<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 June 30, 1998
---------------------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
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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 Identification No.)
incorporation or organization)
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
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 12,834,482 shares of the
Company's Common Stock, $.01 par value, were outstanding as of August 5, 1998.
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FAXSAV INCORPORATED
Index to June 30, 1998 Form 10-Q
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Page
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Part I - Financial Information
Item 1. Financial Statements
Condensed Balance Sheets - June 30, 1998 and December 31, 1997 .. 3
Condensed Statements of Operations -
Three and Six Months Ended June 30, 1998 and 1997 ............... 4
Condensed Statements of Cash Flow - Six Months Ended
June 30, 1998 and 1997 .......................................... 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 ........................................................ 18
Item 2. Changes in Securities .................................................... 18
Item 3. Defaults upon Senior Securities .......................................... 18
Item 4. Submission of Matters to a Vote of Security Holders ...................... 18
Item 5. Other Information ........................................................ 18
Item 6. Exhibits and Reports on Form 8-K ......................................... 18
Signatures ............................................................... 20
</TABLE>
2
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FAXSAV INCORPORATED
CONDENSED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 795,794 $ 3,680,185
Accounts receivable, net of allowances of $183,329
and $330,724 for June 30, 1998 and
and December 31, 1997 2,934,430 2,280,119
Prepaid expenses and other current assets 57,065 35,844
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Total current assets 3,787,289 5,996,148
Property and equipment, net 4,563,921 4,175,264
Other assets, net 359,990 324,173
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Total assets $ 8,711,200 $ 10,495,585
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,235,470 $ 658,703
Accrued expenses and other liabilities 3,661,289 3,219,846
Obligation under capital lease 199,568 315,370
Current portion of notes payable 715,198 469,217
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Total current liabilities 5,811,525 4,663,136
Obligation under capital lease 12,226 85,551
Notes payable 1,306,319 1,083,190
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Total liabilities 7,130,070 5,831,877
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Stockholders' equity:
Common stock, $0.01 par value;40,000,000 shares
authorized; 10,848,051 and 10,827,855 shares issued
and 10,826,662 and 10,806,466 shares outstanding as of
June 30, 1998 and December 31, 1997, respectively 108,267 108,065
Additional paid-in capital 36,738,710 36,730,403
Accumulated deficit (35,265,832) (32,174,745)
Treasury stock, at cost 21,389 common shares
as of June 30, 1998 and December 31, 1997 (15) (15)
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Total stockholders' equity 1,581,130 4,663,708
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Total liabilities and stockholders' equity $ 8,711,200 $ 10,495,585
------------ ------------
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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 STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------- -----------------------
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Revenues $ 5,223,115 $ 4,321,336 $ 10,200,370 $ 8,390,944
Cost of service 2,660,161 2,636,137 5,266,847 5,280,730
------------ ------------ ------------ ------------
Gross margin 2,562,954 1,685,199 4,933,523 3,110,214
Operating expenses:
Network operations and support 898,649 545,806 1,640,227 1,071,994
Research and development 546,572 469,701 1,126,336 933,076
Sales and marketing 1,533,009 1,331,509 2,953,079 2,784,531
General and administrative 822,624 800,254 1,602,761 1,605,766
Depreciation and amortization 380,818 414,649 686,290 845,935
------------ ------------ ------------ ------------
Total operating expenses 4,181,672 3,561,919 8,008,693 7,241,302
------------ ------------ ------------ ------------
Operating loss (1,618,718) (1,876,720) (3,075,170) (4,131,088)
Other income, net (24,907) 62,292 (15,917) 144,891
------------ ------------ ------------ ------------
Net loss $ (1,643,625) $ (1,814,428) $ (3,091,087) $ (3,986,197)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Basic and diluted net loss per
common and equivalent share $ (0.15) $ (0.19) $ (0.29) $ (0.41)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Shares used in computing net loss
per common and equivalent share 10,817,867 9,795,654 10,814,654 9,791,748
------------ ------------ ------------ ------------
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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)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,091,087) $(3,986,197)
Adjustments to reconcile net loss to net cash used
In operating activities:
Depreciation and amortization expense 686,290 845,935
Other adjustments 66,417 98,466
Changes in assets and liabilities:
Accounts receivable (744,811) (306,154)
Accounts payable 576,767 (176,008)
Other, net 597,560 (64,615)
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Net cash used in operating activities (1,908,864) (3,588,573)
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CASH FLOWS USED IN INVESTING ACTIVITIES:
Proceeds received from marketable securities 0 1,002,513
Purchase of property and equipment, net (1,264,018) (1,692,566)
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Net cash used in investing activities (1,264,018) (690,053)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of notes payable and capital lease obligation (368,355) (227,987)
Borrowings under line of credit 648,337 396,285
Proceeds from issuance of common stock and
exercise of stock options and warrants, net 8,509 23,311
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Net cash provided by financing activities 288,491 191,609
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NET INCREASE(DECREASE) (2,884,391) (4,087,017)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 3,680,185 7,923,105
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 795,794 $ 3,836,088
----------- -----------
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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, 1997 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 the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
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 six month periods ended June 30, 1998. The results for the three
and six month periods ended June 30, 1998 are not necessarily indicative of
the results expected for the full fiscal year.
2. EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share". In accordance with SFAS 128, both basic
and diluted net loss per share are presented in the financial statements. Stock
options outstanding of approximately 1,716,000 and 1,532,000 for the three and
six months ended June 30, 1998 and 1997, respectively, have been excluded from
the calculation of diluted earnings per share, since their effect would be
antidilutive. In addition, approximately 100,000 warrants outstanding have been
excluded from diluted earnings per share, since their 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 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. The Company adopted SFAS 130 during the first quarter of
1998, but presently the Company's Comprehensive Loss and Net Loss are equal.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Among other provisions, it requires that
entities recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Gains and losses resulting from changes in the fair values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. This standard is effective for fiscal years
beginning after June 15, 1999, though earlier adoption is encouraged and
retroactive application is prohibited. For FaxSav this means that the standard
must be adopted no later than January 1, 2000. Management does not expect the
adoption of this standard to have a material impact on FaxSav's results of
operations, financial position or cash flows as the Company does not presently
use derivative instruments or engage in hedging activities.
6
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5. RECLASSIFICATION
Certain items in 1997 have been reclassified to conform to the 1998
presentation.
6. SUBSEQUENT EVENT - EQUITY FINANCING
In July 1998, the Company issued 2,000,000 shares of its unregistered
common stock to a group of investors for an aggregate purchase price of
$7,000,000. The sale was in accordance with a Common Stock Purchase Agreement,
between the Company and the investors, which requires the Company to register
the securities within sixty (60) days. The pro forma amounts below reflect the
adjustment to and the effect on the unaudited financial statements as if the
financing was done on June 30, 1998.
<TABLE>
<CAPTION>
PROFORMA CONDENSED BALANCE SHEET
JUNE 30, 1998
-------------------
(unaudited)
Pro Forma Pro Forma
As Reported Adjustment Effect
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<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 795,794 $ 6,950,000 $ 7,745,794
Accounts receivable, net 2,934,430 2,934,430
Prepaid expenses and other current assets 57,065 57,065
------------ ------------ ------------
Total current assets 3,787,289 6,950,000 10,737,289
Property and equipment, net 4,563,921 4,563,921
Other assets, net 359,990 359,990
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Total assets $ 8,711,200 $ 6,950,000 $ 15,661,200
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,235,470 $ 1,235,470
Accrued expenses and other liabilities 3,661,289 3,661,289
Obligation under capital lease 199,568 199,568
Current portion of notes payable 715,198 715,198
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Total current liabilities 5,811,525 5,811,525
Obligation under capital lease 12,226 12,226
Notes payable 1,306,319 1,306,319
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Total liabilities 7,130,070 7,130,070
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Stockholders' equity:
Common stock 108,267 20,000 128,267
Additional paid-in capital 36,738,710 6,930,000 43,668,710
Accumulated deficit (35,265,832) (35,265,832)
Treasury stock (15) (15)
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Total stockholders' equity 1,581,130 6,950,000 8,531,130
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Total liabilities and stockholders' equity $ 8,711,200 $ 6,950,000 $ 15,661,200
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</TABLE>
7
<PAGE>
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 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>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Percentage of Revenues:
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of service 50.09 61.0 51.6 62.9
------- ------- -------- -------
Gross margin 49.1 39.0 48.4 37.1
------- ------- -------- -------
Operating expenses:
Net operations and support 17.2 12.6 16.1 12.8
Research and development 10.5 10.9 11.0 11.1
Sales and marketing 29.3 30.8 29.0 33.2
General and administrative 15.8 18.5 15.7 19.1
Depreciation and amortization 7.3 9.6 6.7 10.1
------- ------- -------- -------
Total operating expenses 80.01 82.4 78.5 86.3
------- ------- -------- -------
Operating loss (31.0) (43.4) (30.1) (49.2)
------- ------- -------- -------
Other income, net (0.5) 1.4 (0.2) 1.7
------- ------- -------- -------
Loss before income taxes (31.5) (42.0) (30.3) (47.5)
Provision for income taxes -- -- -- --
------- ------- -------- -------
Net loss (31.5)% (42.0)% (30.3)% (47.5)%
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</TABLE>
8
<PAGE>
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
REVENUES.Revenues, which consist primarily of customer usage charges, grew 20.9%
to $5.2 million in the three months ended June 30, 1998 from $4.3 million in the
three months ended June 30, 1997 primarily as a result of the continued
expansion of the Company's customer base, particularly in international markets.
The increased revenues result largely from the Company's Internet desktop-to-fax
and FAXSAV EZ-LIST broadcast services.
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 amounted to $2.7 million and $2.6 million, respectively for the
three month periods ended June 30, 1998 and 1997 but decreased as a percentage
of revenues in the three months ended June 30, 1998 to 50.9% from 61.0% in the
three months ended June 30, 1997. The decreased percentage is a result of
transmitting an increased level of customer faxes over the Company's Internet
Fax 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 $0.9 million and 17.2% of
revenues in the three months ended June 30, 1998 in comparison to $0.5 million
and 12.6% of revenues in the three months ended June 30, 1997 as a result of
hiring additional personnel to implement the Internet fax node deployment plan
and to support the Company's expanding customer base on a 7 day per week/ 24
hour per day basis.
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 each of the three
months ended June 30, 1998 and 1997. As a percentage of revenues, these costs
decreased to 10.5% in the 1998 period from 10.9% in the 1997 period as a result
of higher revenues in 1998.
SALES AND MARKETING.Sales and marketing expenses consist primarily of salaries
and commissions for sales and marketing staffs, promotional material preparation
and mailing costs, agent and dealer commissions. Sales and marketing expenses
increased to $1.5 million for the three months ended June 30, 1998 in comparison
to $1.3 million in the three months ended June 30, 1997, due to increased
marketing expenses to support the growth in international revenues and costs for
the expansion of the Company's direct sales staff in the U.S. As a percentage of
revenues, these costs decreased to 29.3% from 30.8% for the 1998 and 1997
periods, respectively, as a result of 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 amounted to
$0.8 million in the three months ended June 30, 1998 and 1997. As a percentage
of revenues, these expenses decreased to 15.8% in the three months ended June
30, 1998 from 18.5% in the three months ended June 30, 1997 as a result of
increased revenues.
DEPRECIATION AND AMORTIZATION.Depreciation and amortization amounted to $0.4
million in the three months ended June 30, 1998 and 1997. As a percentage of
revenues, depreciation and amortization expenses decreased to 7.3% in the three
months ended June 30, 1998 in comparison to 9.6% in the three months ended June
30, 1997, as a result of increased revenues.
OTHER INCOME, NET. Other income, net decreased to $(0.02) million and (0.5%) of
revenues in the three months ended June 30, 1998 from $0.06 million and 1.4% of
revenues in the three months ended June 30, 1997. In the 1998 period, the
Company incurred increased interest expense and earned less interest income in
comparison to the 1997 period. In 1997, the Company had less outstanding debt
and more funds available for temporary investment as a result of the proceeds
still on hand from its October 1996 initial public offering of securities.
9
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PROVISION FOR INCOME TAXES.The Company had losses for income tax purposes for
the three months ended June 30, 1998 and 1997. 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.
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
REVENUES.Revenues grew 21.6% to $10.2 million in the six months ended June 30,
1998 from $8.4 million in the six months ended June 30, 1997 primarily as a
result of the continued expansion of the Company's customer base, particularly
in international markets. The increased revenues resulted largely from the
Company's Internet desktop-to-fax and FAXSAV EZ-LIST broadcast services.
COST OF SERVICE.Cost of service amounted to $5.3 million in the six months ended
June 30, 1998 and 1997 but decreased as a percentage of revenues in the six
months ended June 30, 1998 to 51.6% from 62.9% in the six months ended June 30,
1997. The decreased percentage is a result of transmitting an increased level of
customer faxes over the Company's Internet Fax Network and lower costs for
international fax charges.
NETWORK OPERATIONS AND SUPPORT.Network operations and support costs increased to
$1.6 million and 16.1% of revenues in the six months ended June 30, 1998 from
$1.1 million and 12.8% of revenues in the six months ended June 30, 1997 as a
result of hiring additional personnel to implement the Internet fax node
deployment plan and to support the Company's expanding customer base on a 7 day
per week / 24 hour per day basis.
RESEARCH AND DEVELOPMENT.Research and development expenses increased to $1.1
million from $0.9 million in the six months ended June 30, 1998 in comparison to
the six months ended June 30, 1997 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 were relatively unchanged amounting to 11.0% in the six months ended
June 30, 1998 from 11.1% in the six months ended June 30, 1997.
SALES AND MARKETING.Sales and marketing expenses increased to $3.0 million for
the six months ended June 30, 1998 in comparison to $2.8 million in the three
months ended June 30, 1997 but decreased as a percentage of revenues to 29.0% in
the 1998 period from 33.2% in the 1997 period.The higher costs in 1998 relate to
additional expenses to support the growth in international revenues and the
expansion of the Company's direct sales staff in the U.S.
GENERAL AND ADMINISTRATIVE.General and administrative expenses amounted to $1.6
million in the six months ended June 30, 1998 and 1997 but decreased as a
percentage of revenues to 15.7% in 1998 from 19.1% in 1997 because of increased
revenues.
DEPRECIATION AND AMORTIZATION.Depreciation and amortization decreased to $0.7
million and 6.7% of revenues in the six months ended June 30, 1998 in comparison
to $0.8 million and 10.1% of revenues in the six months ended June 30, 1997,
primarily reflecting reduced charges for FAXSAV CONNECTORS installed on fax
machines at customer premises, resulting from the Company's shift in its
business to desktop originated services.
OTHER INCOME, NET. Other income, net decreased to $(0.02) million and (0.2%) of
revenues in the six months ended June 30, 1998 from $0.14 million and 1.7% of
revenues in the six months ended June 30, 1997. In the 1998 period, the Company
incurred increased interest expense and earned less interest income in
comparison to the 1997 period. In 1997, the Company had less outstanding debt
and more funds available for temporary investment as a result of the proceeds
still on hand from its October 1996 initial public offering of securities.
PROVISION FOR INCOME TAXES.The Company had losses for income tax purposes for
the six months ended June 30, 1998 and 1997. 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 the 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 six months ended June 30,
1998, the Company entered into an agreement for a $0.5 million secured equipment
line of credit with Silicon Valley Bank, $0.46 million of which was outstanding
as of June 30, 1998. In addition, the Company agreed to a $0.5 million expansion
of its equipment loan facility with Phoenix Growth Capital Corp. and $0.2
million was outstanding as of June 30, 1998.
As a result of operating losses, cash used in operating activities amounted to
$1.9 million in the six months ended June 30, 1998, as compared to $3.6 million
for the comparable period in 1997. Cash used in investing activities, largely
consisting of the purchase of equipment, amounted to $1.3 million for the six
months ended June 30, 1998 and $1.7 million for the comparable period in 1997.
The equipment primarily consisted of network equipment (particularly in the 1998
period) and FAXSAV CONNECTORS purchased by the Company for installation at
customer locations. The Company is obligated to MCI Communications Corp. for a
minimum monthly usage commitment of $0.2 million for total long distance service
through June 1999.
The Company's principal sources of liquidity at June 30, 1998 included cash and
cash equivalents of $0.8 million and $0.3 million in net available balances of
the financing agreements with Silicon Valley Bank and Phoenix Growth Capital
Corp. Subsequent to June 30, 1998 the Company sold 2,000,000 shares of its
common stock in a private placement which raised $7,000,000. Management believes
that its current sources of liquidity will be sufficient to satisfy the
Company's requirements through at least June 30, 1999. 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 six month period ended June 30,1998, the Company has experienced
significant operating losses. The Company incurred operating losses of $7.1
million, $7.5 million and $4.1 million during the years ended December 31, 1997,
1996 and 1995, respectively and $3.1 million during the six months ended June
30, 1998. 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, 1998,
the Company had an accumulated deficit of $35.3 million.
The Company has generated net operating loss ("NOL") carryforwards for income
tax purposes of approximately $30.0 million through December 31, 1997. These NOL
carryforwards have been recorded as a deferred tax asset of approximately $9.5
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.
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, MCI, Sprint,
WorldCom and the regional Bell operating companies, and telecommunications
resellers; (ii) Internet service providers, such as Uunet Technologies, Inc. and
NETCOM On-Line Communications Services,
11
<PAGE>
Inc., (iii) on-line services providers, such as Microsoft Corporation and
America Online, Inc. and (iv) direct fax delivery competitors, including Xpedite
Systems, Inc. and UNIFI Communications, 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 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.
POSSIBLE DELISTING FROM NASDAQ. The Common Stock of the Company is listed on
Nasdaq and continued inclusion of such securities on Nasdaq requires, among
other criteria, that the Company maintain at least $4,000,000 in net tangible
assets. As of June 30, 1998, the Company had net tangible assets of
approximately $1.6 million and was not in compliance with the net tangible
assets maintenance requirement. On July 24, 1998, the Company completed a
private placement of 2 million shares of its unregistered Common Stock to a
group of investors for an aggregate purchase price of $7.0 million. As a
result, the Company's net tangible assets as of June 30,1998 on a pro forma
basis, reflecting the proceeds from the private placement, amounted to $8.5
million. Consequently, the Company is currently in compliance with the Nasdaq
maintenance requirements and expects to be so notified in the near future by
Nasdaq, thereby reducing the risk that the Company's shares would be delisted.
However, if Nasdaq determines that the Company is not currently in compliance
with its maintenance requirements or if, in the future, the Company is unable to
satisfy such maintenance requirements, the Company's securities may be delisted
from Nasdaq. There can be no assurance that the Common stock will not be
delisted, which would materially impair the liquidity of such securities.
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 June 30, 1999. However, the Company's
cash requirements may vary materially from those now planned as a result of
unforeseen changes that could consume a significant portion of the available
resources before such time. To the extent that funds expected to be generated
from the Company's operations are insufficient to meet current or planned
operating requirements or to maintain a Nasdaq listing, the Company will seek to
obtain additional funds through bank facilities, equity or debt financing,
collaborative or other arrangements with corporate partners and others and from
other sources. See "-- Possible Delisting from Nasdaq." 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. If adequate funds are not available, the Company may
be required to delay or to eliminate certain expenditures or to license to third
parties the rights to commercialize technologies that the Company would
otherwise seek to develop itself. 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.
12
<PAGE>
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 a patent will issue from such application 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.
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 is seeking declaratory relief that
current FaxSav service offerings do not infringe any valid claims in AudioFAX's
patents and 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. On February 17, 1998, the Company
filed an answer to the complaint in the Georgia action, denying all allegations
of wrongdoing asserted by AudioFax. On February 25, 1998, the New Jersey
District Court entered an order: (1) denying AudioFax's motion to dismiss for
lack of personal jurisdiction; (2) denying FaxSav's motion to stay or enjoin the
Georgia action; and (3) transferring the New Jersey action to the Georgia court.
It is the Company's intention to appeal items (2) and (3) of the February 25,
1998 order. 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. Although the
Company believes that it will prevail in such matter, there can be no assurance
that this litigation will not have a material adverse effect on the Company's
business, financial condition and results of operations.
There can be no assurance that 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 right 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.
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
13
<PAGE>
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.
DEPENDENCE ON NETWORK INFRASTRUCTURE; NO ASSURANCE OF ADDITIONAL
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 part upon its ability to expand the deployment of 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 additional
contemplated Internet-capable facsimile nodes 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 complete the development of
the contemplated Internet-capable facsimile node infrastructure on a timely
basis 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 LOW-COST FACSIMILE TRANSMISSION MEDIUM; NO
ASSURANCE OF INCREASED MARKET ACCEPTANCE. 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. There
can be no assurance that document transmission over the Internet will continue
to 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 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. In addition, the
Company's future success is dependent upon the increased acceptance by potential
customers of the Internet as the preferred medium for transmission of documents.
There can be no assurance that such market acceptance shall continue to
increase. Lack of increased market acceptance would materially and adversely
affect 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.
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
14
<PAGE>
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 three 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.
WorldCom and MCI 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 WorldCom expired on November 30, 1997, after which the
contract continues on a month-to-month basis until renegotiated by the parties
or terminated by either party. There can be no assurance that 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.
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
15
<PAGE>
and managerial employees or that it can attract, assimilate or retain other
highly qualified technical, sales and managerial personnel in the future.
RELIANCE ON INTERNATIONAL STRATEGIC ALLIANCES; RISKS ASSOCIATED WITH
INTERNATIONAL OPERATIONS. The Company has established and intends to expand 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 establish
additional strategic alliances or to maintain such strategic alliances. The
Company's success in expanding its international customer base depends not only
on the formation of additional strategic alliances but also on the success of
these partners and their ability to market the Company's services. The failure
to 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 expand its international
customer base, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company derived approximately $1.1 million or 22.3% of its total revenues,
from customers outside of the United States in 1997. The Company expects that
such revenues will represent an increasing percentage of its total revenues in
the future. Risks inherent in the Company's international business activities
generally include foreign currency exchange risk, unexpected changes in
regulatory requirements, tariffs and other trade barriers, costs of localizing
products for foreign countries, lack of acceptance of localized products in
foreign markets, longer accounts receivable payment cycles, difficulties in
managing international operations, potentially adverse tax consequences, and the
burdens of complying with a wide variety of foreign laws. There can be no
assurance that such factors will not have a material adverse effect on the
Company's future international revenues and, consequently, on the Company's
business, financial condition and results of operations.
YEAR 2000 COMPLIANCE. Many currently installed computer systems and software
products are coded to accept only two digit entries in the date code field.
These date code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, in less than two
years, computer systems and/or software used by many companies may need to be
upgraded to comply with such "Year 2000" requirements. Significant uncertainty
exists in the software industry concerning the potential effects associated with
such compliance.
The Company has completed a study of its computing and networking systems for
the purpose of identifying all date representations and possible Year 2000
impact. The computing systems that provide application layer services (i.e.,
FaxSav customer services) within the FaxSav network are based upon some variant
of the Unix operating system, which adequately represents dates beyond the year
2000. Many of the computing systems that support the internal operations of the
Company's business have the similar capacity to represent dates beyond the Year
2000. In addition, for all its internal accounting applications, the Company
has purchased new accounting system software that the manufacturer specifies as
Year 2000 compliant. The Company's expected total cost to implement the new
software is approximately $0.2 million. Finally, the Company intends to conduct
a test of its computing systems to verify the results of its study prior to the
Year 2000.
There can be no assurance that the Company's software contains all necessary
date code changes or that all problems can be identified by the Company's study
and subsequent testing. Accordingly, the Company and its customers may be
affected by Year 2000 issues. Compliance with Year 2000 requirements may
disrupt the Company's ability to continue developing and marketing its facsimile
transmission products and services. The Company may also incur certain
unexpected expenditures in connection with Year 2000 compliance. Any of the
foregoing could result in 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.
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<PAGE>
In connection with the deployment of Internet-capable nodes in countries
throughout the world, the Company is 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, Iraq, Libya, North Korea, and Rwanda.
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.
17
<PAGE>
PART II C OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company's annual meeting of stockholders was held on May 28,
1998.
(b) Mr. Labant was reelected as a director for a three-year term
expiring in 2001. Messrs. Murawski, Drazan and Howley continue
as directors.
(c) Motions before stockholders:
1. Election of director as follows:
<TABLE>
<CAPTION>
Name Votes For Votes Against Abstentions Broker Non-Votes
<S> <C> <C> <C> <C>
Robert Labant 8,658,093 0 7,260 2,137,377
</TABLE>
2. Resolution ratifying selection of Coopers & Lybrand L.L.P.,
independent public accountants, as auditors of the Company for
the fiscal year ending December 31, 1998.
<TABLE>
<CAPTION>
Votes For Votes Against Abstentions Broker Non-Votes
<S> <C> <C> <C> <C>
8,627,536 410 37,407 2,137,377
</TABLE>
3. Resolution approving an amendment to the 1996 Stock Option/Stock
Issuance Plan which increased the number of shares of Common
Stock available for issuance by 650,000 shares and implemented
certain other administrative and procedural changes.
<TABLE>
<CAPTION>
Votes For Votes Against Abstentions Broker Non-Votes
<S> <C> <C> <C> <C>
6,308,996 59,636 36,407 4,397,691
</TABLE>
Item 5. Other Information
As disclosed in the Company's latest proxy statement, the deadline for
submitting proposals to be considered for inclusion in the Company's
Proxy Statement for the 1999 Annual Meeting is December 7,1998.
Pursuant to recent amendments to Rule 14a-4-C-(1) under the Securities
Exchange Act of 1934, as amended, the Company will have discretionary
voting authority if a proponent does not notify the Company by March 1,
1999 of their intent to present a proposal from the floor at the 1999
Annual Meeting of Stockholders or of their intent to commence a proxy
solicitation for the 1999 Annual Meeting of Stockholders.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
18
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.
- -----------
<S> <C>
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 and Exhibit 3.3 to the
Registrant's Report on form 10-Q 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 and 3.2 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, as amended
(incorporated by reference to exhibit 10.1 and 10.3 to the Registrant's
Registration Statement
10.2 1990 Stock Option Plan (incorporated by reference to exhibit 10.3 to the
Registrant's Registration Statement).
10.3 1996 Stock Option/Stock Issuance Plan (incorporated by reference to exhibit
10.4 to the Registrant's Registration Statement).
10.4 Form of Officer Severance Agreement (incorporated by reference to exhibit
10.5 to the Registrant's Registration Statement).
10.5 Form of Director Severance Agreement (incorporated by reference to exhibit
10.6 to the Registrant's Registration Statement).
10.6* 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 June 30,
1997).
10.7* 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).
10.8 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).
10.19 Form of Common Stock Purchase Agreement, dated November 21, 1997
(incorporated by reference to Exhibit 10.1 to the Registrant's Registration
Statement on form S-3, Registration No. 333-43939)
10.20 Loan and Security Agreement, dated as of March 27, 1998, between
Silicon Valley Bank and the Registrant. (incorporated by reference to
Exhibit 10.20 to the Registrant's Report on Form 10-Q for the quarter ended
March 31, 1998)
27. Financial Data Schedule.
</TABLE>
_________
* Confidential treatment granted
(b) Reports on Form 8-K
No reports on Form 8-K.
19
<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)
Date: August 11, 1998 /s/ Thomas F. Murawski
-----------------------------------------------
Thomas F. Murawski
Chief Executive Officer, President and Chairman
of the Board of Directors
Date: August 11, 1998 /s/ Peter S. Macaluso
Peter S. Macaluso
Chief Financial Officer
Treasurer and Secretary,
(Principal Financial and Accounting Officer)
20
<PAGE>
FAXSAV INCORPORATED
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No.
- -----------
<S> <C>
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 the By-laws of the Registrant, dated April 25, 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).
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 WorldCom 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 June 30,
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).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.19 Form of Common Stock Purchase Agreement, dated November 21, 1997
(incorporated by reference to Exhibit 10.1 to the Registrant's Registration
Statement on form s-3, Registration No. 333-43929).
10.21 10.20 Loan and Security Agreement, dated as of March 27, 1998,
between Silicon Valley Bank and the Registrant (incorporated by reference
to Exhibit 10.20 to the Registrant's Report on Form 10-Q for the quarter
ended March 31, 1998)
27. Financial Data Schedule.
</TABLE>
__________
* Confidential treatment granted
(b) Reports on Form 8-K
No reports on Form 8-K.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CINTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FAXSAV,
INC. FINANCIAL STATEMENTS, AND IS QUALIFIED IN ITS ENTIRETY BY REFERNECE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 795,794
<SECURITIES> 0
<RECEIVABLES> 3,117,759
<ALLOWANCES> 183,329
<INVENTORY> 0
<CURRENT-ASSETS> 3,787,289
<PP&E> 9,493,902
<DEPRECIATION> 4,929,979
<TOTAL-ASSETS> 8,711,200
<CURRENT-LIABILITIES> 5,811,525
<BONDS> 0
0
0
<COMMON> 108,267
<OTHER-SE> (15)
<TOTAL-LIABILITY-AND-EQUITY> 8,711,200
<SALES> 10,200,370
<TOTAL-REVENUES> 10,200,370
<CGS> 5,266,847
<TOTAL-COSTS> 8,008,693
<OTHER-EXPENSES> (58,983)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 74,901
<INCOME-PRETAX> (3,091,087)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,091,087)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,091,087)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> (.29)
</TABLE>
