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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from______ to ______
Commission file number 0-09613
FAXSAV INCORPORATED
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(Exact name of registrant as specified in its character)
Delaware 11-3025769
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
399 Thornall Street, Edison, New Jersey 08837
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(Address of principal executive offices)
Registrant's telephone number, including area code (732) 906-2000
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT.
Indicate by a check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 9,795,654 shares of the
Company's Common Stock, $.01 par value, were outstanding as of May 9, 1997.
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FAXSAV INCORPORATED
INDEX TO SEPTEMBER 30, 1997 FORM 10-Q
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PAGE
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Part I--Financial Information
Item 1. Financial Statements
Condensed Balance Sheets--September 30, 1997 and December 31, 1996............................... 3
Condensed Statements of Operations -Three and Nine Months Ended September 30, 1997 and 1996...... 4
Condensed Statements of Cash Flow--Nine Months Ended September 30, 1997 and 1996................. 5
Notes to Condensed Financial Statements.......................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 8
Part II--Other Information
Item 1. Legal Proceedings................................................................................ 17
Item 2. Changes in Securities............................................................................ 17
Item 3. Defaults upon Senior Securities.................................................................. 17
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 17
Item 5. Other Information................................................................................ 17
Item 6. Exhibits and Reports on Form 8-K................................................................. 17
Signatures....................................................................................... 19
</TABLE>
2
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FAXSAV INCORPORATED
CONDENSED BALANCE SHEETS
<TABLE>
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SEPTEMBER 30,
1997 DECEMBER 31,
(UNAUDITED) 1996
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ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 2,529,911 $ 7,923,105
Marketable securities............................................................ 0 1,002,513
Accounts receivable, net of allowances of $337,663 and $229,376 for September 30,
1997 and December 31, 1996, respectively....................................... 2,305,616 2,015,155
Prepaid expenses and other current assets........................................ 29,975 251,417
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Total current assets............................................................. 4,865,502 11,192,190
Property and equipment, net........................................................ 4,261,211 3,495,820
Other assets, net.................................................................. 156,738 169,211
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Total assets....................................................................... $ 9,283,451 $ 14,857,221
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 238,677 $ 263,446
Accrued expenses and other liabilities........................................... 3,414,242 3,822,762
Obligation under capital lease................................................... 307,222 282,776
Current portion of notes payable................................................. 283,042 152,111
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Total current liabilities.......................................................... 4,243,183 4,521,095
Obligation under capital lease..................................................... 164,393 398,662
Notes payable...................................................................... 824,189 278,871
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Total liabilities.................................................................. 5,231,765 5,198,628
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock,$0.01 par value;40,000,000 shares authorized; 9,817,043 and
9,792,010 shares issued and 9,795,654 and 9,770,621 shares outstanding as of
September 30, 1997 and December 31, 1996, respectively......................... 97,957 97,706
Additional paid-in capital....................................................... 34,639,806 34,616,745
Accumulated deficit.............................................................. (30,686,062) (25,055,843)
Treasury stock, at cost 21,389 common shares as of September 30, 1997 and
December 31, 1996.............................................................. (15) (15)
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Total stockholders' equity......................................................... 4,051,686 9,658,593
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Total liabilities and stockholders' equity......................................... $ 9,283,451 $ 14,857,221
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</TABLE>
The accompanying notes are an integral part of the condensed financial
statements
3
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FAXSAV INCORPORATED
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ----------------------------
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Revenues.............................................. $ 4,423,634 $ 3,769,544 $ 12,814,578 $ 11,214,710
Cost of service....................................... 2,549,938 2,223,875 7,830,668 6,504,356
------------ ------------- ------------- -------------
Gross margin.......................................... 1,873,696 1,545,669 4,983,910 4,710,354
Operating expenses:
Network operations and support........................ 596,832 545,093 1,668,826 1,412,872
Research and development.............................. 482,795 525,193 1,415,871 1,306,056
Sales and marketing................................... 1,211,031 1,510,809 3,995,562 4,534,113
General and administrative............................ 797,466 576,552 2,403,232 1,951,864
Depreciation and amortization......................... 451,408 343,117 1,297,343 929,964
------------ ------------- ------------- -------------
Operating loss........................................ (1,665,836) (1,955,095) (5,796,924) (5,424,515)
Interest income ( expense ), net...................... (597) (20,440) 96,831 (28,375)
Other income.......................................... 22,411 25,597 69,874 70,878
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Net loss.............................................. ($ 1,644,022) ($ 1,949,938) ($ 5,630,219) ($ 5,382,012)
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Historical net loss per common and equivalent share... ($ 0.17) ($ 3.66) ($ 0.58) ($ 10.55)
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Shares used in computing historical net loss per
common and equivalent share......................... 9,795,654 532,196 9,793,064 509,561
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Pro forma net loss per common and equivalent share.... ($ 0.17) ($ 0.23) ($ 0.58) ($ 0.63)
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Shares used in computing pro forma net loss per common
and equivalent share................................ 9,795,654 8,323,183 9,793,064 8,514,098
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</TABLE>
The accompanying notes are an integral part of the condensed financial
statements
4
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FAXSAV INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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NINE MONTHS ENDED
SEPTEMBER 30,
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1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................................................... ($ 5,630,219) ($ 5,382,012)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense........................................... 1,297,343 929,964
Provision for doubtful accounts................................................. 175,520 183,300
Provision for unrecoverable equipment........................................... (20,000) 150,000
Changes in assets and liabilities:
Accounts receivable............................................................. (465,981) (254,317)
Prepaid expenses and other current assets....................................... 221,442 (477,590)
Other assets.................................................................... (11,729) (90,425)
Accounts payable................................................................ (24,769) 753,993
Accrued expenses and other liabilities.......................................... (388,519) 688,920
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Net cash used in operating activities......................................... (4,846,912) (3,498,167)
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CASH FLOWS USED IN INVESTING ACTIVITIES:
Proceeds from maturity of marketable securities................................... 1,002,513 0
Purchase of property and equipment................................................ (2,038,532) (1,793,632)
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Net cash used in investing activities............................................. (1,036,019) (1,793,632)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments made under capital lease obligation.......................... (209,823) (157,743)
Repayments of note payable...................................................... (132,485) (1,000,000)
Proceeds from note payable...................................................... 808,734 956,334
Proceeds from issuance of preferred stock, net.................................. 0 7,932,715
Proceeds from exercise of stock options and warrants............................ 23,311 0
Treasury stock acquired......................................................... 0 (2,163,878)
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Net cash provided by financing activities........................................... 489,737 5,567,428
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NET INCREASE(DECREASE).............................................................. (5,393,194) 275,629
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................................... 7,923,105 552,370
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CASH AND CASH EQUIVALENTS AT END OF PERIOD.......................................... $ 2,529,911 $ 827,999
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NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired under capital lease.......................................... 0 $ 421,805
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Issuance of common stock under option pursuant to severance agreement........... 0 $ 42,091
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</TABLE>
The accompanying notes are an integral part of the condensed financial
statements
5
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FAXSAV INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited condensed financial statements included herein have been
prepared by the Company in accordance with the requirements of Form 10-Q, and
consequently do not include disclosures normally made in the annual report on
Form 10-K. The December 31, 1996 results included herein have been derived
from the audited financial statements included in the Company's annual report
on Form 10-K. However, the Company believes that the disclosures are adequate
to make the information presented not misleading. These condensed financial
statements should be read in conjunction with the financial statements and
the notes thereto included in its Annual Report on Form 10-K for the year
ended December 31, 1996.
The unaudited condensed financial statements included herein reflect all
adjustments (which include only normal, recurring adjustments) which are, in the
opinion of management, necessary to state fairly the results for the three and
nine month periods ended September 30, 1997 and 1996. The results for the three
and nine month periods ended September 30, 1997 are not necessarily indicative
of the results expected for the full fiscal year.
2. PRO FORMA NET LOSS PER COMMON AND EQUIVALENT SHARE
Pro forma net loss per common and equivalent share for the three and nine
months ended September 30, 1996, 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 completed in
October 1996 prior to the effective date of the Company's registration statement
on Form S-1 and conversion of all outstanding preferred stock into 7,791,981
shares of common stock. 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.
3. 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.
4. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128"),
designed to improve the EPS information provided in the financial statements by
simplifying the existing computational guidelines, revising disclosure
requirements, and increasing comparability of EPS data on an international
basis. The statement requires dual presentation of basic and diluted EPS on the
face of the income statement and a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. The adoption of this standard is required for the
fiscal year ending December 31, 1997. The Company has not yet assessed the
impact of SFAS No. 128 on the Company's results of operations.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income". SFAS No. 130 establishes the standards for
reporting and displaying comprehensive income and its components (revenues,
expenses, gains, and losses) as part of a full set of financial statements. This
statement requires that all elements of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. For the Company SFAS 130 is effective for fiscal years
beginning after
6
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December 15, 1997. Since this standard applies only to the presentation of
comprehensive income, it will not have any impact on the Company's results of
operations, financial position or cash flows.
In June 1997, the Financial Accounting Standards Board also issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information". SFAS
No. 131 establishes the standards for the manner in which public enterprises are
required to report financial and descriptive information about their operating
segments. The standard defines operating segments as components of an enterprise
for which separate financial information is available and evaluated regularly as
a means for assessing segment performance and allocating resources to segments.
In addition, this standard requires the disclosure of information concerning
revenues derived from the enterprise's products or services, countries in which
it earns revenue or holds assets, and major customers. For the Company SFAS 131
is also effective for fiscal years beginning after December 15, 1997.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
FaxSav Incorporated (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. In the fourth
quarter of 1996, the Company began offering fax-to-fax services through local
resellers in certain countries where an Internet node was installed. 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 plans to continue to install Internet nodes in key international
telecommunications markets to enable the Company ultimately to route a
majority of its customers' traffic through the Internet.
THIS REPORT CONTAINS CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE RELATING TO
FUTURE EVENTS OF THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY. STOCKHOLDERS
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
REPORT, INCLUDING THE MATTERS SET FORTH UNDER THE CAPTION "CERTAIN FACTORS THAT
MAY AFFECT FUTURE RESULTS, FINANCIAL CONDITION AND THE MARKET PRICE OF
SECURITIES," WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
INDICATED BY SUCH FORWARD-LOOKING STATEMENTS.
RESULTS OF OPERATIONS
The following table represents unaudited financial information expressed as a
percentage of total revenues for the periods indicated. The Company believes
that this information has been presented on a basis consistent with the
Company's audited financial statements and includes all adjustments,
consisting only of normal recurring adjustments that management considers
necessary for a fair presentation for the periods presented.
<TABLE>
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
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1997 1996 1997 1996
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Percentage of Revenues:
Revenues................................................... 100.0% 100.0% 100.0% 100.0%
Cost of service............................................ 57.6 59.0 61.1 58.0
--------- --------- --------- ---------
Gross margin............................................... 42.4 41.0 38.9 42.0
--------- --------- --------- ---------
Operating expenses
Net operations and support............................... 13.5 14.5 13.0 12.6
Research and development................................. 10.9 14.0 11.1 11.7
Sales and marketing...................................... 27.4 40.1 31.2 40.4
General and administrative............................... 18.0 15.3 18.8 17.4
Depreciation and amortization............................ 10.2 9.1 10.1 8.3
--------- --------- --------- ---------
Total operating expenses............................. 80.0 92.9 84.2 90.4
--------- --------- --------- ---------
Operating loss............................................. (37.6) (51.9) (45.3) (48.4)
--------- --------- --------- ---------
Interest income (expense), net............................. 0.0 (0.5) 0.8 (0.2)
Other income............................................... 0.5 0.7 0.6 0.6
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Loss before income taxes................................... (37.1) (51.7) (43.9) (48.0)
Provision for income taxes................................. -- -- -- --
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Net loss................................................... (37.1)% (51.7)% (43.9)% (48.0)%
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8
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THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
REVENUES. Revenues, which consist primarily of customer usage charges, grew
17.4% to $4.4 million in the three months ended September 30, 1997 from $3.8
million in the three months ended September 30, 1996 primarily as a result of
the continued expansion of the Company's customer base, development of an
international fax-to-fax customer base in 1997, and increased revenues from
the Company's faxSAV EZ-List broadcast service and faxSAV for Internet suite
of services first introduced in the first quarter of 1996.
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 three months ended September 30, 1997 to 57.6% from 59.0% in the three
months ended September 30, 1996. The decreased percentage is a result of
transmitting an increased level of customer faxes over the Company's global
Internet network and lower costs for International telephony termination fax
charges.
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 $0.6 million for the three month period ended September 30, 1997 in
comparison to $0.5 million in the three months ended September 30, 1996 but
decreased to 13.5% of revenues in the 1997 period from 14.5% of revenues in
the 1996 period due to higher revenues in 1997.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries and consulting fees paid to software engineers and
development personnel largely for the continuing development efforts for
enhancements to the company's Internet desktop-to-fax services and faxSAV
EZ-List broadcast service. Research and development expenses amounted to $0.5
million for the three months ended September 30, 1997 and 1996. As a
percentage of revenues, these expenses decreased to 10.9% in the three months
ended September 30, 1997 from 14.0% in the three months ended September 30,
1996 as a result of the increase in revenues in the 1997 period.
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 decreased to $1.2
million for the three months ended September 30, 1997 in comparison to $1.5
million in the three months ended September 30, 1996, primarily as a result
of reduced spending for third party telemarketing programs in the 1997 period
in connection with the Company's change in focus to a direct selling group
and higher expenses incurred in the 1996 period for trade shows and an
advertising and promotion campaign for the introduction of the faxSAV for
Internet suite of services. As a percentage of revenues, these costs
decreased to 27.4% from 40.1% for the 1997 and 1996 periods, respectively, as
a result of reduced spending and higher revenues.
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 $0.8 million and 18.0% of revenues in the three months ended
September 30, 1997 from $0.6 million and 15.3% of revenues in the three
months ended September 30, 1996. The increase in total general and
administrative expenses and the percentage of revenues result from (1)
personnel increases to support the increased customer base and to develop
management information systems and (2) expenses incurred in 1997 related to
the continuing filing and other requirements for the company's publicly
traded stock.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to
$0.5 million and 10.2% of revenues in the three months ended September 30,
1997 in comparison to $0.3 million and 9.1% of revenues in the three months
ended September 30, 1996 primarily reflecting depreciation of the Company's
increased investment in international Internet nodes to implement the
Company's strategy to deploy a global Internet network and in faxSAV
Connectors installed at customer premises to allow access to the FaxSav
network.
9
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PROVISION FOR INCOME TAXES. The Company had losses for income tax purposes
for the three months ended September 30, 1997 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 a valuation allowance for deferred tax assets.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
REVENUES. Revenues grew 14.3% to $12.8 million in the nine months ended
September 30, 1997 from $11.2 million in the nine months ended September 30,
1996 primarily as a result of the continued expansion of the Company's
customer base, development of an international fax-to-fax customer base in
1997, and revenues from the Company's faxSAV EZ-List broadcast service and
faxSAV for Internet suite of services first introduced in the first quarter
of 1996.
COST OF SERVICE. Cost of service increased as a result of the increase in
facsimile volume for the period and also increased as a percentage of
revenues in the nine months ended September 30, 1997 to 61.1% from 58.0% in
the nine months ended September 30, 1996. The increased percentage is a
result of a higher cost of service for the revenues generated from the
Company's lower priced Internet services. These revenues are being generated
without complete benefit of the lower cost Internet network deployment which
is in process.
NETWORK OPERATIONS AND SUPPORT. Network operations and support costs
increased to $1.7 million and 13.0% of revenues in the nine months ended
September 30, 1997 from $1.4 million and 12.6% of revenues in the nine months
ended September 30, 1996 as a result of hiring additional personnel to
implement the Internet fax node deployment plan and to support the Company's
expanding customer base.
RESEARCH AND DEVELOPMENT. Research and development expenses increased to
$1.4 million for the nine months ended September 30, 1997 in comparison to
$1.3 million for the nine months ended September 30, 1996 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 decreased to 11.1% in the nine
months ended September 30, 1997 from 11.7% in the nine months ended September
30, 1996 as a result of increased revenues in the 1997 period.
SALES AND MARKETING. Sales and marketing expenses decreased to $4.0 million
and 31.2% of revenues for the nine months ended September 30, 1997 in
comparison to $4.5 million and 40.4% of revenues in the nine months ended
September 30, 1996. These costs decreased as a result of reduced spending for
the third party telemarketing programs in the 1997 period in connection with
the Company's change in focus to a direct selling group and higher expenses
incurred in the 1996 period for trade shows and an advertising and promotion
campaign for the introduction of the faxSAV for Internet suite of services.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased to
$2.4 million and 18.8% of revenues in the nine months ended September 30,
1997 from $2.0 million and 17.4% of revenues in the nine months ended
September 30, 1996. The increase in total general and administrative expenses
and the percentage of revenues result from personnel increases to support the
increased customer base and expenses incurred for management information
system improvements.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to
$1.3 million and 10.2% of revenues in the nine months ended September 30,
1997 in comparison to $0.9 million and 8.3% of revenues in the nine months
ended September 30, 1996 primarily reflecting depreciation of the Company's
increased investment in international Internet nodes to implement the
Company's strategy to deploy a global Internet network and in faxSAV
Connectors installed at customer premises to allow access to the FaxSav
network.
PROVISION FOR INCOME TAXES. The Company had losses for income tax purposes
for the nine months ended September 30, 1997 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 a valuation allowance for deferred tax assets.
10
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LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its cash requirements for operations and investments
in equipment primarily through public and private sales of equity securities,
bank borrowings and capital lease financing. During the nine months ended
September 30, 1997, the Company entered into (1) an agreement for a $0.8
million secured equipment line of credit with Silicon Valley Bank, $0.4
million of which was outstanding as of September 30, 1997 and (2) an
agreement for a $0.5 million equipment loan facility with Phoenix Growth
Capital Corp., $0.4 million of which was outstanding under this facility as
of September 30, 1997. The net proceeds from the Company's initial public
offering completed in October 1996 amounted to $10.6 million. Cash flows from
the sales of equity securities amounted to $7.9 million in the nine months
ended September 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.
As a result of operating losses, cash used in operating activities amounted
to $4.8 million in the nine months ended September 30, 1997, as compared to
$3.5 million for the comparable period in 1996. Cash used in investing
activities, largely consisting of the purchase of equipment, amounted to $2.0
million in the nine months ended September 30, 1997 and $1.8 million for the
comparable period in 1996. The equipment primarily consisted of network
equipment (particularly in the 1997 period) and faxSAV Connectors purchased
by the Company for installation at customer locations. The Company has
minimum usage commitments with its primary long-distance carriers. Through
November 1997, 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 Communications Corp. for
a minimum monthly usage commitment for total long distance services of $0.2
million per month.
The Company's principal sources of liquidity at September 30, 1997 included
cash and cash equivalents of $2.5 million and $0.5 million in net balances of
the financing agreements with Silicon Valley Bank and Phoenix Growth Capital
Corp. The Company believes that its current cash and cash equivalents and
available equipment financing facilities will be sufficient to meet its
anticipated cash needs for working capital and capital expenditure
requirements through at least the first quarter of 1998. 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.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS, FINANCIAL CONDITION AND THE
MARKET PRICE OF SECURITIES.
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT. From its inception in 1989
through the nine-month period ended September 30, 1997, the Company has
experienced significant operating losses. The Company incurred operating
losses of $3.6 million, $4.1 million and $7.5 million during the years ended
December 31, 1994, 1995 and 1996, respectively, and $5.6 million during the
nine months ended September 30, 1997. 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 September 30, 1997, the Company had an accumulated
deficit of $30.7 million.
The Company has generated net operating loss ("NOL") carryforwards for income
tax purposes of approximately $23.0 million through December 31, 1996. These NOL
carryforwards have been recorded as a deferred tax asset of approximately $8.3
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.
11
<PAGE>
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, which have affected the
market price of securities of many companies in the telecommunications and
technology industries and which may 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.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING; DILUTION. The
Company currently believes that its current cash and cash equivalents will be
sufficient to meet its presently anticipated cash needs for working capital
and capital expenditure requirements through at least the first quarter of
1998. 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. In
addition, in the event that the Company obtains any additional funding, such
financings may have a dilutive effect on the holders of the Company's
securities.
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, 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.
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
12
<PAGE>
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
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 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 NETCOM On-Line Communications
Services, Inc., (iv) on-line services providers, such as Microsoft
Corporation, America Online, Inc. and CompuServe Incorporated and (v) direct
fax delivery competitors, including Xpedite Systems, Inc. and Unifi
Communication. 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.
On August 7, 1997, the Federal Communications Commission (the "FCC") issued new
rules which may significantly reduce the cost of international calls originating
in the United States. Such rules are scheduled to be phased in over a five-year
period starting on January 1, 1998. To the extent that these new regulations are
implemented and result in reductions in the cost of international calls
originating in the United States, the Company will face increased competition
for its international fax services which may have a material adverse effect on
the Company's business, financial condition or 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.
13
<PAGE>
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.
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 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 are the primary providers
of long distance telecommunications services to the Company. 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 November 30, 1997, after which 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
14
<PAGE>
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 combination of
contract, copyright and trademark law, trade secrets, confidentiality
agreements and contractual provisions to protect its proprietary rights. The
Company has been granted a patent related to its faxSAV Connector and has a
patent application pending 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 does not believe that any of its services, trademarks or other
proprietary rights infringe upon valid proprietary rights of third parties.
However, the Company is aware that another third party has recently brought
patent infringement actions against several facsimile service providers and
there can be no assurance that this or other third parties will not assert
infringement claims against the Company in the future. Patents have been
granted recently on fundamental technologies in the communications and
desktop software areas, and patents may be issued 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. Competition for such personnel is intense, and there can be no
assurance that the Company can retain its key technical, sales and managerial
employees or that it can attract, assimilate or retain other highly qualified
technical, sales and managerial personnel in the future.
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
15
<PAGE>
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 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 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 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.
On August 7, 1997, the FCC issued new rules which may significantly reduce
the cost of international calls originating in the United States. Such rules
are scheduled to be phased in over a five year period starting on January 1,
1998. To the extent that these new regulations are implemented and result in
reductions in the cost of international calls originating in the United
States, the Company will face increased competition for its international fax
services which may have a material adverse effect on the Company's business,
financial condition or results in operations.
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 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 has authority for the export of such encryption
technology other than to Cuba, Iran, Libya, North Korea, Sudan and Syria.
Nevertheless, there can be no assurance that such authority 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, or
new legislation or regulation could have a material adverse effect on the
Company's business, financial condition and results of operations.
16
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 5, 1997, the Company filed a complaint for declaratory
judgment against AudioFAX, IP, LLP ("AudioFAX") in the United States District
Court for the District of New Jersey. The Company seeks declaratory relief
that current FaxSav service offerings do not infringe any valid claims in
AudioFAX's patents or that certain claims of AudioFAX's patents are invalid.
On September 8, 1997, AudioFAX filed a complaint against the Company in the
United States District Court for the Northern District of Georgia alleging
patent infringement, seeking a preliminary and permanent injunction against
the Company's alleged infringement (and damages). Various motions by the
parties in the New Jersey and Georgia actions are pending. The Company has
been advised and believes that its service offerings do not infringe any
valid patents of AudioFAX and intends to vigorously pursue these actions.
There can be no assurance that the Company will prevail or that AudioFAX will
not prevail on its claims. No assurance can be given that this litigation
will not have a material adverse effect on the Company.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<S> <C>
Exhibit No.
- -----------
3.1 Registrant's Sixth Amended and Restated Certificate of Incorporation
(incorporated by reference to exhibit 3.3 to the Registrant's Registration
Statement on Form S-1, Registration No. 333-09613 ("Registrant's Registration
Statement")).
3.2 By-laws of the Registrant (incorporated by reference to exhibit 3.4 and 3.5 to
the Registrant's Registration Statement).
3.3 Amendment to By-laws of the Registrant, dated April 25, 1997 (incorporated by
reference to exhibit 3.3 to the Registrants Report on Form 10Q
for the quarter ended June 30, 1997).
4.1 Specimen Common Stock Certificate (incorporated by reference to exhibit 4.1 to
the Registrant's Registration Statement).
4.2 See Exhibits 3.1, 3.2 and 3.3 for provisions of the Certificate of
Incorporation and Bylaws of the Registrant defining rights of holders of Common
Stock of the Registrant.
10.1 Fifth Amended and Restated Investor Rights Agreement (incorporated by reference
to exhibit 10.1 to the Registrant's Registration Statement).
10.2 Amendment and waiver to Fifth Amended and Restated Investor Rights Agreement
(incorporated by reference to exhibit 10.2 to the Registrant's Registration
Statement).
10.3 1990 Stock Option Plan (incorporated by reference to exhibit 10.3 to the
Registrant's Registration Statement).
10.4 1996 Stock Option/Stock Issuance Plan (incorporated by reference to exhibit
10.4 to the Registrant's Registration Statement).
17
<PAGE>
10.5 Form of Officer Severance Agreement (incorporated by reference to exhibit 10.5
to the Registrant's Registration Statement).
10.6 Form of Director Severance Agreement (incorporated by reference to exhibit 10.6
to the Registrant's Registration Statement).
10.7* Telecommunications Services Agreement, between LDDS World Com and the
Registrant, dated December 1, 1996 (incorporated by reference to Exhibit 10.7
to the Registrant's Report on Form 10-Q for the quarter ended March 31, 1997).
10.8* Agreement between MCI Telecommunications Corporation and the Registrant,
effective March 1, 1996 (incorporated by reference to exhibit 10.9 to the
Registrant's Registration Statement).
10.9 Lease Agreement, dated May 28, 1992, between Metro Four Associates Limited
Partnership, Thornall Associates and the Registrant, as extended and amended to
date (incorporated by reference to exhibit 10.10 to the Registrant's
Registration Statement).
10.10 Credit Agreement, dated July 7, 1995, between the Company and Silicon Valley
Bank, as amended to date (incorporated by reference to exhibit 10.11 to the
Registrant's Registration Statement).
10.11 Letter Agreement, dated November 1, 1994 between Telstra Incorporated and the
Registrant (incorporated by reference to exhibit 10.12 to the Registrant's
Registration Statement).
10.12 Series B Preferred Stock Warrant between the Registrant and Comdisco, Inc.,
dated May 30, 1991 (incorporated by reference to exhibit 10.14 to the
Registrant's Registration Statement).
10.13 Series B Preferred Stock Warrant between the Registrant and Comdisco, Inc.,
dated September 16, 1992 (incorporated by reference to exhibit 10.15 to the
Registrant's Registration Statement).
10.14 Series D Preferred Stock Warrant between the Registrant and Comdisco, Inc.,
dated October 28, 1993 (incorporated by reference to exhibit 10.16 to the
Registrant's Registration Statement).
10.15 Common Stock Warrant between the Registrant and LTI Ventures Leasing Corp.,
dated February 15, 1993 (incorporated by reference to exhibit 10.17 to the
Registrant's Registration Statement).
10.16 Common Stock Warrant between the Registrant and LTI Ventures Leasing Corp.,
dated May 5, 1994 (incorporated by reference to exhibit 10.18 to the
Registrant's Registration Statement).
10.17 Common Stock Warrant between the Registrant and Silicon Valley Bancshares,
dated April 6, 1992 (incorporated by reference to exhibit 10.19 to the
Registrant's Registration Statement).
10.18 Common Stock Warrant between the Registrant and Silicon Valley Bancshares,
dated July 7, 1995 (incorporated by reference to exhibit 10.20 to the
Registrant's Registration Statement).
11. Statement Re: Computation of Earnings per Share.
27. Financial Data Schedule.
</TABLE>
- ------------------------
* Confidential treatment granted
(b) Reports on Form 8-K No reports on Form 8-K.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FAXSAV INCORPORATED
(Registrant)
/s/ THOMAS F. MURAWSKI
----------------------------
Date: November 12, 1997 Thomas F. Murawski
Chief Executive Officer,
President and Chairman of
the Board of Directors
/s/ PETER S. MACALUSO
----------------------------
Date: November 12, 1997 Peter S. Macaluso
Chief Financial Officer
(Principal Financial and
Accounting Officer),
Treasurer and Secretary
19
<PAGE>
EX-11
Statement Re: Computation of Earnings per Share
FAXSAV INCORPORATED
EARNINGS PER SHARE
(PROFORMA IN 1996)
EXHIBIT 11
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- ----------------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
------------- ---------- ------------- -------------
Net Loss................................................ $ (1,644,022) $(1,949,938)$ (5,630,219) $ (5,382,012)
------------- ---------- ------------- -------------
------------- ---------- ------------- -------------
Weighted average number of common and equivalent shares
used in computing pro forma loss per share:
Actual.................................................. 9,795,654 532,196 9,793,064 509,561
Effect of converting all preferred into common stock.... 0 7,790,987 0 8,004,537
------------- ---------- ------------- -------------
9,795,654 8,323,183 9,793,064 8,514,098
------------- ---------- ------------- -------------
------------- ---------- ------------- -------------
Net loss per common and equivalent share (proforma in
1996)................................................. $ (.17) $ (.23) $ (.58) $ (.63)
------------- ---------- ------------- -------------
------------- ---------- ------------- -------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the FaxSav,
Inc. financial statements, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,529,911
<SECURITIES> 0
<RECEIVABLES> 2,643,279
<ALLOWANCES> 337,663
<INVENTORY> 0
<CURRENT-ASSETS> 4,865,502
<PP&E> 7,768,871
<DEPRECIATION> 3,507,660
<TOTAL-ASSETS> 9,283,451
<CURRENT-LIABILITIES> 4,243,183
<BONDS> 0
0
0
<COMMON> 97,942
<OTHER-SE> (15)
<TOTAL-LIABILITY-AND-EQUITY> 9,283,451
<SALES> 12,814,578
<TOTAL-REVENUES> 12,814,578
<CGS> 7,830,668
<TOTAL-COSTS> 10,780,834
<OTHER-EXPENSES> (69,874)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (96,831)
<INCOME-PRETAX> (5,630,219)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,630,219)
<EPS-PRIMARY> (.58)
<EPS-DILUTED> (.58)
</TABLE>
