<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 11, 1996
REGISTRATION NO. 333-09613
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-1
AMENDMENT NO. 3
TO
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FAXSAV INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
<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. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
AGGREGATE OFFERING AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED PRICE (1) REGISTRATION FEE
<S> <C> <C>
Common stock, par value $0.01 per share.................. $13,800,000 $4,182
<FN>
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a). A fee in the amount of $10,469
was paid upon the filing of this Registration Statement on August 6, 1996.
</TABLE>
--------------------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
1,500,000 SHARES
[LOGO]
COMMON STOCK
------------------
All of the 1,500,000 shares of Common Stock offered hereby are being sold by
FaxSav Incorporated ("FaxSav" or the "Company"). Prior to this offering, there
has been no public market for the Common Stock. See "Underwriting" for a
discussion of the factors considered in determining the initial public offering
price. The Common Stock has been approved for quotation on The Nasdaq National
Market under the symbol "FAXX."
------------------------
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING AT PAGE 6.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts Proceeds to
Public and Commissions(1) Company(2)
<S> <C> <C> <C>
Per Share...................... $8.00 $0.56 $7.44
Total(3)....................... $12,000,000 $840,000 $11,160,000
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting estimated expenses of $1,000,000 payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an aggregate of 225,000 additional shares of Common Stock on the same terms
and conditions as set forth above, solely to cover over-allotments, if any.
If such option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to the Company will be $13,800,000,
$966,000 and $12,834,000, respectively.
------------------------
The shares of Common Stock offered by this Prospectus are offered by the
Underwriters subject to prior sale, to withdrawal, cancellation or modification
of the offer without notice, to delivery to and acceptance by the Underwriters
and to certain other conditions. It is expected that delivery of the
certificates for the shares of Common Stock will be made at the offices of
Lehman Brothers Inc., New York, New York on or about October 17, 1996.
------------------------
LEHMAN BROTHERS ALEX. BROWN & SONS
INCORPORATED
October 11, 1996
<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," "faxScan" and a service mark application for "EZ-List." This
Prospectus also includes trademarks and trade names of companies other than
FaxSav Incorporated.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<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 EFFECTED ON OCTOBER 7, 1996 OFFERING, (III)
REFLECTS THE FILING UPON THE CLOSING OF THIS OFFERING OF THE SIXTH AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION OF THE COMPANY, WHICH AMONG OTHER THINGS,
CHANGES THE AUTHORIZED NUMBER OF SHARES OF CAPITAL STOCK OF THE COMPANY, AND
(IV) REFLECTS, UPON THE CLOSING OF THE OFFERING, THE CONVERSION OF ALL
OUTSTANDING SHARES OF ALL SERIES OF THE COMPANY'S PREFERRED STOCK INTO AN
AGGREGATE OF 7,791,981 SHARES OF COMMON STOCK.
THE COMPANY
FaxSav Incorporated ("FaxSav" or the "Company") designs, develops and
markets a variety of business-to-business facsimile transmission services,
including fax-to-fax, desktop-to-fax, enhanced fax and broadcast fax services.
FaxSav's services are designed to reduce the cost of sending an international
fax while making the process of sending an international fax easier and less
time-consuming. Through the use of its integrated Internet-based and
telephony-based network and its proprietary software, the Company enables its
customers to send documents and images to fax machines worldwide at rates
substantially below the international rates charged by traditional long distance
carriers. Customers are offered Internet advantaged pricing for facsimile
transmissions to targeted markets worldwide while continuing to use their
traditional fax machines. In addition, the Company has developed easy to use
software enabling customers to transmit documents directly from their computer
desktops. FaxSav has built a customer base consisting of over 7,200 customers
with international fax needs. In addition, there currently are more than 1,000
registered users of the Company's desktop software. In 1995, the Company
transmitted more than 20.4 million minutes of facsimile messages yielding
revenues of $11.6 million. During the first six months of 1996, FaxSav
transmitted 13.8 million minutes of facsimile messages yielding revenues of $7.4
million, as compared to 9.0 million minutes and $5.0 million in revenue for the
same six month period in 1995.
The Company historically has provided low cost facsimile services by
utilizing pre-negotiated volume based arrangements with various telephony common
carriers. To significantly enhance the cost effectiveness of the Company's
transmission services, in early 1996 FaxSav began to deploy a global
Internet-based network of nodes that enable it to bypass the long distance
carriers' networks when sending faxes to or from international areas serviced by
these nodes. In June 1996, FaxSav began to utilize this integrated network for
commercial transmission of faxes over the Internet. FaxSav has deployed Internet
nodes in Bermuda, France, Germany, Hong Kong, South Korea and the United Kingdom
and plans to deploy additional Internet nodes in key international
telecommunications markets by the end of 1997 to enable the Company to route a
majority of its customers' traffic through the Internet. The Company believes
that this planned global Internet infrastructure, which is designed to integrate
seamlessly with its existing telephony-based network, will enable the Company to
bypass long distance carrier networks for transmissions originating and
terminating in countries where such nodes have been deployed, thereby reducing
its customers' international transmission costs. FaxSav believes that this
integrated global network will enable the Company to emerge as a leading
supplier of comprehensive, low cost global facsimile services.
The Company's services are targeted to customers with international
facsimile transmission requirements. FaxSav offers a variety of services
designed to meet the individual business requirements of its customers,
including real-time, "virtual real-time" (immediate delivery attempt following
receipt of the customer's document by the FaxSav network) and broadcast
services. Specifically, customers may utilize: FAXSAV, a real-time fax
transmission through FaxSav's telephony-based network; FAXSAV ASSURED, a
"virtual real-time" enhanced delivery service option which shifts the
responsibility for repetitive completion attempts to the FaxSav network; FAXSAV
EZ-LIST, a fax-to-fax broadcast service which allows a message to be faxed to
multiple recipients by a single transmission to the FaxSav network; FAXSAV PLUS,
the Company's new "virtual real-time" service which utilizes a combination of
FaxSav's traditional telephony-based network and
3
<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......................... 1,500,000 shares
<S> <C>
Common Stock to be outstanding
after the offering.............. 9,670,490 shares(1)
Use of proceeds................... Expansion of Internet network infrastructure, repayment
of existing short-term indebtedness and for general
corporate purposes, including working capital. The
Company may use a portion of the net proceeds to acquire
businesses, services, products or technologies
complementary to the Company's current business. See
"Use of Proceeds."
Nasdaq National Market symbol..... FAXX
</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...... $ (5.99) $ (6.39) $ (7.46) $ (3.44) $ (6.17)
Weighted average common and equivalent shares
outstanding(2).............................. 543,953 546,500 547,444 547,444 555,923
Pro forma net loss per common and equivalent
share(2).................................... $ (0.44) $ (0.40)
------------ ------------
------------ ------------
Shares used in computing pro forma net loss
per common and equivalent share(2).......... 9,243,484 8,609,119
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996(1)
-------------------------
ACTUAL AS ADJUSTED(3)
--------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital....................................................................... $ 793 $ 10,953
Total assets.......................................................................... 7,916 17,576
Total long-term debt.................................................................. 569 569
Total stockholders' equity............................................................ 3,058 13,218
</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 1,500,000 shares of Common Stock
offered hereby at the initial public offering price and the application of
the net proceeds therefrom. See "Use of Proceeds."
-------------------
THIS PROSPECTUS CONTAINS CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE
RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT SUCH STATEMENTS ARE ONLY PREDICTIONS
AND THAT ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING SUCH
STATEMENTS, PROSPECTIVE INVESTORS SHOULD SPECIFICALLY CONSIDER THE VARIOUS
FACTORS IDENTIFIED IN THIS PROSPECTUS, INCLUDING THE MATTERS SET FORTH UNDER THE
CAPTION "RISK FACTORS," WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS.
5
<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 $5.2 million. Based upon the Company's history of operating losses
and presently known factors, management has determined that it is more likely
than not that the Company will be unable to generate sufficient taxable income
prior to the expiration of these NOL carryforwards and has accordingly reduced
its deferred tax assets to zero with a full valuation allowance. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
QUARTERLY FLUCTUATIONS; POSSIBLE VOLATILITY OF STOCK PRICE. The Company may
in the future experience significant quarter to quarter fluctuations in its
results of operations, which may result in volatility in the price of the
Company's Common Stock. Quarterly results of operations may fluctuate as a
result of a variety of factors, including demand for the Company's services, the
introduction of new services and service enhancements by the Company or its
competitors, market acceptance of new services, the mix of revenues between
Internet-based versus telephony-based deliveries, the timing of significant
marketing programs, the number and timing of the hiring of additional personnel,
competitive conditions in the industry and general economic conditions. The
Company's revenues are difficult to forecast. Shortfalls in revenues may
adversely and disproportionately affect the Company's results of operations
because a high percentage of the Company's operating expenses are relatively
fixed, and planned expenditures, such as the anticipated expansion of the
Company's Internet infrastructure, are based primarily on sales forecasts. In
addition, the stock market in general has experienced extreme price and volume
fluctuations, as evidenced by the fluctuations in the Nasdaq National Market in
July 1996, which have affected the market price of securities of many companies
in the telecommunications and technology industries and which have been
unrelated to the operating performance of such companies. These market
fluctuations may adversely affect the market price of the Company's Common
Stock. Accordingly, the Company believes that period to period comparisons of
results of operations are not necessarily meaningful and should not be relied
upon as an indication of future results of operations. There can be no assurance
that the Company will be profitable in any future quarter. Due to the foregoing
factors, it is likely that in one or more future quarters the Company's
operating results will be below the expectations of public market analysts and
investors. Such an event would have a material adverse effect on the price of
the Company's Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Quarterly Results."
DEPENDENCE ON NETWORK INFRASTRUCTURE; NO ASSURANCE OF SUCCESSFUL
INTERNET-CAPABLE NODE DEPLOYMENT. The Company's future success will depend in
part upon the capacity, reliability and security of its network infrastructure
and in particular upon its ability to successfully deploy an international
network of Internet-capable facsimile nodes. The Company must continue to expand
and adapt its network infrastructure as the number of customers and the volume
of traffic they wish to transmit increases. The expansion and adaptation of the
Company's network infrastructure will require substantial financial, operational
and management resources. There can be no assurance that the Company will be
able to expand or adapt its network infrastructure to meet any additional demand
on a timely basis, at a commercially reasonable cost, or at all. In addition,
the Company anticipates that implementation of its price leadership strategy
generally will cause
6
<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
telecommunications lines of several of the above-mentioned long distance
carriers, including LDDS WorldCom and MCI. There can be no assurance that these
companies will not discontinue or otherwise alter their relationships with the
Company in a manner that would have a material adverse effect upon the Company's
business, financial condition and results of operations. In addition, current
and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their services to address the needs of the Company's current and prospective
customers. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. In addition
to direct competitors, many of the Company's larger potential customers may seek
to internally fulfill their fax communication needs through the deployment of
their own computerized fax communications systems or network infrastructures for
intra-company faxing.
Increased competition is likely to result in price reductions and could
result in reduced gross margins and erosion of the Company's market share, any
of which would have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
the Company will be able to compete successfully against current or future
competitors or that competitive pressures will not have a material adverse
effect on the Company's business, financial condition and results of operations.
NO ASSURANCE OF SUCCESSFUL MANAGEMENT OF GROWTH. The Company has rapidly
and significantly expanded its operations and anticipates that significant
expansion will continue to be required in order to address potential market
opportunities. The Company anticipates significantly increasing the size of its
sales and marketing efforts following the completion of this offering, and the
Company also will be required to increase its customer support staff. There can
be no assurance that such expansion will be successfully completed or that it
will generate sufficient revenues to cover the Company's expenses. The inability
of the Company to promptly address and respond to these circumstances could have
a material adverse effect on the Company's business, financial condition and
results of operations.
RAPID INDUSTRY CHANGE. The telecommunications industry in general, and the
facsimile transmission business in particular, are characterized by rapid and
continuous technological change. Future technological advances in the
telecommunications industry may result in the availability of new services or
products that could compete with the facsimile transmission services provided by
the Company or reduce the cost of existing products or services, any of which
could enable the Company's existing or potential customers to fulfill their fax
communications needs more cost efficiently. There can be no assurance that the
Company will be successful in developing and introducing new services that meet
changing customer needs and respond to technological changes or evolving
industry standards in a timely manner, if at all, or that services or
technologies developed by others will not render the Company's services
noncompetitive. The inability of the Company to respond to changing market
conditions, technological developments, evolving industry standards or changing
customer requirements, or the development of competing technology or products
that render the Company's services noncompetitive would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business--Services."
RISK OF SYSTEM FAILURE; SECURITY RISKS. The Company's operations are
dependent on its ability to protect its network from interruption by damage from
fire, earthquake, power loss, telecommunications failure, unauthorized entry,
computer viruses or other events beyond the Company's control. Most of the
Company's current computer hardware and switching equipment, including its
processing equipment, is currently located at two sites. There can be no
assurance that the Company's existing and planned precautions of
8
<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 upon valid proprietary rights of third parties.
However, the Company received a letter in the third quarter of 1995 stating that
the Company's FAXSAV CONNECTOR may be utilizing a call diversion methodology
patented by such correspondent. To the Company's knowledge, such third party has
not initiated a suit, action, proceeding or investigation relating to any
alleged infringement by the Company of such patent. In addition, the Company is
aware that another third party has recently brought patent infringement actions
against several facsimile service providers. There can be no assurance that
these or other third parties will not assert infringement claims against the
Company in the future. Patents have been granted recently on fundamental
technologies in the communications and desktop software areas, and patents may
issue which relate to fundamental technologies incorporated in the Company's
services. As patent applications in the United States are not publicly disclosed
until the patent issues, applications may have been filed which, if issued as
patents, could relate to the Company's services. The Company could incur
substantial costs and diversion of management resources with respect to the
defense of any claims that the Company has infringed upon the proprietary rights
of others, which costs and diversion could have a material adverse effect on the
Company's business, financial condition and results of operations. Furthermore,
parties making such claims could secure a judgment awarding substantial damages,
as well as injunctive or other equitable relief which could effectively block
the Company's ability to license and sell its services in the United States or
abroad. Any such judgment could have a material adverse effect on the Company's
business, financial condition and results of operations. In the event a claim
relating to proprietary technology or information is asserted against the
Company, the Company may seek licenses to such intellectual property. There can
be no assurance, however, that licenses could be obtained on terms acceptable to
the Company, or at all. The failure to obtain any necessary licenses or other
rights could have a material adverse effect on the Company's business, financial
condition and results of operations.
RISK OF SOFTWARE DEFECTS OR DEVELOPMENT DELAYS. Software-based services and
equipment, such as the Company's FAXSAV FOR INTERNET suite of services and the
FAXSAV CONNECTOR, may contain undetected errors or failures when introduced or
when new versions are released. There can be no assurance that, despite testing
by the Company and by current and potential customers, errors will not be found
in such software or other releases after commencement of commercial shipments,
or that the Company will not experience development delays, resulting in delays
in the shipment of software and a loss of or delay in market acceptance, any of
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE ON KEY PERSONNEL. The Company's future performance depends in
significant part upon the continued service of its key technical, sales and
senior management personnel, none of whom is bound by an employment agreement.
The loss of the services of one or more of the Company's executive officers or
other key employees could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's future
success also depends on its continuing ability to attract and retain highly
qualified technical, sales and managerial personnel. Competition for such
personnel is intense,
10
<PAGE>
and there can be no assurance that the Company can retain its key technical,
sales and managerial employees or that it can attract, assimilate or retain
other highly qualified technical, sales and managerial personnel in the future.
See "Management."
RISKS RELATED TO POTENTIAL ACQUISITIONS. The Company may in the future
pursue acquisitions of complementary services or product lines, technologies or
businesses, although the Company has no present understandings, commitments or
agreements with respect to any such acquisitions. Future acquisitions by the
Company could result in potentially dilutive issuances of equity securities, the
incurrence of debt and contingent liabilities and amortization expenses related
to goodwill and other intangible assets, which could materially adversely affect
the Company's business, financial condition and results of operations. In
addition, acquisitions involve numerous risks, including difficulties in the
assimilation of the operations, technologies, services and products of the
acquired companies and the diversion of management's attention from other
business concerns. In the event that any such acquisition were to occur, there
can be no assurance that the Company's business, financial condition and results
of operations would not be materially adversely affected.
RELIANCE ON INTERNATIONAL STRATEGIC ALLIANCES. The Company intends to
establish and build an international customer base by forming strategic sales
and marketing alliances with foreign Internet service providers,
telecommunications companies and resellers. There can be no assurance that the
Company will be able to form or, if formed, maintain any such strategic
alliances. The Company's success in developing an international customer base
depends not only on the formation of such alliances but also on the success of
these partners and their ability to successfully market the Company's services.
The failure to form and maintain such strategic alliances or the failure of
these partners to successfully develop and sustain a market for the Company's
service will have a material adverse effect on the Company's ability to
establish and build an international customer base, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
GOVERNMENT REGULATION. The Company is subject to regulation by the Federal
Communications Commission (the "FCC"), by various state public service and
public utility commissions and by various international regulatory authorities.
FaxSav is licensed by the FCC as an authorized telecommunications company
and is classified as a "non-dominant interexchange carrier." Generally, the FCC
has chosen not to exercise its statutory power to closely regulate the charges
or practices of non-dominant carriers. Nevertheless, the FCC acts upon
complaints against such carriers for failure to comply with statutory
obligations or with the FCC's rules, regulations and policies. The FCC also has
the power to impose more stringent regulatory requirements on the Company and to
change its regulatory classification. There can be no assurance that the FCC
will not change the Company's regulatory classification or otherwise subject the
Company to more burdensome regulatory requirements.
In connection with the anticipated deployment of Internet-capable nodes in
countries throughout the world, the Company will be required to satisfy a
variety of foreign regulatory requirements. The Company intends to explore and
seek to comply with these requirements on a country-by-country basis as the
deployment of Internet-capable facsimile nodes continues. There can be no
assurance that the Company will be able to satisfy the regulatory requirements
in each of the countries currently targeted for node deployment, and the failure
to satisfy such requirements may prevent the Company from installing Internet-
capable facsimile nodes in such countries. The failure to deploy a number of
such nodes could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company's nodes and its FAXLAUNCHER service utilize RSA encryption
technology in connection with the routing of customer documents through the
Internet. The export of such encryption technology is regulated by the United
States government. The Company is seeking authority for the export of such
encryption technology and anticipates that authority will be granted to export
such technology worldwide, other than to Cuba, Iran, Libya, North Korea, Sudan
and Syria. Nevertheless, there can be no assurance that such authority will be
granted or, if granted, that it will not be revoked or modified at any time for
any particular jurisdiction or in general. In addition, there can be no
assurance that such export controls, either
11
<PAGE>
in their current form or as may be subsequently enacted, will not limit the
Company's ability to distribute its services outside of the United States or
electronically. While the Company takes precautions against unlawful exportation
of its software, the global nature of the Internet makes it virtually impossible
to effectively control the distribution of its services. Moreover, future
Federal or state legislation or regulation may further limit levels of
encryption or authentication technology. Any such export restrictions, the
unlawful exportation of the Company's services, or new legislation or regulation
could have a material adverse effect on the Company's business, financial
condition and results of operations.
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial numbers of shares of
Common Stock in the public market after this offering could adversely affect the
market price of the Common Stock. Upon completion of this offering, the Company
will have outstanding 9,670,490 shares of Common Stock. In addition to the
1,500,000 shares of Common Stock offered hereby, as of the effective date of the
Registration Statement of which this Prospectus forms a part (the "Effective
Date"), there will be 8,170,490 shares of Common Stock outstanding, all of which
are "restricted securities" under the Securities Act. Certain stockholders of
the Company are subject to lock-up agreements providing generally that they will
not offer, sell, contract to sell or otherwise dispose of any shares of Common
Stock or any securities convertible or exchangeable into Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of Lehman Brothers Inc., which may be given at any time, without notice,
with respect to all or any portion of such shares. Certain other stockholders of
the Company are subject to similar restrictions contained in an Investor Rights
Agreement. Taking into account the lock-up agreements and notwithstanding
possible earlier eligibility for resale under the provisions of Rules 144 and
701, the numbers of shares that will be available for sale in the public market
will be as follows. Beginning 90 days after the Effective Date, approximately
6,000 shares of restricted securities will become eligible for resale in the
public market. Beginning 180 days after the Effective Date, approximately
6,007,000 additional shares of restricted securities will become eligible for
sale in the public market upon expiration of certain lock-up agreements pursuant
to Rules 144 and 701 and, as of that date, approximately 5,357,000 of such
shares will be subject to certain volume and other resale restrictions pursuant
to Rules 144 and 701. The Securities and Exchange Commission has proposed
certain amendments to Rule 144 which would reduce the holding period required
before shares subject to Rule 144 become eligible for resale in the public
market. This proposal, if adopted, would significantly increase the number of
shares of the Company's Common Stock eligible for immediate resale following the
expiration of the lock-up agreements.
The holders of approximately 8,017,000 shares of Common Stock and the
holders of warrants to purchase an additional 138,385 shares of Common Stock
have the right in certain circumstances to require the Company to register their
shares under the Securities Act for resale to the public. If such holders, by
exercising their demand registration rights, cause a large number of shares to
be registered and sold in the public market, such sales could have an adverse
effect on the market price for the Company's Common Stock. If the Company were
required to include in a Company-initiated registration shares held by such
holders pursuant to the exercise of their piggyback registration rights and
shares held by the holders of an additional 83,741 shares of Common Stock with
piggyback registration rights, such sales may have an adverse effect on the
Company's ability to raise needed capital. The Company intends to file a
registration statement on Form S-8 on or shortly after the date of this
Prospectus registering a total of approximately 1,794,000 shares of Common Stock
subject to outstanding stock options or reserved for issuance under the
Company's stock option plans. Shares issued after the effective date of the S-8
will be eligible for resale by non-affiliates in the public market without
limitation and by affiliates subject to the requirements set forth in Rule 144,
except for the holding period limitation of Rule 144. See "Management--1996
Stock Option/Stock Issuance Plan," "Description of Capital Stock--Registration
Rights of Certain Holders," "Shares Eligible for Future Sale" and
"Underwriting."
NO PRIOR PUBLIC MARKET FOR COMMON STOCK. Prior to this offering, there has
been no public market for the Common Stock, and there can be no assurance that
an active public market for the Common Stock will develop or be sustained after
the offering. The initial public offering price will be determined by
negotiations between the Company and the representatives of the Underwriters.
See "Underwriting" for a discussion of the factors considered in determining the
initial public offering price.
12
<PAGE>
ANTITAKEOVER CONSIDERATIONS. The Company's Sixth Amended and Restated
Certificate of Incorporation (the "Certificate of Incorporation") authorizes the
Board of Directors to issue, without stockholder approval, up to 1,000,000
shares of Preferred Stock with voting, conversion and other rights and
preferences that could adversely affect the voting power or other rights of the
holders of Common Stock. The Certificate of Incorporation also provides for
staggered terms for the members of the Board of Directors. In addition, the
Company will be subject to the provisions of Section 203 of the Delaware General
Corporation Law, which will generally prohibit the Company from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
The foregoing and other provisions of the Certificate of Incorporation and the
Company's By-laws, as amended (the "By-laws") and the application of Section 203
of the Delaware General Corporation Law could have the effect of deterring
certain takeovers or delaying or preventing certain changes in control or
management of the Company, including transactions in which stockholders might
otherwise receive a premium for their shares over then current market prices.
See "Description of Capital Stock--Preferred Stock" and "--Delaware Law and
Certain Provisions of the Company's Restated Certificate of Incorporation and
By-laws."
SUBSTANTIAL DILUTION. Purchasers of shares of Common Stock offered hereby
will experience immediate and substantial dilution in the net tangible book
value of their investment from the initial public offering price. Additional
dilution will occur upon exercise of outstanding options and warrants. See
"Dilution."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,500,000 shares of
Common Stock offered by the Company are approximately $10,160,000, after
deducting the underwriting discounts and commissions and estimated offering
expenses payable by the Company.
The Company currently anticipates that approximately $7.0 million of the net
proceeds will be used to fund capital expenditures associated with the planned
expansion of its Internet network infrastructure through the end of 1997,
however there can be no assurance that actual capital expenditures will not
exceed that amount. The remainder of the net proceeds are anticipated to be used
for working capital requirements, including increased selling and marketing and
research and development efforts, for the repayment of short-term indebtedness
as described below and for general corporate purposes. The Company may also use
a portion of the net proceeds to fund acquisitions of complementary businesses,
products or technologies, although there are no current agreements or
negotiations with respect to any such transaction. The Company will use a
portion of the net proceeds to repay the outstanding principal amount of, plus
accrued interest on, the Company's working capital line of credit. In addition,
a portion of the net proceeds will be used to repay the outstanding principal
amount of the Company's term loan facility, together with accrued interest, as
it comes due. As of August 31, 1996, approximately $0.5 million was outstanding
under the working capital line of credit and approximately $0.5 million was
outstanding under the term loan facility. The working capital line of credit and
the term loan facility, which together constitute the Company's credit facility
(the "Credit Facility") with Silicon Valley Bank (the "Bank"), bear interest at
the Bank's prime rate plus 0.5% (8.75% at August 31, 1996). The working capital
line, which matures in full on April 14, 1997, was utilized for working capital
purposes. The term loan facility, which is repayable in equal monthly
installments over a three-year period commencing on October 14, 1996, was
utilized to finance capital expenditures. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Pending use of the net proceeds for the above purposes, the Company intends
to invest the net proceeds in short-term debt instruments, certificates of
deposit or direct or guaranteed obligations of the United States.
DIVIDEND POLICY
The Company to date has not declared or paid dividends on its capital stock.
In addition, the Company's Credit Facility with the Bank prohibits the Company
from paying dividends without the Bank's consent. The Company intends to retain
any earnings to fund future growth and the operation of its business and,
therefore, does not anticipate paying any cash dividends in the foreseeable
future. The payment of any future dividends will be at the discretion of the
Company's Board of Directors and will be based on the Company's future earnings,
financial condition, capital requirements and other relevant factors.
14
<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 effected on October 7, 1996 and to the conversion of all outstanding
shares of all series of the Company's Preferred Stock outstanding as of June 30,
1996 into an aggregate of 7,790,489 shares of Common Stock upon the closing of
this offering. Without taking into account any of the changes in such pro forma
net tangible book value after June 30, 1996, other than to give effect to the
sale of 1,500,000 shares of Common Stock by the Company in this offering (at the
initial public offering price, and after deducting the underwriting discounts
and commissions and estimated offering expenses payable by the Company), the pro
forma net tangible book value of the Company as of June 30, 1996 would have been
approximately $13.2 million or $1.37 per share. This represents an immediate
increase in pro forma net tangible book value of $1.00 per share to existing
stockholders and immediate dilution in pro forma net tangible book value of
$6.63 per share to new investors. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Initial public offering price..................................... $ 8.00
Pro forma net tangible book value before the offering........... $ 0.37
Increase attributable to new investors.......................... 1.00
---------
Pro forma net tangible book value after the offering.............. 1.37
---------
Dilution to new investors......................................... $ 6.63
---------
---------
</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.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)............... 8,168,998 84.5% $ 24,069,350 66.7% $ 2.95
New investors.......................... 1,500,000 15.5% 12,000,000 33.3% $ 8.00
---------- --------- ------------- ---------
Total.............................. 9,668,998 100.0% $ 36,069,350 100.0%
---------- --------- ------------- ---------
---------- --------- ------------- ---------
</TABLE>
- ---------
(1) Excludes (i) 1,238,619 shares issuable upon the exercise of stock options
outstanding as of June 30, 1996 with a weighted average exercise price of
$0.58 per share, (ii) 555,556 shares of Common Stock available for issuance
as of June 30, 1996 pursuant to the Company's 1996 Stock Option/Stock
Issuance Plan and (iii) 139,877 shares of Common Stock issuable upon
exercise of warrants outstanding as of June 30, 1996 with a weighted average
exercise price of $2.80. See "Management--1996 Stock Option/Stock Issuance
Plan" and Notes 7 and 8 of Notes to Financial Statements.
15
<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 1,500,000 shares of Common Stock at the initial public offering price, after
deducting the underwriting discounts and commissions and estimated offering
expenses payable by the Company, and the application of the estimated net
proceeds therefrom. The financial data in the following table should be read in
conjunction with the Company's financial statements and notes thereto included
elsewhere in this Prospectus.
<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 9,668,998 shares
outstanding on an as adjusted basis(2)...................................... 82 97
Additional paid-in capital...................................................... 23,988 34,133
Accumulated deficit............................................................. (21,012) (21,012)
---------- -----------
Total stockholders' equity.................................................. 3,058 13,218
---------- -----------
Total capitalization...................................................... $ 3,627 $ 13,787
---------- -----------
---------- -----------
</TABLE>
- ---------
(1) Gives effect to the Company's Sixth Amended and Restated Certificate of
Incorporation to be filed upon the closing of the offering. Also gives
effect to the automatic conversion, upon the closing of the offering, of all
of the outstanding shares of all series of Preferred Stock of the Company.
(2) Excludes 1,238,619 shares of Common Stock issuable upon the exercise of
stock options outstanding at June 30, 1996 with a weighted average exercise
price of $0.58 per share, 22,222 shares of Common Stock issuable upon the
exercise of stock options granted after that date at a price equal to the
initial public offering price and 139,877 shares of Common Stock issuable
upon exercise of warrants outstanding as of June 30, 1996 with a weighted
average exercise price of $2.80 per share. See "Management--1996 Stock
Option/Stock Issuance Plan" and Notes 7 and 8 of Notes to Financial
Statements.
16
<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................................. $ (8.79) $ (5.61) $ (5.99) $ (6.39) $ (7.46) $ (3.44) $ (6.17)
Weighted average common and equivalent
shares outstanding (1)................ 379,687 531,876 543,953 546,500 547,444 547,444 555,923
Pro forma net loss per common and
equivalent share (1).................. $ (0.44) $ (0.40)
Shares used in computing pro forma net
loss per common and equivalent share
(1)................................... 9,243,484 8,609,119
</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,
South Korea and the United Kingdom and plans to install additional Internet
nodes in key international telecommunications markets to enable the Company
ultimately to route a majority of its customers' traffic through the Internet.
The Company charges customers monthly for its services based upon the actual
duration (number of minutes) for transmissions originating on facsimile machines
or individual facsimile transmission size (number of pages) for transmissions
originating on computer desktops. Although the Company does not require its
customers to enter into long-term contractual agreements, once customers begin
to use the services regularly, they often continue to use the services on a
recurring basis. Accordingly, the Company believes that its operating results
benefit from the recurring monthly revenue stream from such customers. The
Company has experienced a loss rate of customer fax lines of approximately 40%
annually, which management believes has been primarily driven by competitive
pricing. Due to the recent introduction of the FAXSAV PLUS service and the
FAXSAV FOR INTERNET suite of services, which provide more favorable pricing to
its customers, the Company anticipates that such loss rate will decrease over
time, although there can be no assurance that such rate will not remain constant
or increase in the future.
The Company's revenue and expense levels have continued to increase,
particularly in 1995 and through the six months ended June 30, 1996, as the
Company's customer base has expanded and the Company has invested in the design,
development and marketing of its newer services, including FAXSAV EZ-LIST, a
fax-to-fax broadcast service, and the FAXSAV FOR INTERNET suite of services. On
an annual basis, cost of service, general and administrative expenses, network
operations and support expenses and sales and marketing expenses decreased as a
percentage of revenues in 1995 in comparison to 1994. In the first six months of
1996, cost of service further decreased as a percentage of revenues from the
same period in 1995 but operating expenses increased in the 1996 period as a
result of the development, promotion and marketing of new services.
The Company is seeking to form strategic sales and marketing alliances with
foreign Internet service providers, telecommunications companies and resellers.
The Company anticipates that these organizations will use their knowledge of the
local market, language, customs and regulations, as well as their existing
distribution, customer support and billing infrastructures, to establish, grow
and properly service an international FaxSav customer base. In return, the
Company is offering these organizations either exclusive or non-exclusive rights
to market the Company's services in their territories and offering to provide
such services at a discount to the Company's retail prices. To date the Company
has formed preliminary strategic alliances with companies in Bermuda, Hong Kong,
Japan, Korea, Lebanon, the Philippines, Singapore and Taiwan. In addition, the
Company has formed a preliminary strategic alliance with a United States
corporation regarding activities in Mexico. The Company has entered into
non-binding letters of intent and, in some cases, marketing agreements, with
respect to these strategic alliances. In addition, the Company is developing a
network of commission-based agents to sell the FAXSAV FOR INTERNET suite of
services in foreign markets. To date, this network consists of 56 agents
representing the Company in 39 foreign markets.
A key element of the Company's current business strategy is to offer its
FAXSAV PLUS service at prices based on the economics of delivery through an
Internet backbone. The Company is currently implementing its FAXSAV PLUS service
with a two-tiered pricing structure. Pricing for delivery to the key
telecommunications markets currently targeted for Internet node deployment is
based on the economics of delivery through
18
<PAGE>
a planned Internet backbone, even if the Company has not yet deployed
Internet-capable facsimile nodes in such markets. At September 30, 1996, the
Company had not yet deployed Internet-capable nodes in 26 of such currently
targeted markets. Pricing for delivery to other destinations worldwide continues
to be based on the economics of delivery through the Company's telephony-based
network, which prices may or may not be reduced in the event that the Company
deploys Internet-capable facsimile nodes in such markets. It is anticipated that
this pricing strategy, which the Company introduced in the third quarter of
1996, will generally reduce the Company's overall gross profit margin until a
sufficient number of telecommunications markets are serviced by the Company's
Internet-capable nodes. The Company currently anticipates that, by the end of
1997, it will have deployed Internet-capable nodes in enough key
telecommunications markets worldwide to generally improve its overall gross
profit margin. The Company currently anticipates that approximately $7 million
of the net proceeds of this offering will be used to fund the capital
expenditures associated with its planned Internet-capable node expansion. There
can be no assurance that the Company will be able to deploy the additional
Internet-capable nodes on a timely basis, at a commercially reasonable cost, or
at all, or that overall gross margins will improve when anticipated, or at all.
Any failure of the Company to deploy the contemplated Internet-capable node
infrastructure on a timely basis could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors -- Dependence on Network Infrastructure; No Assurance of Successful
Internet-Capable Node Deployment."
To date, the Company has financed its cash requirements for operations and
investments in equipment primarily through private sales of equity securities,
bank borrowings and capital lease financing. The Company has incurred operating
losses since its inception in 1989. Based on the Company's anticipated increases
in expenses for new product development, deployment of Internet-capable nodes
and sales and marketing programs, the Company expects to incur a net operating
loss for the year ended December 31, 1996, and it expects to incur losses in the
future.
This Prospectus contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Prospective investors are cautioned that such statements are only predictions
and that actual events or results may differ materially. In evaluating such
statements, prospective investors should specifically consider the various
factors identified in this Prospectus, including the matters set forth under the
caption "Risk Factors," which could cause actual results to differ materially
from those indicated by such forward-looking statements.
19
<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 $3.0 million in equity on or before October 30, 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, South Korea and the United Kingdom. FaxSav anticipates
deploying a sufficient number of additional nodes in key telecommunications
markets worldwide by the end of 1997 to enable it to route a majority of its
customers' traffic through the Internet.
The Company's customer base, revenues and facsimile transmission volume have
grown substantially in recent periods. The Company's customer base, which
primarily consists of United States businesses in a broad range of industries,
has grown from approximately 3,300 customers at December 31, 1994 to
approximately 7,200 customers at June 30, 1996, plus over 1,000 registered users
of the Company's desktop-to-fax services. The following chart illustrates the
Company's revenue growth from the quarter ended June 30, 1994, in which the
FAXSAV service was first introduced, through the quarter ended June 30, 1996,
separately identifying the domestic and international destination components:
[A BAR CHART REPRESENTING THE COMPANY'S REVENUE GROWTH (DOMESTICALLY AND
INTERNATIONALLY) FROM JUNE 1994 THROUGH JUNE 1996.]
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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,
South Korea and the United Kingdom. FaxSav anticipates deploying a sufficient
number of additional nodes in key telecommunications markets worldwide by the
end of 1997 to enable it to route a majority of its customers' traffic through
the Internet.
FaxSav, through its integrated Internet and telephony network, provides a
comprehensive range of services for the global transmission of documents and
images, including real-time fax-to-fax, enhanced fax and broadcast fax services.
In addition, to position itself in the emerging desktop-to-fax market, the
Company recently introduced several proprietary software products which enable
the transmission of documents or images created in any Windows or e-mail
application to be routed directly from an Internet-connected computer desktop
through the FaxSav network to fax machines worldwide.
The FaxSav solution provides substantial ease of use to the customer.
Customers may begin transmitting faxes at substantially reduced costs without
any upfront investment or complex system installation. FaxSav is quickly and
easily installed by the customer and does not require any changes in customer
business practices. Customers connect to the FaxSav network by simply installing
a FAXSAV CONNECTOR, a small proprietary device that easily plugs between the
customer's fax machine and the wall jack, or by simply installing FaxSav's
proprietary desktop software on an Internet-connected personal computer.
FaxSav's proprietary routing algorithms then automatically deliver each
facsimile transmission, through either FaxSav's telephony network or Internet
backbone in order to optimize the lowest cost and the highest transmission
quality available on the FaxSav network. Additionally, the FaxSav solution is
both modular and scalable to meet customer business needs in that it can be
easily deployed across multiple fax machines or personal computers within an
organization on an unlimited basis.
THE FAXSAV STRATEGY
FaxSav's objective is to be the leading supplier of low-cost, high quality,
reliable business-to-business global faxing services utilizing the Internet as a
key transmission medium. FaxSav intends to achieve this position by focusing on
the following key elements:
DEPLOY GLOBAL INTERNET INFRASTRUCTURE. FaxSav recently began to deploy
a network of Internet-capable facsimile nodes in order to capture the cost
savings enabled by the Internet for international facsimile transmissions.
The Company intends to rapidly deploy this network infrastructure in key
telecommunications markets worldwide to capture these cost savings for
facsimile traffic both to and from such markets. FaxSav has added Internet
capability to its switching nodes in the United States and has deployed one
Internet-capable facsimile node in each of Bermuda, France, Germany, Hong
Kong, South Korea and the United Kingdom, and anticipates deploying a
sufficient number of additional nodes in key telecommunications markets
worldwide by the end of 1997 to enable it to route a majority of its
customers' traffic through the Internet.
ESTABLISH PRICE LEADERSHIP POSITION. FaxSav intends to increase its
customer base by offering fax delivery services both in the United States
and overseas at substantial savings to traditional telephony pricing.
Beginning in the third quarter of 1996, the Company introduced FAXSAV PLUS,
a new "virtual real-time" service with pricing based on the economics of
delivery through its planned Internet backbone to markets where the Company
has not yet deployed Internet-capable facsimile nodes. Pricing for
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delivery to other destinations worldwide are based on the economics of
delivery through the Company's telephony-based network, which prices may or
may not be reduced in the event that the Company deploys Internet-capable
facsimile nodes in such markets. See "--Services--FAXSAV PLUS." Although
this pricing structure will generally reduce the Company's overall gross
profit margin until a sufficient number of Internet-capable nodes are
deployed, the Company anticipates that this strategy will enable it to
rapidly expand its worldwide market presence.
RAPIDLY EXPAND WORLDWIDE CUSTOMER BASE. The Company intends to rapidly
expand its worldwide customer base by leveraging its price leadership
strategy both domestically and internationally.
- DOMESTICALLY. FaxSav will intensify its sales and marketing efforts in
the United States, including increased direct mail and telemarketing
activities and hiring additional personnel in its direct sales group.
FaxSav will continually monitor the market response to its price
leadership strategy and refine its sales and marketing programs
accordingly.
- INTERNATIONALLY. The Company intends to establish and build an
international customer base by developing a network of commission-based
agents to sell the FAXSAV FOR INTERNET suite of services in foreign
markets and by forming strategic sales and marketing alliances with
foreign Internet service providers, telecommunications companies and
resellers. The Company anticipates that these organizations will use
their knowledge of the local market, language, customs and regulations,
as well as their existing distribution, customer support and billing
infrastructures, to establish, grow and properly service an international
FaxSav customer base.
MAINTAIN TECHNOLOGY LEADERSHIP. The Company has developed significant
technological expertise in all key aspects of the facsimile transmission
business, including global network design, routing and transmission
completion algorithms, database programming and desktop software. The
Company intends to maintain its position as a technological leader in the
facsimile transmission market. The Company continues to place significant
emphasis on the ongoing development of advanced features for its FAXSAV FOR
INTERNET suite of services, including the development of client software for
faxing from the desktop. The Company's development efforts are focused on
new services and applications which are intended to provide easy to use,
cost-efficient and reliable business-to-business facsimile transmission
services on a worldwide basis.
THE FAXSAV NETWORK
OVERVIEW
TRADITIONAL INTERNATIONAL FACSIMILE TRANSMISSION. Traditional international
facsimile transmission (see Figure 1) begins when the originating fax machine
places a call over the local telephone network. Because the number dialed has an
international prefix, the Local Exchange Carrier ("LEC") switches the call to
the sender's long distance carrier (typically AT&T, MCI or Sprint). The long
distance carrier ("LDC") delivers the call to the corresponding long distance
company (the "PTT") in the country of destination, which in turn completes the
call by providing a connection through the local telephone network to the
receiving fax machine. Thus a real-time connection is established over the
traditional telephony networks, and the originating fax machine sends a data
stream, comprising a scanned image, to the receiving fax machine.
[GRAPHIC REPRESENTATION OF TRADITIONAL INTERNATIONAL FACSIMILE TRANSMISSION
FROM ORIGNIATION THROUGH LOCAL AND LONG DISTANCE NETWORKS TO THE POINT OF
DELIVERY.]
FIGURE 1. TRADITIONAL INTERNATIONAL FACSIMILE TRANSMISSION
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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 30, 1996, the Company had not yet deployed Internet-capable nodes in
26 of such currently targeted markets. Pricing for delivery to other
destinations worldwide continues to be based on the economics of delivery
through the Company's telephony-based network, which prices may or may not be
reduced in the event that the Company deploys Internet-capable facsimile nodes
in such markets. The Company estimates that this pricing structure enables
reductions of approximately 40% to 70% in the international fax bills of FAXSAV
PLUS customers. FAXSAV PLUS customers are charged on a per-minute basis for the
transmission time to the destination fax machine, and are billed monthly.
FAXSAV FOR INTERNET SUITE OF SERVICES
The FAXSAV FOR INTERNET suite of services, introduced in stages during the
first half of 1996, enables Internet-connected customers to send faxes directly
from their computer desktops, either from their e-mail package or from a Windows
software application, through the Internet to fax machines worldwide via the
FaxSav network. As of June 30, 1996, there were more than 1,000 registered users
of the FAXSAV FOR INTERNET suite of services. The Company's World Wide Web site
includes a detailed explanation of these services, installation instructions and
service registration forms. Customers are charged on a per-page basis for the
FAXSAV FOR INTERNET suite of services and generally are billed in advance of
use. The FAXSAV FOR INTERNET suite of services includes the following discrete
services:
- FAXLAUNCHER enables customers to fax documents created in any Windows
application directly from an Internet-connected computer desktop to fax
machines worldwide. FAXLAUNCHER also supports documents scanned through
sheet-fed scanners manufactured by Visioneer, Inc., Hewlett-Packard Co. or
Compaq Computer Corporation. FAXLAUNCHER software is provided to customers
in diskette form or it may be downloaded from the Company's World Wide Web
site.
- FAXMAILER enables customers to transmit messages from e-mail packages over
the Internet to the FaxSav network for delivery to fax machines worldwide.
FAXMAILER provides the desktop e-mail customer with the ability to reach
the fax machine of anyone not yet connected to the Internet without the
necessity of creating hard copy and manually sending a fax. Customers may
register for the FAXMAILER service through the Company's World Wide Web
site.
- FAXSCAN enables customers to send documents scanned in any TWAIN-compliant
scanner over the Internet to the FaxSav network for delivery to fax
machines worldwide. The combination of a scanner and FAXSCAN software puts
a virtual fax machine at the desktop for the customer. FAXSCAN software is
provided to customers in diskette form.
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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 and, in some cases, marketing
agreements with respect to these strategic alliances.
In addition to the strategic alliances, the Company is developing a network
of commission-based agents to sell the FAXSAV FOR INTERNET suite of services in
foreign markets. To date, this network consists of 56 agents representing the
Company in 39 foreign markets. The Company also intends to implement a rebiller
program for those agents who have the infrastructure to generate invoices and
perform collections. It is anticipated that, under this program, participating
agents will be provided detailed billing information on their accounts from
which they can create and distribute invoices in the local language and
currency, and locally service customer billing inquiries.
CUSTOMERS
The Company sells its services primarily to small and medium sized
businesses with international document transmission needs and, to a lesser
extent, to international departments and divisions of larger companies.
Customers can install FaxSav's services at individual fax machine or desktop
locations, across departments or throughout organizations by simply plugging the
FAXSAV CONNECTOR, a small proprietary device, between their fax machine and the
telephone jack or by simply installing FaxSav's desktop software on an Internet
connected personal computer. Through 1995, all of the Company's customers were
located in the United States, and their fax messages to international and
domestic destinations accounted for approximately 85% and 15%, respectively, of
the Company's total 1995 revenues. In 1996, with the introduction of the FAXSAV
FOR INTERNET suite of services, the Company began to expand its customer base to
include foreign customers. As of June 30, 1996, the Company had approximately
7,200 customers utilizing its traditional services and more than 1,000
registered users of the Company's desktop services. No single customer accounted
for more than 1% of the Company's revenues in 1995 or in the six months ended
June 30, 1996. The following is a sampling of the Company's customers, separated
into representative industry groups:
MANUFACTURING
Diasonics Ultrasound, Inc.
Enron Oil & Gas Company
Integrated Device Technology Inc.
International Business Machines Corp.
Komatsu America Corp.
LSI Logic Corp.
Solar Turbines, Inc.
Sun Chemical Corp.
RETAIL
Baskin-Robbins International Co.
Chevron Services
K Mart Corp.
L.A. Gear California, Inc.
May Merchandising Company
MCA Inc.
Warner-Lambert Company
SHIPPING
American Vanpac Carriers
Argents Air Express Ltd.
Chemical Tankers of America Inc.
International Forwarders Incorporated
Msas Cargo International Inc.
NYK Line (N.A.), Inc.
OTHER
The Echo Design Group, Inc.
Electronic Distribution Services Incorporated
Environmental Systems Research Institute
International Union for Conservation
The Long-Term Credit Bank of Japan
West Deutsche Landesbank
35
<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 upon valid proprietary rights of third parties.
However, the Company received a letter in the third quarter of 1995 stating that
the Company's FAXSAV CONNECTOR may be utilizing a call diversion methodology
patented by a third party. To the Company's knowledge, such third party has not
initiated any suit, action, proceeding or investigation relating to alleged
infringement by the Company of such patent. In addition, the Company is aware
that another third party has recently brought patent infringement actions
against several facsimile service providers. There can be no assurance that
these or other third parties will not assert infringement claims against the
Company in the future. Patents have been granted recently on fundamental
technologies in the communications and desktop software areas, and patents may
issue which relate to fundamental technologies incorporated in the Company's
services. As patent applications in the United States are not publicly disclosed
until the patent issues, applications may have been filed which, if issued as
patents, could relate to the Company's services. The Company could incur
substantial costs and diversion of management resources with respect to the
defense of any claims that the Company has infringed upon the proprietary rights
of others, which costs and diversion could have a material adverse effect on the
Company's business, financial condition and results of operations. Furthermore,
parties making such claims could secure a judgment awarding substantial damages,
as well as injunctive or other equitable relief which could effectively block
the Company's ability to license and sell its services in the United States or
abroad. Any such judgment could have a material adverse effect on the Company's
business, financial condition and results of operations. In the event a claim
relating to proprietary technology or information is asserted against the
Company, the Company may seek licenses to such intellectual property. There can
be no assurance, however, that licenses could be obtained on terms acceptable to
the Company, or at all. The failure to obtain any necessary licenses or other
rights could have a material adverse effect on the Company's business, financial
condition and results of operations.
GOVERNMENT REGULATION
The Company is subject to regulation by the FCC, by various state public
service and public utility commissions and by various international regulatory
authorities.
FaxSav is licensed by the FCC as an authorized telecommunications company
and is classified as a "non-dominant interexchange carrier." Generally, the FCC
has chosen not to exercise its statutory power to closely regulate the charges
or practices of non-dominant carriers. Nevertheless, the FCC acts upon
complaints against such carriers for failure to comply with statutory
obligations or with the FCC's rules, regulations and policies. The FCC also has
the power to impose more stringent regulatory requirements on the Company and to
change its regulatory classification. There can be no assurance that the FCC
will not change the Company's regulatory classification or otherwise subject the
Company to more burdensome regulatory requirements.
In order to provide intrastate service, the Company is required to obtain
various certifications from the public service or public utility commissions of
each state, or to register or be found exempt from registration by such
commissions. The Company has made the filings and taken the actions it believes
are necessary to allow the limited intrastate services that it currently
provides.
In connection with the anticipated deployment of Internet-capable nodes in
countries throughout the world, the Company will be required to satisfy a
variety of foreign regulatory requirements. The Company intends to explore and
seek to comply with these requirements on a country-by-country basis as the
deployment of Internet-capable facsimile nodes continues. There can be no
assurance that the Company will
37
<PAGE>
be able to satisfy the regulatory requirements in each of the countries
currently targeted for node deployment, and the failure to satisfy such
requirements may prevent the Company from installing Internet-capable facsimile
nodes in such countries. The failure to deploy a number of such nodes could have
a material adverse effect on the Company's business, operating results and
financial condition.
The Company's nodes and its FAXLAUNCHER service utilize RSA encryption
technology in connection with the routing of customer documents through the
Internet. The export of such encryption technology is regulated by the United
States government. The Company is seeking authority for the export of such
encryption technology and anticipates that authority will be granted to export
such technology worldwide, other than to Cuba, Iran, Libya, North Korea, Sudan
and Syria. Nevertheless, there can be no assurance that such authority will be
granted or, if granted, that it will not be revoked or modified at any time for
any particular jurisdiction or in general. In addition, there can be no
assurance that such export controls, either in their current form or as may be
subsequently enacted, will not limit the Company's ability to distribute its
services outside of the United States or electronically. While the Company takes
precautions against unlawful exportation of its software, the global nature of
the Internet makes it virtually impossible to effectively control the
distribution of its services. Moreover, future Federal or state legislation or
regulation may further limit levels of encryption or authentication technology.
Any such export restrictions, the unlawful exportation of the Company's
services, new legislation or regulation could have a material adverse effect on
the Company's business, financial condition and results of operations.
EMPLOYEES
As of June 30, 1996, the Company had 74 full-time employees, including 11 in
research and development, 26 in network operations and support, 23 in sales and
marketing and 14 in finance and administration. In addition, at June 30, 1996,
the Company was utilizing the services of 4 software engineer consultants. The
Company's employees are not covered by any collective bargaining agreements. The
Company believes that its relations with its employees are good.
FACILITIES
The Company's corporate headquarters are located in Edison, New Jersey in
facilities consisting of approximately 8,400 square feet of office space
occupied under a lease expiring in July 1998. In addition, the Company leases
sales offices in the San Francisco and Dallas metropolitan areas. While it
believes that these facilities are adequate for its present needs, the Company
is continually reviewing its needs and may add facilities in the future. The
Company believes that any required additional space would be available on
commercially reasonable terms. Finally, in connection with its deployment of
Internet-capable facsimile nodes, the Company has entered into, and will
continue to enter into, short-term leases in telehousing facilities worldwide.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings. The initiation
of any litigation, including any action claiming infringement by the Company of
intellectual property rights, could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors-- Limited Protection of Intellectual Property Rights; Risk of Third
Party Claims of Infringement."
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<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
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<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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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 Holdings Pty. Limited (Gregory Dunfield)(2)..................... 961,723
Menlo Ventures(3)....................................................... 845,833
Sutter Hill Ventures, a California Limited Partnership.................. 688,497
Coral Partners II, a limited partnership................................ 684,403
Battery Ventures II, L.P................................................ 569,233
Peter Howley............................................................ 124,424
Robert Labant........................................................... 6,944
</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, a subsidiary of Telstra Holdings Pty. Limited, by
the Company for an aggregate amount equal to $2,163,877.50. See footnote 3
to the table under "Principal Stockholders."
(3) Includes 833,333 shares of Common Stock held by Menlo Ventures VI, L.P.
("Menlo VI") and 12,500 shares of Common Stock held by Menlo Entrepreneurs
Fund VI, L.P. ("Menlo Entrepreneurs"). MV Management VI, L.P. is the General
Partner of Menlo VI and Menlo Entrepreneurs.
In October and November 1993, the Company issued warrants to purchase an
aggregate of 21,082 shares of Common Stock with an exercise price of $5.40 per
share to Sierra Ventures III (12,905 shares), Sierra International (263 shares),
Battery Ventures II, L.P. (6,916 shares) and Peter Howley (998 shares).
From June 30, 1993 through August 31, 1996, the Company granted executive
officers and directors, or in the case of Telstra Incorporated director
nominees, to Telstra Incorporated, a total of 897,889 stock options with
exercise prices ranging from $0.225 per share to $3.60 per share.
EMPLOYMENT SEVERANCE AGREEMENTS
For information regarding employment agreements and severance agreements
with executive officers and directors, see "Management--Employment Contracts and
Change of Control Arrangements."
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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, 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% 20.7%
Building 4, Suite 210
3000 Sand Hill Road
Menlo Park, California 94025
Telstra Holdings Pty. Limited c/o FaxSav Incorporated (3)......... 978,390 12.0 10.1
399 Thornall Street
Edison, NJ
Entities affiliated with Menlo Ventures (4)....................... 845,833 10.4 8.8
3000 Sand Hill Road
Menlo Park, CA 94025
Battery Ventures II, L.P (5)...................................... 796,847 9.7 8.3
200 Portland Street
Boston, MA 02114
Coral Partners II, a limited partnership (6)...................... 690,144 8.4 7.1
60 South Sixth Street
Suite 3510
Minneapolis, MN 55402
Sutter Hill Ventures, a California Limited Partnership (7)........ 688,497 8.4 7.1
755 Page Mill Road, Suite A-200
Palo Alto, CA 94304-1005
Thomas F. Murawski (8)............................................ 218,317 2.6 2.2
Jeffrey Drazan (2)................................................ 1,998,133 24.4 20.7
Gregory Dunfield (3).............................................. 978,390 12.0 10.1
Peter A. Howley (9)............................................... 166,445 2.0 1.7
Robert Labant..................................................... 6,944 * *
Thomas C. Mullaney (10)........................................... 54,037 * *
Peter S. Macaluso (11)............................................ 53,207 * *
George Frylinck (12).............................................. 52,022 * *
James C. Kaufeld (13)............................................. 66,211 * *
All current directors and executive officers as a group (9
persons)........................................................ 3,593,706(14) 41.4 35.3
</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) 1,375,364 shares of Common Stock held by Sierra III, (ii)
13,832 shares of Common Stock held by Sierra III International and (iii)
576,325 shares of Common Stock held by Sierra V. Also, includes warrants to
purchase 12,905 shares of Common Stock held by Sierra III and warrants to
purchase 263 shares of Common Stock held by Sierra III International. Mr.
Drazan, a Director of the Company, is a general partner of an affiliate of
Sierra III, Sierra III International and Sierra V and, as such, may be
deemed to share voting and investment power with respect to such shares. Mr.
Drazan disclaims beneficial ownership of such shares except to the extent of
his interest in such shares arising from his interest in Sierra III, Sierra
III International and Sierra V. Also includes 19,444 shares of Common Stock
issuable to Mr. Drazan upon exercise of stock options.
(3)Mr. Dunfield, who is a director of the Company, is a Vice President of
Telstra Incorporated, a wholly-owned subsidiary of Telstra Holdings Pty.
Limited. Includes 16,667 shares of Common Stock issuable to Telstra
Incorporated upon exercise of stock options. Mr. Dunfield disclaims
beneficial ownership of all of the foregoing shares.
(4)Includes (i) 833,333 shares of Common Stock held by Menlo VI and (ii) 12,500
shares of Common Stock held by Menlo Entrepreneurs. MV Management VI, L.P.
is the General Partner of Menlo VI and Menlo Entrepreneurs.
(5)Includes warrants to purchase 6,916 shares of Common Stock. ABF Partners II,
L.P. is the General Partner of Battery Ventures II, L.P.
(6)Coral Management Partners II, Limited Partnership ("Coral Management"), is
the General Partner of Coral Partners II. Includes 5,741 shares of Common
Stock issuable upon exercise of warrants. Excludes an aggregate of 5,626
shares of Common Stock held, in their individual capacity, by three general
partners of Coral Management who share investment and voting power with
respect to the shares of Common Stock held by Coral Partners II. The general
partners disclaim beneficial ownership of the shares held by Coral Partners
II, except as to their proportionate interest therein.
(7)Excludes an aggregate of 390,497 shares of Common Stock held, in their
individual capacity, by the five general partners of the general partner of
Sutter Hill Ventures, a California Limited Partnership ("Sutter Hill"). The
five general partners share voting and investment power with respect to the
shares held by Sutter Hill. Each of these individuals disclaims beneficial
ownership of the shares held by Sutter Hill except as to their proportionate
interest therein, and disclaims beneficial ownership of the shares held by
the other four individuals.
(8)Consists of 218,317 shares of Common Stock issuable upon exercise of stock
options.
(9)Includes 22,222 shares of Common Stock issuable upon exercise of stock
options and 998 shares of Common Stock issuable upon exercise of warrants.
(10)Consists of 54,037 shares of Common Stock issuable upon exercise of stock
options.
(11)Consists of 53,207 shares of Common Stock issuable upon exercise of stock
options.
(12)Consists of 52,022 shares of Common Stock issuable upon exercise of stock
options.
(13)Consists of 66,211 shares of Common Stock issuable upon exercise of stock
options.
(14)See Notes (2) through (13).
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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.
52
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could adversely affect market prices prevailing from time to time. Sales
of substantial amounts of Common Stock of the Company in the public market after
the lapse of existing resale restrictions could adversely affect the prevailing
market price and the ability of the Company to raise equity capital in the
future.
Upon completion of this offering, the Company will have outstanding
9,670,490 shares of Common Stock, assuming no exercise of currently outstanding
options. In addition to the 1,500,000 shares of Common Stock offered hereby
(assuming no exercise of the Underwriters' over-allotment option), as of the
Effective Date, there will be 8,170,490 shares of Common Stock outstanding, all
of which are "restricted securities" under the Securities Act. Certain
stockholders of the Company, holding in the aggregate approximately 7,108,000
shares of Common Stock, are subject to lock-up agreements providing generally
that they will not offer, sell, contract to sell or otherwise dispose of any
shares of Common Stock or any securities convertible or exchangeable into Common
Stock for a period of 180 days after the date of this Prospectus without the
prior written consent of Lehman Brothers Inc., which may be given at any time,
without notice, with respect to all or any portion of such shares. Holders of
approximately 1,056,000 additional shares of Common Stock are subject to similar
restrictions contained in an Investor Rights Agreement. Taking into account the
lock-up agreements and restrictions notwithstanding possible earlier eligibility
for resale under the provisions of Rules 144 and 701, the numbers of shares that
will be available for sale in the public market will be as follows. Beginning 90
days after the Effective Date, approximately 6,000 shares of restricted
securities will become eligible for resale in the public market, subject to
compliance with Rules 144 and 701. Beginning 180 days after the Effective Date,
approximately 6,007,000 additional shares of restricted securities will become
eligible for sale in the public market upon expiration of certain lock-up
agreements pursuant to Rules 144 and 701 and, as of that date, approximately
5,357,000 of such shares will be subject to certain volume and other resale
restrictions pursuant to Rules 144 and 701.
In general, under Rule 144, as currently in effect, any person (or persons
whose shares are aggregated) who has beneficially owned his or her restricted
securities (as that term is defined in Rule 144) for at least two years is
entitled to sell, within any three-month period, a number of such securities
that does not exceed the greater of 1% of the then outstanding shares of the
Company's Common Stock (approximately 104,000 shares immediately after this
offering) or the average weekly trading volume during the four calendar weeks
preceding the date on which notice of such sale was filed under Rule 144,
provided certain requirements concerning availability of public information,
manner of sale and notice of sale are satisfied. A person who is not an
affiliate, has not been an affiliate within three months prior to the sale and
has beneficially owned the restricted securities for at least three years is
entitled to sell such shares under Rule 144(k) without regard to any of the
limitations described above. In meeting the two-year and three-year holding
periods described above, a holder of Restricted Shares may include under certain
circumstances the holding period of a prior owner.
The Securities and Exchange Commission has proposed certain amendments to
Rule 144 that would reduce by one year the holding periods required for shares
subject to Rule 144 to become eligible for resale in the public market. This
proposal, if adopted, would increase the number of shares of Common Stock
eligible for immediate resale following the expiration of the lock-up agreements
described above. No assurance can be given concerning whether or when the
proposal will be adopted by the Securities and Exchange Commission.
Any employee or director of or consultant to the Company who has been
granted options to purchase shares or who has purchased shares pursuant to a
written compensatory plan or written contract prior to the effective date of
this offering pursuant to Rule 701 will be entitled to rely on the resale
provisions of Rule 701, which permits non-affiliates to sell their Rule 701
shares without having to comply with the public information, holding-period,
volume-limitation or notice provisions of Rule 144 and permits affiliates to
sell their Rule 701 shares without having to comply with the Rule 144 holding
period restrictions, in each case commencing 90 days after the date of this
Prospectus.
53
<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.............................................................. 505,000
Alex. Brown & Sons Incorporated.................................................. 505,000
Dean Witter Reynolds Inc......................................................... 50,000
A.G. Edwards & Sons, Inc......................................................... 50,000
EVEREN Securities Inc............................................................ 50,000
Lazard Freres & Co. LLC.......................................................... 50,000
PaineWebber Incorporated......................................................... 50,000
J.C. Bradford & Co............................................................... 24,000
Chicago Corporation.............................................................. 24,000
Furman Selz LLC.................................................................. 24,000
Gabelli & Company, Inc........................................................... 24,000
Ladenburg, Thalmann & Co. Inc.................................................... 24,000
Brad Peery Inc................................................................... 24,000
Prime Charter Limited, LTD....................................................... 24,000
Robinson-Humphrey Company, Inc................................................... 24,000
Scott & Stringfellow, Inc........................................................ 24,000
SoundView Financial Group, Inc................................................... 24,000
----------
Total........................................................................ 1,500,000
----------
----------
</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 $0.30 per share. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $0.10 per share to
certain other Underwriters or to certain other brokers or dealers. After the
initial public offering, the public offering price, the concession to selected
dealers and the reallowance to other dealers may be changed by the Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
and to contribute to payments that the Underwriters may be required to make in
respect thereof.
The Company has granted to the Underwriters an option to purchase up to an
additional 225,000 shares of Common Stock at the public offering price less the
underwriting discounts and commissions shown on the cover page of this
Prospectus, solely to cover over-allotments, if any. Such option may be
exercised at any time until 30 days after the date of this Prospectus. To the
extent that the Underwriters exercise such option, each of the Underwriters will
be committed, subject to certain conditions, to purchase a number of option
shares proportionate to such Underwriter's initial commitment.
The Representatives of the Underwriters have informed the Company that the
Underwriters do not intend to confirm sales to accounts over which they exercise
discretionary authority.
55
<PAGE>
The Company, the directors and officers and certain other stockholders of
the Company have agreed, with certain limitations and except for the shares of
Common Stock to be sold in the offering, not to, directly or indirectly, offer,
sell or contract to sell, or otherwise dispose of shares of Common Stock of the
Company, or any securities convertible into, or exchangeable for, or any rights
to acquire, shares of Common Stock for a period of 180 days after the date of
this Prospectus without the prior written consent of Lehman Brothers on behalf
of the Representatives.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price was determined by negotiation among the
Company and the Representatives of the Underwriters. Among the factors
considered in determining the initial public offering price, in addition to
prevailing market conditions, were the Company's historical performance, capital
structure, estimates of the business potential and earnings prospects of the
Company, an overall assessment of the Company, an assessment of the Company's
management, and the consideration of the above factors in relation to market
valuation of companies in related businesses.
In February 1996, the Company sold 2,000,000 shares of Series F Preferred
Stock to Lehman Brothers Holdings Inc., the parent company of Lehman Brothers
Inc., or approximately 10% of all shares of Series F Preferred Stock issued, for
a purchase price of $0.40 per share. The Company granted certain registration
rights to Lehman Brothers Holdings Inc. in connection with that transaction. In
addition, a Senior Vice President of Lehman Brothers Inc. purchased 500,000
shares of Series F Preferred Stock of the Company in February 1996 for a
purchase price of $0.40 per share, and has been granted certain registration
rights by the Company. The son of such Senior Vice President received 22,727
shares of Series E Preferred Stock by gift in January 1995 from a director of
the Company and the son also purchased 2,612 shares of Series F Preferred Stock
for a purchase price of $0.40 per share in February 1996 in the Company's
private placement and has been granted certain registration rights by the
Company. Each nine shares of Series E Preferred Stock and Series F Preferred
Stock will be converted to one share of Common Stock upon the consummation of
the offering. See "Description of Capital Stock--Registration Rights of Certain
Holders."
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Brobeck, Phleger & Harrison LLP, New York, New York. A member of
Brobeck, Phleger & Harrison LLP is the beneficial owner of 6,199 shares of
Common Stock. Certain legal matters in connection with the offering will be
passed upon for the Underwriters by Testa, Hurwitz & Thibeault, LLP, Boston,
Massachusetts.
EXPERTS
The balance sheets as of December 31, 1995 and 1994 and the related
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 1995, included in this
Prospectus and Registration Statement, have been included herein in reliance on
the report of Coopers and Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement on Form S-1, including
amendments thereto, under the Securities Act with respect to the Common Stock
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and such Common Stock, reference
is made to the Registration Statement and the exhibits and schedules filed as a
part thereof. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete, and, in
each instance, if such contract or document is filed as an exhibit, reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference to such exhibit. The Registration Statement, including exhibits
and schedules thereto, may be inspected without charge at the Commission's
Public Reference Section, Room 1024, 450 Fifth Street, N.W., Washington, D.C.
Copies of all or any part of such material may be obtained from such office at
prescribed rates.
56
<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-19
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of FaxSav Incorporated:
We have audited the accompanying balance sheets of FaxSav Incorporated
(formerly Digitran Corporation) as of December 31, 1994 and 1995, and the
related statements of operations, stockholders' equity (deficit) and cash flows
for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of FaxSav Incorporated as of
December 31, 1994 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Parsippany, New Jersey
March 29, 1996
F-2
<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............................... $ (5.99) $ (6.39) $ (7.46) $ (3.44) $ (6.17)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Weighted average common and equivalent
shares outstanding.................. 543,953 546,500 547,444 547,444 555,923
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Unaudited pro forma data (Note 2):
Pro forma net loss per common and
equivalent share.................. $ (0.44) $ (0.40)
------------- -------------
------------- -------------
Shares used in computing pro-forma
net loss per common and equivalent
share............................. 9,243,484 8,609,119
------------- -------------
------------- -------------
</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 $8.00, the initial public offering price.
Common stock equivalents (i.e., convertible preferred stock and certain stock
options and warrants) issued in earlier periods have not been included since the
effect would be antidilutive.
G. PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation of furniture and equipment, except enhanced fax
equipment, is calculated using the straight-line method over their estimated
useful lives of five years. Enhanced fax equipment is included in equipment and
is depreciated over its estimated life of 30 months. Leasehold improvements are
amortized using the straight-line method over the lesser of the lease term or
the estimated useful life of the related asset. Repairs
F-8
<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 30, 1996.
At December 31, 1995 and June 30, 1996, $1,000,000 and $500,000 (unaudited)
were outstanding under the working capital line of credit. At June 30, 1996,
$165,796 (unaudited) was outstanding under the equipment line of credit. The
amounts outstanding under the facilities approximates its fair value due to the
short-term nature of the obligations. Interest on advances, if any, are at the
Bank's prime rate plus an applicable margin, as defined in the credit agreement,
which resulted in a borrowing rate of 10.5% and 8.75% at December 31, 1995 and
June 30, 1996, respectively.
10. INCOME TAXES:
Inasmuch as the Company continues to incur operating losses and currently
pays no income taxes, no provision or benefit for income taxes has been
recorded.
The income tax benefit at the United States federal statutory rate on the
Company's operating loss, for all periods presented, has been eliminated by an
increase in the valuation allowance for deferred tax assets and operating losses
not recognized.
Through December 31, 1995, the Company has generated net operating loss
carryforwards for income tax purposes of approximately $16,104,000, which expire
through 2010. Net operating loss carryforwards are subject to review and
possible adjustment by the Internal Revenue Service and may be limited in the
event of certain cumulative changes in the ownership interests of significant
stockholders over a three-year period in excess of 50%. The Company believes it
has experienced changes in ownership in excess of 50% and that these changes in
ownership will affect the Company's ability to utilize its net operating loss
carryforwards to offset future taxable income, if any.
The components of the Company's deferred tax asset are as follows:
<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 Holdings Pty. Limited, entered into a
Preferred Stock Purchase Agreement which provided for, among other things: (a)
the sale and issuance of 17,311,021 shares of Series D Preferred Stock for a
purchase price of $3,000,000 ($.1733 per share); (b) the grant of an option, on
a one-time basis between January 1, 1996 and December 31, 1996, to acquire 100%
of the fully diluted shares of the Company's outstanding common stock not owned
by Telstra; (c) Telstra's designation of two of the five numbers of the
Company's Board of Directors, whose size may not be increased without Telstra's
approval; (d) Telstra's prior approval on certain business decisions of the
Company, including business plans, annual budgets, issuance of securities and
certain indebtedness; (e) an additional equity investment through the purchase
of Series D Preferred Stock at $0.1733 per share of up to $1,250,000, if
required by the Company, to be made by the current Preferred Stockholders
(exclusive of Telstra) on a pro rata basis no later than January 31, 1995; and
(f) under the terms of an amended stockholders agreement, the holders of a
majority of the Registerable Securities, as defined, may request, after May 1,
1994, that the Company file a registration statement under the Securities Act of
1933.
The proceeds from the issuance of the shares to Telstra were used for
working capital and capital expenditures for the purpose of sustaining or
expanding the Company's market share. Costs incurred in connection with the
issuance of the Series D Preferred Stock amounted to approximately $134,000.
On February 1, 1994, the Company and Telstra entered into a Service
Agreement whereby the Company will provide management, technical and other
services in support of Telstra's "WorldFax" service in the U.S. for a period of
18 months. In consideration for these services, Telstra paid the Company total
consideration of $750,000. The Company received $309,375 and $440,625 in 1994
and 1995, respectively, in accordance with the Service Agreement which has been
included as other revenue to offset operating expenses incurred in the
accompanying statements of operations.
On October 31, 1994, the Preferred Stock Purchase Agreement referred to
above was amended in connection with the Company's intent to raise additional
equity funds. The amended agreement provided for, among other things: (a)
termination of Telstra's option to acquire 100% of the fully diluted shares of
the
F-18
<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 filed an amendment to its Fifth Amended and Restated Certificate of
Incorporation to effect a one-for-nine reverse stock split at a par value of
$0.01 and to change the authorized number of common shares to 40,000,000. All
share and per share amounts in the financial statements have been retroactively
restated to reflect the reverse stock split.
The Company is also expected to file immediately prior to the closing of the
offering its Sixth Amended and Restated Certificate of Incorporation which will
change the authorized number of preferred stock. All outstanding shares of
preferred stock will convert at the consent of the holders into an aggregate of
7,790,489 shares of common stock. The effect of this conversion has been
presented in the accompanying balance sheets and statements of stockholders
equity (deficit) on a pro forma basis as of June 30, 1996.
F-19
<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 NOVEMBER 5, 1996 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
1,500,000 SHARES
[LOGO]
COMMON STOCK
--------------
PROSPECTUS
OCTOBER 11, 1996
---------------------
LEHMAN BROTHERS
ALEX. BROWN & SONS
INCORPORATED
- --------------------------------------------------
--------------------------------------------------
- --------------------------------------------------
--------------------------------------------------
<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.............................................. 41,414
Printing and engraving.......................................................... 125,000
Legal fees and expenses......................................................... 275,000
Accounting fees and expenses.................................................... 200,000
Blue sky fees and expenses...................................................... 15,000
Directors and officers liability insurance...................................... 300,000
Transfer agent fees............................................................. 1,000
Miscellaneous................................................................... 28,581
------------
Total....................................................................... $ 1,000,000
------------
------------
</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>
<C> <S>
NUMBER DESCRIPTION
- --------- ----------------------------------------------------------------------------------------------------
4.2 See Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5 for provisions of the Certificate of Incorporation and
Bylaws of the Registrant defining rights of holders of Common Stock of the Registrant.
5.1** Opinion of Brobeck, Phleger & Harrison LLP.
10.1** Fifth Amended and Restated Investor Rights Agreement.
10.2** Amendment and waiver to Fifth Amended and Restated Investor Rights Agreement.
10.3** 1990 Stock Option Plan.
10.4** 1996 Stock Option/Stock Issuance Plan.
10.5** Form of Officer Severance Agreement.
10.6** Form of Director Severance Agreement.
10.7** Telstra Severance Agreement.
10.8+** Telecommunications Services Agreement, between Wiltel, Inc. and the Registrant, dated April 4, 1994.
10.9+** Agreement between MCI Telecommunications Corporation and the Registrant, effective March 1, 1996.
10.10** Lease Agreement, dated May 28, 1992, between Metro Four Associates Limited Partnership, Thornall
Associates and the Registrant, as extended and amended to date.
10.11 Credit Agreement, dated July 7, 1995, between the Company and Silicon Valley Bank, as amended to
date.
10.12** Letter Agreement, dated November 1, 1994 between Telstra Incorporated and the Registrant.
10.13** Form of Series C Warrant.
10.14** Series B Preferred Stock Warrant between the Registrant and Comdisco, Inc., dated May 30, 1991.
10.15** Series B Preferred Stock Warrant between the Registrant and Comdisco, Inc., dated September 16,
1992.
10.16** Series D Preferred Stock Warrant between the Registrant and Comdisco, Inc., dated October 28, 1993.
10.17** Common Stock Warrant between the Registrant and LTI Ventures Leasing Corp., dated February 15, 1993.
10.18** Common Stock Warrant between the Registrant and LTI Ventures Leasing Corp., dated May 5, 1994.
10.19** Common Stock Warrant between the Registrant and Silicon Valley Bancshares, dated April 6, 1992.
10.20** Common Stock Warrant between the Registrant and Silicon Valley Bancshares, dated July 7, 1995.
11.1** Statement re Computation of Per Share Earnings.
23.1 Consent of Coopers & Lybrand L.L.P.
23.3** Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
24.** Power of Attorney.
27.** Financial Data Schedule.
</TABLE>
- ---------
** Previously filed.
+ Confidential treatment granted
II-3
<PAGE>
(b) Financial Statement Schedule
Schedule II--Valuation of Qualifying Accounts
Report of Independent Accountants
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in Financial
Statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation of the Registrant, the Underwriting Agreement, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered hereunder, the Registrant will,
unless in the opinion of counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) That for purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424 (b) (1) or (4), or 497
(h) under the Act shall be deemed to be part of this Registration Statement as
of the time it was declared effective.
(2) That for the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of Prospectus shall be deemed to
be a new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized in The City of
Edison, State of New Jersey, on this 11th day of October, 1996.
FAXSAV INCORPORATED
By: /s/ PETER S. MACALUSO
-----------------------------------
Peter S. Macaluso
VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed by the following persons in
the capacities indicated on October 11, 1996:
<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>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of FaxSav Incorporated:
In connection with our audits of the financial statements of FaxSav
Incorporated (formerly Digitran Corporation) as of December 31, 1995 and 1994,
and for each of the three years in the period ended December 31, 1995, which are
included in this Registration Statement, we have also audited the related
financial statement schedule listed under Item 16(b) of this Registration
Statement.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Parsippany, New Jersey
March 29, 1996
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION PAGE
- --------- --------------------------------------------------------------------------------------------- -----------
<C> <S> <C>
1.1** Form of Underwriting Agreement.
3.1** Fifth Amended and Restated Certificate of Incorporation of the Registrant.
3.2** Form of Amendment to Fifth Amended and Restated Certificate of Incorporation of the
Registrant to be filed prior to the consummation of the public offering.
3.3** Form of Sixth Amended and Restated Certificate of Incorporation of the Registrant to be filed
upon the consummation of the public offering.
3.4** By-laws of the Registrant.
3.5** Form of Amendment to By-laws of the Registrant to be in effect upon the consummation of the
public offering.
4.1** Specimen Common Stock Certificate.
4.2 See Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5 for provisions of the Certificate of Incorporation
and Bylaws of the Registrant defining rights of holders of Common Stock of the Registrant.
5.1** Opinion of Brobeck, Phleger & Harrison LLP.
10.1** Fifth Amended and Restated Investor Rights Agreement.
10.2** Amendment and waiver to Fifth Amended and Restated Investor Rights Agreement.
10.3** 1990 Stock Option Plan.
10.4** 1996 Stock Option/Stock Issuance Plan.
10.5** Form of Officer Severance Agreement.
10.6** Form of Director Severance Agreement.
10.7** Telstra Severance Agreement.
10.8+** Telecommunications Services Agreement, between Wiltel, Inc. and the Registrant, dated April
4, 1994.
10.9+** Agreement between MCI Telecommunications Corporation and the Registrant, effective March 1,
1996.
10.10** Lease Agreement, dated May 28, 1992, between Metro Four Associates Limited Partnership,
Thornall Associates and the Registrant, as extended and amended to date.
10.11 Credit Agreement, dated July 7, 1995, between the Company and Silicon Valley Bank, as amended
to date.
10.12** Letter Agreement, dated November 1, 1994 between Telstra Incorporated and the Registrant.
10.13** Form of Series C Warrant.
10.14** Series B Preferred Stock Warrant between the Registrant and Comdisco, Inc., dated May 30,
1991.
10.15** Series B Preferred Stock Warrant between the Registrant and Comdisco, Inc., dated September
16, 1992.
10.16** Series D Preferred Stock Warrant between the Registrant and Comdisco, Inc., dated October 28,
1993.
10.17** Common Stock Warrant between the Registrant and LTI Ventures Leasing Corp., dated February
15, 1993.
10.18** Common Stock Warrant between the Registrant and LTI Ventures Leasing Corp., dated May 5,
1994.
10.19** Common Stock Warrant between the Registrant and Silicon Valley Bancshares, dated April 6,
1992.
10.20** Common Stock Warrant between the Registrant and Silicon Valley Bancshares, dated July 7,
1995.
11.1** Statement re Computation of Per Share Earnings.
23.1 Consent of Coopers & Lybrand L.L.P.
23.3 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
24.** Power of Attorney.
27.** Financial Data Schedule.
</TABLE>
- ------------------------
** Previously filed.
+ Confidential treatment granted
<PAGE>
EXHIBIT 10.11
CREDIT AGREEMENT
Dated as of July 7, 1995
between
DIGITRAN CORPORATION
and
SILICON VALLEY BANK
--------------------------
Line of Credit Loans
$1,000,000
--------------------------
<PAGE>
CREDIT AGREEMENT
TABLE OF CONTENTS
Page
----
Preamble
Section 1 Line of Credit Loans
1.1 Amount . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Line of Credit Note. . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.3 Requests For Line of Credit Loans . . . . . . . . . . . . . . . . . . . 1
1.4 Borrowing Base . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.5 Maturity Date of Line of Credit Loans . . . . . . . . . . . . . . . . . 1
1.6 Termination of Commitment . . . . . . . . . . . . . . . . . . . . . . . 1
1.7 Commitment Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 2 Interest Rates; Payments and Optional Prepayments
2.1 Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.2 Manner and Place of Payment . . . . . . . . . . . . . . . . . . . . . . 2
2.3 Payments Due on Saturdays, Sundays and Holidays . . . . . . . . . . . . 2
2.4 Optional Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.5 Capital Requirements . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 3 Security
3.1 Security Interests . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 4 Conditions Precedent
4.1 This Agreement, the Note and the Security Instruments . . . . . . . . . 3
4.2 No Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
4.3 Correctness of Representations . . . . . . . . . . . . . . . . . . . . 3
4.4 Opinion of Counsel for the Borrower . . . . . . . . . . . . . . . . . . 3
4.5 Governmental Approvals . . . . . . . . . . . . . . . . . . . . . . . . 3
4.6 Filing of Financing Statements, etc. . . . . . . . . . . . . . . . . . 4
4.7 Supporting Documents . . . . . . . . . . . . . . . . . . . . . . . . . 4
4.8 Loan Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
4.9 Compliance and Borrowing Base Certificates . . . . . . . . . . . . . . 4
4.10 Accounts Receivable Audit . . . . . . . . . . . . . . . . . . . . . . . 4
4.11 Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 5 Representations and Warranties
5.1 Corporate Status . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
5.2 No Violation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
5.3 Corporate Power and Authority . . . . . . . . . . . . . . . . . . . . . 5
5.4 Enforceability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
5.5 Governmental Approvals . . . . . . . . . . . . . . . . . . . . . . . . 5
5.6 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 5
<PAGE>
-ii-
5.7 No Material Change . . . . . . . . . . . . . . . . . . . . . . . . . . 6
5.8 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
5.9 Compliance with Other Instruments: Compliance with Law . . . . . . . . 6
5.10 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
5.11 Investment Company Status; Limits on Ability to Incur Indebtedness. . . 6
5.12 Title to Property . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
5.13 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5.14 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5.15 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . 7
5.16 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . 7
5.17 Borrowing Base. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 6 Affirmative Covenants
6.1 Maintenance of Existence . . . . . . . . . . . . . . . . . . . . . . . 8
6.2 Taxes and Other Liens . . . . . . . . . . . . . . . . . . . . . . . . . 8
6.3 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6.4 Financial Statements, Etc. . . . . . . . . . . . . . . . . . . . . . . 8
6.5 Notice of Default. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
6.6 Environmental Matters. . . . . . . . . . . . . . . . . . . . . . . . . 9
6.7 ERISA Information. . . . . . . . . . . . . . . . . . . . . . . . . . . 10
6.8 Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
6.9 Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6.10 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6.11 Depository Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . 11
6.12 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6.13 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 7 Negative Covenants
7.1 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
7.2 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . .11
7.3 Consolidation, Merger or Acquisition . . . . . . . . . . . . . . . . .12
7.4 Disposition of Assets . . . . . . . . . . . . . . . . . . . . . . . . .12
7.5 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
7.6 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
7.7 Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . .13
7.8 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
7.9 Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.10 Sale and Leaseback . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.11 Additional Stock Issuance by Subsidiaries . . . . . . . . . . . . . . 14
7.12 Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.13 Quick Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.14 Minimum Profitability . . . . . . . . . . . . . . . . . . . . . . . . 14
7.15 Leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.16 Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 8 Events of Default
8.1 Events of Default. . . . . . . . . . . . . . . . . . . . . . . . . . . .15
<PAGE>
-iii-
8.2 Remedies Upon an Event of Default. . . . . . . . . . . . . . . . . . . .16
Section 9 Definition
9.1 Certain Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . .17
Section 10 Miscellaneous
10.1 Accounting Terms and Definitions. . . . . . . . . . . . . . . . . . . . 23
10.2 Amendments, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
10.3 Notices, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
10.4 No Waiver; Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . 23
10.5 Right of Set-off. . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
10.6 Expenses; Indemnification . . . . . . . . . . . . . . . . . . . . . . . 24
10.7 Binding Effect. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
10.8 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
10.9 Governing law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
10.10 Waiver of Jury Trial. . . . . . . . . . . . . . . . . . . . . . . . . . 25
10.11 Venue, Consent to Service of Process. . . . . . . . . . . . . . . . . . 25
10.12 Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
10.13 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Exhibits
A - Line of Credit Note
B - Security Agreement
C - Compliance Certificate
D - Borrowing Base Certificate
E - Borrowing Certificate
Schedules
A - Disclosure Schedule
B - Intellectual Property
7.2 Transactions with Affiliates
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT, dated as of July 7, 1995 by and between DIGITRAN
CORPORATION, a Delaware corporation with its principal place of business at 379
Thornall Street, Edison, New Jersey 08837 (the "BORROWER") and SILICON VALLEY
BANK, a California-chartered bank, with its principal place of business at 3000
Lakeside Drive, P.O. Box 3762, Santa Clara, California 95054 with a loan
production office located at Wellesley Office Park, 45 William Street,
Wellesley, Massachusetts 02181 doing business under the name Silicon Valley East
(the "BANK").
SECTION 1 LINE OF CREDIT LOANS.
1.1 AMOUNT. Subject to and upon the terms and conditions set
forth below, the Bank agrees to make loans (each a "LINE OF CREDIT LOAN" and
collectively, the "LINE OF CREDIT LOANS") to the Borrower under this Section 1
from time to time to and including the date which is one year from the date set
forth above (the "COMMITMENT EXPIRATION DATE"), unless earlier terminated
pursuant to Section 1.6, in an aggregate principal amount not to exceed at any
one time outstanding the sum of $1,000,000 (the "LINE OF CREDIT COMMITMENT"),
subject to the limitation set forth in Section 1.4. Within the limit of the Line
of Credit Commitment, the Borrower may borrow, repay and reborrow at any time or
from time to time until the Commitment Expiration Date, or the termination of
the Line of Credit Commitment, whichever occurs earlier.
1.2 LINE OF CREDIT NOTE. The Line of Credit Loans shall be
evidenced by and payable with interest in accordance with the note of the
Borrower in the form of attached EXHIBIT A, dated today's date (the "NOTE").
1.3 REQUESTS FOR LINE OF CREDIT LOANS. Whenever the Borrower
desires to obtain a Line of Credit Loan, it shall notify the Bank by telex,
telecopy or telephone received no later than 1:00 p.m. (Boston time) one Banking
Day before the day on which the requested Line of Credit Loan is to be made.
Such notice shall specify the effective date and the amount of such Loan. Each
such notice (a "NOTICE OF BORROWING") shall be irrevocable and shall be
immediately followed by a written Borrowing Certificate by the Borrower
substantially in the form of attached EXHIBIT E, provided, if such written
confirmation differs in any material respect from the action taken by the Bank,
the records of the Bank shall control absent manifest error. The Bank shall
make such Line of Credit Loan by crediting its amount in immediately available
funds to the Borrower's regular deposit account with the Bank.
1.4 BORROWING BASE. The Borrower shall not permit, or request
any advance hereunder that would cause, the sum of the aggregate unpaid
principal amount of all Line of Credit Loans under this Line of Credit
Commitment (the "EXTENSIONS OF CREDIT"), to exceed at any time an amount equal
to the lesser of (i) the Line of Credit Commitment or (ii) 50% of all Eligible
Domestic Accounts Receivable at such time (such lesser amount, the "BORROWING
BASE").
1.5 MATURITY DATE OF LINE OF CREDIT LOANS. All Line of Credit
Loans shall mature and the total unpaid principal amount thereunder shall be due
and payable on July 7, 1996 (the "MATURITY DATE"), at which time all amounts
advanced under this Section 1 shall be immediately due and payable.
1.6 TERMINATION OF COMMITMENT. The Borrower, upon (a) at least
two (2) Banking Days' prior written notice to the Bank and (b) the repayment in
full of the outstanding principal balance of the Line of Credit Loans (and
accrued interest thereon) and the payment in full of any expenses or other fees
owed by the Borrower to the Bank under or pursuant to this Agreement, may elect
to permanently terminate the Line of Credit Commitment.
<PAGE>
-2-
1.7 COMMITMENT FEE. The Borrower agrees to pay the Bank a
commitment fee (the "Commitment Fee") for the period commencing on the date
hereof and including the Maturity Date (or such earlier date as the Line of
Credit Commitment shall have been terminated) computed at a rate equal to 1/2 of
1% per annum on the average daily unused portion of the Line of Credit
Commitment. Accrued Commitment Fees shall be due and payable quarterly in
arrears on the last Banking Day of July and October 1995 and January and April
1996, respectively.
<PAGE>
SECTION 2 INTEREST RATES; PAYMENTS AND OPTIONAL PREPAYMENTS.
2.1 INTEREST RATES.
(a) The Borrower agrees to pay interest on the unpaid principal
amount of each Line of Credit Loan for each day from and including the date such
Line of Credit Loan was made to but excluding the date the principal on such
Line of Credit Loan is due (whether at maturity, by acceleration or otherwise),
at a fluctuating rate per annum equal to the Prime Rate plus 2%, which interest
rate shall change when the Prime Rate shall change. Such interest shall be
payable monthly in arrears on the last day of each month commencing with the
first such date hereafter and when the principal amount of such Line of Credit
Loan is due (whether at maturity, by acceleration or otherwise).
(b) Any overdue principal or other payment with respect to any
Extension of Credit, including without limitation any overdue interest to the
extent permitted by law, shall, at the Bank's option, bear interest (after as
well as before judgment), payable on demand, for each day from and including the
date payment was due to but excluding the date of actual payment, at a
fluctuating rate per annum equal to the Prime Rate plus five (5) percent per
annum.
2.2 MANNER AND PLACE OF PAYMENT. All payments under this
Agreement or otherwise in respect of the Line of Credit Loans shall be made not
later than 2:00 p.m. (Boston time) on the date when due and shall be made in
immediately available funds at the Office of the Bank or by the Borrower's check
drawn on the depositary account(s) maintained by the Borrower with the Bank,
payable to the Bank or its order. All payments shall be made without setoff,
counterclaim, withholding or reduction of any kind whatsoever. Borrower will
regularly deposit funds received from its business activities in accounts
maintained by the Borrower at Bank's offices in California. Borrower hereby
requests and authorizes the Bank to debit any of Borrower's accounts with the
Bank, specifically, without limitation, Account Number 07-00347100, for payments
of interest and principal due on the Line of Credit Loans and any other
obligations owing by the Borrower to the Bank. The Bank will notify the
Borrower of all debits which the Bank makes against the Borrower's accounts.
Any such debits against the Borrower's accounts in no way shall be deemed a
set-off.
2.3 PAYMENTS DUE ON SATURDAYS, SUNDAYS AND HOLIDAYS. Whenever
any payment to be made hereunder or under the Note shall be due on a day which
is not a Banking Day, such payment may be made on the next succeeding Banking
Day, and such extension of time shall be included in computing any interest or
fees due.
2.4 OPTIONAL PREPAYMENTS. The Borrower shall have the right to
prepay the Line of Credit Loans in whole or in part, without premium or penalty,
at any time and from time to time, provided that at the time of the prepayment
in full of all Extensions of Credit, the Borrower shall pay all interest accrued
on the amount prepaid. Principal amounts repaid or prepaid under the Note or
under the Line of Credit Commitment may be reborrowed by the Borrower subject to
the terms hereof; PROVIDED, HOWEVER, that any funds repaid or prepaid on or
after the earlier to occur of (a) the Commitment Expiration Date or (b) the
termination of the Line of Credit Commitment pursuant to Section 1.6 hereof, may
not be reborrowed or readvanced thereafter.
<PAGE>
-3-
2.5 CAPITAL REQUIREMENTS. If the Bank shall determine that the
adoption or implementation after the date hereof of any applicable law, rule,
regulation or treaty regarding capital adequacy, or any change therein, or any
change in the interpretation or administration thereof by any governmental
authority, central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by the Bank (or its applicable lending
office) with any request or directive regarding capital adequacy (whether or not
having the force of law) of any such authority, central bank or comparable
agency, has or would have the effect of reducing the rate of return on capital
of the Bank or any Person controlling the Bank (a "PARENT") as a consequence of
its obligations hereunder to a level below that which the Bank (or its Parent)
could have achieved but for such adoption, change or compliance (taking into
consideration its policies with respect to capital adequacy) by an amount deemed
by the Bank to be material, then from time to time, within 15 days after demand
by the Bank the Borrower shall pay to the Bank such additional amount or amounts
as will compensate the Bank for such reduction. A statement of the Bank
claiming compensation under this Section and setting forth the additional amount
or amounts to be paid to it hereunder shall be conclusive absent manifest error;
PROVIDED that the determination thereof is made on a reasonable basis.
SECTION 3 SECURITY.
3.1 SECURITY INTERESTS. The Borrower agrees to grant to the
Bank a security interest in, and a lien on, all right, title and interest of the
Borrower in and to all assets of the Borrower and to enter a Security Agreement
in favor of the Bank in the form of EXHIBIT B hereto (the "SECURITY AGREEMENT")
in order to secure payment and performance of the Borrower's obligations to the
Bank under this Agreement, the Note and the other Loan Documents.
SECTION 4 CONDITIONS PRECEDENT.
The Bank shall not be obligated to make any Extensions of Credit to the
Borrower hereunder until the following conditions have been satisfied:
4.1 THIS AGREEMENT, THE NOTE AND THE SECURITY INSTRUMENTS. This
Agreement, the borrowings hereunder, the Note, the Security Instruments and all
transactions contemplated by this Agreement and the Security Instruments shall
have been duly authorized by the Borrower. The Borrower shall have duly
executed and delivered to the Bank this Agreement, the Note and the Security
Instruments to the Bank in form and substance satisfactory to the Bank and its
counsel.
4.2 NO DEFAULT. On the date hereof and on the date of the
making of each Extension of Credit, no Default or Event of Default shall have
occurred and be continuing.
4.3 CORRECTNESS OF REPRESENTATIONS. On the date hereof and on
the date of each Extension of Credit, all representations and warranties made by
the Borrower in Section 5 below or otherwise in writing in connection herewith
shall be true and correct with the same effect as though such representations
and warranties had been made on and as of today's date, except that
representations and warranties expressly limited to a certain date shall be true
and correct as of that date.
4.4 OPINION OF COUNSEL FOR THE BORROWER. On the date hereof,
the Bank shall have received the favorable opinion of Brobeck, Phleger &
Harrison, counsel for the Borrower, in form and substance satisfactory to the
Bank and its counsel.
4.5 GOVERNMENTAL APPROVALS. On the date hereof and on the date
of each Extension of Credit, all necessary approvals, licenses, permissions,
registrations or validations of any Governmental Authority required for the
execution, delivery, performance or carrying out of the provisions of this
Agreement, the Note and the
<PAGE>
-4-
Security Instruments, or for the validity or enforceability of the obligations
incurred thereunder (other than the filing of financing statements as required
under Section 4.6 below), shall have been obtained and shall be in full force
and effect and copies thereof certified by a duly authorized officer of the
Borrower to such effect shall have been delivered to the Bank.
4.6 FILING OF FINANCING STATEMENTS, ETC. On or before the
making of the Line of Credit Loans, financing statements, and other appropriate
documentation relating to the security interests and rights granted pursuant to
the Security Instruments, executed and delivered by the Borrower to the Bank,
shall have been duly recorded or filed in such manner and in such places as is
required by law (including, pursuant to the UCC) to establish, preserve,
protect, and perfect such security interests and rights; and all taxes, fees and
other charges in connection with the execution, delivery and filing of this
Agreement and such financing statements and other appropriate documentation
shall have been duly paid.
4.7 SUPPORTING DOCUMENTS. On or before the date hereof, there
shall have been delivered to the Bank the following supporting documents:
(a) legal existence and corporate good standing certificates
with respect to the Borrower dated as of a recent date issued by the Secretary
of State for Delaware or other officials;
(b) certificates dated as of a recent date with respect to the
due qualification of the Borrower to do business in New Jersey issued by the
Secretary of State of New Jersey;
(c) copies of the corporate charter of the Borrower, certified
by the appropriate Secretaries of State or other officials, as in effect on the
date hereof;
(d) a certificate of the Secretary or Assistant Secretary of the
Borrower certifying as to (i) the By-Laws of the Borrower, as in effect on the
date hereof; (ii) the incumbency and signatures of the officers of the Borrower
who have executed any documents in connection with the transactions contemplated
by this Agreement; and (iii) the resolutions of the Board of Directors and, to
the extent required by law, the shareholders, of the Borrower authorizing the
execution, delivery and performance of this Agreement and the making of the Line
of Credit Loans hereunder, and the execution and delivery of the Note; and
(e) all other information and documents which the Bank or its
counsel may request in connection with the transactions contemplated by this
Agreement.
4.8 LOAN FEE. The Borrower shall have paid a nonrefundable fee
to the Bank in the amount of $10,000, as well as all actual and reasonable fees
and disbursements incurred in connection with the preparation of this Agreement
and the other Loan Documents by Sullivan & Worcester, special counsel to the
Bank.
4.9 COMPLIANCE AND BORROWING BASE CERTIFICATES. The Borrower
shall have furnished to the Bank a Compliance Certificate in the form of
attached EXHIBIT C appropriately completed and signed by the chief financial
officer of the Borrower, and to the extent the Borrower is requesting an
Extension of Credit on the date hereof, a Borrowing Base Certificate in the form
of EXHIBIT D hereto appropriately completed and signed by the chief financial
officer or president of the Borrower, each of which certificates shall reflect
compliance by the Borrower with the requirements of this Credit Agreement.
4.10 ACCOUNTS RECEIVABLE AUDIT. The Bank shall have received the
results of an accounts receivable audit satisfactory to the Bank in all
respects.
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-5-
4.11 LEGAL MATTERS. All documents and legal matters incident to
the transactions contemplated by this Agreement shall be satisfactory to
Sullivan & Worcester, special counsel for the Bank.
Each borrowing hereunder shall constitute a representation and warranty by
the Borrower to the Bank that all of the conditions specified in this Section 4
have been complied with as of the time of any such Borrower Loan.
SECTION 5 REPRESENTATIONS AND WARRANTIES.
In order to induce the Bank to enter into this Agreement and to make the
contemplated Extensions of Credit, the Borrower hereby represents and warrants
as follows (except to the extent qualified by supplemental disclosure set forth
on SCHEDULE A hereto) and the following representations and warranties as so
qualified shall survive the execution and delivery of this Agreement and any of
the Line of Credit Loans:
5.1 CORPORATE STATUS. The Borrower and each of its Subsidiaries
(if any) is a duly organized and validly existing corporation in good standing
under the laws of the jurisdiction of its incorporation and is duly qualified or
licensed as a foreign corporation in good standing in each jurisdiction in which
the failure to do so would have a Material Adverse Effect.
5.2 NO VIOLATION. Neither the execution, delivery or
performance of this Agreement or any other Loan Document, nor consummation of
the contemplated transactions will contravene any law, statute, rule or
regulation to which the Borrower or any of its Subsidiaries is subject or any
judgment, decree, franchise, order or permit applicable to the Borrower or any
of its Subsidiaries, or will conflict or be inconsistent with or will result in
any breach of, or constitute a default under, or result in or require the
creation or imposition of any Lien (other than the lien created by the Security
Instruments) upon any of the property or assets of the Borrower or any of its
Subsidiaries pursuant to, any Contractual Obligation of the Borrower or any of
its Subsidiaries, or violate any provision of the corporate charter or by-laws
of the Borrower or any of its Subsidiaries.
5.3 CORPORATE POWER AND AUTHORITY. The execution, delivery and
performance of this Agreement and the other Loan Documents are within the
corporate powers of the Borrower and have been duly authorized by all necessary
corporate action.
5.4 ENFORCEABILITY. This Agreement and each other Loan Document
constitutes a valid and binding obligation of the Borrower enforceable against
the Borrower in accordance with its terms, except as may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally and subject to general
principles of equity, whether applied in a court of equity or at law.
5.5 GOVERNMENTAL APPROVALS. No order, permission, consent,
approval, license, authorization, registration or validation of, or filing with,
or exemption by, any Governmental Authority is required to authorize, or is
required in connection with, the execution, delivery and performance of this
Agreement or any other Loan Document by the Borrower, or the taking of any
action contemplated hereby or thereby, except for the filing of UCC-1 financing
statements in the appropriate UCC filing offices listed on the Perfection
Certificate (as defined in the Security Agreement).
5.6 FINANCIAL STATEMENTS. (a) The Borrower has furnished the
Bank with complete and correct copies of the audited consolidated balance sheet
of the Borrower and its Subsidiaries as of the Financial Statements Date, and
the related audited consolidated statements of income and of cash flows for the
fiscal year of the Borrower and its Subsidiaries ended on such date, examined by
the Accountants. Such financial statements (including the related schedules and
notes) fairly present the consolidated financial condition of the Borrower and
its Subsidiaries
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-6-
as of the Financial Statements Date, and the consolidated results of their
operations and their consolidated cash flows for the fiscal year then ended.
(b) Neither the Borrower nor any of its Subsidiaries has any
material liabilities, contingent or otherwise, including liabilities for taxes
or any unusual forward or long-term commitments or any Guarantee, which are not
disclosed by or included in the above-referenced financial statements or the
accompanying notes and there are no unrealized or anticipated losses from any
unfavorable commitments of the Borrower or any of its Subsidiaries which may
have a Material Adverse Effect. During the period from the Financial Statements
Date to the date hereof: (i) there has been no sale, transfer or other
disposition by the Borrower or any of its Subsidiaries of any material part of
its business or property and no purchase or other acquisition of any business or
property (including any capital stock of any Person) material in relation to the
consolidated financial condition of the Borrower and its Subsidiaries at the
Financial Statements Date; and (ii) neither the Borrower nor any of its
Subsidiaries has made a Restricted Payment, or agreed or committed to make a
Restricted Payment.
(c) All the above-referenced financial statements (including the
related schedules and notes) have been prepared in accordance with GAAP applied
consistently throughout the periods involved (except as approved by the
Accountants and disclosed therein and, in the case of interim financial
statements, subject to normal year-end adjustments and the absence of footnotes
and schedules).
5.7 NO MATERIAL CHANGE. Since the Financial Statements Date
there has been no development or event, nor to the best knowledge of the
Borrower, any prospective development or event, which has had or could have a
Material Adverse Effect.
5.8 LITIGATION. There are no actions, suits or proceedings
pending or threatened against or affecting the Borrower or any of its
Subsidiaries before any Governmental Authority, which in any one case or in the
aggregate, if determined adversely to the interests of the Borrower or any
Subsidiary thereof, would have a Material Adverse Effect.
5.9 COMPLIANCE WITH OTHER INSTRUMENTS: COMPLIANCE WITH LAW.
Neither the Borrower nor any Subsidiary thereof is in default under (a) any
Contractual Obligation, where such default could have a Material Adverse Effect,
or (b) the terms of any Contractual Obligation relating to any Indebtedness of
the Borrower or such Subsidiary in excess of $25,000. Neither the Borrower nor
any Subsidiary thereof is in default and or in violation of any applicable
statute, rule, writ, injunction, decree, order or regulation of any Governmental
Authority having jurisdiction over the Borrower or any Subsidiary thereof which
default or violation could have a Material Adverse Effect.
5.10 SUBSIDIARIES. The Borrower has no Subsidiaries at the date
hereof.
5.11 INVESTMENT COMPANY STATUS; LIMITS ON ABILITY TO INCUR
INDEBTEDNESS. Neither the Borrower nor any of its Subsidiaries is an
"investment company" or a company "controlled by" an investment company within
the meaning of the Investment Company Act of 1940, as amended. The Borrower is
not subject to regulation under any Federal or State statute or regulation which
limits its ability to incur Indebtedness.
5.12 TITLE TO PROPERTY. The Borrower and each of its
Subsidiaries has good and marketable title to all of its properties and assets,
including the properties and assets reflected in the consolidated balance sheet
of the Borrower and its Subsidiaries as of the Financial Statements Date, except
such as have been disposed of since that date in the ordinary course of
business, and none of such properties or assets is subject to any Lien except
for (a) Permitted Liens, or (b) a defect in title or other claim other than
defects and claims that, in the aggregate, would have no Material Adverse
Effect. The Borrower and each of its Subsidiaries enjoys peaceful and
undisturbed
<PAGE>
-7-
possession under all leases necessary in any material respect for the operation
of its properties and assets, none of which contains any unusual or burdensome
provisions which might materially affect or impair such properties or assets.
All such leases are valid and subsisting and are in full force and effect.
5.13 ERISA. The Borrower and each member of the Controlled Group
have fulfilled their obligations under the minimum funding standards of ERISA
and the Code with respect to each Plan and are in compliance in all material
respects with the presently applicable provisions of ERISA and the Code, and
have not incurred any liability to the PBGC or a Plan under Title IV of ERISA
(other than to make contributions or premium payments in the ordinary course).
5.14 TAXES. All tax returns of the Borrower and its Subsidiaries
required to be filed have been timely filed, all taxes, fees and other
governmental charges (other than those being contested in good faith by
appropriate proceedings diligently conducted and with respect to which adequate
reserves have been established and, in the case of AD VALOREM taxes or
betterment assessments, no proceedings to foreclose any lien with respect
thereto have been commenced and, in all other cases, no notice of lien has been
filed or other action taken to perfect or enforce such lien) shown thereon which
are payable have been paid. The charges and reserves on the books of the
Borrower and its Subsidiaries for all income and other taxes are adequate, and
the Borrower knows of no additional assessment or any basis therefor. The
Federal income tax returns of the Borrower and its Subsidiaries have not been
audited within the last three years, all prior audits have been closed, and
there are no unpaid assessments, penalties or other charges arising from such
prior audits.
5.15 ENVIRONMENTAL MATTERS. (a) The Borrower and each of its
Subsidiaries have obtained all Governmental Approvals that are required for the
operation of its business under any Environmental Law, except where the failure
to so obtain a Governmental Approval would not have a Material Adverse Effect.
(b) The Borrower and each of its Subsidiaries are in compliance
with all terms and conditions of all required Governmental Approvals and are
also in compliance with all terms and conditions of all applicable Environmental
Laws, noncompliance with which would have a Material Adverse Effect.
(c) There is no civil, criminal or administrative action, suit,
demand, claim, hearing, notice of violation, investigation, proceeding, notice
or demand letter pending or, to the best knowledge of the Borrower threatened
against the Borrower or any Subsidiary thereof relating in any way to the
Environmental Laws, and there is no Lien of any private entity or Governmental
Authority against any property of the Borrower or any Subsidiary thereof
relating in any way to the Environmental Laws.
(d) There has been no claim, complaint, notice, or request for
information received by the Borrower with respect to any site listed on the
National Priority List promulgated pursuant to the Comprehensive Environmental
Response, Compensation, and Liability Act ("CERCLA") 42 USC Section 9601 ET SEQ.
or any state list of sites requiring investigation or cleanup with respect to
contamination by Hazardous Substances.
(e) To the best of the Borrower's knowledge, there has been no
release or threat of release of any Hazardous Substance at any Borrower Property
which would likely result in liability being imposed upon the Borrower or any
Subsidiary thereof, which liability would have a Material Adverse Effect.
5.16 INTELLECTUAL PROPERTY. Schedule B lists all of the
copyrights, patents, trademarks and similar rights which are registered with or
granted by an agency of the United States ("INTELLECTUAL PROPERTY") owned by the
Borrower and its Subsidiaries as of the date hereof, together with information,
where applicable, as to registration number, filing date, record owner and
remaining life. Except as set forth in SCHEDULE B, the Borrower or a Subsidiary
thereof is the absolute owner of all right, title and interest in the
Intellectual Property, free and clear of all Liens in favor of other Persons
with full right to pledge, sell, assign, transfer and grant a security interest
therein.
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-8-
The Borrower and each of its Subsidiaries owns or possesses such Intellectual
Property and similar rights necessary for the conduct of its business as now
conducted, without any known conflict with the rights of others which would have
a Material Adverse Effect.
5.17 BORROWING BASE. Giving effect to any Extensions of Credit
to be made as of the date hereof under this Agreement, the aggregate amount of
all Extensions of Credit under this Agreement does not exceed the Borrowing Base
on the date hereof.
SECTION 6 AFFIRMATIVE COVENANTS.
The Borrower covenants and agrees that for so long as this Agreement is in
effect and until the Note, together with all interest thereon and all other
Obligations of the Borrower to the Bank are paid or satisfied in full:
6.1 MAINTENANCE OF EXISTENCE. The Borrower will, and will cause
each of its Subsidiaries to, maintain its existence and comply with all
applicable statutes, rules and regulations and to remain duly qualified as a
foreign corporation, licensed and in good standing in each jurisdiction where
such qualification or licensing is required by the nature of its business, the
character and location of its property, business, or the ownership or leasing of
its property, except where such noncompliance or failure to so qualify would not
have a Material Adverse Effect, and the Borrower will, and will cause each of
its Subsidiaries to, maintain its properties in good operating condition, and
continue to conduct its business as presently conducted.
6.2 TAXES AND OTHER LIENS. The Borrower will, and will cause
each of its Subsidiaries to, pay when due all taxes, assessments, governmental
charges or levies, or claims for labor, supplies, rent and other obligations
made against it which, if unpaid, might become a Lien against the Borrower or
such Subsidiary or on its property, except liabilities being contested in good
faith and by proper proceedings, as to which adequate reserves are maintained on
the books of the Borrower or its Subsidiaries, in accordance with GAAP.
6.3 INSURANCE. The Borrower will, and will cause each of its
Subsidiaries to, maintain insurance with financially sound and reputable
insurance companies in such amounts and against such risks as is usually carried
by owners of similar businesses and properties in the same general areas in
which the Borrower and its Subsidiaries operate, provided that in any event the
Borrower and its Subsidiaries shall maintain or cause to be maintained (a)
insurance against casualty, loss or damage covering all property and
improvements of the Borrower and its Subsidiaries in amounts and in respect of
perils usually carried by owners of similar businesses and properties in the
same general areas in which Borrower and its Subsidiaries operate; (b)
comprehensive general liability insurance against claims for bodily injury,
death or property damage; and (c) workers' compensation insurance to the extent
required by applicable law. In the case of policies referenced in clauses (a)
and (b) above, all such insurance shall (i) name the Borrower and the Bank as
loss payees and additional insureds as their interests may appear; (ii) provide
that no termination, cancellation or material reduction in the amount or
material modification to the extent of coverage shall be effective until at
least 30 days after receipt by the Bank of notice thereof; and (iii) be
reasonably satisfactory in all other respects to the Bank.
6.4 FINANCIAL STATEMENTS, ETC. The Borrower will furnish to the
Bank:
(a) within twenty-eight (28) days after the end of each calendar
month (including the last month of the fiscal year), the unaudited consolidated
balance sheet and income statement of the Borrower and its Subsidiaries as at
the end of, and for, such month (provided, however, that in the case of
financial statements for the last month of any fiscal quarter, such financial
statements shall include an income statement for such fiscal quarter),
accompanied by a certificate of the chief financial officer of the Borrower to
the effect that such financial statements fairly present the consolidated
financial condition of the Borrower and its Subsidiaries as of the end of
<PAGE>
-9-
such month, and the consolidated results of their operations for such month, in
each case in accordance with GAAP (except for the absence of footnotes)
consistently applied (subject to normal year-end audit adjustments);
(b) within one hundred five (105) days after the last day of
each fiscal year of the Borrower, the audited consolidated balance sheet and
income statement and statement of cash flows of the Borrower and its
Subsidiaries as at and for the fiscal year then ended, certified by the
Accountants (the substance of such report to be satisfactory to the Bank),
together with a certificate of the chief financial officer of the Borrower to
the effect that such financial statements fairly present the consolidated
financial condition of the Borrower and its Subsidiaries as of the end of such
fiscal year, and the consolidated results of their operations for such fiscal
year, in each case in accordance with GAAP. The Borrower shall indicate on said
financial statements all guarantees or unusual forward or long-term commitments
made by the Borrower or any Subsidiary thereof;
(c) at the time of the delivery of the monthly and yearly
financial statements required by paragraphs (a) and (b) above, a Compliance
Certificate signed by the chief financial officer or the president of the
Borrower in the form attached to this Agreement as EXHIBIT C, appropriately
completed;
(d) within fifteen (15) days after the end of each fiscal month
of the Borrower, (i) a list of the accounts receivable aging and payables aging
for the Borrower as of the end of such month in such form as the Bank may
prescribe, all in reasonable detail and (ii) a Borrowing Base Certificate signed
by the chief financial officer or the president of the Borrower in the form
attached to this Agreement as EXHIBIT D appropriately completed;
(e) promptly upon the mailing thereof to the shareholders of the
Borrower generally, copies of all financial statements, reports, proxy
statements and other materials;
(f) promptly upon request by the Bank, copies of any management
letter provided by the Accountants;
(g) promptly upon the filing thereof by the Borrower with the
SEC (and in any event within ten (10) days of such filing), copies of any
registration statements and reports on Forms 10-K, 10-Q and 8-K (or their
equivalents if such forms no longer exist);
(h) promptly upon becoming aware of any litigation or other
proceeding against the Borrower or any Subsidiary thereof that may have a
Material Adverse Effect, notice thereof; and
(i) promptly following the request of the Bank, such further
information concerning the business, affairs and financial condition or
operations of the Borrower and its Subsidiaries as the Bank may reasonably
request.
6.5 NOTICE OF DEFAULT. As soon as practicable, and in any
event, within three (3) Banking Days of becoming aware of the existence of any
condition or event which constitutes a Default, the Borrower will provide the
Bank with written notice specifying the nature and period of existence thereof
and what action the Borrower is taking or proposes to take with respect thereto.
6.6 ENVIRONMENTAL MATTERS.
(a) The Borrower and each of its Subsidiaries shall comply with
all terms and conditions of all applicable Governmental Approvals and all
applicable Environmental Laws, except where failure to comply would not have a
Material Adverse Effect.
(b) The Borrower shall promptly notify the Bank should the
Borrower become aware of:
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(i) any spill, release, or threat of release of any
Hazardous Substance at or from any Borrower Property or by any Person for
whose conduct the Borrower or any Subsidiary thereof is responsible, to the
extent the Borrower is required by Environmental Laws to report such to any
Governmental Authority;
(ii) any action or notice with respect to a civil, criminal
or administrative action, suit, demand, claim, hearing, notice of
violation, investigation, proceeding, notice or demand letter pending or
threatened against the Borrower or any Subsidiary thereof relating in any
way to the Environmental Laws, or any Lien of any Governmental Authority or
any other Person against any Borrower Property relating in any way to the
Environmental Laws;
(iii) any claim made or threatened by any Person against the
Borrower or any Subsidiary thereof or any property of the Borrower or any
Subsidiary thereof relating to damage, contribution, cost recovery
compensation, loss or injury resulting from any Hazardous Substance
pertaining to such property or the business or operations of the Borrower
or such Subsidiary; and
(iv) any occurrence or condition on any real property
adjoining or in the vicinity of any Borrower Property known to the officers
or supervisory personnel of the Borrower or any Subsidiary thereof or other
employees having responsibility for the compliance by the Borrower or any
Subsidiary thereof with Environmental Laws, without any independent
investigation, which does cause, or could cause, such Borrower Property, or
any part thereof, to contain Hazardous Substances in violation of any
Environmental Laws, or which does cause, or could cause, such Borrower
Property to be subject to any restrictions on the ownership, occupancy,
transferability or use thereof by the Borrower or any Subsidiary thereof.
(c) The Borrower will, and will cause each of its Subsidiaries
to, at its own cost and expense, and within such period as may be required by
applicable law or regulation, initiate all remedial actions and thereafter
diligently prosecute such action as shall be required by law for the cleanup of
such Borrower Property, including all removal, containment and remedial actions
in accordance with all applicable Environmental Laws and shall further pay or
cause to be paid, at no expense to the Bank, all cleanup, administrative, and
enforcement costs of applicable Government Authorities which may be asserted
against such Borrower Property.
6.7 ERISA INFORMATION. If and when the Borrower or any member
of the Controlled Group (a) gives or is required to give notice to the PBGC of
any "reportable event" (as defined in Section 4043 of ERISA) with respect to any
Plan which might constitute grounds for a termination of such Plan under Title
IV of ERISA, or knows that the plan administrator of any Plan has given or is
required to give notice of any such reportable event, (b) receives notice of
complete or partial withdrawal liability under Title IV of ERISA or (c) receives
notice from the PBGC under Title IV of ERISA of an intent to terminate or
appoint a trustee to administer the Plan, the Borrower shall in each such
instance promptly furnish to the Bank a copy of any such notice.
6.8 INSPECTION. The Borrower will, upon the request of the
Bank, permit a representative of the Bank to discuss its affairs, finances and
accounts with its officers and accountants, at such reasonable times and as
often as the Bank may reasonably request and cause each of its Subsidiaries to
do so. In addition, the Borrower shall permit a representative of the Bank
(including any field examiner or auditor retained by the Bank) to conduct, or
cause to be conducted, at the Borrower's expense, an audit of the Borrower's
accounts receivable and to make copies of the Borrower's books and records twice
during each year commencing on the date hereof and the anniversary of such date,
as the case may be, (the "Applicable Date") and ending on the next anniversary
of the Applicable Date, provided, however, as long as an Event of Default has
occurred and is continuing such audits and may be conducted at more frequent
intervals as determined by the Bank.
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6.9 USE OF PROCEEDS. The Borrower shall use the proceeds of the
borrowings under the Note for the working capital purposes of the Borrower.
Without limiting the foregoing, no part of such proceeds will be used for the
purpose of purchasing or carrying any "margin security" as such term is defined
in Regulation U of the Board of Governors of the Federal Reserve System.
6.10 FURTHER ASSURANCES. The Borrower will, and will cause each
of its Subsidiaries to, execute and deliver to the Bank any writings and do all
things necessary, effectual or reasonably requested by the Bank to carry into
effect the provisions and intent of this Agreement or any other Loan Document.
6.11 DEPOSITORY ACCOUNTS. The Borrower shall maintain its
primary operating deposit accounts at the offices of the Bank, and shall deposit
a portion (as agreed with the Bank, from time to time) of its excess cash with
the Bank in either a demand deposit account, a money market deposit account, or
certificates of deposit, or a combination thereof.
6.12 SUBSIDIARIES. The Borrower shall immediately notify the
Bank of the organization of any foreign or domestic Subsidiaries of the
Borrower. The Bank may require that any Subsidiary with total assets in excess
of $25,000) become a party to any of the Loan Documents as guarantors or
sureties and/or that the Borrower pledge the stock of any Subsidiary as
collateral for the Obligations of the Borrower.
6.13 INTELLECTUAL PROPERTY. The Borrower will promptly inform
the Bank of all applications filed by the Borrower for trademarks, patents and
copyrights and of all trademarks, patents and copyrights granted on or after the
date of this Agreement, and, upon the request of the Bank, will promptly execute
and deliver such forms of conditional assignment, mortgage, pledge and similar
documents as the Bank may reasonably require so as to ensure that the security
interests granted pursuant to the Security Instruments extend to and are
perfected in respect of such additional trademarks, patents and copyrights.
SECTION 7 NEGATIVE COVENANTS.
The Borrower covenants and agrees that for so long as this Agreement is in
effect and until the Note, together with all interest thereon and all other
Obligations of the Borrower to the Bank are paid or satisfied in full, without
the prior written consent of the Bank:
7.1 ERISA. The Borrower will not permit any pension plan
maintained by the Borrower or by any member of a "Controlled Group" (ERISA
Section 210(c) or ERISA Section 210(d)) of which the Borrower is a member to:
(a) engage in any "prohibited transaction" (ERISA Section 2003(c)); (b) fail to
report to the Bank a "reportable event" (ERISA Section 4043) within 30 days
after its occurrence or as to any reportable event as to which the 30-day notice
period requirement of Section 4043(b) of Title IV of ERISA has been waived by
the PBGC, within 30 days of such time as the Borrower is requested by the PBGC
to notify the PBGC of such reportable event; (c) incur any "accumulated funding
deficiency" (ERISA Section 302); (d) terminate its existence at any time in a
manner which could result in the imposition of a Lien (in an amount in excess or
5% of the consolidated total assets of the Borrower and its Subsidiaries) on the
property of the Borrower or any Subsidiary thereof; or (e) fail to report to the
Bank any "complete withdrawal" or "partial withdrawal" by the Borrower or an
affiliate from a "multiemployer plan" (ERISA Sections 4203, 4205, and 4001,
respectively). The quoted terms are defined in the respective sections of ERISA
cited above.
7.2 TRANSACTIONS WITH AFFILIATES. Except for transactions
disclosed in Schedule 7.2 attached hereto, the Borrower will not, and will not
permit any of its Subsidiaries to, directly or indirectly, pay any funds to or
for the account of, make any Investment in, lease, sell, transfer or otherwise
dispose of any assets, tangible or intangible, or engage in any transaction in
connection with any joint enterprise or other joint arrangement with, any
Affiliate of the Borrower, unless such transaction (a) is otherwise permitted
under this Agreement, (b) is in the
<PAGE>
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ordinary course of the Borrower's or such Subsidiary's business, and (c) is upon
fair and reasonable terms no less favorable to the Borrower or such Subsidiary
as those that could be obtained in a comparable arm's length transaction with a
Person not an Affiliate.
7.3 CONSOLIDATION, MERGER OR ACQUISITION. The Borrower will
not, and will not permit any of its Subsidiaries to, merge or consolidate with
or into any other Person, or make any acquisition of the business of any other
Person unless it obtains the prior written consent of the Bank; PROVIDED that
any Subsidiary may merge into Borrower or any wholly-owned Subsidiary of the
Borrower; and PROVIDED FURTHER that the Borrower or a Subsidiary may acquire the
business of another Person or merge with another Person as long as (a) no Event
of Default has occurred and is continuing or would otherwise result therefrom;
(b) the other Person is in the same or a related line of business; (c) the
Borrower or the Subsidiary is the surviving corporation, and (d) there would be
no resulting change in senior management of the Borrower or the Subsidiary.
7.4 DISPOSITION OF ASSETS. The Borrower will not, and will not
permit any of its Subsidiaries to, convey, sell, lease, transfer or otherwise
dispose of any of its property, business or assets (including, without
limitation, accounts receivable and leasehold assets), whether now owned or
hereafter acquired, except:
(a) obsolete or worn out property disposed of in the ordinary
course of business;
(b) the sale or other disposition of any property in the
ordinary course of business, PROVIDED that the aggregate book value of all
assets (other than inventory) so sold or disposed of in any period of
twelve consecutive months shall not exceed 5% of the consolidated total
assets of the Borrower and its Subsidiaries as at the beginning of such
twelve month period; and
(c) the sale of inventory in the ordinary course of business.
7.5 INDEBTEDNESS. The Borrower will not, and will not permit
any of its Subsidiaries to, create, incur, assume or suffer to exist any
Indebtedness, except:
(a) Indebtedness payable to the Bank;
(b) existing Indebtedness, including Subordinated Debt, if any,
listed on SCHEDULE A hereto and any extensions, renewals or replacements
thereof, as long as the principal amount of such Indebtedness is not
increased;
(c) Subordinated Debt incurred by the Borrower after the date
hereof; PROVIDED that, after giving effect to the incurrence of such
Subordinated Debt and to the receipt and application of the proceeds
thereof, no Default shall have occurred and be continuing; and
(d) Purchase Money Indebtedness incurred by the Borrower after
the date hereof; PROVIDED that, after giving effect to the incurrence of
such Purchase Money Indebtedness and to the receipt and application of the
proceeds thereof, no Default shall have occurred and be continuing.
7.6 LIENS. The Borrower will not, and will not permit any of
its Subsidiaries to, create, incur, assume or suffer to exist any Lien on any of
its properties or assets, except the following (collectively, "PERMITTED
LIENS"):
(a) Liens for taxes not delinquent or being contested in good
faith and by proper proceedings, as to which adequate reserves are
maintained on the books of the Borrower or its Subsidiary in accordance
with GAAP;
<PAGE>
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(b) carriers', warehousemen's, mechanics', materialmen's or
similar liens imposed by law incurred in the ordinary course of business in
respect of obligations not overdue, or being contested in good faith and by
proper proceedings and as to which adequate reserves with respect thereto
are maintained on the books of the Borrower in accordance with GAAP;
(c) pledges or deposits in connection with workers'
compensation, unemployment insurance and other types of social security
legislation;
(d) security deposits made to secure the performance of leases,
licenses and statutory obligations incurred in the ordinary course of
business;
(e) Liens in favor of the Bank;
(f) existing Liens and any extensions, renewals and replacements
thereof, if any, listed on SCHEDULE A hereto; PROVIDED that no such Lien is
spread to cover any additional property after the date hereof, and that the
amount of the Indebtedness secured thereby is not increased;
(g) Purchase Money Security Interests made to secure such
Purchase Money Indebtedness incurred pursuant to Section 7.5 (d) hereof;
and
(h) Financing Statements filed pursuant to the Uniform
Commercial Code by the Borrower's lessors under the Borrower's equipment
leases.
7.7 RESTRICTED PAYMENTS. The Borrower will not, and will not
permit any of its Subsidiaries to, declare or make any Restricted Payment.
7.8 INVESTMENTS. The Borrower will not, and will not permit any
of its Subsidiaries to, make, maintain or acquire any Investment in any Person
other than:
(a) marketable obligations issued or guaranteed by the United
States of America having a maturity of one year or less from the date of
purchase;
(b) certificates of deposit, eurodollar time deposits,
commercial paper or any other obligations of the Bank or of any other bank
or trust company organized or licensed to conduct a banking business under
the laws of the United States or any State thereof and which has (or which
is a Subsidiary of a bank holding company which has) publicly traded debt
securities rated A or higher by Standard & Poor's Corporation or A-2 or
higher by Moody's Investors Service, Inc.;
(c) (i) depository accounts at the Bank; and (ii) depository
accounts maintained at other banks and listed on SCHEDULE A or that have
been disclosed to the Bank in writing subsequent to the date hereof;
(d) stock or obligations issued to the Borrower or any
Subsidiary thereof in settlement of claims against others by reason of an
event of bankruptcy or a composition or the readjustment of debt or a
reorganization of any debtor of the Borrower or such Subsidiary;
(e) commercial paper with maturities of not more than 90 days
having the highest rating then given by Moody's Investors Services, Inc. or
Standard & Poor's Corporation;
<PAGE>
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(f) repurchase obligations with a term of not more than seven
days for underlying securities of the types described in subparagraph (b)
above entered into with the Bank or any of the banks referred to in
subparagraph (b) above; and
(g) investments made prior to the date hereof by the Borrower in
its Subsidiaries, and Investments by such Subsidiaries in the Borrower,
whether now existing or hereafter arising.
7.9 LEASES. Neither the Borrower nor any of its Subsidiaries
shall during any fiscal year enter into any leases of real or personal property
as lessee, except that the Borrower may enter into an operating lease of
personal property, if, after giving effect thereto, the aggregate amount of all
payments during any one fiscal year (whether or not such payments are termed
rent) under all operating leases of personal property to which the Borrower is a
party does not exceed $430,000.
7.10 SALE AND LEASEBACK. Neither the Borrower nor any of its
Subsidiaries shall enter into any arrangement, directly or indirectly, whereby
it shall sell or transfer any property owned by it in order to lease such
property or lease other property that the Borrower or any such Subsidiary
intends to use for substantially the same purpose as the property being sold or
transferred.
7.11 ADDITIONAL STOCK ISSUANCE BY SUBSIDIARIES. The Borrower
shall not permit any of its Subsidiaries to issue any additional shares of its
capital stock or other equity securities, any options therefor or any securities
convertible thereto other than to the Borrower.
7.12 CAPITAL EXPENDITURES. Neither the Borrower nor any of its
Subsidiaries shall either purchase or agree to purchase, or incur any
obligations for any equipment or other property constituting fixed assets in any
fiscal year (excluding leases of real or personal property) where the aggregate
of such obligations would exceed $1,270,000.
7.13 QUICK RATIO. The Borrower will not permit the Quick Ratio
at the end of any fiscal month ending during the following periods to be less
than the ratio set forth below opposite such period:
Minimum
Relevant Period Quick Ratio
--------------- -----------
12/31/94 through 08/31/95 1.25 to 1
09/30/95 and thereafter 1 to 1
7.14 MINIMUM PROFITABILITY. The Borrower will not permit its Net
Loss for its fiscal year ending December 31, 1994 to be greater than
($3,500,000) or its Net Income or Net Loss for any of the following fiscal
quarters to be less than or greater than, as the case may be, the amount set
forth opposite such fiscal quarter:
Fiscal Quarter Ending Net Income
--------------------- ----------
03/31/95 ($1,200,000)
06/30/95 ($1,000,000)
09/30/95 ($850,000)
12/31/95 ($600,000)
03/31/96 and thereafter $1
7.15 LEVERAGE. The Borrower will not permit the ratio of Total
Senior Liabilities to Tangible Net Worth at the end of any fiscal month to be
greater than 2.10:1.
<PAGE>
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7.16 TANGIBLE NET WORTH. The Borrower will not permit its Tangible
Net Worth at the end of any of the following fiscal quarters to be less than the
amount set forth below opposite such fiscal quarter:
Minimum
Fiscal Quarter Ending Tangible Net Worth
--------------------- ------------------
12/31/94 $500,000
3/31/95 $3,400,000
6/30/95 $2,500,000
9/30/95 $1,700,000
12/31/95 $1,400,000
3/31/96 $1,250,000
SECTION 8 EVENTS OF DEFAULT.
8.1 EVENTS OF DEFAULT. The occurrence of any of the following
events shall be an "Event of Default" hereunder:
(a) The Borrower shall default in the due and punctual payment
of principal or interest on the Note, or shall default in the payment of
any other amount due under any Loan Document; or
(b) Any representation, warranty or statement made herein or any
other Loan Document, or in any certificate or statement furnished pursuant
to or in connection herewith or therewith, shall prove to be incorrect,
misleading or incomplete in any material respect on the date as of which
made or deemed made; or
(c) The Borrower shall default in the performance or observance
of any term, covenant or agreement on its part to be performed or observed
pursuant to Sections 7.3 and 7.13 through 7.16; or
(d) The Borrower shall default in the performance or observance
of any term, covenant or agreement on its part to be performed or observed
pursuant to any of the provisions of this Agreement or any other Loan
Document (other than those referred to in paragraphs (a) through (c) above)
and such default shall continue unremedied for a period of fifteen (15)
days after the occurrence of such default; or
(e) Any obligation of the Borrower or any Subsidiary thereof in
respect of any Indebtedness (other than the Note) or any Guarantee in
excess of $25,000, shall be declared to be or shall become due and payable
prior to the stated maturity thereof, or such Indebtedness or Guarantee
shall not be paid as and when the same becomes due and payable, or there
shall occur and be continuing any default under any instrument, agreement
or evidence of indebtedness relating to any such Indebtedness the effect of
which is to permit the holder or holders of such instrument, agreement or
evidence of indebtedness, or a trustee, agent or other representative on
behalf of such holder or holders, to cause such Indebtedness to become due
prior to its stated maturity; or
(f) The Borrower or a Subsidiary thereof shall (i) apply for or
consent to the appointment of, or the taking of possession by, a receiver,
custodian, trustee or liquidator of itself or of all or a substantial part
of its property, (ii) make a general assignment for the benefit of its
creditors, (iii) commence a voluntary case under the Bankruptcy Code, (iv)
file a petition seeking to take advantage of any other law relating to
bankruptcy, insolvency, reorganization, winding-up, or composition or
readjustment of debts, (v) fail to controvert in a timely and appropriate
manner, or acquiesce in writing to, any petition filed against
<PAGE>
-16-
it in an involuntary case under the Bankruptcy Code, or (vi) take any corporate
action for the purpose of effecting any of the foregoing; or
(g) A proceeding or case shall be commenced, without the
application or consent of the Borrower or any Subsidiary thereof in any
court of competent jurisdiction, seeking (i) its liquidation,
reorganization, dissolution or winding-up, or the composition or
readjustment of its debts, (ii) the appointment of a trustee, receiver,
custodian, liquidator or the like of the Borrower or such Subsidiary or of
all or any substantial part of its assets, or (iii) similar relief in
respect of the Borrower or such Subsidiary under any law relating to
bankruptcy, insolvency, reorganization, winding-up, or composition or
adjustment of debts, and such proceeding or case shall continue
undismissed, or an order, judgment or decree approving or ordering any of
the foregoing shall be entered and continue unstayed and in effect, for a
period of 60 days; or an order for relief against the Borrower or such
Subsidiary shall be entered in an involuntary case under the Bankruptcy
Code; or
(h) A judgment or judgments for the payment of money in excess
of $50,000 (net of insurance proceeds) in the aggregate shall be rendered
against the Borrower or any Subsidiary thereof and any such judgment or
judgments shall not have been vacated, discharged, stayed or bonded pending
appeal within thirty (30) days from the entry thereof; or
(i) The Borrower or any member of the Controlled Group shall
fail to pay when due an amount or amounts aggregating in excess of $100,000
which it is obligated to pay to the PBGC or to a Plan under Title IV of
ERISA; or a notice of intent to terminate a Plan or Plans having aggregate
Unfunded Liabilities in excess of $100,000 shall be filed under Title IV of
ERISA by the Borrower or any member of the Controlled Group, any plan
administrator or any combination of the foregoing; or the PBGC shall
institute proceedings under Title IV of ERISA to terminate or to cause a
trustee to be appointed to administer any such Plan or Plans or a
proceeding shall be instituted by a fiduciary of any such Plan or Plans
against the Borrower or any member of the Controlled Group to enforce
Sections 515 or 4219(c)(5) of ERISA; or a condition shall exist by reason
of which the PBGC would be entitled to obtain a decree adjudicating that
any such Plan or Plans must be terminated; or there shall occur a complete
or partial withdrawal from, or a default, within the meaning of Section
4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans which
could cause the Borrower or one or more members of the Controlled Group to
incur a current payment obligation in excess of $100,000; or
(j) The Borrower or any Subsidiary thereof shall default in the
performance or observance of any term, covenant or agreement on its part to
be performed or observed pursuant to any of the provisions of any agreement
with the Bank or any instrument delivered in favor of the Bank (other than,
in either case, a Loan Document), and such default shall continue
unremedied beyond the grace period (in any) provided for therein; or
(k) Any Security Instrument shall cease for any reason to be in
full force and effect or shall cease to be effective to grant a perfected
security interest in the collateral described in such Security Instrument
with the priority stated to be granted thereby; or
(l) Borrower shall make any payment on account of its
Subordinated Debt, except to the extent such payment is expressly permitted
hereby or under any subordination agreement entered into with the Bank.
8.2 REMEDIES UPON AN EVENT OF DEFAULT. If any Event of Default
shall have occurred and be continuing, the Bank may (a) declare the Line of
Credit Commitment terminated (whereupon the Line of Credit Commitment shall be
terminated) and/or (b) declare the principal amount then outstanding of, and the
accrued interest
<PAGE>
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on, the Line of Credit Loans and commitment fees and all other amounts payable
hereunder and under the Note to be forthwith due and payable, whereupon such
amounts shall be and become immediately due and payable, without notice
(including, without limitation, notice of intent to accelerate), presentment,
demand, protest or other formalities of any kind, all of which are hereby
expressly waived by the Borrower; PROVIDED that in the case of the occurrence of
an Event of Default with respect to the Borrower referred to in clauses (f) and
(g) of Section 8.1, the Line of Credit Commitment shall be automatically
terminated and the principal amount then outstanding of and the accrued interest
on the Line of Credit Loans and commitment fees and all other amounts payable
hereunder and under the Note shall be and become automatically and immediately
due and payable, without notice (including, without limitation, notice of intent
to accelerate), presentment, demand, protest or other formalities of any kind,
all of which are hereby expressly waived by the Borrower.
SECTION 9 DEFINITIONS.
9.1 CERTAIN DEFINITIONS.
"ACCOUNTANTS" means Coopers & Lybrand, or another accountant firm of
national reputation or other certified public accountants selected by the
Borrower and approved by the Bank.
"AFFILIATE" means, with respect to any specified Person (the
"SPECIFIED PERSON"), any Person directly or indirectly controlling, controlled
by or under direct or indirect common control with, the Specified Person and,
without limiting the generality of the foregoing, includes (i) any director or
officer of the Specified Person or any Affiliate of the Specified Person, (ii)
any such director's or officer's parent, spouse, child or child's spouse (a
"RELATIVE"), (iii) any group acting in concert, of one or more such directors,
officers, relatives or any combination thereof (a "GROUP"), (iv) any Person
controlled by any such director, officer, relative or group in which any such
director, officer, relative or group beneficially owns or holds 5% or more of
any class of voting securities or a 5% or greater equity or profits interest and
(v) any Person or group which beneficially owns or holds 5% or more of any class
of voting securities or a 5% or greater equity or profits interest in the
Specified Person. For the purposes of this definition, the term "control" when
used with respect to any Specified Person means the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Specified Person, whether through the ownership of voting
securities, by contract or otherwise.
"AGREEMENT" shall mean this Credit Agreement.
"BANKING DAY" shall mean any day, excluding Saturday and Sunday and
excluding any other day which in the Commonwealth of Massachusetts or the State
of California is a legal holiday or a day on which banking institutions are
authorized by law to close.
"BORROWER PROPERTY" means any real property owned, occupied, or
operated by the Borrower or any of its Subsidiaries.
"BORROWING BASE" shall have the meaning specified in Section 1.4.
"CODE" means the Internal Revenue Code of 1986, as amended, or any
successor statute.
"COLLATERAL" shall have the meaning given that term in the Security
Agreement.
"COMMITMENT COMMISSION" shall have the meaning specified in Section
1.7.
"COMMITMENT EXPIRATION DATE" shall have the meaning specified in
Section 1.1.
<PAGE>
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"CONTRACTUAL OBLIGATION" means, as to any Person, any provision of any
security issued by such Person or of any agreement, instrument or other
undertaking to which such Person is a party or by which it or any of its
property is bound.
"CONTROLLED GROUP" means all members of a controlled group of
corporations and all trades or businesses (whether or not incorporated) under
common control which, together with the Borrower, are treated as a single
employer under Section 414 of the Code.
"CURRENT LIABILITIES" means, at any time, all liabilities of the
Borrower and its Subsidiaries at such time, on a consolidated basis, that would
be classified as current liabilities in accordance with GAAP, including, without
limitation, all Indebtedness of the Borrower and its Subsidiaries payable on
demand or maturing within one year of such time, or renewable at the option of
the Borrower or such Subsidiary for a period of not more than one year from such
time, and all serial maturity and periodic or installment payments on any
Indebtedness, to the extent such payments are required to be made within one
year from such time.
"DEFAULT" means any condition or event that constitutes an Event of
Default or that with the giving of notice or lapse of time or both would, unless
cured or waived, become an Event of Default.
"ELIGIBLE DOMESTIC ACCOUNTS RECEIVABLE" means an account receivable
owing to the Borrower which met the following specifications at the time it came
into existence and continues to meet the same until it is collected in full:
(a) The original stated maturity of the account is not more than
90 days after the invoice date thereof, and the account (regardless of its
stated maturity date) does not remain unpaid more than 90 days after such
invoice date.
(b) The account arose from the performance of services or an
outright sale of goods by Borrower, such goods have been shipped to the
account debtor, and Borrower has possession of, or has delivered to Bank,
shipping and delivery receipts evidencing such shipment.
(c) The account is owned solely by the Borrower, and is not
subject to any assignment, claim, lien, or security interest, other than a
security interest in favor of the Bank.
(d) The account is not subject to set-off, credit, allowance or
adjustment by the account debtor, except discount allowed for prompt
payment; the account is not one as to which the account debtor disputes
liability or makes any claim with respect thereto or as to which the Bank
believes, in its sole discretion, that there may be a basis for dispute
(but only to the extent of the amount subject to such dispute or claim), or
which involves an account debtor subject to any insolvency proceeding, or
becomes insolvent, or goes out of business.
(e) The account arose in the ordinary course of Borrower's
business and did not arise from the performance of services or a sale of
goods to a supplier or employee of the Borrower.
(f) No notice of bankruptcy or insolvency of the account debtor
has been received by or is known to the Borrower.
(g) The Borrower has pledged any instrument or chattel paper
evidencing the account to the Bank pursuant to the provisions of the
Security Agreement.
<PAGE>
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(h) Not more than 50% of the aggregate receivables of the
account debtor have remained unpaid for a period of more than ninety (90) days
from the invoice date.
(i) The aggregate accounts receivables from the account debtor
(including its Subsidiaries and Affiliates) do not exceed 25% of the total
Eligible Accounts Receivable of the Borrower; that portion of the account
over the 25% level will be disqualified.
(j) The account does not relate to goods placed on consignment,
guaranteed sale, sale or return, sale on approval, bill and hold, or other
terms by reason of which the payment by the account debtor may be
conditional.
(k) The account debtor is not an Affiliate, officer, employee or
agent of the Borrower.
(l) The account debtor is not a Governmental Authority.
(m) The Borrower does not owe any amounts to the account debtor
for goods sold, services rendered or otherwise; to the extent that any
amounts are so owed, the accounts of such account debtor in an amount equal
to the amounts owed by the Borrower to the account debtor shall be
disqualified.
(n) The Bank has not notified the Borrower that the Bank has
determined that an account or account debtor is unsatisfactory for credit
reasons (which determination shall not be made unreasonably).
(o) The account debtor is a person or entity located in the
United States and the account arose out of services rendered or goods
delivered in the United States.
"ENVIRONMENTAL LAWS" means all federal, state, local and foreign laws,
and all regulations, notices or demand letters issued, promulgated or entered
thereunder, relating to pollution or protection of the environment and to
occupational health and safety, including, without limitation, laws relating to
emissions, discharges, releases or threatened releases of pollutants,
contaminants, chemicals, or Hazardous Substances into the environment
(including, without limitation, ambient air, surface water, ground water, land
surface or subsurface strata) or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of pollutants, contaminants, chemicals or Hazardous Substances.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, or any successor statutes.
"EVENT OF DEFAULT" has the meaning set forth in Section 8.
"EXTENSION OF CREDIT" shall have the meaning set forth in Section 1.4.
"FINANCIAL STATEMENTS DATE" means December 31, 1994.
"GAAP" means accounting principles generally accepted in the United
States applied on a consistent basis,
"GOVERNMENTAL APPROVALS" shall mean any authorization, consent, order,
approval, license, lease, ruling, permit, tariff, rate, certification,
validation, exemption, filing or registration by or with, or notice to, any
Governmental Authority.
"GOVERNMENTAL AUTHORITY" shall mean any federal, state, municipal or
other governmental department, commission, board, bureau, agency, court,
tribunal or other instrumentality, domestic or foreign, and any arbitrator.
<PAGE>
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"GUARANTEE" by any Person means any obligation, contingent or
otherwise, of such Person directly or indirectly guaranteeing any Indebtedness
or other obligation of any other Person and, without limiting the generality of
the foregoing, any obligation, direct or indirect, contingent or otherwise of
such Person (a) to purchase or pay (or advance or supply funds for the purchase
or payment of) such Indebtedness or other obligation (whether arising by virtue
of partnership arrangements, by agreement to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (b) entered into for the purpose of
assuring in any other manner the obligee of such Indebtedness or other
obligation of the payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part); PROVIDED that the term Guarantee shall
not include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning.
"HAZARDOUS SUBSTANCES" shall mean all hazardous and toxic substances,
wastes or materials, hydrocarbons (including naturally occurring or man-made
petroleum and hydrocarbons), flammable explosives, urea formaldehyde
insulation, radioactive materials, biological substances, PCBs, pesticides,
herbicides and any other kind and/or type of pollutants, or contaminants and/or
any other similar substances or materials which, because of toxic, flammable,
explosive, corrosive, reactive, radioactive or other properties that may be
hazardous to human health or the environment, are included under or regulated
by any Environmental Laws.
"INDEBTEDNESS" of any Person at any date shall mean, (a) all
indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services (excluding current trade liabilities incurred in
the ordinary course of business and payable in accordance with customary
practices, but including any class of capital stock of such Person with fixed
payment obligations or with redemption at the option of the holder), or which is
evidenced by a note, bond, debenture or similar instrument, (b) all obligations
of such Person under leases that should be treated as capitalized leases in
accordance with GAAP, (c) all obligations of such Person in respect of
acceptances issued or created for the account of such Person, and all
reimbursement obligations (contingent or otherwise) of such Person in respect of
any letters of credit issued for the account of such Person, and (d) all
liabilities secured by any Lien on any property owned by such Person even though
such Person has not assumed or otherwise become liable for the payment thereof.
"INTELLECTUAL PROPERTY" shall have the meaning specified in Section
5.16.
"INVESTMENTS" means, with respect to any Person (the "INVESTOR"), (a)
any investment by the Investor in any other Person, whether by means of share
purchase, capital contribution, purchase or other acquisition of a partnership
or joint venture interest, loan, time deposit, demand deposit or otherwise and
(b) any Guarantee by the Borrower of any Indebtedness or other obligation of any
other Person.
"LIEN" means any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other), or preference, priority or
other security agreement of any kind or nature whatsoever (including, without
limitation, any conditional sale or other title retention agreement, any lease
that should be capitalized in accordance with GAAP, and the filing of a
financing statement under the Uniform Commercial Code or comparable law of any
jurisdiction), together with any renewal or extension thereof.
"LINE OF CREDIT COMMITMENT" shall have the meaning specified in
Section 1.1.
"LINE OF CREDIT LOANS" shall have the meaning specified in Section
1.1.
"LOAN DOCUMENTS" means, collectively, this Agreement, the Note, the
Financing Statements, the Security Instruments, and all other agreements and
instruments that are from time to time executed in connection with this
Agreement, as each of such agreements and instruments may be amended, modified
or supplemented from time to time.
<PAGE>
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"MATERIAL ADVERSE EFFECT" means a material adverse effect on (a) the
business, operations, property, condition (financial or otherwise) or prospects
of the Borrower, or of the Borrower and its Subsidiaries taken as a whole, (b)
the ability of the Borrower to perform its obligations under this Agreement, the
Note or any of the other Loan Documents, (c) the validity or enforceability of
this Agreement, the Note or any of the other Loan Documents, or the rights or
remedies of the Bank hereunder or thereunder, or (d) the right of the Bank to
enforce the payment of accounts against account debtors in any particular State.
"MULTIEMPLOYER PLAN" means at any time an employee pension benefit
plan within the meaning of Section 4001(a)(3) of ERISA to which the Borrower or
any member of the Controlled Group is then making or accruing an obligation to
make contributions or has within the preceding five plan years made
contributions, including for these purposes any Person which ceased to be a
member of the Controlled Group during such five year period.
"NET INCOME" or "NET LOSS" for any period in respect of which the
amount thereof shall be determined, shall mean the aggregate of the consolidated
net income (or net loss) after taxes for such period (taken as a cumulative
whole) of the Borrower and its Subsidiaries, determined in accordance with GAAP,
exclusive of the write-up of any asset.
"NOTE" shall have the meaning set forth in Section 1.2.
"OBLIGATIONS" shall have the meaning given the term "Secured
Obligations" in the Security Agreement.
"OFFICE OF THE BANK" shall mean the banking office of the Bank located
at 3000 Lakeside Drive, P.O. Box 3762, Santa Clara, California 95054, or such
other location of which the Bank shall notify the Borrower.
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"PERMITTED LIENS" shall have the meaning set forth in Section 7.6.
"PERSON" shall mean and include any individual, firm, corporation,
trust or other unincorporated organization or association or other enterprise
or any government or political subdivision, agency, department or
instrumentality thereof.
"PLAN" means any employee pension benefit plan which is covered by
Title IV of ERISA or subject to the minimum funding standards under Section 412
of the Code and is either (a) maintained by the Borrower or any member of the
Controlled Group for employees of the Borrower or any member of the Controlled
Group or (b) maintained pursuant to a collective bargaining agreement or any
other arrangement under which more than one employer makes contributions and to
which the Borrower or any member of the Controlled Group is then making or
accruing an obligation to make contributions or has within the preceding five
plan years made contributions.
"PRIME RATE" shall mean the per annum rate of interest from time to
time announced and made effective by the Bank as its Prime Rate (which rate may
or may not be the lowest rate available from the Bank at any given time).
"PURCHASE MONEY INDEBTEDNESS" shall mean Indebtedness incurred to
finance the acquisition of assets or the cost of improvements on real property
or leaseholds, in each case in an amount not in excess of the lesser of (a) the
purchase price or acquisition cost of said assets or the cost of said
improvements and (b) the fair market value of said assets or said improvements
on the date of acquisition of said assets or contract for said improvements.
<PAGE>
-22-
"PURCHASE MONEY SECURITY INTEREST" shall mean (a) a security interest
securing Purchase Money Indebtedness, which security interest applies solely to
the particular assets acquired with the Purchase Money Indebtedness that said
Purchase Money Security Interest secures, and (b) the renewal, extension and
refunding of such Purchase Money Indebtedness in an amount not exceeding the
amount thereof remaining unpaid immediately prior to such renewal, extension or
refunding.
"QUICK RATIO" means, at any time, all cash and accounts receivable,
less reserves for doubtful accounts, of the Borrower and its Subsidiaries at
such time, on a consolidated basis, determined in accordance with GAAP, divided
by the aggregate of all Current Liabilities at such time.
"RESTRICTED PAYMENT" means, with respect to the Borrower or any
Subsidiary thereof, (a) any dividend or other distribution on any shares of
capital stock of the Borrower or such Subsidiary (except dividends payable
solely in shares of capital stock or rights to acquire capital stock of the
Borrower, and dividends payable solely to the Borrower), (b) any payment on
account of the purchase, redemption, retirement or acquisition of (i) any shares
of the capital stock of the Borrower or a Subsidiary thereof or (ii) any option,
warrant, convertible security or other right to acquire shares of the capital
stock of the Borrower or a Subsidiary thereof, other than, in either case,
payments made solely to the Borrower, and (c) any required or optional payment
of any principal of, or premium [or interest] on, or any required or optional
purchase, redemption or other retirement or other acquisition of any
Subordinated Debt.
"SEC" means the Securities and Exchange Commission.
"SECURITY AGREEMENT" shall have the meaning set forth in Section 3.1.
"SECURITY INSTRUMENTS" means, collectively, the Security Agreement and
each other instrument or agreement that purports to secure the Obligations of
the Borrower to the Bank.
"SUBORDINATED DEBT" means Indebtedness of the Borrower that is
subordinated to the Indebtedness of the Borrower owing to the Bank either (a)
pursuant to a subordination agreement in form and substance satisfactory to the
Bank between the Bank and the holder(s) of such Indebtedness, or (b) pursuant to
the terms thereof, where the Bank has confirmed in writing that such terms are
satisfactory to it.
"SUBSIDIARY" means, with respect to any Person, any corporation or
other entity of which securities or other ownership interests having ordinary
voting power to elect a majority of the board of directors or other Persons
performing similar functions are at the time directly or indirectly owned by
such Person.
"TANGIBLE NET WORTH" means, at any time, the consolidated
stockholders' equity of the Borrower and its Subsidiaries at such time
determined in accordance with GAAP, LESS all assets that are reflected on the
consolidated balance sheet of the Borrower and its Subsidiaries at such time
that would be treated as intangibles under GAAP (including, but not limited, to
goodwill, capitalized software and excess purchase costs), PLUS all then
outstanding Subordinated Debt.
"TOTAL SENIOR LIABILITIES" means, at any time, the consolidated
liabilities of the Borrower and its Subsidiaries at such time, determined in
accordance with GAAP, LESS all then outstanding Subordinated Debt.
"UCC" shall have the meaning given such term in the Security
Agreement.
"UNFUNDED LIABILITIES" means, with respect to any Plan, at any time,
the amount (if any) by which (a) the present value of all benefits under such
Plan exceeds (b) the fair market value of all Plan assets allocable to such
benefits, all determined as of the then most recent valuation date for such
Plan, but only to the extent that such
<PAGE>
-23-
excess represents a potential liability of the Borrower or any member of the
Controlled Group to the PBGC or such Plan under Title IV of ERISA.
SECTION 10 MISCELLANEOUS.
10.1 ACCOUNTING TERMS AND DEFINITIONS. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
determinations with respect to accounting matters hereunder shall be made, and
all financial statements and certificates and reports as to financial matters
required to be delivered hereunder shall be prepared, in accordance with GAAP;
PROVIDED that if any change in GAAP in itself materially affects the calculation
of any financial covenant in this Agreement, the Borrower may by notice to the
Bank, or the Bank may by notice to the Borrower, require that such covenant
thereafter be calculated in accordance with GAAP as in effect, and applied by
the Borrower, immediately before such change in GAAP occurs. If such notice is
given, the compliance certificates delivered pursuant to Section 6.4 after such
change occurs shall be accompanied by reconciliations of the difference between
the calculation set forth therein and a calculation made in accordance with GAAP
as in effect from time to time after such change occurs. To enable the ready
determination of compliance with the covenants set forth in this Agreement, the
Borrower will not change the date on which its fiscal year or any of its fiscal
quarters end without the prior consent of the Bank.
10.2 AMENDMENTS, ETC. No amendment or waiver of any
provision of this Agreement or the Note, nor consent to any departure by the
Borrower therefrom, shall in any event be effective unless the same shall be in
writing and signed by the Bank and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.
10.3 NOTICES, ETC. All notices and other communications
provided for hereunder shall be in writing and shall be delivered by hand, by a
nationally recognized commercial overnight delivery service, by first class mail
or by telecopy, delivered, addressed or transmitted, if to the Borrower, at its
address at 379 Thornall Street, Edison, New Jersey 08837, Attention: Peter
Macaluso, Vice President and CFO, Telecopy No. (908) 906-1113; and if to the
Bank, at its address at Wellesley Office Park, 45 William Street, Wellesley,
Massachusetts 02181, Attention: Joan S. Parsons, Vice President, Telecopy No.
(617) 431-9906; or, as to each party, at such other address as shall be
designated by such party in a written notice to the other party. All such
notices and communications shall be deemed effective, (a) in the case of hand
deliveries, when delivered; (b) in the case of an overnight delivery service, on
the next Banking Day after being placed in the possession of such delivery
service, with delivery charges prepaid; (c) in the case of mail, three days
after deposit in the postal system, first class postage prepaid; and (d) in the
case of telecopy notices, when electronic indication of receipt is received,
except that notices to the Bank pursuant to the provisions of Section 1.3 shall
not be effective until received by the Bank.
10.4 NO WAIVER; REMEDIES. No failure on the part of the
Bank to exercise, and no delay in exercising, any right hereunder or under the
Note shall operate as a waiver thereof; nor shall any single or partial exercise
of any right hereunder or under the Note preclude any other or further exercise
thereof or the exercise of any other right. The remedies herein provided are
cumulative and not exclusive of any remedies provided by law.
10.5 RIGHT OF SET-OFF. (a) Upon the occurrence and during
the continuance of any Event of Default, the Bank is hereby authorized at any
time and from time to time, to the fullest extent permitted by law, to set off
and apply any and all deposits (general or special, time or demand, provisional
or final) at any time held and other indebtedness at any time owing by the Bank
to or for the credit or the account of the Borrower against any and all of the
obligations of the Borrower now or hereafter existing under this Agreement and
the Note, irrespective of whether or not the Bank shall have made any demand
hereunder and although such obligations may be contingent or unmatured.
<PAGE>
-24-
(b) The Bank agrees promptly to notify the Borrower after
any such set-off and application, PROVIDED that the failure to give such notice
shall not affect the validity of such set-off and application. The rights of
the Bank under this Section 10.5 are in addition to other rights and remedies
(including, without limitation, other rights of set-off) which the Bank may
have.
10.6 EXPENSES; INDEMNIFICATION. (a) The Borrower shall pay
on demand (i) the reasonable fees and disbursements of counsel to the Bank in
connection with the preparation of this Agreement and the preparation or review
of each agreement, opinion, certificate and other document referred to in or
delivered pursuant hereto; (ii) all out-of-pocket costs and expenses of the Bank
in connection with the administration of this Agreement and the other Loan
Documents, and any waiver or amendment of any provision hereof or thereof,
including without limitation, the reasonable fees and disbursements of counsel
for the Bank, and of any field examiner or auditor retained by the Bank as
contemplated in Section 6.8; and (iii) if any Event of Default occurs, all costs
and expenses incurred by the Bank, including the reasonable fees and
disbursements of counsel to the Bank, and of any appraisers, environmental
engineers or consultants, or investment banking firms retained by the Bank in
connection with such Event of Default or collection, bankruptcy, insolvency and
other enforcement proceedings related thereto. The Borrower agrees to pay,
indemnify and hold the Bank harmless from, any and all recording and filing
fees, and any and all liabilities with respect to, or resulting from any delay
in paying, stamp, excise or other taxes, if any, which may be payable or
determined to be payable in connection with the execution and delivery of or the
consummation or administration of any of the transactions contemplated by, or
any amendment, supplement or modification of, or any waiver or consent under or
in respect of, this Agreement or the other Loan Documents, or any documents
delivered pursuant hereto or thereto.
(b) The Borrower agrees to indemnify the Bank and its
officers and directors and hold the Bank and its officers and directors harmless
from and against any and all liabilities, losses, damages, costs and expenses of
any kind (including, without limitation, the reasonable fees and disbursements
of counsel for the Bank) in connection with any investigative, administrative or
judicial proceeding initiated by a third party where the Bank is designated a
party thereto, or where the Bank or a representative thereof is required to give
testimony or produce evidence or documentation, relating to or arising out of
this Agreement or any other Loan Document, or the existence of any Hazardous
Substance on, in, or under any Borrower Property, or any violation of any
applicable Environmental Laws for which the Borrower or any Subsidiary thereof
has any liability or which occurs upon any Borrower Property, or the imposition
of any Lien under any Environmental Laws, PROVIDED that the Bank shall not have
the right to be indemnified hereunder for its own gross negligence or willful
misconduct as determined by a court of competent jurisdiction and provided
further that the Bank provides prompt notice to Borrower of any claim against
the Bank by a third party.
(c) The agreements in this Section 10.6 shall survive the
repayment of the Note, and all other amounts payable under this Agreement and
the other Loan Documents.
10.7 BINDING EFFECT. This Agreement shall become effective
when it shall have been executed by the Borrower and the Bank (provided,
however, in no event shall this Agreement become effective until signed by an
officer of the Bank in California) and thereafter shall be binding upon and
inure to the benefit of the Borrower and the Bank and their respective
successors and assigns, except that the Borrower shall not have the right to
assign its rights hereunder or any interest herein without the prior written
consent of the Bank. The Bank may assign to any financial institution all or
any part of, or any interest (undivided or divided) in, the Bank's rights and
benefits under this Agreement or the Note, and to the extent of that assignment
such assignee shall have the same rights and benefits against the Borrower
hereunder as it would have had if such assignee were the Bank making the Line of
Credit Loans hereunder.
10.8 SEVERABILITY. Any provision of this Agreement which is
prohibited, unenforceable or not authorized in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition,
<PAGE>
-25-
unenforceability or non-authorization without invalidating the remaining
provisions hereof or affecting the validity, enforceability or legality of such
provision in any other jurisdiction.
10.9 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF
MASSACHUSETTS.
10.10 WAIVER OF JURY TRIAL. THE BANK AND THE BORROWER AGREE
THAT NEITHER OF THEM NOR ANY ASSIGNEE OR SUCCESSOR SHALL (A) SEEK A JURY TRIAL
IN ANY LAWSUIT, PROCEEDING, COUNTERCLAIM OR ANY OTHER ACTION BASED UPON, OR
ARISING OUT OF, THIS AGREEMENT, ANY RELATED INSTRUMENTS, ANY COLLATERAL OR THE
DEALINGS OR THE RELATIONSHIP BETWEEN OR AMONG ANY OF THEM, OR (B) SEEK TO
CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT
BE OR HAS NOT BEEN WAIVED. THE PROVISIONS OF THIS PARAGRAPH HAVE BEEN FULLY
DISCUSSED BY THE BANK AND THE BORROWER, AND THESE PROVISIONS SHALL BE SUBJECT TO
NO EXCEPTIONS. NEITHER THE BANK NOR THE BORROWER HAS AGREED WITH OR REPRESENTED
TO THE OTHER THAT THE PROVISIONS OF THIS PARAGRAPH WILL NOT BE FULLY ENFORCED IN
ALL INSTANCES.
10.11 VENUE, CONSENT TO SERVICE OF PROCESS. THE BORROWER
ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND
UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF
COMPETENT JURISDICTION IN THE STATE OF CALIFORNIA OR THE COMMONWEALTH OF
MASSACHUSETTS IN ANY ACTION, SUIT OR PROCEEDING OF ANY KIND AGAINST IT WHICH
ARISES OUT OF OR BY REASON OF THIS AGREEMENT, THE NOTE, ANY OTHER LOAN DOCUMENT,
OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IRREVOCABLY AGREES TO BE
BOUND BY ANY FINAL JUDGMENT RENDERED BY ANY SUCH COURT IN ANY SUCH ACTION, SUIT
OR PROCEEDING IN WHICH IT SHALL HAVE BEEN SERVED WITH PROCESS IN THE MANNER
HEREINAFTER PROVIDED, SUBJECT TO EXERCISE AND EXHAUSTION OF ALL RIGHTS OF APPEAL
AND TO THE EXTENT THAT IT MAY LAWFULLY DO SO, WAIVES AND AGREES NOT TO ASSERT,
BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE, IN SUCH ACTION, SUIT OR PROCEEDING
ANY CLAIMS THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT,
THAT ITS PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE
ACTION, SUIT OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE
THEREOF IS IMPROPER, AND AGREES THAT PROCESS MAY BE SERVED UPON IT IN ANY SUCH
ACTION, SUIT OR PROCEEDING IN THE MANNER PROVIDED BY CHAPTER 223A OF THE GENERAL
LAWS OF MASSACHUSETTS, RULE 4 OF THE MASSACHUSETTS RULES OF CIVIL PROCEDURE OR
RULE 4 OF THE FEDERAL RULES OF CIVIL PROCEDURE.
10.12 HEADINGS. Section headings in this Agreement are
included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.
10.13 COUNTERPARTS. This Agreement may be signed in one or
more counterparts each of which shall constitute an original and all of which
taken together shall constitute one and the same instrument.
<PAGE>
-26-
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their respective officers thereunto duly
authorized as of the date first above written.
DIGITRAN CORPORATION
By: /s/ Peter S. Macaluso
----------------------------
Name: Peter S. Macaluso
Title: Vice President and CFO
SILICON VALLEY EAST, a Division of Silicon Valley
Bank
By: ----------------------------
Name: Joan S. Parsons
Title: Vice President
SILICON VALLEY BANK
By:
----------------------------
Name:
Title:
(Signed at Santa Clara, California)
<PAGE>
-27-
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their respective officers thereunto duly
authorized as of the date first above written.
DIGITRAN CORPORATION
By:
----------------------------
Name:
Title:
SILICON VALLEY EAST, a Division of Silicon Valley
Bank
By: /s/ Joan S. Parson
----------------------------
Name: Joan S. Parsons
Title: Vice President
SILICON VALLEY BANK
By: /s/ Becky Butler
----------------------------
Name: Becky Butler
Title: VP/Mgr
(Signed at Santa Clara, California)
<PAGE>
PROMISSORY NOTE Exhibit A
$1,000,000 Wellesley, Massachusetts
As of July 7, 1995
For value received, the undersigned, DIGITRAN CORPORATION, a Delaware
corporation (the "BORROWER"), promises to pay to SILICON VALLEY BANK (the
"BANK") at the office of the Bank located at 3000 Lakeside Drive, P.O. Box 3762,
Santa Clara, California 95054, or to its order, the lesser of One Million
Dollars ($1,000,000) or the outstanding principal amount hereunder, on July 7, 1
996 (the "MATURITY DATE"), together with interest on the principal amount hereof
from time to time outstanding at a fluctuating rate per annum equal to the Prime
Rate (as defined below) plus 2% until the Maturity Date, payable monthly in
arrears on the first day of each calendar month occurring after the date hereof
and on the Maturity Date. The Borrower promises to pay on demand interest at a
per annum rate of interest equal to the Prime Rate plus 5% on any overdue
principal (and to the extent permitted by law, overdue interest). The Bank's
"Prime Rate" is the per annum rate of interest from time to time announced and
made effective by the Bank as its Prime Rate (which rate may or may not be the
lowest rate available from the Bank at any given time).
Computations of interest shall be made by the Bank on the basis of a year
of 360 days for the actual number of days occurring in the period for which such
interest is payable.
This note is the Note referred to in the credit agreement of even date
herewith between the Bank and the Borrower (together with all related
schedules), as the same may be amended, modified or supplemented from time to
time (the "CREDIT AGREEMENT"), and is entitled to the benefits thereof and of
the other Loan Documents referred to therein, and is subject to optional and
mandatory prepayment as provided therein. This note is secured INTER ALIA by a
Security Agreement dated of even date herewith by the Borrower in favor of the
Bank, as the same may be amended, modified or supplemented from time to time.
Upon the occurrence of any Event of Default under, and as defined in, the
Credit Agreement, at the option of the Bank, the principal amount then
outstanding of and the accrued interest on the advances under this note and all
other amounts payable under this note shall become immediately due and payable,
without notice (including, without limitation, notice of intent to accelerate),
presentment, demand, protest or other formalities of any kind, all of which are
hereby expressly waived by the Borrower.
The Bank shall keep a record of the amount and the date of the making of
each advance pursuant to the Credit Agreement and each payment of principal with
respect thereto by maintaining a computerized record of such information and
printouts of such computerized record, which computerized record, and the
printouts thereof, shall constitute PRIMA FACIE evidence of the accuracy of the
information so endorsed.
The undersigned agrees to pay all reasonable costs and expenses of the Bank
(including, without limitation, the reasonable fees and expenses of attorneys)
in connection with the enforcement of this note and the other loan documents.
<PAGE>
-2-
EXHIBIT A
No delay or omission on the part of the Bank in exercising any right
hereunder shall operate as a waiver of such right or of any other right of the
Bank, nor shall any delay, omission or waiver on any one occasion be deemed a
bar to or waiver of the same or any other right on any future occasion. The
Borrower and every endorser or guarantor of this note regardless of the time,
order or place of signing waives presentment, demand, protest and notices of
every kind and assents to any one or more extensions or postponements of the
time of payment or any other indulgences, to any substitutions, exchanges or
releases of collateral for this note, and to the additions or releases of any
other parties or persons primarily or secondarily liable.
THIS NOTE HAS BEEN DELIVERED TO THE BANK AND ACCEPTED BY THE BANK IN THE
STATE OF CALIFORNIA.
THE BORROWER HEREBY EXPRESSLY WAIVES ANY RIGHT IT MAY NOW OR HEREAFTER HAVE
TO A JURY TRIAL IN ANY SUIT, ACTION OR PROCEEDING WHICH ARISES OUT OF OR BY
REASON OF THIS NOTE, ANY LOAN DOCUMENT (AS DEFINED IN THE CREDIT AGREEMENT), OR
THE TRANSACTIONS CONTEMPLATED HEREBY.
BY ITS EXECUTION AND DELIVERY OF THIS NOTE, THE BORROWER ACCEPTS FOR ITSELF
AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NON-
EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION
IN THE STATE OF CALIFORNIA OR THE COMMONWEALTH OF MASSACHUSETTS IN ANY ACTION,
SUIT OR PROCEEDING OF ANY KIND AGAINST IT WHICH ARISES OUT OF OR BY REASON OF
THIS NOTE, ANY LOAN DOCUMENT (AS DEFINED IN THE CREDIT AGREEMENT), OR THE
TRANSACTIONS CONTEMPLATED HEREBY, IN ADDITION TO ANY OTHER COURT IN WHICH SUCH
ACTION, SUIT OR PROCEEDING MAY BE BROUGHT, IRREVOCABLY AGREES TO BE BOUND BY ANY
FINAL JUDGMENT RENDERED BY ANY SUCH COURT IN ANY SUCH ACTION, SUIT OR PROCEEDING
IN WHICH IT SHALL HAVE BEEN SERVED WITH PROCESS IN THE MANNER HEREINAFTER
PROVIDED, SUBJECT TO EXERCISE AND EXHAUSTION OF ALL RIGHTS OF APPEAL AND TO THE
EXTENT THAT IT MAY LAWFULLY DO SO, WAIVES AND AGREES NOT TO ASSERT, BY WAY OF
MOTION, AS A DEFENSE OR OTHERWISE, IN SUCH ACTION, SUIT OR PROCEEDING ANY CLAIMS
THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT, THAT ITS
PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE ACTION, SUIT
OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE THEREOF IS
IMPROPER, AND AGREES THAT PROCESS MAY BE SERVED UPON IT IN ANY SUCH ACTION, SUIT
OR PROCEEDING IN THE MANNER PROVIDED BY CHAPTER 223A OF THE GENERAL LAWS OF
MASSACHUSETTS, RULE 4 OF THE MASSACHUSETTS RULES OF CIVIL PROCEDURE OR RULE 4 OF
THE FEDERAL RULES OF CIVIL PROCEDURE.
ALL RIGHTS AND OBLIGATIONS HEREUNDER SHALL BE GOVERNED BY THE LAW OF THE
COMMONWEALTH OF MASSACHUSETTS AND THIS NOTE SHALL BE DEEMED TO BE UNDER SEAL.
DIGITRAN CORPORATION
By: /s/ Peter S. Macaluso
----------------------------
Name: Peter S. Macaluso
Title: Vice President and CFO
<PAGE>
EXHIBIT B
<PAGE>
SECURITY AGREEMENT
SECURITY AGREEMENT dated as of July 7, 1995 between DIGITRAN
CORPORATION, a Delaware corporation (the "COMPANY") and SILICON VALLEY BANK (the
"Bank").
W I T N E S E T H :
WHEREAS, the Company and the Bank entered into to a Credit Agreement
dated as of July 7, 1995 (as the same day be amended, supplemented, extended or
restated from time to time, the "CREDIT AGREEMENT"), providing for the
Extensions of Credit to be made by the Bank to the Company;
WHEREAS, in order to induce the Bank to enter into the Credit
Agreement, the Company has agreed to grant a continuing security interest in and
to the Collateral (as defined below) to secure its obligations under the Credit
Agreement, including, without limitation, its obligations under the promissory
note issued by the Company to the Bank pursuant to the Credit Agreement (as the
same day be amended, supplemented, extended or restated from time to time, the
"NOTE");
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are acknowledged,
the parties agree as follows:
SECTION 1. DEFINITIONS
Except for the terms defined below or elsewhere in this Agreement, the
terms used herein shall have the respective meanings provided for in the Credit
Agreement:
"ACCOUNTS" means all "accounts" (as defined in the UCC) now owned or
hereafter acquired by the Company and shall also mean and include all
accounts receivable, contract rights, book debts, notes, drafts and other
obligations or indebtedness owing to the Company arising from the sale,
lease or exchange of goods or other property and/or the performance of
services by it (including any obligation which might be characterized as an
account, contract right or general intangible under the UCC) and all the
Company's rights in, to and under all purchase orders for goods, services
or other property, and all the Company's rights to any goods, services or
other property represented by any of the foregoing (including returned or
repossessed goods and unpaid sellers' rights of rescission, replevin,
reclamation and rights to stoppage in transit) and all monies due to or to
become due to the Company under all contracts for the sale, lease or
exchange of goods or-other property and/or the performance of services by
it (whether or not yet earned by performance on the part of the Company),
in each case whether now in existence or hereafter arising or acquired,
including the right to receive the proceeds of said purchase orders and
contracts and all collateral security and guarantees of any kind given by
any Person with respect to any of the foregoing.
"COLLATERAL" has the meaning set forth in Section 3.
"DOCUMENTS" means all "documents" (as defined in the UCC) or other
receipts covering, evidencing or representing goods, now owned or hereafter
acquired, by the Company.
"EQUIPMENT" means all "equipment" (as defined in the UCC) now owned or
hereafter acquired by the Company, including, without limitation, all motor
vehicles, trucks and trailers, except such equipment which is held by the
Borrower pursuant to a capital lease (as determined in accordance with GAAP).
<PAGE>
-2-
"GENERAL INTANGIBLES" means all "general intangibles" (as defined in
the UCC) now owned or hereafter acquired by the Company, including, without
limitation, all (a) obligations or indebtedness owing to the Company (other
than Accounts) from whatever source arising, (b) patent licenses, patents,
trademark licenses, trademarks, rights in intellectual property, goodwill,
trade names, service marks, trade secrets, copyrights, permits and
licenses, (c) inventions, processes, production methods, proprietary
information, know-how and trade secrets used or useful in the business of
the Company, (d) licenses or user or other agreements granted to the
Company with respect to any of the items described in clause (b) or (c)
above, (e) information, customer lists, identification of suppliers, data,
plans, blueprints, specifications, designs, drawings, recorded knowledge,
surveys, engineering reports, test reports, manuals, materials standards,
catalogs, computer and automatic machinery software and programs and the
like pertaining to the business of the Company, (f) field repair data,
sales data, and other information relating to sales or service of products
now or hereafter manufactured, (g) accounting information and all media in
or on which any of the information, knowledge, data or records may be
recorded or stored and all computer programs used for the compilation or
printout thereof, (h) causes of action, claims and warranties now or
hereafter owned or acquired by the Company in respect of any of the items
listed above and (i) all tax refunds to which the Company is entitled.
"INSTRUMENTS" means all "instruments", "chattel paper" or "letters of
credit" (each as defined in the UCC) evidencing, representing, arising from
or existing in respect of, relating to, securing or otherwise supporting
the payment of, any of the Accounts, including promissory notes, drafts,
bills of exchange and trade acceptances, now owned or hereafter acquired by
the Company.
"INVENTORY" means all "inventory" (as defined in the UCC), now owned
or hereafter acquired by the Company, wherever located, and shall also mean
and include, without limitation, all raw materials and other materials and
supplies, work-in-process and finished goods and any products made or
processed therefrom and all substances, if any, commingled therewith or
added thereto.
"PERFECTION CERTIFICATE" means a certificate substantially in the form
of EXHIBIT A hereto, completed with the schedules and attachments
contemplated thereby to the satisfaction of the Bank, and duly executed by
the chief financial officer of the Company.
"PERMITTED FINANCING STATEMENTS" means any financing statements naming
the Company as Debtor filed solely pursuant to Section 9-408 of the UCC and
financing statements relating to Permitted Liens.
"PERMITTED LIENS" means the Liens on the Collateral permitted to be
created, assumed or to exist pursuant to Section 7.6 of the Credit
Agreement.
"PROCEEDS" means all proceeds of, and all other profits, rentals or
receipts, in whatever form, arising from the collection, sale, lease,
exchange, assignment, licensing or other disposition of, or realization
upon, Collateral, including, without limitation, all claims of the Company
against third parties for loss of, damage to or destruction of, or for
proceeds payable under, or unearned premiums with respect to, policies of
insurance in respect of, any Collateral, and any condemnation or
requisition payments with respect to any Collateral, in each case whether
now existing or hereafter arising.
<PAGE>
-3-
"SECURED OBLIGATIONS" means all obligations of the Company to the
Bank, whether now existing or hereafter incurred or created, joint or
several, direct or indirect, absolute or contingent, due or to become due,
matured or unmatured, liquidated or unliquidated, arising by contract,
operation of law or otherwise, including (a) all principal of and interest
(including any interest which accrues after the commencement of any case,
proceeding or other action relating to the bankruptcy, insolvency or
reorganization of the Company) on any advance to the Company under the
Credit Agreement or the Note; (b) all other amounts (including any fees or
expenses) payable by the Company under the Credit Agreement, the Note or
any other Loan Document; (c) all amounts payable to the Bank in connection
with the issuance of any letter of credit by the Bank for the account of
the Company or any drawing thereunder, including any reimbursement
obligation and fees payable under any related letter of credit application
or reimbursement agreement executed by the Company; (d) all amounts payable
by the Company hereunder; and (e) any renewals, refinancings or extensions
of any of the foregoing.
"SECURITY INTERESTS" means the security interests granted pursuant to
Section 3, as well as all other security interests created or assigned as
additional security for the Secured Obligations pursuant to the provisions
of this Agreement.
"UCC" means the Uniform Commercial Code in effect on the date hereof
in Massachusetts; provided that if by reason of law, the perfection or
effect of perfection or non-perfection of the Security Interests in any
Collateral is governed by the Uniform Commercial Code in effect in a
jurisdiction other than Massachusetts, "UCC" means the Uniform Commercial
Code in effect in such other jurisdiction for purposes of the provisions
hereof relating to such perfection or effect of perfection or non-
perfection.
SECTION 2. REPRESENTATIONS AND WARRANTIES
The Company represents and warrants as follows:
(a) The Company has good title to all of the Collateral, free and clear of
any Liens other than the Permitted Liens and the Security Interests.
(b) Neither the Company nor its predecessors has performed any acts which
might prevent the Bank from enforcing any of the terms of this Agreement or
which would limit the Bank in any such enforcement. Other than the Permitted
Financing Statements and financing statements or other similar or equivalent
documents or instruments with respect to the Security Interests, no financing
statement, mortgage, security agreement or similar or equivalent document or
instrument covering all or any part of the Collateral is on file or of record in
any jurisdiction in which such filing or recording would be effective to perfect
a Lien on such Collateral. No Collateral is in the possession of any Person
(other than the Company) asserting any claim thereto or security interest
therein, except that the Bank or its designee may have possession of Collateral
as contemplated hereby.
(c) Prior to the first borrowing under the Credit Agreement, the Company
shall deliver the Perfection Certificate to the Bank. The information set forth
therein shall be correct and complete.
(d) When UCC financing statements in appropriate form have been filed in
the offices specified in the Perfection Certificate to the extent that a
security interest therein may be perfected by filing pursuant to the UCC, the
Security Interests shall constitute valid and perfected security
<PAGE>
-4-
interests in the Collateral (except Inventory in transit), in each case prior to
all other Liens and rights of others therein.
(e) Except for the filings referred to in paragraph (d) above, no
authorization, approval or other action by, and no notice of filing with, any
Governmental Authority that has not been received, taken or made is required (i)
for the grant by the Company of the Security Interests or for the execution,
delivery or performance of this Agreement by the Company, (ii) for the
perfection and maintenance of the Security Interests as first priority security
interests and liens, or (iii) for the exercise by the Bank of the rights or the
remedies in respect of the Collateral pursuant to this Agreement.
(f) The Inventory and Equipment are insured in accordance with the
requirements of this Security Agreement and the Credit Agreement.
SECTION 3. THE SECURITY INTERESTS
(a) In order to secure the full and punctual payment of the Secured
Obligations in accordance with their respective terms, the Company hereby
hypothecates, assigns, pledges and grants to the Bank a continuing security
interest and lien in and to all right, title and interest of the Company in the
following property, whether now owned or existing or hereafter acquired or
arising and regardless of where located (all being collectively referred to as
the "COLLATERAL"):
(i) Accounts;
(ii) Inventory;
(iii) General Intangibles;
(iv) Documents;
(v) Instruments;
(vi) Equipment;
(vii) All monies and property of any kind of the Company in
the possession or under the control of the Bank;
(viii) All books and records (including customer lists,
marketing information, credit files, price lists, operating records, vendor
and supplier price lists, sales literature, computer programs, printouts
and other computer materials and records) of the Company pertaining to any
of the Collateral; and
(ix) All Proceeds of, attachments or accessions to, or
substitutions for all or any of the Collateral described in Clauses (i)
through (viii) hereof.
(b) The Security Interests are granted as security only and shall not
subject the Bank to, or transfer or in any way affect or modify, any obligation
or liability of the Company with respect to any of the Collateral or any related
transaction.
<PAGE>
-5-
SECTION 4. FURTHER ASSURANCES; COVENANTS
The Company covenants as follows:
(a) The Company will not change (i) the locations of its principal place
of business or its chief executive office, (ii) its federal tax identification
number, (iii) the locations where it keeps or holds any related records from the
applicable locations described in the Perfection Certificate, or (iv) its name,
identity or corporate structure in any manner, without giving the Bank 30 days
prior written notice. In the event of any such change, the Company shall, at
its cost and expense, cooperate with the Bank and cause to be filed or recorded
additional financing statements, amendments or supplements to existing financing
statements, continuation statements or other documents required to be recorded
or filed in order to perfect and protect the Security Interests. The Company
shall not, in any event, make any such change if such change would cause the
Security Interests in any Collateral to lapse or cease to be perfected.
(b) The Company will, from time to time, at its expense, execute, deliver,
file and record any statement, assignment, instrument, document, agreement or
other paper and take any other action (including, without limitation, any
filings of financing or continuation statements under the UCC) that the Bank may
from time to time reasonably determine to be necessary or desirable in order to
create, preserve, upgrade in rank (to the extent required hereby), perfect,
confirm or validate the Security Interests or to enable the Bank to (i) obtain
the full benefits of this Agreement, or (ii) to exercise and enforce any of its
rights, powers and remedies hereunder with respect to any of the Collateral. At
the Bank's request, the Company will use reasonable efforts to obtain the
consent of any Person that is necessary or desirable to effect the pledge
hereunder of any right, title, claims and benefits now owned or hereafter
acquired by the Company in and to any General Intangible. To the extent
permitted by law, the Company hereby authorizes the Bank to execute and file
financing statements or continuation statements without the Company's signature
appearing thereon. The Company agrees that a carbon, photographic or other
reproduction of this Agreement or of a financing statement is sufficient as a
financing statement. The Company shall pay the costs of, or incidental to, any
recording or filing of any financing or continuation statements concerning the
Collateral.
(c) If any warehouseman, bailee or any of the Company's agents or
processors possesses or controls any Collateral, the Company shall, upon the
request of the Bank, notify such warehouseman, bailee, agent or processor of the
Security Interests created hereby and to hold all such Collateral for the Bank's
account subject to the Bank's instructions.
(d) The Company shall keep complete and accurate books and records
relating to the Collateral, and stamp or otherwise mark them in such manner as
the Bank may reasonably request in order to reflect the Security Interests.
(e) The Company will promptly deliver and pledge each Instrument to the
Bank, appropriately endorsed to the Bank without recourse, provided that so long
as no Event of Default shall have occurred and be continuing, the Company may
retain for collection in the ordinary course any Instruments it receives in the
ordinary course of business and the Bank shall, promptly upon request of the
Company, make appropriate arrangements for making any other Instrument pledged
by the Company available to it for purposes of presentation, collection or
renewal (any such arrangement to be effected, to the extent deemed appropriate
by the Bank, against trust receipt or like document).
<PAGE>
-6-
(f) The Company shall use its best efforts to cause to be collected from
its account debtors, as and when due, any and all amounts owing under or on
account of each Account (including, without limitation, Accounts which are
delinquent, such Accounts to be collected in accordance with lawful collection
procedures and the Company's standard procedures) and apply forthwith upon
receipt mail such amounts so collected to the outstanding balance of such
Account, except that, unless an Event of Default has occurred and is continuing
and the Bank is exercising its rights hereunder to collect Accounts, the Company
may allow in the ordinary course of business as adjustments to amounts owing
under its Accounts (i) an extension or renewal of the time of payment, or
settlement for less than the total unpaid balance, which the Company finds
appropriate in accordance with prudent business judgment and (ii) a refund or
credit due as a result of returned or damaged merchandise, all in accordance
with the Company's ordinary course of business consistent with its historical
collection practices. The costs and expenses (including, without limitation,
attorney's fees) of collection, whether incurred by the Company or the Bank,
shall be borne by the Company.
(g) Upon the occurrence and during the continuance of any Event of
Default, upon the request of the Bank, the Company will promptly notify (and the
Company hereby authorizes the Bank so to notify) each account debtor in respect
of any Account or Instrument that such Collateral has been assigned to the Bank,
and that any payments due or to become due in respect of such Collateral are to
be made directly to the Bank or any designee of the Bank. Following such
request of the Bank, the Company shall hold all proceeds from collection of
Accounts as trustee for the Bank (without commingling the same with other funds
of the Company) and shall turn the same over to the Bank immediately upon
receipt in the for received (duly endorsed by the Company to the Bank, if
required). The Bank shall apply the proceeds of such collections it receives to
the Secured Obligations in accordance with Section 8 of this Agreement. The
application of the proceeds of such collections shall be conditional upon the
final payment in cash of the items so collected. If any item is not so paid or
the Bank is required for any reason to return any payment made, the Bank may
reverse any credit given in respect of such item.
(h) Without the prior written consent of the Bank, the Company will not
(i) sell, lease, exchange, assign or otherwise dispose of, or grant any option
with respect to, any Collateral except as permitted by Section 7.4 of the Credit
Agreement and, in the case of any such permitted sale or exchange, the Security
Interests created hereby in such item (but not in any Proceeds arising from such
sale or exchange) shall cease immediately without any further action on the part
of the Bank; or (ii) create, incur or suffer to exist any Lien with respect to
any Collateral, except for Permitted Liens and the Security Interests.
(i) The Company will maintain, with financially sound and reputable
companies, insurance policies (i) insuring all Inventory and Equipment against
loss by fire, explosion, theft and other casualties reasonably satisfactory to
the Bank and (ii) insuring the Company and the Bank against liability for
personal injury and property damage relating to Inventory and Equipment, such
policies to be in such form and amounts and having such coverage as is
reasonably satisfactory to the Bank, with losses payable to the Bank as sole
loss payee. All such insurance shall (A) provide that no termination,
cancellation, material reduction in amount or material change in coverage
thereof shall be effective until at least 30 days after receipt by the Bank of
written notice thereof, (B) in the case of the policies referenced in clause
(ii) above, name the Bank as additional insured and (C) be otherwise reasonably
satisfactory to the Bank.
(j) The Company will keep each item of Equipment in good order and repair
and will not use the same in violation of law or any policy of insurance
thereon.
<PAGE>
-7-
(k) The Company will, promptly upon request, provide to the Bank all
information and evidence it may reasonably request concerning the Collateral
(including without limitation, the names, addresses, face value, and date of
invoices for each debtor obligated on each Account) to enable the Bank to
enforce the provisions of this Agreement.
SECTION 5. GENERAL AUTHORITY
The Company hereby irrevocably appoints the Bank its true and lawful
attorney, with full power of substitution, in the name of the Company, the Bank,
or otherwise, for the sole use and benefit of the Bank, but at the Company's
expense, to the extent permitted by law to exercise, at any time and from time
to time while an Event of Default has occurred and is continuing, all or any of
the following powers with respect to all or any of the Collateral:
(a) to endorse the Company's name on any checks, notes, acceptances,
money orders, drafts, filings or other forms of payment or security that
may come into the Bank's possession,
(b) to demand, sue for, collect, receive and give acquittance for any
and all monies due or to become due thereon or by virtue thereof,
(c) to settle, compromise, compound, prosecute or defend any action
or proceeding with respect thereto,
(d) to sell, transfer, assign or otherwise deal in or with the same
or the proceeds or avails thereof, as fully and effectively as if the Bank
were the absolute owner, and
(e) to extend the time of payment thereof and to make any allowance
and other adjustments with reference thereto;
PROVIDED that the Bank shall give the Company not less than ten days prior
written notice of the time and place of any sale or other intended disposition
of any of the Collateral, except any Collateral which is perishable or threatens
to decline speedily in value or is of a type customarily sold on a recognized
market. The Company agrees that such notice constitutes "reasonable
notification" within the meaning of Section 9-504(3) of the UCC.
SECTION 6. REMEDIES UPON EVENT OF DEFAULT
(a) If any Event of Default has occurred and is continuing, the Bank may
exercise all rights of a secured party under the UCC (whether or not in effect
in the jurisdiction where such rights are exercised) and, in addition, the Bank
may, without being required to give any notice, except as herein provided or as
may be required by law, sell any and all of the Collateral at public or private
sale, for cash, upon credit or for future delivery, and at such prices as the
Bank may deem satisfactory. The Bank may be the purchaser of any or all of the
Collateral so sold at any public sale (or, if the Collateral is of a type
customarily sold in a recognized market or is of a type which is the subject of
widely distributed standard price quotations, at any private sale) and
thereafter hold the same, absolutely, free from any right or claim of whatsoever
kind. The Company will execute and deliver such documents and take such other
action as the Bank deems necessary or advisable in order that any such sale may
be made in compliance with law. Upon any such sale the Bank shall have the
right to deliver, assign and transfer to the purchaser the Collateral so sold.
Each purchaser at any such sale shall hold the Collateral so sold to it
absolutely, free from any claim or right of whatsoever kind, including any
equity or right of redemption of the Company. The
<PAGE>
-8-
Company, to the extent permitted by law, hereby specifically waives all rights
of redemption, stay or appraisal which it has or may have under any law now
existing or hereafter adopted. The notice (if any) of such sale required by
Section 5 shall (i) in case of a public sale, state the time and place fixed for
such sale, and (ii) in the case of a private sale, state the day after which
such sale may be consummated. Any such public sale shall be held at such
time(s) within ordinary business hours and at such places as the Bank may fix in
the notice of such sale. At any such sale the Collateral may be sold in one lot
as an entirety or in separate parcels, as the Bank may determine. The Bank
shall not be obligated to make any such sale pursuant to any such notice. The
Bank may, without notice or publication, adjourn any public or private sale or
cause the same to be adjourned from time to time by announcement at the time and
place fixed for the sale, and such sale may be made at any time or place to
which the same may be so adjourned. In case of any sale of all or any part of
the Collateral on credit or for future delivery, the Collateral so sold may be
retained by the Bank until the selling price is paid by the purchaser thereof,
but the Bank shall not incur any liability in case of the failure of such
purchaser to take up and pay for the Collateral so sold and, in case of any such
failure, such Collateral may again be sold upon like notice. The Bank, instead
of exercising the power of sale herein conferred upon it, may proceed by a suit
or suits at law or in equity to foreclose the Security Interests and sell the
Collateral, or any portion thereof, under a judgment or decree of a court or
courts of competent jurisdiction.
(b) For the purpose of enforcing its rights and remedies under this
Agreement, the Bank may (i) require the Company to, and the Company agrees that
it will, at its expense and upon the request of the Bank, forthwith assemble all
or any part of the Collateral as directed by the Bank and make it available at a
place designated by the Bank which is, in its opinion, reasonably convenient to
the Bank, whether at the premises of the Company or otherwise, (ii) to the
extent permitted by law, enter, with or without process of law and without
breach of the peace, any premise where any of the Collateral may be located, and
without charge or liability to it seize and remove such Collateral from such
premises, (iii) have access to and use the Company's books and records relating
to the Collateral and (v) prior to the disposition of the Collateral, store or
transfer it without charge in or by means of any storage or transportation
facility owned or leased by the Company, process, repair or recondition it or
otherwise prepare it for disposition in any manner and to the extent the Bank
deems appropriate to preserve and enhance its value and, in connection with such
preparation and disposition, use, as a licensee (or if no decline in the value
of the Collateral would result, otherwise) without charge any trademark, trade
name, copyright, patent or technical process used by the Company.
SECTION 7. LIMITATION ON DUTY OF BANK IN RESPECT OF COLLATERAL
Beyond the safe custody thereof in accordance with law, the Bank shall have
no duty as to any Collateral in the possession or control of the Bank or any
agent or bailee, or any income thereon, or as to the preservation of rights
against prior parties or any other rights pertaining thereto. The Bank shall be
deemed to have exercised reasonable care in the custody and preservation of the
Collateral in its possession if the Collateral is accorded treatment
substantially equivalent to that which it accords its own property of like
nature, and shall not be liable or responsible for any loss or damage to any of
the Collateral, or for any diminution in the value thereof, by reason of the act
or omission of any warehouseman, carrier, forwarding agency, consignee or other
agent or bailee selected by the Bank in good faith and in the absence of gross
negligence.
<PAGE>
-9-
SECTION 8. APPLICATION OF PROCEEDS
Upon the occurrence and during the continuance of an Event of Default, the
proceeds of any sale of, or other realization upon, all or any part of the
Collateral shall be applied by the Bank in the following order of priorities:
FIRST, to payment of the expenses of such sale or other realization,
including reasonable compensation to the Bank and its agents and counsel in
connection therewith, and all expenses, liabilities and advances incurred
or made by the Bank in connection therewith, and any other unreimbursed
expenses for which the Bank is to be reimbursed pursuant to Section 10.6 of
the Credit Agreement, or Section 9 hereof and unpaid fees owing to the Bank
under the Credit Agreement;
SECOND, to the payment of accrued but unpaid interest on the Secured
Obligations;
THIRD, to the payment of unpaid principal of the Secured Obligations;
FOURTH, to the payment of all other Secured Obligations, until all
Secured Obligations shall have been paid in full; and
FINALLY, to payment to the Company or its successors or assigns, or as
a court of competent jurisdiction may direct, of any surplus then remaining
from such proceeds.
The Bank may make distributions hereunder in cash or in kind or in any
combination thereof.
SECTION 9. EXPENSES
In the event that the Company fails to comply with the provisions of the
Credit Agreement or this Agreement, such that the value of any Collateral or the
validity, perfection, rank or value of any Security Interest is thereby
diminished or potentially diminished or put at risk, the Bank may effect such
compliance on behalf of the Company, and the Company shall reimburse the Bank
for the costs thereof within two Business Days of demand therefor. All
insurance expenses and all reasonable expenses of protecting, storing,
warehousing, appraising, insuring, handling, maintaining, and shipping the
Collateral, any and all excise, property, sales, and use taxes imposed by any
state, federal, or local authority on any of the Collateral, or in respect of
the sale or other disposition thereof, shall be borne by the Company; and if the
Company fails to promptly pay any portion thereof when due, the Bank may, at its
option, but shall not be required to, pay the same and charge the Company's
account therefor, and the Company agrees to reimburse the Bank therefor on
demand. All sums so paid or incurred by the Bank for any of the foregoing and
any and all other sums for which the Company may become liable hereunder and all
reasonable costs and expenses (including attorneys' fees, legal expenses and
court costs) reasonably incurred by the Bank in enforcing or protecting the
Security Interests or any of their rights or remedies under this Agreement,
shall, together with interest thereon until paid at the rate applicable to
advances made under the Credit Agreement, be additional Secured Obligations
hereunder.
SECTION 10. TERMINATION OF SECURITY INTERESTS
Upon the indefeasible payment in full of all Secured Obligations and the
termination of the Commitment, the Security Interests shall terminate and all
rights to the Collateral shall revert to the Company, and this Security
Agreement shall terminate and no longer be of any force and effect.
<PAGE>
-10-
SECTION 11. NOTICES
All notices, approvals, requests, demands and other communications
hereunder shall be given in accordance with the Credit Agreement.
SECTION 12. WAIVERS, NON-EXCLUSIVE REMEDIES
No failure on the part of the Bank to exercise, and no delay in exercising
and no course of dealing with respect to, any right under the Credit Agreement
or this Agreement shall operate as a waiver thereof; nor shall any single or
partial exercise by the Bank of any right under the Credit Agreement or this
Agreement preclude any other or further exercise thereof or the exercise of any
other right. The rights in this Agreement and the Credit Agreement are
cumulative and are not exclusive of any other remedies provided by law.
SECTION 13. SUCCESSORS AND ASSIGNS
This Agreement is for the benefit of the Bank and its successors and
assigns, and in the event of an assignment of all or any of the Secured
Obligations, the rights hereunder, to the extent applicable to the indebtedness
so assigned, may be transferred with such indebtedness. This Agreement shall be
binding on the Company and its successors and assigns,
SECTION 14. CHANGES IN WRITING
Neither this Agreement nor any provision hereof may be changed, waived,
discharged or terminated orally, but only in writing signed by the Company and
the Bank.
SECTION 15. MASSACHUSETTS LAW
THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE
LAWS OF THE COMMONWEALTH OF MASSACHUSETTS, EXCEPT AS OTHERWISE REQUIRED BY
MANDATORY PROVISIONS OF LAW AND EXCEPT TO THE EXTENT THAT REMEDIES PROVIDED BY
THE LAWS OF ANY JURISDICTION OTHER THAN THE COMMONWEALTH OF MASSACHUSETTS ARE
GOVERNED BY THE LAWS OF SUCH JURISDICTION.
SECTION 16. SEVERABILITY
If any provision hereof is invalid and unenforceable in any jurisdiction,
then, to the fullest extent permitted by law, (a) the other provisions hereof
shall remain in full force and effect in such jurisdiction and shall be
liberally construed in favor of the Bank in order to carry out the intentions of
the parties hereto as nearly as may be possible; and (b) the invalidity or
unenforceability of any provision hereof in any jurisdiction shall not affect
the validity or enforceability of such provision in any other jurisdiction.
SECTION 17. COUNTERPARTS
This Agreement may be executed in any number of counterparts, all of which
taken together shall constitute one and the same instrument and any of the
parties hereto may execute this Agreement by signing any such counterpart.
<PAGE>
-11-
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective authorized officers as of the day and year
first above written.
DIGITRAN CORPORATION
By: /s/ Peter S. Macaluso
----------------------------
Name: Peter S. Macaluso
Title: Vice President and CFO
SILICON VALLEY BANK
By: /s/ Joan S. Parsons
----------------------------
Name: Joan S. Parsons
Title: Vice President
<PAGE>
EXHIBIT A
PERFECTION CERTIFICATE
OF
DIGITRAN CORPORATION
The undersigned, the chief financial officer of Digitran Corporation, a
Delaware corporation (the "COMPANY"), hereby certifies to Silicon Valley Bank
(the "BANK") with reference to the Security Agreement dated as of July 7, 1995
between the Company and the Bank (the terms defined therein being used herein as
therein defined) as follows:
1. NAMES. (a) The exact corporate name of the Company as it appears in
its certificate of incorporation is as follows:
Digitran Corporation
(b) Set forth below is each other corporate name the Company has had
since its organization, together with the date of the relevant change:
(c) Set forth below is a description of each change by the Company of
its identity or corporate structure in any way within the past five years:
(d) The following is a list of all other names (including trade names
or similar appellations) used by the Company or any of its divisions or other
business units at any time during the past five years:
(e) The Federal tax identification number of the Company is as
follows:
2. CURRENT LOCATIONS. (a) The chief executive office of the Company is
located at the following address:
379 Thornall Street
Edison, NJ 08837
<PAGE>
-2-
(b) The following are all the locations where the Company maintains
any books or records relating to any Accounts:
Mailing
Name Address City State
---- ------- ---- -----
(c) The following are all the locations where Inventory and Equipment
of the Company are located:
Mailing
Name Address City State
---- ------- ---- -----
(d) The following are all the places of business of the Company not
identified above:
Mailing
Name Address City State
---- ------- ---- -----
3. PRIOR LOCATIONS. Set forth below is the information required by
subparagraphs (a), (b), (c) and (d) of paragraph 2 with respect to each location
or place of business maintained by the Company at any time during the past five
years:
4. UNUSUAL TRANSACTIONS. Except as set forth in SCHEDULE 4, all Accounts
have been originated by the Company and all Equipment has been acquired by the
Company in the ordinary course of its business.
5. FILE SEARCH REPORTS. Attached hereto as SCHEDULE 5 is a true copy of
a file search report from the Uniform Commercial Code filing officer in each
jurisdiction identified in paragraph 2 or 3 above with respect to each name set
forth in paragraph 1 above, together with a true copy of each financing
statement or other filing identified in such file search reports. To the best
knowledge of the Company, no other financing statements have been filed listing
the Company as a debtor and no such filings are pending except in favor of the
Bank.
<PAGE>
-3-
WITNESS WHEREOF, I have hereunto set my hand this __ day of ________,
199_.
-------------------------
Name:
-------------------
Title:
-------------------
<PAGE>
SCHEDULE 4
-----------
(Unusual Transactions)
<PAGE>
SCHEDULE 5
----------
(Search Reports)
<PAGE>
EXHIBIT C
COMPLIANCE CERTIFICATE
----------------------
TO: SILICON VALLEY BANK
3000 Lakeside Drive
Santa Clara, California 95954
The undersigned authorized officer of Digitran Corporation and ____________
(the "Borrower"), hereby certify, with respect to the Credit Agreement dated as
of July 7, 1995 between Silicon Valley Bank and the Borrower (the "Bank"), as
amended through the date hereof (the "Credit Agreement"), that (a) the Borrower
has been in complete compliance for the period from ___/___/_____ to
___/___/_____ (the "Applicable Financial Statements Date") with the covenants
of the Borrowers contained therein as demonstrated below, and (b) no Default has
occurred and is continuing as of the date hereof, except, in either case, as
noted below. All capitalized terms used herein and not otherwise defined shall
have the meanings prescribed therefor in the Credit Agreement.
<TABLE>
<CAPTION>
ACTUAL AS
COVENANT REQUIRED OF __________
<S> <C> <C>
- ------------------------------------------------------------------------------------------
Financial Statements Monthly w/in 28 days;
annually w/in 105 days; and
Borrowing Base Certificate
and A/R aging w/in 15 days of
each month
- ------------------------------------------------------------------------------------------
All documents filed with SEC Within 10 days after filing
- ------------------------------------------------------------------------------------------
Minimum Quick Ratio (cash & 1.25:1 at all times from ___.___:1
accounts receivable/current 12/31/94 through 8/31/95; ($__________ to $__________)
liabilities) 1.0:1 at all times thereafter
- ------------------------------------------------------------------------------------------
<PAGE>
-2-
- ------------------------------------------------------------------------------------------
Minimum Profitability Maximum Net Loss of
$3,500,000 for the fiscal
year ending 12/31/94; Maximum
Net Loss of $1,200,000 for
the quarter ending 3/31/95;
$1,000,000 for the quarter
ending 6/30/95; $850,000 for
the quarter ending 9/30/95;
$600,000 for the quarter
ending 12/31/95 and Minimum
Net Income of $1 for the
quarter ending 3/31/96 and
each quarter thereafter. $__________
- ------------------------------------------------------------------------------------------
Limit of Capital Maximum Capital Expenditure
Expenditures of $1,270,000 in any fiscal $__________
year
- ------------------------------------------------------------------------------------------
Limit on Operating Lease Maximum Lease Expense of
Payments $430,000
- ------------------------------------------------------------------------------------------
Minimum Tangible Net Worth $500,000 for the quarter
ending 12/31/94; $3,400,000
for the quarter ending
3/31/95; $2,500,000 for
quarter ending 6/30/95;
$1,700,000 for quarter ending
9/30/95; $1,400,000 for
quarter ending 12/31/95 and
$1,250,000 for quarter ending
3/31/96 and each quarter
thereafter.
- ------------------------------------------------------------------------------------------
Calculation of Tangible Net stockholders' equity $__________
Worth
- intangible assets $__________
- goodwill $__________
+ Subordinated Debt $__________]
Total Tangible Net Worth $__________
- ------------------------------------------------------------------------------------------
Maximum Ratio of Total 2.1:1 at all times ___.___:1
Senior Liabilities
($__________
to Tangible Net Worth) $__________]
- ------------------------------------------------------------------------------------------
A/R Advance Rate 50% of Eligible Domestic
Accounts Receivable. $__________
- ------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
-3-
Comments Regarding Exceptions:
Attached hereto are financial statements as of and for the fiscal
[month][year] ended on the Applicable Financial Statements Date, which have been
certified by the [undersigned] [Accountants] as required by Section 6.4 of the
Credit Agreement.
Submitted by:
By:
Name:
Title:
Date:
<PAGE>
EXHIBIT D
BORROWING BASE CERTIFICATE
The undersigned is an authorized officer of Digitran Corporation (the
"Borrower"), and is delivering this certificate pursuant to the requirements of
the Credit Agreement dated as of July 7, 1995 between Silicon Valley Bank (the
"Bank") and the Borrower, as amended through the date hereof (the "Credit
Agreement").
The undersigned hereby certifies to the Bank that the following is a fair,
accurate and complete report of the Borrowing Base (as such term is defined in
the Credit Agreement) of the Borrower as of , 199__ (the
"Relevant Date"):
I. ACCOUNTS RECEIVABLE ACTIVITY
A. Eligible Domestic Accounts Receivable: $
1. Balance as of the Relevant Date
2. Minus: Ineligible Accounts
Foreign Accounts
Amounts over 90 days due
Balance of 50% over 90 days accounts
Excess 25% Concentration
Contra Accounts
Intercompany/Employee Accounts
Government Accounts
Other Ineligible Accounts
Total Ineligible Accounts
3. Total Eligible Domestic Accounts Receivable (Line (1) minus
Line (2)) $
4. Funds Available (50% of Line (3)) $
II. EXTENSION OF CREDIT ACTIVITY
A. Total Funds Available:
(Limited to the lesser of $1,000,000 or the amount set forth
in I.A.4. $
B. Extension of Credit Balance as of the Relevant Date
$
C. Reserve Position (II.A minus II.B) $
Accompanying this certificate is a fair, accurate and complete report
of accounts receivable aging for the Borrower as of the Relevant Date, in
reasonable detail.
<PAGE>
-2-
The above listed collateral is subject to a security interest in favor of
the Bank pursuant to the terms of a Security Agreement executed by the Borrower
and the Bank.
Submitted By:
Name:
Title:
Date:
<PAGE>
EXHIBIT E
SILICON VALLEY BANK
LOAN PAYMENT/ADVANCE
TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., E.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE:
FAX#: 617-431-9906 TIME:
FROM:
CLIENT NAME (BORROWER)
REQUESTED BY:
AUTHORIZED SIGNERS NAME
AUTHORIZED SIGNATURE:
PHONE NUMBER:
FROM ACCOUNT # TO ACCOUNT #
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
PRINCIPAL INCREASE (ADVANCE) $
PRINCIPAL PAYMENT (ONLY) $
INTEREST PAYMENT (ONLY) $
PRINCIPAL & INTEREST (PAYMENT) $
OTHER INSTRUCTIONS:
BANK USE ONLY
TELEPHONE REQUEST:
The following person is authorized to request the loan payment transfer/
loan advance on the above designated account and is known to me.
AUTHORIZED REQUESTER PHONE #
RECEIVED BY (BANK) PHONE #
AUTHORIZED SIGNATURE (BANK)
<PAGE>
SCHEDULE A
Existing Indebtedness
OF DIGITRAN CORPORATION
Digitran Corporation
Equipment Lease Commitments
As of April 30, 1995
Equipment Lease Term Buyout
Lessor Cost Payment Date Price
Comdisco Inc.
Lease schedule 106,644 3,460 12/31/95 FMV
Buyout #268-00 60,000 5,185 9/30/95 $1.00
Buyout #268-02 24,925 2,164 3/31/96 $1.00
LTI Venture Leasing
($300,000 lease line)
Schedule 1 50,475 2,347 7/31/95 FMV
Schedule 2 97,334 4,477 4/30/96 FMV
Schedule 3 40,874 1,901 1/31/97 FMV
Schedule 4 13,575 524 2/28/97 FMV
Schedule 5 28,474 1,099 6/30/97
Schedule 6 130,118 4,515 1/31/98 13%
360,850 14,863
Phoenix Leasing Incorporated
($500,000 lease line)
Schedule 1 93,676 3,068 3/31/98 15%
Schedule 2 51,574 1,689 4/30/98 15%
145,250 4,757
<PAGE>
Schedule B
INTELLECTUAL PROPERTY
Trademark and Service Mark Registrations
NAME OF MARK REGISTRATION NO. REGISTRATION DATE
DIGITRAN THE FAX 1,768,897 5/4/93
NETWORK COMPANY
FAXASSURED 1,766,243 4/20/93
FAXSAVER 1,766,242 4/20/93
DIGITRAN 1,766,241 4/20/93
Trademark Application
NAME OF MARK APPLICATION NO. FILING DATE
FAXSAV 74/518,903 5/2/94
<PAGE>
SCHEDULE 7.2
The Borrower and Telstra Incorporated, a Delaware corporation and shareholder in
the Borrower ("Telstra"), signed a letter agreement on November 1, 1994 (the
"Letter Agreement"), which sets forth the basic terms of a Traffic Agreement
between the Borrower and Telstra. Under the terms of the Letter Agreement, the
Borrower and Telstra have agreed that (i) the Borrower will exclusively use
Telstra's "WorldFax" service for all of the Borrower's outbound traffic from the
United States, subject to customer acceptance, quality of service and
competitive pricing, (ii) pricing for the Borrower's use of Telstra's "WorldFax"
service is to be reviewed on a six-month basis, (iii) the arrangements are for a
period of five yeas commencing on the commercial commencement date of Telstra's
"WorldFax" service in the United States and (iv) Digitran has a right to use a
secondary carrier for outbound traffic from the United States in the event of a
"WorldFax" outage.
<PAGE>
LOAN DOCUMENT MODIFICATION AGREEMENT NO. 1
dated as of April 15, 1996,
amending, INTER ALIA,
CREDIT AGREEMENT
dated as of July 7, 1995
between
SILICON VALLEY BANK (the "Bank")
and
FAXSAV INCORPORATED (the "Borrower")
<PAGE>
LOAN MODIFICATION AGREEMENT
(NO. 1; DATED AS OF APRIL 15, 1996
LOAN DOCUMENT MODIFICATION AGREEMENT dated as of April 15, 1996 by and
between FAXSAV INCORPORATED, a Delaware corporation with its principal place of
business at 379 Thornall Street, Edison, New Jersey 08837 and formerly known as
Digitran Corporation (the "BORROWER") and SILICON VALLEY BANK (the "BANK"), a
California-chartered bank with its principal place of business at 3003 Tasman
Drive, Santa Clara, California 95054, and with a loan production office located
at Wellesley Office Park, 45 William Street, Wellesley, MA 02181, doing business
under the name "Silicon Valley East."
1. REFERENCE TO EXISTING LOAN DOCUMENTS.
Reference is hereby made to that Credit Agreement dated July 7, 1995
between the Bank and the Borrower (with the attached schedules and exhibits, the
"CREDIT AGREEMENT") and the Loan Documents referred to therein, including
without limitation that certain Promissory Note of the Borrower dated July 7,
1995 in the principal amount of $1,000,000 (the "WORKING CAPITAL NOTE"), and the
Security Documents referred to therein. Unless otherwise defined herein,
capitalized terms used in this Agreement shall have the same respective meanings
as set forth in the Credit Agreement.
2. EFFECTIVE DATE.
This Agreement shall become effective as of April 15, 1996 (the "EFFECTIVE
DATE"), provided that the Bank shall have received the following on or before
April 29, 1996 and provided further, however, in no event shall this Agreement
become effective until signed by an officer of the Bank in California:
a. two copies of this Agreement, duly executed by the Borrower;
b. an amended and restated promissory note (working capital line of
credit) in the form enclosed herewith (the "AMENDED WORKING CAPITAL NOTE"), duly
executed by the Borrower;
c. a promissory note in the principal amount of $750,000 in respect
of the Equipment Line Commitment in the form enclosed herewith (the "EQUIPMENT
LINE NOTE"), duly executed by the Borrower; and
d. evidence of the approval by your Board of Directors of this
Agreement the Amended Working Capital Note and the Equipment Line Note.
By the signature of its authorized officer below, the Borrower is hereby
representing that, except as modified in SCHEDULE A attached hereto, the
representations of the Borrower set forth in the Loan Documents (including those
contained in the Credit Agreement. as amended by this Agreement) are true and
correct as of the Effective Date as if made on and as of such date. In
addition, the Borrower confirms its authorization as to the debiting of its
account with the Bank in the aggregate amount of $5,000 in order to pay the
Bank's facility fee for the period up to and including the extended Commitment
Expiration Date. Finally, the Borrower agrees that, as of the Effective Date,
it has no defenses against its obligations to pay any amounts outstanding under
the Credit Agreement and the other Loan Documents.
<PAGE>
-2-
3. DESCRIPTION OF CHANGE IN TERMS.
As of the Effective Date, the Credit Agreement is modified in the following
respects:
a. Section 1.1 is hereby amended by deleting the words "the date
which is one year from the date set forth above" and substituting in place
thereof the date "April 14, 1997."
b. Section 1.4 is hereby amended and restated in its entirety to
read as follows:
"BORROWING BASE. The Borrower shall not permit, or request any advance
hereunder that would cause, the sum of the aggregate of all Working Capital
Line of Credit Loans under this Section 1 to exceed at any time an amount
equal to the lesser of (a) the Working Capital Line of Credit Commitment
and (b) 60% of all Eligible Domestic Accounts Receivable at such time MINUS
(until the occurrence of a Debt Service Coverage Event) the aggregate
outstanding amount of Equipment Line of Credit Loans under Section 1A
hereof (the lesser of (a) and (b) being referred to herein as the
"BORROWING BASE")."
c. Section 1.5 is hereby amended by deleting the date "July 7, 1996"
appearing in the second line thereof and substituting in place thereof the date
"April 14, 1997. "
d. There is hereby inserted immediately following Section 1 the
following new Section 1A:
"SECTION 1A EQUIPMENT LINE OF CREDIT LOANS.
"1A. AMOUNT. Subject to and upon the terms and conditions set forth
below, the Bank agrees to make loans (each an "EQUIPMENT LINE OF CREDIT
LOAN" and collectively, the "EQUIPMENT LINE OF CREDIT LOANS") to the
Borrower under this Section 1A.1 from time to time up to and including
October 14, 1996 (the "EQUIPMENT LINE COMMITMENT EXPIRATION DATE"), unless
earlier terminated pursuant to Section 1A.6, in an aggregate amount not to
exceed at any one time outstanding the lesser of (a) $750,000 and (b) until
the occurrence of a Debt Service Coverage Event, 60% of all Eligible
Domestic Accounts Receivable at such time LESS the aggregate outstanding
principal amount of Working Capital Line of Credit Loans (the "EQUIPMENT
LINE COMMITMENT"), subject to the limitation set forth in Section 1A.4.
"1A.2 EQUIPMENT NOTE. The Equipment Line of Credit Loans shall be
evidenced by and payable with interest in accordance with the note of the
Borrower in the form of attached EXHIBIT A-1, dated as of the date hereof
(the "EQUIPMENT LINE NOTE"). The Working Capital Line Note and the
Equipment Line Note are sometimes together referred to as the "BORROWER
NOTES."
"1A.3 REQUESTS FOR EQUIPMENT LINE LOANS. The Borrower may make
requests for Equipment Line of Credit Loans, and the Bank shall make such
loans in the same manner as provided in Section 1.3 with respect to Working
Capital Line of Credit Loans, except that together with the Notice of
Borrowing, the Borrower shall furnish to the Bank copies of all invoices
for items of Eligible Equipment and such other information as the Bank
shall reasonably request.
<PAGE>
-3-
"1A.4 RESTRICTIONS ON ADVANCES. Equipment Line of Credit Loans
may be made only with respect to an item or items of Eligible Equipment
specifically identified in accordance with Section 1A.3, and the principal
amount of any such Equipment Line of Credit Loans may not exceed 80% of the
invoice price of such item or items of Eligible Equipment, including sales
taxes, shipping charges, installation charges and similar charges and
expenses.
"1A.5 MATURITY DATE OF EQUIPMENT LINE LOANS. All Equipment Line
of Credit Loans shall be repayable in installments in accordance with the
terms of the Equipment Line Note, provided that all Equipment Line of
Credit Loans shall mature and the total principal amount thereunder shall
be prepayable on October 14, 1999 (the "EQUIPMENT LINE MATURITY DATE"), at
which time all amounts advanced under this Section 1A shall be immediately
due and payable.
"1A.6 TERMINATION OF COMMITMENT. The Borrower, upon (a) at least
two (2) Banking Days' prior written notice to the Bank and (b) the
repayment in full of the outstanding principal balance of the Equipment
Line of Credit Loans (and accrued interest thereon) and the payment in full
of any expenses or other fees owed by the Borrower to the Bank under or
pursuant to this Agreement, may elect to permanently terminate the
Equipment Line Commitment."
e. Section 2.1 (a) is hereby amended by deleting the phrase "Prime
Rate plus 2%" appearing in the fourth line thereof and substituting in place
thereof the phrase "Prime Rate plus 1/2%."
f. Subparagraph (b) of Section 2.1 is hereby relettered as
subparagraph "(c)" and is further amended by substituting for the words
"Extension of Credit" in the first line thereof the following: "any Working
Capital Line of Credit Loans or the Equipment Line of Credit Loans (together,
the "BORROWER LOANS")."
g. There is hereby inserted immediately following subparagraph (a)
of Section 2.1 the following new subparagraph (b):
"(b) The Borrower agrees to pay interest on the unpaid principal
amount of each Equipment Line of Credit Loan for each day from and
including the date such Equipment Line of Credit Loan was made to it,
but excluding the date the principal on such Equipment Line of Credit
Loan is due (whether at maturity, by acceleration or otherwise), at a
fluctuating rate per annum equal to the Prime Rate plus 1/2%, which
interest shall change when the Prime Rate shall change. Such interest
shall be payable monthly in arrears on the fourteenth day of each
month commencing with the first such date hereafter and when the
principal amount of such Equipment Line of Credit Loan is due (whether
at maturity, by acceleration or otherwise)."
h. Section 4 is hereby amended by deleting the words "Extensions of
Credit" appearing in the first line of the initial unnumbered paragraph thereof
and substituting in place thereof the words "Borrower Loans."
<PAGE>
-4-
i. Section 5 is hereby amended by deleting the words "Extensions of
Credit" in the first line and "Line of Credit Loans" appearing in the fourth
line of the initial unnumbered paragraph thereof and substituting in place
thereof the words "Borrower Loans."
j. Section 6.11 is hereby amended by inserting at the end thereof
the following:
"In addition, Borrower agrees to maintain a minimum monthly average
balance of $500,000 in one or more money market accounts at the Bank.
Borrower acknowledges and agrees that the rate of interest on the Borrower
Notes has been established based upon Borrower's compliance."
k. The text of Sections 7.9 is hereby deleted in its entirety and
there is hereby inserted in place thereof the following: "Not utilized."
l. Sections 7.12 through 7.16 of the Credit Agreement are amended in
their entirety to read as follows:
"7.12 CAPITAL EXPENDITURES. Neither the Borrower nor any of its
Subsidiaries shall either purchase or agree to purchase, or incur any
obligations for, any equipment or other property constituting fixed assets
in any fiscal year (excluding leases of real or personal property) where
the aggregate of such purchases or obligations would exceed $2,500,000.
"7.13 QUICK RATIO. The Borrower will not permit the Quick Ratio
at the end of any fiscal month, commencing with the month ending March 3 1,
1996, to be less than 1.25 to 1.
"7.14 MINIMUM PROFITABILITY. Commencing with the fiscal quarter
ending March 31, 1996, the Borrower will not permit (a) Net Losses to
exceed $1,600,000 for the quarter ending March 31, 1996; $950,000 for the
quarter ending June 30, 1996 and $200,000 for the quarter ending September
30, 1996; and (b) Net Income to be less than $1 for the quarter ending
December 31, 1996 and thereafter.
"7.15 LEVERAGE. The Borrower will not permit the ratio of Total
Senior Liabilities to Tangible Net Worth at the end of any fiscal month,
commencing with the month ending March 31, 1996, to be more than 1.75 to 1.
"7.16 TANGIBLE NET WORTH. The Borrower will not permit Tangible
Net Worth at the end of any fiscal month, commencing with the month ending
March 31, 1996, to be less than $3,500,000 PLUS (a) 100% of cumulative Net
Income earned by the Borrower after March 31, 1996 (with no offset for Net
Losses incurred in any month); and (b) 100% of the proceeds (net of
reasonable costs of issuance) from the sale of any shares of capital stock
of the Borrower."
m. There is inserted immediately following Section 7.16 the
following new Section 7.17 to read as follows:
"7.17 DEBT SERVICE COVERAGE. Following the first occurrence of a
Debt Service Coverage Event, the Borrower will not permit the Debt Service
Ratio for any fiscal quarter to be less than 1.5 to 1. "
<PAGE>
-5-
n. Section 9 is hereby amended by inserting the following additional
definitions in alphabetical order:
""BORROWER LOANS" shall have the meaning specified in Section 2.1(c)."
""BORROWER NOTES shall have the meaning specified in Section 1A.2."
""COMMITMENTS" shall mean the Working Capital Line Commitment and the
Equipment Line Commitment."
""DEBT SERVICE COVERAGE EVENT" shall mean an event that occurs when the
following conditions are satisfied:
"(a) The Borrower and its Subsidiaries shall in any two (2)
consecutive fiscal quarters, commencing with the fiscal quarter ending
March 31, 1996, have a Debt Service Ratio of at least 1.5 to 1; and
"(b) The Borrower shall have notified the Bank in writing of its
election that a Debt Service Coverage Event be deemed to have occurred; and
"(c) The Borrower shall have furnished to the Bank consolidated
financial statements of the Borrower and its Subsidiaries demonstrating
satisfaction of the condition referred to in CLAUSE (A) above."
""DEBT SERVICE RATIO" shall mean, for any fiscal period, the ratio of (a)
Net Income (Net Loss), PLUS the sum of depreciation and amortization for such
period, PLUS the sum of the aggregate amount of interest accrued during such
period on Indebtedness of the Borrower and its Subsidiaries on a consolidated
basis ("INTEREST EXPENSE") to (b) the sum of Interest Expense, the current
portion of Long-Term Indebtedness and obligations of the Borrower and its
Subsidiaries in respect of any capitalized lease."
""ELIGIBLE EQUIPMENT" means any items of equipment that the Borrower has
requested that the Bank finance the purchase of through an Equipment Line of
Credit Loan under this Agreement, and which, both on the date of such request
and the date of such loan, meets the following requirements:
"(a) such equipment is not (i) a motor vehicle, airplane or similar
mode of transportation, (ii) a fixture or leasehold improvement, or (iii)
intended by the Borrower to become a fixture or leasehold improvement;
"(b) such equipment has been purchased by the Borrower from the
manufacturer or a distributor thereof, has not been put in service by any
Person prior to the date of the invoice furnished to the Borrower by such
manufacturer or distributor, and has an invoice date of not earlier than
January 31, 1996 or later than October 14, 1996;
"(c) such equipment is owned solely by the Borrower and is not subject
to any leasehold interest, assignment, claim, lien or security interest,
other than a security interest in favor of the Bank pursuant to the
Security Agreement; and
<PAGE>
-6-
"(d) such equipment is in the possession of the Borrower and is
located in the State of New Jersey or another jurisdiction of which the
Borrower has given the Bank written notice."
""EQUIPMENT LINE COMMITMENT" shall have the meaning set forth in Section
1A.1."
""EQUIPMENT LINE EXPIRATION DATE" shall have the meaning specified in
Section 1A.1."
""EQUIPMENT LINE OF CREDIT LOANS" shall have the meaning set forth in
Section 1A.1."
""EQUIPMENT LINE MATURITY DATE" shall have the meaning specified in Section
1A.5."
""EQUIPMENT LINE NOTE" shall have the meaning set forth in Section 1A.l."
o. The definitions of "Line of Credit Loans" and "Extensions of
Credit" are hereby changed to "Working Capital Line of Credit Loans." The
definition of "Line of Credit Commitment" is hereby changed to "Working Capital
Line of Credit Commitment." All references to such terms throughout the Credit
Agreement and the other Loan Documents are changed accordingly.
p. All references to the term "Note" in Section 1 of the Credit
Agreement are changed to the term "Working Capital Line of Credit Note." All
other references to the term "Note" in the Credit Agreement and the other Loan
Documents shall (unless it is clear from the context that the reference is
solely to the Working Capital Line of Credit Note) shall be changed to refer to
"the Borrower Notes."
q. The Credit Agreement and the other Loan Documents are hereby
amended wherever necessary or appropriate to reflect the foregoing changes.
4. CONTINUING VALIDITY.
Upon the effectiveness hereof, each reference in each Security Instrument
or other Loan Document to "the Credit Agreement", "thereunder", "thereof",
"therein", or words of like import referring to the Credit Agreement, shall mean
and be a reference to the Credit Agreement, as amended hereby. Except as
specifically set forth above, the Credit Agreement shall remain in full force
and effect and is hereby ratified and confirmed. Each of the other Loan
Documents, is in full force and effect and is hereby ratified and confirmed.
The amendments set forth above (i) do not constitute a waiver or modification of
any term, condition or covenant of the Credit Agreement or any other Loan
Document, other than as expressly set forth herein, and (ii) shall not prejudice
any rights which the Bank may now or hereafter have under or in connection with
the Credit Agreement, as modified hereby, or the other Loan Documents and shall
not obligate the Bank to assent to any further modifications.
5. MISCELLANEOUS.
a. This Agreement may be signed in one or more counterparts each of
which taken together shall constitute one and the same document.
b. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS.
<PAGE>
-7-
c. THE BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS
PROPERTIES, UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR
FEDERAL COURT OF COMPETENT JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS IN
ANY ACTION, SUIT, OR PROCEEDING OF ANY KIND AGAINST IT WHICH ARISES OUT OF OR BY
REASON OF THIS LOAN MODIFICATION AGREEMENT; PROVIDED, HOWEVER, THAT IF FOR ANY
REASON LENDER CANNOT AVAIL ITSELF OF THE COURTS OF THE COMMONWEALTH OF
MASSACHUSETTS, THEN VENUE SHALL LIE IN SANTA CLARA COUNTY, CALIFORNIA.
d. The Borrower agrees to promptly pay on demand all costs and
expenses of the Bank in connection with the preparation, reproduction, execution
and delivery of this letter amendment and the other instruments and documents to
be delivered hereunder, including the reasonable fees and out-of-pocket expenses
of Sullivan & Worcester LLP, special counsel for the Bank with respect thereto.
[remainder of page intentionally blank]
<PAGE>
-8-
IN WITNESS WHEREOF, the Bank and the Borrower have caused this Agreement to
be signed under seal by their respective duly authorized officers as of the date
set forth above.
SILICON VALLEY EAST, a Division of Silicon
Valley Bank
By: /S/ JANE BRAUN
------------------------
Name: Jane Braun
Title: Vice President
SILICON VALLEY BANK
By: /S/ G. LINVILL
--------------------------
Name: G. Linvill
Title: SVP
(signed in Santa Clara, CA)
FAXSAV INCORPORATED
By:
---------------------------
Name:
Title:
<PAGE>
-8-
IN WITNESS WHEREOF, the Bank and the Borrower have caused this Agreement to
be signed under seal by their respective duly authorized officers as of the date
set forth above.
SILICON VALLEY EAST, a Division of Silicon
Valley Bank
By: /S/ JANE BRAUN
-----------------------
Name: Jane Braun
Title: Vice President
SILICON VALLEY BANK
By:
-----------------------
Name:
Title:
(signed in Santa Clara, CA)
FAXSAV INCORPORATED
By:
-----------------------
Name:
Title:
<PAGE>
-8-
IN WITNESS WHEREOF, the Bank and the Borrower have caused this Agreement to
be signed under seal by their respective duly authorized officers as of the date
set forth above.
SILICON VALLEY EAST, a Division of Silicon
Valley Bank
By:
-----------------------
Name: Jane Braun
Title: Vice President
SILICON VALLEY BANK
By:
-----------------------
Name:
Title:
(signed in Santa Clara, CA)
FAXSAV INCORPORATED
By: /S/ Peter S. Macaluso
--------------------------
Name: Peter S. Macaluso
Title: Vice President and CFO
<PAGE>
SCHEDULE A
QUALIFICATIONS AND SUPPLEMENTS TO PRIOR REPRESENTATIONS
See attached.
<PAGE>
FAXSAV INCORPORATED
EQUIPMENT LEASE COMMITMENTS
AS OF MARCH 31, 1996
EQUIPMENT LEASE TERM
LESSOR COST PAYMENT DATE
- ------ --------- ------- -------
LTI VENTURE LEASING
($300,000 lease line)
SCHEDULE 1 50,475 985 7/31/99
SCHEDULE 2 97,334 4,477 4/30/96
SCHEDULE 3 40,874 1,901 1/31/97
SCHEDULE 4 13,575 524 2/28/97
SCHEDULE 5 28,474 1,099 6/30/97
SCHEDULE 6 13,118 4,515 1/31/98
SCHEDULE 7 8,058 2,668 2/28/99
---------------------
251,908 16,169
PHOENIX LEASING
($500,000 lease line)
SCHEDULE 1 93,677 3,068 3/16/98
SCHEDULE 2 51,574 1,689 3/31/98
SCHEDULE 3 93,368 3,058 4/30/98
SCHEDULE 4 95,696 3,134 7/31/98
SCHEDULE 5 92,439 3,027 10/31/98
SCHEDULE 6 59,449 1,947 11/31/98
--------------------
486,202 15,923
FIRST UNITED LEASING 15,492 465 7/31/98
<PAGE>
AMENDED AND RESTATED PROMISSORY NOTE
(Working Capital Line of Credit Loans)
$1,000,000 Wellesley, Massachusetts
April 15, 1996 (Originally
dated July 7, 1995)
For value received, the undersigned, FAXSAV INCORPORATED, a Delaware
corporation (the "BORROWER"), promises to pay to SILICON VALLEY BANK (the
"BANK") at the office of the Bank located at 3003 Tasman Drive, Santa Clara,
California 95054, or to its order, the lesser of One Million Dollars
($1,000,000) or the outstanding principal amount hereunder, on April 14, 1997
(the "MATURITY DATE"), together with interest on the principal amount hereof
from time to time outstanding at a fluctuating rate per annum equal to the Prime
Rate (as defined below) plus one-half percent (1/2%) until the Maturity Date,
payable monthly in arrears on the fourteenth day of each calendar month
occurring after the date hereof and on the Maturity Date. The Borrower promises
to pay on demand interest at a per annum rate of interest equal to the Prime
Rate plus 5% on any overdue principal (and to the extent permitted by law,
overdue interest). The Bank's "Prime Rate" is the per annum rate of interest
from time to time announced and made effective by the Bank as its Prime Rate
(which rate may or may not be the lowest rate available from the Bank at any
given time).
Computations of interest shall be made by the Bank on the basis of a year
of 360 days for the actual number of days occurring in the period for which such
interest is payable.
This promissory note amends and restates the terms and conditions of the
obligations of the Borrower under the promissory note dated July 7, 1995 (the
"ORIGINAL NOTE") by the Borrower to the Bank. Nothing contained in this
promissory note shall be deemed to create or represent the issuance of new
indebtedness or the exchange by the Borrower of the Original Note for a new
promissory note. This promissory note is referred to in the credit agreement
dated July 7, 1995, as amended by a loan document modification agreement dated
as of April 15, 1996, by the Bank and accepted by the Borrower together with all
related schedules, as the same may be amended, modified or supplemented from
time to time (the "CREDIT AGREEMENT"), and is subject to optional and mandatory
prepayment as provided therein, and is entitled to the benefits thereof and of
the other Loan Documents referred to therein.
Each reference in each Loan Document (as defined in the Credit Agreement)
to "the Note", "thereof", "therein", "thereunder", or words of like import
referring to the Original Note, shall mean and be a reference to the Original
Note, as amended and restated hereby.
<PAGE>
-2-
Upon the occurrence of any Event of Default under, and as defined in, the
Credit Agreement, at the option of the Bank, the principal amount then
outstanding of and the accrued interest on the advances under this note and all
other amounts payable under this note shall become immediately due and payable,
without notice (including, without limitation, notice of intent to accelerate),
presentment, demand, protest or other formalities of any kind, all of which are
hereby expressly waived by the Borrower.
The Bank shall keep a record of the amount and the date of the making of
each advance pursuant to the Credit Agreement and each payment of principal with
respect thereto by maintaining a computerized record of such information and
printouts of such computerized record, which computerized record, and the
printouts thereof, shall constitute PRIMA FACIE evidence of the accuracy of the
information so endorsed.
The undersigned agrees to pay all reasonable costs and expenses of the Bank
(including, without limitation, the reasonable fees and expenses of attorneys)
in connection with the enforcement of this note and the other Loan Documents and
the preservation of their respective rights hereunder and thereunder.
No delay or omission on the part of the Bank in exercising any right
hereunder shall operate as a waiver of such right or of any other right of the
Bank, nor shall any delay, omission or waiver on any one occasion be deemed a
bar to or waiver of the same or any other right on any future occasion. The
Borrower and every endorser or guarantor of this note regardless of the time,
order or place of signing waives presentment, demand, protest and notices of
every kind and assents to any one or more extensions or postponements of the
time of payment or any other indulgences, to any substitutions, exchanges or
releases of collateral for this note, and to the additions or releases of any
other parties or persons primarily or secondarily liable.
THIS NOTE HAS BEEN DELIVERED TO THE BANK AND ACCEPTED BY THE BANK IN THE
STATE OF CALIFORNIA.
THE BORROWER HEREBY EXPRESSLY WAIVES ANY RIGHT IT MAY NOW OR HEREAFTER HAVE
TO A JURY TRIAL IN ANY SUIT, ACTION OR PROCEEDING WHICH ARISES OUT OF OR BY
REASON OF THIS NOTE, ANY LOAN DOCUMENT (AS DEFINED IN THE CREDIT AGREEMENT), OR
THE TRANSACTIONS CONTEMPLATED HEREBY.
BY ITS EXECUTION AND DELIVERY OF THIS NOTE, THE BORROWER ACCEPTS FOR ITSELF
AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NON
- -EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION
IN THE COMMONWEALTH OF MASSACHUSETTS (OR IF FOR ANY REASON ACCESS TO SUCH COURTS
IS DENIED TO THE BANK, THEN, IN THE STATE OF CALIFORNIA) IN ANY ACTION, SUIT OR
PROCEEDING OF ANY KIND AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS NOTE,
ANY LOAN DOCUMENT (AS DEFINED IN THE CREDIT AGREEMENT), OR THE TRANSACTIONS
CONTEMPLATED HEREBY, IN ADDITION TO ANY OTHER COURT IN WHICH SUCH ACTION, SUIT
OR PROCEEDING MAY BE BROUGHT, IRREVOCABLY
<PAGE>
-3-
AGREES TO BE BOUND BY ANY FINAL JUDGMENT RENDERED BY ANY SUCH COURT IN ANY SUCH
ACTION, SUIT OR PROCEEDING IN WHICH IT SHALL HAVE BEEN SERVED WITH PROCESS IN
THE MANNER HEREINAFTER PROVIDED, SUBJECT TO EXERCISE AND EXHAUSTION OF ALL
RIGHTS OF APPEAL AND TO THE EXTENT THAT IT MAY LAWFULLY DO SO, WAIVES AND AGREES
NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE, IN SUCH ACTION, SUIT
OR PROCEEDING ANY CLAIMS THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION
OF SUCH COURT, THAT ITS PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR
EXECUTION, THAT THE ACTION, SUIT OR PROCEEDING IS BROUGHT IN AN INCONVENIENT
FORUM OR THAT THE VENUE THEREOF IS IMPROPER, AND AGREES THAT PROCESS MAY BE
SERVED UPON IT IN ANY SUCH ACTION, SUIT OR PROCEEDING IN THE MANNER PROVIDED BY
CHAPTER 223A OF THE GENERAL LAWS OF MASSACHUSETTS, RULE 4 OF THE MASSACHUSETTS
RULES OF CIVIL PROCEDURE OR RULE 4 OF THE FEDERAL RULES OF CIVIL PROCEDURE.
ALL RIGHTS AND OBLIGATIONS HEREUNDER SHALL BE GOVERNED BY THE LAW OF THE
COMMONWEALTH OF MASSACHUSETTS AND THIS NOTE SHALL BE DEEMED TO BE UNDER SEAL.
FAXSAV INCORPORATED
By: /S/ Peter S. Macaluso
--------------------------
Name: Peter S. Macaluso
Title: Vice President and CFO
<PAGE>
PROMISSORY NOTE
(Equipment Line of Credit Loans)
$750,000 Edison, New Jersey
As of April 15, 1996
For value received, the undersigned, FAXSAV INCORPORATED, a Delaware
corporation formerly known as Digitran Corporation (the "BORROWER"), promises to
pay to SILICON VALLEY BANK (the "BANK") at the office of the Bank located at
3003 Tasman Drive, Santa Clara, California 95054, or to its order, the lesser of
(i) Seven Hundred Fifty Thousand Dollars ($750,000) or (ii) the principal
outstanding hereunder as of October 14, 1996, in thirty-six (36) equal monthly
installments payable on the fourteenth day of each month, commencing October 14,
1996 and ending on September 14, 1999 (the "MATURITY DATE"), but in no event
more than Seven Hundred Fifty Thousand Dollars ($750,000) in principal amount in
the aggregate, together with interest on the principal amount hereof from time
to time outstanding at a fluctuating rate per annum equal to the Prime Rate (as
defined below) plus one-half percent (1/2%) until the Maturity Date, payable
monthly in arrears on the last day of each calendar month occurring after the
date hereof and on the Maturity Date. The Borrower promises to pay on demand
interest at a per annum rate of interest equal to the Prime Rate plus 5% on any
overdue principal (and to the extent permitted by law, overdue interest). The
Bank's "Prime Rate" is the per annum rate of interest from time to time
announced and made effective by the Bank as its Prime Rate (which rate may or
may not be the lowest rate available from the Bank at any given time).
Computations of interest shall be made by the Bank on the basis of a year
of 360 days for the actual number of days occurring in the period for which such
interest is payable.
This note is the Equipment Line Note referred to in the Loan Document
Modification Agreement of even date herewith, which amended the credit agreement
dated as of July 7, 1995, between the Bank and the Borrower (together with all
related schedules), and as the same may be further amended, modified or
supplemented from time to time (the "CREDIT AGREEMENT"), and is entitled to the
benefits thereof and of the other Loan Documents referred to therein, and is
subject to optional and mandatory prepayment as provided therein. This note is
secured INTER ALIA by a Security Agreement dated as of July 7, 1995, herewith by
the Borrower in favor of the Bank, and as the same may be further amended,
modified or supplemented from time to time and by other Security Instruments
referenced in the Credit Agreement.
Upon the occurrence of any Event of Default under, and as defined in the
Credit Agreement, at the option of the Bank, the principal amount then
outstanding of and the accrued interest on the advances under this note and all
other amounts payable under this note shall become immediately due and payable,
without notice (including, without limitation, notice of intent to accelerate),
presentment, demand, protest or other formalities of any kind, all of which are
hereby expressly waived by the Borrower.
<PAGE>
-2-
The Bank shall keep a record of the amount and the date of the making of
each advance pursuant to the Credit Agreement and each payment of principal with
respect thereto either by maintaining a computerized record of such information
and printouts of such computerized record, which endorsement or computerized
record, and the printouts thereof, shall constitute PRIMA FACIE evidence of the
accuracy of the information so endorsed.
The undersigned agrees to pay all reasonable costs and expenses of the Bank
(including, without limitation, the reasonable fees and expenses of attorneys)
in connection with the enforcement of this note and the other Loan Documents and
the preservation of their respective rights hereunder and thereunder.
No delay or omission on the part of the Bank in exercising any right
hereunder shall operate as a waiver of such right or of any other right of the
Bank, nor shall any delay, omission or waiver on any one occasion be deemed a
bar to or waiver of the same or any other right on any future occasion. The
Borrower and every endorser or guarantor of this note regardless of the time,
order or place of signing waives presentment, demand, protest and notices of
every kind and assents to any one or more extensions or postponements of the
time of payment or any other indulgences, to any substitutions, exchanges or
releases of collateral for this note, and to the additions or releases of any
other parties or persons primarily or secondarily liable.
THIS NOTE SHALL BE DEEMED DELIVERED TO THE BANK AND ACCEPTED BY THE BANK IN
THE STATE OF CALIFORNIA.
THE BORROWER HEREBY EXPRESSLY WAIVES ANY RIGHT IT MAY NOW OR HEREAFTER HAVE
TO A JURY TRIAL IN ANY SUIT, ACTION OR PROCEEDING WHICH ARISES OUT OF OR BY
REASON OF THIS NOTE, ANY LOAN DOCUMENT (AS DEFINED IN THE CREDIT AGREEMENT), OR
THE TRANSACTIONS CONTEMPLATED HEREBY.
BY ITS EXECUTION AND DELIVERY OF THIS NOTE, THE BORROWER ACCEPTS FOR ITSELF
AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NON-
EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION
IN THE COMMONWEALTH OF MASSACHUSETTS (OR IF FOR ANY REASON ACCESS TO SUCH COURTS
IS DENIED TO THE BANK, THEN IN THE STATE OF CALIFORNIA) IN ANY ACTION, SUIT OR
PROCEEDING OF ANY KIND AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS NOTE,
ANY LOAN DOCUMENT (AS DEFINED IN THE CREDIT AGREEMENT), OR THE TRANSACTIONS
CONTEMPLATED HEREBY, IN ADDITION TO ANY OTHER COURT IN WHICH SUCH ACTION, SUIT
OR PROCEEDING MAY BE BROUGHT, IRREVOCABLY AGREES TO BE BOUND BY ANY FINAL
JUDGMENT RENDERED BY ANY SUCH COURT IN ANY SUCH ACTION, SUIT OR PROCEEDING IN
WHICH IT SHALL HAVE BEEN SERVED WITH PROCESS IN THE MANNER HEREINAFTER
PROVIDED, SUBJECT TO EXERCISE AND EXHAUSTION OF ALL RIGHTS OF APPEAL AND TO THE
EXTENT THAT IT MAY LAWFULLY DO SO, WAIVES AND AGREES NOT TO ASSERT, BY WAY OF
MOTION, AS A DEFENSE OR OTHERWISE, IN SUCH ACTION, SUIT OR PROCEEDING ANY CLAIMS
THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF
<PAGE>
-3-
SUCH COURT, THAT ITS PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION,
THAT THE ACTION, SUIT OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT
THE VENUE THEREOF IS IMPROPER, AND AGREES THAT PROCESS MAY BE SERVED UPON IT IN
ANY SUCH ACTION, SUIT OR PROCEEDING IN THE MANNER PROVIDED BY CHAPTER 223A OF
THE GENERAL LAWS OF MASSACHUSETTS, RULE 4 OF THE MASSACHUSETTS RULES OF CIVIL
PROCEDURE OR RULE 4 OF THE FEDERAL RULES OF CIVIL PROCEDURE.
ALL RIGHTS AND OBLIGATIONS HEREUNDER SHALL BE GOVERNED BY THE LAW OF THE
COMMONWEALTH OF MASSACHUSETTS AND THIS NOTE SHALL BE DEEMED TO BE UNDER SEAL.
FAXSAV INCORPORATED
By: /S/ Peter S. Macaluso
----------------------------
Name: Peter S. Macaluso
Title: Vice President and CFO
<PAGE>
EXHIBIT C
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM:FAXSAV INCORPORATED
The undersigned authorized officer (the "Officer") of FaxSav Incorporated
("Borrower") hereby certifies that in accordance with the terms end conditions
of the Credit Agreement between Borrower and Silicon Valley Bank, as amended
(the "Agreement"), (i) Borrower is in complete compliance for the period ending
3/31/96 with all covenants except as noted below and (ii) all representations
and warranties of Borrower stated in the Agreement are true and correct in all
material respects as if made on and as of the date hereof. Attached herewith
are the required documents supporting the above certification. The Officer
further certifies that these are prepared in accordance with Generally Accepted
Accounting Principles (GAAP) and are consistently applied from one period to the
next except as explained in an accompanying letter or footnotes. The Officer
expressly acknowledges that no borrowings may be requested by the Borrower at
any time if on the date of determination the Borrower is not in compliance with
any of the terms of the Agreement, and that such compliance is determined not
just at the date this certificate is delivered.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES"
COLUMN.
Reporting Covenant Required Complies
- ------------------ -------- --------
Monthly financial statements Monthly within 28 days Yes No
Annual (CPA Audited) FYE within 105 days Yes No
A/R Aging Monthly within 15 days Yes No
A/R Audit Initial and Semi-Annual Yes No
Financial Covenant Required Actual Complies
- ------------------ -------- ------ --------
Maintain on a Monthly Basis:
Minimum Quick Ratio 1.25:1.0 1.61:1.0 Yes No
Minimum Tangible Net Worth $3,500,000 $4,866,430 Yes No
Maximum Leverage Ratio 1.75:1.0 1.02:10 Yes No
Minimum Debt Service Ratio 1.50:1.0 N/A:1.0 Yes No
Profitability: Maximum Net Loss
for Quarters ending:
3/31/96 $1,600,000 $1,519,085 Yes No
6/30/96 $ 950,000 $___________ Yes No
9/30/96 $ 200,000 $___________ Yes No
Minimum Net Income
for Quarters ending
on or after:
12/31/96 $ 1 $___________ Yes No
- -------------------
PLUS 100% of cumulative Net Income (with no offset for Net Losses for any month)
earned during March 1996 and any month thereafter, PLUS 100% of the proceeds
(net of reasonable costs of Issuance) of the sale of shares of capital stock.
<PAGE>
Comments Regarding Exceptions: See Attached.
Sincerely,
/S/ Peter S. Macaluso
- ----------------------------
Signature: Peter S. Macaluso
Title: Vice President and CFO
Date:
<PAGE>
- --------------------------------------------------------------------------------
CERTIFICATE OF SECRETARY
BORROWER: FaxSav Incorporated LENDER: Silicon Valley Bank
379 Thornall Street 3003 Tasman Drive
Edison, NJ 08837 P.O. Box 3762
Santa Clara, CA 95054
- --------------------------------------------------------------------------------
I, Peter S. Macaluso, hereby certify (1) that I am the duly elected,
qualified and acting Secretary of FaxSav Incorporated, a Delaware corporation
(the "Company"), and (2) that attached hereto as EXHIBIT A is a true, correct
and complete copy of certain resolutions duly adopted by the Board of Directors
of the Company on April 18, 1996 authorizing and approving, among other things,
the execution, delivery and performance of the Loan Document Modification
Agreement (No. 1) dated as of April 15, 1996, amending the Credit Agreement
dated July 7, 1995 (as so amended and modified, the "Credit Agreement") by and
between the Company and Silicon Valley Bank (the "Bank"), and the other
agreements and transactions contemplated thereby, including without limitation
the issuance to the Bank by the Borrower of (A) the Borrower's Amended and
Restated Promissory Note (Working Capital Line of Credit Loans) dated April 15,
1996 in the original principal amount of up to $1,000,000 and (B) the Borrower's
Promissory Note (Equipment Line of Credit Loans) dated as of April 15, 1996 in
the original principal amount of up to $750,000. Said resolutions have not been
amended or repealed and remain in full force and effect on the date hereof.
IN WITNESS WHEREOF, I have signed this certificate and affixed the
corporate seal of the Company.
Dated: April 26, 1996 /s/ Peter S. Macaluso
-------------- ---------------------
Secretary
[Corporate Seal]
<PAGE>
-2-
I, Thomas F. Murawski, President of the Company do hereby certify that
Peter S. Macaluso is on the date hereof the duly elected or appointed, qualified
and acting Secretary of the Company, and the signature set forth above is the
genuine signature of such officer.
/s/ Thomas F. Murawski
-----------------------
<PAGE>
EXHIBIT A
RESOLVED: That the form, terms and conditions of (A) the Loan Document
Modification Agreement (No. 1) and the attached Schedules and
Exhibits (collectively, the "Loan Modification") to be entered into
by and between Silicon Valley Bank (the "Bank") and the Corporation
to modify and amend the Credit Agreement dated July 7, 1995 by and
between the Bank and the Corporation (as so amended and modified,
the "Credit Agreement"), pursuant to which the Bank will make
available to the Corporation a $1,000,000 working-capital line of
credit and a $750,000 equipment-loan line of credit, and (B) the
Amended and Restated Promissory Note (Working Capital Line of Credit
Loans) in the original principal amount of up to $1,000,000 and the
Promissory Note (Equipment Line of Credit Loans) in the original
principal amount of up to $750,000 to be executed pursuant to the
Loan Modification and the Credit Agreement (together, the "Notes"),
which form, terms and conditions have been presented to and reviewed
by the Board of Directors, be, and they hereby are, approved and
adopted; and further
RESOLVED: That the President, any Vice President and the Chief Financial Officer
(the "Authorized Officers") of the Corporation be, and each of them
hereby is, authorized, empowered and directed, in the name and on
behalf of the Corporation, (A) to execute, under its corporate seal
if necessary, and to deliver the Loan Modification and the Notes to
be issued by the Corporation pursuant thereto in substantially the
forms adopted with such changes as any such officer shall, in his
sole discretion approve, such approval to be conclusively evidenced
by such Authorized Officer's execution thereof, and (B) to request
extensions of credit from time to time as contemplated by the Credit
Agreement and the Notes, whether in the form of loan advances,
letters of credit or otherwise; and further
RESOLVED: That the Authorized Officers of the Corporation be, and each of them
singly hereby is, authorized and empowered, in the name and on behalf
of the Corporation, to prepare, execute, deliver, file and record any
and all agreements, certificates, and other documents and instruments
(including, without limitation, any letter of credit applications or
foreign exchange contracts), to request advances under the
aforementioned Credit Agreement on behalf of the Corporation (whether
in the form of loan advances, letters of credit or otherwise), to take
any action as they or any of them may deem necessary or appropriate in
order to effectuate fully the purposes of the foregoing resolutions
and the transactions contemplated thereby, and to enter into on behalf
of the Corporation any amendments, modifications or extensions to the
Credit Agreement, the Notes or any security instruments or other
document contemplated thereby as such officer may deem necessary or
appropriate including, without limitation, any modification that
increases the amount that the Corporation may borrow from the Bank
under the Credit Agreement or otherwise; and further
RESOLVED: That any and all acts of the type authorized pursuant to these
resolutions and performed prior to adoption and approval of these
resolutions are hereby ratified and approved, that these resolutions
Shall remain in full force and effect as long
<PAGE>
-2-
as any obligations are owing to the Bank or as long as the Bank is
committed to make extensions of credit to the Company and the Bank may
rely on these resolutions until written notice of their revocation
shall have been delivered to and received by the Bank; provided,
however, any such notice shall not affect any of the Corporation's
agreements or commitments in effect or any of its obligations
outstanding at the time such notice is given.
<PAGE>
August 2, 1996
Peter Macaluso
Chief Financial Officer
FaxSav, Inc.
399 Thornall Street
3rd Floor
Edison, NJ 08837
Dear Peter:
Silicon Valley Bank ("Bank") hereby waives FaxSav Inc.'s ("Company") existing
default under the Loan as a result of FaxSav Inc.'s failure to comply with
the Profitability covenant as of the quarter ended June 30, 1996; the Quick
Ratio covenant as of the month ended June 30, 1996; and the TNW covenant as
of the month ended June 30, 1996.
Silicon Valley Bank's agreement to waive the above-described defaults
(1) in no way shall be deemed an agreement by the Bank to waive FaxSav, Inc.'s
compliance with the above-described covenants as of all other dates and
(2) shall not limit or impair the Bank's right to demand strict performance
of these covenants as of all other dates and (3) shall not limit or impair
the Bank's right to demand strict performance of all other covenants as of
any date. Furthermore, the Bank agrees to revise these covenants for the
period ending July 31, 1996 and thereafter, as per the attached Term Sheet.
Sincerely,
/s/ Joan S. Parsons
- ----------------------
Joan S. Parsons
Senior Vice President
Technology Division
Agreed and Accepted this 2nd day of August, 1996.
By: /s/ Peter S. Macaluso
Title: Vice President and CEO
<PAGE>
FAXSAV, INC.
------------
FACILITY: A) $1,000,000 Revolving Line of Credit.
B) $750,000 Equipment Line of Credit.
TOTAL OUTSTANDINGS LIMITED TO
$1,000,000 UNTIL IPO OR ADDITIONAL
EQUITY IS RAISED.
RATE: A) Prime +0.5%
B) Prime +0.5%
FEE: Aggregate modification fee of $2,500.00.
EXPIRATION: A) 4/14/97
B) 10/14/96
ADVANCE RATE: A) 60% of eligible domestic A/R under
90 days from invoice.
B) 80% of eligible equipment purchases
subsequent to 1/31/96.
COLLATERAL: All Corporate Assets, including
Intellectual Property.
COVENANTS:
Profitability: (tested quarterly): Maximum loss of
($2,100,000) for the quarter ending
9/30/96; Maximum loss of ($1,500,000)
for the quarter ending 12/31/96; and
Maximum loss of ($1,100,000) for the
quarter ending 3/31/97.
<PAGE>
Liquidity: (tested monthly): Minimum Quick Ratio
of 0.6:1 for the months ending 7/31/96
through 9/30/96; increasing to 1.25:1 for
the month ending 10/31/96 and
thereafter.
Leverage: (tested monthly): Total Liabilities
divided by TNW not to exceed 2.2:1 for
the month ending 7/31/96; 2.7:1 for the
month ending 8/31/96; 3.35:1 for the
month ending 9/30/96; and 1.75:1 for the
month ending 10/31/96 and thereafter.
Tangible Net Worth: (tested monthly): Minimum
Tangible Net Worth of $1,000,000 for the
months ending 7/31/96 through 9/30/96;
and $3,500,000 for the month ending
10/31/96 and thereafter.
Tangible Net Worth is defined as equity
plus Subordinated Debt minus Intangible
Assets.
EQUITY EVENT: IPO MUST OCCUR ON OR BEFORE 10/15/96
OR THE COMPANY MUST CLOSE ON
ADDITIONAL EQUITY IN THE MINIMUM
AMOUNT OF $3,000,000 BY 10/15/96.
REPORTING: Monthly financials and Certificate of
Compliance within 30 days.
Borrowing Base Certificate and A/R
aging within 15 days.
Audited fiscal within 90 days.
OTHER: Primary operating account at SVB.
Some portion of excess funds at SVB.
Legal costs for account of Borrower.
Examination of Company's A/R by an
agent of the Bank at Company's expense.
<PAGE>
Silicon Valley East 40 William Street, Suite 360
A Division of Silicon Valley Bank Wellesley, MA 02181 617-431-9901
October 8, 1996
Peter S. Macaluse
Vice President & Chief Financial Officer
FaxSav Incorporated
399 Thernall Street
Edison, N.J. 08837
Dear Peter:
Per our telephone conversation earlier today, below is a recap of the Bank
approved changes to FaxSav Inc.'s Credit Facilities:
- - The closing date for an IPO or private placement shall be changed from the
existing date of October 15, 1996 to October 30, 1996:
- - Upon the (1) successful completion of an IPO with net proceeds to the
Company of no less than $12,000,000 and (2) payment in full of the line of
credit balance (the line will be terminated; no additional borrowings will
be permitted), all existing covenants will be dropped and the following
covenant will be added; Minimum cash and short-term investments shall at
all times be equal to at least two times the term loan balance
outstanding. This covenant will be tested quarterly.
In addition, the Bank agrees to:
(1) release its all asset lien and terminate the negative pledge but
retain a perfected security interest in the assets financed by the term
loan;
(2) change the reporting requirements so that the Bank receives the
Company's 10Qs and 10Ks within 5 days of filing and a copy of the audited
annual report within 90 days of a fiscal year end;
(3) no longer require an accounts receivable audit.
Peter, if these changes meet with your approval, please sign in the space
provided below. There will be a $500.00 fee associated with this modification
which will be due upon your acceptance. Once I receive a signed copy of this
letter back from you, I will have these terms put into a legal document.
If you have any questions with regard to these changes, please call me at
(617) 431-9909.
Sincerely
/s/ Jane A. Braun
- -----------------
Jane A. Braun
Vice President
ACCEPTED BY:
/s/ Peter Macaluso
- ----------------------
Peter Macaluso, VP and CFO
cc: Diane Raven, Documentation Specialist, SVB
(Member FDIC)
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-1 (File
No. 333-9613) of FaxSav Incorporated of our reports dated March 29, 1996, on our
audits of the financial statements and financial statement schedule of FaxSav
Incorporated (formerly Digitran Corporation). We also consent to the reference
to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Parsippany, New Jersey
October 10, 1996