-----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, SQmcj0SRuGeXsVzwAv+2UpGsGaBhMmjHqHlkRtSaQOVA+P+dSexcT/ocbA5RO2rw MVGxkBuayibY3OqXVu2olA== 0000912057-96-019986.txt : 19960911 0000912057-96-019986.hdr.sgml : 19960911 ACCESSION NUMBER: 0000912057-96-019986 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19960910 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: 96628275 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 SEPTEMBER 10, 1996 REGISTRATION NO. 333-09613 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM S-1 AMENDMENT NO. 1 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. / / -------------------------- 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to the registration or qualification under the securities laws of any such State. SUBJECT TO COMPLETION, DATED SEPTEMBER 10, 1996 PROSPECTUS 2,200,000 SHARES [LOGO] COMMON STOCK ------------------ All of the 2,200,000 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. It is currently estimated that the initial public offering price will be between $10.00 and $12.00 per share. See "Underwriting" for a discussion of the factors to be 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 INVOLVES 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...................... Total(3).......................
(1) The Company and a certain stockholder of the Company (the "Selling Stockholder") have 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) Telstra Holdings Pty. (the "Selling Stockholder") has granted the Underwriters a 30-day option to purchase up to an aggregate of 330,000 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 and Underwriting Discounts and Commissions will be $ and $ , respectively, and the proceeds to the Selling Stockholder will be $ . The Company will not receive any of the proceeds from the sale of shares by the Selling Stockholder. See "Principal Stockholders" and "Underwriting." ------------------------ 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 , 1996. ------------------------ LEHMAN BROTHERS ALEX. BROWN & SONS INCORPORATED , 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" and "faxScan." 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 TO BE EFFECTED PRIOR TO THE CLOSING OF THIS 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 small to medium sized businesses 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 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......................... 2,200,000 shares Common Stock to be outstanding after the offering.............. 10,370,490 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.............. $ (6.62) $ (7.06) $ (8.24) $ (3.80) $ (6.80) Weighted average common and equivalent shares outstanding(2)...................................... 492,388 494,935 495,879 495,879 504,358 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)............................. 9,248,091 8,615,421 ------------ ------------ ------------ ------------
AS OF JUNE 30, 1996(1) ------------------------- ACTUAL AS ADJUSTED(3) --------- -------------- BALANCE SHEET DATA: Working capital....................................................................... $ 793 $ 22,299 Total assets.......................................................................... 7,916 28,922 Total long-term debt.................................................................. 569 569 Total stockholders' equity............................................................ 3,058 24,564
- --------- (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 2,200,000 shares of Common Stock offered hereby at an assumed initial public offering price of $11.00 per share and the application of the estimated 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 $3.8 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 telecommuni- cations 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 the 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. There can be no assurance that this 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, 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." 10 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 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 11 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 10,370,490 shares of Common Stock. In addition to the 2,200,000 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 63,000 shares of restricted securities will become eligible for resale in the public market. Beginning 180 days after the Effective Date, approximately 5,950,000 additional shares of restricted securities will become eligible for sale in the public market upon expiration of certain lock-up agreements pursuant to Rule 144 and, as of that date, approximately 5,300,000 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. 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 12 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 2,200,000 shares of Common Stock offered by the Company are estimated to be approximately $21,506,000 at an assumed initial public offering price of $11.00 per share, after deducting the estimated underwriting discounts and commissions and offering expenses payable by the Company. The Company will not receive any proceeds from the exercise, if any, of the Underwriters' over-allotment option. 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 to be effected prior to the closing of this offering 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 2,200,000 shares of Common Stock by the Company in this offering (at an assumed initial public offering price of $11.00 per share, and after deducting the estimated underwriting discounts and commissions and 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 $24.6 million or $2.37 per share. This represents an immediate increase in pro forma net tangible book value of $2.00 per share to existing stockholders and immediate dilution in pro forma net tangible book value of $8.63 per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price............................. $ 11.00 Pro forma net tangible book value before the offering........... $ 0.37 Increase attributable to new investors.......................... 2.00 --------- Pro forma net tangible book value after the offering.............. 2.37 --------- Dilution to new investors......................................... $ 8.63 --------- ---------
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 (based on an assumed initial public offering price of $11.00 per share).
SHARES PURCHASED(1) TOTAL CONSIDERATION(1) ------------------------ ------------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------------ ---------- ------------- ---------- ------------- Existing stockholders(2)........... 8,168,998 78.78% $ 24,069,350 49.86% $ 2.95 New investors...................... 2,200,000 21.22% 24,200,000 50.14% $ 11.00 ------------ ---------- ------------- ---------- Total.......................... 10,368,998 100.00% $ 48,269,350 100.00% ------------ ---------- ------------- ---------- ------------ ---------- ------------- ----------
- --------- (1) Sales by the Selling Stockholder in this offering, if the Underwriters' over-allotment option is exercised in full, will reduce the number of shares held by existing stockholders to 7,838,998, or approximately 75.60% of the total number of shares of Common Stock to be outstanding after this offering, and will increase the number of shares held by new investors to 2,530,000 or approximately 24.40% of the total number of shares of Common Stock to be outstanding after this offering. See "Principal Stockholders." (2) 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 2,200,000 shares of Common Stock at an assumed initial public offering price of $11.00 per share, after deducting the estimated underwriting discounts and commissions and 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 10,368,998 shares outstanding on an as adjusted basis(2)...................................... 82 104 Additional paid-in capital...................................................... 23,988 45,472 Accumulated deficit............................................................. (21,012) (21,012) ---------- ----------- Total stockholders' equity.................................................. 3,058 24,564 ---------- ----------- Total capitalization...................................................... $ 3,627 $ 25,133 ---------- ----------- ---------- -----------
- --------- (1) Gives effect to the Company's Sixth Amended and Restated Certificate of Incorporation to be filed prior to 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................................. $ (9.31) $ (6.21) $ (6.62) $ (7.06) $ (8.24) $ (3.80) $ (6.80) Weighted average common and equivalent shares outstanding (1)................ 357,066 480,311 492,388 494,935 495,879 495,879 504,358 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)................................... 9,248,091 8,615,421
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 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 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 31 agents representing the Company in 23 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 1, 1996, the Company had not yet deployed Internet-capable nodes in 27 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 million in equity on or before October 15, 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 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 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 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 delivery to other destinations worldwide are based on the economics of delivery through the Company's 28 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 1, 1996, the Company had not yet deployed Internet-capable nodes in 27 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 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 31 agents representing the Company in 23 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 the 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. There can be no assurance that 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 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. 37 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 Incorporated (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 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 ("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% 19.2% Building 4, Suite 210 3000 Sand Hill Road Menlo Park, California 94025 Telstra Incorporated c/o FaxSav Incorporated (3).................. 978,390 12.0 9.4 399 Thornall Street Edison, NJ Entities affiliated with Menlo Ventures (4)....................... 845,833 10.4 8.2 3000 Sand Hill Road Menlo Park, CA 94025 Battery Ventures II, L.P (5)...................................... 796,847 9.7 7.7 200 Portland Street Boston, MA 02114 Sutter Hill Ventures, a California Limited Partnership (6)........ 688,497 8.4 6.6 755 Page Mill Road, Suite A-200 Palo Alto, CA 94304-1005 Coral Partners II, a limited partnership (7)...................... 684,403 8.4 6.6 60 South Sixth Street Suite 3510 Minneapolis, MN 55402 Thomas F. Murawski (8)............................................ 218,317 2.6 2.1 Jeffrey Drazan (2)................................................ 1,998,133 24.4 19.3 Gregory Dunfield (3).............................................. 978,390 12.0 9.4 Peter A. Howley (9)............................................... 166,445 2.0 1.6 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 33.0
- --------- * 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) 1,535,022 shares of Common Stock held by Sierra III, (ii) 13,832 shares of Common Stock held by Sierra III International and (iii) 416,667 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. The Company has been informed that Telstra Holdings Pty. (the "Selling Stockholder"), the direct parent of Telstra Incorporated, has exercised an option to purchase 8,655,511 shares of Series D Preferred Stock beneficially owned by Telstra Incorporated, which shares will be converted into 961,723 shares of Common Stock upon consummation of this offering. The Selling Stockholder has informed the Company that it will close on the exercise of this option prior to the consummation of this offering. The Selling Stockholder has granted to the Underwriters an option to purchase up to 330,000 shares of Common Stock at the public offering price less underwriting discounts and commissions shown on the cover page of this Prospectus, solely to cover over-allotments, if any. See "Underwriting." If the over-allotment option is exercised in full, the Selling Stockholder will own 648,390 shares, representing 6.3% of the outstanding Common Stock. Includes 16,667 shares of Common Stock issuable to Telstra Incorporated upon exercise of stock options. Mr. Dunfield disclaims beneficial ownership of such 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)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. (7)Coral Management Partners II, Limited Partnership ("Coral Management"), is the General Partner of Coral Partners II. Excludes an aggregate of 5,626 shares of Common Stock and warrants to purchase an aggregate of 5,741 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. (8)Includes 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)Includes 54,037 shares of Common Stock issuable upon exercise of stock options. (11)Includes 53,207 shares of Common Stock issuable upon exercise of stock options. (12)Includes 52,022 shares of Common Stock issuable upon exercise of stock options. (13)Includes 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 10,370,490 shares of Common Stock, assuming no exercise of currently outstanding options. In addition to the 2,200,000 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 7,922,000 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 185,000 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 63,000 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 5,950,000 additional shares of restricted securities will become eligible for sale in the public market upon expiration of certain lock-up agreements pursuant to Rule 144 and, as of that date, approximately 5,300,000 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.............................................................. Alex. Brown & Sons Incorporated.................................................. ---------- Total........................................................................ 2,200,000 ---------- ----------
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 $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ 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 and the Selling Stockholder have 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 Selling Stockholder has granted to the Underwriters an option to purchase up to an additional 330,000 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. See "Principal Stockholders." 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 and the Selling Stockholder that the Underwriters do not intend to confirm sales to accounts over which they exercise discretionary authority. The Company, the Selling Stockholder, 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. 55 Prior to this offering, there has been no public market for the Common Stock. The initial public offering price will be determined by negotiation among the Company and the Representatives of the Underwriters. Among the factors to be considered in determining the initial public offering price, in addition to prevailing market conditions, will be 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-18
F-1 The following opinion is in the form which will be signed by Coopers & Lybrand L.L.P. upon consummation of the one-for-nine reverse stock split as described in Note 14 to the financial statements assuming that from March 29, 1996 to the date of such reverse split, no other events shall have occurred that would affect the accompanying financial statements and notes thereto. COOPERS & LYBRAND L.L.P. Parsippany, New Jersey March 29, 1996 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. 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............................... $ (6.62) $ (7.06) $ (8.24) $ (3.80) $ (6.80) ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Weighted average common and equivalent shares outstanding.................. 492,388 494,935 495,879 495,879 504,358 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- 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............................. 9,248,091 8,615,421 ------------- ------------- ------------- -------------
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 $11.00, the proposed 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 15, 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 Holding -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 is expected to file an amendment to its Fifth Amended and Restated Certificate of Incorporation which will effect a one-for-nine reverse stock split at a par value of $0.01 and change the authorized number of common shares to 40,000,000 prior to the effective date of this Registration Statement. 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 [A GRAPHIC REPRESENTATION OF THE COMPANY'S PLANNED INTERNET-BASED NETWORK ON A WORLD MAP WITH SYMBOLS DEMONSTRATING THE SITES OF EXISTING AND PLANNED INTERNET NODES] * There can be no assurance that the planned 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" in this Prospectus. - -------------------------------------------------- -------------------------------------------------- - -------------------------------------------------- -------------------------------------------------- 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 , 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. 2,200,000 SHARES [LOGO] COMMON STOCK -------------- PROSPECTUS , 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.............................................. 43,423 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................................................................... 26,572 ------------ 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 LTI Ventures Leasing Corp., dated February 15, 1993. 10.18 Common Stock Warrant between LTI Ventures Leasing Corp., dated May 5, 1994. 10.19 Common Stock Warrant between Silicon Valley Bancshares, dated April 6, 1992. 10.20 Common Stock Warrant between 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.
- --------- * To be supplied by amendment. ** Previously filed. + Confidential treatment requested (b) Financial Statement Schedule Schedule II--Valuation of Qualifying Accounts Report of Independent Accountants II-3 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. 1 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 10th day of September, 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. 1 to the Registration Statement has been signed by the following persons in the capacities indicated on September 10, 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 The following opinion is in the form which will be signed by Coopers & Lybrand L.L.P. upon consummation of the one-for-nine reverse stock split as described in Note 14 to the financial statements assuming that from March 29, 1996 to the date of such reverse split, no other events shall have occurred that would affect the accompanying financial statements and notes thereto. COOPERS & LYBRAND L.L.P. Parsippany, New Jersey March 29, 1996 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. Parsippany, New Jersey March 29, 1996 EX-3.2 2 EX-3.2 Exhibit 3.2 CERTIFICATE OF AMENDMENT OF FIFTH AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF FAXSAV INCORPORATED Pursuant to Sections 228 and 242 of the General Corporation Law of the State of Delaware ************************** FaxSav Incorporated, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation") DOES HEREBY CERTIFY: FIRST: That ARTICLE FOURTH, Section A. of the Fifth Amended and Restated Certificate of Incorporation of the Corporation is amended, effective at 6:00 P.M. on the date that this certificate of amendment is filed, by deleting the first paragraph thereof in its entirety and inserting in lieu thereof: A. Classes of Stock. This Corporation is authorized to issue two classes of shares designated "Common Stock" and "Preferred Stock", respectively. The total number of shares of Common Stock authorized to be issued is Forty million (40,000,000) shares, and each such share will have a par value of $.01. The total number of shares of Preferred Stock authorized to be issued is Eighty million, Two Hundred thousand (80,200,000) and each such share will have a par value of $.001. The rights, preferences, privileges and restrictions granted to and imposed upon the two classes of shares are set forth below in this Article. Each nine (9) shares of the Corporation's Common Stock, par value $.0025 per share, issued and outstanding immediately prior to 6:00 P.M. on the date this certificate of amendment is filed shall be converted and reclassified automatically at 6:00 P.M., Delaware time, on the date this certificate of amendment is filed into one (1) share of the Corporation's Common Stock, par value $.01 per share, so that each share of the Corporation's Common Stock issued and outstanding is hereby converted and reclassified. No fractional interests resulting from such conversion shall be issued but, in lieu thereof, the Corporation will round the number of shares of the Corporation's Common Stock issuable to each holder either up or down, as the case may be, to the nearest whole share of Common Stock. SECOND: That the foregoing amendment was approved by the holders of the requisite number of shares of said Corporation in accordance with Section 228 of the General Corporation Law of the State of Delaware and has been duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, said Corporation has caused this certificate to be signed by Thomas J. Murawski, Chief Executive Officer and President, and Peter S. Macaluso, its Secretary, this _____ day of September, 1996. By: ------------------------------ Chief Executive Officer and President ATTEST: - -------------------------- Secretary 2 EX-3.3 3 EX-3.3 Exhibit 3.3 SIXTH AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF FAXSAV INCORPORATED (Pursuant to Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware) FaxSav Incorporated, a corporation organized and existing under the General Corporation Law of the State of Delaware (the "General Corporation Law"), DOES HEREBY CERTIFY: FIRST: That the corporation was originally incorporated under the name Digitran Corporation, and the date of filing of its original Certificate of Incorporation with the Secretary of State of the State of Delaware was November 29, 1989. Amended and Restated Certificates of Incorporation were filed with the Secretary of State of the State of Delaware on August 14, 1990, May 21, 1992, January 7, 1994, January 12, 1995 and February 28, 1996, respectively. Pursuant to the filing of the Fifth Amended and Restated Certificate of Incorporation (the "Fifth Certificate"), the name of the corporation was changed from Digitran Corporation to FaxSav Incorporated. The Fifth Certificate was amended by the Certificate of Amendment to the Fifth Certificate, filed with the Secretary of State of the State of Delaware on September ___, 1996. SECOND: The Board of Directors of the corporation, by written consent dated as of August 14, 1996, duly adopted resolutions setting forth the Sixth Amended and Restated Certificate of Incorporation herein contained, declaring its advisability and directing that such Sixth Amended and Restated Certificate of Incorporation be submitted to the holders of the issued and outstanding Common Stock, $0.0025 par value, and Preferred Stock, $0.001 par value, of the corporation, for approval in accordance with the applicable provisions of Sections 242 and 245 of the General Corporation Law of the State of Delaware and the corporation's Fifth Amended and Restated Certificate of Incorporation, as currently in effect. The Sixth Amended and Restated Certificate of Incorporation was duly adopted, after having been declared advisable by the Board of Directors of the corporation, by written consent, dated as of August [21], 1996, of the holders of a majority of the Common Stock, $0.0025 par value, and the holders of a majority of the Preferred Stock, $0.001 par value, of the corporation, voting as a single class and as separate classes, all in accordance with the applicable provisions of Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware and the corporation's Fifth Amended and Restated Certificate of Incorporation, as currently in effect, and written notice of the action by written consent of the corporation's stockholders has been given to those stockholders who have not consented in writing as provided in Section 228(d) of the General Corporation Law of the State of Delaware. THIRD: The text of the Sixth Amended and Restated Certificate of Incorporation, as hereby restated and amended hereby, shall read in its entirety as follows: ARTICLE I The name of this corporation is: FaxSav Incorporated. ARTICLE II The address of the registered office of the corporation in the State of Delaware is 1209 Orange Street, in The City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE III The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law. ARTICLE IV A. Classes of Stock. This corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the corporation is authorized to issue is Forty One million (41,000,000) shares. Forty million (40,000,000) shares, par value $0.01 per share, shall be Common Stock and One million (1,000,000) shares, par value $0.01 per share, shall be Preferred Stock. The number of authorized shares of Common Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the stock of the corporation entitled to vote, irrespective of the provisions of Section 242(b)(2) of the General Corporation Law of Delaware. B. Common Stock. (1) General. All shares of Common Stock will be identical and will entitle the holders thereof to the same rights, powers and privileges. The rights, powers and privileges of the holders of the Common Stock are subject to and qualified by the rights of holders of the Preferred Stock. (2) Dividends. Dividends may be declared and paid on the Common Stock from funds lawfully available therefor as and when determined by the Board of Directors and subject to any preferential dividend rights of any then outstanding Preferred Stock. (3) Dissolution, Liquidation or Winding Up. In the event of any dissolution, liquidation or winding up of the affairs of the corporation, whether voluntary or involuntary, each issued and outstanding share of Common Stock shall entitle the holder thereof to receive an equal portion of the net assets of the corporation available for distribution to the holders of Common Stock, subject to any preferential rights of any then outstanding Preferred Stock. 2 (4) Voting Rights. Except as otherwise required by law or this Sixth Amended and Restated Certificate of Incorporation, each holder of Common Stock shall have one vote in respect of each share of stock held of record by such holder on the books of the corporation for the election of directors and on all matters submitted to a vote of stockholders of the corporation. Except as otherwise required by law or provided herein, holders of Common Stock shall vote together as a single class, subject to any special or preferential voting rights of any then outstanding Preferred Stock. There shall be no cumulative voting. (5) Redemption. The Common Stock is not redeemable. C. Preferred Stock. The Board of Directors is authorized, subject to limitations prescribed by law and the provisions of ARTICLE IV, to provide for the issuance of the shares of Preferred Stock in series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences, and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. The authority of the Board with respect to each series shall include, but not be limited to, determination of the following: (1) The number of shares constituting that series and the distinctive designation of that series; (2) The dividend rate on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of that series; (3) Whether that series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights; (4) Whether that series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine; (5) Whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; (6) Whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking fund; (7) The rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the corporation, and the relative rights or priority, if any, of payment of shares of that series; and 3 (8) Any other relative rights, preferences and limitations of that series. Dividends on outstanding shares of Preferred Stock shall be paid or declared and set apart for payment before any dividends shall be paid or declared and set apart for payment on the Common Stock with respect to the same dividend period. If upon any voluntary or involuntary liquidation, dissolution or winding up of the corporation, the assets available for distribution to holders of shares of Preferred Stock of all series shall be insufficient to pay such holders the full preferential amount to which they are entitled, then such assets shall be distributed ratably among the shares of all series of Preferred Stock in accordance with the respective preferential amounts (including unpaid cumulative dividends, if any) payable with respect thereto. ARTICLE V In furtherance of and not in limitation of powers conferred by statute, it is further provided: A. Election of directors need not be by written ballot. B. The Board of Directors is expressly authorized to adopt, amend or repeal the By-Laws of the corporation. ARTICLE VI The number of directors of the corporation shall be fixed from time to time by a By-law or amendment thereof duly adopted by the Board of Directors or by the stockholders. The Board of Directors shall be and is divided into three classes: Class I, Class II and Class III, which shall be as nearly equal in number as possible. Each director shall serve for a term ending on the date of the third annual meeting of stockholders following the annual meeting at which the director was elected; provided, however, that each initial director in Class I shall hold office until the annual meeting of stockholders in 1997; each initial director in Class II shall hold office until the annual meeting of stockholders in 1998; and each initial director in Class III shall hold office until the annual meeting of stockholders in 1999. Notwithstanding the foregoing provisions of this Article, each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. In the event of any increase or decrease in the authorized number of directors, (1) each director then serving as such shall nevertheless continue as a director of the class of which he is a member until the expiration of his current term, or his earlier resignation, removal from office or death, and (2) the newly created or eliminated directorship resulting from such increase or decrease shall be apportioned by the Board of Directors among the three classes of directors so as to maintain such classes as nearly equal as possible. 4 ARTICLE VII Meetings of stockholders may be held within or without the State of Delaware, as the By-laws may provide. The books of the corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the By-laws of the corporation. The Stockholders of the corporation may not take any action by written consent in lieu of a meeting. ARTICLE VIII Except to the extent that the General Corporation Law of Delaware prohibits the elimination or limitation of liability of directors for breaches of fiduciary duty, no director of the corporation shall be personally liable to the corporation or its stockholders for monetary damages for any breach of fiduciary duty as a director, notwithstanding any provision of law imposing such liability. If the General Corporation Law is amended after approval by the stockholders of this Article to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law of the State of Delaware, as so amended. No amendment to or repeal of this provision shall apply to or have any effect on the liability or alleged liability of any director of the corporation for or with respect to any acts or omissions of such director occurring prior to such amendment. ARTICLE IX The corporation may, to the fullest extent permitted by Section 145 of the General Corporation Law of Delaware, as amended from time to time, indemnify each person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was, or has agreed to become, a director or officer of the corporation, or is or was serving, or has agreed to serve, at the request of the corporation, as a director, officer or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise (including any employee benefit plan) (all such persons being referred to hereafter as an "Indemnitee"), or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such action, suit or proceeding and any appeal therefrom. Indemnification may include payment by the corporation of expenses in defending an action or proceeding in advance of the final disposition of such action or proceeding upon receipt of an undertaking by the Indemnitee to repay such payment if it is ultimately determined that such person is not entitled to indemnification under this Article, 5 which undertaking may be accepted without reference to the financial ability of such person to make such repayment. The corporation shall not indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person unless the initiation thereof was approved by the Board of Directors of the corporation. The indemnification rights provided in this Article (i) shall not be deemed exclusive of any other rights to which Indemnitees may be entitled under any law, agreement or vote of stockholders or disinterested directors or otherwise, and (ii) shall inure to the benefit of the heirs, executors and administrators of such persons. The corporation may, to the extent authorized from time to time by its Board of Directors, grant indemnification rights to other employees or agents of the corporation or other persons serving the corporation and such rights may be equivalent to, or greater or less than, those set forth in this Article. ARTICLE X The corporation reserves the right to amend, alter, change or repeal any provision contained in this Sixth Amended and Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute and this Sixth Amended and Restated Certificate of Incorporation, and all rights conferred upon stockholders herein are granted subject to this reservation. ARTICLE XI Whenever a compromise or arrangement is proposed between this corporation and its creditors or any class of them and/or between this corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this corporation or of any creditor or stockholder thereof, or on the application of any receiver or receivers appointed for this corporation under the provisions of section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this corporation under the provisions of section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this corporation, as the case may be, and also on this corporation. * * * 6 FOURTH: The foregoing amendment and restatement was approved by the holders of the requisite number of shares of said corporation in accordance with Section 228 of the General Corporation Law and duly adopted in accordance with the provisions of Section 242 and 245 of the General Corporation Law. IN WITNESS WHEREOF, this Sixth Amended and Restated Certificate of Incorporation has been signed by the President and the Secretary of this corporation this ____ day of [September], 1996. ---------------------------- Thomas J. Murawski, Chief Executive Officer and President ---------------------------- Peter S. Macaluso, Secretary 7 EX-3.5 4 EX-3.5 Exhibit 3.5 CERTIFICATE OF AMENDMENT OF THE BYLAWS OF FAXSAV INCORPORATED Pursuant to Article V of the Fifth Amended and Restated Certificate of Incorporation * * * * * * * * * * The undersigned, Peter J. Macaluso, the Secretary of FaxSav Incorporated, a Delaware corporation (the "Company"), hereby certifies that effective _______________, 1996, the Bylaws of the Company, are amended as follows: Article II, Section 11, is hereby deleted in its entirety. ----------------------------- Peter S. Macaluso Secretary , 1996 ------------------ EX-4.1 5 EX-4.1 EXHIBIT 4.1 NUMBER [LOGO] SHARES FAXSAV INCORPORATED COMMON STOCK INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE CUSIP 31210L 104 SEE REVERSE FOR CERTAIN DEFINITIONS THIS CERTIFIES THAT is the owner of FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF FAXSAV INCORPORATED transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon the surrender of this Certificate properly endorsed. This Certificate is not valid until countersigned and registered by the Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: [Corporate Seal] SECRETARY PRESIDENT COUNTERSIGNED AND REGISTERED: Registrar and Transfer Company By TRANSFER AGENT AND REGISTRAR, AUTHORIZED SIGNATURE. FaxSav Incorporated will furnish without charge to each stockholder who so requests the powers, designations, preference and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Such request may be made to the Corporation or the Transfer Agent. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -- as tenants in common UNIF GIFT MIN ACT --_________________ Custodian _________________ TEN ENT -- as tenants by the entireties (Cust) (Minor) JT TEN -- as joint tenants with right under Uniform Gifts to Minors of survivorship and not as tenants Act___________________________________________ in common (State) UNIF TRF MIN ACT --_______________ Custodian (until age____) (Cust) _________ under Uniform Transfers (Minor) to Minors Act_________________________ (State) Additional abbreviations may also be used though not in the above list. For value received,_______________________________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE:____________________________ _________________________________________________________________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE) _________________________________________________________________________________________________________________________________ _________________________________________________________________________________________________________________________________ __________________________________________________________________________________________________________________________ Shares of the common stock represented by the within certificate, and do hereby irrevocably constitute and appoint ________________________________________________________________________________________________________________________ Attorney to transfer the said stock the books of the within-named Corporation with full power of substitution in the premises. Dated:________________________ X_____________________________________________________________________________________ X_____________________________________________________________________________________ NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER Signature(s) Guaranteed By _______________________________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBER- SHIP IN AN APPROVED SIGNATURE GUARANTEE PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15
EX-10.2 6 EX-10.2 Exhibit 10.2 AMENDMENT AND WAIVER TO THE FIFTH AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT This AMENDMENT (the "Amendment") to that certain FIFTH AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT (the "Fifth Investor Rights Agreement") dated as of February 28, 1996, by and among FAXSAV INCORPORATED, a Delaware corporation (the "Company," previously Digitran Corporation) and the investors signatories thereto (collectively, the "Investors"), is entered into and made effective as of the date (the "Effective Date") an underwriting agreement is entered into among the underwriters, the Company and any selling stockholders pertaining to an initial public offering of the Common Stock of the Company (the "Common Stock"), by and among the Company and the Investors. All capitalized terms used but not defined herein shall have the meanings ascribed to them in the Fifth Investor Rights Agreement. R E C I T A L S A. WHEREAS, the Company and the Investors entered into the Fifth Investor Rights Agreement under which the Investors were granted certain rights, including under certain circumstances, a right of first offer of securities offered by the Company; B. WHEREAS, the Board of Directors of the Company (the "Board") has determined previously that it is in the best interests of the Company to complete an initial public offering of its Common Stock (the "IPO"); C. WHEREAS, it is in the best interests of the Company to amend Section 4.4 of the Fifth Investors Rights Agreement to delete the right of first offer from the Fifth Investor Rights Agreement upon the Effective Date and for the Investors to waive the right of first offer in connection with the IPO and; D. WHEREAS, pursuant to Section 3.1 of the Investor Rights Agreement, the holders of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock (the "Preferred Stock") have certain demand registration rights commencing three (3) months after the effective date of a registration statement filed with the Securities and Exchange Commission (the "Effectiveness Date") and, pursuant to Section 3.3 of the Fifth Investor Rights Agreement, have certain piggyback registration rights in connection with the IPO; E. WHEREAS, pursuant to Section 3.17 of the Fifth Investors Rights Agreement, the holders of Series F Preferred Stock have a right of first refusal to include their shares of Series F Preferred Stock in any underwriter's over-allotment in connection with the IPO (the "Over-Allotment"); F. WHEREAS, pursuant to Section 6.5 of the Fifth Investor Rights Agreement, the written consent of the Company and the holders of at least two-thirds of the outstanding Registrable Securities is required to waive any provision of Section 3 of the Fifth Investor Rights Agreement, and at least two-thirds of the holders of the Common Stock of the Company issued or issuable upon conversion of the Preferred Stock of the Company held by the parties to the Fifth Investor Rights Agreement, not including Common Stock held by Martin Ellis, Jeffrey Kurland, Jerrold Siegan and Marshall Ellis, is required in order to amend any provision of Section 4 of the Fifth Investor Rights Agreement. NOW, THEREFORE, in consideration of good and valuable consideration, the receipt of which is hereby acknowledged, the undersigned hereby agree as follows: 1. Waiver and Consent. Pursuant to Section 6.5 of the Fifth Investor Rights Agreement, (a) the undersigned Investors, being the holders of at least two-thirds of the currently outstanding Registrable Securities, consent to the waiver and hereby waive (i) any and all demand registration rights set forth in Section 3.1 of the Fifth Investor Rights Agreement for a period of 180 days following the Effectiveness Date, (ii) any and all piggy-back registration rights set forth in Section 3.3 of the Fifth Investor Rights Agreement with respect to the IPO and for a period of 180 days following the Effectiveness Date, and (iii) any and all rights of first offer pursuant to Section 4.4 of the Fifth Investor Rights Agreement with respect to the IPO, and (b) the undersigned holders of Series F Preferred Stock consent to the waiver and hereby waive all rights pursuant to Section 3.17 of the Fifth Investor Rights Agreement to register their shares of registrable securities in the Over-Allotment with respect to the IPO. 2. Amendment to the Fifth Investor Rights Agreement. Section 4 of the Fifth Investor Rights Agreement shall hereby be amended by deleting in its entirety Section 4.4. 3. Termination. In the event that the Effective Date does not occur before December 31, 1996, this waiver and amendment shall terminate and be of no further effect. 4. Governing Law. This Amendment shall be governed by and construed under the laws of the State of California as applied to agreements among California residents, made and to be performed entirely within the State of California. 5. Entire Agreement. This Amendment together with the Fifth Investor Rights Agreement constitutes the full and entire understanding and agreement among the parties with regard to the subjects hereof and thereof. - 2 - 6. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. [The remainder of this page intentionally left blank] - 3 - IN WITNESS WHEREOF, the parties hereto have duly executed this AMENDMENT TO THE FIFTH INVESTOR RIGHTS AGREEMENT as of this ____ day of August, 1996. FAXSAV INCORPORATED By: ------------------------------------ Peter Macaluso, Vice President - 4 - IN WITNESS WHEREOF, the parties hereto have duly executed this AMENDMENT TO THE FIFTH INVESTOR RIGHTS AGREEMENT as of this ____ day of August, 1996. If individual investor ----------------------------- Print Name of Investor ----------------------------- Signature If corporate or partnership investor ----------------------------- Print Name of Investor By: -------------------------- Title: ----------------------- - 5 - IN WITNESS WHEREOF, the parties hereto have duly executed this AMENDMENT TO THE FIFTH INVESTOR RIGHTS AGREEMENT as of this ____ day of August, 1996. SIERRA VENTURES III, A CALIFORNIA LIMITED PARTNERSHIP By: ------------------------------------ Its General Partner SIERRA VENTURES III INTERNATIONAL, L.P. By: ------------------------------------ Its General Partner SIERRA VENTURES V By: ------------------------------------ Its General Partner - 6 - IN WITNESS WHEREOF, the parties hereto have duly executed this AMENDMENT TO THE FIFTH INVESTOR RIGHTS AGREEMENT as of this ____ day of August, 1996. BATTERY VENTURES II, L.P. By: ------------------------------------ Its General Partner - 7 - IN WITNESS WHEREOF, the parties hereto have duly executed this AMENDMENT TO THE FIFTH INVESTOR RIGHTS AGREEMENT as of this ____ day of August, 1996. SAND HILL FINANCIAL COMPANY, A CALIFORNIA LIMITED PARTNERSHIP By: ------------------------------------ Its General Partner - 8 - IN WITNESS WHEREOF, the parties hereto have duly executed this AMENDMENT TO THE FIFTH INVESTOR RIGHTS AGREEMENT as of this ____ day of August, 1996. TELSTRA INCORPORATED By: ------------------------------------ Title: ---------------------------------- - 9 - IN WITNESS WHEREOF, the parties hereto have duly executed this AMENDMENT TO THE FIFTH INVESTOR RIGHTS AGREEMENT as of this ____ day of August, 1996. CORAL PARTNERS II, A LIMITED PARTNERSHIP (FORMERLY IAI VENTURE PARTNERS II) By: ------------------------------------ Its General Partner - 10 - IN WITNESS WHEREOF, the parties hereto have duly executed this AMENDMENT TO THE FIFTH INVESTOR RIGHTS AGREEMENT as of this ____ day of August, 1996. SUTTER HILL VENTURES, a California Limited Partnership. By: ------------------------------------ Its General Partner - 11 - IN WITNESS WHEREOF, the parties hereto have duly executed this AMENDMENT TO THE FIFTH INVESTOR RIGHTS AGREEMENT as of this ____ day of August, 1996. MENLO VENTURES VI, L.P. By: MV Management VI, L.P. Its General Partner By: ------------------------------------ General Partner MENLO ENTREPRENEURS FUND VI, L.P. By: MV Management VI, L.P. Its General Partner By: ------------------------------------ General Partner - 12 - IN WITNESS WHEREOF, the parties hereto have duly executed this AMENDMENT TO THE FIFTH INVESTOR RIGHTS AGREEMENT as of this ____ day of August, 1996. LEHMAN BROTHERS HOLDINGS INC. By: ------------------------------------ Title: ---------------------------------- - 13 - EX-10.4 7 EX-10.4 Exhibit 10.4 FAXSAV INCORPORATED 1996 STOCK OPTION/STOCK ISSUANCE PLAN ARTICLE ONE GENERAL PROVISIONS I. PURPOSE OF THE PLAN This 1996 Stock Option/Stock Issuance Plan is intended to promote the interests of FaxSav Incorporated, a Delaware corporation, by providing eligible persons with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to remain in the service of the Corporation. Capitalized terms shall have the meanings assigned to such terms in the attached Appendix. II. STRUCTURE OF THE PLAN A. The Plan shall be divided into three separate equity programs: (i) the Discretionary Option Grant Program under which eligible persons may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock, (ii) the Stock Issuance Program under which eligible persons may, at the discretion of the Plan Administrator, be issued shares of Common Stock directly, either through the immediate purchase of such shares or as a bonus for services rendered the Corporation (or any Parent or Subsidiary), and (iii) the Automatic Option Grant Program under which Eligible Directors shall automatically receive option grants at periodic intervals to purchase shares of Common Stock. B. The provisions of Articles One and Five shall apply to all equity programs under the Plan and shall accordingly govern the interests of all persons under the Plan. III. ADMINISTRATION OF THE PLAN A. Prior to the Section 12(g) Registration Date, the Discretionary Option Grant and Stock Issuance Programs shall be administered by the Board. Beginning with the Section 12(g) Registration Date, the Primary Committee shall have sole and exclusive authority to administer the Discretionary Option Grant and Stock Issuance Programs with respect to Section 16 Insiders. B. Administration of the Discretionary Option Grant and Stock Issuance Programs with respect to all other persons eligible to participate in those programs may, at the Board's discretion, be vested in the Primary Committee or a Secondary Committee, or the Board may retain the power to administer those programs with respect to all such persons. The members of the Secondary Committee may be Board members who are Employees eligible to receive discretionary option grants or direct stock issuances under the Plan or any other stock option, stock appreciation, stock bonus or other stock plan of the Corporation (or any Parent or Subsidiary). C. Members of the Primary Committee or any Secondary Committee shall serve for such period of time as the Board may determine and may be removed by the Board at any time. The Board may also at any time terminate the functions of any Secondary Committee and reassume all powers and authority previously delegated to such committee. D. Each Plan Administrator shall, within the scope of its administrative functions under the Plan, have full power and authority to establish such rules and regulations as it may deem appropriate for proper administration of the Discretionary Option Grant and Stock Issuance Programs and to make such determinations under, and issue such interpretations of, the provisions of such programs and any outstanding options or stock issuances thereunder as it may deem necessary or advisable. Decisions of the Plan Administrator within the scope of its administrative functions under the Plan shall be final and binding on all parties who have an interest in the Discretionary Option Grant or Stock Issuance Program under its jurisdiction or any option or stock issuance thereunder. E. Service on the Primary Committee or the Secondary Committee shall constitute service as a Board member, and members of each such committee shall accordingly be entitled to full indemnification and reimbursement as Board members for their service on such committee. No member of the Primary Committee or the Secondary Committee shall be liable for any act or omission made in good faith with respect to the Plan or any option grants or stock issuances under the Plan. F. Administration of the Automatic Option Grant Program shall be self-executing in accordance with the terms of that program, and no Plan Administrator shall exercise any discretionary functions with respect to option grants made thereunder. IV. ELIGIBILITY 2. A. The persons eligible to participate in the Discretionary Option Grant and Stock Issuance Programs are as follows: (i) Employees, (ii) non-employee members of the Board (other than those serving as members of the Primary Committee) or the board of directors of any Parent or Subsidiary, and (iii) consultants and other independent advisors who provide services to the Corporation (or any Parent or Subsidiary). B. Each Plan Administrator shall, within the scope of its administrative jurisdiction under the Plan, have full authority (subject to the provisions of the Plan) to determine, (i) with respect to the option grants under the Discretionary Option Grant Program, which eligible persons are to receive option grants, the time or times when such option grants are to be made, the number of shares to be covered by each such grant, the status of the granted option as either an Incentive Option or a Non-Statutory Option, the time or times at which each option is to become exercisable, the vesting schedule (if any) applicable to the option shares and the maximum term for which the option is to remain outstanding and (ii) with respect to stock issuances under the Stock Issuance Program, which eligible persons are to receive stock issuances, the time or times when such issuances are to be made, the number of shares to be issued to each Participant, the vesting schedule (if any) applicable to the issued shares and the consideration to be paid for such shares. C. The Plan Administrator shall have the absolute discretion either to grant options in accordance with the Discretionary Option Grant Program or to effect stock issuances in accordance with the Stock Issuance Program. D. The individuals eligible to participate in the Automatic Option Grant Program shall be limited to (i) those individuals who first become non-employee Board members on or after the Underwriting Date, whether through appointment by the Board or election by the Corporation's stockholders, and (ii) those individuals who are to continue to serve as non-employee Board members after one or more Annual Stockholders Meetings held after the Underwriting Date, including those individuals serving as non-employee Board members on the Underwriting Date. A non-employee Board member who has previously been in the employ of the Corporation (or any Parent or Subsidiary) shall not be eligible to receive an initial option grant under the Automatic Option Grant Program on the Underwriting Date or (if later) at the time he or she first becomes a non-employee Board member, but such individual shall be eligible to receive periodic option grants under the Automatic Option Grant Program upon his or her continued service as a non-employee Board member after one or more Annual Stockholders Meetings. V. STOCK SUBJECT TO THE PLAN 3. A. The stock issuable under the Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the Corporation on the open market. The maximum number of shares of Common Stock which may be issued over the term of the Plan shall not exceed 16,147,572 shares. Such authorized share reserve is comprised of (i) the number of shares which remain available for issuance, as of the Plan Effective Date, under the Predecessor Plan as last approved by the Corporation's stockholders, including the shares subject to the outstanding options incorporated into the Plan, plus (ii) an additional increase of 5,000,000 shares authorized by the Board but subject to stockholder approval prior to the Plan Effective Date. B. No one person participating in the Plan may receive options, separately exercisable stock appreciation rights and direct stock issuances for more than 2,700,000 shares of Common Stock in the aggregate over the term of the Plan. C. Shares of Common Stock subject to outstanding options shall be available for subsequent issuance under the Plan to the extent (i) the options (including any options incorporated from the Predecessor Plan) expire or terminate for any reason prior to exercise in full or (ii) the options are cancelled in accordance with the cancellation-regrant provisions of Article Two. All shares issued under the Plan (including shares issued upon exercise of options incorporated from the Predecessor Plan), whether or not those shares are subsequently repurchased by the Corporation pursuant to its repurchase rights under the Plan, shall reduce on a share-for-share basis the number of shares of Common Stock available for subsequent issuance under the Plan. In addition, should the exercise price of an option under the Plan (including any option incorporated from the Predecessor Plan) be paid with shares of Common Stock or should shares of Common Stock otherwise issuable under the Plan be withheld by the Corporation in satisfaction of the withholding taxes incurred in connection with the exercise of an option or the vesting of a stock issuance under the Plan, then the number of shares of Common Stock available for issuance under the Plan shall be reduced by the gross number of shares for which the option is exercised or which vest under the stock issuance, and not by the net number of shares of Common Stock issued to the holder of such option or stock issuance. D. Should any change be made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, appropriate adjustments shall be made to (i) the maximum number and/or class of securities issuable under the Plan, (ii) the number and/or class of securities for which any one person may be granted options, separately exercisable stock appreciation rights and direct stock issuances over the term of the Plan, (iii) the number and/or class of securities for which automatic option grants are to be made subsequently per Eligible Director under the Automatic Option Grant Program and (iv) the number and/or class of securities and the exercise price per share in effect under each outstanding option (including any option incorporated from the Predecessor Plan) in order to prevent the dilution or enlargement of benefits thereunder. The adjustments determined by the Plan Administrator shall be final, binding and conclusive. 4. ARTICLE TWO DISCRETIONARY OPTION GRANT PROGRAM I. OPTION TERMS Each option shall be evidenced by one or more documents in the form approved by the Plan Administrator; provided, however, that each such document shall comply with the terms specified below. Each document evidencing an Incentive Option shall, in addition, be subject to the provisions of the Plan applicable to such options. A. Exercise Price. 1. The exercise price per share shall be fixed by the Plan Administrator but shall not be less than eighty-five percent (85%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall become immediately due upon exercise of the option and shall, subject to the provisions of Section I of Article Five and the documents evidencing the option, be payable in one or more of the forms specified below: (i) cash or check made payable to the Corporation, (ii) shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date, or (iii) to the extent the option is exercised for vested shares, through a special sale and remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable written instructions to (a) a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such exercise and (b) the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale. Except to the extent such sale and remittance procedure is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. 5. B. Exercise and Term of Options. Each option shall be exercisable at such time or times, during such period and for such number of shares as shall be determined by the Plan Administrator and set forth in the documents evidencing the option. However, no option shall have a term in excess of ten (10) years measured from the option grant date. C. Effect of Termination of Service. 1. The following provisions shall govern the exercise of any options held by the Optionee at the time of cessation of Service or death: (i) Any option outstanding at the time of the Optionee's cessation of Service for any reason shall remain exercisable for such period of time thereafter as shall be determined by the Plan Administrator and set forth in the documents evidencing the option, but no such option shall be exercisable after the expiration of the option term. (ii) Any option exercisable in whole or in part by the Optionee at the time of death may be exercised subsequently by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution. (iii) During the applicable post-Service exercise period, the option may not be exercised in the aggregate for more than the number of vested shares for which the option is exercisable on the date of the Optionee's cessation of Service. Upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee's cessation of Service, terminate and cease to be outstanding to the extent the option is not otherwise at that time exercisable for vested shares. (iv) Should the Optionee's Service be terminated for Misconduct, then all outstanding options held by the Optionee shall terminate immediately and cease to be outstanding. 2. The Plan Administrator shall have the discretion, exercisable either at the time an option is granted or at any time while the option remains outstanding, to: (i) extend the period of time for which the option is to remain exercisable following the Optionee's cessation of Service from the period otherwise in effect for that option to such greater period of time as the Plan Administrator shall deem appropriate, but in no event beyond the expiration of the option term, and/or 6. (ii) permit the option to be exercised, during the applicable post-Service exercise period, not only with respect to the number of vested shares of Common Stock for which such option is exercisable at the time of the Optionee's cessation of Service but also with respect to one or more additional installments in which the Optionee would have vested under the option had the Optionee continued in Service. D. Stockholder Rights. The holder of an option shall have no stockholder rights with respect to the shares subject to the option until such person shall have exercised the option, paid the exercise price and become a holder of record of the purchased shares. E. Repurchase Rights. The Plan Administrator shall have the discretion to grant options which are exercisable for unvested shares of Common Stock. Should the Optionee cease Service while holding such unvested shares, the Corporation shall have the right to repurchase, at the exercise price paid per share, any or all of those unvested shares. The terms upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Plan Administrator and set forth in the document evidencing such repurchase right. F. Limited Transferability of Options. During the lifetime of the Optionee, Incentive Options shall be exercisable only by the Optionee and shall not be assignable or transferable other than by will or by the laws of descent and distribution following the Optionee's death. However, a Non-Statutory Option may, in connection with the Optionee's estate plan, be assigned in whole or in part during the Optionee's lifetime to one or more members of the Optionee's immediate family or to a trust established exclusively for the benefit of one or more such family members. The assigned portion may only be exercised by the person or persons who acquire a proprietary interest in the option pursuant to the assignment. The terms applicable to the assigned portion shall be the same as those in effect for the option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate. II. INCENTIVE OPTIONS The terms specified below shall be applicable to all Incentive Options. Except as modified by the provisions of this Section II, all the provisions of Articles One, Two and Five shall be applicable to Incentive Options. Options which are specifically designated as Non-Statutory Options when issued under the Plan shall not be subject to the terms of this Section II. A. Eligibility. Incentive Options may only be granted to Employees. B. Exercise Price. The exercise price per share shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date. 7. C. Dollar Limitation. The aggregate Fair Market Value of the shares of Common Stock (determined as of the respective date or dates of grant) for which one or more options granted to any Employee under the Plan (or any other option plan of the Corporation or any Parent or Subsidiary) may for the first time become exercisable as Incentive Options during any one (1) calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two (2) or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such options as Incentive Options shall be applied on the basis of the order in which such options are granted. D. 10% Stockholder. If any Employee to whom an Incentive Option is granted is a 10% Stockholder, then the exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the option grant date, and the option term shall not exceed five (5) years measured from the option grant date. III. CORPORATE TRANSACTION/CHANGE IN CONTROL A. In the event of any Corporate Transaction, each outstanding option shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable for all of the shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. However, an outstanding option shall not so accelerate if and to the extent: (i) such option is, in connection with the Corporate Transaction, either to be assumed by the successor corporation (or parent thereof) or to be replaced with a comparable option to purchase shares of the capital stock of the successor corporation (or parent thereof), (ii) such option is to be replaced with a cash incentive program of the successor corporation which preserves the spread existing on the unvested option shares at the time of the Corporate Transaction and provides for subsequent payout in accordance with the same vesting schedule applicable to such option or (iii) the acceleration of such option is subject to other limitations imposed by the Plan Administrator at the time of the option grant. The determination of option comparability under clause (i) above shall be made by the Plan Administrator, and its determination shall be final, binding and conclusive. B. All outstanding repurchase rights shall also terminate automatically, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transaction, except to the extent: (i) those repurchase rights are to be assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan Administrator at the time the repurchase right is issued. C. The Plan Administrator shall have the discretion, exercisable either at the time the option is granted or at any time while the option remains outstanding, to provide for the automatic acceleration of one or more outstanding options (and the automatic termination of one or more outstanding repurchase rights with the immediate vesting of the shares of Common Stock 8. subject to those rights) upon the occurrence of a Corporate Transaction, whether or not those options are to be assumed or replaced (or those repurchase rights are to be assigned) in the Corporate Transaction. The Plan Administrator shall also have the discretion to grant options which do not accelerate whether or not such options are assumed (and to provide for repurchase rights that do not terminate whether or not such rights are assigned) in connection with a Corporate Transaction. D. Immediately following the consummation of the Corporate Transaction, all outstanding options shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof). E. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to (i) the number and class of securities available for issuance under the Plan following the consummation of such Corporate Transaction, (ii) the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain the same and (iii) the maximum number of securities and/or class of securities for which any one person may be granted stock options, separately exercisable stock appreciation rights and direct stock issuances under the Plan. F. The Plan Administrator shall have the discretion, exercisable at the time the option is granted or at any time while the option remains outstanding, to provide for the automatic acceleration of any options which are assumed or replaced in a Corporate Transaction and do not otherwise accelerate at that time (and the termination of any of the Corporation's outstanding repurchase rights which do not otherwise terminate at the time of the Corporate Transaction) in the event the Optionee's Service should subsequently terminate by reason of an Involuntary Termination within eighteen (18) months following the effective date of such Corporate Transaction. Any options so accelerated shall remain exercisable for fully-vested shares until the earlier of (i) the expiration of the option term or (ii) the expiration of the one (1)-year period measured from the effective date of the Involuntary Termination. G. The Plan Administrator shall have the discretion, exercisable either at the time the option is granted or at any time while the option remains outstanding, to (i) provide for the automatic acceleration of one or more outstanding options (and the automatic termination of one or more outstanding repurchase rights with the immediate vesting of the shares of Common Stock subject to those rights) upon the occurrence of a Change in Control or (ii) condition any such option acceleration (and the termination of any outstanding repurchase rights) upon the subsequent Involuntary Termination of the Optionee's Service within a specified period following the effective date of such Change in Control. Any options accelerated in connection with a Change in Control shall remain fully exercisable until the expiration or sooner termination of the option term. 9. H. The portion of any Incentive Option accelerated in connection with a Corporate Transaction or Change in Control shall remain exercisable as an Incentive Option only to the extent the applicable One Hundred Thousand Dollar ($100,000) limitation is not exceeded. To the extent such dollar limitation is exceeded, the accelerated portion of such option shall be exercisable as a Non-Statutory Option under the Federal tax laws. I. The grant of options under the Discretionary Option Grant Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. IV. CANCELLATION AND REGRANT OF OPTIONS The Plan Administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected option holders, the cancellation of any or all outstanding options under the Discretionary Option Grant Program (including outstanding options incorporated from the Predecessor Plan) and to grant in substitution new options covering the same or different number of shares of Common Stock but with an exercise price per share based on the Fair Market Value per share of Common Stock on the new grant date. V. STOCK APPRECIATION RIGHTS A. The Plan Administrator shall have full power and authority to grant to selected Optionees tandem stock appreciation rights and/or limited stock appreciation rights. B. The following terms shall govern the grant and exercise of tandem stock appreciation rights: (i) One or more Optionees may be granted the right, exercisable upon such terms as the Plan Administrator may establish, to elect between the exercise of the underlying option for shares of Common Stock and the surrender of that option in exchange for a distribution from the Corporation in an amount equal to the excess of (a) the Fair Market Value (on the option surrender date) of the number of shares in which the Optionee is at the time vested under the surrendered option (or surrendered portion thereof) over (b) the aggregate exercise price payable for such shares. (ii) No such option surrender shall be effective unless it is approved by the Plan Administrator. If the surrender is so approved, then the distribution to which the Optionee shall be entitled may be made in shares of Common Stock valued at Fair Market Value on the option surrender date, in cash, or partly in shares and partly in cash, as the Plan Administrator shall in its sole discretion deem appropriate. 10. (iii) If the surrender of an option is rejected by the Plan Administrator, then the Optionee shall retain whatever rights the Optionee had under the surrendered option (or surrendered portion thereof) on the option surrender date and may exercise such rights at any time prior to the later of (a) five (5) business days after the receipt of the rejection notice or (b) the last day on which the option is otherwise exercisable in accordance with the terms of the documents evidencing such option, but in no event may such rights be exercised more than ten (10) years after the option grant date. C. The following terms shall govern the grant and exercise of limited stock appreciation rights: (i) One or more Section 16 Insiders may be granted limited stock appreciation rights with respect to their outstanding options. (ii) Upon the occurrence of a Hostile Take-Over, each such individual holding one or more options with such a limited stock appreciation right shall have the unconditional right (exercisable for a thirty (30)-day period following such Hostile Take-Over) to surrender each such option to the Corporation, to the extent the option is at the time exercisable for vested shares of Common Stock. In return for the surrendered option, the Optionee shall receive a cash distribution from the Corporation in an amount equal to the excess of (a) the Take-Over Price of the shares of Common Stock which are at the time vested under each surrendered option (or surrendered portion thereof) over (b) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following the option surrender date. (iii) Neither the approval of the Plan Administrator nor the consent of the Board shall be required in connection with such option surrender and cash distribution. (iv) The balance of the option (if any) shall continue in full force and effect in accordance with the documents evidencing such option. 11. ARTICLE THREE STOCK ISSUANCE PROGRAM I. STOCK ISSUANCE TERMS Shares of Common Stock may be issued under the Stock Issuance Program through direct and immediate issuances without any intervening option grants. Each such stock issuance shall be evidenced by a Stock Issuance Agreement which complies with the terms specified below. A. Purchase Price. 1. The purchase price per share shall be fixed by the Plan Administrator, but shall not be less than eighty-five percent (85%) of the Fair Market Value per share of Common Stock on the issuance date. 2. Subject to the provisions of Section I of Article Five, shares of Common Stock may be issued under the Stock Issuance Program for any of the following items of consideration which the Plan Administrator may deem appropriate in each individual instance: (i) cash or check made payable to the Corporation, or (ii) past services rendered to the Corporation (or any Parent or Subsidiary). B. Vesting Provisions. 1. Shares of Common Stock issued under the Stock Issuance Program may, in the discretion of the Plan Administrator, be fully and immediately vested upon issuance or may vest in one or more installments over the Participant's period of Service or upon attainment of specified performance objectives. The elements of the vesting schedule applicable to any unvested shares of Common Stock issued under the Stock Issuance Program, namely: (i) the Service period to be completed by the Participant or the performance objectives to be attained, (ii) the number of installments in which the shares are to vest, (iii) the interval or intervals (if any) which are to lapse between installments, and 12. (iv) the effect which death, Permanent Disability or other event designated by the Plan Administrator is to have upon the vesting schedule, shall be determined by the Plan Administrator and incorporated into the Stock Issuance Agreement. 2. Any new, substituted or additional securities or other property (including money paid other than as a regular cash dividend) which the Participant may have the right to receive with respect to the Participant's unvested shares of Common Stock by reason of any stock dividend, stock split, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration shall be issued subject to (i) the same vesting requirements applicable to the Participant's unvested shares of Common Stock and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate. 3. The Participant shall have full stockholder rights with respect to any shares of Common Stock issued to the Participant under the Stock Issuance Program, whether or not the Participant's interest in those shares is vested. Accordingly, the Participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares. 4. Should the Participant cease to remain in Service while holding one or more unvested shares of Common Stock issued under the Stock Issuance Program or should the performance objectives not be attained with respect to one or more such unvested shares of Common Stock, then those shares shall be immediately surrendered to the Corporation for cancellation, and the Participant shall have no further stockholder rights with respect to those shares. To the extent the surrendered shares were previously issued to the Participant for consideration paid in cash or cash equivalent (including the Participant's purchase-money indebtedness), the Corporation shall repay to the Participant the cash consideration paid for the surrendered shares and shall cancel the unpaid principal balance of any outstanding purchase-money note of the Participant attributable to the surrendered shares. 5. The Plan Administrator may in its discretion waive the surrender and cancellation of one or more unvested shares of Common Stock (or other assets attributable thereto) which would otherwise occur upon the cessation of the Participant's Service or the non-attainment of the performance objectives applicable to those shares. Such waiver shall result in the immediate vesting of the Participant's interest in the shares of Common Stock as to which the waiver applies. Such waiver may be effected at any time, whether before or after the Participant's cessation of Service or the attainment or non-attainment of the applicable performance objectives. II. CORPORATE TRANSACTION/CHANGE IN CONTROL A. All outstanding cancellation rights under the Stock Issuance Program shall terminate automatically, and all the shares of Common Stock subject to those terminated rights 13. shall immediately vest in full, in the event of any Corporate Transaction, except to the extent (i) those cancellation rights are assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed in the Stock Issuance Agreement. B. The Plan Administrator shall have the discretion, exercisable either at the time the unvested shares are issued or at any time while the Corporation's cancellation rights remain outstanding to provide that any cancellation rights that are assigned in the Corporate Transaction shall automatically terminate, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event the Participant's Service should subsequently terminate by reason of an Involuntary Termination within eighteen (18) months following the effective date of such Corporate Transaction. C. The Plan Administrator shall have the discretion to provide for cancellation rights with terms different from those in effect under this Section II in connection with a Corporate Transaction. D. The Plan Administrator shall have the discretion, exercisable either at the time the unvested shares are issued or at any time while the Corporation's cancellation right remains outstanding, to (i) provide for the automatic termination of one or more outstanding cancellation rights and the immediate vesting of the shares of Common Stock subject to those rights upon the occurrence of a Change in Control or (ii) condition any such accelerated vesting upon the subsequent Involuntary Termination of the Participant's Service within a specified period following the effective date of such Change in Control. III. SHARE ESCROW/LEGENDS Unvested shares may, in the Plan Administrator's discretion, be held in escrow by the Corporation until the Participant's interest in such shares vests or may be issued directly to the Participant with restrictive legends on the certificates evidencing those unvested shares. 14. ARTICLE FOUR AUTOMATIC OPTION GRANT PROGRAM I. OPTION TERMS A. Grant Dates. Option grants shall be made on the dates specified below: 1. Each individual who is first elected or appointed as a non-employee Board member on or after the Underwriting Date shall automatically be granted, on the date of such initial election or appointment, a Non-Statutory Option to purchase 200,000 shares of Common Stock, provided such individual has not previously been in the employ of the corporation (or any Parent or Subsidiary). 2. On the date of each Annual Stockholders Meeting held after the Underwriting Date, each individual who is to continue to serve as an Eligible Director, shall automatically be granted a Non-Statutory Option to purchase an additional 40,000 shares of Common Stock, provided such individual has served as a non-employee Board member for at least six (6) months. There shall be no limit on the number of such 40,000-share option grants any one Eligible Director may receive over his or her period of Board service. B. Exercise Price. 1. The exercise price per share shall be equal to one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. C. Option Term. Each option shall have a term of ten (10) years measured from the option grant date. D. Exercise and Vesting of Options. Each option shall be immediately exercisable for any or all of the option shares. However, any shares purchased under the option shall be subject to repurchase by the Corporation, at the exercise price paid per share, upon the Optionee's cessation of Board service prior to vesting in those shares. Each initial grant shall vest, and the Corporation's repurchase right shall lapse, in a series of four (4) successive equal annual installments over the Optionee's period of continued service as a Board member, with the first such installment to vest upon the Optionee's completion of one (1) year of Board service measured from the option grant date. Each annual grant shall vest, and the Corporation's 15. repurchase right shall lapse, upon the Optionee's completion of one (1) year of Board service measured from the option grant date. E. Effect of Termination of Board Service. The following provisions shall govern the exercise of any options held by the Optionee at the time the Optionee ceases to serve as a Board member: (i) The Optionee (or, in the event of Optionee's death, the personal representative of the Optionee's estate or the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution) shall have a twelve (12)- month period following the date of such cessation of Board service in which to exercise each such option. (ii) During the twelve (12)-month exercise period, the option may not be exercised in the aggregate for more than the number of vested shares of Common Stock for which the option is exercisable at the time of the Optionee's cessation of Board service. (iii) Should the Optionee cease to serve as a Board member by reason of death or Permanent Disability, then all shares at the time subject to the option shall immediately vest so that such option may, during the twelve (12)-month exercise period following such cessation of Board service, be exercised for all or any portion of those shares as fully-vested shares of Common Stock. (iv) In no event shall the option remain exercisable after the expiration of the option term. Upon the expiration of the twelve (12)-month exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee's cessation of Board service for any reason other than death or Permanent Disability, terminate and cease to be outstanding to the extent the option is not otherwise at that time exercisable for vested shares. II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKEOVER A. In the event of any Corporate Transaction, the shares of Common Stock at the time subject to each outstanding option but not otherwise vested shall automatically vest in full so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable for all of the shares of Common Stock at the time subject to such option and may be exercised for all or any portion of those shares as fully-vested shares of Common Stock. Immediately following the consummation of the Corporate Transaction, each 16. automatic option grant shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof). B. In connection with any Change in Control, the shares of Common Stock at the time subject to each outstanding option but not otherwise vested shall automatically vest in full so that each such option shall, immediately prior to the effective date of the Change in Control, become fully exercisable for all of the shares of Common Stock at the time subject to such option and may be exercised for all or any portion of those shares as fully-vested shares of Common Stock. Each such option shall remain exercisable for such fully-vested option shares until the expiration or sooner termination of the option term or the surrender of the option in connnection with a Hostile Take-Over. C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a thirty (30)-day period in which to surrender to the Corporation each of his or her outstanding automatic option grants. The Optionee shall in return be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the Take-Over Price of the shares of Common Stock at the time subject to each surrendered option (whether or not the Optionee is otherwise at the time vested in those shares) over (ii) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following the surrender of the option to the Corporation. No approval or consent of the Board or any Plan Administrator shall be required in connection with such option surrender and cash distribution. D. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain the same. E. The grant of options under the Automatic Option Grant Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. III. REMAINING TERMS The remaining terms of each option granted under the Automatic Option Grant Program shall be the same as the terms in effect for option grants made under the Discretionary Option Grant Program. 17. ARTICLE FIVE MISCELLANEOUS I. FINANCING A. The Plan Administrator may permit any Optionee or Participant to pay the option exercise price under the Discretionary Option Grant Program or the purchase price for shares issued under the Stock Issuance Program by delivering a promissory note payable in one or more installments. The terms of any such promissory note (including the interest rate and the terms of repayment) shall be established by the Plan Administrator in its sole discretion. Promissory notes may be authorized with or without security or collateral. In all events, the maximum credit available to the Optionee or Participant may not exceed the sum of (i) the aggregate option exercise price or purchase price payable for the purchased shares plus (ii) any Federal, state and local income and employment tax liability incurred by the Optionee or the Participant in connection with the option exercise or share purchase. B. The Plan Administrator may, in its discretion, determine that one or more such promissory notes shall be subject to forgiveness by the Corporation in whole or in part upon such terms as the Plan Administrator may deem appropriate. II. TAX WITHHOLDING A. The Corporation's obligation to deliver shares of Common Stock upon the exercise of options or upon the issuance or vesting of such shares under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements. B. The Plan Administrator may, in its discretion, provide any or all holders of Non-Statutory Options or unvested shares of Common Stock under the Plan (other than the options granted or the shares issued under the Automatic Option Grant Program) with the right to use shares of Common Stock in satisfaction of all or part of the Taxes incurred by such holders in connection with the exercise of their options or the vesting of their shares. Such right may be provided to any such holder in either or both of the following formats: (i) Stock Withholding: The election to have the Corporation withhold, from the shares of Common Stock otherwise issuable upon the exercise of such Non-Statutory Option or the vesting of such shares, a portion of those shares with an aggregate Fair Market Value equal to the percentage of the Taxes (not to exceed one hundred percent (100%)) designated by the holder. 18. (ii) Stock Delivery: The election to deliver to the Corporation, at the time the Non-Statutory Option is exercised or the shares vest, one or more shares of Common Stock previously acquired by such holder (other than in connection with the option exercise or share vesting triggering the Taxes) with an aggregate Fair Market Value equal to the percentage of the Taxes (not to exceed one hundred percent (100%)) designated by the holder. III. EFFECTIVE DATE AND TERM OF THE PLAN A. The Plan shall become effective on the Plan Effective Date. Options may be granted under the Discretionary Option Grant Program at any time on or after the Plan Effective Date. The Automatic Option Grant Program shall become effective on the Underwriting Date and the initial options under that program shall be made to the Eligible Directors at that time. However, no options granted under the Plan may be exercised, and no shares shall be issued under the Plan, until the Plan is approved by the Corporation's stockholders. If such stockholder approval is not obtained within twelve (12) months after the date the Plan is adopted by the Board, then all options previously granted under this Plan shall terminate and cease to be outstanding, and no further options shall be granted and no shares shall be issued under the Plan. B. The Plan shall serve as the successor to the Predecessor Plan, and no further option grants shall be made under the Predecessor Plan after the Plan Effective Date. All options outstanding under the Predecessor Plan as of such date shall be incorporated into the Plan at that time and shall be treated as outstanding options under the Plan. However, each outstanding option so incorporated shall continue to be governed solely by the terms of the documents evidencing such option, and no provision of the Plan shall be deemed to affect or otherwise modify the rights or obligations of the holders of such incorporated options with respect to their acquisition of shares of Common Stock. C. One or more provisions of the Plan, including (without limitation) the option/vesting acceleration provisions of Article Two relating to Corporate Transactions and Changes in Control, may, in the Plan Administrator's discretion, be extended to one or more options incorporated from the Predecessor Plan which do not otherwise contain such provisions. D. The Plan shall terminate upon the earliest of (i) June 29, 2006, (ii) the date on which all shares available for issuance under the Plan shall have been issued pursuant to the exercise of the options or the issuance of shares (whether vested or unvested) under the Plan or (iii) the termination of all outstanding options in connection with a Corporate Transaction. Upon such Plan termination, all outstanding options and unvested stock issuances shall continue to have force and effect in accordance with the provisions of the documents evidencing such options or issuances. IV. AMENDMENT OF THE PLAN 19. A. The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects. However, no such amendment or modification shall adversely affect any rights and obligations with respect to options, stock appreciation rights or unvested stock issuances at the time outstanding under the Plan unless the Optionee or the Participant consents to such amendment or modification. In addition, amendments to the Plan shall be subject to approval of the Corporation's stockholders to the extent required by applicable laws or regulations. B. Options to purchase shares of Common Stock may be granted under the Discretionary Option Grant Program and shares of Common Stock may be issued under the Stock Issuance Program that are in each instance in excess of the number of shares then available for issuance under the Plan, provided any excess shares actually issued under those programs are held in escrow until there is obtained stockholder approval of an amendment sufficiently increasing the number of shares of Common Stock available for issuance under the Plan. If such stockholder approval is not obtained within twelve (12) months after the date the first such excess grants or issuances are made, then (i) any unexercised options granted on the basis of such excess shares shall terminate and cease to be outstanding and (ii) the Corporation shall promptly refund to the Optionees and the Participants the exercise or purchase price paid for any excess shares issued under the Plan and held in escrow, together with interest (at the applicable Short Term Federal Rate) for the period the shares were held in escrow, and such shares shall thereupon be automatically cancelled and cease to be outstanding. V. USE OF PROCEEDS Any cash proceeds received by the Corporation from the sale of shares of Common Stock under the Plan shall be used for general corporate purposes. VI. REGULATORY APPROVALS A. The implementation of the Plan, the granting of any option or stock appreciation right under the Plan and the issuance of any shares of Common Stock (i) upon the exercise of any option or stock appreciation right or (ii) under the Stock Issuance Program shall be subject to the Corporation's procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the options and stock appreciation rights granted under it and the shares of Common Stock issued pursuant to it. B. No shares of Common Stock or other assets shall be issued or delivered under the Plan unless and until there shall have been compliance with all applicable requirements of Federal and state securities laws, including the filing and effectiveness of the Form S-8 registration statement for the shares of Common Stock issuable under the Plan, and all applicable listing requirements of any stock exchange (or the Nasdaq National Market, if applicable) on which Common Stock is then listed for trading. VII. NO EMPLOYMENT/SERVICE RIGHTS 20. Nothing in the Plan shall confer upon the Optionee or the Participant any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining such person) or of the Optionee or the Participant, which rights are hereby expressly reserved by each, to terminate such person's Service at any time for any reason, with or without cause. 21. APPENDIX The following definitions shall be in effect under the Plan: A. Automatic Option Grant Program shall mean the automatic option grant program in effect under the Plan. B. Board shall mean the Corporation's Board of Directors. C. Change in Control shall mean a change in ownership or control of the Corporation effected through either of the following transactions: (i) the acquisition, directly or indirectly, by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation), of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's stockholders which the Board does not recommend such stockholders to accept, or (ii) a change in the composition of the Board over a period of thirty-six (36) consecutive months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (A) have been Board members continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time the Board approved such election or nomination. D. Code shall mean the Internal Revenue Code of 1986, as amended. E. Common Stock shall mean the Corporation's common stock. F. Corporate Transaction shall mean either of the following stockholder- approved transactions to which the Corporation is a party: (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction; or A-1. (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation. G. Corporation shall mean FaxSav Incorporated, a Delaware corporation, and any corporate successor to all or substantially all of the assets or voting stock of FaxSav Incorporated which shall by appropriate action adopt the Plan. H. Discretionary Option Grant Program shall mean the discretionary option grant program in effect under the Plan. I. Eligible Director shall mean a non-employee Board member eligible to participate in the Automatic Option Grant Program in accordance with the eligibility provisions of Article One. J. Employee shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance. K. Exercise Date shall mean the date on which the Corporation shall have received written notice of the option exercise. L. Fair Market Value per share of Common Stock on any relevant date shall be determined in accordance with the following provisions: (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as such price is reported by the National Association of Securities Dealers on the Nasdaq National Market or any successor system. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (iii) For purposes of any option grants made on the Underwriting Date, the Fair Market Value shall be deemed to be equal to the price per share at A-2. which the Common Stock is sold in the initial public offering pursuant to the Underwriting Agreement. For purposes of any option grants made prior to the Underwriting Date, the Fair Market Value shall be determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate. M. Hostile Take-Over shall mean the acquisition, directly or indirectly, by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's stockholders which the Board does not recommend such stockholders to accept. N. Incentive Option shall mean an option which satisfies the requirements of Code Section 422. O. Involuntary Termination shall mean the termination of the Service of any individual which occurs by reason of: (i) such individual's involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or (ii) such individual's voluntary resignation following (A) a change in his or her position with the Corporation which materially reduces his or her level of responsibility, (B) a reduction in his or her level of compensation (including base salary, fringe benefits and participation in corporate-performance based bonus or incentive programs) by more than fifteen percent (15%) or (C) a relocation of such individual's place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected by the Corporation without the individual's consent. P. Misconduct shall mean the commission of any act of fraud, embezzlement or dishonesty by the Optionee or Participant, any unauthorized use or disclosure by such person of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by such person adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may consider as grounds for the dismissal or discharge of any Optionee, Participant or other person in the Service of the Corporation (or any Parent or Subsidiary). Q. 1934 Act shall mean the Securities Exchange Act of 1934, as amended. A-3. R. Non-Statutory Option shall mean an option not intended to satisfy the requirements of Code Section 422. S. Optionee shall mean any person to whom an option is granted under the Discretionary Option Grant or Automatic Option Grant Program. T. Parent shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. U. Participant shall mean any person who is issued shares of Common Stock under the Stock Issuance Program. V. Permanent Disability or Permanently Disabled shall mean the inability of the Optionee or the Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more. However, solely for the purposes of the Automatic Option Grant Program, Permanent Disability or Permanently Disabled shall mean the inability of the non-employee Board member to perform his or her usual duties as a Board member by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more. W. Plan shall mean the Corporation's 1996 Stock Option/Stock Issuance Plan, as set forth in this document. X. Plan Administrator shall mean the particular entity, whether the Primary Committee, the Board or the Secondary Committee, which is authorized to administer the Discretionary Option Grant and Stock Issuance Programs with respect to one or more classes of eligible persons, to the extent such entity is carrying out its administrative functions under those programs with respect to the persons under its jurisdiction. Y. Plan Effective Date shall mean June 30, 1996, the date on which the Plan was adopted by the Board. Z. Predecessor Plan shall mean the Corporation's existing 1990 Stock Option Plan. AA. Primary Committee shall mean the committee of two (2) or more non-employee Board members appointed by the Board to administer the Discretionary Option Grant and Stock Issuance Programs with respect to Section 16 Insiders. A-4. AB. Secondary Committee shall mean a committee of two (2) or more Board members appointed by the Board to administer the Discretionary Option Grant and Stock Issuance Programs with respect to eligible persons other than Section 16 Insiders. AC. Section 12(g) Registration Date shall mean the date on which the Common Stock is first registered under Section 12(g) of the 1934 Act. AD. Section 16 Insider shall mean an officer or director of the Corporation subject to the short-swing profit liabilities of Section 16 of the 1934 Act. AE. Service shall mean the performance of services to the Corporation (or any Parent or Subsidiary) by a person in the capacity of an Employee, a non-employee member of the board of directors or a consultant or independent advisor, except to the extent otherwise specifically provided in the documents evidencing the option grant or stock issuance. AF. Stock Exchange shall mean either the American Stock Exchange or the New York Stock Exchange. AG. Stock Issuance Agreement shall mean the agreement entered into by the Corporation and the Participant at the time of issuance of shares of Common Stock under the Stock Issuance Program. AH. Stock Issuance Program shall mean the stock issuance program in effect under the Plan. AI. Subsidiary shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. AJ. Take-Over Price shall mean the greater of (i) the Fair Market Value per share of Common Stock on the date the option is surrendered to the Corporation in connection with a Hostile Take-Over or (ii) the highest reported price per share of Common Stock paid by the tender offeror in effecting such Hostile Take-Over. However, if the surrendered option is an Incentive Option, the Take-Over Price shall not exceed the clause (i) price per share. AK. Taxes shall mean the Federal, state and local income and employment tax liabilities incurred by the holder of Non-Statutory Options or unvested shares of Common Stock in connection with the exercise of those options or the vesting of those shares. AL. 10% Stockholder shall mean the owner of stock (as determined under Code Section 424(d)) possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation (or any Parent or Subsidiary). A-5. AM. Underwriting Agreement shall mean the agreement between the Corporation and the underwriter or underwriters managing the initial public offering of the Common Stock. AN. Underwriting Date shall mean the date on which the Underwriting Agreement is executed and the initial public offering price of the Common Stock is established. A-6. EX-10.13 8 EX-10.13 Exhibit 10.13 FORM OF WARRANT TO PURCHASE SHARES OF SERIES C PREFERRED STOCK THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT. DIGITRAN CORPORATION INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE THIS CERTIFIES THAT, for value received, [Investor] (the "Investor") is entitled to purchase, on the terms hereof, [ ] shares of Series C Preferred Stock of Digitran Corporation, a Delaware corporation (the "Company") , with the designations, powers, preferences, rights, qualifications, limitations and restrictions set forth in the Second Amended and Restate Certificate of Incorporation of the Company at a per share purchase price of $.60, subject to adjustment as provided herein. This Warrant is issued pursuant to the following terms and provisions: 1. Exercise of Warrant. The terms and conditions upon which this Warrant may be exercised, and the Series C Preferred Stock covered hereby (the "Warrant Stock") may be purchased, are as follows: 1.1 Voluntary Exercise. This Warrant may be exercised in full or in part at any time after the date hereof, but in no case may this Warrant be exercised later than the close of business on December 31, 1996 (the "Termination Date"), after which time this Warrant shall terminate and shall be void and of no further force or effect. 1.2 Purchase Price. The per share purchase price for the shares of Series C Preferred Stock to be issued upon exercise of this Warrant shall be $.60, subject to adjustment as provided herein. 1.3 Method of Exercise. The exercise of the purchase rights evidenced by this Warrant shall be effected by (a) the surrender of the Warrant, together with a duly executed copy of the form of subscription attached hereto, to the Company at its principal offices and (b) the delivery of the purchase price by check or bank draft payable to the Company's order or by wire transfer to the Company's account for the number of shares for which the purchase rights hereunder are being exercised or any other form of consideration approved by the Company's Board of Directors. 1.4 Issuance of Shares. Upon the exercise of the purchase rights evidenced by this Warrant, a certificate or certificates for the purchased shares shall be issued to the Investor as soon as possible. 2. Certain Adjustments. 2.1 Conversion or Redemption of Series C Preferred Stock. Should all of the Company's outstanding Series C Preferred Stock be, at any time prior to the expiration of this Warrant, converted into shares of the Company's Common Stock in accordance with the Company's Certificate of Incorporation, as amended and/or restated and effective immediately prior to the conversion of all of the Company's Series C Preferred Stock (the "Certificate"), then this Warrant shall immediately become exercisable for that number of shares of the Company's Common Stock equal to the number of shares of Common Stock which would have been received if this Warrant had been exercised in full and the Warrant Stock received thereupon had been simultaneously converted into Common Stock immediately prior to such event. The per share purchase price shall be immediately adjusted to equal the quotient obtained by dividing (x) the aggregated purchase price of the number of shares of Series C Preferred Stock for which this Warrant was exercisable immediately prior to such conversion by (y) the number of shares of Common Stock for which this Warrant is exercisable immediately after such conversion or redemption. 2.2 Common Stock Dividends. If at any time following the conversion of all the outstanding Series C Preferred Stock and prior to the expiration of this Warrant, there shall be an event with respect to the Common Stock of the type referred to in Section 2.4 or 2.5, then the provisions of such Sections with respect to Series C Preferred Stock shall apply mutatis mutandis to the Common Stock issuable upon the exercise of this Warrant and the Purchase Price thereof. 2.3 Mergers, Consolidations or Sale of Assets. If at any time there shall be a capital reorganization (other than a combination or subdivision of Warrant Stock otherwise provided for herein), or a merger or consolidation of the Company with or into another corporation, or the sale of the Company's properties and assets as, or substantially as, an entirety to any other person, then, as part of such reorganization, merger, consolidation or sale, lawful provision shall be made so that the Investor shall thereafter be entitled to receive upon exercise of this Warrant, during the period specified in this Warrant and upon payment of the purchase price, the number of shares of stock or other securities -2- or property of the Company or the successor corporation resulting from such reorganization, merger, consolidation or sale, to which a holder of the Series C Preferred Stock (or Common Stock issuable upon conversion thereof) deliverable upon exercise of this Warrant would have been entitled under the provisions of the agreement in such reorganization, merger, consolidation or sale if this Warrant had been exercised immediately before that reorganization, merger, consolidation or sale. In any such case, appropriate adjustment (as determined in good faith by the Company's Board of Directors) shall be made in the application of the provisions of this Warrant with respect to the rights and interests of the Investor after the reorganization, merger, consolidation or sale to the end that the provisions of this Warrant (including adjustment of the purchase price then in effect and the number of shares of Warrant Stock) shall be applicable after that event, as near as reasonably may be, in relation to any shares or other property deliverable after that event upon exercise of this Warrant. 2.4 Splits and Subdivisions. In the event the Company should at any time or from time to time fix a record date for the effectuation of a split or subdivision of the outstanding shares of Series C Preferred Stock or the determination of the holders of Series C Preferred Stock entitled to received a dividend or other distribution payable in additional shares of Series C Preferred Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Series C Preferred Stock (hereinafter referred to as the "Series C Equivalents") without payment of any consideration by such holder for the additional shares of Series C Preferred Stock or Series C Equivalents (including the additional shares of Series C Preferred Stock issuable upon conversion or exercise thereof), the, as of such record date (or the date of such distribution, split or subdivision if no record date is fixed), the purchase price should be appropriately decreased and the number of shares of Warrant Stock shall be appropriately increased in proportion to such increase of outstanding shares. 2.5 Combination of Shares. If the number of shares of Series C Preferred Stock outstanding at any time after the date hereof is decreased by a combination of the outstanding shares of Series C Preferred Stock, the purchase price shall be appropriately increased and the number of shares of Warrant Stock shall be appropriately decreased in proportion to such decrease in outstanding shares. 2.6 Adjustments for Other Distribution. In the event the Company shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by the Company or other persons, assets (excluding cash dividends) or options or rights not referred to in subsection 2.4, then, in each such case for the purpose of this subsection 2.6, upon exercise of this Warrant the holder thereof shall be entitled to a proportionate share of any -3- such distribution as though such holder was the holder of the number of shares of Series C Preferred Stock of the Company into which this Warrant may be exercised as of the record date fixed for the determination of the holders of Series C Preferred Stock of the Company entitled to receive such distribution. 2.7 Certificate as to Adjustments. In the case of each adjustment or readjustment of the purchase price pursuant to this Section 2, the Company will promptly compute such adjustment or readjustments in accordance with the terms hereof and cause a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based to be delivered to the holder of this Warrant. The Company will, upon the written request at any time of the holder of this Warrant, furnish or cause to be furnished to such holder a certificate setting forth: (a) Such adjustments and readjustments; (b) The purchase price at the time in effect; and (c) The number of shares of Warrant Stock and the amount, if any, of other property at the time receivable upon the exercise of the Warrant. 2.8 Notices of Record Date, etc. In the event of: (a) Any taking by the Company of a record of the holders of any class of securities of the Company for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend payable out of earned surplus at the same rate as that of the last such cash dividend theretofore paid) or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right; or (b) Any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all of the assets of the Company to any other person or any consolidation or merger involving the Company; or (c) Any voluntary or involuntary dissolution, liquidation or winding-up of the Company; the Company will mail to the holder of this Warrant at least twenty (20) days prior to the earliest date specified therein, a notice specifying: (i) The date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and -4- character of such dividend, distribution or right; and (ii) The date on which any such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding-up is expected to become effective and the record date for determining stockholders entitled to vote thereon. 3. Fractional Shares. No fractional shares shall be issued in connection with any exercise of this Warrant. In lieu of the issuance of such fractional share, the Company shall make a cash payment equal to the then fair market value of such fractional share as determined in good faith by the Company's Board of Directors. 4. Reservation of Series C Preferred Stock and Common Stock. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Preferred Stock and Common Stock, solely for the purpose of effecting the exercise of this Warrant such number of its shares of Series C Preferred Stock (and Common Stock upon conversion of the Series C Preferred Stock) as shall from time to time be sufficient to effect the exercise of this Warrant; and if at any time the number of authorized but unissued shares of Series C Preferred Stock or Common Stock shall not be sufficient to effect the exercise of the entire Warrant and the conversion of the Series C Preferred Stock thereafter, in addition to such other remedies as shall be available to the holder of this Warrant, the Company will use its reasonable best efforts to take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Series C Preferred Stock or Common Stock to such number of shares as shall be sufficient for such purpose. 5. Privilege of Stock Ownership. Prior to the exercise of this Warrant, the Investor shall not be entitled, by virtue of holding this Warrant, to any rights of a stockholder of the Company. However, nothing in this Section 5, shall limit the right of the Investor to participate in distributions described in Section 2 hereof if Investor ultimately exercises this Warrant. 6. Limitation of Liability. Except as otherwise provided herein, in the absence of affirmative action by the holder hereof to purchase the Warrant Stock, no mere enumeration herein of the rights or privileges of the holder hereof shall give rise to any liability of such holder for the purchase price or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. -5- 7. Transfers and Exchanges. 7.1 Subject to compliance with applicable federal and state securities laws, this Warrant and all rights hereunder are transferable in whole or in part by the Investor to any person or entity. The Investor will provide written notice of such transfer to the Company, and if no written objection is received by the Investor within ten (10) days after the date of notice, then such transfer shall be deemed accepted by the Company. The transfer shall be recorded on the books of the Company upon the surrender of this Warrant, properly endorsed, to the Company at its principal offices and the payment to the Company of all transfer taxes and other governmental charges imposed on such transfer. In the event of a partial transfer, the Company shall issue to the several holders one or more appropriate new warrants. 7.2 In the event of a partial exercise of this Warrant, the Company shall issue an appropriate new warrant to the Investor. 7.3 All new warrants issued in connection with transfers, exchanges or partial exercises shall be identical in form and provision to this Warrant except as to the number of shares. 8. Successors and Assigns. The terms and provisions of this Warrant shall be binding upon the Company and the Investor and their respective successors and assigns. 9. Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction, or mutilation of this Warrant, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to the Company, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of this Warrant, if mutilated, the Company will make and deliver a new warrant of like tenor and dated as of such cancellation, in lieu of this Warrant. 10. Saturdays, Sundays, Holidays, Inc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday or Sunday or shall be a legal holiday, then such action may be taken or such -6- right may be exercised, except as to the purchase price, on the next succeeding day not a legal holiday. DIGITRAN CORPORATION By: /s/ Peter S. Macaluso ------------------------- Peter S. Macaluso Name (Print) Vice President and CFO Title Dated: October 25, 1993 -7- EX-10.14 9 EX-10.14 Exhibit 10.14 THESE SECURITIES HAVE NOT SEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL (WHICH MAY BE COMPANY COUNSEL) REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933. WARRANT AGREEMENT To Purchase Shares of the Preferred Stock of Digitran Corporation dated as of May 30, 1991 WHEREAS, Digitran Corporation, a Delaware corporation (the "Company") has entered into a Master Lease Agreement dated as of May 30, 1991, Equipment Schedule #VL-1, and related Summary Equipment Schedules (the "Leases") with Comdisco, Inc., a Delaware corporation (the "Warrantholder"); and WHEREAS, the Company desires to grant to Warrantholder, in consideration for such Leases, the right to purchase shares of its Preferred Stock; NOW, THEREFORE, in consideration of the Warrantholder executing and delivering such Leases and in consideration of mutual covenants and agreements contained herein, the Company and Warrantholder certify and agree as follows: 1. GRANT OF THE RIGHT TO PURCHASE PREFERRED STOCK. For value received, the Company hereby grants to the Warrantholder, and the Warrantholder is entitled, upon the terms and subject to the conditions hereinafter set forth, to subscribe for and purchase, from the Company, 60,000 fully paid and non-assessable shares of the Company's Preferred Series B Stock ("Preferred Stock") at a purchase price of $1.00 per share (the "Exercise Price"). The number and purchase price of such shares are subject to adjustment as provided in Section 8 hereof. 2.(a) TERM OF THE WARRANT AGREEMENT. Except as otherwise provided for herein, the term of this Warrant Agreement and the right to purchase Preferred Stock as granted herein shall commence on the date of execution hereof and shall be exercisable for a period of (i) ten (10) years after the date of execution hereof, or (ii) or in accordance with paragraphs (b) or (c) below. (b) Notwithstanding the term of this Warrant Agreement fixed pursuant to Section 2(a) above, the right to purchase Preferred Stock as granted herein shall expire, if not previously exercised immediately upon the closing of either of the following events: (i) the issuance and sale of shares of Common Stock of the Company in the Company's first public offering of securities for its own account pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "Initial Public Offering"), provided, however, that (A) the Initial Public Offering price of the Common Stock (upon conversion of the Preferred Stock) exceeds $3.00 per share; and (B) the Warrantholder would be entitled to participate in the Company's IPO pro rata with the other stockholders of the Company. (ii) a merger or consolidation of the Company with or into another corporation when the Company is not the surviving corporation, or the sale of all or substantially all of the Company's properties and assets to any other person (the "Merger") provided in which Warrantholder realizes a value for its shares equal to or greater than $2.00 per share. The Company shall notify the Warrantholder if the Initial Public Offering or Merger is proposed in accordance with the terms of Subsection 8(g) hereof, and if the Company fails to deliver such written notice, then notwithstanding anything to the contrary in this Warrant Agreement, the rights to purchase the Company's Preferred Stock shall not expire until the Company complies with such notice provisions. Such notice shall also contain such details of the proposed Initial Public Offering or Merger as are reasonable in the circumstances. If such closing does not take place, the Company shall promptly notify the Warrantholder that such proposed transaction has been terminated, and the Warrantholder may rescind any exercise of its purchase rights promptly after such notice of termination of the proposed transaction if the exercise of Warrants occurred after the Company notified the Warrantholder that the Initial Public Offering or Merger was proposed or if the exercise were otherwise precipitated by such proposed Initial Public Offering or Merger. In the event of such rescission, the Warrants will continue to be exercisable on the same terms and conditions contained herein. 3. EXERCISE OF THE PURCHASE RIGHTS. The purchase rights set forth in this Warrant Agreement are exercisable by the Warrantholder, in whole or in part, at any time, or from time to time, prior to the expiration of the term set forth in Section 2 above, by tendering to the Company at its principal office a notice of exercise in the form attached hereto as Exhibit I (the "Notice of Exercise"), duly completed and executed. Upon receipt of the Notice of Exercise and the payment of the purchase price in accordance with the terms set forth below, the Company shall issue to the Warrantholder a certificate for the number of shares of Preferred Stock purchased and shall execute the Notice of Exercise indicating the number of shares which remain subject to future purchases, if any. Notwithstanding anything to the contrary contained in Section 2 above or this Section 3, the Warrantholder shall either (i) exercise all outstanding warrants by paying to the Company, by cash or check, an amount equal to the aggregate Warrant Price of the shares being purchased, or (ii) receive shares equal to the value -2- (as determined below) of this Warrant by surrender of the Warrant at the principal office of the Company together with notice of such election in which event the Company shall issue to the Warrantholder a number of shares of Preferred computed using the following formula: X = Y(A-B) A Where: X = the number of shares of Preferred to be issued to the Warrantholder. Y = the number of shares of Preferred under this Warrant. A = the fair market value of one share of Common. B = Exercise Price. As used herein, current fair market value of Common Stock shall mean with respect to each share of Common Stock the average of the closing prices of the Company's Common Stock sold on all securities exchanges on which the Common Stock may at the time be listed, or, if there have been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day the Common Stock is not so listed, the average of the representative bid and asked prices quoted in the NASDAQ System as of 4:00 p.m., New York City time, or, if on any day the Common Stock is not quoted in the NASDAQ System, the average of the highest bid and lowest asked price on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each such case averaged over a period of 21 days consisting of the day as of which the current fair market value of Common Stock is being determined and the 20 consecutive business days prior to such day. If at any time the Common Stock is not listed on any securities exchange or quoted in the NASDAQ System or the over-the-counter market, the current fair market value of Preferred Stock shall be the highest price per share which the Company could obtain from a willing buyer (not a current employee or director) for shares of Preferred Stock sold by the Company, from authorized but unissued shares, as determined in good faith by the Board of Directors of the Company, unless (i) the Company shall become subject to a merger, acquisition or other consolidation pursuant to which the Company is not the surviving party, in which case the current fair market value of the Preferred Stock shall be deemed to be the value received by the holders of the Company's Series B Preferred Stock for each share of Series B Preferred Stock (or Common Stock if all such shares have been converted into Common Stock) pursuant to the Company's Acquisition; or (ii) the Warrantholder shall purchase such shares in conjunction with the initial underwritten public offering of the Company's Common Stock pursuant to a registration statement filed under the Securities Act of 1933, in which case, the fair market value of the -3- shares of stock subject to this Warrant shall be the price at which all registered shares are sold to the public in such offering. 4. RESERVATION OF SHARES. (a) Authorization and Reservation of Shares. During the term of this Warrant Agreement, the Company will at all times have authorized and reserved a sufficient number of shares of its Preferred Stock to provide for the exercise of the rights to purchase Preferred Stock as provided for herein. (b) Registration or Listing. If any shares of Preferred Stock required to be reserved for purposes of exercise of the Warrant Agreement hereunder require registration with or approval of any governmental authority under any Federal or State law (other than any registration under the Securities Act of 1933, as then in effect, or any similar Federal statute then enforced, or any state securities law, required by reason of any transfer involved in such conversion), or listing on any domestic securities exchange, before such shares may be issued upon conversion, the Company will, at its expense and as expeditiously as possible, use its best efforts to cause such shares to be duly registered, listed or approved for listing on such domestic securities exchange, as the case may be. 5. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of the Warrantholder's rights to purchase Preferred Stock, but in lieu of such fractional shares the Company shall make a cash payment therefor upon the basis of the Exercise Price then in effect. 6. NO RIGHTS AS SHAREHOLDERS. This Warrant Agreement does not entitle the Warrantholder to any voting rights or other rights as a shareholder of the Company prior to the exercise of the Warrantholder's rights to purchase Preferred Stock as provided for herein. 7. WARRANTHOLDER REGISTRY. The Company shall maintain a registry showing the name and address of the registered holder of this Warrant Agreement. 8. ADJUSTMENT RIGHTS. The purchase price per share and the number of shares of Preferred Stock purchasable hereunder are subject to adjustment from time to time, as follows: (a) Merger and Sale of Assets. If at any time there shall be a capital reorganization of the shares of the Company's stock (other than a combination, reclassification, exchange or subdivision of shares otherwise provided for herein), or a merger or consolidation of the Company with or into another corporation when the Company is not the surviving corporation, or the sale of all or substantially all of the Company's properties and assets to any other person, then, as a part of such reorganization, merger, consolidation or sale, lawful provision shall be made so that the Warrantholder shall thereafter be entitled to receive upon exercise -4- of its rights to purchase Preferred Stock, the number of shares of Preferred Stock or other securities of the successor corporation resulting from such merger or consolidation, to which a holder of the Preferred Stock deliverable upon exercise of the right to purchase Preferred Stock hereunder would have been entitled in such capital reorganization, merger, consolidation or sale if the right to purchase such Preferred Stock hereunder had been exercised immediately prior to such capital reorganization, merger, consolidation or sale. In any such case, appropriate adjustment (as determined in good faith by the Company's Board of Directors) shall be made in the application of the provisions of this Warrant Agreement with respect to the rights and interest of the Warrantholder after the reorganization, merger, consolidation or sale to the end that the provisions of this Warrant Agreement (including adjustments of the Exercise Price and number of shares of Preferred Stock purchasable pursuant to the terms and conditions of this Warrant Agreement) shall be applicable after that event, as near as reasonably may be, in relation to any shares deliverable after that event upon the exercise of the Warrantholder's rights to purchase Preferred Stock pursuant to this Warrant Agreement. (b) Reclassification of Shares. If the Company at any time shall, by combination, reclassification, exchange or subdivision of securities or otherwise, change any of the securities as to which purchase rights under this Warrant Agreement exist into the same or a different number of securities of any other class or classes, this Warrant Agreement shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities which were subject to the purchase rights under this Warrant Agreement immediately prior to such combination, reclassification, exchange, subdivision or other change. (c) Subdivision or Combination of Shares. If the Company at any time shall combine or subdivide its Preferred Stock, the Exercise Price shall be proportionately decreased in the case of a subdivision, or proportionately increased in the case of a combination. (d) Stock Dividends. If the Company at any time shall pay a dividend payable in, or make any other distribution (except any distribution specifically provided for in the foregoing subsections (a) or (b)) of the Company's stock, then the Exercise Price shall be adjusted, from and after the date of determination of stockholders entitled to receive such dividend or distribution, to that price determined by multiplying the Exercise Price in effect immediately prior to such date of determination by a fraction (i) the numerator of which shall be the total number of all shares of the Company's stock outstanding immediately prior to such dividend or distribution, and (ii) the denominator of which shall be the total number of all shares of the Company's stock outstanding immediately after such dividend or distribution. The Warrantholder shall thereafter be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of shares of Preferred Stock (calculated to the nearest whole share) obtained by -5- multiplying the Exercise Price in effect immediately prior to such adjustment by the number of shares of Preferred Stock issuable upon the exercise hereof immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (e) Issuance of Shares at Other Than Exercise Price. If the Company should issue shares of its stock or any other equity security at a price per share less than the Exercise Price in effect immediately prior to such issuance, then the Exercise Price shall be adjusted by dividing (i) the sum of (A) the total number of shares of the Company's stock outstanding immediately prior to such issuance multiplied by the then effective Exercise Price and (B) the value of the consideration received by the Company upon such issuance of such shares, by (ii) the total number of shares of the Company's stock outstanding immediately after such issuance. The Warrantholder shall thereafter be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of shares of Preferred Stock (calculated to the nearest whole share) obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of shares of Preferred Stock issuable upon the exercise hereof immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. For the purposes of this paragraph (e), the issuance of securities convertible into or exercisable for the Preferred Stock shall be deemed the issuance of the number of shares of Preferred Stock into which such securities are convertible or for which such securities are exercisable, and the consideration received for such securities shall be deemed to include the minimum aggregate amount payable upon conversion or exercise of such securities. In the event the right to convert or exercise such securities expires unexercised, the Exercise Price of shares issuable upon the exercise hereof shall be readjusted accordingly. (f) Right to Purchase Additional Stock. If, for any reason, the total Warrantholder's cost of equipment leased pursuant to the Leases should exceed $500,000, Warrantholder shall have the right to purchase from the Company, at the Exercise Price per share specified in section 1 (which price may be subject to adjustment from time to time as provided for in this Section 8), an additional number of shares, which number shall be determined by (i) multiplying the amount by which the Warrantholder's total equipment cost exceeds $500,000 by 12%, and (ii) dividing the product thereof by the Exercise Price per share referenced above. (g) Notice of Adjustments. In the event that: (i) the Company shall declare any dividend or distribution upon its stock, whether in cash, property, stock or other securities; (ii) the Company shall offer for subscription prorata to the holders of any class of its Preferred or other convertible stock any additional shares of stock of any class or other rights; (iii) there shall be any capital reorganization, reclassification, consolidation, merger or sale of all or substantially all of the Company's assets; or (iv) there shall be any voluntary or involuntary dissolution, -6- liquidation or winding up of the Company; then, in connection with each such event, the Company shall send to the Warrantholder: (i) At least 20 days' prior written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend, distribution, subscription rights (specifying the date on which the holders of Preferred Stock shall be entitled thereto) or for determining rights to vote in respect of such capital reorganization, reclassification, consolidation, merger or sale of all or substantially all of the Company's assets, dissolution, liquidation or winding up; and (ii) In the case of any such capital reorganization, reclassification, consolidation, merger or sale of all or substantially all of the Company's assets, dissolution, liquidation or winding up, at least 20 days' prior written notice of the date when the same shall take place (and specifying the date on which the holders of Preferred Stock shall be entitled to exchange their Preferred Stock for securities or other property deliverable upon such capital reorganization, reclassification, consolidation, merger or sale of all or substantially all of the Company's assets, dissolution, liquidation or winding up). Each such written notice shall set forth, in reasonable detail, (i) the event requiring the adjustment, (ii) the amount of the adjustment, (iii) the method by which such adjustment was calculated, (iv) the Exercise Price, and (v) the number of shares subject to purchase hereunder after giving effect to such adjustment, and shall be given by first class mail, postage prepaid, addressed to the Warrantholder, at the address as shown on the books of the Company. (h) Registration and Listing. The Company will take all such actions as may be necessary to assure that all shares of Preferred Stock issuable pursuant to this Warrant Agreement may be so issued without violation of any applicable law or regulation or any requirements of any domestic stock exchange (except for official notice of issuance, which will be immediately transmitted by the company upon issuance) upon which shares of Preferred Stock or other shares of the same class may be listed. The Company will not take any action which will result in any adjustment of the number of shares of Preferred Stock issuable upon exercise of this Warrant Agreement if the total number of shares of Preferred Stock issuable after such action upon exercise of the Warrant Agreement then outstanding, together with the total number of shares of Preferred Stock then outstanding, would exceed the total number of shares of Preferred Stock then authorized and not reserved for any purpose other than the purpose of issue upon exercise of the Warrant Agreement. -7- 9. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. (a) Reservation of Preferred Stock. The Preferred Stock issuable upon exercise of the Warrantholder's rights has been duly and validly reserved and, when issued in accordance with the provisions of this Warrant Agreement, will be validly issued, fully paid and non-assessable, and will be free of any taxes, liens, charges or encumbrances of any nature whatsoever; provided, however, that the Preferred Stock issuable pursuant to this Warrant Agreement may be subject to restrictions on transfer under state and/or Federal securities laws. The Company has made available to the Warrantholder true, correct and complete copies of its Articles of Incorporation and By-Laws, as amended, and minutes of all Board of Directors (including all committees of the Board of Directors, if any) and Shareholder meetings the Company's inception through May 16, 1991. The issuance of certificates for shares of Preferred Stock upon exercise of the Warrant Agreement shall be made without charge to the Warrantholder for any issuance tax in respect thereof, or other cost incurred by the Company in connection with such exercise and the related issuance of shares of Preferred Stock; provided that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved and the issuance and delivery of any certificate in a name other than that of the Warrantholder. The Company will not close its books against the transfer of the Warrant Agreement or of any share of Preferred Stock issued or issuable upon exercise of the Warrant and any agreement in any manner which interferes with the timely exercise of the Warrant. (b) Due Authority. The execution and delivery by the Company of the Leases, and this Warrant Agreement and the performance of all obligations of the Company thereunder and hereunder, including the issuance to Warrantholder of the right to acquire the shares of Preferred Stock set forth in Section 1 above (which number of shares may be from time to time adjusted pursuant to the terms of Section 8 above) have been duly authorized by all necessary corporate action on the part of the Company, and the Leases and this Warrant Agreement are not inconsistent with the Company's Certificate of Incorporation or By-Laws, do not contravene any law or governmental rule, regulation or order applicable to it, do not and will not contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument to which it is a party or by which it is bound, and the Leases and this Warrant Agreement constitute legal, valid and binding agreements of the Company, enforceable in accordance with their respective terms. (c) Consents and Approvals. No consent or approval of, giving of notice to, registration with, or taking of any other action in respect of any state, Federal or other governmental authority or agency is required with respect to the execution, delivery and performance by the Company of its obligations under this Warrant Agreement. -8- (d) Litigation. There are no actions, suits, audits, investigations or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company in any court or before any governmental commission, board or authority which, if adversely determined, will have a material adverse effect on the ability of the Company to perform its obligations under the Leases and this Warrant Agreement. (e) Subsidiaries or Affiliates. The Company has no subsidiaries or affiliated companies and does not otherwise own or control, directly or indirectly, any other corporation, association or business entity. (f) Issued Securities. All issued and outstanding shares of Common Stock, Preferred Stock or any other securities of the Company have been duly authorized and validly issued and are fully paid and nonassessable. All outstanding shares of Common Stock, Preferred Stock and any other securities were issued in full compliance with all Federal and state securities laws. In addition: (i) The authorized capital of the Company consists of (A) 8,000,000 shares of Common Stock, of which 900,000 shares are issued and outstanding, (B) 1,666,667 shares of Series A Preferred Stock are authorized for issuance of which 1,400,000 are outstanding, (C) 1,600,000 shares of Series B Preferred Stock are authorized for issuance of which 1,555,000 are outstanding, and (D) 1,333,000 shares of Series C Preferred Stock are authorized for issuance of which none are outstanding. All of the outstanding Preferred Stock is convertible into Common Stock on a share for share basis. (ii) The Company has reserved (A) 1,100,000 shares of Common Stock for issuance under its Stock Option Plan, under which 640,000 options are outstanding except for the warrant granted to Sierra Ventures to purchase 1,100,000 shares of Series C Preferred Stock at a price of $1.50. There are no other options, warrants, conversion privileges or other rights presently outstanding to purchase or otherwise acquire any authorized but unissued shares of the Company's capital stock or other securities of the Company. (iii) In accordance with the Company's Articles of Incorporation, no shareholder of the Company has preemptive rights to purchase new issuances of the Company's capital stock. (g) Financial Statements. The Company has delivered to the Warrantholder its audited consolidated financial statements for its fiscal year ended December 31, 1990, together with the report thereon of its independent public accountants, and its unaudited Balance Sheet and Statement of Income for the five (5) month period ending may 31, 1991 (the "Financial Statements"). The Financial Statements are complete and correct in all material respects and have been prepared in accordance with generally accepted accounting -9- principles applied on a consistent basis throughout the periods indicated. The condition and operating results of the Company as of the dates and during the periods indicated therein are true and correct in all material aspects, subject as to the Balance Sheet and Statement of Income for the five (5) month period then ending May 31, 1991, to normal year-end audit adjustments. Since May 31, 1991, there has been no change in the assets, liabilities, financial condition or operations of the Company from that reflected in the Financial Statements other than changes in the ordinary course of business which have not been, individually or in the aggregate, materially adverse. The Company shall deliver to the Warrantholder (i) within one hundred twenty (120) days after the end of the Company's fiscal year, statements of income for such fiscal year, a consolidated balance sheet of the Company as of the end of such year and consolidated statement of the sources and application of funds for such year, which year-end financial reports shall be in reasonable detail and certified by independent public accountants of nationally recognized standing selected by the Company, and (ii) within forty-five (45) days after the end of each fiscal quarter other than the last fiscal quarter, unaudited consolidated statements of income and sources and application of funds for such quarter and a consolidated balance sheet as of the end of such quarter. (h) Contingent and Absolute Liabilities. The Company has no material liabilities or obligations, absolute or contingent except the liabilities and obligations of the Company as set forth in the Financial Statements and liabilities and obligations which have occurred in the ordinary course of business, and which have not been materially adverse. (i) Licenses, Patents and Copyrights. To the best of the Company's knowledge, the Company owns, possesses, has access to, or can become licensed on reasonable terms under, all patents, patent applications, trademarks, trade names, inventions, franchises, licenses, permits, computer software and copyrights necessary for the operation of its business as now conducted, with no known infringement of, or conflict with, the rights of others. (j) Employee Contracts. To the best of the Company's knowledge, no employee of the Company is in violation of any material term of any employment contract, patent disclosure agreement or any other contract or agreement relating to the relationship of any such employee with the Company or any prior employer because of the nature of the business conducted by the Company. (k) Insurance. The Company has in full force and effect insurance policies, with extended coverage, insuring the Company and its property and business against such losses and risks, and in such amounts, as are customary for corporations engaged in a similar business and similarly situated and as otherwise may be required pursuant to the terms of any other contract or agreement. -10- (l) Other Commitments to Register Securities. Except for those rights granted in the Second Investor Rights Agreement dated April 15, 1991, and those rights granted in the Warrant Purchase Agreement dated August 14, 1990, and those rights granted in this Warrant Agreement, the Company is not, pursuant to the terms of any other agreement currently in existence, under any obligation to register under the 1933 Act, any of its presently outstanding securities or any of its securities which may hereafter be issued. (m) Exempt Transaction. Subject to the accuracy of the Warrantholder's representations in Section 10 hereof, the issuance of the Preferred Stock upon exercise of the Warrantholder's right to purchase such Preferred Stock will constitute transactions exempt from (i) the registration requirements of Section 5 of the 1933 Act, in reliance upon Section 4(2) thereof, and (ii) the qualification requirements of the Delaware Corporate Securities Law. (n) Compliance with Rule 144. At the written request of the Warrantholder, who proposes to sell Preferred Stock issuable upon the exercise of the Warrant in compliance with Rule 144 promulgated by the Securities and Exchange Commission under the 1933 Act, the Company shall furnish to the Warrantholder, within ten days after receipt of such request, a written statement confirming the Company's compliance with the filing requirements of the Securities and Exchange Commission as set forth in such Rule, as such Rule may be amended from time to time. (o) No Events of Default, Material Contracts. All material contracts, agreements and instruments to which the Company is a party are in full force and effect in all material respects, and are valid, binding and enforceable by the Company in accordance with their respective terms, subject to the effect of applicable bankruptcy and other similar laws affecting the rights of creditors generally, and rules of law concerning equitable remedies and no event of default, and no event which, with the passing of time or the giving of notice, or both, would constitute an event of default has occurred or is continuing under any such contract, agreement or instrument. (p) Brokers' Fees. The Company has not incurred, and will not incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with the Warrant Agreement or any other transaction contemplated thereby. (q) Untrue, Misleading Statements. No representation or warranty of the Company contained in the Leases, and this Warrant Agreement or any certificate or exhibit furnished or to be furnished to Warrantholder pursuant thereto or in connection with the transactions contemplated thereby (when read together) contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein not misleading. -11- (r) Indebtedness to Employees and Shareholders. The Company is not indebted to any employee, shareholder, officer or director of the Company, and no such employee, shareholder, officer or director is indebted to the Company. 10. REPRESENTATIONS AND COVENANTS OF THE WARRANTHOLDER. This Warrant Agreement has been entered into by the Company in reliance upon the following representations and covenants of the Warrantholder, which by its execution hereof the Warrantholder hereby confirms: (a) Investment Purpose. The right to acquire Preferred Stock or the Preferred Stock issuable upon exercise of the Warrantholder's rights contained herein will be acquired for investment and not with a view to the sale or distribution of any part thereof, and the Warrantholder has no present intention of selling or engaging in any public distribution of the same except pursuant to a registration or exemption. (b) Private Issue. The Warrantholder understands (i) that the Preferred Stock issuable upon exercise of the Warrantholder's rights contained herein is not registered under the 1933 Act or qualified under applicable state securities laws on the ground that the issuance contemplated by this Warrant Agreement will be exempt from the registration and qualifications requirements thereof, and (ii) that the Company's reliance on such exemption is predicated on the representations set forth in this Section 10. (c) Disposition of Warrantholder's Rights. In no event will the Warrantholder make a disposition of any of its rights to acquire Preferred Stock or Preferred Stock issuable upon exercise of such rights unless and until (i) it shall have notified the Company of the proposed disposition, and (ii) if requested by the Company, it shall have furnished the Company with an opinion of counsel (which counsel may either be inside or outside counsel to the Warrantholder) satisfactory to the Company and its counsel to the effect that (A) appropriate action necessary for compliance with the 1933 Act has been taken, or (B) an exemption from the registration requirements of the 1933 Act is available. Notwithstanding the foregoing, the restrictions imposed upon the transferability of any of its rights to acquire Preferred Stock or Preferred Stock issuable on the exercise of such rights do not apply to transfers from the beneficial owner of any of the aforementioned securities to its nominee or from such nominee to its beneficial owner, and shall terminate as to any particular share of Preferred Stock when (1) such security shall have been effectively registered under the 1933 Act and sold by the holder thereof in accordance with such registration or (2) such security shall have been sold without registration in compliance with Rule 144 under the 1933 Act, or (3) a letter shall have been issued to the Warrantholder at its request by the staff of the Securities and Exchange Commission or a ruling shall have been issued to the Warrantholder at its request by such Commission stating that no action shall be recommended by such staff or taken by such Commission, as the case may be, if such security is transferred -12- without registration under the 1933 Act in accordance with the conditions set forth in such letter or ruling and such letter or ruling specifies that no subsequent restrictions on transfer are required. Whenever the restrictions imposed hereunder shall terminate, as hereinabove provided, the Warrantholder or holder of a share of Preferred Stock then outstanding as to which such restrictions have terminated shall be entitled to receive from the Company, without expense to such holder, one or more new certificates for the Warrant or for such shares of Preferred Stock not bearing any restrictive legend. (d) Financial Risk. The Warrantholder has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investment and has the ability to bear the economic risks of its investment. (e) Risk of No Registration. The Warrantholder understands that if the Company does not register with the Securities and Exchange Commission pursuant to Section 12 of the 1933 Act, or file reports pursuant to Section 15(d), of the Securities Exchange Act of 1934 (the "1934 Act"), or if a registration statement covering the securities under the 1933 Act is not in effect when it desires to sell (i) the rights to purchase Preferred Stock pursuant to this Warrant Agreement, or (ii) the Preferred Stock issuable upon exercise of the right to purchase, it may be required to hold such securities for an indefinite period. The Warrantholder also understands that any sale of its rights of the Warrantholder to purchase Preferred Stock or Preferred Stock which might be made by it in reliance upon Rule 144 under the 1933 Act may be made only in accordance with the terms and conditions of that Rule. 11. Registration Rights. Warrantholder and Company agree that all shares of Preferred Stock subject to the Warrant Agreement shall have the same registration rights and be subject to the same terms and conditions with respect to the registration and sale of such stock as possessed by the Series B Preferred Shareholders as provided for in the Second Investors Rights Agreement dated April 15, 1991, by and among the Company and those certain Purchasers identified therein, attached hereto as Exhibit II. 12. TRANSFERS. Subject to the terms and conditions contained in Section 10 hereof, this Warrant Agreement and all rights hereunder are transferable in whole or in part by the Warrantholder and any successor transferee, provided, however, that in no event shall the number of transfers of the rights and interests in all of the Warrants exceed three (3) transfers. The transfer shall be recorded on the books of the Company upon receipt by the Company of a notice of transfer in the form attached hereto as Exhibit III (the "Transfer Notice"), at its principal offices and the payment to the Company of all transfer taxes and other governmental charges imposed on such transfer. -13- 13. MISCELLANEOUS. (a) Effective Date. The provisions of this Warrant Agreement shall be construed and shall be given effect in all respects as if it had been executed and delivered by the Company on the date hereof. This Warrant Agreement shall be binding upon any successors or assigns of the Company. (b) Attorney's Fees. In any litigation, arbitration or court proceeding between the Company and the Warrantholder relating hereto, the prevailing party shall be entitled to attorneys' fees and expenses and all costs of proceedings incurred in enforcing this Warrant Agreement. (c) Governing Law. This Warrant Agreement shall be governed by and construed for all purposes under and in accordance with the laws of the State of Illinois. (d) Counterparts. This Warrant Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (e) Titles and Subtitles. The titles of the paragraphs and subparagraphs of this Warrant Agreement are for convenience and are not to be considered in construing this Agreement. (f) Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States mail, by registered or certified mail, addressed (i) to the Warrantholder at 6111 N. River Road, Rosemont, Illinois 60018, attention: Jim Labe, Venture Leasing Director, cc: Legal Department, and (ii) to the Company at 560 Sylvan Avenue, Englewood Cliffs, New Jersey 07632, or at such other address as any such party may subsequently designate by written notice to the other party. (g) Specific Performance. The Company recognizes and agrees that the Warrantholder will not have an adequate remedy if the Company fails to comply with this Agreement and that damages will not be readily ascertainable, and the Company expressly agrees that, in the event of such failure, it shall not oppose an application by the Warrantholder or any other person entitled to the benefit of this Agreement requiring specific performance of any or all provisions hereof or enjoining the Company from continuing to commit any such breach of this Agreement. (h) Survival. The representations, warranties, covenants and conditions of the respective parties contained herein or made pursuant to this Warrant Agreement shall survive the execution and delivery of this Warrant Agreement. (i) Severability. In the event any one or more of the provisions of this Warrant Agreement shall for any reason be held -14- invalid, illegal or unenforceable, the remaining provisions of this Warrant Agreement shall be unimpaired, and the invalid, illegal or unenforceable provision shall be replaced by a mutually acceptable valid, legal and enforceable provision, which comes closest to the intention of the parties underlying the invalid, illegal or unenforceable provision. (j) Amendments. Any provision of this Warrant Agreement may be amended by a written instrument signed by the Company and by the Warrantholder. (k) Additional Documents. The Company, upon execution of this Warrant Agreement, shall provide the Warrantholder with certified resolutions and an opinion from the Company's counsel addressed to the Warrantholder with respect to the representations, warranties and covenants set forth in subparagraphs (a) through (f) and subparagraphs (1) , (m) and (o) of Section 9 above and shall also supply such other documents as the Warrantholder may from time to time reasonably request. IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement to be executed by its officers thereunto duly authorized. Company: DIGITRAN CORPORATION Dated July 3, 1991 By: /s/ Timothy C. Cronin ------------------------ Title: President Warrantholder: COMDISCO, INC. By: /s/ Jas. Lale ----------------------- Title: -15- Exhibit I NOTICE OF EXERCISE To: (1) The undersigned Warrantholder hereby elects to purchase ______ shares of the Preferred Stock of , pursuant to the terms of the Warrant Agreement dated the ______ day of , 19__ (the "Warrant Agreement") between and the Warrantholder, and tenders herewith payment of the purchase price for such shares in full, together with all applicable transfer taxes, if any. (2) In exercising its rights to purchase the Preferred Stock of , the undersigned hereby confirms and acknowledges the investment representations and warranties made in Section 11 of the Warrant Agreement. (3) Please issue a certificate or certificates representing said shares of Preferred Stock in the name of the undersigned or in such other name as is specified below. ------------------------------------- (Name) ------------------------------------- (Address) Warrantholder: COMDISCO, INC. By: ---------------------------------- Title: ------------------------------- Date: -------------------------------- -16- ACKNOWLEDGEMENT OF EXERCISE The undersigned of _____________________, hereby acknowledge receipt of the "Notice of Exercise" from Comdisco, Inc., to purchase _________ shares of the Preferred Stock, of ____________ __________, pursuant to the terms of the Warrant Agreement, and further acknowledges that _________ shares remain subject to purchase under the terms of the Warrant Agreement. Company: By: ---------------------------------- Title: ------------------------------- Date: -------------------------------- -17- EXHIBIT II SECOND INVESTOR RIGHTS AGREEMENT This Agreement is made as of the ____ day of April, 1991, by and among Digitran Corporation, a Delaware corporation (the "Company") and the undersigned investors (collectively, the "Investors"). R E C I T A L S A. The Company and certain of the Investors are parties to an Investor Rights Agreement dated April _, 1991 (the "Investor Rights Agreement"), which grants such Investors certain registration rights and certain other investor rights. B. The Company desires to enter into an agreement with certain purchasers (collectively, the "Proposed Agreement") that will provide, among other things, for the sale and issuance of up to 1,600,000 shares of Series B Preferred Stock of the Company at $1.00 per share (the "Additional Shares"). C. Pursuant to Section 5.5 of the Investor Rights Agreement, the Company must obtain the approval of the holders of a majority of the "Registrable Securities" (as defined as section 3.1(b) of the Investor Rights Agreement), and a majority of the holders of the Common Stock of the Company issued or issuable upon conversion of the Preferred Stock held by the parties to the Investor Rights Agreement, not including Common Stock held by Martin Ellis, Jeffrey Kurland, Jerry Siegan and Marshall Ellis, in order to grant registration rights and certain other investor rights with respect to the Additional Shares or in order to amend any provision of the Investor Rights Agreement. D. Certain of the Investors are holders of a majority of the currently outstanding Registrable Securities (as defined in Section 3.1(b) of the Investor Rights Agreement) and holders of a majority of the Common Stock of the Company issued or issuable upon conversion of the Preferred Stock held by the parties to the Investor Rights Agreement, not including Common Stock held by Martin Ellis, Jeffrey Kurland, Jerry Siegan and Marshall Ellis. NOW, THEREFORE, in consideration of good and valuable consideration, the receipt of which is hereby acknowledged, the undersigned hereby agree as follows: 1. Consent to Grant of Registration Rights. Pursuant to Section 5.5 of the Investor Rights Agreement, certain of the Investors, being the holders of a majority of the currently outstanding Registrable Securities (as defined in Section 3.1(b) of the Investor Rights Agreement) hereby consent to the granting of registration rights to the purchasers of the Additional Shares. 2. Amendment of Investor Rights Agreement. Effective upon the first issuance and sale of the Additional Shares, the prior Investor Rights Agreement shall be terminated and of no further force and effect and the Investors agree to be bound by the provisions hereof. 3. Registration Rights. The Company covenants and agrees as follows: 3.1 Definitions. For purposes of this Section 3: a. The term "register", "registered," and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement or document; b. The term "Registrable Securities" means(1) the Common Stock issuable or issued upon conversion of the outstanding Series A Preferred Stock, (2) the Common Stock issuable or issued upon conversion of the Series B Preferred Stock sold pursuant to the Proposed Agreement, (3) the Common Stock issuable or issued upon conversion of the Series C Preferred Stock issued or issuable upon exercise of the outstanding Series C Warrant, (4) only for purposes of Sections 3.3, 3.7 and 3.10, the Founders Stock (as defined below), and (5) any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any other warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of such Preferred Stock, Warrants, Founders Stock or Common Stock, excluding in all cases, however, any Registrable Securities sold by a person in a transaction in which his rights under this Section 3 are not assigned; c. The number of shares of "Registrable Securities then outstanding" shall be determined by the number of shares of Common Stock outstanding which are, and the number of shares of Common Stock issuable pursuant to then exercisable or convertible securities which are, Registrable Securities. d. The term "Holder" means any person owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with Section 3.13 hereof; and e. The term "Form S-3" means such form under the Act as in effect on the date hereof or any registration form under the Act subsequently adopted by the Securities and Exchange 2. Commission ("SEC") which permits inclusion or incorporation of substantial information by reference to other documents filed by the company with the SEC. f. The term "Founders Stock" shall mean the shares of Common Stock held by the individuals as set forth on Exhibit C to the Proposed Agreement. 3.2 Request for Registration. a. If the Company shall receive at any time after the earlier of (i) August 13, 1992, or (ii) three (3) months after the effective date of the first registration statement for a public offering of securities of the Company (other than a registration statement relating either to the sale of securities to employees of the Company pursuant to a stock option, stock purchase or similar plan or a SEC Rule 145 transaction), a written request from the Holders of a majority of the Registrable Securities then outstanding that the Company file a registration statement under the Act covering the registration of Registrable Securities then the Company shall, within ten (10) days of the receipt thereof, give written notice of such request to all Holders and shall, subject to the limitations of subsection 3.2(b), effect as soon as practicable, and in any event shall use its best efforts to effect within 120 days of the receipt of such request, the registration under the Act of all Registrable Securities which the Holders request to be registered within twenty (20) days of the mailing of such notice by the Company in accordance with paragraph 5.7. b. If the Holders initiating the registration request hereunder ("Initiating Holders") intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Section 3.2 and the Company shall include such information in the written notice referred to in subsection 3.2(a). The underwriter will be selected by the Company and a majority in interest of the Initiating Holders and shall be reasonably acceptable to the Company. In such event, the right of any Holder to include his Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company as provided in subsection 3.4(e)) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by a majority in interest of the Initiating Holders. Notwithstanding any other provision of this Section 3.2, if the underwriter advises the Initiating Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Initiating Holders shall so advise all Holders of Registrable Securities which would otherwise be underwritten pursuant hereto, and the number of shares of Registrable Securities that may be 3. included in the underwriting shall be allocated among all Holders thereof, including the Initiating Holders, in proportion (as nearly as practicable) to the amount of Registrable Securities of the Company owned by each Holder; provided, however, that the number of shares of Registrable Securities to be included in such underwriting shall not be reduced unless all other securities are first entirely excluded from the underwriting. c. The Company is obligated to effect only two (2) such registrations pursuant to this Section 3.2. d. Notwithstanding the foregoing, if the Company shall furnish to Holders requesting a registration statement pursuant to this Section 3.2, a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such registration statement to be filed and it is therefore essential to defer the filing of such registration statement, the Company shall have the right to defer taking action with respect to such filing for a period of not more than 60 days after receipt of the request of the Initiating Holders; provided, however, that the Company may not utilize this right more than once in any twelve month period. 3.3 Company Registration. If (but without any obligation to do so) the Company proposes to register (including for this purpose a registration effected by the Company for shareholders other than the Holders) any of its stock or other securities under the Act in connection with the public offering of such securities solely for cash (other than a registration relating solely to the sale of securities to participants in a Company stock plan, or a registration on any form which does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities), the Company shall, at such time, promptly give each Holder written notice of such registration. Upon the written request of each Holder given within twenty (20) days after mailing of such notice by the Company in accordance with Section 5.7, the Company shall, subject to the provisions of Section 3.8, cause to be registered under the Act all of the Registrable Securities that each such Holder has requested to be registered. 3.4 Obligations of the Company. Whenever required under this Section 3 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: a. Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to one hundred twenty (120) days. 4. b. Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. c. Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. d. Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. e. In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. f. Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. g. Use its best efforts to furnish, at the request of any Holder requesting registration of Registrable Securities pursuant to this Section 3, on the date that such Registrable Securities are delivered to the underwriters for sale in connection with a registration pursuant to this Section 3, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities and (ii) a letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if 5. any, and to the Holders requesting registration of Registrable Securities. 3.5 Furnish Information. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 3 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of such Holder's Registrable Securities. 3.6 Expenses of Demand Registration. All expenses other than underwriting discounts and commissions incurred in connection with registrations, filings or qualifications pursuant to Section 3.2, including (without limitation) all registration, filing and qualification fees, printers' and accounting fees, fees and disbursements of counsel for the Company, and the reasonable fees and disbursements of one counsel for the selling Holders shall be borne by the Company; provided, however, that the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 3.2 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (in which case all Participating Holders shall bear such expenses), unless the Holders of a majority of the Registrable Securities agree to forfeit their right to one demand registration pursuant to Section 3.2; provided, further, however, that if at the time of such withdrawal, the Holders have learned of a material adverse change in the condition, business, or prospects of the Company from that known to the Holders at the time of their request and have withdrawn the request with reasonable promptness following disclosure by the Company of such material adverse change, then the Holders shall not be required to pay any of such expenses and shall retain their rights pursuant to Section 3.2. 3.7 Expenses of Company Registration. The Company shall bear and pay all expenses incurred in connection with any registration, filing or qualification of Registrable Securities with respect to the registrations pursuant to Section 3.3 for each Holder (which right may be assigned as provided in Section 3.13), including (without limitation) all registration, filing, and qualification fees, printers and accounting fees relating or apportionable thereto, and the fees and disbursements of one counsel for the selling Holders selected by them, but excluding underwriting discounts and commissions relating to Registrable Securities. 3.8 Underwriting Requirements. In connection with any offering involving an underwriting of shares of the Company's capital stock, the Company shall not be required under Section 3.3 to include any of the Holders' securities in such underwriting unless they accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters), and then only 6. in such quantity as the underwriters determine in their sole discretion will not, jeopardize the success of the offering by the Company. If the total amount of securities, including Registrable Securities, requested by shareholders to be included in such offering exceeds the amount of securities sold other than by the Company that the underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, which the underwriters determine in their sole discretion will not jeopardize the success of the offering (the securities so included to be apportioned pro rata among the selling shareholders according to the total amount of securities entitled to be included therein owned by each selling Shareholder or in such other proportions as shall mutually be agreed to by such selling shareholders) but in no event shall (i) the amount of securities of the selling Holders included in the offering be reduced below thirty percent (30%) of the total amount of securities included in such offering, unless such offering is the initial public offering of the Company's securities in which case the selling shareholders may be excluded if the underwriters make the determination described above and no other shareholder's securities are included or (ii) notwithstanding (i) above, any shares being sold by a shareholder exercising a demand registration right similar to that granted in Section 3.2 be excluded from such offering. For purposes of the preceding parenthetical concerning apportionment, for any selling shareholder which is a holder of Registrable Securities and which is a partnership or corporation, the partners, retired partners and shareholders of such holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single "selling shareholder", and any pro-rata reduction with respect to such "selling shareholder" shall be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such "selling shareholder", as defined in this sentence. 3.9 Delay of Registration. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 3. 3.10 Indemnification. In the event any Registrable Securities are included in a registration statement under this Section 3: a. To the extent permitted by law, the Company will indemnify and hold harmless each Holder, any underwriter (as defined in the Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Act or the Securities Exchange Act of 1934, as amended (the "1934 Act"), against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Act, or the 1934 Act or other federal or state law, insofar as such losses, 7. claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the Act, or the 1934 Act or any state securities law; and the Company will pay to each such Holder, underwriter or controlling person, as incurred, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 3.10(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person. b. To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the Act, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages, or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Act, or the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will pay, as incurred, any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this subsection 3.10(b), in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 3.10(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided, that, in no event shall any indemnity under this subsection 3.10(b) exceed the gross proceeds from the offering received by such Holder. 8. c. Promptly after receipt by an indemnified party under this Section 3.10 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 3.10, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 3.10, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 3.10. d. If the indemnification provided for in subsection (a) or (b) of this Section 3.10 is held by a court of competent jurisdiction to be unavailable to an indemnified party, then each indemnifying party under any such subsection, in lieu of indemnifying such indemnified party thereunder, hereby agrees to contribute to the amount paid or payable by such indemnified party in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other. Notwithstanding the foregoing, the amount any Holder of Registrable Securities shall be obligated to contribute pursuant to this subsection (d) shall be limited to an amount equal to the net proceeds from the offering received by such holder. e. The obligations of the Company and Holders under this Section 3.10 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 3, and otherwise. 3.11 Reports Under Securities Exchange Act of 1934. With a view to making available to the Holders the benefits of Rule 144 promulgated under the Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company agrees to: a. make and keep public information available, as those terms are understood and defined in SEC Rule 144, at all times after ninety (90) days after the effective date of the first 9. registration statement filed by the Company for the offering of its securities to the general public; b. take such action, including the voluntary registration of its Common Stock under Section 12 of the 1934 Act, as is necessary to enable the Holders to utilize Form S-3 for the sale of their Registrable Securities, such action to be taken as soon as practicable after the end of the fiscal year in which the first registration statement filed by the Company for the offering of its securities to the general public is declared effective; c. file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the 1934 Act; and d. furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144 (at any time after ninety (90) days after the effective date of the first registration statement filed by the Company), the Act and the 1934 Act (at any time after it has become subject to such reporting requirements), or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC which permits the selling of any such securities without registration or pursuant to such form. 3.12 Form S-3 Registration. In case the Company shall receive from Holders of at least twenty percent (20%) of the Registrable Securities then outstanding a written request or requests that the Company effect a registration on Form S-3 and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company will: a. promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders; and b. as soon as practicable, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's or Holders' Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within fifteen (15) days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance, pursuant to this section 3.12: (1) if Form S-3 is not available for such offering by the Holders; (2) if 10. the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public (net of any underwriters' discounts or commissions) of less than $250,000; (3) if the Company shall furnish to the Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such Form S-3 Registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than sixty (60) days after receipt of the request of the Holder or Holders under this Section 3.12; provided, however, that the Company shall not utilize this right more than once in any twelve month period; (4) if the Company has, within the twelve (12) month period preceding the date of such request, already effected two registrations on Form S-3 for the Holders pursuant to this Section 3.12; or (5) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance. c. Subject to the foregoing, the Company shall file a registration statement covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders. All expenses incurred in connection with a registration requested pursuant to Section 3.12, including (without limitation) all registration, filing, qualification, printer's and accounting fees and the reasonable fees and disbursements of counsel for the selling Holder or Holders and counsel for the Company, but excluding any underwriters' discounts or commissions associated with Registrable Securities, shall be borne pro rata by the Holder or Holders participating in the Form S-3 Registration. Registrations effected pursuant to this Section 3.12 shall not be counted as demands for registration or registrations effected pursuant to Sections 3.2 or 3.3, respectively. 3.13 Assignment of Registration Rights. The rights to cause the Company to register Registrable Securities pursuant to this Section 3 may be assigned (but only with all related obligations) by a Holder to a transferee or assignee of such securities, provided the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; and provided, further, that such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Act. 3.14 Limitations on Subsequent Registration Rights. From and after the date of this Agreement, the Company shall not, without the prior written consent of the Holders of a majority of the outstanding Registrable Securities, enter into any agreement with 11. any holder or prospective holder of any securities of the Company which would allow such holder or prospective holder (a) to include such securities in any registration filed under Section 3.2 hereof, unless under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of his securities will not reduce the amount of the Registrable Securities of the Holders which is included or (b) to make a demand registration which could result in such registration statement being declared effective prior to the earlier of either of the dates set forth in subsection 3.2(a) or within one hundred twenty (120) days of the effective date of any registration effected pursuant to Section 3.2. 3.15 "Market Stand-Off" Agreement. Each Investor hereby agrees that, during the period, of duration specified by the Company and an underwriter of Common Stock or other securities of the Company, following the effective date of a registration statement of the Company filed under the Act, it shall not, to the extent requested by the Company and such underwriter, directly or indirectly sell, offer to sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of (other than to donees who agree to be similarly bound) any securities of the Company held by it at any time during such period except Common Stock included in such registration; provided, however, that: a. such agreement shall be applicable only to the first such registration statement of the Company which covers Common Stock (or other securities) to be sold on its behalf to the public in an underwritten offering; and b. all officers and directors of the Company and all other persons with registration rights (whether or not pursuant to this Agreement) enter into similar agreements. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the Registrable Securities of each Investor (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period. 3.16 Termination of Registration Rights. No Holder shall be entitled to exercise any right provided for in this Section 3 after seven (7) years following the consummation of the sale of securities pursuant to a registration statement filed by the Company under the Act in connection with the initial firm commitment underwritten offering of its securities to the general public. 4. Covenants of the Company. This Section 4 shall not apply to Martin Ellis, Jeffrey Kurland, Jerry Siegan and Marshall Ellis, (the holders of Founders Stock as listed on Exhibit C to the Proposed Agreement), or transferees thereof. 12. 4.1 Delivery of Financial Statements. The Company shall deliver to each Investor: a. as soon as practicable, but in any event within ninety (90) days after the end of each fiscal year of the Company, an income statement for such fiscal year, a balance sheet of the Company and statement of shareholder's equity as of the end of such year, and a schedule as to the sources and applications of funds for such year, such year-end financial reports to be in reasonable detail, prepared in accordance with generally accepted accounting principles ("gaap"), and audited and certified by independent public accountants of nationally recognized standing selected by the Company; b. within thirty (30) days of the end of each month, an unaudited income statement and schedule as to the sources and application of funds and balance sheet for and as of the end of such month, in reasonable detail; c. as soon as practicable, but in any event thirty (30) days prior to the end of each fiscal year, a budget and business plan for the next fiscal year, prepared on a monthly basis, including balance sheets and sources and applications of funds statements for such months and, as soon as prepared, any other budgets or revised budgets prepared by the Company; d. with respect to the financial statements called for in subsection (b) of this Section 4.1, an instrument executed by the Chief Financial officer or President of the Company and certifying that such financials were prepared in accordance with gaap consistently applied with prior practice for earlier periods (with the exception of footnotes that may be required by gaap) and fairly present the financial condition of the Company and its results of operation for the period specified, subject to year-end audit adjustment; e. such other information relating to the financial condition, business, prospects or corporate affairs of the Company as the Investor or any assignee of the Investor may from time to time request, provided, however, that the Company shall not be obligated under this subsection (e) or any other subsection of Section 4.1 to provide information which it deems in good faith to be a trade secret or similar confidential information. 4.2 Inspection. The Company shall permit each Investor, at such Investor's expense, to visit and inspect the Company's properties, to examine its books of account and records and to discuss the Company's affairs, finances and accounts with its officers, all at such reasonable times as may be requested by such Investor; provided, however, that the Company shall not be obligated pursuant to this Section 4.2 to provide access to any information which it reasonably considers to be a trade secret or similar confidential information. 13. 4.3 Termination of Information and Inspection Covenants. The covenants set forth in subsections 4.1(b), (c) and (e) and Section 4.2 shall terminate as to each Investor and be of no further force or effect when the sale of securities pursuant to a registration statement filed by the Company under the Act in connection with the firm commitment underwritten offering of its securities to the general public is consummated or when the Company first becomes subject to the periodic reporting requirements of Sections 12(g) or 15(d) of the 1934 Act, whichever event shall first occur. 4.4 Right of First Offer. Subject to the terms and conditions specified in this paragraph 4.4, the Company hereby grants to the Investor (as hereinafter defined) a right of first offer with respect to future sales by the Company of its Shares (as hereinafter defined). For purposes of this Section 4.4, Investor includes any general partners and affiliates of an Investor. The Investor shall be entitled to apportion the right of first offer hereby granted it among itself and its partners and affiliates in such proportions as it deems appropriate. Each time the Company proposes to offer any shares of, or securities convertible into or exercisable for any shares of, any class of its capital stock ("Shares"), the Company shall first make an offering of such Shares to the Investor in accordance with the following provisions: a. The Company shall deliver a notice by certified mail ("Notice") to the Investor stating (i) its bona fide intention to offer such Shares, (ii) the number of such Shares to be offered, and (iii) the price and terms, if any, upon which it proposes to offer such Shares. b. By written notification received by the Company, within twenty (20) calendar days after receipt giving of the Notice, the Investor may elect to purchase or obtain, at the price and on the terms specified in the Notice, up to that portion of such Shares which equals the proportion that the number of shares of Common Stock issued and held, or issuable upon conversion of the Preferred Stock then held, by such Investor bears to the total number of shares of Common Stock of the Company then outstanding, assuming full conversion of all then-outstanding Preferred Stock. The Company shall promptly, in writing, inform the Investor which purchases all the shares available to it ("Fully-?Exercising Investor") of any other Investor's failure to do likewise. During the ten-day period commencing after receipt of such information is given, each Fully-Exercising Investor shall be entitled to obtain that portion of the Shares not subscribed for by the Investor which is equal to the proportion that the number of shares of Common Stock then held, by such Fully-Exercising Investor bears to the total number of shares of Common Stock issued and held, or issuable upon conversion of the Preferred Stock then held, by all Fully-Exercising Investors who wish to purchase some of the unsubscribed shares. 14. c. If all Shares referred to in the Notice are not elected to be obtained as provided in Subsection 4.4(b) hereof, the Company may, during the thirty-day period following the expiration of the period provided in subsection 4.4(b) hereof, offer the remaining unsubscribed portion of such Shares to any person or persons at a price not less than, and upon terms no more favorable to the offeree than those specified in the Notice. If the Company does not enter into an agreement for the sale of the Shares within such period, or if such agreement is not consummated within thirty (30) days of the execution thereof, the right provided hereunder shall be deemed to be revived and such Shares shall not be offered unless first reoffered to the Investors in accordance herewith. d. The right of first offer in this paragraph 4.4 shall not be applicable (i) to the issuance or sale of not to exceed 1,100,000 shares of Common Stock (or options therefor) to employees, directors and consultants for the primary purpose of soliciting or retaining their employment pursuant to a stock option or restricted stock purchase plan approved in accordance with Section 4.7 hereof, or (ii) to or after consummation of a bona fide, firmly underwritten public offering of shares of Common Stock, registered under the Act pursuant to a registration statement on Form S-1, at an offering price of at least $6.50 per share (appropriately adjusted for any stock split, dividend, combination or other recapitalization), (iii) the issuance of securities in connection with a bona fide business acquisition of or by the Company, whether by merger, consolidation, sale of assets, sale or exchange of stock or otherwise, (iv) issuances of the Series A, Series B and Series C Preferred Stock upon exercise of the Warrants (as defined in the Warrant Purchase Agreement), or (v) the issuance of stock, warrants or other securities or rights to persons or entitles with which the Company has business primarily equity financing purposes. 4.5 Observer Rights. If the Investor does not have a representative on the Board of Directors for any reason the Company shall invite a representative of the Investor to attend all meetings of its Board of Directors in a nonvoting observer capacity with participation rights and, in this respect, shall give such representative copies of all notices, minutes, consents, and other materials that it provides to its directors. Such Investor shall also have the right to consult with and advise management of the Company on a monthly basis; provided, however, that such representative shall agree to hold in confidence and trust and to act in a fiduciary manner with respect to all information so provided; and, provided further, that the Company reserves the right to withhold any information and to exclude such representative from any meeting or portion thereof if access to such information or attendance at such meeting could adversely affect the attorney-client privilege between the Company and its counsel. 4.6 Termination of Certain Covenants. The covenants set forth in Section 4.5 shall terminate and be of no further force or effect upon the consummation of the sale of securities pursuant to 15. a registration statement filed by the Company under the Act in connection with the firm commitment underwritten offering of its securities to the general public. 4.7 Employee Stock Purchase Agreements. The Company will not issue or grant or agree to issue or grant any shares of its capital stock or any option, right or warrant to purchase shares of its capital stock or securities convertible into or exchangeable for shares of its capital stock to any employee or officer of the Company or a subsidiary except pursuant to the a stock option plan or restricted stock purchase plan adopted by the Board of Directors (a "Plan"). Such issuances or grants shall be made upon the Board's approval of management's recommendations with respect to such issuances or grants. Each purchase of shares of Common Stock or exercise of option to purchase such shares will be conditioned upon the execution and delivery by the Company and such employee or officer of an Employee Stock Purchase Agreement in substantially the form attached as Exhibit D to the Proposed Agreement (with appropriate adjustments with respect to vesting as determined by the Board of Directors). 5. Miscellaneous. 5.1 Governing Law. This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents, made and to be performed entirely within the State of California. 5.2 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto. 5.3 Entire Agreement. This Agreement constitutes the full and entire understanding and agreement among the parties with regard to the subjects hereof and no party shall be liable or bound to any other party in any manner by any representations, warranties, covenants, or agreements except as specifically set forth herein or therein. Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto and their respective successors and assigns, any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided herein. 5.4 Separability. Any invalidity, illegality, or limitation of the enforceability with respect to any party hereto of any one or more of the provisions of this Agreement, or any part thereof, whether arising by reason of the law of any such party's domicile or otherwise, shall in no way affect or impair the validity, legality, or enforceability of this Agreement with respect to other parties. In case any provision of this Agreement, shall be invalid, illegal, or unenforceable, it shall to the extent practicable, be modified so as to make it valid, legal and enforceable and to retain as nearly as practicable the intent of the parties, and the validity, legality, and enforceability of the 16. remaining provisions shall not in any way be affected or impaired thereby. 5.5 Amendment and Waivers. Any provision of Section 3 may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of at least two-thirds of the Registrable Securities then outstanding. Any amendment or waiver regarding Section 3 of this Agreement, effected in accordance with this paragraph, shall be binding upon each holder of any Registrable Securities then outstanding, each future holder of all such Registrable Securities, and the Company. Any provision of Section 4 of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of at least two-thirds of the Common Stock issued or issuable upon conversion of Preferred Stock held by the undersigned investors (not including any Common Stock held by Martin Ellis, Jeffrey Kurland, Jerry Siegan or Marshall Ellis, or transferees thereof). Any amendment or waiver regarding Section 4 of this Agreement, effected in accordance with this paragraph, shall be binding upon each Investor, each future transferee of Preferred Stock of the Company held by an Investor, and the Company. 5.6 Delays or Omissions. No delay or omission to exercise any right, power, or remedy accruing to any party hereto or any subsequent holder of any Registrable Securities upon any breach, default or noncompliance of the Company under this Agreement, shall impair any such right, power, or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein, or of any similar breach, default or noncompliance thereafter occurring. It is further agreed that any waiver, permit, consent, or approval of any kind or character on the part of the parties hereto of any breach, default or noncompliance under this Agreement or any waiver on the part of the parties hereto of any provisions or conditions of this Agreement must be in writing and shall be effective only to the extent specifically set forth in such writing, and that all remedies, either under this Agreement, by law, or otherwise afforded to the parties hereto, shall be cumulative and not alternative. 5.7 Notices, etc. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed effectively given upon personal delivery or upon deposit with the United States Post Office, by first class mail, postage prepaid, addressed: (a) if to a party hereto other than the Company, at such party's address as maintained in the Company's records, or at such other address as such party shall have furnished to the Company in writing, or (b) if to the Company, at its address as set forth at the end of this Agreement, or at such other address as the Company shall have furnished to the other parties hereto in writing. 17. 5.8 Titles and Subtitles. The titles of the paragraphs and subparagraphs of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 5.9 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. DIGITRAN CORPORATION By: ------------------------------------------ Timothy C. Cronin, President SIERRA VENTURES III ------------------------------------------ By: SIERRA VENTURES III INTERNATIONAL ------------------------------------------ By: ------------------------------------------ Marshall Ellis ------------------------------------------ Jeff Kurland ------------------------------------------ Jerrold Siegan ------------------------------------------ Martin Ellis ------------------------------------------ Don Pascal NOEL GROUP, INC. 18. ------------------------------------------ By: BATTERY VENTURES II, L.P. ------------------------------------------ By: FOURTH GENERATION ------------------------------------------ By: SEAVEST PARTNERS ------------------------------------------ By: THE ENCORE GROUP ------------------------------------------ By: 19. EX-10.15 10 EX-10.15 Exhibit 10.15 THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL (WHICH MAY BE COMPANY COUNSEL) REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933. WARRANT AGREEMENT To Purchase Shares of the Preferred Stock of Digitran Corporation dated as of September 16, 1992 WHEREAS, Digitran Corporation, a Delaware corporation (the "Company") has entered into a Master Lease Agreement dated as of May 30, 1991, Equipment Schedule #VL-2 dated as of September 16, 1992, and related Summary Equipment Schedules (the "Leases") with Comdisco, Inc., a Delaware corporation (the "Warrantholder"); and WHEREAS, the Company desires to grant to Warrantholder, in consideration for such Leases, the right to purchase shares of its Preferred Stock; NOW, THEREFORE, in consideration of the Warrantholder executing and delivering such Leases and in consideration of mutual covenants and agreements contained herein, the Company and Warrantholder certify and agree as follows: 1. GRANT OF TO PURCHASE PREFERRED STOCK. For value received, the Company hereby grants to the Warrantholder, and the Warrantholder is entitled, upon the terms and subject to the conditions hereinafter set forth, to subscribe for and purchase, from the Company, 11,000 fully paid and non-assessable shares of the Company's Preferred Series B Stock ("Preferred Stock") at a purchase price of $1.00 per share (the "Exercise Price"). The number and purchase price of such shares are subject to adjustment as provided in Section 8 hereof. 2.(a). TERM OF THE WARRANT AGREEMENT. Except as otherwise provided for herein, the term of this Warrant Agreement and the right to purchase Preferred Stock as granted herein shall commence on the date of execution hereof and shall be exercisable for a period of (i) ten (10) years after the date of execution hereof, or(ii) or in accordance with paragraphs (b) or (c) below. (b) Notwithstanding the term of this Warrant Agreement fixed pursuant to Section 2(a) above, the right to purchase Preferred Stock as granted herein shall expire, if not previously exercised immediately upon the closing of either of the following events: (i) the issuance and sale of shares of Common Stock of the Company in the Company's first public offering of securities for its own account pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "Initial Public Offering"), provided, however, that (A) the Initial Public Offering price of the Common Stock (upon conversion of the Preferred Stock) exceeds $3.00 per share; and (B) the Warrantholder would be entitled to participate in the Company's IPO pro rata with the other stockholders of the Company. (ii) a merger or consolidation of the Company with or into another corporation when the Company is not the surviving corporation, or the sale of all or substantially all of the Company's properties and assets to any other person (the "Merger") provided in which Warrantholder realizes a value for its shares equal to or greater than $2.00 per share. The Company shall notify the Warrantholder if the Initial Public Offering or Merger is proposed in accordance with the terms of Subsection 8(g) hereof, and if the Company fails to deliver such written notice, then notwithstanding anything to the contrary in this Warrant Agreement, the rights to purchase the Company's Preferred Stock shall not expire until the Company complies with such notice provisions. Such notice shall also contain such details of the proposed Initial Public Offering or Merger as are reasonable in the circumstances. If such closing does not take place, the Company shall promptly notify the Warrantholder that such proposed transaction has been terminated, and the Warrantholder may rescind any exercise of its purchase rights promptly after such notice of termination of the proposed transaction if the exercise of Warrants occurred after the Company notified the Warrantholder that the Initial Public Offering or Merger was proposed or if the exercise were otherwise precipitated by such proposed Initial Public Offering or Merger. In the event of such rescission, the Warrants will continue to be exercisable on the same terms and conditions contained herein. 3. EXERCISE OF THE PURCHASE RIGHTS. The purchase rights set forth in this Warrant Agreement are exercisable by the Warrantholder, in whole or in part, at any time, or from time to time, prior to the expiration of the term set forth in Section 2 above, by tendering to the Company at its principal office a notice of exercise in the form attached hereto as Exhibit I (the "Notice of Exercise"), duly completed and executed. Upon receipt of the Notice of Exercise and the payment of the purchase price in accordance with the terms set forth below, the Company shall issue to the Warrantholder a certificate for the number of shares of Preferred Stock purchased and shall execute the Notice of Exercise indicating the number of shares which remain subject to future purchases, if any. Notwithstanding anything to the contrary contained in Section 2 above or this Section 3, the Warrantholder shall either (i) exercise all outstanding warrants by paying to the Company, by cash or check, an amount equal to the aggregate Warrant Price of the -2- shares being purchased, or (ii) receive shares equal to the value (as determined below) of this Warrant by surrender of the Warrant at the principal office of the Company together with notice of such election in which event the Company shall issue to the Warrantholder a number of shares of Preferred computed using the following formula: X = Y(A-B) ------- A Where: X = the number of shares of Preferred to be issued to the Warrantholder. Y = the number of shares of Preferred under this Warrant. A = the fair market value of one share of Common. B = Exercise Price. As used herein, current fair market value of Common Stock shall mean with respect to each share of Common Stock the average of the closing prices of the Company's Common Stock sold on all securities exchanges on which the Common Stock may at the time be listed, or, if there have been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day the Common Stock is not so listed, the average of the representative bid and asked prices quoted in the NASDAQ System as of 4:00 p.m., New York City time, or, if on any day the Common Stock is not quoted in the NASDAQ System, the average of the highest bid and lowest asked price on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each such case averaged over a period of 21 days consisting of the day as of which the current fair market value of Common Stock is being determined and the 20 consecutive business days prior to such day. If at any time the Common Stock is not listed on any securities exchange or quoted in the NASDAQ System or the over-the-counter market, the current fair market value of Preferred Stock shall be the highest price per share which the Company could obtain from a willing buyer (not a current employee or director) for shares of Preferred Stock sold by the Company, from authorized but unissued shares, as determined in good faith by the Board of Directors of the Company, unless (i) the Company shall become subject to a merger, acquisition or other consolidation pursuant to which the Company is not the surviving party, in which case the current fair market value of the Preferred Stock shall be deemed to be the value received by the holders of the Company's Series B Preferred Stock for each share of Series B Preferred Stock (or Common Stock if all such shares have been converted into Common Stock) pursuant to the Company's Acquisition; or (ii) the Warrantholder shall purchase such shares in conjunction with the initial underwritten public offering of the Company's Common Stock pursuant to a registration statement filed under the Securities Act of 1933, in which case, the fair market value of the -3- shares of stock subject to this Warrant shall be the price at which all registered shares are sold to the public in such offering. 4. RESERVATION OF SHARES. (a) Authorization and Reservation of Shares. During the term of this Warrant Agreement, the Company will at all times have authorized and reserved a sufficient number of shares of its Preferred Stock to provide for the exercise of the rights to purchase Preferred Stock as provided for herein. (b) Registration or Listing. If any shares of Preferred Stock required to be reserved for purposes of exercise of the Warrant Agreement hereunder require registration with or approval of any governmental authority under any Federal or State law (other than any registration under the Securities Act of 1933, as then in effect, or any similar Federal statute then enforced, or any state securities law, required by reason of any transfer involved in such conversion), or listing on any domestic securities exchange, before such shares may be issued upon conversion, the Company will, at its expense and as expeditiously as possible, use its best efforts to cause such shares to be duly registered, listed or approved for listing on such domestic securities exchange, as the case may be. 5. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of the Warrantholder's rights to purchase Preferred Stock, but in lieu of such fractional shares the Company shall make a cash payment therefor upon the basis of the Exercise Price then in effect. 6. NO RIGHTS AS SHAREHOLDERS. This Warrant Agreement does not entitle the Warrantholder to any voting rights or other rights as a shareholder of the Company prior to the exercise of the Warrantholder's rights to purchase Preferred Stock as provided for herein. 7. WARRANTHOLDER REGISTRY. The Company shall maintain a registry showing the name and address of the registered holder of this Warrant Agreement. 8. ADJUSTMENT RIGHTS. The purchase price per share and the number of shares of Preferred Stock purchasable hereunder are subject to adjustment from time to time, as follows: (a) Merger and Sale of Assets. If at any time there shall be a capital reorganization of the shares of the Company's stock (other than a combination, reclassification, exchange or subdivision of shares otherwise provided for herein), or a merger or consolidation of the Company with or into another corporation when the Company is not the surviving corporation, or the sale of all or substantially all of the Company's properties and assets to any other person, then, as a part of such reorganization, merger, consolidation or sale, lawful provision shall be made so that the -4- Warrantholder shall thereafter be entitled to receive upon exercise of its rights to purchase Preferred Stock, the number of shares of Preferred Stock or other securities of the successor corporation resulting from such merger or consolidation, to which a holder of the Preferred Stock deliverable upon exercise of the right to purchase Preferred Stock hereunder would have been entitled in such capital reorganization, merger, consolidation or sale if the right to purchase such Preferred Stock hereunder had been exercised immediately prior to such capital reorganization, merger, consolidation or sale. In any such case, appropriate adjustment (as determined in good faith by the Company's Board of Directors) shall be made in the application of the provisions of this Warrant Agreement with respect to the rights and interest of the Warrantholder after the reorganization, merger, consolidation or sale to the end that the provisions of this Warrant Agreement (including adjustments of the Exercise Price and number of shares of Preferred Stock purchasable pursuant to the terms and conditions of this Warrant Agreement) shall be applicable after that event, as near as reasonably may be, in relation to any shares deliverable after that event upon the exercise of the Warrantholder's rights to purchase Preferred Stock pursuant to this Warrant Agreement. (b) Reclassification of Shares. If the Company at any time shall, by combination, reclassification, exchange or subdivision of securities or otherwise, change any of the securities as to which purchase rights under this Warrant Agreement exist into the same or a different number of securities of any other class or classes, this Warrant Agreement shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities which were subject to the purchase rights under this Warrant Agreement immediately prior to such combination, reclassification, exchange, subdivision or other change. (c) Subdivision or Combination of Shares. If the Company at any time shall combine or subdivide its Preferred Stock, the Exercise Price shall be proportionately decreased in the case of a subdivision, or proportionately increased in the case of a combination. (d) Stock Dividends. If the Company at any time shall pay a dividend payable in, or make any other distribution (except any distribution specifically provided for in the foregoing subsections (a) or (b)) of the Company's stock, then the Exercise Price shall be adjusted, from and after the date of determination of stockholders entitled to receive such dividend or distribution, to that price determined by multiplying the Exercise Price in effect immediately prior to such date of determination by a fraction (i) the numerator of which shall be the total number of all shares of the Company's stock outstanding immediately prior to such dividend or distribution, and (ii) the denominator of which shall be the total number of all shares of the Company's stock outstanding immediately after such dividend or distribution. The Warrantholder shall thereafter be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of shares of Preferred -5- Stock (calculated to the nearest whole share) obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of shares of Preferred Stock issuable upon the exercise hereof immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (e) Issuance of Shares at Other Than Exercise Price. If the Company should issue shares of its stock or any other equity security at a price per share less than the Exercise Price in effect immediately prior to such issuance, then the Exercise Price shall be adjusted by dividing (i) the sum of (A) the total number of shares of the Company's stock outstanding immediately prior to such issuance multiplied by the then effective Exercise Price and (B) the value of the consideration received by the Company upon such issuance of such shares, by (ii) the total number of shares of the Company's stock outstanding immediately after such issuance. The Warrantholder shall thereafter be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of shares of Preferred Stock (calculated to the nearest whole share) obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of shares of Preferred Stock issuable upon the exercise hereof immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. For the purposes of this paragraph (e), the issuance of securities convertible into or exercisable for the Preferred Stock shall be deemed the issuance of the number of shares of Preferred Stock into which such securities are convertible or for which such securities are exercisable, and the consideration received for such securities shall be deemed to include the minimum aggregate amount payable upon conversion or exercise of such securities. In the event the right to convert or exercise such securities expires unexercised, the Exercise Price of shares issuable upon the exercise hereof shall be readjusted accordingly. (f) Right to Purchase Additional Stock. If, for any reason, the total Warrantholder's cost of equipment leased pursuant to the Leases should exceed $100,000, Warrantholder shall have the right to purchase from the Company, at the Exercise Price per share specified in section 1 (which price may be subject to adjustment from time to time as provided for in this Section 8), an additional number of shares, which number shall be determined by (i) multiplying the amount by which the Warrantholder's total equipment cost exceeds $100,000 by 11%, and (ii) dividing the product thereof by the Exercise Price per share referenced above. (g) Notice of Adjustments. In the event that: (i) the Company shall declare any dividend or distribution upon its stock, whether in cash, property, stock or other securities; (ii) the Company shall offer for subscription pro rata to the holders of any class of its Preferred or other convertible stock any additional shares of stock of any class or other rights; (iii) there shall be any capital reorganization, reclassification, consolidation, merger or sale of all or substantially all of the Company's assets; or -6- (iv) there shall be any voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in connection with each such event, the Company shall send to the Warrantholder: (i) At least 20 days' prior written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend, distribution, subscription rights (specifying the date on which the holders of Preferred Stock shall be entitled thereto) or for determining rights to vote in respect of such capital reorganization, reclassification, consolidation, merger or sale of all or substantially all of the Company's assets, dissolution, liquidation or winding up; and (ii) In the case of any such capital reorganization, reclassification, consolidation, merger or sale of all or substantially all of the Company's assets, dissolution, liquidation or winding up, at least 20 days' prior written notice of the date when the same shall take place (and specifying the date on which the holders of Preferred Stock shall be entitled to exchange their Preferred Stock for securities or other property deliverable upon such capital reorganization, reclassification, consolidation, merger or sale of all or substantially all of the Company's assets, dissolution, liquidation or winding up). Each such written notice shall set forth, in reasonable detail, (i) the event requiring the adjustment, (ii) the amount of the adjustment, (iii) the method by which such adjustment was calculated, (iv) the Exercise Price, and (v) the number of shares subject to purchase hereunder after giving effect to such adjustment, and shall be given by first class mail, postage prepaid, addressed to the Warrantholder, at the address as shown on the books of the Company. (h) Registration and Listing. The Company will take all such actions as may be necessary to assure that all shares of Preferred Stock issuable pursuant to this Warrant Agreement may be so issued without violation of any applicable law or regulation or any requirements of any domestic stock exchange (except for official notice of issuance, which will be immediately transmitted by the Company upon issuance) upon which shares of Preferred Stock or other shares of the same class may be listed. The Company will not take any action which will result in any adjustment of the number of shares of Preferred Stock issuable upon exercise of this Warrant Agreement if the total number of shares of Preferred Stock issuable after such action upon exercise of the Warrant Agreement then outstanding, together with the total number of shares of Preferred Stock then outstanding, would exceed the total number of shares of Preferred Stock then authorized and not reserved for any purpose other than the purpose of issue upon exercise of the Warrant Agreement. -7- 9. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. (a) Reservation of Preferred Stock. The Preferred Stock issuable upon exercise of the Warrantholder's rights has been duly and validly reserved and, when issued in accordance with the provisions of this Warrant Agreement, will be validly issued, fully paid and non-assessable, and will be free of any taxes, liens, charges or encumbrances of any nature whatsoever; provided, however, that the Preferred Stock issuable pursuant to this Warrant Agreement may be subject to restrictions on transfer under state and/or Federal securities laws. The Company has made available to the Warrantholder true, correct and complete copies of its Articles of Incorporation and By-Laws, as amended, and minutes of all Board of Directors (including all committees of the Board of Directors, if any) and Shareholder meetings the Company's inception through May 16, 1991. The issuance of certificates for shares of Preferred Stock upon exercise of the Warrant Agreement shall be made without charge to the Warrantholder for any issuance tax in respect thereof, or other cost incurred by the company in connection with such exercise and the related issuance of shares of Preferred Stock; provided that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved and the issuance and delivery of any certificate in a name other than that of the Warrantholder. The Company will not close its books against the transfer of the Warrant Agreement or of any share of Preferred Stock issued or issuable upon exercise of the Warrant and any agreement in any manner which interferes with the timely exercise of the Warrant. (b) Due Authority. The execution and delivery by the Company of the Leases, and this Warrant Agreement and the performance of all obligations of the Company thereunder and hereunder, including the issuance to Warrantholder of the right to acquire the shares of Preferred Stock set forth in Section 1 above (which number of shares may be from time to time adjusted pursuant to the terms of Section 8 above) have been duly authorized by all necessary corporate action on the part of the Company, and the Leases and this Warrant Agreement are not inconsistent with the Company's Certificate of Incorporation or By-Laws, do not contravene any law or governmental rule, regulation or order applicable to it, do not and will not contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument to which it is a party or by which it is bound, and the Leases and this Warrant Agreement constitute legal, valid and binding agreements of the Company, enforceable in accordance with their respective terms. (c) Consents and Approvals. No consent or approval of, giving of notice to, registration with, or taking of any other action in respect of any state, Federal or other governmental authority or agency is required with respect to the execution, delivery and performance by the Company of its obligations under this Warrant Agreement. -8- (d) Litigation. There are no actions, suits, audits, investigations or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company in any court or before any governmental commission, board or authority which, if adversely determined, will have a material adverse effect on the ability of the Company to perform its obligations under the Leases and this Warrant Agreement. (e) Subsidiaries or Affiliates. The Company has no subsidiaries or affiliated companies and does not otherwise own or control, directly or indirectly, any other corporation, association or business entity. (f) Issued Securities. All issued and outstanding shares of Common Stock, Preferred Stock or any other securities of the Company have been duly authorized and validly issued and are fully paid and nonassessable. All outstanding shares of Common Stock, Preferred Stock and any other securities were issued in full compliance with all Federal and state securities laws. In addition: (i) The authorized capital of the Company consists of (A) 21,666,667 shares of Common Stock, of which 2,887,320 shares are issued and outstanding, (B) 1,400,000 shares of Series A Preferred Stock are authorized for issuance of which 1,400,000 are outstanding, (C) 3,600,000 shares of Series B Preferred Stock are authorized for issuance of which 3,516,600 are outstanding, and (D) 8,333,333 shares of Series C Preferred Stock are authorized for issuance of which 8,329,526 are outstanding. All of the outstanding Preferred Stock is convertible into Common Stock on a share for share basis. (ii) The Company has reserved (A) 1,792,665 shares of Common Stock for issuance under its Stock Option Plan, under which 1,374,175 options are outstanding except for the warrant granted to Silicon Valley Bank to purchase 83,333 shares of Common Stock; and Comdisco, Inc. to purchase 67,200 shares of Preferred Stock at a price of $1.00. There are no other options, warrants, conversion privileges or other rights presently outstanding to purchase or otherwise acquire any authorized but unissued shares of the Company's capital stock or other securities of the Company. (iii) In accordance with the Company's Articles of Incorporation, no shareholder of the Company has preemptive rights to purchase new issuances of the Company's capital stock. (g) Financial Statements. The Company has delivered to the Warrantholder its audited consolidated financial statements for its fiscal year ended _______________________, together with the report thereon of its independent public accountants, and its unaudited Balance Sheet and Statement of Income for the ___ (__) month period ending _______________ (the "Financial Statements"). The Financial Statements are complete and correct in all material respects and -9- have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated. The condition and operating results of the Company as of the dates and during the periods indicated therein are true and correct in all material aspects, subject as to the Balance Sheet and Statement of Income for the ______ (__) month period then ending 1992, to normal year-end audit adjustments. Since 1992, there has been no change in the assets, liabilities, financial condition or operations of the Company from that reflected in the Financial Statements other than changes in the ordinary course of business which have not been, individually or in the aggregate, materially adverse. The Company shall deliver to the Warrantholder (i) within one hundred twenty (120) days after the end of the Company's fiscal year, statements of income for such fiscal year, a consolidated balance sheet of the Company as of the end of such year and consolidated statement of the sources and application of funds for such year, which year-end financial reports shall be in reasonable detail and certified by independent public accountants of nationally recognized standing selected by the Company, and (ii) within forty-five (45) days after the end of each fiscal quarter other than the last fiscal quarter, unaudited consolidated statements of income and sources and application of funds for such quarter and a consolidated balance sheet as of the end of such quarter. (h) Contingent and Absolute Liabilities. The Company has no material liabilities or obligations, absolute or contingent except the liabilities and obligations of the Company as set forth in the Financial Statements and liabilities and obligations which have occurred in the ordinary course of business, and which have not been materially adverse. (i) Licenses, Patents and Copyrights. To the best of the Company's knowledge, the Company owns, possesses, has access to, or can become licensed on reasonable terms under, all patents, patent applications, trademarks, trade names, inventions, franchises, licenses, permits, computer software and copyrights necessary for the operation of its business as now conducted, with no known infringement of, or conflict with, the rights of others. (j) Employee Contracts. To the best of the Company's knowledge, no employee of the Company is in violation of any material term of any employment contract, patent disclosure agreement or any other contract or agreement relating to the relationship of any such employee with the Company or any prior employer because of the nature of the business conducted by the Company. (k) Insurance. The Company has in full force and effect insurance policies, with extended coverage, insuring the Company and its property and business against such losses and risks, and in such amounts, as are customary for corporations engaged in a similar business and similarly situated and as otherwise may be required pursuant to the terms of any other contract or agreement. -10- (l) Other Commitments to Register Securities. Except for those rights granted in the Second Investor Rights Agreement dated April 15, 1991, and those rights granted in the Warrant Purchase Agreement dated August 14, 1990, and those rights granted in this Warrant Agreement, the Company is not, pursuant to the terms of any other agreement currently in existence, under any obligation to register under the 1933 Act, any of its presently outstanding securities or any of its securities which may hereafter be issued. (m) Exempt Transaction. Subject to the accuracy of the Warrantholder's representations in Section 10 hereof, the issuance of the Preferred Stock upon exercise of the Warrantholder's right to purchase such Preferred Stock will constitute transactions exempt from (i) the registration requirements of Section 5 of the 1933 Act, in reliance upon Section 4(2) thereof, and (ii) the qualification requirements of the Delaware Corporate Securities Law. (n) Compliance with Rule 144. At the written request of the Warrantholder, who proposes to sell Preferred Stock issuable upon the exercise of the Warrant in compliance with Rule 144 promulgated by the Securities and Exchange Commission under the 1933 Act, the Company shall furnish to the Warrantholder, within ten days after receipt of such request, a written statement confirming the Company's compliance with the filing requirements of the Securities and Exchange Commission as set forth in such Rule, as such Rule may be amended from time to time. (o) No Events of Default, Material Contracts. All material contracts, agreements and instruments to which the Company is a party are in full force and effect in all material respects, and are valid, binding and enforceable by the Company in accordance with their respective terms, subject to the effect of applicable bankruptcy and other similar laws affecting the rights of creditors generally, and rules of law concerning equitable remedies and no event of default, and no event which, with the passing of time or the giving of notice, or both, would constitute an event of default has occurred or is continuing under any such contract, agreement or instrument. (p) Brokers' Fees. The Company has not incurred, and will not incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with the Warrant Agreement or any other transaction contemplated thereby. (q) Untrue, Misleading Statements. No representation or warranty of the Company contained in the Leases, and this Warrant Agreement or any certificate or exhibit furnished or to be furnished to Warrantholder pursuant thereto or in connection with the transactions contemplated thereby (when read together) contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein not misleading. -11- (r) Indebtedness to Employees and Shareholders. The Company is not indebted to any employee, shareholder, officer or director of the Company, and no such employee, shareholder, officer or director is indebted to the Company. 10. REPRESENTATIONS AND COVENANTS OF THE WARRANTHOLDER. This Warrant Agreement has been entered into by the Company in reliance upon the following representations and covenants of the Warrantholder, which by its execution hereof the Warrantholder hereby confirms: (a) Investment Purpose. The right to acquire Preferred Stock or the Preferred Stock issuable upon exercise of the Warrantholder's rights contained herein will be acquired for investment and not with a view to the sale or distribution of any part thereof, and the Warrantholder has no present intention of selling or engaging in any public distribution of the same except pursuant to a registration or exemption. (b) Private Issue. The Warrantholder understands (i) that the Preferred Stock issuable upon exercise of the Warrantholder's rights contained herein is not registered under the 1933 Act or qualified under applicable state securities laws on the ground that the issuance contemplated by this Warrant Agreement will be exempt from the registration and qualifications requirements thereof, and (ii) that the Company's reliance on such exemption is predicated on the representations set forth in this Section 10. (c) Disposition of Warrantholder's Rights. In no event will the Warrantholder make a disposition of any of its rights to acquire Preferred Stock or Preferred Stock issuable upon exercise of such rights unless and until (i) it shall have notified the Company of the proposed disposition, and (ii) if requested by the Company, it shall have furnished the Company with an opinion of counsel (which counsel may either be inside or outside counsel to the Warrantholder) satisfactory to the Company and its counsel to the effect that (A) appropriate action necessary for compliance with the 1933 Act has been taken, or (B) an exemption from the registration requirements of the 1933 Act is available. Notwithstanding the foregoing, the restrictions imposed upon the transferability of any of its rights to acquire Preferred Stock or Preferred Stock issuable on the exercise of such rights do not apply to transfers from the beneficial owner of any of the aforementioned securities to its nominee or from such nominee to its beneficial owner, and shall terminate as to any particular share of Preferred Stock when (1) such security shall have been effectively registered under the 1933 Act and sold by the holder thereof in accordance with such registration or (2) such security shall have been sold without registration in compliance with Rule 144 under the 1933 Act, or (3) a letter shall have been issued to the Warrantholder at its request by the staff of the Securities and Exchange Commission or a ruling shall have been issued to the Warrantholder at its request by such Commission stating that no action shall be recommended by such staff or taken by such Commission, as the case may be, if such security is transferred -12- without registration under the 1933 Act in accordance with the conditions set forth in such letter or ruling and such letter or ruling specifies that no subsequent restrictions on transfer are required. Whenever the restrictions imposed hereunder shall terminate, as hereinabove provided, the Warrantholder or holder of a share of Preferred Stock then outstanding as to which such restrictions have terminated shall be entitled to receive from the Company, without expense to such holder, one or more new certificates for the Warrant or for such shares of Preferred Stock not bearing any restrictive legend. (d) Financial Risk. The Warrantholder has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investment and has the ability to bear the economic risks of its investment. (e) Risk of No Registration. The Warrantholder understands that if the Company does not register with the Securities and Exchange Commission pursuant to Section 12 of the 1933 Act, or file reports pursuant to Section 15(d), of the Securities Exchange Act of 1934 (the "1934 Act"), or if a registration statement covering the securities under the 1933 Act is not in effect when it desires to sell (i) the rights to purchase Preferred Stock pursuant to this Warrant Agreement, or (ii) the Preferred Stock issuable upon exercise of the right to purchase, it may be required to hold such securities for an indefinite period. The Warrantholder also understands that any sale of its rights of the Warrantholder to purchase Preferred Stock or Preferred Stock which might be made by it in reliance upon Rule 144 under the 1933 Act may be made only in accordance with the terms and conditions of that Rule. 11. Registration Rights. Warrantholder and Company agree that all shares of Preferred Stock subject to the Warrant Agreement shall have the same registration rights and be subject to the same terms and conditions with respect to the registration and sale of such stock as possessed by the Series B Preferred Shareholders as provided for in the Second Investors Rights Agreement dated April 15, 1991, by and among the Company and those certain Purchasers identified therein, attached hereto as Exhibit II. 12. TRANSFERS. Subject to the terms and conditions contained in Section 10 hereof, this Warrant Agreement and all rights hereunder are transferable in whole or in part by the Warrantholder and any successor transferee, provided, however, that in no event shall the number of transfers of the rights and interests in all of the Warrants exceed three (3) transfers. The transfer shall be recorded on the books of the Company upon receipt by the Company of a notice of transfer in the form attached hereto as Exhibit III (the "Transfer Notice"), at its principal offices and the payment to the Company of all transfer taxes and other governmental charges imposed on such transfer. -13- 13. MISCELLANEOUS. (a) Effective Date. The provisions of this Warrant Agreement shall be construed and shall be given effect in all respects as if it had been executed and delivered by the Company on the date hereof. This Warrant Agreement shall be binding upon any successors or assigns of the Company. (b) Attorney's Fees. In any litigation, arbitration or court proceeding between the Company and the Warrantholder relating hereto, the prevailing party shall be entitled to attorneys' fees and expenses and all costs of proceedings incurred in enforcing this Warrant Agreement. (c) Governing Law. This Warrant Agreement shall be governed by and construed for all purposes under and in accordance with the laws of the State of Illinois. (d) Counterparts. This Warrant Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (e) Titles and Subtitles. The titles of the paragraphs and subparagraphs of this Warrant Agreement are for convenience and are not to be considered in construing this Agreement. (f) Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States mail, by registered or certified mail, addressed (i) to the Warrantholder at 6111 N. River Road, Rosemont, Illinois 60018, attention: Jim Labe, President Venture Leasing, cc: Legal Department, and (ii) to the Company at 379 Thornall Street, Edison, New Jersey 08820, or at such other address as any such party may subsequently designate by written notice to the other party. (g) Specific Performance. The Company recognizes and agrees that the Warrantholder will not have an adequate remedy if the Company fails to comply with this Agreement and that damages will not be readily ascertainable, and the Company expressly agrees that, in the event of such failure, it shall not oppose an application by the Warrantholder or any other person entitled to the benefit of this Agreement requiring specific performance of any or all provisions hereof or enjoining the Company from continuing to commit any such breach of this Agreement. (h) Survival. The representations, warranties, covenants and conditions of the respective parties contained herein or made pursuant to this Warrant Agreement shall survive the execution and delivery of this Warrant Agreement. (i) Severability. In the event any one or more of the provisions of this Warrant Agreement shall for any reason be held invalid, illegal or unenforceable, the remaining provisions of this -14- Warrant Agreement shall be unimpaired, and the invalid, illegal or unenforceable provision shall be replaced by a mutually acceptable valid, legal and enforceable provision, which comes closest to the intention of the parties underlying the invalid, illegal or unenforceable provision. (j) Amendments. Any provision of this Warrant Agreement may be amended by a written instrument signed by the Company and by the Warrantholder. (k) Additional Documents. The Company, upon execution of this Warrant Agreement, shall provide the Warrantholder with certified resolutions and an opinion from the Company's counsel addressed to the Warrantholder with respect to the representations, warranties and covenants set forth in subparagraphs (a) through (f) and subparagraphs (1) , (m) and (o) of Section 9 above and shall also supply such other documents as the Warrantholder may from time to time reasonably request. IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement to be executed by its officers thereunto duly authorized. Company: DIGITRAN CORPORATION Dated: October 2, 1992 By:/s/ Peter S. Macaluso ------------------------------- Title: Vice President Warrantholder: COMDISCO, INC. By: /s/ Jas. Lale ------------------------------- Title: -15- Exhibit I NOTICE OF EXERCISE To: (1) The undersigned Warrantholder hereby elects to purchase ______ shares of the Preferred Stock of ____________________________, pursuant to the terms of the Warrant Agreement dated the _______ day of _______________________, 19__ (the "Warrant Agreement") between ____________________________________ and the Warrantholder, and tenders herewith payment of the purchase price for such shares in full, together with all applicable transfer taxes, if any. (2) In exercising its rights to purchase the Preferred Stock of , the undersigned hereby confirms and acknowledges the investment representations and warranties made in Section 11 of the Warrant Agreement. (3) Please issue a certificate or certificates representing said shares of Preferred Stock in the name of the undersigned or in such other name as is specified below. ------------------------------- (Name) ------------------------------- (Address) Warrantholder: COMDISCO, INC. By: ------------------------------------ Title: --------------------------------- Date: ---------------------------------- -16- ACKNOWLEDGEMENT OF EXERCISE The undersigned _____________________________________, hereby acknowledge receipt of the "Notice of Exercise" from Comdisco, Inc., to purchase _________________ shares of the Preferred Stock, of _______________________________, pursuant to the terms of the Warrant Agreement, and further acknowledges that ________________ shares remain subject to purchase under the terms of the Warrant Agreement. Company: By: ------------------------------------ Title: --------------------------------- Date: ---------------------------------- -17- EX-10.16 11 EX-10.16 Exhibit 10.16 THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL (WHICH MAY BE COMPANY COUNSEL) REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933. WARRANT AGREEMENT To Purchase Shares of the Preferred Stock of Digitran Corporation dated as of October 28, 1993 WHEREAS, Digitran Corporation, a Delaware corporation (the "Company") has entered into a Forbearance Agreement dated as of October 28, 1993 (the "Agreement") with Comdisco, Inc., a Delaware corporation (the "Warrantholder"); and WHEREAS, the Company desires to grant to Warrantholder, in consideration for such Agreement, the right to purchase shares of its Preferred Stock; NOW, THEREFORE, in consideration of the Warrantholder executing and delivering such Agreement and in consideration of mutual covenants and agreements contained herein, the Company and Warrantholder certify and agree as follows: 1. GRANT OF THE RIGHT TO PURCHASE SERIES D PREFERRED STOCK. For value received, the Company hereby grants to the Warrantholder, and the Warrantholder is entitled, upon the terms and subject to the conditions hereinafter set forth, to subscribe for and purchase, from the Company, 87,570 fully paid and non-assessable shares of the Company's Series D Preferred Stock ("Preferred Stock") at a purchase price of $.1733 per share (the "Exercise Price") . The number and purchase price of such shares are subject to adjustment as provided in Section 8 hereof. 2. (a) TERM OF THE WARRANT AGREEMENT. Except as otherwise provided for herein, the term of this Warrant Agreement and the right to purchase Preferred Stock as granted herein shall commence on the date of execution hereof and shall be exercisable for a period of (i) ten (10) years after the date of execution hereof, or (ii) in accordance with paragraphs (b) or (c) below. (b) Notwithstanding the term of this Warrant Agreement fixed pursuant to Section 2(a) above, the right to purchase Preferred Stock as granted herein shall expire, if not previously exercised immediately upon the closing of either of the following events: (i) the issuance and sale of shares of Common Stock of the Company in the Company's first public offering of securities for its own account pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "Initial Public Offering"), provided, however, that (A) the Initial Public Offering price of the Common Stock (upon conversion of the Preferred Stock) exceeds $3.00 per share; and (B) the Warrantholder would be entitled to participate in the Company's IPO pro rata with the other stockholders of the Company. (ii) a merger or consolidation of the Company with or into another corporation when the Company is not the surviving corporation, or the sale of all or substantially all of the Company's properties and assets to any other person (the "Merger") provided in which Warrantholder realizes a value for its shares equal to or greater than $2.00 per share. The Company shall notify the Warrantholder if the Initial Public Offering or Merger is proposed in accordance with the terms of Subsection 8(g) hereof, and if the Company fails to deliver such written notice, then notwithstanding anything to the contrary in this Warrant Agreement, the rights to purchase the Company's Preferred Stock shall not expire until the Company complies with such notice provisions. Such notice shall also contain such details of the proposed Initial Public Offering or Merger as are reasonable in the circumstances. If such closing does not take place, the Company shall promptly notify the Warrantholder that such proposed transaction has been terminated, and the Warrantholder may rescind any exercise of its purchase rights promptly after such notice of termination of the proposed transaction if the exercise of Warrants occurred after the Company notified the Warrantholder that the Initial Public Offering or Merger was proposed or if the exercise were otherwise precipitated by such proposed Initial Public Offering or Merger. In the event of such rescission, the Warrants will continue to be exercisable on the same terms and conditions contained herein. 3. EXERCISE OF THE PURCHASE RIGHTS. The purchase rights set forth in this Warrant Agreement are exercisable by the Warrantholder, in whole or in part, at any time, or from time to time, prior to the expiration of the term set forth in Section 2 above, by tendering to the Company at its principal office a notice of exercise in the form attached hereto as Exhibit I (the "Notice of Exercise"), duly completed and executed. Upon receipt of the Notice of Exercise and the payment of the purchase price in accordance with the terms set forth below, the Company shall issue to the Warrantholder a certificate for the number of shares of Preferred Stock purchased and shall execute the Notice of Exercise indicating the number of shares which remain subject to future purchases, if any. - 2 - Notwithstanding anything to the contrary contained in Section 2 above or this Section 3, the Warrantholder shall either (i) exercise all outstanding warrants by paying to the Company, by cash or check, an amount equal to the aggregate Warrant Price of the shares being purchased, or (ii) receive shares equal to the value (as determined below) of this Warrant by surrender of the Warrant at the principal office of the Company together with notice of such election in which event the Company shall issue to the Warrantholder a number of shares of Preferred computed using the following formula: X = Y(A-B) ------ A Where: X = the number of shares of Preferred to be issued to the Warrantholder. Y = the number of shares of Preferred under this Warrant. A = the fair market value of one share of Common. B = Exercise Price. As used herein, current fair market value of Common Stock shall mean with respect to each share of Common Stock the average of the closing prices of the Company's Common Stock sold on all securities exchanges on which the Common Stock may at the time be listed, or, if there have been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day the Common Stock is not so listed, the average of the representative bid and asked prices quoted in the NASDAQ System as of 4:00 p.m., New York City time, or, if on any day the Common Stock is not quoted in the NASDAQ System, the average of the highest bid and lowest asked price on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each such case averaged over a period of 21 days consisting of the day as of which the current fair market value of Common Stock is being determined and the 20 consecutive business days prior to such day. If at any time the Common Stock is not listed on any securities exchange or quoted in the NASDAQ System or the over-the-counter market, the current fair market value of Preferred Stock shall be the highest price per share which the Company could obtain from a willing buyer (not a current employee or director) for shares of Preferred Stock sold by the Company, from authorized but unissued shares, as determined in good faith by the Board of Directors of the Company, unless (i) the Company shall become subject to a merger, acquisition or other consolidation pursuant to which the Company is not the surviving party, in which case the current fair market value of the Preferred Stock shall be deemed to be the value received by the holders of the Company's Series A Preferred Stock for each share of Series A Preferred Stock (or Common Stock if all such shares have been - 3 - converted into Common Stock) pursuant to the Company's Acquisition; or (ii) the Warrantholder shall purchase such shares in conjunction with the initial underwritten public offering of the Company's Common Stock pursuant to a registration statement filed under the Securities Act of 1933, in which case, the fair market value of the shares of stock subject to this Warrant shall be the price at which all registered shares are sold to the public in such offering. 4. RESERVATION OF SHARES. (a) Authorization and Reservation of Shares. During the term of this Warrant Agreement, the Company will at all times have authorized and reserved a sufficient number of shares of its Preferred Stock to provide for the exercise of the rights to purchase Preferred Stock as provided for herein. (b) Registration or Listing. If any shares of Preferred Stock required to be reserved for purposes of exercise of the Warrant Agreement hereunder require registration with or approval of any governmental authority under any Federal or State law (other than any registration under the Securities Act of 1933, as then in effect, or any similar Federal statute then enforced, or any state securities law, required by reason of any transfer involved in such conversion), or listing on any domestic securities exchange, before such shares may be issued upon conversion, the Company will, at its expense and as expeditiously as possible, use its best efforts to cause such shares to be duly registered, listed or approved for listing on such domestic securities exchange, as the case may be. 5. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of the Warrantholder's rights to purchase Preferred Stock, but in lieu of such fractional shares the Company shall make a cash payment therefor upon the basis of the Exercise Price then in effect. 6. NO RIGHTS AS SHAREHOLDERS. This Warrant Agreement does not entitle the Warrantholder to any voting rights or other rights as a shareholder of the Company prior to the exercise of the Warrantholder's rights to purchase Preferred Stock as provided for herein. 7. WARRANTHOLDER REGISTRY. The Company shall maintain a registry showing the name and address of the registered holder of this Warrant Agreement. 8. ADJUSTMENT RIGHTS. The purchase price per share and the number of shares of Preferred Stock purchasable hereunder are subject to adjustment from time to time, as follows: (a) Merger and Sale of Assets. If at any time there shall be a capital reorganization of the shares of the Company's stock (other than a combination, reclassification, exchange or subdivision of shares otherwise provided for herein), or a merger - 4 - or consolidation of the Company with or into another corporation when the Company is not the surviving corporation, or the sale of all or substantially all of the Company's properties and assets to any other person, then, as a part of such reorganization, merger, consolidation or sale, lawful provision shall be made so that the Warrantholder shall thereafter be entitled to receive upon exercise of its rights to purchase Preferred Stock, the number of shares of Preferred Stock or other securities of the successor corporation resulting from such merger or consolidation, to which a holder of the Preferred Stock deliverable upon exercise of the right to purchase Preferred Stock hereunder would have been entitled in such capital reorganization, merger, consolidation or sale if the right to purchase such Preferred Stock hereunder had been exercised immediately prior to such capital reorganization, merger, consolidation or sale. In any such case, appropriate adjustment (as determined in good faith by the Company's Board of Directors) shall be made in the application of the provisions of this Warrant Agreement with respect to the rights and interest of the Warrantholder after the reorganization, merger, consolidation or sale to the end that the provisions of this Warrant Agreement (including adjustments of the Exercise Price and number of shares of Preferred Stock purchasable pursuant to the terms and conditions of this Warrant Agreement) shall be applicable after that event, as near as reasonably may be, in relation to any shares deliverable after that event upon the exercise of the Warrantholder's rights to purchase Preferred Stock pursuant to this Warrant Agreement. (b) Reclassification of Shares. If the Company at any time shall, by combination, reclassification, exchange or subdivision of securities or otherwise, change any of the securities as to which purchase rights under this Warrant Agreement exist into the same or a different number of securities of any other class or classes, this Warrant Agreement shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities which were subject to the purchase rights under this Warrant Agreement immediately prior to such combination, reclassification, exchange, subdivision or other change. (c) Subdivision or Combination of Shares. If the Company at any time shall combine or subdivide its Preferred Stock, the Exercise Price shall be proportionately decreased in the case of a subdivision, or proportionately increased in the case of a combination. (d) Stock Dividends. If the Company at any time shall pay a dividend payable in, or make any other distribution (except any distribution specifically provided for in the foregoing subsections (a) or (b)) of the Company's stock, then the Exercise Price shall be adjusted, from and after the date of determination of stockholders entitled to receive such dividend or distribution, to that price determined by multiplying the Exercise Price in effect immediately prior to such date of determination by a fraction (i) the numerator of which shall be the total number of all shares - 5 - of the Company's stock outstanding immediately prior to such dividend or distribution, and (ii) the denominator of which shall be the total number of all shares of the Company's stock outstanding immediately after such dividend or distribution. The Warrantholder shall thereafter be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of shares of Preferred Stock (calculated to the nearest whole share) obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of shares of Preferred Stock issuable upon the exercise hereof immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (e) Issuance of Shares at Other Than Exercise Price. If the Company should issue shares of its stock or any other equity security at a price per share less than the Exercise Price in effect immediately prior to such issuance, then the Exercise Price shall be adjusted by dividing (i) the sum of (A) the total number of shares of the Company's stock outstanding immediately prior to such issuance multiplied by the then effective Exercise Price and (B) the value of the consideration received by the Company upon such issuance of such shares, by (ii) the total number of shares of the Company's stock outstanding immediately after such issuance. The Warrantholder shall thereafter be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of shares of Preferred Stock (calculated to the nearest whole share) obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of shares of Preferred Stock issuable upon the exercise hereof immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. For the purposes of this paragraph (e), the issuance of securities convertible into or exercisable for the Preferred Stock shall be deemed the issuance of the number of shares of Preferred Stock into which such securities are convertible or for which such securities are exercisable, and the consideration received for such securities shall be deemed to include the minimum aggregate amount payable upon conversion or exercise of such securities. In the event the right to convert or exercise such securities expires unexercised, the Exercise Price of shares issuable upon the exercise hereof shall be readjusted accordingly. (f) Right to Purchase Additional Stock. If, for any reason, the total amount of Warrantholder's forbearance pursuant to the Forbearance Agreement should exceed $87,570, Warrantholder shall have the right to purchase from the Company, at the Exercise Price per share specified in Section 1 (which price may be subject to adjustment from time to time as provided for in this Section 8), an additional number of shares, which number shall be determined by (i) multiplying the amount by which the Warrantholder's total equipment cost exceeds $89,473 by 100%, and (ii) dividing the product thereof by the Exercise Price per share referenced above. - 6 - (g) Notice of Adjustments. In the event that: (i) the Company shall declare any dividend or distribution upon its stock, whether in cash, property, stock or other securities; (ii) the Company shall offer for subscription prorata to the holders of any class of its Preferred or other convertible stock any additional shares of stock of any class or other rights; (iii) there shall be any capital reorganization, reclassification, consolidation, merger or sale of all or substantially all of the Company's assets; or (iv) there shall be any voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in connection with each such event, the Company shall send to the Warrantholder: (i) At least 20 days' prior written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend, distribution, subscription rights (specifying the date on which the holders of Preferred Stock shall be entitled thereto) or for determining rights to vote in respect of such capital reorganization, reclassification, consolidation, merger or sale of all or substantially all of the Company's assets, dissolution, liquidation or winding up; and (ii) In the case of any such capital reorganization, reclassification, consolidation, merger or sale of all or substantially all of the Company's assets, dissolution, liquidation or winding up, at least 20 days' prior written notice of the date when the same shall take place (and specifying the date on which the holders of Preferred Stock shall be entitled to exchange their Preferred Stock for securities or other property deliverable upon such capital reorganization, reclassification, consolidation, merger or sale of all or substantially all of the Company's assets, dissolution, liquidation or winding up). Each such written notice shall set forth, in reasonable detail, (i) the event requiring the adjustment, (ii) the amount of the adjustment, (iii) the method by which such adjustment was calculated, (iv) the Exercise Price, and (v) the number of shares subject to purchase hereunder after giving effect to such adjustment, and shall be given by first class mail, postage prepaid, addressed to the Warrantholder, at the address as shown on the books of the Company. (h) Registration and Listing. The Company will take all such actions as may be necessary to assure that all shares of Preferred Stock issuable pursuant to this Warrant Agreement may be so issued without violation of any applicable law or regulation or any requirements of any domestic stock exchange (except for official notice of issuance, which will be immediately transmitted by the Company upon issuance) upon which shares of Preferred Stock or other shares of the same class may be listed. The Company will not take any action which will result in any adjustment of the number of shares of Preferred Stock issuable upon exercise of this Warrant Agreement if the total number of shares of Preferred Stock issuable - 7 - after such action upon exercise of the Warrant Agreement then outstanding, together with the total number of shares of Preferred Stock then outstanding, would exceed the total number of shares of Preferred Stock then authorized and not reserved for any purpose other than the purpose of issue upon exercise of the Warrant Agreement. 9. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. (a) Reservation of Preferred Stock. The Preferred Stock issuable upon exercise of the Warrantholder's rights has been duly and validly reserved and, when issued in accordance with the provisions of this Warrant Agreement, will be validly issued, fully paid and non-assessable, and will be free of any taxes, liens, charges or encumbrances of any nature whatsoever; provided, however, that the Preferred Stock issuable pursuant to this Warrant Agreement may be subject to restrictions on transfer under state and/or Federal securities laws. The Company has made available to the Warrantholder true, correct and complete copies of its Articles of Incorporation and By-Laws, as amended, and minutes of all Board of Directors (including all committees of the Board of Directors, if any) and Shareholder meetings from the Company's inception through May 16, 1991. The issuance of certificates for shares of Preferred Stock upon exercise of the Warrant Agreement shall be made without charge to the Warrantholder for any issuance tax in respect thereof, or other cost incurred by the Company in connection with such exercise and the related issuance of shares of Preferred Stock; provided that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved and the issuance and delivery of any certificate in a name other than that of the Warrantholder. The Company will not close its books against the transfer of the Warrant Agreement or of any share of Preferred Stock issued or issuable upon exercise of the Warrant and any agreement in any manner which interferes with the timely exercise of the Warrant. (b) Due Authority. The execution and delivery by the Company of the Agreement, and this Warrant Agreement and the performance of all obligations of the Company thereunder and hereunder, including the issuance to Warrantholder of the right to acquire the shares of Preferred Stock set forth in Section 1 above (which number of shares may be from time to time adjusted pursuant to the terms of Section 8 above) have been duly authorized by all necessary corporate action on the part of the Company, and the Agreement and this Warrant Agreement are not inconsistent with the Company's Certificate of Incorporation or By-Laws, do not contravene any law or governmental rule, regulation or order applicable to it, do not and will not contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument to which it is a party or by which it is bound, and the Agreement and this Warrant Agreement constitute legal, valid and binding agreements of the Company, enforceable in accordance with their respective terms. - 8 - (c) Consents and Approvals. No consent or approval of, giving of notice to, registration with, or taking of any other action in respect of any state, Federal or other governmental authority or agency is required with respect to the execution, delivery and performance by the Company of its obligations under this Warrant Agreement. (d) Litigation. There are no actions, suits, audits, investigations or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company in any court or before any governmental commission, board or authority which, if adversely determined, will have a material adverse effect on the ability of the Company to perform its obligations under the Agreement and this Warrant Agreement. (e) Subsidiaries or Affiliates. The Company has no subsidiaries or affiliated companies and does not otherwise own or control, directly or indirectly, any other corporation, association or business entity. (f) Issued Securities. All issued and outstanding shares of Common Stock, Preferred Stock or any other securities of the Company have been duly authorized and validly issued and are fully paid and nonassessable. All outstanding shares of Common Stock, Preferred Stock and any other securities were issued in full compliance with all Federal and state securities laws. In addition: (i) The authorized capital of the Company consists of (A) 21,266,667 shares of Common Stock, of which 2,887,320 shares are issued and outstanding, (B) 1,400,000 shares of Series A Preferred Stock are authorized for issuance of which 1,400,000 are outstanding, (C) 3,600,000 shares of Series B Preferred Stock are authorized for issuance of which 3,516,600 are outstanding, and (D) 8,333,333 shares of Series C Preferred Stock are authorized for issuance of which 8,329,526 are outstanding. All of the outstanding Preferred Stock is convertible into Common Stock on a share for share basis. (ii) The Company has reserved (A) 1,792,665 shares of Common Stock for issuance under its Stock Option Plan, under which 1,374,175 options are outstanding except for the warrant granted to Silicon Valley Bank to purchase 83,333 shares of Common Stock; and Comdisco, Inc. to purchase 67,200 shares of Preferred Stock at a price of $1.00, subject to appropriate anti-dilution rights. There are no other options, warrants, conversion privileges or other rights presently outstanding to purchase or otherwise acquire any authorized but unissued shares of the Company's capital stock or other securities of the Company. (iii) In accordance with the Company's Articles of Incorporation, no shareholder of the Company has preemptive - 9 - rights to purchase new issuances of the Company's capital stock. (g) Financial Statements. The Company has delivered to the Warrantholder its audited consolidated financial statements for its fiscal year ended December 31, 1992, together with the report thereon of its independent public accountants, and its unaudited Balance Sheet and Statement of Income for the twelve (12) month period ending December 31, 1993 (the "Financial Statements"). The Financial Statements are complete and correct in all material respects and have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated. The condition and operating results of the Company as of the dates and during the periods indicated therein are true and correct in all material aspects, subject as to the Balance Sheet and Statement of Income for the twelve (12) month period then ending December 31, 1993 to normal year-end audit adjustments. Since December 31, 1993, there has been no change in the assets, liabilities, financial condition or operations of the Company from that reflected in the Financial Statements other than changes in the ordinary course of business which have not been, individually or in the aggregate, materially adverse. The Company shall deliver to the Warrantholder (i) within one hundred twenty (120) days after the end of the Company's fiscal year, statements of income for such fiscal year, a consolidated balance sheet of the Company as of the end of such year and consolidated statement of the sources and application of funds for such year, which year-end financial reports shall be in reasonable detail and certified by independent public accountants of nationally recognized standing selected by the Company, and (ii) within forty-five (45) days after the end of each fiscal quarter other than the last fiscal quarter, unaudited consolidated statements of income and sources and application of funds for such quarter and a consolidated balance sheet as of the end of such quarter. (h) Contingent and Absolute Liabilities. The Company has no material liabilities or obligations, absolute or contingent except the liabilities and obligations of the Company as set forth in the Financial Statements and liabilities and obligations which have occurred in the ordinary course of business, and which have not been materially adverse. (i) Licenses, Patents and Copyrights. To the best of the Company's knowledge, the Company owns, possesses, has access to, or can become licensed on reasonable terms under, all patents, patent applications, trademarks, trade names, inventions, franchises, licenses, permits, computer software and copyrights necessary for the operation of its business as now conducted, with no known infringement of, or conflict with, the rights of others. - 10 - (j) Employee Contracts. To the best of the Company's knowledge, no employee of the Company is in violation of any material term of any employment contract, patent disclosure agreement or any other contract or agreement relating to the relationship of any such employee with the Company or any prior employer because of the nature of the business conducted by the Company. (k) Insurance. The Company has in full force and effect insurance policies, with extended coverage, insuring the Company and its property and business against such losses and risks, and in such amounts, as are customary for corporations engaged in a similar business and similarly situated and as otherwise may be required pursuant to the terms of any other contract or agreement. (1) Other Commitments to Register Securities. Except for those rights granted in the Second Investor Rights Agreement dated April 15, 1991, and those rights granted in the Warrant Purchase Agreement dated August 14, 1990, and those rights granted in this Warrant Agreement, the Company is not, pursuant to the terms of any other agreement currently in existence, under any obligation to register under the 1933 Act, any of its presently outstanding securities or any of its securities which may hereafter be issued. (m) Exempt Transaction. Subject to the accuracy of the Warrantholder's representations in Section 10 hereof, the issuance of the Preferred Stock upon exercise of the Warrantholder's right to purchase such Preferred Stock will constitute transactions exempt from (i) the registration requirements of Section 5 of the 1933 Act, in reliance upon Section 4(2) thereof, and (ii) the qualification requirements of the Delaware Corporate Securities Law. (n) Compliance with Rule 144. At the written request of the Warrantholder, who proposes to sell Preferred Stock issuable upon the exercise of the Warrant in compliance with Rule 144 promulgated by the Securities and Exchange Commission under the 1933 Act, the Company shall furnish to the Warrantholder, within ten days after receipt of such request, a written statement confirming the Company's compliance with the filing requirements of the Securities and Exchange Commission as set forth in such Rule, as such Rule may be amended from time to time. (o) No Events of Default, Material Contracts. All material contracts, agreements and instruments to which the Company is a party are in full force and effect in all material respects, and are valid, binding and enforceable by the Company in accordance with their respective terms, subject to the effect of applicable bankruptcy and other similar laws affecting the rights of creditors generally, and rules of law concerning equitable remedies and no event of default, and no event which, with the passing of time or the giving of notice, or both, would constitute an event of default has occurred or is continuing under any such contract, agreement or instrument. - 11 - (p) Brokers' Fees. The Company has not incurred, and will not incur, directly or indirectly, any liability for brokerage or finders' fees or agents commissions or any similar charges in connection with the Warrant Agreement or any other transaction contemplated thereby. (q) Untrue, Misleading Statements. No representation or warranty of the Company contained in the Agreement, and this Warrant Agreement or any certificate or exhibit furnished or to be furnished to Warrantholder pursuant thereto or in connection with the transactions contemplated thereby (when read together) contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein not misleading. (r) Indebtedness to Employees and Shareholders. The Company is not indebted to any employee, shareholder, officer or director of the Company, and no such employee, shareholder, officer or director is indebted to the Company. 10. REPRESENTATIONS AND COVENANTS OF THE WARRANTHOLDER. This Warrant Agreement has been entered into by the Company in reliance upon the following representations and covenants of the Warrantholder, which by its execution hereof the Warrantholder hereby confirms: (a) Investment Purpose. The right to acquire Preferred Stock or the Preferred Stock issuable upon exercise of the Warrantholder's rights contained herein will be acquired for investment and not with a view to the sale or distribution of any part thereof, and the Warrantholder has no present intention of selling or engaging in any public distribution of the same except pursuant to a registration or exemption. (b) Private Issue. The Warrantholder understands (i) that the Preferred Stock issuable upon exercise of the Warrantholder's rights contained herein is not registered under the 1933 Act or qualified under applicable state securities laws on the ground that the issuance contemplated by this Warrant Agreement will be exempt from the registration and qualifications requirements thereof, and (ii) that the Company's reliance on such exemption is predicated on the representations set forth in this Section 10. (c) Disposition of Warrantholder's Rights. In no event will the Warrantholder make a disposition of any of its rights to acquire Preferred Stock or Preferred Stock issuable upon exercise of such rights unless and until (i) it shall have notified the Company of the proposed disposition, and (ii) if requested by the Company, it shall have furnished the Company with an opinion of counsel (which counsel may either be inside or outside counsel to the Warrantholder) satisfactory to the Company and its counsel to the effect that (A) appropriate action necessary for compliance with the 1933 Act has been taken, or (B) an exemption from the registration requirements of the 1933 Act is available. - 12 - Notwithstanding the foregoing, the restrictions imposed upon the transferability of any of its rights to acquire Preferred Stock or Preferred Stock issuable on the exercise of such rights do not apply to transfers from the beneficial owner of any of the aforementioned securities to its nominee or from such nominee to its beneficial owner, and shall terminate as to any particular share of Preferred Stock when (1) such security shall have been effectively registered under the 1933 Act and sold by the holder thereof in accordance with such registration or (2) such security shall have been sold without registration in compliance with Rule 144 under the 1933 Act, or (3) a letter shall have been issued to the Warrantholder at its request by the staff of the Securities and Exchange Commission or a ruling shall have been issued to the Warrantholder at its request by such Commission stating that no action shall be recommended by such staff or taken by such Commission, as the case may be, if such security is transferred without registration under the 1933 Act in accordance with the conditions set forth in such letter or ruling and such letter or ruling specifies that no subsequent restrictions on transfer are required. Whenever the restrictions imposed hereunder shall terminate, as hereinabove provided, the Warrantholder or holder of a share of Preferred Stock then outstanding as to which such restrictions have terminated shall be entitled to receive from the Company, without expense to such holder, one or more new certificates for the Warrant or for such shares of Preferred Stock not bearing any restrictive legend. (d) Financial Risk. The Warrantholder has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investment and has the ability to bear the economic risks of its investment. (e) Risk of No Registration. The Warrantholder understands that if the Company does not register with the Securities and Exchange Commission pursuant to Section 12 of the 1933 Act, or file reports pursuant to Section 15(d), of the Securities Exchange Act of 1934 (the "1934 Act"), or if a registration statement covering the securities under the 1933 Act is not in effect when it desires to sell (i) the rights to purchase Preferred Stock pursuant to this Warrant Agreement, or (ii) the Preferred Stock issuable upon exercise of the right to purchase, it may be required to hold such securities for an indefinite period. The Warrantholder also understands that any sale of its rights of the Warrantholder to purchase Preferred Stock or Preferred Stock which might be made by it in reliance upon Rule 144 under the 1933 Act may be made only in accordance with the terms and conditions of that Rule. 11. Registration Rights. Warrantholder and Company agree that all shares of Preferred Stock subject to the Warrant Agreement shall have the same registration rights and be subject to the same terms and conditions with respect to the registration and sale of such stock as possessed by the Series A Preferred Shareholders as provided for in the Second Investors Rights Agreement dated - 13 - April 15, 1991, by and among the Company and those certain Purchasers identified therein, attached hereto as Exhibit II. 12. TRANSFERS. Subject to the terms and conditions contained in Section 10 hereof, this Warrant Agreement and all rights hereunder are transferable in whole or in part by the Warrantholder and any successor transferee, provided, however, that in no event shall the number of transfers of the rights and interests in all of the Warrants exceed three (3) transfers. The transfer shall be recorded on the books of the Company upon receipt by the Company of a notice of transfer in the form attached hereto as Exhibit III (the "Transfer Notice"), at its principal offices and the payment to the Company of all transfer taxes and other governmental charges imposed on such transfer. 13. MISCELLANEOUS. (a) Effective Date. The provisions of this Warrant Agreement shall be construed and shall be given effect in all respects as if it had been executed and delivered by the Company on the date hereof. This Warrant Agreement shall be binding upon any successors or assigns of the Company. (b) Attorney's Fees. In any litigation, arbitration or court proceeding between the Company and the Warrantholder relating hereto, the prevailing party shall be entitled to attorneys' fees and expenses and all costs of proceedings incurred in enforcing this Warrant Agreement. (c) Governing Law. This Warrant Agreement shall be governed by and construed for all purposes under and in accordance with the laws of the State of Illinois. (d) Counterparts. This Warrant Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (e) Titles and Subtitles. The titles of the paragraphs and subparagraphs of this Warrant Agreement are for convenience and are not to be considered in construing this Agreement. (f) Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States mail, by registered or certified mail, addressed (i) to the Warrantholder at 6111 N. River Road, Rosemont, Illinois 60018, attention: Jim Labe, President Venture Leasing, cc: Legal Department, and (ii) to the Company at 379 Thornall Street, Edison, New Jersey 08820, or at such other address as any such party may subsequently designate by written notice to the other party. (g) Specific Performance. The Company recognizes and agrees that the Warrantholder will not have an adequate remedy if the - 14 - Company fails to comply with this Agreement and that damages will not be readily ascertainable, and the Company expressly agrees that, in the event of such failure, it shall not oppose an application by the Warrantholder or any other person entitled to the benefit of this Agreement requiring specific performance of any or all provisions hereof or enjoining the Company from continuing to commit any such breach of this Agreement. (h) Survival. The representations, warranties, covenants and conditions of the respective parties contained herein or made pursuant to this Warrant Agreement shall survive the execution and delivery of this Warrant Agreement. (i) Severability. In the event any one or more of the provisions of this Warrant Agreement shall for any reason be held invalid, illegal or unenforceable, the remaining provisions of this Warrant Agreement shall be unimpaired, and the invalid, illegal or unenforceable provision shall be replaced by a mutually acceptable valid, legal and enforceable provision, which comes closest to the intention of the parties underlying the invalid, illegal or unenforceable provision. (j) Amendments. Any provision of this Warrant Agreement may be amended by a written instrument signed by the Company and by the Warrantholder. (k) Additional Documents. The Company, upon execution of this Warrant Agreement, shall provide the Warrantholder with certified resolutions and shall also supply such other documents as the Warrantholder may from time to time reasonably request. IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement to be executed by its officers thereunto duly authorized. Dated: October 28, 1993 Company: DIGITRAN CORPORATION By: ---------------------------- Title: ---------------------------- Warrantholder: COMDISCO, INC. By: ---------------------------- Title: ---------------------------- - 15 - Exhibit I NOTICE OF EXERCISE To: (1) The undersigned Warrantholder hereby elects to purchase ________ shares of the Preferred Stock of __________________, pursuant to the terms of the Warrant Agreement dated the _____ day of __________, 19__ (the "Warrant Agreement") between ____________________ and the Warrantholder, and tenders herewith payment of the purchase price for such shares in full, together with all applicable transfer taxes, if any. (2) In exercising its rights to purchase the Preferred Stock of _________________________, the undersigned hereby confirms and acknowledges the investment representations and warranties made in Section 11 of the Warrant Agreement. (3) Please issue a certificate or certificates representing said shares of Preferred Stock in the name of the undersigned or in such other name as is specified below. ------------------------------ (Name) ------------------------------ (Address) Warrantholder: COMDISCO, INC. By: --------------------------- Title: ------------------------ Date: ------------------------- - 16 - ACKNOWLEDGEMENT OF EXERCISE The undersigned ________________________, hereby acknowledges receipt of the "Notice of Exercise" from Comdisco, Inc., to purchase ________ shares of the Preferred Stock, of ______________, pursuant to the terms of the Warrant Agreement, and further acknowledges that ___________________ shares remain subject to purchase under the terms of the Warrant Agreement. Company: By: --------------------------- Title: ------------------------ Date: ------------------------- - 17 - Exhibit III TRANSFER NOTICE (To transfer or assign the foregoing Warrant Agreement execute this form and supply required information. Do not use this form to purchase shares.) FOR VALUE RECEIVED, the foregoing Warrant Agreement and all rights evidenced thereby are hereby transferred and assigned to - -------------------------------------------------------------------------------- (Please Print) whose address is ---------------------------------------------------------------- Dated -------------------------- Holder's Signature -------------------------------------------- Holder's Address ---------------------------------------------- Signature Guaranteed: --------------------------------------------------------- NOTE: The signature to this Transfer Notice must correspond with the name as it appears on the face of the Warrant Agreement, without alteration or enlargement or any change whatever. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant Agreement. - 18 - EX-10.17 12 EX-10.17 Exhibit 10.17 THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1993, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. WARRANT TO PURCHASE STOCK Issue Date: February 15, 1993 Expiration Date: Seven years from issuance Exercise Price: See Preamble Below Number and Class of Stock: See Preamble Below THIS WARRANT CERTIFIES THAT, for the agreed upon value of $1.00 and for other good and valuable consideration, LTI Ventures Leasing Corp., ("Holder") is entitled to purchase 50,000 fully paid and nonassessable shares of the common stock, $.0025 par value per share (the "Shares"), of Digitran Corporation (the "Company") as may be purchased for Thirty Thousand Dollars ($30,000) (the "Face Value") at an initial exercise price per share (the "Warrant Price") equal to sixty cents ($.60); as adjusted pursuant to Article 2 of this Warrant, subject to the provisions and upon the terms and conditions set forth of this Warrant. ARTICLE 1. EXERCISE AND EARLY TERMINATION 1.1 Method of Exercise. Holder may exercise this Warrant by delivering a duly executed Notice of Exercise in substantially the form attached as Appendix 1 to the principal office of the Company. Unless Holder is exercising the conversion right set forth in Section 1.2, Holder shall also deliver to the Company a check for the aggregate Warrant Price for the shares being purchased. 1.2 Conversion Right. In lieu of exercising this Warrant as specified in Section 1.1, Holder may from time to time convert this warrant, in whole or in part, into a number of shares determined by dividing (a) the aggregate fair market value of the shares or other securities otherwise issuable upon exercise of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair market value of one Share. The fair market value of the Shares shall be determined pursuant to Section 1.4. 1.3 Fair Market Value. If the Shares are traded in a public market, the fair market value of the Shares shall be the closing price of the Shares (or the closing price of the Company's business day immediately before Holder delivers its Notice of Exercise to the Company. If the Shares are not traded in a public market, the Board of Directors of the Company shall determine fair market value in its reasonable good faith judgment. The foregoing notwithstanding, if Holder advises the Board of Directors in writing that Holder disagrees with such determination, then the Company and Holder shall promptly agree upon a reputable investment banking firm to undertake such valuation. If the valuation of such investment banking firm is greater than that of such investment banking firm shall be paid by the Company. In all other circumstances, such fees and expenses shall be paid by Holder. 1.4 Delivery of Certificate and New Warrant. Promptly after Holder exercises or converts this Warrant, the Company shall deliver to Holder certificates for the Shares acquired and if this Warrant has not been fully exercised or converted and has not expired, a new Warrant representing the Shares not so acquired. 1.5 Replacement of Warrants. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of mutilation, or surrender and cancellation of this Warrant, the Company at its expense shall execute dna deliver, in lieu of this Warrant, a new warrant of like tenor. 1.6 Repurchase on Sale, Merger, or Consolidation of the Company. 1.6.1 "Acquisition". For the purpose of this Warrant, "Acquisition" means any sale, license, or other disposition of all or substantially all of the assets of the Company, or any reorganization, consolidation, or merger of the Company where the holders of the Company's securities before the transaction beneficially own less than 50% of the outstanding voting securities of the surviving entity after the transaction. 1.6.2 Assumption of Warrant. If upon the closing of any Acquisition the successor entity assumes the obligations of this Warrant, then this Warrant shall be exercisable for the same securities, cash, and property as would be payable for the Shares issuable upon exercise of the unexercised portion of this Warrant as if such Shares were outstanding on the record date for the Acquisition and subsequent closing. The Warrant Price shall be adjusted accordingly. 1.6.3 Nonassumption. If upon the closing of any Acquisition and successor entity does not assume the obligations of this Warrant and Holder has not otherwise exercised this Warrant in full, then the unexercised portion of this Warrant shall be deemed to have been automatically converted pursuant to Section 1.2 and thereafter Holder shall participate in the acquisition on the same terms as other holders of the same class of securities of the Company. ARTICLE 2. ADJUSTMENTS TO THE SHARES 2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a dividend on its common stock (or the Shares if the Shares are securities other than common stock) payable in common stock, or other securities, subdivides the outstanding common stock into a greater amount of common stock, or, if the Shares are securities other than common stock, subdivides the Shares in a transaction that increases the amount of common stock into which the Shares are convertible, then upon exercise of this Warrant, for each Share acquired, Holder shall receive, without cost of Holder, the total number and kind of securities to which Holder would have been - 2 - entitled had Holder owned the Shares of record as of the date the dividend or subdivision occurred. 2.2 Reclassification, Exchange or Substitution. Upon any reclassification, exchange, substitution, or other event that results in a change of the number and/or class of the securities issuable upon exercise or conversion of this Warrant, Holder shall be entitled to receive, upon exercise or conversion of this Warrant, the number and kind of securities and property that Holder would have received for the Shares if this Warrant had been exercised immediately before such reclassification, exchange, substitution, or other event. Such an event shall include any automatic conversion of the outstanding or issuable securities of the Company of the same class or series as the Shares to common stock pursuant to the terms of the Company's Certificate of Incorporation upon the closing of a registered public offering of the Company's common stock. The Company or its successor shall promptly issue to Holder a new Warrant for such new securities or other property. The new Warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 2 including, without limitation, adjustments to the Warrant Price and to the number of securities or property issuable upon exercise of the new Warrant. The provisions of this Section 2.2 shall similarly apply to successive reclassifications, exchanges, substitutions, or other events. 2.3 Adjustments for Combinations, Etc. If the outstanding Shares are Combined or consolidated, by reclassification or otherwise, into a lesser number of shares, the Warrant Price shall be proportionately increased. 2.4 Adjustments for Diluting Issuances. The Warrant Price and the number of Shares issuable upon exercise of this Warrant or, if the Shares are Preferred Stock, the number of shares of common stock issuable upon conversion of the Shares, shall be subject to adjustment, from time to time in the manner set forth on Exhibit A in the event of Diluting Issuances (as defined on Exhibit A). 2.5 No Impairment. The Company shall not, by amendment of its Certificate of Incorporation or through a reorganization, transfer of assets, consolidation, merger, dissolution, issue, or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this Warrant by the Company, but shall at all times in good faith assist in carrying out of all the provisions of this Article 2 and in taking all such action as may be necessary or appropriate to protect Holder's rights under this Article against impairment. If the Company takes any action affecting the Shares or its common stock other than as described above that adversely affects Holder's rights under this Warrant, the Warrant Price shall be adjusted downward and the number of Shares issuable upon exercise of this Warrant shall be adjusted upward in such a manner that the aggregate Warrant Price of this Warrant is unchanged. 2.6 Reservation of Shares. The Company will at all times reserve and keep available out of its authorized but unissued common stock, solely for issuance, sale and delivery upon the exercise or conversion of this Warrant, a number of shares of common stock equal to the number of shares of common stock issuable upon the exercise of this Warrant. - 3 - 2.7 Fractional Shares. No fractional shares shall be issuable upon exercise or conversion of the Warrant and the number of Shares to be issued shall be rounded down to the nearest whole Share. If a fractional share interest arises upon any exercise or conversion of the Warrant, the Company shall eliminate such fractional share interest by paying Holder amount computed by multiplying the fractional interest by the fair market value of a full Share. 2.8 Certificate as to Adjustments. Upon each adjustment of the Warrant Price, the Company at its expense shall promptly compute such adjustment, and furnish Holder with a certificate of its Chief Financial Officer setting forth such adjustment and the facts upon which such adjustment is based. The Company shall, upon written request, furnish Holder a certificate setting forth the Warrant Price in effect upon the date thereof and the series of adjustments leading to such Warrant Price. ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY. 3.1 Representations and Warranties. The Company hereby represents and warrants to the Holder as follows: (a) The initial Warrant Price referenced on the first page of this Warrant is not greater than the fair market value of the Shares as of the date of this Warrant. (b) All Shares which may be issued upon the exercise of the purchase right represented by this Warrant, and all securities, if any, issuable upon conversion of the Shares, shall, upon issuance, be duly authorized, validly issued, fully paid and nonassessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws. (c) The authorized and issued and outstanding capital stock of the Company is as set forth on Exhibit B. All the outstanding shares of capital stock of the Company have been duly authorized, are validly issued and are fully paid and nonassessable. Except as set forth in Exhibit B, (i) there are no options, warrants or rights to purchase shares of capital stock or other securities of Company authorized, issued or outstanding, nor is the Company obligated in any other manner to issue shares of its capital stock or other securities; (ii) there are no restrictions on the transfer of shares of capital stock of the Company other than those imposes by federal and relevant state securities laws; and (iii) no holder of any security of the Company is entitled to preemptive or similar statutory or contractual rights, either arising pursuant to any agreement or instrument to which the Company is a party, or which are otherwise binding upon the Company. Neither the issuance of this Warrant nor the shares of Common Stock issued upon any exercise or conversion of this Warrant will result in an adjustment under the antidilution or exercise rights of any holders of any outstanding shares of capital stock of the Company. The offer and sales of all shares of capital stock and other securities of the Company issued before the date of this Warrant complied with or were exempt from the registration requirements of all federal and state securities laws. 3.2 Notice of Certain Events. If the Company proposes at any time (a) to declare any dividend or distribution upon its common stock, whether in cash, property, stock, or other securities and whether or not a regular cash dividend; (b) to offer for subscription pro rata to - 4 - the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (c) to effect any reclassification or recapitalization of common stock; (d) to merge or consolidate with or into any other corporation, or sell, lease, license, or convey all or substantially all of its assets, or to liquidate, dissolve or wind up; or (e) offer holders of registration rights the opportunity to participate in an underwritten public offering of the company's securities for cash, then, in connection with each such event, the Company shall give Holder (1) at least 20 days prior written notice of the date on which a record will be taken for such dividend, distribution, or subscription rights (and specifying the date on which the holders of common stock will be entitled thereto) or for determining rights to vote, if any, in respect of the matters referred to in (c) and (d) above at least 20 days prior written notice of the dated on which the holders of common stock will be entitled to exchange their common stock for securities or other property deliverable upon the occurrence of such event); and (3) in the case of the master referred to in (e) above, the same notice as is given to the holders of such registration rights. 3.3 Information Rights. So long as the Holder holds this Warrant and/or any of the Shares, the Company shall deliver to the Holder (a) promptly after mailing, copies of all notices or (b) within ninety (90) days after the end of each fiscal year of the Company, the annual audited financial statements of the Company certified by independent public accountants or recognized standing and (c) within forty-five (45) days after the end of each of the first three quarters or each fiscal year, the Company's quarterly, unaudited financial statements. ARTICLE 4. MISCELLANEOUS. 4.1 Term: Notice of Expiration. This Warrant is exercisable, in whole or in part, at any time and from time to time on or before the Expiration Date set forth above. The Company shall give Holder written notice of Holder's right to exercise this Warrant in the form attached as Appendix 2 not more than 90 days and not less than 30 days before the Expiration Date. If the notice is not so give, the Expiration Date shall automatically be extended until 30 days after the date the Company delivers the notice to Holder. 4.2 Legends. This Warrant and the Shares (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) shall be imprinted with a legend in substantially the following form: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. 4.3 Compliance with Securities Laws on Transfer. This Warrant and the Shares issuable upon exercise this Warrant (and the securities issuable, directly or indirectly, upon conversion of the Share, if any) may not be transferred or assigned in whole or in part without compliance with applicable federal and state securities laws by the transferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinions reasonably - 5 - satisfactory to the Company, H reasonably requested by the Company). The Company shall not require Holder to provide an opinion of counsel if the transfer is to an affiliate of Holder or if there is no material question as to an affiliate of Holder or if there is no material question as to the availability of current information as referenced in Rule 144 (c), Holder represents that it has complied with Rule 144 (d) and (e) in reasonable detail, the selling broker represents that it has complied with Rule 144 (f), and the Company is provided with a copy of Holder's notice of proposed sale. 4.4 Transfer Procedure. Subject to the provisions of Section 4.2, Holder may transfer all or part of this Warrant or the Shares issuable upon exercise of this Warrant (or the securities issuable, directly or indirectly, upon conversion of the Shares, if any) by giving the Company notice of the portion of the Warrant being transferred setting both the name, address and the taxpayer identification number of the transferee and surrendering this Warrant to the Company for reissuance to the transferee(s) (and Holder if applicable). Unless the Company is filing financial information which the SEC pursuant to the Securities Exchange Act of 1934, the Company shall have the right to refuse to transfer any portion of this Warrant to any person who directly competes with the Company. 4.5 Notices. All notices and other communications from the Company to the Holder, or vice versa, shall be deemed delivered and effective when give personally or mailed by first class registered or certified mail, postage prepaid, to the Company at its address as set forth above or to the Holder at: Leasing Technologies International, Inc., 1266 Main Street, Stamford, Connecticut 06902, Attn: George A. Parker with a copy to Hugh M. Baum c/o LTI, 1266 Main Street, Stamford, CT 06902, or at such other address as may have been fumished to the Company or the Holder, as the case may be, in writing by the Company or such holder from time to time. 4.6 Waiver. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. 4.7 Attorneys Fees. In the event of any dispute between the parties concerning the terms and provisions of this Warrant, the party prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorney's fees. - 6 - 4.8 Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of Connecticut, without giving effect to its principles regarding conflicts of law. DIGITRAN CORPORATION By /s/ Thomas F. Murawski ----------------------------- Name Thomas F. Murawski (Print) Title: President By /s/ Peter S. Macaluso ----------------------------- Name Peter S. Macaluso (Print) Title: Chief Financial Officer - 7 - APPENDIX 1 NOTICE OF EXERCISE 1. The undersigned hereby elects to purchase shares of Common Stock of Digitran Corporation pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full. 1. The undersigned hereby elects to convert the attached Warrant into Shares/cash [strike one] in the manner specified in the Warrant. This conversion is exercised with respect to of the Shares covered by the Warrant. [Strike paragraph that does not apply.] 2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name as is specified below: ------------------------------------------- (Name) ------------------------------------------- ------------------------------------------- (Address) 3. The undersigned represents it is acquiring the shares solely for its own account and not as a nominee for any other party and not with a view toward the resale or distribution thereof except in compliance with applicable securities laws. ------------------------------------------- (Signature) - ------------------ (Date) - 8 - APPENDIX 2 NOTICE THAT WARRANT IS ABOUT TO EXPIRE -------------------------------------- - -------------------------------------------------------------------------------- (Name of Holder) - -------------------------------------------------------------------------------- (Address of Holder) Attn: Chief Financial Officer Dear : This is to advise you that the Warrant issued to you described below will expire on ________, 19__. Issuer: Digitran Corporation Issue Date: April _, 1992 Class of Security Issuable: Common Stock Exercise Price per Share: ______________ Procedure for Exercise: ________________ Please contact [name of contract person at (phone number)] with any questions you may have concerning exercise of the Warrant. This is your only notice of pending expiration. DIGITRAN CORPORATION (Name of Issuer) By: --------------------------------------------- Its: -------------------------------------------- - 9 - EXHIBIT A ANTI-DILUTION PROVISIONS (FOR COMMON STOCK WARRANTS WHERE EXERCISE PRICE EQUALS PRICE OF PREFERRED STOCK WHICH HAS ANTI-DILUTION PROTECTION) In the event of the issuance (a "Diluting Issuance") by the Company, after the Issue Date of the Warrant, of securities at a price per share less than the then conversion price of the Company's Series C Preferred Stock, then the number of Shares issuable upon exercise of the Warrant shall be adjusted as a result of Diluting Issuances in the same proportion as the number of shares of common stock issuable upon conversion of the Series C Preferred Stock in accordance with the Company's Articles (Certificate) of Incorporation which adjust the conversion price of the Preferred Stock in the event of Diluting Issuances. The Company and the Holder agrees that the Provisions, as in effect on the Issue Date, shall be amended to conform to any subsequent amendment, waiver or termination thereof by the Company's shareholders and shall terminate upon the conversion of the Preferred Stock. Under no circumstances shall the aggregate Warrant Price payable by the Holder upon exercise of the Warrant increase as a result of any adjustment arising from a Diluting Issuance. - 10 - EXHIBIT C REGISTRATION RIGHTS The Shares (if common stock), or the common stock issuable upon conversion of the Shares, shall be deemed "registration securities" or otherwise entitled to "piggy back" registration rights in accordance with the terms of the following agreement (the "Agreement") between the Company and its investor(s): Second Investors' Rights Agreement, as amended effective April 6, 1992 [Identify Agreement by date, title and parties. If no Agreement exists, indicate by "none".] By acceptance of the Warrant to which this Exhibit C is attached, Holder shall be deemed to be a party to the Agreement. If no Agreement exists, then the Company and the Holder shall enter into Holder's standard form of Registration Rights Agreement as in effect on the Issue Date of the Warrant. - 11 - EX-10.18 13 EX-10.18 Exhibit 10.18 THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1993, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. WARRANT TO PURCHASE STOCK Issue Date: May 5, 1994 Expiration Date: Seven years from issuance Exercise Price: See Preamble Below Number and Class of Stock: See Preamble Below THIS WARRANT CERTIFIES THAT, for the agreed upon value of $1.00 and for other good and valuable consideration, LTI Ventures Leasing Corp., ("Holder") is entitled to purchase 89,000 fully paid and nonassessable shares of the common stock, $.0025 par value per share (the "Shares"), of Digitran Corporation (the "Company") as may be purchased for Seventeen Thousand Eight Hundred Dollars ($17,800) (the "Face Value") at an initial exercise price per share (the "Warrant Price") equal to twenty cents ($.20); as adjusted pursuant to Article 2 of this Warrant, subject to the provisions and upon the terms and conditions set forth of this Warrant. ARTICLE 1. EXERCISE AND EARLY TERMINATION 1.1 Method of Exercise. Holder may exercise this Warrant by delivering a duly executed Notice of Exercise in substantially the form attached as Appendix 1 to the principal office of the Company. Unless Holder is exercising the conversion right set forth in Section 1.2, Holder shall also deliver to the Company a check for the aggregate Warrant Price for the shares being purchased. 1.2 Conversion Right. In lieu of exercising this Warrant as specified in Section 1.1, Holder may from time to time convert this warrant, in whole or in part, into a number of shares determined by dividing (a) the aggregate fair market value of the shares or other securities otherwise issuable upon exercise of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair market value of one Share. The fair market value of the Shares shall be determined pursuant to Section 1.4. 1.3 Fair Market Value. If the Shares are traded in a public market, the fair market value of the Shares shall be the closing price of the Shares (or the closing price of the Company's business day immediately before Holder delivers its Notice of Exercise to the Company. If the Shares are not traded in a public market, the Board of Directors of the Company shall determine fair market value in its reasonable good faith judgment. The foregoing notwithstanding, if Holder advises the Board of Directors in writing that Holder disagrees with such determination, then the Company and Holder shall promptly agree upon a reputable investment banking firm to undertake such valuation. If the valuation of such investment banking firm is greater than that of such investment banking firm shall be paid by the Company. In all other circumstances, such fees and expenses shall be paid by Holder. 1.4 Delivery of Certificate and New Warrant. Promptly after Holder exercises or converts this Warrant, the Company shall deliver to Holder certificates for the Shares acquired and, if this Warrant has not been fully exercised or converted and has not expired, a new Warrant representing the Shares not so acquired. 1.5 Replacement of Warrants. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction on delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of mutilation, or surrender and cancellation of this Warrant, the Company at its expense shall execute dna deliver, in lieu of this Warrant, a new warrant of like tenor. 1.6 Repurchase on Sale, Merger, or Consolidation of the Company. 1.6.1 "Acquisition". For the purpose of this Warrant, "Acquisition" means any sale, license, or other disposition of all or substantially all of the assets of the Company, or any reorganization, consolidation, or merger of the Company where the holders of the Company's securities before the transaction beneficially own less than 50% of the outstanding voting securities of the surviving entity after the transaction. 1.6.2 Assumption of Warrant. If upon the closing of any Acquisition the successor entity assumes the obligations of this Warrant, then this Warrant shall be exercisable for the same securities, cash, and property as would be payable for the Shares issuable upon exercise of the unexercised portion of this Warrant as if such Shares were outstanding on the record date for the Acquisition and subsequent closing. The Warrant Price shall be adjusted accordingly. 1.6.3 Nonassumption. If upon the closing of any Acquisition and successor entity does not assume the obligations of this Warrant and Holder has not otherwise exercised this Warrant in full, then the unexercised portion of this Warrant shall be deemed to have been automatically converted pursuant to Section 1.2 and thereafter Holder shall participate in the acquisition on the same terms as other holders of the same class of securities of the Company. ARTICLE 2. ADJUSTMENTS TO THE SHARES 2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a dividend on its common stock (or the Shares if the Shares are securities other than common stock) payable in common stock, or other securities, subdivides the outstanding common stock into a greater amount of common stock, or, if the Shares are securities other than common stock, subdivides the Shares in a transaction that increases the amount of common stock into which the Shares are convertible, then upon exercise of this Warrant, for each Share acquired, Holder shall receive, without cost of Holder, the total number and kind of securities to which Holder would have been entitled had Holder owned the Shares of record as of the date the dividend or subdivision occurred. - 2 - 2.2 Reclassification, Exchange, or Substitution. Upon any reclassification, exchange, substitution, or other event that results in a change of the number and/or class of the securities issuable upon exercise or conversion of this Warrant, Holder shall be entitled to receive, upon exercise or conversion of this Warrant, the number and kind of securities and property that Holder would have received for the Shares if this Warrant had been exercised immediately before such reclassification, exchange, substitution, or other event. Such an event shall include any automatic conversion of the outstanding or issuable securities of the Company of the same class or series as the Shares to common stock pursuant to the terms of the Company's Certificate of Incorporation upon the closing of a registered public offering of the Company's common stock. The Company or its successor shall promptly issue to Holder a new Warrant for such new securities or other property. The new Warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 2 including, without limitation, adjustments to the Warrant Price and to the number of securities or property issuable upon exercise of the new Warrant. The provisions of this Section 2.2 shall similarly apply to successive reclassifications, exchanges, substitutions, or other events. 2.3 Adjustments for Combinations, Etc. If the outstanding Shares are Combined or consolidated, by reclassification or otherwise. into a lesser number of shares, the Warrant Price shall be proportionately increased. 2.4 Adjustments for Diluting Issuances. The Warrant Price and the number of Shares issuable upon exercise of this Warrant or, if the Shares are Preferred Stock, the number of shares of common stock issuable upon conversion of the Shares, shall be subject to adjustment, from time to time in the manner set forth on Exhibit A in the event of Diluting Issuances (as defined on Exhibit A). 2.5 No Impairment. The Company shall not, by amendment of its Certificate of Incorporation or through a reorganization, transfer of assets, consolidation, merger, dissolution, issue, or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this Warrant by the Company, but shall at all times in good faith assist in carrying out of all the provisions of this Article 2 and in taking all such action as may be necessary or appropriate to protect Holder's rights under this Article against impairment. If the Company takes any action affecting the Shares or its common stock other than as described above that adversely affects Holder's rights under this Warrant, the Warrant Price shall be adjusted downward and the number of Shares issuable upon exercise of this Warrant shall be adjusted upward in such a manner that the aggregate Warrant Price of this Warrant is unchanged. 2.6 Reservation of Shares. The Company will at all times reserve and keep available out of its authorized but unissued common stock, solely for issuance, sale and delivery upon the exercise or conversion of this Warrant, a number of shares of common stock equal to the number of shares of common stock issuable upon the exercise of this Warrant. 2.7 Fractional Shares. No fractional shares shall be issuable upon exercise or conversion of the Warrant and the number of Shares to be issued shall be rounded down to the nearest whole Share. If a fractional share interest arises upon any exercise or conversion of the - 3 - Warrant, the Company shall eliminate such fractional share interest by paying Holder amount computed by multiplying the fractional interest by the fair market value of a full Share. 2.8 Certificate as to Adjustments. Upon each adjustment of the Warrant Price, the Company at its expense shall promptly compute such adjustment, and furnish Holder with a certificate of its Chief Financial Officer setting forth such adjustment and the facts upon which such adjustment is based. The Company shall, upon written request, furnish Holder a certificate setting forth the Warrant Price in effect upon the date thereof and the series of adjustments leading to such Warrant Price. ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY. 3.1 Representations and Warranties. The Company hereby represents and warrants to the Holder as follows: (a) The initial Warrant Price referenced on the first page of this Warrant is not greater than the fair market value of the Shares as of the date of this Warrant. (b) All Shares which may be issued upon the exercise of the purchase right represented by this Warrant, and all securities, if any, issuable upon conversion of the Shares, shall, upon issuance, be duly authorized, validly issued, fully paid and nonassessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws. (c) The authorized and issued and outstanding capital stock of the Company is as set forth on Exhibit B. All the outstanding shares of capital stock of the Company have been duly authorized, are validly issued and are fully paid and nonassessable. Except as set forth in Exhibit B, (i) there are no options, warrants or rights to purchase shares of capital stock or other securities of Company authorized, issued or outstanding, nor is the Company obligated in any other manner to issue shares of its capital stock or other securities; (ii) there are no restrictions on the transfer of shares of capital stock of the Company other than those imposes by federal and relevant state securities laws; and (iii) no holder of any security of the Company is entitled to preemptive or similar statutory or contractual rights, either arising pursuant to any agreement or instrument to which the Company is a party, or which are otherwise binding upon the Company. Neither the issuance of this Warrant nor the shares of Common Stock issued upon any exercise or conversion of this Warrant will result in an adjustment under the antidilution or exercise rights of any holders of any outstanding shares of capital stock of the Company. The offer and sales of all shares of capital stock and other securities of the Company issued before the date of this Warrant complied with or were exempt from the registration requirements of all federal and state securities laws. 3.2 Notice of Certain Events. If the Company proposes at any time (a) to declare any dividend or distribution upon its common stock, whether in cash, property, stock, or other securities and whether or not a regular cash dividend; (b) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (c) to effect any reclassification or recapitalization of common stock; (d) to merge or consolidate with or into any other corporation, or sell, lease, license, or convey all or - 4 - substantially all of its assets, or to liquidate, dissolve or wind up; or (e) offer holders of registration rights the opportunity to participate in an underwritten public offering of the company's securities for cash, then, in connection with each such event, the Company shall give Holder (1) at least 20 days prior written notice of the date on which a record will be taken for such dividend, distribution, or subscription rights (and specifying the date on which the holders of common stock will be entitled thereto) or for determining rights to vote, if any, in respect of the matters referred to in (c) and (d) above at least 20 days prior written notice of the dated on which the holders of common stock will be entitled to exchange their common stock for securities or other property deliverable upon the occurrence of such event); and (3) in the case of the master referred to in (e) above, the same notice as is given to the holders of such registration rights. 3.3 Information Rights. So long as the Holder holds this Warrant and/or any of the Shares, the Company shall deliver to the Holder (a) promptly after mailing, copies of all notices or (b) within ninety (90) days after the end of each fiscal year of the Company, the annual audited financial statements of the Company certified by independent public accountants or recognized standing and (c) within forty-five (45) days after the end of each of the first three quarters or each fiscal year, the Company's quarterly, unaudited financial statements. ARTICLE 4. MISCELLANEOUS. 4.1 Term: Notice of Expiration. This Warrant is exercisable, in whole or in part, at any time and from time to time on or before the Expiration Date set forth above. The Company shall give Holder written notice of Holder's right to exercise this Warrant in the form attached as Appendix 2 not more than 90 days and not less than 30 days before the Expiration Date. If the notice is not so give, the Expiration Date shall automatically be extended until 30 days after the date the Company delivers the notice to Holder. 4.2 Legends. This Warrant and the Shares (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) shall be imprinted with a legend in substantially the following form: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. 4.3 Compliance with Securities Laws on Transfer. This Warrant and the Shares issuable upon exercise this Warrant (and the securities issuable, directly or indirectly, upon conversion of the Share, if any) may not be transferred or assigned in whole or in part without compliance with applicable federal and state securities laws by the transferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, H reasonably requested by the Company). The Company shall not require Holder to provide an opinion of counsel if the transfer is to an affiliate of Holder or if there is no material question as to an affiliate of Holder or if there is no material question as to - 5 - the availability of current information as referenced in Rule 144 (c), Holder represents that it has complied with Rule 144 (d) and (e) in reasonable detail, the selling broker represents that it has complied with Rule 144 (f), and the Company is provided with a copy of Holder's notice of proposed sale. 4.4 Transfer Procedure. Subject to the provisions of Section 4.2, Holder may transfer all or part of this Warrant or the Shares issuable upon exercise of this Warrant (or the securities issuable, directly or indirectly, upon conversion of the Shares, if any) by giving the Company notice of the portion of the Warrant being transferred setting both the name, address and the taxpayer identification number of the transferee and surrendering this Warrant to the Company for reissuance to the transferee(s) (and Holder if applicable). Unless the Company is filing financial information which the SEC pursuant to the Securities Exchange Act of 1934, the Company shall have the right to refuse to transfer any portion of this Warrant to any person who directly competes with the Company. 4.5 Notices. All notices and other communications from the Company to the Holder, or vice versa, shall be deemed delivered and effective when give personally or mailed by first class registered or certified mail, postage prepaid, to the Company at its address as set forth above or to the Holder at: Leasing Technologies International, Inc., 1266 Main Street, Stamford, Connecticut 06902, Attn: George A. Parker with a copy to Hugh M. Baum c/o LTI, 1266 Main Street, Stamford, CT 06902, or at such other address as may have been furnished to the Company or the Holder, as the case may be, in writing by the Company or such holder from time to time. 4.6 Waiver. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. 4.7 Attorneys Fees. In the event of any dispute between the parties concerning the terms and provisions of this Warrant, the party prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorney's fees. - 6 - 4.8 Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of Connecticut, without giving effect to its principles regarding conflicts of law. DIGITRAN CORPORATION By /s/ Thomas F. Murawski ------------------------------ Name Thomas F. Murawski (Print) Title: President By /s/ Peter S. Macaluso ------------------------------ Name Peter S. Macaluso (Print) Title: Chief Financial Officer - 7 - APPENDIX 1 NOTICE OF EXERCISE 1. The undersigned hereby elects to purchase __________ shares of Common Stock of Digitran Corporation pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full. 1. The undersigned hereby elects to convert the attached Warrant into Shares/cash [strike one] in the manner specified in the Warrant. This conversion is exercised with respect to of the Shares covered by the Warrant. [Strike paragraph that does not apply.] 2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name as is specified below: ------------------------------------------- (Name) -------------------------------------------- -------------------------------------------- (Address) 3. The undersigned represents it is acquiring the shares solely for its own account and not as a nominee for any other party and not with a view toward the resale or distribution thereof except in compliance with applicable securities laws. ------------------------------------------- (Signature) - ------------------- (Date) - 8 - APPENDIX 2 NOTICE THAT WARRANT IS ABOUT TO EXPIRE - -------------------------------------------------------------------------------- (Name of Holder) - -------------------------------------------------------------------------------- (Address of Holder) Attn: Chief Financial Officer Dear : This is to advise you that the Warrant issued to you described below will expire on ________, 19__. Issuer: Digitran Corporation Issue Date: April ___, 1992 Class of Security Issuable: Common Stock Exercise Price per Share: Procedure for Exercise: Please contact [name of contract person at (phone number)] with any questions you may have concerning exercise of the Warrant. This is your only notice of pending expiration. DIGITRAN CORPORATION (Name of Issuer) By: --------------------------------------------- Its: -------------------------------------------- - 9 - EXHIBIT A ANTI-DILUTION PROVISIONS (FOR COMMON STOCK WARRANTS WHERE EXERCISE PRICE EQUALS PRICE OF PREFERRED STOCK WHICH HAS ANTI-DILUTION PROTECTION) In the event of the issuance (a "Diluting Issuance") by the Company, after the Issue Date of the Warrant, of securities at a price per share less than the then conversion price of the Company's Series D Preferred Stock, then the number of Shares issuable upon exercise of the Warrant shall be adjusted as a result of Diluting Issuances in the same proportion as the number of shares of common stock issuable upon conversion of the Series D Preferred Stock in accordance with the Company's Articles (Certificate) of Incorporation which adjust the conversion price of the Preferred Stock in the event of Diluting Issuances. The Company and the Holder agree that the Provisions, as in effect on the Issue Date, shall be amended to conform to any subsequent amendment, waiver or termination thereof by the Company's shareholders and shall terminate upon the conversion of the Preferred Stock. Under no circumstances shall the aggregate Warrant Price payable by the Holder upon exercise of the Warrant increase as a result of any adjustment arising from a Diluting Issuance. - 10 - EXHIBIT C REGISTRATION RIGHTS The Shares (if common stock), or the common stock issuable upon conversion of the Shares, shall be deemed "registration securities" or otherwise entitled to "piggy back" registration rights in accordance with the terms of the following agreement (the "Agreement") between the Company and its investor(s): Second Investors' Rights Agreement, as amended effective April 6, 1992 [Identify Agreement by date, title and parties. If no Agreement exists, indicate by "none".] By acceptance of the Warrant to which this Exhibit C is attached, Holder shall be deemed to be a party to the Agreement. If no Agreement exists, then the Company and the Holder shall enter into Holder's standard form of Registration Rights Agreement as in effect on the Issue Date of the Warrant. - 11 - EX-10.19 14 EX-10.19 Exhibit 10.19 THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. AMENDED AND RESTATED WARRANT TO PURCHASE STOCK Issue Date: April 6, 1992 Expiration Date: July 7, 2000 Exercise Price: $0.22 Number and Class of Stock: 83,333 shares of Common Stock THIS AMENDED AND RESTATED WARRANT (the "Warrant") is issued as of the Issue Date set forth above by DIGITRAN CORPORATION, a Delaware corporation (the "Company") for the benefit of SILICON VALLEY BANCSHARES (the "Holder"). THIS WARRANT CERTIFIES THAT, for the agreed upon value of $1.00 and for other good and valuable consideration, the Holder is entitled to purchase 83,333 fully paid and nonassessable shares of the common stock, $.0025 par value per share (the "Shares"), of the Company, at the initial exercise price per Share (the "Warrant Price") as set forth above and as adjusted pursuant to Article 2 of this Warrant, subject to the provisions and upon the terms and conditions set forth of this Warrant. ARTICLE 1. EXERCISE AND EARLY TERMINATION. 1.1 Method of Exercise. Holder may exercise this Warrant by delivering a duly executed Notice of Exercise in substantially the form attached as Appendix 1 hereto to the principal office of the Company. This Warrant shall be exercisable until the Expiration Date. Unless Holder is exercising the conversion right set forth in Section 1.2, Holder shall also deliver to the Company a check for the aggregate Warrant Price for the Shares being purchased. 1.2 Conversion Right. In lieu of exercising this Warrant as specified in Section 1.1, Holder may from time to time convert this Warrant, in whole or in part, into a number of Shares determined by dividing (a) the aggregate fair market value of the Shares or other securities otherwise issuable upon exercise of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair market value of one Share. The fair market value of the Shares shall be determined pursuant to Section 1.3. 1.3 Fair Market Value. If the Shares are traded in a public market, the fair market value of the Shares shall be the closing price of the Shares reported for the business day immediately before Holder delivers its Notice of Exercise to the Company. If the Shares are not traded in a public market, the Board of Directors of the Company shall determine fair market value in its reasonable good faith judgment. The foregoing notwithstanding, if Holder advises the Board of Directors in writing that Holder disagrees with such determination, then the Company and Holder shall promptly agree upon a reputable investment banking firm to undertake such valuation. if the valuation of such investment banking firm is greater than that determined by the Board of Directors, then all fees and expenses of such investment banking firm shall be paid by the Company. In all other circumstances, such fees and expenses shall be paid by Holder. 1.4 Delivery of Certificate and New Warrant. Promptly after Holder exercises or converts this Warrant, the Company shall deliver to Holder certificates for the Shares acquired and, if this Warrant has not been fully exercised or converted and has not expired, a new Warrant representing the Shares not so acquired. 1.5 Replacement of Warrants. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of mutilation, or surrender and cancellation of this Warrant, the Company at its expense shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor. 1.6 Repurchase on Sale, Merger, or Consolidation of the Company. 1.6.1. "Acquisition". For the purpose of this Warrant, "Acquisition" means any sale, license, or other disposition of all or substantially all of the assets of the Company, or any reorganization, consolidation, or merger of the Company where the holders of the Company's securities before the transaction beneficially own less than 50% of the outstanding voting securities of the surviving entity after the transaction. 1.6.2. Assumption of Warrant. If upon the closing of any Acquisition the successor entity assumes the obligations of this Warrant, then this Warrant shall be exercisable for the same securities, cash, and property as would be payable for the Shares issuable upon exercise of the unexercised portion of this Warrant as if such Shares were outstanding on the record date for the Acquisition and subsequent closing. The Warrant Price shall be adjusted accordingly. 1.6.3. Nonassumption. If upon the closing of any Acquisition the successor entity does not assume the obligations of this Warrant and Holder has not otherwise exercised this Warrant in full, then the unexercised portion of this Warrant shall be deemed to have been automatically converted pursuant to Section 1.2 and thereafter Holder shall participate in the acquisition on the same terms as other holders of the same class of securities of the Company. ARTICLE 2. ADJUSTMENTS TO THE SHARES. 2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a dividend on its common stock payable in common stock, or other securities, subdivides the outstanding common stock into a greater amount of common stock, or, if the Shares are securities other than common stock, subdivides the Shares in a transaction that increases the amount of common stock into which the Shares are convertible, then upon exercise of this Warrant, for each Share acquired, Holder shall receive, without cost to Holder, the total number and kind of securities to which Holder would have been entitled had Holder owned the Shares of record as of the date the dividend or subdivision occurred. 2.2 Reclassification, Exchange or Substitution. Upon any reclassification, exchange, substitution, or other event that results in a change of the number and/or class of the securities issuable upon exercise or conversion of this Warrant, Holder shall be entitled to receive, upon exercise or conversion of this Warrant, the number and kind of securities and property that Holder would have received for the Shares if this Warrant had been exercised immediately before such reclassification, exchange, substitution, or other event. Such an event shall include any automatic conversion of the outstanding or issuable securities of the Company of the same class or series as the Shares to common stock pursuant to the terms of the Company's Certificate of Incorporation upon the closing of a registered public offering of the Company's common stock. -2- The Company or its successor shall promptly issue to Holder a new Warrant for such new securities or other property. The new Warrant shall provide for adjustments which shall be as nearly equivalent of the new Warrant. The provisions of this Section 2.2 shall similarly apply to successive reclassifications, exchanges, substitutions, or other events. 2.3 Adjustments for Combinations, Etc. If the outstanding Shares are combined or consolidated, by reclassification or otherwise, into a lesser number of shares, the Warrant Price shall be proportionately increased. 2.4 Adjustments for Diluting Issuances. The Warrant Price and the number of Shares issuable upon exercise of this Warrant or, if the Shares are Preferred Stock, the number of shares of common stock issuable upon conversion of the Shares, shall be subject to adjustment, from time to time in the manner set forth on Exhibit A in the event of Diluting Issuances (as defined on Exhibit A). 2.5 No Impairment. The Company shall not, by amendment of its Certificate of Incorporation or through a reorganization, transfer of assets, consolidation, merger, dissolution, issue, or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this Warrant by the Company, but shall at all times in good faith assist in carrying out of all the provisions of this Article 2 and in taking all such action as may be necessary or appropriate to protect Holder's rights under this Article against impairment. If the Company takes any action affecting the Shares or its common stock other than as described above that adversely affects Holder's rights under this Warrant, the Warrant Price shall be adjusted downward and the number of Shares issuable upon exercise of this Warrant shall be adjusted upward in such a manner that the aggregate Warrant Price of this Warrant is unchanged. 2.6 Reservation of Shares. The Company will at all times reserve and keep available out of its authorized but unissued common stock, solely for issuance, sale and delivery upon the exercise or conversion of this Warrant, a number of shares of common stock equal to the number of shares of common stock issuable upon the exercise of this Warrant. 2.7 Fractional Shares. No fractional shares shall be issuable upon exercise or conversion of the Warrant and the number of Shares to be issued shall be rounded down to the nearest whole Share. If a fractional share interest arises upon any exercise or conversion of the Warrant, the Company shall eliminate such fractional share interest by paying Holder an amount computed by multiplying the factional interest by the fair market value of a full Share. 2.8 Certificate as to Adjustments. Upon each adjustment of the Warrant Price, the Company at its expense shall promptly compute such adjustment, and furnish Holder with a certificate of its Chief Financial officer setting forth such adjustment and the facts upon which such adjustment is based. The Company shall, upon written request, furnish Holder a certificate setting forth the Warrant Price in effect upon the date thereof and the series of adjustments leading to such Warrant Price. ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY. 3.1 Representations and Warranties. The Company hereby represents andwarrants to the Holdern as follows: -3- (a) The initial Warrant Price referenced on the first page of this Warrant is not greater than the fair market value of the Shares as of the date of this Warrant. (b) All Shares which may be issued upon the exercise of the purchase right represented by this Warrant shall, upon issuance, be duly authorized, validly issued, fully paid and nonassessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws. (c) The authorized and issued and outstanding capital stock of the company is as set forth on Exhibit B. All the outstanding shares of capital stock of the Company have been duly authorized, are validly issued and are fully paid and nonassessable. Except as set forth in Exhibit B, (i) there are no options, warrants or rights to purchase shares of capital stock or other securities of the Company authorized, issued or outstanding, nor is the Company obligated in any other manner to issue shares of its capital stock or other securities; (ii) there are no restrictions on the transfer of shares of capital stock of the Company other than those imposed by federal and relevant state securities laws; and (iii) no bolder of any security of the Company is entitled to preemptive or similar statutory or contractual rights, either arising pursuant to any agreement or instrument to which the Company is a party, or which are otherwise binding upon the Company. Neither the issuance of this Warrant nor the shares of Common Stock issued upon any exercise or conversion of this Warrant will result in an adjustment under the antidilution or exercise rights of any holders of any outstanding shares of capital stock of the Company. The offer and sales of all shares of capital stock and other securities of the Company issued before the date of this Warrant complied with or were exempt from the registration requirements of all federal and state securities laws. 3.2 Notice of Certain Events. If the Company proposes at any time (a) to declare any dividend or distribution upon its common stock, whether in cash, property, stock, or other securities and whether or not a regular cash dividend; (b) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (c) to effect any reclassification or recapitalization of common stock; (d) to merge or consolidate with or into any other corporation, or sell, lease, license, or convey all or substantially all of its assets, or to liquidate, dissolve or wind up; or (e) offer holders of registration rights the opportunity to participate in an underwritten public offering of the company's securities for cash, then, in connection with each such event, the Company shall give Holder (1) at least 20 days prior written notice of the date on which a record will be taken for such dividend, distribution, or subscription rights (and specifying the date on which the holders of common stock will be entitled thereto) or for determining rights to vote, if any, in respect of the matters referred to in (c) and (d) above; (2) in the case of the matters referred to in (c) and (d) above at least 20 days prior written notice of the date when the same will take place (and specifying the date on which the holders of common stock will be entitled to exchange their common stock for securities or other property deliverable upon the occurrence of such event); and (3) in the case of the matter referred to in (e) above, the same notice as is given to the holders of such registration rights. 3.3 Information Rights. So long as the Holder holds this Warrant and/or any of the Shares, the Company shall deliver to the Holder (a) promptly after mailing, copies of all notices or other written communications to the shareholders of the Company, (b) within ninety (90) days after the end of each fiscal year of the Company, the annual audited financial statements of the Company certified by independent public accountants of recognized standing and (c) within forty-five (45) days after the end of each of the first three quarters or each fiscal year, the Company's quarterly, unaudited financial statements. -4- 3.4 Registration under Securities Act of 1933, As Amended. The Company agrees that the Shares shall be subject to the registration rights set forth in that certain Fourth Investor Rights Agreement dated as of January 12, 1995, by and among the Company and the persons signatories thereto. ARTICLE 4. MISCELLANEOUS. 4.1 Term: Notice of Expiration. This Warrant is exercisable, in whole or in part, at any time and from time to time on or before the Expiration Date set forth above. The Company shall give Holder written notice of Holder's right to exercise this Warrant in the form attached as Appendix 2 hereto not more than 90 days and not less than 30 days before the Expiration Date. If the notice is not so given, the Expiration Date shall automatically be extended until 30 days after the date the Company delivers the notice to Holder. 4.2 Legends. This Warrant and the Shares shall be imprinted with a legend in substantially the following form: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. 4.3 Compliance with Securities Laws on Transfer. This Warrant and the Shares issuable upon exercise of this Warrant may not be transferred or assigned in whole or in part without compliance with applicable federal and state securities laws by the transferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, reasonably requested by the Company). The Company shall not require Holder to provide an opinion of counsel if the transfer is to an affiliate of Holder or if there is no material question as to the availability of current information as referenced in Rule 144(c), Holder represents that it has complied with Rule 144(d) and (e) in reasonable detail, the selling broker represents that it has complied with Rule 144(f), and the Company is provided with a copy of Holder's notice of proposed sale. 4.4 Transfer Procedure. Subject to the provisions of Section 4.2, Holder may transfer all or part of this Warrant or the Shares issuable upon exercise of this Warrant by giving the Company notice of the portion of the Warrant being transferred setting forth the name, address and taxpayer identification number of the transferee and surrendering this Warrant to the Company for reissuance to the transferees) (and Holder if applicable). Unless the Company is filing financial information with the client pursuant to the Securities Exchange Act of 1934, the Company shall have the right to refuse to transfer any portion of this Warrant to any person who directly competes with the Company. 4.5 Notices. All notices and other communications from the Company to the Holder, or vice versa, shall be deemed delivered and effective when given personally or mailed by first-class registered or certified mail, postage prepaid, to the Company at Digitran Corporation, 379 Thornall Street, Edison, NJ 08837, Attn: Chief Financial Officer or to the Holder at: Silicon Valley Bank, 45 William Street, Wellesley, Massachusetts 02181, Attn: Joan Parsons, Vice President, with a copy to Dennis Uyemura, Chief Financial Officer, Silicon Valley Bancshares, 2248 North First Street, San Jose, California 95121, or at such other address as may have been furnished to the Company or the Holder, as the case may be, in writing by the Company or such holder from time to time. -5- 4.6 Waiver. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. 4.7 Attorneys Fees. In the event of any dispute between the parties concerning the terms and provisions of this Warrant, the party prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorneys' fees. 4.8 Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of California, without giving effect to its principles regarding conflicts of law. 4.9 Amendment and Restatement of Warrant. In order to induce Silicon Valley Bank, a California chartered bank and a subsidiary of the Holder, to enter into a Credit Agreement for the benefit of the Company, as amended, dated as of July 7, 1995, the Company desires to hereby amend and restate in its entirety that certain warrant to purchase shares of its stock issued to Holder by the Company on April 6, 1992 (the "Original Warrant"), in order to extend the expiration date and adjust the exercise price. No other change, including without limitation, any change to the Issue Date, is intended to be effected hereby. DIGITRAN CORPORATION By /s/ Thomas F. Muranski ----------------------------- Name Thomas F. Muranski (Print) Title: President By /s/ Peter S. Macaluso ----------------------------- Name Peter S. Macaluso (Print) Title: Chief Financial Officer, Secretary -6- APPENDIX I NOTICE OF EXERCISE 1. The undersigned hereby elects to purchase _____ shares of the Common Stock of Digitran Corporation pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full. 1. The undersigned hereby elects to convert the attached Warrant into Shares/cash (strike one) in the manner specified in the Warrant. This conversion is exercised with respect to ______ the Shares covered by the Warrant. [Strike paragraph that does not apply.] 2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name as is specified below: ------------------------------------------- (Name) -------------------------------------------- -------------------------------------------- (Address) 3. The undersigned represents it is acquiring the shares solely for its own account and not as a nominee for any other party and not with a view toward the resale or distribution thereof except in compliance with applicable securities laws. --------------------------------------------- (Signature) - ------------------ (Date) -7- APPENDIX 2 NOTICE THAT WARRANT IS ABOUT TO EXPIRE Silicon Valley East 45 William Street Wellesley, Massachusetts 02181 Attn: Joan S. Parsons Vice President Dear Ms. Parsons: This is to advise you that the Warrant issued to you described below will expire on July 7, 2000. Issuer: Digitran Corporation Issue Date: April 6, 1992 Class of Security Issuable: Common Stock Exercise Price per Share: $0.22 Procedure for Exercise: Please contact [name of contact person at (phone number) with any questions you may have concerning exercise of the Warrant. This is your only notice of pending expiration. DIGITRAN CORPORATION (Name of Issuer) By: ---------------------------------- Its: ---------------------------------- -8- EXHIBIT A ANTI-DILUTION PROVISIONS (FOR COMMON STOCK WARRANTS WHERE EXERCISE PRICE EQUALS PRICE OF PREFERRED STOCK WHICH HAS ANTI-DILUTION PROTECTION) In the event of the issuance (a "Diluting Issuance") by the Company, after the Issue Date of the Warrant, of securities at a price per share less than the then conversion price of the Company's Series E Preferred Stock, then the number of Shares issuable upon exercise of the Warrant shall be adjusted as a result of Diluting Issuances in the same proportion as the number of shares of common stock issuable upon conversion of the Company's Series E Preferred Stock (the "Preferred Stock") are adjusted pursuant to those provisions (the "Provisions") of the Company's Certificate of Incorporation which adjust the conversion price of the Preferred Stock in the event of Diluting Issuances. The Company agrees that the Provisions, as in effect on the Issue Date, shall be amended to conform to any subsequent amendment, waiver or termination thereof by the Company's shareholders and shall terminate upon the conversion of the Preferred Stock. Under no circumstances shall the aggregate Warrant Price payable by the Holder upon exercise of the Warrant increase as a result of any adjustment arising from a Diluting Issuance. -9- APPENDIX 1 NOTICE OF EXERCISE 1. The undersigned hereby elects to purchase shares of the Common Stock of Digitran Corporation pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full. 2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name as is specified below: Silicon Valley Bancshares 2248 North First Street San Jose, CA 95121 3. The undersigned represents it is acquiring the shares solely for the account of Silicon Valley Bancshares and not as a nominee for any other party and not with a view toward the resale or distribution thereof except in compliance with applicable securities laws. SILICON VALLEY BANCSHARES By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- - ------------------ (Date) APPENDIX 2 NOTICE THAT WARRANT IS ABOUT TO EXPIRE Silicon Valley East 45 William Street Wellesley, Massachusetts 02181 Attn: Joan S. Parsons Vice President Dear Ms. Parsons: This is to advise you that the Warrant issued to you described below will expire on July 7, 2000. Issuer: Digitran Corporation Issue Date: July 7, 1995 Class of Security Issuable: Common Exercise Price per Share: $0.22 Procedure for Exercise: Please contact [name of contact person at (phone number)] with any questions you may have concerning exercise of the Warrant. This is your only notice of pending expiration. Digitran Corporation By: ------------------------------------ Its: ------------------------------------ EXHIBIT A ANTI-DILUTION PROVISIONS In the event of the issuance (a "Diluting Issuance") by the Company, after the Issue Date of the Warrant, of securities at a price per share less than the then conversion price of the Company's Series E Preferred Stock, then the number of Shares issuable upon exercise of the Warrant shall be adjusted as a result of Diluting Issuances in the same proportion as the number of shares of common stock issuable upon conversion of the Company's Series E Preferred Stock (the "Preferred Stock") are adjusted pursuant to those provisions (the "Provisions") of the Company's Fourth Amended and Restated Certificate of Incorporation which adjust the conversion price of the Preferred Stock in the event of Diluting Issuances.* The Company agrees that the Provisions, as in effect on the Issue Date, shall be deemed to remain in full force and effect for purposes of this Warrant during its term notwithstanding (a) any subsequent amendment, waiver or termination thereof by the Company's shareholders or (b) the conversion of the Preferred Stock. Under no circumstances shall the aggregate Warrant Price payable by the Holder upon exercise of the Warrant increase as a result of any adjustment arising from a Diluting Issuance. - -------- * Assumes our exercise price of $.22 per share is the same as the conversion price of the Series E Preferred Stock. Exhibit B DIGITRAN CORPORATION CAPITALIZATION 4/30/95 Authorized Issued ---------- ------ Preferred Stock Series A 1,400,000 1,400,000 Series B 4,000,000 3,516,600 Series C 8,700,000 8,329,526 Series D 26,600,000 26,432,903 Series E 19,500,000 19,090,899 60,200,000 58,769,928 Common Stock 75,000,000 2,946,184 EX-10.20 15 EX-10.20 Exhibit 10.20 THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. WARRANT TO PURCHASE STOCK Corporation: Digitran Corporation, a Delaware corporation Number of Shares: 176,667 Class of Stock: Common Initial Exercise Price: $0.22 per share Issue Date: July 7, 1995 Expiration Date: July 7, 2000 THIS WARRANT CERTIFIES THAT, for the agreed upon value of $1.00 and for other good and valuable consideration, SILICON VALLEY BANCSHARES ("Holder") is entitled to purchase the number of fully paid and nonassessable shares of the class of securities (the "Shares") of Digitran Corporation, a Delaware corporation (the "Company") at the initial exercise price per Share (the "Warrant Price') all as set forth above and as adjusted pursuant to Article 2 of this Warrant, subject to the provisions and upon the terms and conditions set forth of this Warrant. ARTICLE 1 EXERCISE 1. 1. Method of Exercise. Holder may exercise this Warrant by delivering a duly executed Notice of Exercise in substantially the form attached as Appendix 1 hereto, to the principal office of the Company. Unless Holder is exercising the conversion right set forth in Section 1.2, Holder shall also deliver to the Company a check for the aggregate Warrant Price for the Shares being purchased. 1.2. Conversion Right. In lieu of exercising this Warrant as specified in Section 1.1, Holder may from time to time convert this Warrant, in whole or in part, into a number of Shares determined by dividing (a) the aggregate fair market value of the Shares or other securities otherwise issuable upon exercise of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair market value of one Share. The fair market value of the Shares shall be determined pursuant to Section 1.3. 1.3. Fair Market Value. If the Shares are traded in a public market, the fair market value of the Shares shall be the closing price of the Shares (or the closing price of the Company's stock into which the Shares are convertible) reported for the business day immediately before Holder delivers its Notice of Exercise to the Company. If the Shares are not traded in a public market, the Board of Directors of the Company shall determine fair market value in its reasonable good faith judgment. The foregoing notwithstanding, if Holder advises the Board of Directors in writing that Holder disagrees with such determination, then the Company and Holder shall promptly agree upon a reputable investment banking firm to undertake such valuation. If the valuation of such investment banking firm is greater than that determined by the Board of Directors, then all fees and expenses of such investment banking firm shall be paid by the Company. In all other circumstances, such fees and expenses shall be paid by Holder. 1.4. Delivery of Certificate and New Warrant. Promptly after Holder exercises or converts this Warrant, the Company shall deliver to Holder certificates for the Shares acquired and, if this Warrant has not been fully exercised or converted and has not expired, a new Warrant representing the Shares not so acquired. 1.5. Replacement of Warrants. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of mutilation, or surrender and cancellation of this Warrant, the Company at its expense shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor. 1.6. Repurchase on Sale, Merger, or Consolidation of the Company. (a) "Acquisition". For the purpose of this Warrant, "Acquisition" means any sale, license, or other disposition of all or substantially all of the assets of the Company, or any reorganization, consolidation, or merger of the Company where the holders of the Company's securities before the transaction beneficially own less than 50% of the outstanding voting securities of the surviving entity after the transaction. (b) Assumption of Warrant. If upon the closing of any Acquisition the successor entity assumes the obligations of this Warrant, then this Warrant shall be exercisable for the same securities, cash, and property as would be payable for the Shares issuable upon exercise of the unexercised portion of this Warrant as if such Shares were outstanding on the record date for the Acquisition and subsequent closing. The Warrant Price shall be adjusted accordingly. (c) Nonassumption. If upon the closing of any Acquisition the successor entity does not assume the obligations of this Warrant and Holder has not otherwise exercised this Warrant in full, then the unexercised portion of this Warrant shall be deemed to have been automatically converted pursuant to Section 1.2 and thereafter Holder shall participate in the acquisition on the same terms as other holders of the same class of securities of the Company. ARTICLE 2 ADJUSTMENTS TO THE SHARES 2.1. Stock Dividends, Splits, Etc. If the Company declares or pays a dividend on its common stock payable in common stock, or other securities, subdivides the outstanding common stock into a greater amount of common stock, then upon exercise of this Warrant, for each Share acquired, Holder shall receive, without cost to Holder, the total number and kind of securities to which Holder would have been entitled had Holder owned the Shares of record as of the date the dividend or subdivision occurred. 2.2. Reclassification, Exchange or Substitution. Upon any reclassification, exchange, substitution, or other event that results in a change of the number and/or class of the securities issuable upon exercise or conversion of this Warrant, Holder shall be entitled to receive, upon exercise or conversion of this Warrant, the number and kind of securities and property that Holder would have received for the Shares if this Warrant had been exercised immediately before such reclassification, exchange, substitution, or other event. Such an event shall include any automatic conversion of the outstanding or issuable securities of the Company of the same class or series as the Shares to common stock pursuant to the terms of the Company's Certificate of Incorporation upon the closing of a registered public offering of the Company's common stock. The Company or its successor shall promptly issue to Holder a new Warrant for such new securities or other property. The new Warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 2 including, without limitation, adjustments to the Warrant Price and to the number of securities or property -2- issuable upon exercise of the new Warrant. The provisions of this Section 2.2 shall similarly apply to successive reclassifications, exchanges, substitutions, or other events. 2.3. Adjustments for Combinations, Etc. If the outstanding Shares are combined or consolidated, by reclassification or otherwise, into a lesser number of shares, the Warrant Price shall be proportionately increased. 2.4. Adjustments for Diluting Issuances. The Warrant Price and the number of Shares issuable upon exercise of this Warrant shall be subject to adjustment, from time to time in the manner set forth on Exhibit A in the event of Diluting Issuances (as defined on Exhibit A). 2.5. No Impairment. The Company shall not, by amendment of its Certificate of Incorporation or through a reorganization, transfer of assets, consolidation, merger, dissolution, issue, or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this Warrant by the Company, but shall at all times in good faith assist in carrying out of all the provisions of this Article 2 and in taking all such action as may be necessary or appropriate to protect Holder's rights under this Article against impairment. If the Company takes any action affecting the Shares or its common stock other than as described above that adversely affects Holder's rights under this Warrant, the Warrant Price shall be adjusted downward and the number of Shares issuable upon exercise of this Warrant shall be adjusted upward in such a manner that the aggregate Warrant Price of this Warrant is unchanged. 2.6. Reservation of Shares. The Company will at all times reserve and keep available out of its authorized but unissued common stock, solely for issuance, sale and delivery upon the exercise or conversion of this Warrant, a number of shares of common stock equal to the number of shares of common stock issuable upon the exercise of this Warrant. 2.7. Fractional Shares. No fractional shares shall be issuable upon exercise or conversion of the Warrant and the number of Shares to be issued shall be rounded down to the nearest whole Share. If a fractional share interest arises upon any exercise or conversion of the Warrant, the Company shall eliminate such fractional share interest by paying Holder amount computed by multiplying the factional interest by the fair market value of a full Share. 2.8. Certificate as to Adjustments. Upon each adjustment of the Warrant Price, the Company at its expense shall promptly compute such adjustment, and furnish Holder with a certificate of its Chief Financial Officer setting forth such adjustment and the facts upon which such adjustment is based. The Company shall, upon written request, furnish Holder a certificate setting forth the Warrant Price in effect upon the date thereof and the series of adjustments leading to such Warrant Price. ARTICLE 3 REPRESENTATIONS AND COVENANTS OF THE COMPANY. 3.1. Representations and Warranties. The Company hereby represents and warrants to the Holder as follows: (a) The initial Warrant Price referenced on the first page of this Warrant is not greater than (i) the price per share at which the Shares (or, if more recent, the conversion price per share at which securities convertible into the Shares) were last issued in an arms-length transaction in which at least $500,000 of the Shares (or securities convertible into the Shares) were sold and (ii) the fair market value of the Shares as of the date of this Warrant. (b) All Shares which may be issued upon the exercise of the purchase right represented by this Warrant shall, upon issuance, be duly authorized, validly issued, fully paid -3- and nonassessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws. (c) The authorized and issued and outstanding capital stock of the Company is as set forth on Exhibit B. All the outstanding shares of capital stock of the Company have been duly authorized, are validly issued and are fully paid and nonassessable. Except as set forth in Exhibit B, (i) there are no options, warrants or rights to purchase shares of capital stock or other securities of Company authorized, issued or outstanding, nor is the Company obligated in any other manner to issue shares of its capital stock or other securities; (ii) there are no restrictions on the transfer of shares of capital stock of the Company other than those imposed by federal and relevant state securities laws; and (iii) no holder of any security of the Company is entitled to preemptive or similar statutory or contractual rights, either arising pursuant to any agreement or instrument to which the Company is a party, or which are otherwise binding upon the Company. Neither the issuance of this Warrant nor the shares of Common Stock issued upon any exercise of this Warrant will result in an adjustment under the antidilution or exercise rights of any holders of any outstanding shares of capital stock of the Company. The offer and sales of all shares of capital stock and other securities of the Company issued before the date of this Warrant complied with or were exempt from the registration requirements of all federal and state securities laws. 3.2. Notice of Certain Events. If the Company proposes at any time (a) to declare any dividend or distribution upon its common stock, whether in cash, property, stock, or other securities and whether or not a regular cash dividend; (b) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (c) to effect any reclassification or recapitalization of common stock; (d) to merge or consolidate with or into any other corporation, or sell, lease, license, or convey all or substantially all of its assets, or to liquidate, dissolve or wind up; or (e) offer holders of registration rights the opportunity to participate in an underwritten public offering of the company's securities for cash, then, in connection with each such event, the Company shall give Holder (1) at least 20 days prior written notice of the date on which a record will be taken for such dividend, distribution, or subscription rights (and specifying the date on which the holders of common stock will be entitled thereto) or for determining rights to vote, if any, in respect of the matters referred to in (c) and (d) above; (2) in the case of the matters referred to in (c) and (d) above at least 20 days prior written notice of the date when the same will take place (and specifying the date on which the holders of common stock will be entitled to exchange their common stock for securities or other property deliverable upon the occurrence of such event); and (3) in the case of the matter referred to in (e) above, the same notice as is given to the holders of such registration rights. 3.3. Information Rights. So long as the Holder holds this Warrant and/or any of the Shares, the Company shall deliver to the Holder (a) promptly after mailing, copies of all notices or other written communications to the shareholders of the Company, (b) within ninety (90) days after the end of each fiscal year of the Company, the annual audited financial statements of the Company certified by independent public accountants or recognized standing and (c) within forty-five (45) days after the end of each of the first three quarters or each fiscal year, the Company's quarterly, unaudited financial statements. 3.4. Registration Under Securities Act of 1933, as amended. The Company agrees that the Shares shall be subject to the registration rights set forth in that certain Fourth Investor Rights Agreement dated as of January 12, 1995, by and among the Company and the persons signatories thereto. ARTICLE 4 MISCELLANEOUS. 4.1. Term; Notice of Expiration. This Warrant is exercisable, in whole or in part, at any time and from time to time on or before the Expiration Date set forth above. The Company -4- shall give Holder written notice of Holder's right to exercise this Warrant in the form attached as Appendix 2 not more than 90 days and not less than 30 days before the Expiration Date. If the notice is not so given, the Expiration Date shall automatically be extended until 30 days after the date the Company delivers the notice to Holder. 4.2. Legends. This Warrant and the Shares shall be imprinted with a legend in substantially the following form: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. 4.3. Compliance with Securities Laws on Transfer. This Warrant and the Shares issuable upon exercise this Warrant may not be transferred or assigned in whole or in part without compliance with applicable federal and state securities laws by the transferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, reasonably requested by the Company). The Company shall not require Holder to provide an opinion of counsel if the transfer is to an affiliate of Holder or if there is no material question as to the availability of current information as referenced in Rule 144(c), Holder represents that it has complied with Rule 144(d) and (e) in reasonable detail, the selling broker represents that it has complied with Rule 144(f), and the Company is provided with a copy of Holder's notice of proposed sale. 4.4. Transfer Procedure. Subject to the provisions of Section 4.3, Holder may transfer all or part of this Warrant or the Shares issuable upon exercise of this Warrant by giving the Company notice of the portion of the Warrant being transferred setting forth the name, address and taxpayer identification number of the transferee and surrendering this Warrant to the Company for reissuance to the transferee(s) (and Holder if applicable). Unless the Company is filing financial information with the SEC pursuant to the Securities Exchange Act of 1934, as amended, the Company shall have the right to refuse to transfer any portion of this Warrant to any person who directly competes with the Company. 4.5. Notices. All notices and other communications from the Company to the Holder, or vice versa, shall be deemed delivered and effective when given personally or mailed by first-class registered or certified mail, postage prepaid, to the Company at Digitran Corporation, 379 Thornall Street, Edison, New Jersey 08837, Attn: Chief Financial Officer or to the Holder at: Silicon Valley East, 45 William Street, Wellesley, Massachusetts 02181, Attn: Joan Parsons, Vice President, with a copy to Dennis Uyemura, Chief Financial Officer, Silicon Valley Bancshares, 2248 North First Street, San Jose, California 95121, or at such other address as may have been furnished to the Company or the Holder, as the case may be, in writing by the Company or such holder from time to time. 4.6. Waiver. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. 4.7. Attorneys Fees. In the event of any dispute between the parties concerning the terms and provisions of this Warrant, the party prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorneys' fees. 4.8. Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of California, without giving effect to that state's principles regarding conflicts of law. -5- DIGITRAN CORPORATION By: /s/ Thomas F. Murawski --------------------------------- Name: Thomas F. Murawski (Print) Title: President By: /s/ Peter S. Macaluso --------------------------------- Name: Peter S. Macaluso (Print) Title: Chief Financial Officer, Secretary -6- Exhibit B DIGITRAN CORPORATION CAPITALIZATION 4/30/95 Authorized Issued ---------- ------ Preferred Stock Series A 1,400,000 1,400,000 Series B 4,000,000 3,516,600 Series C 8,700,000 8,329,526 Series D 26,600,000 26,432,903 Series E 19,500,000 19,090,899 60,200,000 58,769,928 Common Stock 75,000,000 2,946,184 -7- EX-23.1 16 EXHIBIT 23.1 EXHIBIT 23.1 The financial statements of FaxSav Incorporated have been prepared to give effect to the one-for-nine reverse stock split at a par value of $0.01, as described in Note 14 to the financial statements included in this registration statement. When the reverse stock split has occurred, we will issue the consent below. COOPERS & LYBRAND L.L.P. Parsippany, New Jersey September 9, 1996 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this Registration Statement on Form S-1 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." Parsippany, New Jersey , 1996 -----END PRIVACY-ENHANCED MESSAGE-----