<PAGE>
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)
<TABLE>
<S> <C> <C>
DELAWARE 4822 11-3025769
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of
Incorporation or Organization) Classification Code) Identification
Number)
</TABLE>
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:
<TABLE>
<S> <C>
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
</TABLE>
--------------------------
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.
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- --------------------------------------------------------------------------------
<PAGE>
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.
<PAGE>
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.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts Proceeds to
Public and Commissions(1) Company(2)
<S> <C> <C> <C>
Per Share......................
Total(3).......................
</TABLE>
(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
<PAGE>
[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
<PAGE>
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
<PAGE>
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
<TABLE>
<CAPTION>
Common Stock offered by the
Company......................... 2,200,000 shares
<S> <C>
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
</TABLE>
- ---------
(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
<PAGE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,(1)
---------------------------------- -----------------------
1993 1994 1995 1995 1996
--------- --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C>
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
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996(1)
-------------------------
ACTUAL AS ADJUSTED(3)
--------- --------------
<S> <C> <C>
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
</TABLE>
- ---------
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<S> <C> <C>
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
---------
---------
</TABLE>
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).
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION(1)
------------------------ ------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
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%
------------ ---------- ------------- ----------
------------ ---------- ------------- ----------
</TABLE>
- ---------
(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
<PAGE>
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.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996(1)
-----------------------
PRO FORMA
PRO FORMA AS ADJUSTED
---------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
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
---------- -----------
---------- -----------
</TABLE>
- ---------
(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
<PAGE>
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.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------- JUNE 30,
1991 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
- ---------
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------- --------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
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 )%
------ ------ ----- ----- -----
------ ------ ----- ----- -----
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
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 )%
------ ----------- ----------- ----------- ------------ -----------
------ ----------- ----------- ----------- ------------ -----------
</TABLE>
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
<PAGE>
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
<PAGE>
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.
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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.]
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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
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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
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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
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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.
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[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.
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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
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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.
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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."
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<PAGE>
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
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<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- --------------------------------------------------
<S> <C> <C>
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
</TABLE>
- ---------
(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
<PAGE>
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
<PAGE>
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
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION(1)
ANNUAL ----------------
COMPENSATION(1) SECURITIES
--------------------- UNDERLYING
NAME AND PRINCIPAL POSITIONS SALARY BONUS OPTIONS
- ------------------------------------------------------------------------- ---------- --------- ----------------
<S> <C> <C> <C>
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
</TABLE>
- ---------
(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.
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<PAGE>
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
<TABLE>
<CAPTION>
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%
- ----------------------------------- ------------------ --------------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
- ---------
(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
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED NET VALUES OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS(1)
-------------------------- ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
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
</TABLE>
- ---------
(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
<PAGE>
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
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<PAGE>
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
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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.
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<PAGE>
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:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK ON
AN AS CONVERTED
BASIS
--------------------
<S> <C>
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
</TABLE>
- ---------
(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."
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<PAGE>
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.
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<PAGE>
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.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF PERCENTAGE OF
COMMON STOCK OUTSTANDING SHARES
BENEFICIALLY ----------------------------------
OWNED(1) BEFORE OFFERING AFTER OFFERING
-------------- ----------------- ---------------
<S> <C> <C> <C>
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
</TABLE>
- ---------
* 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.
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<PAGE>
(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).
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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.
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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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Lehman Brothers Inc..............................................................
Alex. Brown & Sons Incorporated..................................................
----------
Total........................................................................ 2,200,000
----------
----------
</TABLE>
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
<PAGE>
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
<PAGE>
FAXSAV INCORPORATED
(FORMERLY DIGITRAN CORPORATION)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
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
</TABLE>
F-1
<PAGE>
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
<PAGE>
FAXSAV INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1995
------------ ------------ JUNE 30, PRO FORMA
1996 NOTES 2 AND 14
------------ JUNE 30, 1996
(UNAUDITED) --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
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
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
FAXSAV INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------------------
1993 1994 1995
------------- ------------- ------------- FOR THE SIX MONTHS ENDED
JUNE 30,
----------------------------
1995 1996
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
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
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
FAXSAV INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------------
1993 1994 1995
----------- ----------- ----------- FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------
1995
----------- 1996
(UNAUDITED) -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
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
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
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)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- -------------------- PAID-IN ACCUMULATED TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK
----------- --------- --------- --------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
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)
----------- --------- --------- --------- ------------ ------------- -----------
----------- --------- --------- --------- ------------ ------------- -----------
<CAPTION>
TOTAL
-----------
<S> <C>
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
-----------
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
(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
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
(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
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-10
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
---------------------- ------------------------
OPERATING CAPITAL OPERATING CAPITAL
LEASES LEASES LEASES LEASES
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
(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
---------- -----------
---------- -----------
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1994 1995 JUNE 30, 1996
----------------------- ----------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ --------- ------------ --------- ------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
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
------------ --------- ------------ --------- ------------ -----------
------------ --------- ------------ --------- ------------ -----------
</TABLE>
F-14
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
INCENTIVE OPTION
NONQUALIFIED STOCK AVAILABLE PRICE
OPTIONS OPTIONS FOR GRANT PER SHARE
------------ --------- ----------- -------------
<S> <C> <C> <C> <C>
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
------------ --------- -----------
------------ --------- -----------
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1995
------------- -------------
<S> <C> <C>
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)
------------- -------------
$ -- $ --
------------- -------------
------------- -------------
</TABLE>
F-17
<PAGE>
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
<PAGE>
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
<PAGE>
[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.
<PAGE>
- --------------------------------------------------
--------------------------------------------------
- --------------------------------------------------
--------------------------------------------------
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
<TABLE>
<CAPTION>
Page
---
<S> <C>
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
</TABLE>
------------------------
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
- --------------------------------------------------
--------------------------------------------------
- --------------------------------------------------
--------------------------------------------------
<PAGE>
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.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
------------
<S> <C>
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
------------
------------
</TABLE>
- ---------
* 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
<PAGE>
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:
<TABLE>
<CAPTION>
RANGE OF
NO. OF EXERCISE
SHARES PRICES
------------ --------------
<S> <C> <C>
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
</TABLE>
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
<TABLE>
<CAPTION>
RANGE OF
NO. OF EXERCISE
SHARES PRICES
------------ --------------
<S> <C> <C>
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
</TABLE>
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
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- --------- ----------------------------------------------------------------------------------------------------
<C> <S>
.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.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
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.
<C> <S>
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.
</TABLE>
- ---------
* 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
<PAGE>
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
<PAGE>
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:
<TABLE>
<S> <C>
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
</TABLE>
II-5
<PAGE>
FAXSAV INCORPORATED
SUPPLEMENTAL SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
-------------------------
<S> <C> <C> <C> <C> <C>
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
------------ ----------- ------------ ----------- ------------
------------ ----------- ------------ ----------- ------------
</TABLE>
- ---------
(a) Accounts receivable recoveries
(b) Write-offs
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
(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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
------------------
<PAGE>
<TABLE>
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
<S> <C> <C>
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.
<PAGE>
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
</TABLE>
<PAGE>
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");
<PAGE>
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 -
<PAGE>
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 -
<PAGE>
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 -
<PAGE>
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 -
<PAGE>
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 -
<PAGE>
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 -
<PAGE>
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 -
<PAGE>
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 -
<PAGE>
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 -
<PAGE>
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 -
<PAGE>
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 -
<PAGE>
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 -
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
(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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
(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.
<PAGE>
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.
<PAGE>
(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
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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.
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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
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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
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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.
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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.
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(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.
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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.
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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.
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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.
<PAGE>
(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.
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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.
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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.
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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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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
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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
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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
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<PAGE>
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.
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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
<PAGE>
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
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<PAGE>
(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
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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
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<PAGE>
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
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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,
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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.
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<PAGE>
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.
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<PAGE>
(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-
<PAGE>
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.
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<PAGE>
(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-
<PAGE>
(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-
<PAGE>
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.
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<PAGE>
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
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<PAGE>
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-
<PAGE>
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:
--------------------------------
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<PAGE>
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:
--------------------------------
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<PAGE>
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)
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
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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.
<PAGE>
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.
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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.
<PAGE>
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.
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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.
<PAGE>
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.
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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.
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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.
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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.
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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.
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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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
------------------------------------------
By:
BATTERY VENTURES II, L.P.
------------------------------------------
By:
FOURTH GENERATION
------------------------------------------
By:
SEAVEST PARTNERS
------------------------------------------
By:
THE ENCORE GROUP
------------------------------------------
By:
19.
<PAGE>
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
<PAGE>
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
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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
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<PAGE>
(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.
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<PAGE>
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.
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<PAGE>
(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
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<PAGE>
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-
<PAGE>
(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-
<PAGE>
(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-
<PAGE>
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-
<PAGE>
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
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<PAGE>
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-
<PAGE>
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:
----------------------------------
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<PAGE>
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:
----------------------------------
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<PAGE>
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
<PAGE>
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.
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<PAGE>
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 -
<PAGE>
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 -
<PAGE>
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 -
<PAGE>
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 -
<PAGE>
(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
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<PAGE>
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.
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<PAGE>
(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
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<PAGE>
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.
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<PAGE>
(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.
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<PAGE>
(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.
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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:
----------------------------
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<PAGE>
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:
-------------------------
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<PAGE>
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:
-------------------------
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<PAGE>
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.
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<PAGE>
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
<PAGE>
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
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<PAGE>
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 -
<PAGE>
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 -
<PAGE>
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 -
<PAGE>
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 -
<PAGE>
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 -
<PAGE>
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 -
<PAGE>
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:
--------------------------------------------
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<PAGE>
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 -
<PAGE>
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 -
<PAGE>
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
<PAGE>
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 -
<PAGE>
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 -
<PAGE>
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 -
<PAGE>
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 -
<PAGE>
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 -
<PAGE>
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
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<PAGE>
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)
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(Date)
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<PAGE>
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:
--------------------------------------------
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<PAGE>
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.
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<PAGE>
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.
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<PAGE>
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.
<PAGE>
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.
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<PAGE>
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:
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<PAGE>
(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.
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<PAGE>
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.
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<PAGE>
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
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<PAGE>
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)
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(Date)
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<PAGE>
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:
----------------------------------
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<PAGE>
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.
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<PAGE>
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:
---------------------------------
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(Date)
<PAGE>
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:
------------------------------------
<PAGE>
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.
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* Assumes our exercise price of $.22 per share is the same as the conversion
price of the Series E Preferred Stock.
<PAGE>
Exhibit B
DIGITRAN CORPORATION
CAPITALIZATION
4/30/95
Authorized Issued
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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
<PAGE>
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.
<PAGE>
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
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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.
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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
