE BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF CALIFORNIA OR THE COMMONWEALTH OF MASSACHUSETTS IN ANY ACTION, SUIT OR PROCEEDING OF ANY KIND AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS AGREEMENT, THE NOTE, ANY OTHER LOAN DOCUMENT, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IRREVOCABLY AGREES TO BE BOUND BY ANY FINAL JUDGMENT RENDERED BY ANY SUCH COURT IN ANY SUCH ACTION, SUIT OR PROCEEDING IN WHICH IT SHALL HAVE BEEN SERVED WITH PROCESS IN THE MANNER HEREINAFTER PROVIDED, SUBJECT TO EXERCISE AND EXHAUSTION OF ALL RIGHTS OF APPEAL AND TO THE EXTENT THAT IT MAY LAWFULLY DO SO, WAIVES AND AGREES NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE, IN SUCH ACTION, SUIT OR PROCEEDING ANY CLAIMS THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT, THAT ITS PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE ACTION, SUIT OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE THEREOF IS IMPROPER, AND AGREES THAT PROCESS MAY BE SERVED UPON IT IN ANY SUCH ACTION, SUIT OR PROCEEDING IN THE MANNER PROVIDED BY CHAPTER 223A OF THE GENERAL LAWS OF MASSACHUSETTS, RULE 4 OF THE MASSACHUSETTS RULES OF CIVIL PROCEDURE OR RULE 4 OF THE FEDERAL RULES OF CIVIL PROCEDURE. 10.12 HEADINGS. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. 10.13 COUNTERPARTS. This Agreement may be signed in one or more counterparts each of which shall constitute an original and all of which taken together shall constitute one and the same instrument. -26- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first above written. DIGITRAN CORPORATION By: /s/ Peter S. Macaluso ---------------------------- Name: Peter S. Macaluso Title: Vice President and CFO SILICON VALLEY EAST, a Division of Silicon Valley Bank By: ---------------------------- Name: Joan S. Parsons Title: Vice President SILICON VALLEY BANK By: ---------------------------- Name: Title: (Signed at Santa Clara, California) -27- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first above written. DIGITRAN CORPORATION By: ---------------------------- Name: Title: SILICON VALLEY EAST, a Division of Silicon Valley Bank By: /s/ Joan S. Parson ---------------------------- Name: Joan S. Parsons Title: Vice President SILICON VALLEY BANK By: /s/ Becky Butler ---------------------------- Name: Becky Butler Title: VP/Mgr (Signed at Santa Clara, California) PROMISSORY NOTE Exhibit A $1,000,000 Wellesley, Massachusetts As of July 7, 1995 For value received, the undersigned, DIGITRAN CORPORATION, a Delaware corporation (the "BORROWER"), promises to pay to SILICON VALLEY BANK (the "BANK") at the office of the Bank located at 3000 Lakeside Drive, P.O. Box 3762, Santa Clara, California 95054, or to its order, the lesser of One Million Dollars ($1,000,000) or the outstanding principal amount hereunder, on July 7, 1 996 (the "MATURITY DATE"), together with interest on the principal amount hereof from time to time outstanding at a fluctuating rate per annum equal to the Prime Rate (as defined below) plus 2% until the Maturity Date, payable monthly in arrears on the first day of each calendar month occurring after the date hereof and on the Maturity Date. The Borrower promises to pay on demand interest at a per annum rate of interest equal to the Prime Rate plus 5% on any overdue principal (and to the extent permitted by law, overdue interest). The Bank's "Prime Rate" is the per annum rate of interest from time to time announced and made effective by the Bank as its Prime Rate (which rate may or may not be the lowest rate available from the Bank at any given time). Computations of interest shall be made by the Bank on the basis of a year of 360 days for the actual number of days occurring in the period for which such interest is payable. This note is the Note referred to in the credit agreement of even date herewith between the Bank and the Borrower (together with all related schedules), as the same may be amended, modified or supplemented from time to time (the "CREDIT AGREEMENT"), and is entitled to the benefits thereof and of the other Loan Documents referred to therein, and is subject to optional and mandatory prepayment as provided therein. This note is secured INTER ALIA by a Security Agreement dated of even date herewith by the Borrower in favor of the Bank, as the same may be amended, modified or supplemented from time to time. Upon the occurrence of any Event of Default under, and as defined in, the Credit Agreement, at the option of the Bank, the principal amount then outstanding of and the accrued interest on the advances under this note and all other amounts payable under this note shall become immediately due and payable, without notice (including, without limitation, notice of intent to accelerate), presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Borrower. The Bank shall keep a record of the amount and the date of the making of each advance pursuant to the Credit Agreement and each payment of principal with respect thereto by maintaining a computerized record of such information and printouts of such computerized record, which computerized record, and the printouts thereof, shall constitute PRIMA FACIE evidence of the accuracy of the information so endorsed. The undersigned agrees to pay all reasonable costs and expenses of the Bank (including, without limitation, the reasonable fees and expenses of attorneys) in connection with the enforcement of this note and the other loan documents. -2- EXHIBIT A No delay or omission on the part of the Bank in exercising any right hereunder shall operate as a waiver of such right or of any other right of the Bank, nor shall any delay, omission or waiver on any one occasion be deemed a bar to or waiver of the same or any other right on any future occasion. The Borrower and every endorser or guarantor of this note regardless of the time, order or place of signing waives presentment, demand, protest and notices of every kind and assents to any one or more extensions or postponements of the time of payment or any other indulgences, to any substitutions, exchanges or releases of collateral for this note, and to the additions or releases of any other parties or persons primarily or secondarily liable. THIS NOTE HAS BEEN DELIVERED TO THE BANK AND ACCEPTED BY THE BANK IN THE STATE OF CALIFORNIA. THE BORROWER HEREBY EXPRESSLY WAIVES ANY RIGHT IT MAY NOW OR HEREAFTER HAVE TO A JURY TRIAL IN ANY SUIT, ACTION OR PROCEEDING WHICH ARISES OUT OF OR BY REASON OF THIS NOTE, ANY LOAN DOCUMENT (AS DEFINED IN THE CREDIT AGREEMENT), OR THE TRANSACTIONS CONTEMPLATED HEREBY. BY ITS EXECUTION AND DELIVERY OF THIS NOTE, THE BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NON- EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF CALIFORNIA OR THE COMMONWEALTH OF MASSACHUSETTS IN ANY ACTION, SUIT OR PROCEEDING OF ANY KIND AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS NOTE, ANY LOAN DOCUMENT (AS DEFINED IN THE CREDIT AGREEMENT), OR THE TRANSACTIONS CONTEMPLATED HEREBY, IN ADDITION TO ANY OTHER COURT IN WHICH SUCH ACTION, SUIT OR PROCEEDING MAY BE BROUGHT, IRREVOCABLY AGREES TO BE BOUND BY ANY FINAL JUDGMENT RENDERED BY ANY SUCH COURT IN ANY SUCH ACTION, SUIT OR PROCEEDING IN WHICH IT SHALL HAVE BEEN SERVED WITH PROCESS IN THE MANNER HEREINAFTER PROVIDED, SUBJECT TO EXERCISE AND EXHAUSTION OF ALL RIGHTS OF APPEAL AND TO THE EXTENT THAT IT MAY LAWFULLY DO SO, WAIVES AND AGREES NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE, IN SUCH ACTION, SUIT OR PROCEEDING ANY CLAIMS THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT, THAT ITS PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE ACTION, SUIT OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE THEREOF IS IMPROPER, AND AGREES THAT PROCESS MAY BE SERVED UPON IT IN ANY SUCH ACTION, SUIT OR PROCEEDING IN THE MANNER PROVIDED BY CHAPTER 223A OF THE GENERAL LAWS OF MASSACHUSETTS, RULE 4 OF THE MASSACHUSETTS RULES OF CIVIL PROCEDURE OR RULE 4 OF THE FEDERAL RULES OF CIVIL PROCEDURE. ALL RIGHTS AND OBLIGATIONS HEREUNDER SHALL BE GOVERNED BY THE LAW OF THE COMMONWEALTH OF MASSACHUSETTS AND THIS NOTE SHALL BE DEEMED TO BE UNDER SEAL. DIGITRAN CORPORATION By: /s/ Peter S. Macaluso ---------------------------- Name: Peter S. Macaluso Title: Vice President and CFO EXHIBIT B SECURITY AGREEMENT SECURITY AGREEMENT dated as of July 7, 1995 between DIGITRAN CORPORATION, a Delaware corporation (the "COMPANY") and SILICON VALLEY BANK (the "Bank"). W I T N E S E T H : WHEREAS, the Company and the Bank entered into to a Credit Agreement dated as of July 7, 1995 (as the same day be amended, supplemented, extended or restated from time to time, the "CREDIT AGREEMENT"), providing for the Extensions of Credit to be made by the Bank to the Company; WHEREAS, in order to induce the Bank to enter into the Credit Agreement, the Company has agreed to grant a continuing security interest in and to the Collateral (as defined below) to secure its obligations under the Credit Agreement, including, without limitation, its obligations under the promissory note issued by the Company to the Bank pursuant to the Credit Agreement (as the same day be amended, supplemented, extended or restated from time to time, the "NOTE"); NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are acknowledged, the parties agree as follows: SECTION 1. DEFINITIONS Except for the terms defined below or elsewhere in this Agreement, the terms used herein shall have the respective meanings provided for in the Credit Agreement: "ACCOUNTS" means all "accounts" (as defined in the UCC) now owned or hereafter acquired by the Company and shall also mean and include all accounts receivable, contract rights, book debts, notes, drafts and other obligations or indebtedness owing to the Company arising from the sale, lease or exchange of goods or other property and/or the performance of services by it (including any obligation which might be characterized as an account, contract right or general intangible under the UCC) and all the Company's rights in, to and under all purchase orders for goods, services or other property, and all the Company's rights to any goods, services or other property represented by any of the foregoing (including returned or repossessed goods and unpaid sellers' rights of rescission, replevin, reclamation and rights to stoppage in transit) and all monies due to or to become due to the Company under all contracts for the sale, lease or exchange of goods or-other property and/or the performance of services by it (whether or not yet earned by performance on the part of the Company), in each case whether now in existence or hereafter arising or acquired, including the right to receive the proceeds of said purchase orders and contracts and all collateral security and guarantees of any kind given by any Person with respect to any of the foregoing. "COLLATERAL" has the meaning set forth in Section 3. "DOCUMENTS" means all "documents" (as defined in the UCC) or other receipts covering, evidencing or representing goods, now owned or hereafter acquired, by the Company. "EQUIPMENT" means all "equipment" (as defined in the UCC) now owned or hereafter acquired by the Company, including, without limitation, all motor vehicles, trucks and trailers, except such equipment which is held by the Borrower pursuant to a capital lease (as determined in accordance with GAAP). -2- "GENERAL INTANGIBLES" means all "general intangibles" (as defined in the UCC) now owned or hereafter acquired by the Company, including, without limitation, all (a) obligations or indebtedness owing to the Company (other than Accounts) from whatever source arising, (b) patent licenses, patents, trademark licenses, trademarks, rights in intellectual property, goodwill, trade names, service marks, trade secrets, copyrights, permits and licenses, (c) inventions, processes, production methods, proprietary information, know-how and trade secrets used or useful in the business of the Company, (d) licenses or user or other agreements granted to the Company with respect to any of the items described in clause (b) or (c) above, (e) information, customer lists, identification of suppliers, data, plans, blueprints, specifications, designs, drawings, recorded knowledge, surveys, engineering reports, test reports, manuals, materials standards, catalogs, computer and automatic machinery software and programs and the like pertaining to the business of the Company, (f) field repair data, sales data, and other information relating to sales or service of products now or hereafter manufactured, (g) accounting information and all media in or on which any of the information, knowledge, data or records may be recorded or stored and all computer programs used for the compilation or printout thereof, (h) causes of action, claims and warranties now or hereafter owned or acquired by the Company in respect of any of the items listed above and (i) all tax refunds to which the Company is entitled. "INSTRUMENTS" means all "instruments", "chattel paper" or "letters of credit" (each as defined in the UCC) evidencing, representing, arising from or existing in respect of, relating to, securing or otherwise supporting the payment of, any of the Accounts, including promissory notes, drafts, bills of exchange and trade acceptances, now owned or hereafter acquired by the Company. "INVENTORY" means all "inventory" (as defined in the UCC), now owned or hereafter acquired by the Company, wherever located, and shall also mean and include, without limitation, all raw materials and other materials and supplies, work-in-process and finished goods and any products made or processed therefrom and all substances, if any, commingled therewith or added thereto. "PERFECTION CERTIFICATE" means a certificate substantially in the form of EXHIBIT A hereto, completed with the schedules and attachments contemplated thereby to the satisfaction of the Bank, and duly executed by the chief financial officer of the Company. "PERMITTED FINANCING STATEMENTS" means any financing statements naming the Company as Debtor filed solely pursuant to Section 9-408 of the UCC and financing statements relating to Permitted Liens. "PERMITTED LIENS" means the Liens on the Collateral permitted to be created, assumed or to exist pursuant to Section 7.6 of the Credit Agreement. "PROCEEDS" means all proceeds of, and all other profits, rentals or receipts, in whatever form, arising from the collection, sale, lease, exchange, assignment, licensing or other disposition of, or realization upon, Collateral, including, without limitation, all claims of the Company against third parties for loss of, damage to or destruction of, or for proceeds payable under, or unearned premiums with respect to, policies of insurance in respect of, any Collateral, and any condemnation or requisition payments with respect to any Collateral, in each case whether now existing or hereafter arising. -3- "SECURED OBLIGATIONS" means all obligations of the Company to the Bank, whether now existing or hereafter incurred or created, joint or several, direct or indirect, absolute or contingent, due or to become due, matured or unmatured, liquidated or unliquidated, arising by contract, operation of law or otherwise, including (a) all principal of and interest (including any interest which accrues after the commencement of any case, proceeding or other action relating to the bankruptcy, insolvency or reorganization of the Company) on any advance to the Company under the Credit Agreement or the Note; (b) all other amounts (including any fees or expenses) payable by the Company under the Credit Agreement, the Note or any other Loan Document; (c) all amounts payable to the Bank in connection with the issuance of any letter of credit by the Bank for the account of the Company or any drawing thereunder, including any reimbursement obligation and fees payable under any related letter of credit application or reimbursement agreement executed by the Company; (d) all amounts payable by the Company hereunder; and (e) any renewals, refinancings or extensions of any of the foregoing. "SECURITY INTERESTS" means the security interests granted pursuant to Section 3, as well as all other security interests created or assigned as additional security for the Secured Obligations pursuant to the provisions of this Agreement. "UCC" means the Uniform Commercial Code in effect on the date hereof in Massachusetts; provided that if by reason of law, the perfection or effect of perfection or non-perfection of the Security Interests in any Collateral is governed by the Uniform Commercial Code in effect in a jurisdiction other than Massachusetts, "UCC" means the Uniform Commercial Code in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or effect of perfection or non- perfection. SECTION 2. REPRESENTATIONS AND WARRANTIES The Company represents and warrants as follows: (a) The Company has good title to all of the Collateral, free and clear of any Liens other than the Permitted Liens and the Security Interests. (b) Neither the Company nor its predecessors has performed any acts which might prevent the Bank from enforcing any of the terms of this Agreement or which would limit the Bank in any such enforcement. Other than the Permitted Financing Statements and financing statements or other similar or equivalent documents or instruments with respect to the Security Interests, no financing statement, mortgage, security agreement or similar or equivalent document or instrument covering all or any part of the Collateral is on file or of record in any jurisdiction in which such filing or recording would be effective to perfect a Lien on such Collateral. No Collateral is in the possession of any Person (other than the Company) asserting any claim thereto or security interest therein, except that the Bank or its designee may have possession of Collateral as contemplated hereby. (c) Prior to the first borrowing under the Credit Agreement, the Company shall deliver the Perfection Certificate to the Bank. The information set forth therein shall be correct and complete. (d) When UCC financing statements in appropriate form have been filed in the offices specified in the Perfection Certificate to the extent that a security interest therein may be perfected by filing pursuant to the UCC, the Security Interests shall constitute valid and perfected security -4- interests in the Collateral (except Inventory in transit), in each case prior to all other Liens and rights of others therein. (e) Except for the filings referred to in paragraph (d) above, no authorization, approval or other action by, and no notice of filing with, any Governmental Authority that has not been received, taken or made is required (i) for the grant by the Company of the Security Interests or for the execution, delivery or performance of this Agreement by the Company, (ii) for the perfection and maintenance of the Security Interests as first priority security interests and liens, or (iii) for the exercise by the Bank of the rights or the remedies in respect of the Collateral pursuant to this Agreement. (f) The Inventory and Equipment are insured in accordance with the requirements of this Security Agreement and the Credit Agreement. SECTION 3. THE SECURITY INTERESTS (a) In order to secure the full and punctual payment of the Secured Obligations in accordance with their respective terms, the Company hereby hypothecates, assigns, pledges and grants to the Bank a continuing security interest and lien in and to all right, title and interest of the Company in the following property, whether now owned or existing or hereafter acquired or arising and regardless of where located (all being collectively referred to as the "COLLATERAL"): (i) Accounts; (ii) Inventory; (iii) General Intangibles; (iv) Documents; (v) Instruments; (vi) Equipment; (vii) All monies and property of any kind of the Company in the possession or under the control of the Bank; (viii) All books and records (including customer lists, marketing information, credit files, price lists, operating records, vendor and supplier price lists, sales literature, computer programs, printouts and other computer materials and records) of the Company pertaining to any of the Collateral; and (ix) All Proceeds of, attachments or accessions to, or substitutions for all or any of the Collateral described in Clauses (i) through (viii) hereof. (b) The Security Interests are granted as security only and shall not subject the Bank to, or transfer or in any way affect or modify, any obligation or liability of the Company with respect to any of the Collateral or any related transaction. -5- SECTION 4. FURTHER ASSURANCES; COVENANTS The Company covenants as follows: (a) The Company will not change (i) the locations of its principal place of business or its chief executive office, (ii) its federal tax identification number, (iii) the locations where it keeps or holds any related records from the applicable locations described in the Perfection Certificate, or (iv) its name, identity or corporate structure in any manner, without giving the Bank 30 days prior written notice. In the event of any such change, the Company shall, at its cost and expense, cooperate with the Bank and cause to be filed or recorded additional financing statements, amendments or supplements to existing financing statements, continuation statements or other documents required to be recorded or filed in order to perfect and protect the Security Interests. The Company shall not, in any event, make any such change if such change would cause the Security Interests in any Collateral to lapse or cease to be perfected. (b) The Company will, from time to time, at its expense, execute, deliver, file and record any statement, assignment, instrument, document, agreement or other paper and take any other action (including, without limitation, any filings of financing or continuation statements under the UCC) that the Bank may from time to time reasonably determine to be necessary or desirable in order to create, preserve, upgrade in rank (to the extent required hereby), perfect, confirm or validate the Security Interests or to enable the Bank to (i) obtain the full benefits of this Agreement, or (ii) to exercise and enforce any of its rights, powers and remedies hereunder with respect to any of the Collateral. At the Bank's request, the Company will use reasonable efforts to obtain the consent of any Person that is necessary or desirable to effect the pledge hereunder of any right, title, claims and benefits now owned or hereafter acquired by the Company in and to any General Intangible. To the extent permitted by law, the Company hereby authorizes the Bank to execute and file financing statements or continuation statements without the Company's signature appearing thereon. The Company agrees that a carbon, photographic or other reproduction of this Agreement or of a financing statement is sufficient as a financing statement. The Company shall pay the costs of, or incidental to, any recording or filing of any financing or continuation statements concerning the Collateral. (c) If any warehouseman, bailee or any of the Company's agents or processors possesses or controls any Collateral, the Company shall, upon the request of the Bank, notify such warehouseman, bailee, agent or processor of the Security Interests created hereby and to hold all such Collateral for the Bank's account subject to the Bank's instructions. (d) The Company shall keep complete and accurate books and records relating to the Collateral, and stamp or otherwise mark them in such manner as the Bank may reasonably request in order to reflect the Security Interests. (e) The Company will promptly deliver and pledge each Instrument to the Bank, appropriately endorsed to the Bank without recourse, provided that so long as no Event of Default shall have occurred and be continuing, the Company may retain for collection in the ordinary course any Instruments it receives in the ordinary course of business and the Bank shall, promptly upon request of the Company, make appropriate arrangements for making any other Instrument pledged by the Company available to it for purposes of presentation, collection or renewal (any such arrangement to be effected, to the extent deemed appropriate by the Bank, against trust receipt or like document). -6- (f) The Company shall use its best efforts to cause to be collected from its account debtors, as and when due, any and all amounts owing under or on account of each Account (including, without limitation, Accounts which are delinquent, such Accounts to be collected in accordance with lawful collection procedures and the Company's standard procedures) and apply forthwith upon receipt mail such amounts so collected to the outstanding balance of such Account, except that, unless an Event of Default has occurred and is continuing and the Bank is exercising its rights hereunder to collect Accounts, the Company may allow in the ordinary course of business as adjustments to amounts owing under its Accounts (i) an extension or renewal of the time of payment, or settlement for less than the total unpaid balance, which the Company finds appropriate in accordance with prudent business judgment and (ii) a refund or credit due as a result of returned or damaged merchandise, all in accordance with the Company's ordinary course of business consistent with its historical collection practices. The costs and expenses (including, without limitation, attorney's fees) of collection, whether incurred by the Company or the Bank, shall be borne by the Company. (g) Upon the occurrence and during the continuance of any Event of Default, upon the request of the Bank, the Company will promptly notify (and the Company hereby authorizes the Bank so to notify) each account debtor in respect of any Account or Instrument that such Collateral has been assigned to the Bank, and that any payments due or to become due in respect of such Collateral are to be made directly to the Bank or any designee of the Bank. Following such request of the Bank, the Company shall hold all proceeds from collection of Accounts as trustee for the Bank (without commingling the same with other funds of the Company) and shall turn the same over to the Bank immediately upon receipt in the for received (duly endorsed by the Company to the Bank, if required). The Bank shall apply the proceeds of such collections it receives to the Secured Obligations in accordance with Section 8 of this Agreement. The application of the proceeds of such collections shall be conditional upon the final payment in cash of the items so collected. If any item is not so paid or the Bank is required for any reason to return any payment made, the Bank may reverse any credit given in respect of such item. (h) Without the prior written consent of the Bank, the Company will not (i) sell, lease, exchange, assign or otherwise dispose of, or grant any option with respect to, any Collateral except as permitted by Section 7.4 of the Credit Agreement and, in the case of any such permitted sale or exchange, the Security Interests created hereby in such item (but not in any Proceeds arising from such sale or exchange) shall cease immediately without any further action on the part of the Bank; or (ii) create, incur or suffer to exist any Lien with respect to any Collateral, except for Permitted Liens and the Security Interests. (i) The Company will maintain, with financially sound and reputable companies, insurance policies (i) insuring all Inventory and Equipment against loss by fire, explosion, theft and other casualties reasonably satisfactory to the Bank and (ii) insuring the Company and the Bank against liability for personal injury and property damage relating to Inventory and Equipment, such policies to be in such form and amounts and having such coverage as is reasonably satisfactory to the Bank, with losses payable to the Bank as sole loss payee. All such insurance shall (A) provide that no termination, cancellation, material reduction in amount or material change in coverage thereof shall be effective until at least 30 days after receipt by the Bank of written notice thereof, (B) in the case of the policies referenced in clause (ii) above, name the Bank as additional insured and (C) be otherwise reasonably satisfactory to the Bank. (j) The Company will keep each item of Equipment in good order and repair and will not use the same in violation of law or any policy of insurance thereon. -7- (k) The Company will, promptly upon request, provide to the Bank all information and evidence it may reasonably request concerning the Collateral (including without limitation, the names, addresses, face value, and date of invoices for each debtor obligated on each Account) to enable the Bank to enforce the provisions of this Agreement. SECTION 5. GENERAL AUTHORITY The Company hereby irrevocably appoints the Bank its true and lawful attorney, with full power of substitution, in the name of the Company, the Bank, or otherwise, for the sole use and benefit of the Bank, but at the Company's expense, to the extent permitted by law to exercise, at any time and from time to time while an Event of Default has occurred and is continuing, all or any of the following powers with respect to all or any of the Collateral: (a) to endorse the Company's name on any checks, notes, acceptances, money orders, drafts, filings or other forms of payment or security that may come into the Bank's possession, (b) to demand, sue for, collect, receive and give acquittance for any and all monies due or to become due thereon or by virtue thereof, (c) to settle, compromise, compound, prosecute or defend any action or proceeding with respect thereto, (d) to sell, transfer, assign or otherwise deal in or with the same or the proceeds or avails thereof, as fully and effectively as if the Bank were the absolute owner, and (e) to extend the time of payment thereof and to make any allowance and other adjustments with reference thereto; PROVIDED that the Bank shall give the Company not less than ten days prior written notice of the time and place of any sale or other intended disposition of any of the Collateral, except any Collateral which is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market. The Company agrees that such notice constitutes "reasonable notification" within the meaning of Section 9-504(3) of the UCC. SECTION 6. REMEDIES UPON EVENT OF DEFAULT (a) If any Event of Default has occurred and is continuing, the Bank may exercise all rights of a secured party under the UCC (whether or not in effect in the jurisdiction where such rights are exercised) and, in addition, the Bank may, without being required to give any notice, except as herein provided or as may be required by law, sell any and all of the Collateral at public or private sale, for cash, upon credit or for future delivery, and at such prices as the Bank may deem satisfactory. The Bank may be the purchaser of any or all of the Collateral so sold at any public sale (or, if the Collateral is of a type customarily sold in a recognized market or is of a type which is the subject of widely distributed standard price quotations, at any private sale) and thereafter hold the same, absolutely, free from any right or claim of whatsoever kind. The Company will execute and deliver such documents and take such other action as the Bank deems necessary or advisable in order that any such sale may be made in compliance with law. Upon any such sale the Bank shall have the right to deliver, assign and transfer to the purchaser the Collateral so sold. Each purchaser at any such sale shall hold the Collateral so sold to it absolutely, free from any claim or right of whatsoever kind, including any equity or right of redemption of the Company. The -8- Company, to the extent permitted by law, hereby specifically waives all rights of redemption, stay or appraisal which it has or may have under any law now existing or hereafter adopted. The notice (if any) of such sale required by Section 5 shall (i) in case of a public sale, state the time and place fixed for such sale, and (ii) in the case of a private sale, state the day after which such sale may be consummated. Any such public sale shall be held at such time(s) within ordinary business hours and at such places as the Bank may fix in the notice of such sale. At any such sale the Collateral may be sold in one lot as an entirety or in separate parcels, as the Bank may determine. The Bank shall not be obligated to make any such sale pursuant to any such notice. The Bank may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the same may be so adjourned. In case of any sale of all or any part of the Collateral on credit or for future delivery, the Collateral so sold may be retained by the Bank until the selling price is paid by the purchaser thereof, but the Bank shall not incur any liability in case of the failure of such purchaser to take up and pay for the Collateral so sold and, in case of any such failure, such Collateral may again be sold upon like notice. The Bank, instead of exercising the power of sale herein conferred upon it, may proceed by a suit or suits at law or in equity to foreclose the Security Interests and sell the Collateral, or any portion thereof, under a judgment or decree of a court or courts of competent jurisdiction. (b) For the purpose of enforcing its rights and remedies under this Agreement, the Bank may (i) require the Company to, and the Company agrees that it will, at its expense and upon the request of the Bank, forthwith assemble all or any part of the Collateral as directed by the Bank and make it available at a place designated by the Bank which is, in its opinion, reasonably convenient to the Bank, whether at the premises of the Company or otherwise, (ii) to the extent permitted by law, enter, with or without process of law and without breach of the peace, any premise where any of the Collateral may be located, and without charge or liability to it seize and remove such Collateral from such premises, (iii) have access to and use the Company's books and records relating to the Collateral and (v) prior to the disposition of the Collateral, store or transfer it without charge in or by means of any storage or transportation facility owned or leased by the Company, process, repair or recondition it or otherwise prepare it for disposition in any manner and to the extent the Bank deems appropriate to preserve and enhance its value and, in connection with such preparation and disposition, use, as a licensee (or if no decline in the value of the Collateral would result, otherwise) without charge any trademark, trade name, copyright, patent or technical process used by the Company. SECTION 7. LIMITATION ON DUTY OF BANK IN RESPECT OF COLLATERAL Beyond the safe custody thereof in accordance with law, the Bank shall have no duty as to any Collateral in the possession or control of the Bank or any agent or bailee, or any income thereon, or as to the preservation of rights against prior parties or any other rights pertaining thereto. The Bank shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equivalent to that which it accords its own property of like nature, and shall not be liable or responsible for any loss or damage to any of the Collateral, or for any diminution in the value thereof, by reason of the act or omission of any warehouseman, carrier, forwarding agency, consignee or other agent or bailee selected by the Bank in good faith and in the absence of gross negligence. -9- SECTION 8. APPLICATION OF PROCEEDS Upon the occurrence and during the continuance of an Event of Default, the proceeds of any sale of, or other realization upon, all or any part of the Collateral shall be applied by the Bank in the following order of priorities: FIRST, to payment of the expenses of such sale or other realization, including reasonable compensation to the Bank and its agents and counsel in connection therewith, and all expenses, liabilities and advances incurred or made by the Bank in connection therewith, and any other unreimbursed expenses for which the Bank is to be reimbursed pursuant to Section 10.6 of the Credit Agreement, or Section 9 hereof and unpaid fees owing to the Bank under the Credit Agreement; SECOND, to the payment of accrued but unpaid interest on the Secured Obligations; THIRD, to the payment of unpaid principal of the Secured Obligations; FOURTH, to the payment of all other Secured Obligations, until all Secured Obligations shall have been paid in full; and FINALLY, to payment to the Company or its successors or assigns, or as a court of competent jurisdiction may direct, of any surplus then remaining from such proceeds. The Bank may make distributions hereunder in cash or in kind or in any combination thereof. SECTION 9. EXPENSES In the event that the Company fails to comply with the provisions of the Credit Agreement or this Agreement, such that the value of any Collateral or the validity, perfection, rank or value of any Security Interest is thereby diminished or potentially diminished or put at risk, the Bank may effect such compliance on behalf of the Company, and the Company shall reimburse the Bank for the costs thereof within two Business Days of demand therefor. All insurance expenses and all reasonable expenses of protecting, storing, warehousing, appraising, insuring, handling, maintaining, and shipping the Collateral, any and all excise, property, sales, and use taxes imposed by any state, federal, or local authority on any of the Collateral, or in respect of the sale or other disposition thereof, shall be borne by the Company; and if the Company fails to promptly pay any portion thereof when due, the Bank may, at its option, but shall not be required to, pay the same and charge the Company's account therefor, and the Company agrees to reimburse the Bank therefor on demand. All sums so paid or incurred by the Bank for any of the foregoing and any and all other sums for which the Company may become liable hereunder and all reasonable costs and expenses (including attorneys' fees, legal expenses and court costs) reasonably incurred by the Bank in enforcing or protecting the Security Interests or any of their rights or remedies under this Agreement, shall, together with interest thereon until paid at the rate applicable to advances made under the Credit Agreement, be additional Secured Obligations hereunder. SECTION 10. TERMINATION OF SECURITY INTERESTS Upon the indefeasible payment in full of all Secured Obligations and the termination of the Commitment, the Security Interests shall terminate and all rights to the Collateral shall revert to the Company, and this Security Agreement shall terminate and no longer be of any force and effect. -10- SECTION 11. NOTICES All notices, approvals, requests, demands and other communications hereunder shall be given in accordance with the Credit Agreement. SECTION 12. WAIVERS, NON-EXCLUSIVE REMEDIES No failure on the part of the Bank to exercise, and no delay in exercising and no course of dealing with respect to, any right under the Credit Agreement or this Agreement shall operate as a waiver thereof; nor shall any single or partial exercise by the Bank of any right under the Credit Agreement or this Agreement preclude any other or further exercise thereof or the exercise of any other right. The rights in this Agreement and the Credit Agreement are cumulative and are not exclusive of any other remedies provided by law. SECTION 13. SUCCESSORS AND ASSIGNS This Agreement is for the benefit of the Bank and its successors and assigns, and in the event of an assignment of all or any of the Secured Obligations, the rights hereunder, to the extent applicable to the indebtedness so assigned, may be transferred with such indebtedness. This Agreement shall be binding on the Company and its successors and assigns, SECTION 14. CHANGES IN WRITING Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated orally, but only in writing signed by the Company and the Bank. SECTION 15. MASSACHUSETTS LAW THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS, EXCEPT AS OTHERWISE REQUIRED BY MANDATORY PROVISIONS OF LAW AND EXCEPT TO THE EXTENT THAT REMEDIES PROVIDED BY THE LAWS OF ANY JURISDICTION OTHER THAN THE COMMONWEALTH OF MASSACHUSETTS ARE GOVERNED BY THE LAWS OF SUCH JURISDICTION. SECTION 16. SEVERABILITY If any provision hereof is invalid and unenforceable in any jurisdiction, then, to the fullest extent permitted by law, (a) the other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in favor of the Bank in order to carry out the intentions of the parties hereto as nearly as may be possible; and (b) the invalidity or unenforceability of any provision hereof in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction. SECTION 17. COUNTERPARTS This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Agreement by signing any such counterpart. -11- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. DIGITRAN CORPORATION By: /s/ Peter S. Macaluso ---------------------------- Name: Peter S. Macaluso Title: Vice President and CFO SILICON VALLEY BANK By: /s/ Joan S. Parsons ---------------------------- Name: Joan S. Parsons Title: Vice President EXHIBIT A PERFECTION CERTIFICATE OF DIGITRAN CORPORATION The undersigned, the chief financial officer of Digitran Corporation, a Delaware corporation (the "COMPANY"), hereby certifies to Silicon Valley Bank (the "BANK") with reference to the Security Agreement dated as of July 7, 1995 between the Company and the Bank (the terms defined therein being used herein as therein defined) as follows: 1. NAMES. (a) The exact corporate name of the Company as it appears in its certificate of incorporation is as follows: Digitran Corporation (b) Set forth below is each other corporate name the Company has had since its organization, together with the date of the relevant change: (c) Set forth below is a description of each change by the Company of its identity or corporate structure in any way within the past five years: (d) The following is a list of all other names (including trade names or similar appellations) used by the Company or any of its divisions or other business units at any time during the past five years: (e) The Federal tax identification number of the Company is as follows: 2. CURRENT LOCATIONS. (a) The chief executive office of the Company is located at the following address: 379 Thornall Street Edison, NJ 08837 -2- (b) The following are all the locations where the Company maintains any books or records relating to any Accounts: Mailing Name Address City State ---- ------- ---- ----- (c) The following are all the locations where Inventory and Equipment of the Company are located: Mailing Name Address City State ---- ------- ---- ----- (d) The following are all the places of business of the Company not identified above: Mailing Name Address City State ---- ------- ---- ----- 3. PRIOR LOCATIONS. Set forth below is the information required by subparagraphs (a), (b), (c) and (d) of paragraph 2 with respect to each location or place of business maintained by the Company at any time during the past five years: 4. UNUSUAL TRANSACTIONS. Except as set forth in SCHEDULE 4, all Accounts have been originated by the Company and all Equipment has been acquired by the Company in the ordinary course of its business. 5. FILE SEARCH REPORTS. Attached hereto as SCHEDULE 5 is a true copy of a file search report from the Uniform Commercial Code filing officer in each jurisdiction identified in paragraph 2 or 3 above with respect to each name set forth in paragraph 1 above, together with a true copy of each financing statement or other filing identified in such file search reports. To the best knowledge of the Company, no other financing statements have been filed listing the Company as a debtor and no such filings are pending except in favor of the Bank. -3- WITNESS WHEREOF, I have hereunto set my hand this __ day of ________, 199_. ------------------------- Name: ------------------- Title: ------------------- SCHEDULE 4 ----------- (Unusual Transactions) SCHEDULE 5 ---------- (Search Reports) EXHIBIT C COMPLIANCE CERTIFICATE ---------------------- TO: SILICON VALLEY BANK 3000 Lakeside Drive Santa Clara, California 95954 The undersigned authorized officer of Digitran Corporation and ____________ (the "Borrower"), hereby certify, with respect to the Credit Agreement dated as of July 7, 1995 between Silicon Valley Bank and the Borrower (the "Bank"), as amended through the date hereof (the "Credit Agreement"), that (a) the Borrower has been in complete compliance for the period from ___/___/_____ to ___/___/_____ (the "Applicable Financial Statements Date") with the covenants of the Borrowers contained therein as demonstrated below, and (b) no Default has occurred and is continuing as of the date hereof, except, in either case, as noted below. All capitalized terms used herein and not otherwise defined shall have the meanings prescribed therefor in the Credit Agreement.
ACTUAL AS COVENANT REQUIRED OF __________ - ------------------------------------------------------------------------------------------ Financial Statements Monthly w/in 28 days; annually w/in 105 days; and Borrowing Base Certificate and A/R aging w/in 15 days of each month - ------------------------------------------------------------------------------------------ All documents filed with SEC Within 10 days after filing - ------------------------------------------------------------------------------------------ Minimum Quick Ratio (cash & 1.25:1 at all times from ___.___:1 accounts receivable/current 12/31/94 through 8/31/95; ($__________ to $__________) liabilities) 1.0:1 at all times thereafter - ------------------------------------------------------------------------------------------ -2- - ------------------------------------------------------------------------------------------ Minimum Profitability Maximum Net Loss of $3,500,000 for the fiscal year ending 12/31/94; Maximum Net Loss of $1,200,000 for the quarter ending 3/31/95; $1,000,000 for the quarter ending 6/30/95; $850,000 for the quarter ending 9/30/95; $600,000 for the quarter ending 12/31/95 and Minimum Net Income of $1 for the quarter ending 3/31/96 and each quarter thereafter. $__________ - ------------------------------------------------------------------------------------------ Limit of Capital Maximum Capital Expenditure Expenditures of $1,270,000 in any fiscal $__________ year - ------------------------------------------------------------------------------------------ Limit on Operating Lease Maximum Lease Expense of Payments $430,000 - ------------------------------------------------------------------------------------------ Minimum Tangible Net Worth $500,000 for the quarter ending 12/31/94; $3,400,000 for the quarter ending 3/31/95; $2,500,000 for quarter ending 6/30/95; $1,700,000 for quarter ending 9/30/95; $1,400,000 for quarter ending 12/31/95 and $1,250,000 for quarter ending 3/31/96 and each quarter thereafter. - ------------------------------------------------------------------------------------------ Calculation of Tangible Net stockholders' equity $__________ Worth - intangible assets $__________ - goodwill $__________ + Subordinated Debt $__________] Total Tangible Net Worth $__________ - ------------------------------------------------------------------------------------------ Maximum Ratio of Total 2.1:1 at all times ___.___:1 Senior Liabilities ($__________ to Tangible Net Worth) $__________] - ------------------------------------------------------------------------------------------ A/R Advance Rate 50% of Eligible Domestic Accounts Receivable. $__________ - ------------------------------------------------------------------------------------------
-3- Comments Regarding Exceptions: Attached hereto are financial statements as of and for the fiscal [month][year] ended on the Applicable Financial Statements Date, which have been certified by the [undersigned] [Accountants] as required by Section 6.4 of the Credit Agreement. Submitted by: By: Name: Title: Date: EXHIBIT D BORROWING BASE CERTIFICATE The undersigned is an authorized officer of Digitran Corporation (the "Borrower"), and is delivering this certificate pursuant to the requirements of the Credit Agreement dated as of July 7, 1995 between Silicon Valley Bank (the "Bank") and the Borrower, as amended through the date hereof (the "Credit Agreement"). The undersigned hereby certifies to the Bank that the following is a fair, accurate and complete report of the Borrowing Base (as such term is defined in the Credit Agreement) of the Borrower as of , 199__ (the "Relevant Date"): I. ACCOUNTS RECEIVABLE ACTIVITY A. Eligible Domestic Accounts Receivable: $ 1. Balance as of the Relevant Date 2. Minus: Ineligible Accounts Foreign Accounts Amounts over 90 days due Balance of 50% over 90 days accounts Excess 25% Concentration Contra Accounts Intercompany/Employee Accounts Government Accounts Other Ineligible Accounts Total Ineligible Accounts 3. Total Eligible Domestic Accounts Receivable (Line (1) minus Line (2)) $ 4. Funds Available (50% of Line (3)) $ II. EXTENSION OF CREDIT ACTIVITY A. Total Funds Available: (Limited to the lesser of $1,000,000 or the amount set forth in I.A.4. $ B. Extension of Credit Balance as of the Relevant Date $ C. Reserve Position (II.A minus II.B) $ Accompanying this certificate is a fair, accurate and complete report of accounts receivable aging for the Borrower as of the Relevant Date, in reasonable detail. -2- The above listed collateral is subject to a security interest in favor of the Bank pursuant to the terms of a Security Agreement executed by the Borrower and the Bank. Submitted By: Name: Title: Date: EXHIBIT E SILICON VALLEY BANK LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., E.S.T. TO: CENTRAL CLIENT SERVICE DIVISION DATE: FAX#: 617-431-9906 TIME: FROM: CLIENT NAME (BORROWER) REQUESTED BY: AUTHORIZED SIGNERS NAME AUTHORIZED SIGNATURE: PHONE NUMBER: FROM ACCOUNT # TO ACCOUNT # REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT PRINCIPAL INCREASE (ADVANCE) $ PRINCIPAL PAYMENT (ONLY) $ INTEREST PAYMENT (ONLY) $ PRINCIPAL & INTEREST (PAYMENT) $ OTHER INSTRUCTIONS: BANK USE ONLY TELEPHONE REQUEST: The following person is authorized to request the loan payment transfer/ loan advance on the above designated account and is known to me. AUTHORIZED REQUESTER PHONE # RECEIVED BY (BANK) PHONE # AUTHORIZED SIGNATURE (BANK) SCHEDULE A Existing Indebtedness OF DIGITRAN CORPORATION Digitran Corporation Equipment Lease Commitments As of April 30, 1995 Equipment Lease Term Buyout Lessor Cost Payment Date Price Comdisco Inc. Lease schedule 106,644 3,460 12/31/95 FMV Buyout #268-00 60,000 5,185 9/30/95 $1.00 Buyout #268-02 24,925 2,164 3/31/96 $1.00 LTI Venture Leasing ($300,000 lease line) Schedule 1 50,475 2,347 7/31/95 FMV Schedule 2 97,334 4,477 4/30/96 FMV Schedule 3 40,874 1,901 1/31/97 FMV Schedule 4 13,575 524 2/28/97 FMV Schedule 5 28,474 1,099 6/30/97 Schedule 6 130,118 4,515 1/31/98 13% 360,850 14,863 Phoenix Leasing Incorporated ($500,000 lease line) Schedule 1 93,676 3,068 3/31/98 15% Schedule 2 51,574 1,689 4/30/98 15% 145,250 4,757 Schedule B INTELLECTUAL PROPERTY Trademark and Service Mark Registrations NAME OF MARK REGISTRATION NO. REGISTRATION DATE DIGITRAN THE FAX 1,768,897 5/4/93 NETWORK COMPANY FAXASSURED 1,766,243 4/20/93 FAXSAVER 1,766,242 4/20/93 DIGITRAN 1,766,241 4/20/93 Trademark Application NAME OF MARK APPLICATION NO. FILING DATE FAXSAV 74/518,903 5/2/94 SCHEDULE 7.2 The Borrower and Telstra Incorporated, a Delaware corporation and shareholder in the Borrower ("Telstra"), signed a letter agreement on November 1, 1994 (the "Letter Agreement"), which sets forth the basic terms of a Traffic Agreement between the Borrower and Telstra. Under the terms of the Letter Agreement, the Borrower and Telstra have agreed that (i) the Borrower will exclusively use Telstra's "WorldFax" service for all of the Borrower's outbound traffic from the United States, subject to customer acceptance, quality of service and competitive pricing, (ii) pricing for the Borrower's use of Telstra's "WorldFax" service is to be reviewed on a six-month basis, (iii) the arrangements are for a period of five yeas commencing on the commercial commencement date of Telstra's "WorldFax" service in the United States and (iv) Digitran has a right to use a secondary carrier for outbound traffic from the United States in the event of a "WorldFax" outage. LOAN DOCUMENT MODIFICATION AGREEMENT NO. 1 dated as of April 15, 1996, amending, INTER ALIA, CREDIT AGREEMENT dated as of July 7, 1995 between SILICON VALLEY BANK (the "Bank") and FAXSAV INCORPORATED (the "Borrower") LOAN MODIFICATION AGREEMENT (NO. 1; DATED AS OF APRIL 15, 1996 LOAN DOCUMENT MODIFICATION AGREEMENT dated as of April 15, 1996 by and between FAXSAV INCORPORATED, a Delaware corporation with its principal place of business at 379 Thornall Street, Edison, New Jersey 08837 and formerly known as Digitran Corporation (the "BORROWER") and SILICON VALLEY BANK (the "BANK"), a California-chartered bank with its principal place of business at 3003 Tasman Drive, Santa Clara, California 95054, and with a loan production office located at Wellesley Office Park, 45 William Street, Wellesley, MA 02181, doing business under the name "Silicon Valley East." 1. REFERENCE TO EXISTING LOAN DOCUMENTS. Reference is hereby made to that Credit Agreement dated July 7, 1995 between the Bank and the Borrower (with the attached schedules and exhibits, the "CREDIT AGREEMENT") and the Loan Documents referred to therein, including without limitation that certain Promissory Note of the Borrower dated July 7, 1995 in the principal amount of $1,000,000 (the "WORKING CAPITAL NOTE"), and the Security Documents referred to therein. Unless otherwise defined herein, capitalized terms used in this Agreement shall have the same respective meanings as set forth in the Credit Agreement. 2. EFFECTIVE DATE. This Agreement shall become effective as of April 15, 1996 (the "EFFECTIVE DATE"), provided that the Bank shall have received the following on or before April 29, 1996 and provided further, however, in no event shall this Agreement become effective until signed by an officer of the Bank in California: a. two copies of this Agreement, duly executed by the Borrower; b. an amended and restated promissory note (working capital line of credit) in the form enclosed herewith (the "AMENDED WORKING CAPITAL NOTE"), duly executed by the Borrower; c. a promissory note in the principal amount of $750,000 in respect of the Equipment Line Commitment in the form enclosed herewith (the "EQUIPMENT LINE NOTE"), duly executed by the Borrower; and d. evidence of the approval by your Board of Directors of this Agreement the Amended Working Capital Note and the Equipment Line Note. By the signature of its authorized officer below, the Borrower is hereby representing that, except as modified in SCHEDULE A attached hereto, the representations of the Borrower set forth in the Loan Documents (including those contained in the Credit Agreement. as amended by this Agreement) are true and correct as of the Effective Date as if made on and as of such date. In addition, the Borrower confirms its authorization as to the debiting of its account with the Bank in the aggregate amount of $5,000 in order to pay the Bank's facility fee for the period up to and including the extended Commitment Expiration Date. Finally, the Borrower agrees that, as of the Effective Date, it has no defenses against its obligations to pay any amounts outstanding under the Credit Agreement and the other Loan Documents. -2- 3. DESCRIPTION OF CHANGE IN TERMS. As of the Effective Date, the Credit Agreement is modified in the following respects: a. Section 1.1 is hereby amended by deleting the words "the date which is one year from the date set forth above" and substituting in place thereof the date "April 14, 1997." b. Section 1.4 is hereby amended and restated in its entirety to read as follows: "BORROWING BASE. The Borrower shall not permit, or request any advance hereunder that would cause, the sum of the aggregate of all Working Capital Line of Credit Loans under this Section 1 to exceed at any time an amount equal to the lesser of (a) the Working Capital Line of Credit Commitment and (b) 60% of all Eligible Domestic Accounts Receivable at such time MINUS (until the occurrence of a Debt Service Coverage Event) the aggregate outstanding amount of Equipment Line of Credit Loans under Section 1A hereof (the lesser of (a) and (b) being referred to herein as the "BORROWING BASE")." c. Section 1.5 is hereby amended by deleting the date "July 7, 1996" appearing in the second line thereof and substituting in place thereof the date "April 14, 1997. " d. There is hereby inserted immediately following Section 1 the following new Section 1A: "SECTION 1A EQUIPMENT LINE OF CREDIT LOANS. "1A. AMOUNT. Subject to and upon the terms and conditions set forth below, the Bank agrees to make loans (each an "EQUIPMENT LINE OF CREDIT LOAN" and collectively, the "EQUIPMENT LINE OF CREDIT LOANS") to the Borrower under this Section 1A.1 from time to time up to and including October 14, 1996 (the "EQUIPMENT LINE COMMITMENT EXPIRATION DATE"), unless earlier terminated pursuant to Section 1A.6, in an aggregate amount not to exceed at any one time outstanding the lesser of (a) $750,000 and (b) until the occurrence of a Debt Service Coverage Event, 60% of all Eligible Domestic Accounts Receivable at such time LESS the aggregate outstanding principal amount of Working Capital Line of Credit Loans (the "EQUIPMENT LINE COMMITMENT"), subject to the limitation set forth in Section 1A.4. "1A.2 EQUIPMENT NOTE. The Equipment Line of Credit Loans shall be evidenced by and payable with interest in accordance with the note of the Borrower in the form of attached EXHIBIT A-1, dated as of the date hereof (the "EQUIPMENT LINE NOTE"). The Working Capital Line Note and the Equipment Line Note are sometimes together referred to as the "BORROWER NOTES." "1A.3 REQUESTS FOR EQUIPMENT LINE LOANS. The Borrower may make requests for Equipment Line of Credit Loans, and the Bank shall make such loans in the same manner as provided in Section 1.3 with respect to Working Capital Line of Credit Loans, except that together with the Notice of Borrowing, the Borrower shall furnish to the Bank copies of all invoices for items of Eligible Equipment and such other information as the Bank shall reasonably request. -3- "1A.4 RESTRICTIONS ON ADVANCES. Equipment Line of Credit Loans may be made only with respect to an item or items of Eligible Equipment specifically identified in accordance with Section 1A.3, and the principal amount of any such Equipment Line of Credit Loans may not exceed 80% of the invoice price of such item or items of Eligible Equipment, including sales taxes, shipping charges, installation charges and similar charges and expenses. "1A.5 MATURITY DATE OF EQUIPMENT LINE LOANS. All Equipment Line of Credit Loans shall be repayable in installments in accordance with the terms of the Equipment Line Note, provided that all Equipment Line of Credit Loans shall mature and the total principal amount thereunder shall be prepayable on October 14, 1999 (the "EQUIPMENT LINE MATURITY DATE"), at which time all amounts advanced under this Section 1A shall be immediately due and payable. "1A.6 TERMINATION OF COMMITMENT. The Borrower, upon (a) at least two (2) Banking Days' prior written notice to the Bank and (b) the repayment in full of the outstanding principal balance of the Equipment Line of Credit Loans (and accrued interest thereon) and the payment in full of any expenses or other fees owed by the Borrower to the Bank under or pursuant to this Agreement, may elect to permanently terminate the Equipment Line Commitment." e. Section 2.1 (a) is hereby amended by deleting the phrase "Prime Rate plus 2%" appearing in the fourth line thereof and substituting in place thereof the phrase "Prime Rate plus 1/2%." f. Subparagraph (b) of Section 2.1 is hereby relettered as subparagraph "(c)" and is further amended by substituting for the words "Extension of Credit" in the first line thereof the following: "any Working Capital Line of Credit Loans or the Equipment Line of Credit Loans (together, the "BORROWER LOANS")." g. There is hereby inserted immediately following subparagraph (a) of Section 2.1 the following new subparagraph (b): "(b) The Borrower agrees to pay interest on the unpaid principal amount of each Equipment Line of Credit Loan for each day from and including the date such Equipment Line of Credit Loan was made to it, but excluding the date the principal on such Equipment Line of Credit Loan is due (whether at maturity, by acceleration or otherwise), at a fluctuating rate per annum equal to the Prime Rate plus 1/2%, which interest shall change when the Prime Rate shall change. Such interest shall be payable monthly in arrears on the fourteenth day of each month commencing with the first such date hereafter and when the principal amount of such Equipment Line of Credit Loan is due (whether at maturity, by acceleration or otherwise)." h. Section 4 is hereby amended by deleting the words "Extensions of Credit" appearing in the first line of the initial unnumbered paragraph thereof and substituting in place thereof the words "Borrower Loans." -4- i. Section 5 is hereby amended by deleting the words "Extensions of Credit" in the first line and "Line of Credit Loans" appearing in the fourth line of the initial unnumbered paragraph thereof and substituting in place thereof the words "Borrower Loans." j. Section 6.11 is hereby amended by inserting at the end thereof the following: "In addition, Borrower agrees to maintain a minimum monthly average balance of $500,000 in one or more money market accounts at the Bank. Borrower acknowledges and agrees that the rate of interest on the Borrower Notes has been established based upon Borrower's compliance." k. The text of Sections 7.9 is hereby deleted in its entirety and there is hereby inserted in place thereof the following: "Not utilized." l. Sections 7.12 through 7.16 of the Credit Agreement are amended in their entirety to read as follows: "7.12 CAPITAL EXPENDITURES. Neither the Borrower nor any of its Subsidiaries shall either purchase or agree to purchase, or incur any obligations for, any equipment or other property constituting fixed assets in any fiscal year (excluding leases of real or personal property) where the aggregate of such purchases or obligations would exceed $2,500,000. "7.13 QUICK RATIO. The Borrower will not permit the Quick Ratio at the end of any fiscal month, commencing with the month ending March 3 1, 1996, to be less than 1.25 to 1. "7.14 MINIMUM PROFITABILITY. Commencing with the fiscal quarter ending March 31, 1996, the Borrower will not permit (a) Net Losses to exceed $1,600,000 for the quarter ending March 31, 1996; $950,000 for the quarter ending June 30, 1996 and $200,000 for the quarter ending September 30, 1996; and (b) Net Income to be less than $1 for the quarter ending December 31, 1996 and thereafter. "7.15 LEVERAGE. The Borrower will not permit the ratio of Total Senior Liabilities to Tangible Net Worth at the end of any fiscal month, commencing with the month ending March 31, 1996, to be more than 1.75 to 1. "7.16 TANGIBLE NET WORTH. The Borrower will not permit Tangible Net Worth at the end of any fiscal month, commencing with the month ending March 31, 1996, to be less than $3,500,000 PLUS (a) 100% of cumulative Net Income earned by the Borrower after March 31, 1996 (with no offset for Net Losses incurred in any month); and (b) 100% of the proceeds (net of reasonable costs of issuance) from the sale of any shares of capital stock of the Borrower." m. There is inserted immediately following Section 7.16 the following new Section 7.17 to read as follows: "7.17 DEBT SERVICE COVERAGE. Following the first occurrence of a Debt Service Coverage Event, the Borrower will not permit the Debt Service Ratio for any fiscal quarter to be less than 1.5 to 1. " -5- n. Section 9 is hereby amended by inserting the following additional definitions in alphabetical order: ""BORROWER LOANS" shall have the meaning specified in Section 2.1(c)." ""BORROWER NOTES shall have the meaning specified in Section 1A.2." ""COMMITMENTS" shall mean the Working Capital Line Commitment and the Equipment Line Commitment." ""DEBT SERVICE COVERAGE EVENT" shall mean an event that occurs when the following conditions are satisfied: "(a) The Borrower and its Subsidiaries shall in any two (2) consecutive fiscal quarters, commencing with the fiscal quarter ending March 31, 1996, have a Debt Service Ratio of at least 1.5 to 1; and "(b) The Borrower shall have notified the Bank in writing of its election that a Debt Service Coverage Event be deemed to have occurred; and "(c) The Borrower shall have furnished to the Bank consolidated financial statements of the Borrower and its Subsidiaries demonstrating satisfaction of the condition referred to in CLAUSE (A) above." ""DEBT SERVICE RATIO" shall mean, for any fiscal period, the ratio of (a) Net Income (Net Loss), PLUS the sum of depreciation and amortization for such period, PLUS the sum of the aggregate amount of interest accrued during such period on Indebtedness of the Borrower and its Subsidiaries on a consolidated basis ("INTEREST EXPENSE") to (b) the sum of Interest Expense, the current portion of Long-Term Indebtedness and obligations of the Borrower and its Subsidiaries in respect of any capitalized lease." ""ELIGIBLE EQUIPMENT" means any items of equipment that the Borrower has requested that the Bank finance the purchase of through an Equipment Line of Credit Loan under this Agreement, and which, both on the date of such request and the date of such loan, meets the following requirements: "(a) such equipment is not (i) a motor vehicle, airplane or similar mode of transportation, (ii) a fixture or leasehold improvement, or (iii) intended by the Borrower to become a fixture or leasehold improvement; "(b) such equipment has been purchased by the Borrower from the manufacturer or a distributor thereof, has not been put in service by any Person prior to the date of the invoice furnished to the Borrower by such manufacturer or distributor, and has an invoice date of not earlier than January 31, 1996 or later than October 14, 1996; "(c) such equipment is owned solely by the Borrower and is not subject to any leasehold interest, assignment, claim, lien or security interest, other than a security interest in favor of the Bank pursuant to the Security Agreement; and -6- "(d) such equipment is in the possession of the Borrower and is located in the State of New Jersey or another jurisdiction of which the Borrower has given the Bank written notice." ""EQUIPMENT LINE COMMITMENT" shall have the meaning set forth in Section 1A.1." ""EQUIPMENT LINE EXPIRATION DATE" shall have the meaning specified in Section 1A.1." ""EQUIPMENT LINE OF CREDIT LOANS" shall have the meaning set forth in Section 1A.1." ""EQUIPMENT LINE MATURITY DATE" shall have the meaning specified in Section 1A.5." ""EQUIPMENT LINE NOTE" shall have the meaning set forth in Section 1A.l." o. The definitions of "Line of Credit Loans" and "Extensions of Credit" are hereby changed to "Working Capital Line of Credit Loans." The definition of "Line of Credit Commitment" is hereby changed to "Working Capital Line of Credit Commitment." All references to such terms throughout the Credit Agreement and the other Loan Documents are changed accordingly. p. All references to the term "Note" in Section 1 of the Credit Agreement are changed to the term "Working Capital Line of Credit Note." All other references to the term "Note" in the Credit Agreement and the other Loan Documents shall (unless it is clear from the context that the reference is solely to the Working Capital Line of Credit Note) shall be changed to refer to "the Borrower Notes." q. The Credit Agreement and the other Loan Documents are hereby amended wherever necessary or appropriate to reflect the foregoing changes. 4. CONTINUING VALIDITY. Upon the effectiveness hereof, each reference in each Security Instrument or other Loan Document to "the Credit Agreement", "thereunder", "thereof", "therein", or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement, as amended hereby. Except as specifically set forth above, the Credit Agreement shall remain in full force and effect and is hereby ratified and confirmed. Each of the other Loan Documents, is in full force and effect and is hereby ratified and confirmed. The amendments set forth above (i) do not constitute a waiver or modification of any term, condition or covenant of the Credit Agreement or any other Loan Document, other than as expressly set forth herein, and (ii) shall not prejudice any rights which the Bank may now or hereafter have under or in connection with the Credit Agreement, as modified hereby, or the other Loan Documents and shall not obligate the Bank to assent to any further modifications. 5. MISCELLANEOUS. a. This Agreement may be signed in one or more counterparts each of which taken together shall constitute one and the same document. b. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS. -7- c. THE BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS IN ANY ACTION, SUIT, OR PROCEEDING OF ANY KIND AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS LOAN MODIFICATION AGREEMENT; PROVIDED, HOWEVER, THAT IF FOR ANY REASON LENDER CANNOT AVAIL ITSELF OF THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS, THEN VENUE SHALL LIE IN SANTA CLARA COUNTY, CALIFORNIA. d. The Borrower agrees to promptly pay on demand all costs and expenses of the Bank in connection with the preparation, reproduction, execution and delivery of this letter amendment and the other instruments and documents to be delivered hereunder, including the reasonable fees and out-of-pocket expenses of Sullivan & Worcester LLP, special counsel for the Bank with respect thereto. [remainder of page intentionally blank] -8- IN WITNESS WHEREOF, the Bank and the Borrower have caused this Agreement to be signed under seal by their respective duly authorized officers as of the date set forth above. SILICON VALLEY EAST, a Division of Silicon Valley Bank By: /S/ JANE BRAUN ------------------------ Name: Jane Braun Title: Vice President SILICON VALLEY BANK By: /S/ G. LINVILL -------------------------- Name: G. Linvill Title: SVP (signed in Santa Clara, CA) FAXSAV INCORPORATED By: --------------------------- Name: Title: -8- IN WITNESS WHEREOF, the Bank and the Borrower have caused this Agreement to be signed under seal by their respective duly authorized officers as of the date set forth above. SILICON VALLEY EAST, a Division of Silicon Valley Bank By: /S/ JANE BRAUN ----------------------- Name: Jane Braun Title: Vice President SILICON VALLEY BANK By: ----------------------- Name: Title: (signed in Santa Clara, CA) FAXSAV INCORPORATED By: ----------------------- Name: Title: -8- IN WITNESS WHEREOF, the Bank and the Borrower have caused this Agreement to be signed under seal by their respective duly authorized officers as of the date set forth above. SILICON VALLEY EAST, a Division of Silicon Valley Bank By: ----------------------- Name: Jane Braun Title: Vice President SILICON VALLEY BANK By: ----------------------- Name: Title: (signed in Santa Clara, CA) FAXSAV INCORPORATED By: /S/ Peter S. Macaluso -------------------------- Name: Peter S. Macaluso Title: Vice President and CFO SCHEDULE A QUALIFICATIONS AND SUPPLEMENTS TO PRIOR REPRESENTATIONS See attached. FAXSAV INCORPORATED EQUIPMENT LEASE COMMITMENTS AS OF MARCH 31, 1996 EQUIPMENT LEASE TERM LESSOR COST PAYMENT DATE - ------ --------- ------- ------- LTI VENTURE LEASING ($300,000 lease line) SCHEDULE 1 50,475 985 7/31/99 SCHEDULE 2 97,334 4,477 4/30/96 SCHEDULE 3 40,874 1,901 1/31/97 SCHEDULE 4 13,575 524 2/28/97 SCHEDULE 5 28,474 1,099 6/30/97 SCHEDULE 6 13,118 4,515 1/31/98 SCHEDULE 7 8,058 2,668 2/28/99 --------------------- 251,908 16,169 PHOENIX LEASING ($500,000 lease line) SCHEDULE 1 93,677 3,068 3/16/98 SCHEDULE 2 51,574 1,689 3/31/98 SCHEDULE 3 93,368 3,058 4/30/98 SCHEDULE 4 95,696 3,134 7/31/98 SCHEDULE 5 92,439 3,027 10/31/98 SCHEDULE 6 59,449 1,947 11/31/98 -------------------- 486,202 15,923 FIRST UNITED LEASING 15,492 465 7/31/98 AMENDED AND RESTATED PROMISSORY NOTE (Working Capital Line of Credit Loans) $1,000,000 Wellesley, Massachusetts April 15, 1996 (Originally dated July 7, 1995) For value received, the undersigned, FAXSAV INCORPORATED, a Delaware corporation (the "BORROWER"), promises to pay to SILICON VALLEY BANK (the "BANK") at the office of the Bank located at 3003 Tasman Drive, Santa Clara, California 95054, or to its order, the lesser of One Million Dollars ($1,000,000) or the outstanding principal amount hereunder, on April 14, 1997 (the "MATURITY DATE"), together with interest on the principal amount hereof from time to time outstanding at a fluctuating rate per annum equal to the Prime Rate (as defined below) plus one-half percent (1/2%) until the Maturity Date, payable monthly in arrears on the fourteenth day of each calendar month occurring after the date hereof and on the Maturity Date. The Borrower promises to pay on demand interest at a per annum rate of interest equal to the Prime Rate plus 5% on any overdue principal (and to the extent permitted by law, overdue interest). The Bank's "Prime Rate" is the per annum rate of interest from time to time announced and made effective by the Bank as its Prime Rate (which rate may or may not be the lowest rate available from the Bank at any given time). Computations of interest shall be made by the Bank on the basis of a year of 360 days for the actual number of days occurring in the period for which such interest is payable. This promissory note amends and restates the terms and conditions of the obligations of the Borrower under the promissory note dated July 7, 1995 (the "ORIGINAL NOTE") by the Borrower to the Bank. Nothing contained in this promissory note shall be deemed to create or represent the issuance of new indebtedness or the exchange by the Borrower of the Original Note for a new promissory note. This promissory note is referred to in the credit agreement dated July 7, 1995, as amended by a loan document modification agreement dated as of April 15, 1996, by the Bank and accepted by the Borrower together with all related schedules, as the same may be amended, modified or supplemented from time to time (the "CREDIT AGREEMENT"), and is subject to optional and mandatory prepayment as provided therein, and is entitled to the benefits thereof and of the other Loan Documents referred to therein. Each reference in each Loan Document (as defined in the Credit Agreement) to "the Note", "thereof", "therein", "thereunder", or words of like import referring to the Original Note, shall mean and be a reference to the Original Note, as amended and restated hereby. -2- Upon the occurrence of any Event of Default under, and as defined in, the Credit Agreement, at the option of the Bank, the principal amount then outstanding of and the accrued interest on the advances under this note and all other amounts payable under this note shall become immediately due and payable, without notice (including, without limitation, notice of intent to accelerate), presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Borrower. The Bank shall keep a record of the amount and the date of the making of each advance pursuant to the Credit Agreement and each payment of principal with respect thereto by maintaining a computerized record of such information and printouts of such computerized record, which computerized record, and the printouts thereof, shall constitute PRIMA FACIE evidence of the accuracy of the information so endorsed. The undersigned agrees to pay all reasonable costs and expenses of the Bank (including, without limitation, the reasonable fees and expenses of attorneys) in connection with the enforcement of this note and the other Loan Documents and the preservation of their respective rights hereunder and thereunder. No delay or omission on the part of the Bank in exercising any right hereunder shall operate as a waiver of such right or of any other right of the Bank, nor shall any delay, omission or waiver on any one occasion be deemed a bar to or waiver of the same or any other right on any future occasion. The Borrower and every endorser or guarantor of this note regardless of the time, order or place of signing waives presentment, demand, protest and notices of every kind and assents to any one or more extensions or postponements of the time of payment or any other indulgences, to any substitutions, exchanges or releases of collateral for this note, and to the additions or releases of any other parties or persons primarily or secondarily liable. THIS NOTE HAS BEEN DELIVERED TO THE BANK AND ACCEPTED BY THE BANK IN THE STATE OF CALIFORNIA. THE BORROWER HEREBY EXPRESSLY WAIVES ANY RIGHT IT MAY NOW OR HEREAFTER HAVE TO A JURY TRIAL IN ANY SUIT, ACTION OR PROCEEDING WHICH ARISES OUT OF OR BY REASON OF THIS NOTE, ANY LOAN DOCUMENT (AS DEFINED IN THE CREDIT AGREEMENT), OR THE TRANSACTIONS CONTEMPLATED HEREBY. BY ITS EXECUTION AND DELIVERY OF THIS NOTE, THE BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NON - -EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS (OR IF FOR ANY REASON ACCESS TO SUCH COURTS IS DENIED TO THE BANK, THEN, IN THE STATE OF CALIFORNIA) IN ANY ACTION, SUIT OR PROCEEDING OF ANY KIND AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS NOTE, ANY LOAN DOCUMENT (AS DEFINED IN THE CREDIT AGREEMENT), OR THE TRANSACTIONS CONTEMPLATED HEREBY, IN ADDITION TO ANY OTHER COURT IN WHICH SUCH ACTION, SUIT OR PROCEEDING MAY BE BROUGHT, IRREVOCABLY -3- AGREES TO BE BOUND BY ANY FINAL JUDGMENT RENDERED BY ANY SUCH COURT IN ANY SUCH ACTION, SUIT OR PROCEEDING IN WHICH IT SHALL HAVE BEEN SERVED WITH PROCESS IN THE MANNER HEREINAFTER PROVIDED, SUBJECT TO EXERCISE AND EXHAUSTION OF ALL RIGHTS OF APPEAL AND TO THE EXTENT THAT IT MAY LAWFULLY DO SO, WAIVES AND AGREES NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE, IN SUCH ACTION, SUIT OR PROCEEDING ANY CLAIMS THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT, THAT ITS PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE ACTION, SUIT OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE THEREOF IS IMPROPER, AND AGREES THAT PROCESS MAY BE SERVED UPON IT IN ANY SUCH ACTION, SUIT OR PROCEEDING IN THE MANNER PROVIDED BY CHAPTER 223A OF THE GENERAL LAWS OF MASSACHUSETTS, RULE 4 OF THE MASSACHUSETTS RULES OF CIVIL PROCEDURE OR RULE 4 OF THE FEDERAL RULES OF CIVIL PROCEDURE. ALL RIGHTS AND OBLIGATIONS HEREUNDER SHALL BE GOVERNED BY THE LAW OF THE COMMONWEALTH OF MASSACHUSETTS AND THIS NOTE SHALL BE DEEMED TO BE UNDER SEAL. FAXSAV INCORPORATED By: /S/ Peter S. Macaluso -------------------------- Name: Peter S. Macaluso Title: Vice President and CFO PROMISSORY NOTE (Equipment Line of Credit Loans) $750,000 Edison, New Jersey As of April 15, 1996 For value received, the undersigned, FAXSAV INCORPORATED, a Delaware corporation formerly known as Digitran Corporation (the "BORROWER"), promises to pay to SILICON VALLEY BANK (the "BANK") at the office of the Bank located at 3003 Tasman Drive, Santa Clara, California 95054, or to its order, the lesser of (i) Seven Hundred Fifty Thousand Dollars ($750,000) or (ii) the principal outstanding hereunder as of October 14, 1996, in thirty-six (36) equal monthly installments payable on the fourteenth day of each month, commencing October 14, 1996 and ending on September 14, 1999 (the "MATURITY DATE"), but in no event more than Seven Hundred Fifty Thousand Dollars ($750,000) in principal amount in the aggregate, together with interest on the principal amount hereof from time to time outstanding at a fluctuating rate per annum equal to the Prime Rate (as defined below) plus one-half percent (1/2%) until the Maturity Date, payable monthly in arrears on the last day of each calendar month occurring after the date hereof and on the Maturity Date. The Borrower promises to pay on demand interest at a per annum rate of interest equal to the Prime Rate plus 5% on any overdue principal (and to the extent permitted by law, overdue interest). The Bank's "Prime Rate" is the per annum rate of interest from time to time announced and made effective by the Bank as its Prime Rate (which rate may or may not be the lowest rate available from the Bank at any given time). Computations of interest shall be made by the Bank on the basis of a year of 360 days for the actual number of days occurring in the period for which such interest is payable. This note is the Equipment Line Note referred to in the Loan Document Modification Agreement of even date herewith, which amended the credit agreement dated as of July 7, 1995, between the Bank and the Borrower (together with all related schedules), and as the same may be further amended, modified or supplemented from time to time (the "CREDIT AGREEMENT"), and is entitled to the benefits thereof and of the other Loan Documents referred to therein, and is subject to optional and mandatory prepayment as provided therein. This note is secured INTER ALIA by a Security Agreement dated as of July 7, 1995, herewith by the Borrower in favor of the Bank, and as the same may be further amended, modified or supplemented from time to time and by other Security Instruments referenced in the Credit Agreement. Upon the occurrence of any Event of Default under, and as defined in the Credit Agreement, at the option of the Bank, the principal amount then outstanding of and the accrued interest on the advances under this note and all other amounts payable under this note shall become immediately due and payable, without notice (including, without limitation, notice of intent to accelerate), presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Borrower. -2- The Bank shall keep a record of the amount and the date of the making of each advance pursuant to the Credit Agreement and each payment of principal with respect thereto either by maintaining a computerized record of such information and printouts of such computerized record, which endorsement or computerized record, and the printouts thereof, shall constitute PRIMA FACIE evidence of the accuracy of the information so endorsed. The undersigned agrees to pay all reasonable costs and expenses of the Bank (including, without limitation, the reasonable fees and expenses of attorneys) in connection with the enforcement of this note and the other Loan Documents and the preservation of their respective rights hereunder and thereunder. No delay or omission on the part of the Bank in exercising any right hereunder shall operate as a waiver of such right or of any other right of the Bank, nor shall any delay, omission or waiver on any one occasion be deemed a bar to or waiver of the same or any other right on any future occasion. The Borrower and every endorser or guarantor of this note regardless of the time, order or place of signing waives presentment, demand, protest and notices of every kind and assents to any one or more extensions or postponements of the time of payment or any other indulgences, to any substitutions, exchanges or releases of collateral for this note, and to the additions or releases of any other parties or persons primarily or secondarily liable. THIS NOTE SHALL BE DEEMED DELIVERED TO THE BANK AND ACCEPTED BY THE BANK IN THE STATE OF CALIFORNIA. THE BORROWER HEREBY EXPRESSLY WAIVES ANY RIGHT IT MAY NOW OR HEREAFTER HAVE TO A JURY TRIAL IN ANY SUIT, ACTION OR PROCEEDING WHICH ARISES OUT OF OR BY REASON OF THIS NOTE, ANY LOAN DOCUMENT (AS DEFINED IN THE CREDIT AGREEMENT), OR THE TRANSACTIONS CONTEMPLATED HEREBY. BY ITS EXECUTION AND DELIVERY OF THIS NOTE, THE BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NON- EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS (OR IF FOR ANY REASON ACCESS TO SUCH COURTS IS DENIED TO THE BANK, THEN IN THE STATE OF CALIFORNIA) IN ANY ACTION, SUIT OR PROCEEDING OF ANY KIND AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS NOTE, ANY LOAN DOCUMENT (AS DEFINED IN THE CREDIT AGREEMENT), OR THE TRANSACTIONS CONTEMPLATED HEREBY, IN ADDITION TO ANY OTHER COURT IN WHICH SUCH ACTION, SUIT OR PROCEEDING MAY BE BROUGHT, IRREVOCABLY AGREES TO BE BOUND BY ANY FINAL JUDGMENT RENDERED BY ANY SUCH COURT IN ANY SUCH ACTION, SUIT OR PROCEEDING IN WHICH IT SHALL HAVE BEEN SERVED WITH PROCESS IN THE MANNER HEREINAFTER PROVIDED, SUBJECT TO EXERCISE AND EXHAUSTION OF ALL RIGHTS OF APPEAL AND TO THE EXTENT THAT IT MAY LAWFULLY DO SO, WAIVES AND AGREES NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE, IN SUCH ACTION, SUIT OR PROCEEDING ANY CLAIMS THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF -3- SUCH COURT, THAT ITS PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE ACTION, SUIT OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE THEREOF IS IMPROPER, AND AGREES THAT PROCESS MAY BE SERVED UPON IT IN ANY SUCH ACTION, SUIT OR PROCEEDING IN THE MANNER PROVIDED BY CHAPTER 223A OF THE GENERAL LAWS OF MASSACHUSETTS, RULE 4 OF THE MASSACHUSETTS RULES OF CIVIL PROCEDURE OR RULE 4 OF THE FEDERAL RULES OF CIVIL PROCEDURE. ALL RIGHTS AND OBLIGATIONS HEREUNDER SHALL BE GOVERNED BY THE LAW OF THE COMMONWEALTH OF MASSACHUSETTS AND THIS NOTE SHALL BE DEEMED TO BE UNDER SEAL. FAXSAV INCORPORATED By: /S/ Peter S. Macaluso ---------------------------- Name: Peter S. Macaluso Title: Vice President and CFO EXHIBIT C COMPLIANCE CERTIFICATE TO: SILICON VALLEY BANK FROM:FAXSAV INCORPORATED The undersigned authorized officer (the "Officer") of FaxSav Incorporated ("Borrower") hereby certifies that in accordance with the terms end conditions of the Credit Agreement between Borrower and Silicon Valley Bank, as amended (the "Agreement"), (i) Borrower is in complete compliance for the period ending 3/31/96 with all covenants except as noted below and (ii) all representations and warranties of Borrower stated in the Agreement are true and correct in all material respects as if made on and as of the date hereof. Attached herewith are the required documents supporting the above certification. The Officer further certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistently applied from one period to the next except as explained in an accompanying letter or footnotes. The Officer expressly acknowledges that no borrowings may be requested by the Borrower at any time if on the date of determination the Borrower is not in compliance with any of the terms of the Agreement, and that such compliance is determined not just at the date this certificate is delivered. PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN. Reporting Covenant Required Complies - ------------------ -------- -------- Monthly financial statements Monthly within 28 days Yes No Annual (CPA Audited) FYE within 105 days Yes No A/R Aging Monthly within 15 days Yes No A/R Audit Initial and Semi-Annual Yes No Financial Covenant Required Actual Complies - ------------------ -------- ------ -------- Maintain on a Monthly Basis: Minimum Quick Ratio 1.25:1.0 1.61:1.0 Yes No Minimum Tangible Net Worth $3,500,000 $4,866,430 Yes No Maximum Leverage Ratio 1.75:1.0 1.02:10 Yes No Minimum Debt Service Ratio 1.50:1.0 N/A:1.0 Yes No Profitability: Maximum Net Loss for Quarters ending: 3/31/96 $1,600,000 $1,519,085 Yes No 6/30/96 $ 950,000 $___________ Yes No 9/30/96 $ 200,000 $___________ Yes No Minimum Net Income for Quarters ending on or after: 12/31/96 $ 1 $___________ Yes No - ------------------- PLUS 100% of cumulative Net Income (with no offset for Net Losses for any month) earned during March 1996 and any month thereafter, PLUS 100% of the proceeds (net of reasonable costs of Issuance) of the sale of shares of capital stock. Comments Regarding Exceptions: See Attached. Sincerely, /S/ Peter S. Macaluso - ---------------------------- Signature: Peter S. Macaluso Title: Vice President and CFO Date: - -------------------------------------------------------------------------------- CERTIFICATE OF SECRETARY BORROWER: FaxSav Incorporated LENDER: Silicon Valley Bank 379 Thornall Street 3003 Tasman Drive Edison, NJ 08837 P.O. Box 3762 Santa Clara, CA 95054 - -------------------------------------------------------------------------------- I, Peter S. Macaluso, hereby certify (1) that I am the duly elected, qualified and acting Secretary of FaxSav Incorporated, a Delaware corporation (the "Company"), and (2) that attached hereto as EXHIBIT A is a true, correct and complete copy of certain resolutions duly adopted by the Board of Directors of the Company on April 18, 1996 authorizing and approving, among other things, the execution, delivery and performance of the Loan Document Modification Agreement (No. 1) dated as of April 15, 1996, amending the Credit Agreement dated July 7, 1995 (as so amended and modified, the "Credit Agreement") by and between the Company and Silicon Valley Bank (the "Bank"), and the other agreements and transactions contemplated thereby, including without limitation the issuance to the Bank by the Borrower of (A) the Borrower's Amended and Restated Promissory Note (Working Capital Line of Credit Loans) dated April 15, 1996 in the original principal amount of up to $1,000,000 and (B) the Borrower's Promissory Note (Equipment Line of Credit Loans) dated as of April 15, 1996 in the original principal amount of up to $750,000. Said resolutions have not been amended or repealed and remain in full force and effect on the date hereof. IN WITNESS WHEREOF, I have signed this certificate and affixed the corporate seal of the Company. Dated: April 26, 1996 /s/ Peter S. Macaluso -------------- --------------------- Secretary [Corporate Seal] -2- I, Thomas F. Murawski, President of the Company do hereby certify that Peter S. Macaluso is on the date hereof the duly elected or appointed, qualified and acting Secretary of the Company, and the signature set forth above is the genuine signature of such officer. /s/ Thomas F. Murawski ----------------------- EXHIBIT A RESOLVED: That the form, terms and conditions of (A) the Loan Document Modification Agreement (No. 1) and the attached Schedules and Exhibits (collectively, the "Loan Modification") to be entered into by and between Silicon Valley Bank (the "Bank") and the Corporation to modify and amend the Credit Agreement dated July 7, 1995 by and between the Bank and the Corporation (as so amended and modified, the "Credit Agreement"), pursuant to which the Bank will make available to the Corporation a $1,000,000 working-capital line of credit and a $750,000 equipment-loan line of credit, and (B) the Amended and Restated Promissory Note (Working Capital Line of Credit Loans) in the original principal amount of up to $1,000,000 and the Promissory Note (Equipment Line of Credit Loans) in the original principal amount of up to $750,000 to be executed pursuant to the Loan Modification and the Credit Agreement (together, the "Notes"), which form, terms and conditions have been presented to and reviewed by the Board of Directors, be, and they hereby are, approved and adopted; and further RESOLVED: That the President, any Vice President and the Chief Financial Officer (the "Authorized Officers") of the Corporation be, and each of them hereby is, authorized, empowered and directed, in the name and on behalf of the Corporation, (A) to execute, under its corporate seal if necessary, and to deliver the Loan Modification and the Notes to be issued by the Corporation pursuant thereto in substantially the forms adopted with such changes as any such officer shall, in his sole discretion approve, such approval to be conclusively evidenced by such Authorized Officer's execution thereof, and (B) to request extensions of credit from time to time as contemplated by the Credit Agreement and the Notes, whether in the form of loan advances, letters of credit or otherwise; and further RESOLVED: That the Authorized Officers of the Corporation be, and each of them singly hereby is, authorized and empowered, in the name and on behalf of the Corporation, to prepare, execute, deliver, file and record any and all agreements, certificates, and other documents and instruments (including, without limitation, any letter of credit applications or foreign exchange contracts), to request advances under the aforementioned Credit Agreement on behalf of the Corporation (whether in the form of loan advances, letters of credit or otherwise), to take any action as they or any of them may deem necessary or appropriate in order to effectuate fully the purposes of the foregoing resolutions and the transactions contemplated thereby, and to enter into on behalf of the Corporation any amendments, modifications or extensions to the Credit Agreement, the Notes or any security instruments or other document contemplated thereby as such officer may deem necessary or appropriate including, without limitation, any modification that increases the amount that the Corporation may borrow from the Bank under the Credit Agreement or otherwise; and further RESOLVED: That any and all acts of the type authorized pursuant to these resolutions and performed prior to adoption and approval of these resolutions are hereby ratified and approved, that these resolutions Shall remain in full force and effect as long -2- as any obligations are owing to the Bank or as long as the Bank is committed to make extensions of credit to the Company and the Bank may rely on these resolutions until written notice of their revocation shall have been delivered to and received by the Bank; provided, however, any such notice shall not affect any of the Corporation's agreements or commitments in effect or any of its obligations outstanding at the time such notice is given. August 2, 1996 Peter Macaluso Chief Financial Officer FaxSav, Inc. 399 Thornall Street 3rd Floor Edison, NJ 08837 Dear Peter: Silicon Valley Bank ("Bank") hereby waives FaxSav Inc.'s ("Company") existing default under the Loan as a result of FaxSav Inc.'s failure to comply with the Profitability covenant as of the quarter ended June 30, 1996; the Quick Ratio covenant as of the month ended June 30, 1996; and the TNW covenant as of the month ended June 30, 1996. Silicon Valley Bank's agreement to waive the above-described defaults (1) in no way shall be deemed an agreement by the Bank to waive FaxSav, Inc.'s compliance with the above-described covenants as of all other dates and (2) shall not limit or impair the Bank's right to demand strict performance of these covenants as of all other dates and (3) shall not limit or impair the Bank's right to demand strict performance of all other covenants as of any date. Furthermore, the Bank agrees to revise these covenants for the period ending July 31, 1996 and thereafter, as per the attached Term Sheet. Sincerely, /s/ Joan S. Parsons - ---------------------- Joan S. Parsons Senior Vice President Technology Division Agreed and Accepted this 2nd day of August, 1996. By: /s/ Peter S. Macaluso Title: Vice President and CEO FAXSAV, INC. ------------ FACILITY: A) $1,000,000 Revolving Line of Credit. B) $750,000 Equipment Line of Credit. TOTAL OUTSTANDINGS LIMITED TO $1,000,000 UNTIL IPO OR ADDITIONAL EQUITY IS RAISED. RATE: A) Prime +0.5% B) Prime +0.5% FEE: Aggregate modification fee of $2,500.00. EXPIRATION: A) 4/14/97 B) 10/14/96 ADVANCE RATE: A) 60% of eligible domestic A/R under 90 days from invoice. B) 80% of eligible equipment purchases subsequent to 1/31/96. COLLATERAL: All Corporate Assets, including Intellectual Property. COVENANTS: Profitability: (tested quarterly): Maximum loss of ($2,100,000) for the quarter ending 9/30/96; Maximum loss of ($1,500,000) for the quarter ending 12/31/96; and Maximum loss of ($1,100,000) for the quarter ending 3/31/97. Liquidity: (tested monthly): Minimum Quick Ratio of 0.6:1 for the months ending 7/31/96 through 9/30/96; increasing to 1.25:1 for the month ending 10/31/96 and thereafter. Leverage: (tested monthly): Total Liabilities divided by TNW not to exceed 2.2:1 for the month ending 7/31/96; 2.7:1 for the month ending 8/31/96; 3.35:1 for the month ending 9/30/96; and 1.75:1 for the month ending 10/31/96 and thereafter. Tangible Net Worth: (tested monthly): Minimum Tangible Net Worth of $1,000,000 for the months ending 7/31/96 through 9/30/96; and $3,500,000 for the month ending 10/31/96 and thereafter. Tangible Net Worth is defined as equity plus Subordinated Debt minus Intangible Assets. EQUITY EVENT: IPO MUST OCCUR ON OR BEFORE 10/15/96 OR THE COMPANY MUST CLOSE ON ADDITIONAL EQUITY IN THE MINIMUM AMOUNT OF $3,000,000 BY 10/15/96. REPORTING: Monthly financials and Certificate of Compliance within 30 days. Borrowing Base Certificate and A/R aging within 15 days. Audited fiscal within 90 days. OTHER: Primary operating account at SVB. Some portion of excess funds at SVB. Legal costs for account of Borrower. Examination of Company's A/R by an agent of the Bank at Company's expense. Silicon Valley East 40 William Street, Suite 360 A Division of Silicon Valley Bank Wellesley, MA 02181 617-431-9901 October 8, 1996 Peter S. Macaluse Vice President & Chief Financial Officer FaxSav Incorporated 399 Thernall Street Edison, N.J. 08837 Dear Peter: Per our telephone conversation earlier today, below is a recap of the Bank approved changes to FaxSav Inc.'s Credit Facilities: - - The closing date for an IPO or private placement shall be changed from the existing date of October 15, 1996 to October 30, 1996: - - Upon the (1) successful completion of an IPO with net proceeds to the Company of no less than $12,000,000 and (2) payment in full of the line of credit balance (the line will be terminated; no additional borrowings will be permitted), all existing covenants will be dropped and the following covenant will be added; Minimum cash and short-term investments shall at all times be equal to at least two times the term loan balance outstanding. This covenant will be tested quarterly. In addition, the Bank agrees to: (1) release its all asset lien and terminate the negative pledge but retain a perfected security interest in the assets financed by the term loan; (2) change the reporting requirements so that the Bank receives the Company's 10Qs and 10Ks within 5 days of filing and a copy of the audited annual report within 90 days of a fiscal year end; (3) no longer require an accounts receivable audit. Peter, if these changes meet with your approval, please sign in the space provided below. There will be a $500.00 fee associated with this modification which will be due upon your acceptance. Once I receive a signed copy of this letter back from you, I will have these terms put into a legal document. If you have any questions with regard to these changes, please call me at (617) 431-9909. Sincerely /s/ Jane A. Braun - ----------------- Jane A. Braun Vice President ACCEPTED BY: /s/ Peter Macaluso - ---------------------- Peter Macaluso, VP and CFO cc: Diane Raven, Documentation Specialist, SVB (Member FDIC) EX-23.1 3 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this Registration Statement on Form S-1 (File No. 333-9613) of FaxSav Incorporated of our reports dated March 29, 1996, on our audits of the financial statements and financial statement schedule of FaxSav Incorporated (formerly Digitran Corporation). We also consent to the reference to our firm under the caption "Experts." COOPERS & LYBRAND L.L.P. Parsippany, New Jersey October 10, 1996 -----END PRIVACY-ENHANCED MESSAGE-----