SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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
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FaxSav Incorporated
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(Exact name of registrant as specified in its charter)
Delaware 11-3025769
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
399 Thornall Street, Edison, New Jersey 08837
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (732) 906-2000
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
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(Title of Class)
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(Title of Class)
Indicate by check mark 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 by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
While it is difficult to determine the number of shares owned by
non-affiliates, the registrant estimates that the aggregate market value of
outstanding Common Stock on March 24 (based upon the last sale of such Common
Stock reported on the Nasdaq National Market on March 24), held by
non-affiliates was approximately $22,115,000. For this computation, the
registrant has excluded the market value of all shares of its Common Stock
reported as beneficially owned by officers, directors and certain significant
stockholders of the registrant. Such exclusion shall not be deemed to constitute
an admission that any such stockholder is an affiliate of the registrant.
As of March 24, 1998, there were outstanding 10,813,541 shares of the
registrant's Common Stock, par value $.01.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement of FaxSav Incorporated relative to the Annual Meeting of
the Stockholders to be held on May 28, 1998, which is incorporated by reference
into Part III of this Form 10-K.
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PART I
Item 1. Business
General
FaxSav Incorporated (the "Company") designs, develops and markets a variety
of business-to-business facsimile transmission services, including fax-to-fax,
desktop-to-fax, enhanced fax and broadcast fax services. The Company has
developed proprietary software which enables its customers to specify on a
call-by-call basis whether a facsimile transmission will be delivered through
FaxSav's real-time, "virtual real-time (Internet fax)" or broadcast services.
This software, coupled with FaxSav's fax-only network of three interconnected
switching nodes in the United States and Internet-capable facsimile nodes
located in seventeen countries as of December 31, 1997, automatically delivers
each outgoing transmission through the route that provides the lowest cost and
the highest transmission quality available on the FaxSav network. Pre-negotiated
volume-based arrangements with several telephony common carriers (including LDDS
WorldCom Inc. ("World Com") and MCI Communications Corp. ("MCI")) and the cost
savings available for transmission through the Internet enable FaxSav to
transmit its customers' documents and images to fax machines worldwide at rates
that are below the international rates charged by long distance voice carriers.
While FaxSav generates cost savings for customers transmitting faxes to
international destinations, the principal motivation for many FaxSav customers
to use the Company's services is ease of use, rather than cost savings.
The Company has deployed Internet-capable facsimile nodes in seventeen key
international telecommunications markets to enable it to migrate a portion of
its customer traffic off of its telephony-based network and to route it over the
Internet. This global Internet backbone, which is designed to seamlessly
integrate with FaxSav's existing telephony-based network, enables the Company to
bypass long distance common carriers for transmissions originating and
terminating in countries where such nodes have been deployed, thereby further
reducing its customers' international transmission costs. FaxSav believes that
the combination of its telephony-based network and its growing Internet-based
network will enable it to emerge as a leading supplier of comprehensive,
convenient, low-cost global faxing services. FaxSav intends to expand its
network of Internet-capable facsimile nodes in key telecommunications markets
worldwide throughout 1998 to enable it to route a majority of its customers'
international traffic through the Internet.
Industry Background
The Market For Facsimile Services
Technological advances over the past decade have improved the speed and
quality of facsimile transmissions and reduced the cost of fax machines to
consumers, resulting in a large and increasing worldwide installed base of fax
machines. In addition, there recently has been a rapid increase in the installed
base of fax-capable personal computers. The proliferation of fax machines and
fax capable computers, and improvements in the transmission quality of domestic
and international telephone networks, have resulted in facsimile transmission
being the preferred means of immediate business-to-business document delivery.
Traditional International Facsimile Transmission
A facsimile message typically is transmitted by means of a telephone call
from one fax machine to another over the voice telephony network. Once a
connection has been established between the two machines, the scanned image from
the originating fax machine is electronically transmitted to the destination fax
machine. Facsimile transmissions historically have been, and substantially all
of such
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transmissions continue to be, implemented on a real-time continuous connection
basis using the voice telephony network as a transmission medium.
An international facsimile transmission from the United States typically is
routed as follows: (i) the sending fax machine accesses the local exchange
carrier (an "LEC"), which then routes the fax to the customer's long distance
carrier; (ii) the long distance carrier then routes the fax via its voice
telephony network to the telephone company of the destination country; and (iii)
the foreign telephone company then routes the fax to a local telephone number to
which the destination fax machine is attached. In this example, the long
distance company will bill the customer to cover the LEC access fee, the fee for
use of its voice telephony network and the fee for the connection between the
long distance carrier's network and the foreign telephone company, which
includes the fee for delivery to the destination fax machine. The majority of
the cost for international transmissions from the United States to destinations
outside of North America is attributable to the inter-country connection fee.
Document Delivery Over The Internet
Substantially all inter-country facsimile traffic worldwide is transmitted
through voice telephony networks at rates which are largely dictated by the
inter-country connection fees. Unlike traditional public and private
telecommunications networks, which are individually managed, the Internet is a
cooperative interconnection of many such public and private networks which
enables businesses, educational institutions, government agencies and
individuals to transmit data internationally without incurring inter-country
voice telephony connection fees.
Although the Internet has been used for a number of years as a medium for
the international delivery of documents from computer to computer, substantially
all facsimile traffic worldwide continues to originate and terminate on fax
machines. The ability to effectively capture the savings enabled by Internet
document delivery in the international facsimile market therefore requires the
deployment, on a global basis, of a network of Internet-capable facsimile nodes
to bridge the gap between the Internet and the fax machine.
The FaxSav Solution
FaxSav has deployed an international network of Internet-capable facsimile
nodes in seventeen countries (as of December 31, 1997) which are designed to
provide a reliable means to deliver facsimile transmissions to fax machines
worldwide at substantially reduced costs. This global Internet backbone, which
is designed to seamlessly integrate with FaxSav's existing telephony-based
network, enables the Company to bypass inter-country connection fees for
transmissions originating and terminating through such nodes.
FaxSav, through its integrated Internet and telephony network, provides a
comprehensive range of services for the global transmission of documents and
images, including fax-to-fax, enhanced fax and broadcast fax services. In
addition, to position itself in the emerging desktop-to-fax market, the Company
has developed several proprietary software products which enable the
transmission of documents or images created in any Windows, Macintosh or e-mail
application to be routed directly from an Internet-connected computer desktop
through the FaxSav network to fax machines worldwide.
The FaxSav solution provides substantial ease of use to the customer.
Customers may begin transmitting faxes at substantially reduced costs without
any upfront investment or complex system installation. FaxSav is quickly and
easily installed by the customer and does not require any changes in customer
business practices. Customers connect to the FaxSav network from a fax machine
by simply installing a faxSAV Connector, a small proprietary device that easily
plugs between the customer's fax machine and the wall jack, or by simply
installing FaxSav's proprietary desktop software on an Internet-connected
personal computer. FaxSav's proprietary routing algorithms then automatically
deliver
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each facsimile transmission, through either FaxSav's telephony network or
Internet backbone in order to optimize the lowest cost and the highest
transmission quality available on the FaxSav network. Additionally, the FaxSav
solution is both modular and scalable to meet customer business needs in that it
can be easily deployed across multiple fax machines or personal computers within
an organization on an unlimited basis.
The FaxSav Network
Overview
Traditional International Facsimile Transmission. In the United States,
traditional international facsimile transmission begins when the originating fax
machine places a call over the local telephone network. Because the number
dialed has an international prefix, the Local Exchange Carrier ("LEC") switches
the call to the sender's long distance carrier (typically AT&T Corp. ("AT&T")
MCI or Sprint Corp., ("Sprint"). The long distance carrier ("LDC") delivers the
call to the corresponding long distance company (the "PTT") in the country of
destination, which in turn completes the call by providing a connection through
the local telephone network to the receiving fax machine. Thus a real-time
connection is established over the traditional telephony networks, and the
originating fax machine sends a data stream, comprising a scanned image, to the
receiving fax machine.
Facsimile Transmission via FaxSav's Network. FaxSav's services, which are
targeted at businesses and professionals engaged in international facsimile
messaging, are designed to reduce the cost of sending international faxes, and
to make the process of sending such faxes easier and less time-consuming. The
FaxSav network offers its customers the benefits of increased savings and
convenience by bypassing parts or all of the traditional network described
above. For example, an international fax-to-fax message delivered through
FaxSav's Internet-based network utilizes the Internet as a delivery medium,
bypassing the long distance carriers and thereby avoiding expensive
inter-country connection fees. In addition, a customer using the faxSAV for
Internet suite of services accesses the FaxSav network through its Internet
service provider (an "ISP") rather than through the local telephone network; the
Company's proprietary software then either routes the call over FaxSav's
telephony network or bypasses the long distance carriers and the associated
inter-country connection fees by routing the call through FaxSav's
Internet-based network.
The FaxSav Network
The FaxSav network is designed to minimize the cost of sending faxes
internationally by selecting the optimal route and carrier for each facsimile
transmission. Currently FaxSav provides its customers with the ability to reach
fax machines worldwide via its telephony-based network. FaxSav's telephony-based
services are competitively priced and, on faxes to most international
destinations, FaxSav customers are expected to realize substantial savings as
compared to the rates charged by traditional long distance carriers.
In addition to its telephony-based network, FaxSav has deployed an
Internet-based network which connects key telecommunications markets worldwide.
FaxSav's Internet-based network complements its telephony-based network and
provides the Company with the opportunity to further lower the retail price of
its customers' international facsimile transmissions while increasing its market
share. As FaxSav continues to deploy its Internet nodes internationally, it will
be able to route an increasing portion of its customers' traffic over the
Internet.
FaxSav believes that the combination of its telephony-based network and its
growing Internet-based network is critical to achieving its objective of
emerging as the leading provider of comprehensive low-cost global faxing
solutions. Therefore FaxSav intends to maintain both a
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telephony-based and an Internet-based network, and expects to eventually route a
majority of its customers' traffic through the Internet.
Network Infrastructure
At the core of the FaxSav network are three main switching nodes, installed
in New York, New Jersey and Washington, D.C. These switching nodes utilize
FaxSav's proprietary messaging software to provide the full range of the
Company's service offerings, including real-time delivery, "virtual real-time
(Internet fax)" delivery, least cost fax routing, e-mail to fax conversion,
Internet access, broadcast delivery, customer registration and customer query
capabilities. Each switching node employs switch-to-host architecture and fully
redundant hardware and software, and is interconnected to the others through a
private intranet utilizing T1 links. A backup connection is also provided
through separate T1 links to the Internet via firewalls. The switching nodes are
installed in secure locations and are supported by uninterruptible power
supplies with emergency power generators as further backup. The main switching
nodes are connected through the Internet to the Internet facsimile nodes
installed by FaxSav overseas, extending access to the Company's service in the
markets where such nodes are located. Internet nodes provide "virtual real-time"
fax delivery, least-cost fax routing via the best node, e-mail to fax conversion
and broadcast delivery capabilities. FaxSav has designed a network-wide
redundancy into its nodes, such that if any particular node fails for any reason
to complete a transmission, an alternative route through the FaxSav network will
automatically be selected. In addition, in the event of an Internet failure, the
Internet nodes have a spanning (multiple simultaneous calling) dial backup
capability to connect via telephony lines to the nearest node. This node-based
and network wide redundancy is designed to allow FaxSav to reliably provide
service to its customers without interruption. Additionally, RSA encryption is
provided in each Internet node such that each file delivered through FaxSav's
Internet nodes is encrypted, addressing security concerns of its customers. All
nodes are designed for unattended operation, provide a full range of system
monitoring and control capability and can be upgraded and maintained remotely.
Services
faxSAV
faxSAV, the Company's first fax-to-fax service, is a real-time fax
transmission service that is delivered through the Company's telephony-based
network. The faxSAV service is accessed by customers through the installation of
a faxSAV Connector, a small proprietary device which is plugged between the fax
machine and the telephone jack. The faxSAV Connector, which is programmable
directly from FaxSav headquarters based on the customer's specified needs,
automatically identifies each outgoing call which the customer has pre-selected
for delivery by the Company and routes the call to the FaxSav network. The
faxSAV Connector is provided by FaxSav free of charge with no installation cost
to the customer. The Company believes that, depending on the volume and
destinations of the customer's traffic, the faxSAV service provides significant
savings to customers on fax usage costs in comparison to the international rates
charged by the major long distance carriers. faxSAV customers are charged on a
per-minute basis for the transmission time to the destination fax machine, and
are billed monthly. The Company also offers customized pricing plans based on
the customer's volume of traffic to individual countries.
faxSAV Assured
faxSAV Assured is a "virtual real-time" enhanced delivery option available
to all faxSAV customers through the faxSAV Connector which may be selected for
all of the customer's traffic or on a call by call basis. faxSAV Assured shifts
the responsibility for repetitive completion attempts to the FaxSav network,
thereby reducing indirect costs and increasing the reliability, timeliness and
predictability of difficult facsimile deliveries. The standard faxSAV Assured
service immediately begins to attempt delivery, and
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makes multiple attempts for a period of one hour. If the fax has not been
successfully completed within that time, the customer is sent a "Non-Delivery"
notice. The Company also offers customized faxSAV Assured services to meet
customer-specific delivery schedules.
faxSAV EZ-List
faxSAV EZ-List is an easy to use fax broadcast service which, from a fax
machine, utilizes the capabilities of the faxSAV Connector to capture the fax
message and the customer's list identification number in a single transmission.
During 1997, the Company introduced its Broadcast List Manager software product
which enables customers to manage and submit broadcast lists from their
desktops. faxSAV EZ-List enables customers to send the same fax message to
multiple recipients by transmitting a single fax message to the FaxSav network
and identifying a specific list of fax addresses previously stored in the
Company's customer database. faxSAV EZ-List customers are charged on a
per-minute basis for the transmission time to each destination fax machine, and
are billed monthly. The Company also offers customized pricing plans based on
the customer's volume of traffic to individual countries.
faxSAV PLUS
In the third quarter of 1996 the Company introduced faxSAV PLUS, a new
"virtual real-time" Internet fax service which is designed to provide reliable
delivery of facsimile transmissions at substantially reduced costs. This service
is designated as Internet fax because the Company utilizes a combination of its
traditional telephony-based network and its growing Internet-based network to
deliver faxSAV PLUS transmissions to fax machines worldwide. The Company is
currently implementing the faxSAV PLUS service with a two-tiered pricing
structure. Pricing for delivery to the key telecommunications markets that
either have Internet nodes installed or are currently targeted for Internet node
deployment is based on the economics of delivery through a planned Internet
backbone. Pricing for delivery to other destinations worldwide continues to be
based on the economics of delivery through the Company's telephony-based
network, which prices may or may not be reduced in the event that the Company
deploys Internet-capable facsimile nodes in such markets. faxSAV PLUS customers
are charged on a per-minute basis for the transmission time to the destination
fax machine, and are billed monthly.
faxSAV for Internet Suite of Services
The faxSAV for Internet suite of services, introduced in stages during the
first half of 1996, enables Internet-connected customers to send faxes directly
from their computer desktops, either from their e-mail package or from a Windows
or Macintosh software application, through the Internet to fax machines
worldwide via the FaxSav network. The Company's World Wide Web site includes a
detailed explanation of these services, installation instructions and service
registration forms. Customers are charged on a per-page basis for the faxSAV for
Internet suite of services and generally are billed in advance of use. The
faxSAV for Internet suite of services includes the following discrete services:
o faxLauncher enables customers to fax documents created in any Windows or
Macintosh application directly from an Internet-connected computer desktop to
fax machines worldwide. faxLauncher also supports documents scanned through
sheet-fed scanners manufactured by Visioneer, Inc., Hewlett-Packard Co. or
Compaq Computer Corporation. A new version of this software, faxLauncher Pro,
provides users with additional features including on-line fax status checking,
off-line queuing, account code support and storage of sent faxes. faxLauncher
software is provided to customers in diskette form or it may be downloaded from
the Company's World Wide Web site.
o faxMailer enables customers to transmit messages from e-mail packages
over the Internet to the FaxSav network for delivery to fax machines worldwide.
faxMailer provides the desktop e-mail customer with the ability to reach the fax
machine of anyone not yet connected to the Internet without
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the necessity of creating hard copy and manually sending a fax. Customers may
register for the faxMailer service through the Company's World Wide Web site.
o faxScan enables customers to send documents scanned in any
TWAIN-compliant scanner over the Internet to the FaxSav network for delivery to
fax machines worldwide. The combination of a scanner and faxScan software puts a
virtual fax machine at the desktop for the customer. faxScan software is
provided to customers in diskette form.
o Serverlink enables any fax software or applications developer the
flexibility of linking to the FaxSav Network in order to facilitate the seamless
distribution of fax documents worldwide. Use of Serverlink results in least
cost-routing and expanded availability of fax software or applications to
multiple users. Serverlink is provided to potential partners and customers
electronically.
faxSAV Custom Corporate Solutions
faxSAV Custom Corporate Solutions are specialized services developed by the
Company to meet customer needs for specific volume fax applications. FaxSav will
custom tailor a software, networking and telecommunications solution designed to
provide the customer with additional savings in time and money.
Customer Support Services
The Company believes that customer support is important in differentiating
its facsimile delivery services from other delivery approaches. The customer
support services provided by the Company include installation assistance on an
as-requested basis, facilitation of international fax completion and monitoring
the performance of faxSAV Connectors. The Company currently provides customer
support and network/faxSAV Connector monitoring functions twenty-four hours a
day, seven days a week. The Company's support personnel respond to telephone
inquiries and e-mail inquiries. The Company also provides information about its
services and new desktop software upgrades on its World Wide Web site.
To provide immediate response to customer inquiries, the Company has
developed a wide area network that provides a real-time fax tracking system and
allows network operations and customer service personnel to redirect, reschedule
or repair fax transmissions that are experiencing completion difficulty. The
system accesses fax traffic information via an Oracle database that is updated
from the Company's three switching nodes in the United States and provides an
on-line connectivity to the Company's master customer database.
Sales and Marketing
Domestic Sales and Marketing
The Company offers its services in the United States through multiple sales
channels which include a direct field sales force, an agent and dealer
distribution network, and promotional activities at trade shows and on the
FaxSav World Wide Web site. Through the first quarter of 1997, the Company had
employed a direct mail and direct response program supported by multiple third
party telemarketing firms. However, thereafter the Company changed its focus by
expanding its direct sales approach to reach larger prospective customers.
During 1995 the Company established a direct field sales force to address
the specialized faxing needs of major accounts and to manage and support the
Company's agent channel. The Company's agent and dealer distribution network
consists of organizations which sell office equipment, office supplies and
telephony services, as well as independent marketing companies. These agents
offer FaxSav services as a companion offering to their other products lines. The
Company has also entered into agreements for
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the bundling faxSAV for Internet suite of services with the products of computer
hardware, software and Internet services companies although revenues from these
agreements have been insignificant.
The Company has used computer and Internet trade shows as forums to
introduce the faxSAV for Internet suite of services to prospective customers and
partners. The Company's promotions have included the distribution of free
software to access its services and free faxing during a trial period and the
Company currently offers 5 free pages of faxes to each new subscriber that
registers through the company's World Wide Web home page. The Company has
promoted its faxLauncher software on the World Wide Web since February 1996.
International Alliances
In connection with the installation of Internet-capable facsimile nodes in
certain foreign countries, the Company has formed strategic sales and marketing
alliances with local Internet service providers, telecommunications companies
and resellers. The Company anticipates that these organizations will use their
knowledge of the local market, language, customs and regulations, as well as
their existing distribution, customer support and billing infrastructures, to
establish, grow and properly service an international FaxSav customer base. In
return, the Company is offering these organizations either exclusive or
non-exclusive rights to market the Company's services in their territories and
offering to provide such services at a discount to the Company's retail prices.
In addition to the strategic alliances, the Company has developed a network
of commission-based agents to sell the faxSAV for Internet suite of services in
foreign markets. To date, this network consists of over 200 agents representing
the Company in 70 foreign markets. The Company has also implemented a reseller
program for those agents who have the infrastructure to generate invoices and
perform collections. Under this program, participating agents are provided
detailed billing information on their accounts from which they can create and
distribute invoices in the local language and currency, and locally service
customer billing inquiries.
Customers
The Company sells its services primarily to businesses with international
document transmission needs. Customers can install FaxSav's services at
individual fax machine or desktop locations, across departments or throughout
organizations by simply plugging the faxSAV Connector, a small proprietary
device, between their fax machine and the telephone jack or by simply installing
FaxSav's desktop software on an Internet connected personal computer. Through
1995, all of the Company's customers were located in the United States. In 1996,
with the introduction of the faxSAV for Internet suite of services, the Company
began to expand its customer base to include foreign desktop customers. In the
first quarter of 1997, the Company began offering fax-to-fax services through
its international marketing alliances in certain countries where an Internet
node was installed. In 1997, revenues from these international customers
amounted to $2.3 million or 13.2% of total revenues.
Competition
The market for facsimile transmission services is intensely competitive and
there are limited barriers to entry. The Company expects that competition will
intensify in the future. The Company believes that its ability to compete
successfully will depend upon a number of factors, including market presence;
the capacity, reliability and security of its network infrastructure; the
pricing policies of its competitors and suppliers; the timing of introductions
of new services and service enhancements by the Company and its competitors; and
industry and general economic trends. A key element of the Company's strategy is
to expand its market presence by leveraging its price leadership strategy both
domestically and internationally. The Company intends to maintain and improve
the capacity, reliability and security of its network infrastructure through
continued research and development activities and will
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continue to place significant emphasis on the ongoing development of new
services and applications of its existing services.
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. (an
affiliate of WorldCom) and NETCOM On-Line Communications Services, 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 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.
Intellectual Property
The Company's success is dependent upon its proprietary technology. The
Company relies primarily on a combination of contract, copyright and trademark
law, trade secrets, confidentiality agreements and contractual provisions to
protect its proprietary rights. The Company has 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 the pending patent will issue from such application or that
present or future patents will provide sufficient protection to the Company's
present or future technologies, products and processes. In addition, there can
be no assurance that others will not independently develop substantially
equivalent proprietary information or obtain access to the Company's know-how.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of the Company's services or 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
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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 is likely to
prevail in such matter, there can be no assurance that the outcome of 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.
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 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
9
<PAGE>
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.
Employees
As of December 31, 1997, the Company had 108 full-time employees, including
16 in research and development, 32 in network operations and support, 46 in
sales and marketing and 14 in finance and administration. In addition, at
December 31, 1997, the Company was utilizing the services of 2 software engineer
consultants. The Company's employees are not covered by any collective
bargaining agreements. The Company believes that its relations with its
employees are good.
10
<PAGE>
Item 2. Properties
The Company's corporate headquarters are located in Edison, New Jersey in
facilities consisting of approximately 13,200 square feet of office space
occupied under a lease expiring in May 2002. The Company's three U.S. Network
facilities are co-located in telehousing facilities under short term leases. In
addition, the Company leases offices for its sales staff in the Chicago, Dallas,
Ft. Lauderdale, Los Angeles, New York and San Francisco metropolitan areas.
While it believes that these facilities are adequate for its present needs, the
Company is continually reviewing its needs and may add facilities in the future.
The Company believes that any required additional space would be available on
commercially reasonable terms. Finally, in connection with its deployment of
Internet-capable facsimile nodes, the Company has entered into, and will
continue to enter into, short-term leases in telehousing facilities worldwide.
Item 3. 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 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 it is
likely to prevail in such matter, there can be no assurance that the outcome of
this litigation will not have a material adverse effect on the Company's
business, financial condition and results of operations.
Item 4. Submission of Matters to a Vote of Security-Holders
None.
11
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "FAXX." The following table sets forth, from the calendar period
indicated since the Company's initial public offering in October 1996, the range
of high and low sales prices for the Common Stock of the Company on the Nasdaq
National Market. These prices do not include retail mark-up, mark-down or
commissions.
1996 High Low
---- ---
Fourth Quarter (from October 11, 1996)...........$8.50 $5.00
1997
First Quarter....................................$7.50 $4.00
Second Quarter....................................5.25 1.25
Third Quarter.....................................1.75 1.00
Fourth Quarter....................................3.00 1.00
As of March 24, 1998, there were 140 holders of record of the Company's
Common Stock. On March 24, 1998, the last sale price reported on the Nasdaq
National Market for the Company's Common Stock was $2.94 per share.
12
<PAGE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands, except for share and per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues .................................... $ 17,418 $ 15,036 $ 11,649 $ 3,449 $ 2,580
Cost of service ............................. 10,414 8,898 7,021 2,297 1,856
----------- ----------- ----------- ----------- -----------
Gross margin ................................ 7,004 6,138 4,628 1,152 724
Operating expenses:
Network operations and support ........... 2,287 1,985 1,183 851 742
Research and development ................. 1,909 1,772 840 613 628
Sales and marketing ...................... 5,268 6,065 4,238 2,337 1,597
General and administrative ............... 3,132 2,495 2,007 970 953
Depreciation and amortization ............ 1,702 1,437 928 242 102
Other .................................... -- -- (441) (309) --
----------- ----------- ----------- ----------- -----------
Total operating expenses ............... 14,298 13,754 8,755 4,704 4,022
----------- ----------- ----------- ----------- -----------
Operating loss .............................. (7,294) (7,616) (4,127) (3,552) (3,298)
Interest income (expense), net .............. 79 46 46 45 23
Other income (expense), net ................. 96 94 (4) 14 15
----------- ----------- ----------- ----------- -----------
Loss before income taxes .................... (7,119) (7,476) (4,085) (3,493) (3,260)
Provision for income taxes .................. -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Net loss .................................... $ (7,119) $ (7,476) $ (4,085) $ (3,493) $ (3,260)
=========== =========== =========== =========== ===========
Net loss per common and equivalent share .... $ (0.72) $ (2.74) $ (12.48) $ (10.70) $ (10.07)
=========== =========== =========== =========== ===========
Weighted average common and equivalent shares
outstanding (1) .......................... 9,880,681 2,724,651 327,353 326,410 323,862
=========== =========== =========== =========== ===========
Pro forma net loss per common and equivalent
share (1) ................................ $ (0.72) $ (0.86) $ (0.45) $ (0.50)
=========== =========== =========== ===========
Shares used in computing pro forma net loss
per common and equivalent share (1) ...... 9,880,681 8,712,054 9,079,566 6,957,411
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit)....................... $1,333 $7,080 $ (849) $ (385) $(354)
Total assets.................................... 10,496 14,448 4,840 2,430 989
Total long-term debt............................ 1,169 678 326 -- 321
Total stockholders' equity (deficit)............ 4,664 9,659 687 621 (336)
</TABLE>
- ----------
(1) See Note 2 of Notes to Financial Statements: "Summary of Significant
Accounting Policies -- Earnings Per Share" and " -- Pro Forma Earnings Per
Share."
13
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
FaxSav 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
first quarter of 1997, the Company also expanded its fax-to-fax service
offerings to certain international markets where it had installed an Internet
node. In 1997, revenues from international customers were $2.3 million, or 13.2%
of total revenues.
The Company's network includes interconnection in the United States with
the existing worldwide telephony network through three network sites enabling
delivery of facsimile transmissions to virtually any domestic or international
destination. The Company also had Internet nodes installed in seventeen
countries as of December 31, 1997. 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.
The Company's revenue and expense levels have continued to increase,
particularly in 1996 as compared to 1995 and 1995 as compared to 1994, as the
Company's customer base has expanded and the Company invested in the design,
development and marketing of its newer services, including the faxSAV for
Internet suite of services and faxSav EZ-List, a fax broadcast service.
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.
14
<PAGE>
Results of Operations
The following table sets forth certain operating data as a percentage of
total revenues for the periods indicated (subtotals not adjusted for rounding):
Years Ended December 31,
----------------------------------
1997 1996 1995
---- ---- ----
Percentages of Revenues:
Revenues................................ 100.0% 100.0% 100.0%
Cost of service......................... 59.8 59.2 60.3
------ ------ -----
Gross margin............................ 40.2 40.8 39.7
Operating expenses:
Network operations and support....... 13.1 13.2 10.2
Research and development............. 11.0 11.8 7.2
Sales and marketing.................. 30.2 40.3 36.4
General and administrative........... 18.0 16.6 17.2
Depreciation and amortization........ 9.8 9.6 8.0
Other................................ -- -- (3.8)
------ ------ -----
Total operating expenses.......... 82.1 91.5 75.2
------ ------ -----
Operating loss.......................... (41.9) (50.7) (35.5)
Interest income (expense), net.......... 0.5 0.3 0.4
Other income (expense), net............. 0.5 0.6 (0.0)
------ ------ -----
Loss before income taxes................ (40.9) (49.8) (35.1)
Provision for income taxes.............. -- -- --
------ ------ -----
Net loss................................ (40.9)% (49.8)% (35.1)%
====== ====== ======
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues. Revenues, which consist primarily of customer usage charges, grew
15.8% to $17.4 million in the year ended December 31, 1997 from $15.0 million in
the year ended December 31, 1996 primarily as a result of increased revenues
from (i) the Company's faxSAV for Internet suite of services first introduced in
1996, (ii) the Company's faxSAV EZ-List broadcast service and (iii) an
international fax-to-fax customer base developed in 1997. Fax volumes in total,
representing faxes delivered to domestic and international destinations, grew
40.0% to 39.5 million in 1997 as compared to 28.3 million in 1996, while faxes
to international destinations grew 33.0% to 22.0 million in 1997 from 16.5
million in 1996.
Cost of service. Cost of service consists of local access charges, leased
network backbone circuit costs and long distance and international termination
charges. These are primarily variable costs based on actual facsimile volumes.
Cost of service increased in 1997 as a result of the increase in facsimile
volume for the year and also increased as a percentage of revenues to 59.8% in
1997 from 59.2% in 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 were generated without the complete benefit of the
lower cost Internet network deployment that is still in process. By December 31,
1997 the Company had completed the installation of Internet nodes in seventeen
of the planned thirty countries.
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 $2.3 million in
the year ended December 31, 1997 from $2.0 million in the year ended December
31, 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.
As a percentage of revenues, these costs remained relatively unchanged amounting
to 13.1% in 1997 and 13.2% in 1996.
15
<PAGE>
Research and development. Research and development expenses consist
primarily of salaries and consulting fees paid to software engineers and
development personnel. Research and development expenses increased to $1.9
million for the year ended December 31, 1997 in comparison to $1.8 million for
the year ended December 31, 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 enhancements to the Company's faxSAV
EZ-List broadcast service. As a percentage of revenues, these expenses decreased
to 11.0% in 1997 from 11.8% in 1996 as a result of increased revenues in 1997.
Sales and marketing. Sales and marketing expenses consist primarily of
salaries and commissions for sales and marketing staffs, promotion material
preparation and mailing costs, third-party telemarketing charges and agent and
dealer commissions. Sales and marketing expenses decreased to $5.3 million and
30.2% of revenues for the year ended December 31,1997 in comparison to $6.1
million and 40.3% for the year ended December 31, 1996. These costs decreased as
a result of reduced spending for third party telemarketing programs in 1997 in
connection with the Company's change in focus to a direct selling staff and as a
result of higher expenses incurred in 1996 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 consist of
expenses associated with the Company's management, accounting, finance, billing
and administrative functions. General and administrative expenses increased to
$3.1 million and 18.0% of revenues in the year ended December 31, 1997 from $2.5
million and 16.6% of revenues for the year ended December 31, 1996. The
increases in total expenses and in the percentage of revenues result from
personnel increases to support the increased customer base, expenses incurred
for management information systems improvements and from expenses incurred in
1997 related to the public ownership of the Company's common stock.
Depreciation and amortization. Depreciation and amortization increased to
$1.7 million and 9.8% of revenues in the year ended December 31, 1997 in
comparison to $1.4 million and 9.6% of revenues in the year ended December 31,
1996, primarily reflecting depreciation of the company's increased investment in
international Internet nodes as part of 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 years ended December 31, 1997 and 1996. Accordingly, there was no
provision or credit for income taxes. 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.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues. Revenues, which consist primarily of customer usage charges, grew
29.1% to $15.0 million in year ended December 31, 1996 from $11.6 million in the
year ended December 31, 1995 primarily as a result of the continued expansion of
the Company's customer base. Contributing to the increase were revenues from the
Company's faxSAV EZ-List broadcast service and faxSav for Internet suite of
services which were commercially introduced in the first quarter of 1996. Usage
volumes in total, representing domestic and international fax traffic, grew 39%
in 1996 as compared to 1995, while international fax minutes grew 62% to 16.5
million minutes in 1996 as compared to 10.2 million minutes in 1995.
Cost of service. Cost of service consists of local access charges, leased
network backbone circuit costs and long distance domestic and international
termination charges. These are primarily variable costs based on actual
facsimile volume. Cost of service increased as a result of the increase in
facsimile volume for the period but decreased as a percentage of revenues in the
year ended December 31, 1996
16
<PAGE>
to 59.2% from 60.3% in the year ended December 31, 1995. This percentage
decrease was a result of volume discounts on long distance termination 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 $2.0 million and
13.2% of revenues in the year ended December 31, 1996 from $1.2 million and
10.2% of revenues in the year ended December 31, 1995 as a result of hiring
additional personnel to implement the Internet fax node deployment plan and to
support the Company's expanding customer base.
Research and development. Research and development expenses consist
primarily of salaries and consulting fees paid to software engineers and
development personnel. Research and development expenses increased by 111% in
the year ended December 31, 1996 in comparison to the year ended December 31,
1995 due to the continuing development efforts for enhancements to the Company's
Internet desktop-to-fax services both in client software and network
enhancements and the continuing development of the Company's faxSav EZ-List
broadcast service. Such development efforts resulted in increased expenses
amounting to 11.8% of revenues in 1996 from 7.2% of revenues in 1995.
Sales and marketing. Sales and marketing expenses consist primarily of
salaries and commissions for sales and marketing staffs, promotional material
preparation and mailing costs, third-party telemarketing charges and agent and
dealer commissions. Sales and marketing expenses increased to $6.1 million for
the year ended December 31, 1996 in comparison to $4.2 million in the year ended
December 31, 1995. As a percentage of revenues, these costs were 40.3% in 1996
and 36.4% in 1995. These increases were a result of the Company initiating a
program of presenting its faxSAV for Internet suite of services at trade shows
in the United States and in foreign countries where it plans to deploy Internet
fax nodes. The Company also initiated an advertising and promotion campaign to
promote its new services and expanded its sales and marketing staff.
General and administrative. General and administrative expenses consist of
expenses associated with the Company's management, accounting, finance, billing
and administrative functions. General and administrative expenses increased to
$2.5 million in the year ended December 31, 1996 from $2.0 million in the year
ended December 31, 1995. As a percentage of revenues, these costs decreased to
16.6% of revenues in the year ended December 31, 1996 from 17.2% of revenues in
the year ended December 31, 1995. The increase in total general and
administrative expenses results from personnel increases to support the
increased customer base, expenses incurred for management information system
improvements and management recruiting fees. The percentage decrease was a
result of the increase in revenue.
Depreciation and amortization. Depreciation and amortization amounted to
$1.4 million and 9.6% of revenues in the year ended December 31, 1996, in
comparison to $0.9 million and 8% of revenues in the year ended December 31,
1995, primarily reflecting depreciation of the Company's increased investment in
faxSAV Connectors installed at customer premises to allow access to the FaxSav
network.
Other. Other operating income of $0.4 million for the year ended December
31, 1995 represents service fees received under a Service Agreement with Telstra
which offset various operating expenses incurred in support of the development
of Telstra's "WorldFax" service in the U.S. The Agreement expired in 1995.
Provision for income taxes. The Company had losses for income tax purposes
for the years ended December 31, 1996 and 1995. Accordingly, there was no
provision or credit for income taxes for those periods. Any income tax benefits
for these losses has been offset by an increase in a valuation allowance for
deferred tax assets.
17
<PAGE>
Liquidity and Capital Resources
The Company has financed its cash requirements for operations and
investments in equipment through public and private sales of equity securities,
bank borrowings and capital lease financing. During the year ended December 31,
1997, the Company entered into (1) an agreement for a $0.8 million secured
equipment line of credit with Silicon Valley Bank and (2) an agreement for a
$0.5 million equipment loan facility from Phoenix Growth Capital Corp. All
amounts available to the Company under these agreements had been advanced by
December 31, 1997. The net proceeds from the Company's initial public offering
completed in October 1996 amounted to $10.6 million. Cash flows from the private
sales of equity securities amounted to $2.1 million in 1997 and $7.9 million in
1996, net of issuance costs. $2.2 million of the 1996 proceeds 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 $5.5 million in 1997, as compared to $4.9 million in 1996. Cash used for the
purchase of equipment amounted to $2.9 million in 1997 and $2.3 million in 1996.
The equipment includes network equipment (particularly in the 1997 period) and
faxSAV Connectors purchased by the Company for installation at customer
locations. The Company is obligated through June 1999 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 December 31, 1997 included
cash and cash equivalents of $3.6 million and the $0.5 million in equipment
financing resulting from its agreement with Silicon Valley Bank effective March
1998. The Company currently believes that its current cash and cash equivalents
and available equipment financing facility will be sufficient to meet its
anticipated cash needs for working capital and capital expenditure requirements
through at least the end of 1998, but, in order to meet minimum requirements for
the Nasdaq National Market ("Nasdaq"), the Company anticipates raising
additional equity financing during 1998. If the Company's cash requirements vary
materially from those now planned as a result of unforeseen changes, management
believes that its current sources of liquidity will be sufficient to satisfy the
Company's requirements through the end of 1998 after limiting its network
expansion and reducing or eliminating research and development activities and
sales and marketing expenditures. 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 year ended December 31, 1997, 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. 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 December 31, 1997, the Company had an accumulated deficit of $32.2 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.
18
<PAGE>
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, 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 and Market Illiquidity. 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 December 31, 1997, the Company had net
tangible assets of approximately $4.7 million. Without an equity financing, the
Company is likely not to meet the net tangible assets maintenance requirement as
of March 31, 1998. The Company is currently exploring equity financing
alternatives. If the Company is unable to satisfy such maintenance requirements,
the Company's securities may be delisted from the Nasdaq System. In such event,
trading, if any, in the Common Stock would thereafter be conducted in the
over-the-counter market in the "pink sheets" or the NASD's "Electronic Bulletin
Board." Consequently, the liquidity of
19
<PAGE>
the Company's securities could be materially impaired, not only in the number of
securities that can be bought and sold at a given price, but also through delays
in the timing of transactions and reduction in security analysts' and the
media's coverage of the Company, which could result in lower prices for the
Company's securities than might otherwise be attained and could also result in a
larger spread between the bid and asked prices for the Company securities. In
addition, under the Securities Exchange Act of 1934, as amended, and the
Securities Enforcement Remedies and Penny Stock Reform Act of 1990, if the
Common Stock is delisted from trading on Nasdaq and the trading price of the
Common Stock is less than $5.00 per share, trading in the Common Stock would
also be subject to certain broker special sales practice requirements and
special disclosure requirements which could severely limit the market liquidity
of the Common Stock. There can be no assurance that the Common Stock will not be
delisted or treated as penny 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 end of 1998. 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 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 and Market
Illiquidity." 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.
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
20
<PAGE>
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 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
21
<PAGE>
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
22
<PAGE>
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 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
23
<PAGE>
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 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 such 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 $2.3 million or 13.2% 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. There can be no assurance that the Company's
software contains all necessary date code changes. 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
24
<PAGE>
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.
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 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.
Item 8. Financial Statements and Supplementary Data
The information in response to this item is set forth in the Financial
Statements beginning on page F-3 of this report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
25
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Certain information in response to this item regarding the directors and
executive officers of FaxSav is incorporated herein by reference to FaxSav
Incorporated's Proxy Statement dated April 1998 to be filed with the Securities
and Exchange Commission (the "SEC"). Information on compliance with Section
16(a) of the Exchange Act is incorporated herein by reference to "Compliance
with Section 16(a) of the Securities Exchange Act of 1934" in the Company's
Proxy Statement dated April 1998 to be filed with the SEC.
Item 11. Executive Compensation
Information in response to this item is incorporated herein by reference to
"Executive Compensation" in the Company's Proxy Statement dated April 1998 to be
filed with the SEC.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information in response to this item is incorporated herein by reference to
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement dated April 1998 to be filed with the SEC.
Item 13. Certain Relationships and Related Transactions
Information in response to this item is incorporated herein by reference to
"Certain Transactions" in the Company's Proxy Statement dated April 1998 to be
filed with the SEC.
26
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements Page No.
--------
Report of Independent Accountants...................................F-2
Balance Sheets at December 31, 1997 and 1996........................F-3
Statement of Operations for the years ended December 31, 1997,
1996 and 1995....................................................F-4
Statement of Cash Flows for the years ended December 31, 1997,
1996 and 1995....................................................F-5
Statement of Stockholders' Equity (Deficit) for the years
ended December 31, 1997, 1996 and 1995...........................F-6
Notes to Financial Statements..................................F-7-F-21
(2) Financial Statement Schedules
Supplemental Schedules to Financial Statements.....................F-22
(b) Reports on Form 8-K
None.
(c) Exhibits
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 Registrants. 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 exhibits 10.1 and 10.2 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 WorldCom and the
Registrant, dated December 1, 1996 (incorporated by reference to
exhibit 10.8 to the Registrant's Report on Form 10-Q for the quarter
ended March 31, 1997).
27
<PAGE>
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 (the
"Metro Four Lease"), as extended and amended prior to May 5, 1997
(incorporated by reference to exhibit 10.10 to the Registrant's
Registration Statement).
10.9** Amendment to Metro Four Lease, dated May 5, 1997.
10.10** Loan and Security Agreement, dated September 26, 1997, between the
Company and Silicon Valley Bank.
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. 333-43929).
11.** Statement Regarding Computation of Earnings Per Share.
23.** Consent of Coopers & Lybrand L.L.P.
27.** Financial Data Schedule.
99. Proxy Statement of FaxSav Incorporated relative to the Annual Meeting
of the Stockholders to be held on May 28, 1998, which is incorporated
by reference into Part III of this Form 10-K.
- ----------
* Confidential treatment granted.
** Filed herewith.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf of the undersigned, thereunto duly authorized.
FAXSAV INCORPORATED
By: /s/ Thomas F. Murawski
----------------------
Thomas F. Murawski
Chief Executive Officer, President and Chairman of the
Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities indicated
on March 30, 1998:
Signature Title(s)
/s/ Thomas F. Murawski Chief Executive Officer, President and Chairman
- ---------------------- of the Board of Directors
/s/ Peter S. Macaluso Chief Financial Officer (Principal Financial and
- ---------------------- Accounting Officer), Treasurer and Secretary
/s/ Jeffrey M. Drazan Director
- ----------------------
/s/ Peter A. Howley Director
- ----------------------
/s/ Robert Labant Director
- ----------------------
29
<PAGE>
FaxSav Incorporated
(formerly Digitran Corporation)
Index to Financial Statements
Page
----
Report of Independent Accountants............................................F-2
Balance Sheets as of December 31, 1997 and 1996..............................F-3
Statements of Operations for the years ended December 31, 1997,
1996 and 1995..............................................................F-4
Statements of Cash Flows for the years ended December 31, 1997,
1996 and 1995..............................................................F-5
Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1997, 1996 and 1995...........................................F-6
Notes to Financial Statements ..........................................F-7-F-21
Supplemental Schedule to Financial Statements...............................F-22
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
FaxSav Incorporated:
We have audited the financial statements and financial statement schedule of
FaxSav Incorporated (formerly Digitran Corporation) (the "Company") listed in
the index on page F-1 of this Form 10-K. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FaxSav Incorporated as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Parsippany, New Jersey
February 4, 1998
F-2
<PAGE>
FaxSav Incorporated
Balance Sheets
as of December 31, 1997 and 1996
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
----------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,680,185 $ 7,923,105
Marketable securities 1,002,513
Accounts receivable, less allowances of $330,724 and
$229,376 as of December 31, 1997 and 1996,
respectively 2,280,119 2,015,155
Prepaid expenses and other current assets 35,844 251,417
----------- -------------
Total current assets 5,996,148 11,192,190
Property and equipment, net 4,175,264 3,086,845
Other assets, net 324,173 169,211
----------- -------------
Total assets $10,495,585 $14,448,246
=========== =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 658,703 $ 263,446
Accrued expenses and other liabilities 3,219,846 3,413,787
Obligation under capital lease 315,370 282,776
Current portion of notes payable 469,217 152,111
----------- -------------
Total current liabilities 4,663,136 4,112,120
Obligation under capital lease 85,551 398,662
Notes payable 1,083,190 278,871
----------- -------------
Total liabilities 5,831,877 4,789,653
----------- -------------
Commitments and contingencies (Note 12)
Stockholders' equity:
Common stock, $0.01 par value; 40,000,000 shares
authorized; 10,827,855 and 9,792,010 shares
issued as of December 31, 1997 and 1996,
respectively, and 10,806,466 and 9,770,621
shares outstanding as of December 31, 1997
and 1996, respectively 108,065 97,706
Additional paid-in capital 36,730,403 34,616,745
Accumulated deficit (32,174,745) (25,055,843)
Treasury stock, at cost, 21,389 common shares as
of December 31, 1997 and 1996, respectively (15) (15)
----------- -------------
Total stockholders' equity 4,663,708 9,658,593
----------- -------------
Total liabilities and stockholders' equity $10,495,585 $ 14,448,246
=========== =============
</TABLE>
The accompanying notes are an integral part of the financial statements. F-3
<PAGE>
FaxSav Incorporated
Statements Of Operations
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenue $ 17,418,333 $ 15,035,711 $ 11,649,499
Cost of service 10,413,797 8,898,308 7,020,659
------------ ------------ ------------
Gross margin 7,004,536 6,137,403 4,628,840
------------ ------------ ------------
Operating expenses:
Network operations and support 2,286,594 1,984,607 1,183,119
Research and development 1,909,137 1,771,822 840,083
Sales and marketing 5,268,099 6,065,045 4,237,787
General and administrative 3,132,438 2,495,624 2,006,901
Depreciation and amortization 1,702,054 1,436,673 928,652
Other 0 0 (440,625)
------------ ------------ ------------
Total operating expenses 14,298,322 13,753,771 8,755,917
------------ ------------ ------------
Operating loss (7,293,786) (7,616,368) (4,127,077)
------------ ------------ ------------
Other income (expense):
Interest income 240,987 188,680 98,408
Interest expense (162,218) (142,269) (52,727)
Other 96,115 93,568 (4,051)
------------ ------------ ------------
174,884 139,979 41,630
------------ ------------ ------------
Net loss $ (7,118,902) $ (7,476,389) $ (4,085,447)
============ ============ ============
Historical basic and diluted net loss
per common share $ (0.72) $ (2.74) $ (12.48)
============ ============ ============
Shares used in computing historical
net loss per common shares 9,880,681 2,724,651 327,353
============ ============ ============
Unaudited pro forma data (Note 2):
Pro forma basic and diluted
net loss per common share $ (0.72) $ (0.86) $ (0.45)
============ ============ ============
Shares used in computing pro
forma net loss per common
share 9,880,681 8,712,054 9,079,566
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements. F-4
<PAGE>
FaxSav Incorporated
Statements Of Cash Flows
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------ --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (7,118,902) $ (7,476,389) $ (4,085,447)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization expense 1,702,054 1,436,673 928,652
Provision for doubtful accounts 230,520 219,400 194,720
Gain on sale of property and equipment (18,791) -- --
Changes in assets and liabilities:
Accounts receivable (495,484) 123,497 (1,440,046)
Prepaid expenses and other current
assets 215,573 (184,111) 48,363
Other assets (182,462) (80,199) (63,584)
Accounts payable 395,257 (40,961) (263,097)
Accrued expenses and other
liabilities (193,941) 1,086,523 1,171,916
------------- ------------ --------------
Net cash used in operating activities (5,466,176) (4,915,567) (3,508,523)
------------- ------------ --------------
Cash flows used in investing activities:
Proceeds/(purchase) of marketable
securities 1,002,513 (1,002,513) --
Purchase of property and equipment (2,856,952) (2,328,829) (1,267,219)
Proceeds from sales of property and
equipment 112,770
------------- ------------ --------------
Net cash used in investing activities (1,741,669) (3,331,342) (1,267,219)
------------- ------------ --------------
Cash flows from financing activities:
Principal payments made under capital
lease obligation (280,517) (219,201) (135,343)
Borrowings under line of credit 1,299,797 956,334 1,000,000
Repayments of notes payable (178,372) (1,525,352) --
Proceeds from issuance of preferred stock, net -- 7,933,434 4,151,863
Proceeds from issuance of common stock
and exercise of stock options and warrants, net 2,124,017 10,636,307 --
Treasury stock acquired - preferred -- (2,163,878) --
------------- ------------ --------------
Net cash provided by financing
activities 2,964,925 15,617,644 5,016,520
------------- ------------ --------------
Net increase in cash (4,242,920) 7,370,735 240,778
Cash and cash equivalents at beginning of
period 7,923,105 552,370 311,592
------------- ------------ --------------
Cash and cash equivalents at end of period $ 3,680,185 $ 7,923,105 $ 552,370
============= ============ ==============
Supplemental Disclosure:
Cash paid for interest $ 45,918 $ 68,421 $ 41,685
============= ============ ==============
Noncash investing and financing activities:
Equipment acquired under capital lease $ -- $ 421,805 $ 569,178
============= ============ ==============
Issuance of common stock under option
pursuant to severance agreement $ -- $ 42,091 $ --
============= ============ ==============
</TABLE>
The accompanying notes are an integral part of the financial statements. F-5
<PAGE>
FaxSav Incorporated
Statements Of Stockholders' Equity (Deficit)
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock Additional
---------------------------- -------------------------- Paid-In
Shares Amount Shares Amount Capital
------------ -------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 39,679,021 $ 39,679 327,353 $ 3,274 $ 14,071,681
Issuance of Series E preferred stock 19,090,900 19,091 4,180,828
Expense in connection with stock issuance (48,056)
Net loss
------------ -------------- ---------- ------------ ------------
Balance at December 31, 1995 58,769,921 58,770 327,353 3,274 18,204,453
Issuance of Series F preferred stock 19,999,988 20,000 7,979,998
Treasury stock acquired - Series D preferred
stock (8,655,510) (2,155,222)
Conversion of preferred stock into common
stock (70,127,830) (78,783) 7,791,981 77,920 (7,793)
Issuance of common stock in connection with
initial public offering 1,600,000 16,000 11,888,000
Expense in connection with stock issuances (1,343,035)
Exercise of warrants 13,431 13 131 8,765
Exercise of stock options 51,156 512 41,579
Net loss
------------ -------------- ---------- ------------ ------------
Balance at December 31, 1996 0 0 9,770,621 97,706 34,616,745
------------ -------------- ---------- ------------ ------------
Issuance of common stock in connection with
private placement 1,000,000 10,000 2,165,000
Exercise of stock options 35,746 358 27,277
Exercise of warrants 99 1 539
Expenses in connection with stock issuance (79,158)
Net loss
------------ -------------- ---------- ------------ ------------
Balance, at December 31, 1997 -0- $ -0- 10,806,466 $ 108,065 $ 36,730,403
============ ============== ========== ============ ============
<CAPTION>
Accumulated Treasury
Deficit Stock Total
------------- ------------- --------------
<S> <C> <C> <C>
Balance at January 1, 1995 $(13,494,007) $ (15) $ 620,612
Issuance of Series E preferred stock 4,199,919
Expense in connection with stock issuance (48,056)
Net loss (4,085,447) (4,085,447)
------------- ------------- --------------
Balance at December 31, 1995 (17,579,454) (15) 687,028
Issuance of Series F preferred stock 7,999,998
Treasury stock acquired - Series D preferred
stock (8,656) (2,163,878)
Conversion of preferred stock into common
stock 8,656 --
Issuance of common stock in connection with
initial public offering 11,904,000
Expense in connection with stock issuances (1,343,035)
Exercise of warrants 8,778
Exercise of stock options 42,091
Net loss (7,476,389) (7,476,389)
------------- ------------- --------------
Balance at December 31, 1996 (25,055,843) (15) 9,658,593
------------- ------------- --------------
Issuance of common stock in connection with
private placement 2,175,000
Exercise of stock options 27,635
Exercise of warrants 540
Expenses in connection with stock issuance (79,158)
Net loss (7,118,902) (7,118,902)
------------- ------------- --------------
Balance, at December 31, 1997 $(32,174,745) $ (15) $ 4,663,708
============= ============= ==============
</TABLE>
The Company has 1,000,000 authorized shares of preferred stock at $0.01 par
value. No preferred stock is currently issued or outstanding.
The accompanying notes are an integral part of the financial statements. F-6
<PAGE>
FaxSav Incorporated
Notes To Financial Statements
1. Organization and Nature of Operations:
FaxSav Incorporated, formerly known as Digitran Corporation (the
"Company"), was formed in November 1989 to engage in the sale of network
services customized for the transmission of data, facsimile and graphical
information. In February 1996, the Company changed its name to FaxSav
Incorporated.
The Company designs, develops, and markets a variety of
business-to-business facsimile transmission services, including fax-to-fax,
desktop to fax, enhanced fax and broadcast fax services and operates in one
business segment. Through the use of its integrated Internet-based and
telephony-based network and its proprietary software, the Company enables
its customers to send documents and images to fax machines worldwide. In
early 1996, the Company began to deploy a global Internet-based network of
nodes that enable it to bypass the long distance carriers' networks when
sending faxes to or from international areas serviced by these nodes. Prior
to 1997, most of the Company's revenues have been derived from delivering
facsimile transmissions to locations outside the United States from
customers located throughout the United States. In 1997, the Company
expanded its customer base in international markets including the
development of a fax-to-fax business in certain markets in the Asia Pacific
region. As a result, international revenues were approximately $2,300,000
in 1997. Due to the ubiquitous nature of the Company's network and its
centralized operations in the United States, the Company measures the
results of its international business to the gross margin level only, which
approximated the overall results for the Company in 1997. Identifiable
assets from all international localities were less than 10% of the
Company's total assets.
The Company is subject to risks common to rapidly growing technology-based
companies, including limited operating history, dependence on key
personnel, raising capital, rapid technological change, dependence on
network infrastructure, competition from substitute products and larger
companies, and the successful development and marketing of commercial
products and services.
The Company currently believes its cash and cash equivalents will be
sufficient to meet its presently anticipated cash needs through at least
the end of 1998 and, in order to meet minimum NASDAQ listing requirements,
the Company anticipates raising additional equity financing during 1998.
Even if the Company's cash requirements vary materially from those now
planned as a result of unforeseen changes, management believes that its
current sources of liquidity are sufficient for it to continue operations
through the end of 1998. In this regard, the Company is prepared to limit
its network expansion and reduce or eliminate research and development
activities, and sales and marketing expenditures, if necessary.
Fax boards used in the Company's telecommunications network are supplied by
one vendor on a non-exclusive basis. Other components of the Company's
operating network are supplied by a limited number of vendors, also on a
non-exclusive basis. Management believes that other suppliers could be
identified to provide this equipment at a competitive price if this
supplier was unable to provide equipment.
F-7
<PAGE>
FaxSav Incorporated
Notes to Financial Statements (Continued)
1. Organization and Nature of Operations (Continued):
Operation of the Company's network is dependent upon long distance
telecommunications companies transmitting information for the Company. The
Company has typically utilized only a limited number of these providers to
generate volume discounts. The Company's business strategy is also
dependent upon providing this service at the lowest possible cost which is
greatly affected by the cost of long distance transmission service.
Management believes that its long-distance transmissions could be made at
competitive rates with any number of companies providing long distance
service.
In October 1996, the Company completed an initial public offering of 1.6
million shares of its common stock. The aggregate gross proceeds of the
offering were approximately $12 million.
In connection with the offering, the Company filed an amendment to its
Fifth Amended and Restated Certificate of Incorporation to effect a
one-for-nine reverse stock split at a par value of $0.01 and to change the
authorized number of common shares to 40,000,000. All share and per share
amounts in the financial statements have been retroactively restated to
reflect the reverse stock split.
The Company also filed immediately prior to the closing of the offering its
Sixth Amended and Restated Certificate of Incorporation which changed the
authorized amount of preferred stock. All outstanding shares of preferred
stock were converted at the consent of the holders into an aggregate of
7,791,981 shares of common stock.
2. Summary Of Significant Accounting Policies:
A. Revenue Recognition and Cost of Service:
The Company recognizes revenue as services are provided to customers
and records the related cost of service as incurred. Cost of service
consists of local access charges, leased network backbone circuit
costs and long distance domestic and international termination
charges.
B. Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
F-8
<PAGE>
FaxSav Incorporated
Notes to Financial Statements (Continued)
2. Summary Of Significant Accounting Policies (Continued):
B. Estimates (Continued):
Significant estimates made by management and included in the financial
statements are the allowance for bad debts, the valuation allowance
for deferred tax assets, and the accrual for legal defense.
C. Reverse Stock Split and Conversion of Preferred Stock:
In October 1996, in connection with an initial public offering of the
Company's common stock, the Company effectuated a reverse stock split
for common shares of one-for-nine shares. The effect of this reverse
stock split on all share and per share amounts has been retroactively
restated in the financial statements.
The Company also converted all of its outstanding preferred stock at
the election of the holders into 7,791,981 shares of common stock in
connection with the offering.
D. Earnings Per Share:
In 1997, the Company 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.
In February 1998, the SEC issued Staff Accounting Bulletin No. 98
("SAB 98"), which revised the views of the staff contained in previous
staff accounting bulletins, to be consistent with the provisions of
SFAS 128. All prior periods have been restated in accordance with SAB
98.
Stock options outstanding of approximately 1,523,000, 1,256,000 and
1,067,000 for the years ended December 31, 1997, 1996, and 1995,
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 for each of
the three years ended December 31, 1997, have been excluded from
diluted earnings per share, since their effect would be antidilutive.
F-9
<PAGE>
FaxSav Incorporated
Notes to Financial Statements (Continued)
2. Summary Of Significant Accounting Policies (Continued):
E. Pro Forma Earnings Per Share:
Pro forma basic and diluted net loss per common shares is based on the
weighted average number of shares outstanding during the periods
presented, including the effect of pro forma conversion for all
periods of all outstanding preferred stock into 7,791,981 shares of
common stock in October 1996 in connection with the initial public
offering of the Company. Pro forma basic and diluted net loss per
share has been presented as additional information to enhance the
comparability of results for all periods presented assuming conversion
of the preferred stock into common shares of the Company.
F. Cash Equivalents:
The Company considers all highly liquid debt instruments purchased
with an original maturity of three months or less to be cash
equivalents.
G. Marketable Securities:
The Company accounts for its marketable securities in accordance with
statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS No. 115").
SFAS 115 requires a more detailed disclosure of debt and equity
securities held for investment, the methods to be used in determining
fair value and when to record unrealized holding gains and losses in
earnings or in a separate component of stockholders' equity. It is the
Company's policy to invest primarily in government and commercial
paper securities. It is the Company's intent and ability to hold
investments to maturity.
H. Property and Equipment:
Property and equipment are stated at cost, net of accumulated
depreciation and amortization. Depreciation of furniture and
equipment, except enhanced fax equipment, is calculated using the
straight-line method over their estimated useful lives of five years.
Enhanced fax equipment is included in equipment and is depreciated
over its estimated life of 30 months. Leasehold improvements are
amortized using the straight-line method over the lesser of the lease
term or the estimated useful life of the related asset. Repairs and
maintenance costs are expensed as incurred; major renewals and
betterments are capitalized. When assets are sold or otherwise
disposed of, the cost and related accumulated depreciation are removed
from the accounts and any gain or loss on the disposition is reflected
in current operations.
F-10
<PAGE>
FaxSav Incorporated
Notes to Financial Statements (Continued)
2. Summary Of Significant Accounting Policies (Continued):
H. Property and Equipment (Continued):
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. If the sum of the expected future undiscounted cash flows
is less than the carrying amount of the asset, a loss is recognized
for the difference between the estimated fair value and carrying value
of the assets.
I. Income Taxes:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes".
This statement requires an asset and liability approach for deferred
taxes that recognizes deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized
in the Company's financial statements or tax returns.
J. Concentration of Credit Risk:
Statement of Financial Accounting Standards No. 105, "Disclosure of
Information about Financial Instruments with Off-Balance-Sheet Risk
and Financial Instruments with Concentration of Credit Risk" requires
disclosure of any significant off-balance-sheet and credit risk
concentrations. Financial instruments that potentially subject the
Company to concentrations of credit risk consist primarily of cash and
cash equivalents and accounts receivable. From time to time, the
Company had concentrations of cash in several banks in the form of
demand deposits and money market accounts. The Company believes that
concentrations of credit risk with respect to trade accounts
receivable are limited due to the large number of entities comprising
the Company's customer base.
K. Financial Instruments:
The estimated fair value of the Company's financial instruments, which
include cash, cash equivalents, accounts receivable, obligations under
capital lease and amounts outstanding under line of credit,
approximates their carrying value.
The fair value of cash and cash equivalents and accounts receivable
approximates their carrying value because their maturity is generally
less than one year in duration. The fair value of obligations under
capital lease and amounts outstanding under the line of credit was
determined using valuation techniques that considered cash flow
discounted at current rates.
F-11
<PAGE>
FaxSav Incorporated
Notes to Financial Statements (Continued)
2. Summary Of Significant Accounting Policies (Continued):
L. Impact of Recently Issued Accounting Standards:
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." These statements, which are
effective for fiscal years beginning after December 15, 1997, expand
or modify disclosures and will have no impact on the financial
position, results of operations or cash flows.
M. Legal Defense:
The Company accrues the estimated future cost of defending itself
against lawsuits or other claims when management has determined, in
consultation with its legal counsel, that these matters are probable
of assertion against the Company.
N. Reclassification:
Certain items in 1996 have been reclassified to conform to 1997
presentation.
3. Marketable Securities:
Held-to-maturity marketable securities consist of corporate commercial
paper. These securities are carried at original cost, which approximates
fair value. Any realized gains or losses would be recognized on the
specific identification method. There were no gross unrealized gains or
losses at December 31, 1996.
Investments in securities classified as held-to-maturity at December 31,
1996 had a maturity date which did not exceed one year.
F-12
<PAGE>
FaxSav Incorporated
Notes to Financial Statements (Continued)
4. Property And Equipment:
Property and equipment is comprised of the following:
December 31,
-------------------------
1997 1996
----------- ------------
Equipment $7,844,450 $ 5,361,788
Computer software 364,385 210,833
Furniture and fixtures 113,386 44,611
Leasehold improvements 160,008 127,506
----------- ------------
8,482,229 5,744,738
Less, accumulated depreciation and
amortization 4,306,965 2,657,893
----------- ------------
$4,175,264 $ 3,086,845
=========== ============
Included in the equipment balance is certain equipment under capital leases
of approximately $966,058 and $935,250 at December 31, 1997 and 1996,
respectively. Accumulated amortization of equipment under capital leases
approximated $394,867 and $201,656 as of December 31, 1997 and 1996,
respectively. Depreciation and amortization expense for owned property and
equipment for the years ended December 31, 1997, 1996, and 1995, amounted
to $1,674,554, $1,388,753, and $897,260, respectively.
5. Accrued Expenses and Other Liabilities:
Accrued expenses and other liabilities is comprised of the following:
December 31,
--------------------------
1997 1996
------------ ------------
Accrued carrier charges $ 1,926,925 $ 1,737,370
Accrued salaries, bonuses and commissions 195,688 173,830
Excise and state taxes payable 269,245 309,959
Accrual for legal defense 251,917 381,073
Insurance premiums payable 79,449 235,021
Other 496,622 576,534
------------ ------------
$ 3,219,846 $ 3,413,787
============ ============
F-13
<PAGE>
FaxSav Incorporated
Notes to Financial Statements (Continued)
6. Line of Credit and Note Payable to Bank:
In July 1995, the Company entered into a Credit Agreement ("Agreement")
with a bank ("the Bank") comprised of a $1,000,000 working capital line of
credit. The Agreement provided for certain restrictions and covenants,
including the payment of dividends on the Company's common stock and
incurring additional indebtedness. In connection with the Agreement, the
Company issued warrants (see Note 8) to the Bank. In April 1996, the
Company accepted a revised commitment which renewed the $1,000,000 working
capital line of credit and extended a $750,000 equipment line of credit
under the same terms (collectively referred to as line of credit). Under
the revised Agreement, the working capital line of credit expired in April
1997. Any amounts borrowed under the equipment line of credit were to be
repaid in monthly installments over a three-year period commencing in
October 1996 with a 9% annual interest rate applied to the unpaid-principal
balance. As of June 30, 1996, the Company was in default of certain
financial covenants contained in the revised Agreement; however, the Bank
waived these defaults and revised the covenants for the period July 31,
1996 until December 31, 1996. The revised agreement limited the total
amount outstanding under both credit lines to $1 million until the Company
raised additional equity on or before October 30, 1996.
In October 1996, the Company paid off the balance outstanding on the
working capital line of credit of $500,000 from the proceeds of its initial
public offering. In November 1996, a further amendment to the Agreement
eliminated the working capital line of credit and the financial covenants
and restrictions. Under the revised agreement, the Company agreed to
maintain cash and cash equivalent balances of at least twice the amount
outstanding under the equipment line of credit. As of December 31, 1997,
the Company had approximately $279,000 outstanding under this line of
credit which will be paid off in equal installments over the next
twenty-two months.
During 1997, the Company entered into two new loan agreements. The first
agreement was an equipment line of credit, in the form of a promissory
note, in the amount of $800,000. Interest on advances, if any, are at the
Bank's prime rate plus an applicable margin, as defined in the credit
agreement, which resulted in a borrowing rate of 9.5% for 1997. Among the
covenants stated in the agreement, specific liquidity ratios, debt service
ratios, and net worth ratios are required to be maintained, and disclosed
to the Bank on a monthly basis. As of December 31, 1997, the Company had
fully utilized the line of credit.
The second agreement, an equipment loan line of $500,000, is in the form of
two secured promissory notes, both of which the Company is required to pay
over a term of forty-eight months with effective interest rate of 16%. The
equipment purchased with the proceeds of this loan will serve as
collateral.
F-14
<PAGE>
FaxSav Incorporated
Notes to Financial Statements (Continued)
7. Commitments:
Telecommunications Lines
The Company has committed to minimum monthly usage levels with its primary
telecommunications carriers. The commitments require minimum monthly
payments, exclusive of usage discounts, of $200,000 per month through June,
1999. The Company also leases space under co-locate agreements for certain
of its telecommunications equipment.
Leases
Total rent expense for office facilities for the years ended December 31,
1997, 1996 and 1995 amounted to $302,643, $181,594 and $147,516,
respectively.
The Company leases certain computer equipment pursuant to operating leases
which expire through 2000. Rent expense related to these leases for the
years ended December 31, 1997, 1996 and 1995 amounted to $120,085, $168,666
and $247,167, respectively.
The Company acquired equipment for $421,805 and $569,178 under capital
lease obligations during the years ended December 31, 1996 and 1995,
respectively. Interest paid for capital lease obligations during the years
ended December 31, 1997, 1996 and 1995 was $59,658, $69,682 and $20,796,
respectively.
The Company was obligated under these agreements to make the following
payments for office facilities and equipment:
December 31, 1997 December 31, 1996
----------------------- -----------------------
Operating Capital Operating Capital
Lease Lease Lease Lease
---------- ---------- ---------- ----------
1997 $ -- $ -- $ 100,891 $ 342,435
1998 316,641 331,716 38,260 322,680
1999 311,808 103,126 25,567 103,126
2000 295,400 -- 6,224 --
2001 and thereafter 377,768 --
---------- ---------- ---------- ----------
Total minimum lease
payments $1,301,617 434,842 $ 170,942 768,241
========== ==========
Less, amount representing
interest 33,921 86,803
Less, current principal
maturities of obligation
under capital lease 315,370 282,776
---------- ----------
Long-term lease obligation $ 85,551 $ 398,662
========== ==========
F-15
<PAGE>
FaxSav Incorporated
Notes to Financial Statements (Continued)
8. Capital Stock And Warrants (See also Note 13):
Convertible Preferred Stock
Prior to October 1996, the Company was authorized to issue 1,400,000 shares
of Series A Preferred Stock, 4,000,000 shares of Series B Preferred Stock,
8,700,000 shares of Series C Preferred Stock, 26,600,000 shares of Series D
Preferred Stock, 19,500,000 shares of Series E Preferred Stock and
20,000,000 shares of Series F Preferred Stock (collectively, "the Preferred
Stock"). Holders of the Preferred Stock were entitled to dividends at the
rate of $0.075 per share for Series A, $0.10 per share for Series B, $0.06
per share for Series C, $0.01733 per share for Series D, $0.022 per share
for Series E and $0.04 per share for Series F when and if declared by the
Company's Board of Directors. Such dividends were not cumulative. Holders
of the Series A, B, C, D, E and F Preferred Stock were entitled to a
liquidation preference per share of $0.75, $1.00, $0.60, $0.1733, $0.22 and
$0.40, respectively. No dividends had been declared on the Preferred Stock.
In January 1994, under a Preferred Stock Purchase Agreement (the "Telstra
Agreement") the Company issued 17,311,021 shares of Series D Preferred
Stock to Telstra Incorporated ("Telstra") for an aggregate purchase price
of $3,000,000 and 1,880,529 shares of Series D Preferred Stock to certain
preferred stockholders upon conversion of the Company's promissory notes
(and accrued interest thereon) which were due and payable on December 31,
1993.
The Telstra Agreement gave Telstra (a) a grant, on a one-time basis during
1996, to acquire all of the fully diluted shares of the Company's stock not
owned by Telstra; (b) representation on the FaxSav Board of Directors; and
(c) approval over certain business decisions of the Company. Subsequent
amendments to the Telstra Agreement and the occurrence of the initial
public offering of the Company's common stock resulted in the termination
of Telstra's option and other rights.
In November 1994, the Company issued 7,241,343 shares of Series D Preferred
Stock for an aggregate purchase price of $1,254,926. The shares were issued
to certain existing preferred stockholders in several separate
transactions.
In January 1995, the Company issued 19,090,900 shares of Series E Preferred
Stock for an aggregate purchase price of $4,199,919. The shares were issued
to certain existing as well as new investors.
F-16
<PAGE>
FaxSav Incorporated
Notes to Financial Statements (Continued)
8. Capital Stock And Warrants (See also Note 13) (Continued):
Convertible Preferred Stock (Continued)
In February 1996 and March 1996, the Company issued 19,999,988 shares of
Series F Preferred Stock for an aggregate purchase price of $7,979,998 to
certain existing as well as other new investors in the Company. In
accordance with a December 1995 Stock Option Agreement between the Company
and Telstra, the Company on March 18, 1996 repurchased 8,655,510 shares of
Series D Preferred Stock held by Telstra for $0.25 per share for a total of
$2,163,878.
All shares of Series A, B, C, D, E, and F Preferred Stock were converted
into common stock of the Company in connection with the initial public
offering of its common stock in October 1996.
Warrants
On July 8, 1993, the Company agreed to grant warrants to purchase 5,556
shares of common stock to a firm providing equipment to the Company under a
Master Lease Agreement. The exercise price was $5.40 per share and the
warrants were to expire ten years from the date of grant. On May 5, 1994,
the Company granted additional warrants, which were to expire ten years
from the date of grant, to purchase 9,889 shares of common stock at $1.80
per share to this firm in connection with an increase in the equipment
covered by the Master Lease Agreement.
On July 7, 1995, the Company granted warrants to purchase 28,889 shares of
common stock to a bank in connection with the issuance of the working
capital line of credit. The exercise price was $1.98 per share and the
warrants were to expire five years from the date of grant.
The number and purchase price of the shares could have been adjusted by the
occurrence of certain events, as defined in the warrant agreements.
9. Stock Options:
The Company has a stock option plan which authorizes up to 1,794,175 shares
of common stock to be issued. Under the stock option plan, the Company may
grant incentive stock options or nonqualified stock options. The option
exercise price of stock options may not be less than 85% of the fair value
of a share of common stock on the date of the option grant, and the options
expire in ten years. The shares issuable upon the exercise of nonqualified
options generally vest over one or two years from the date of grant. The
shares issuable upon the exercise of incentive stock options generally vest
20% upon completion by the optionee of one year of service and the
remaining 80% over 48 equal months of service thereafter based on continued
service.
F-17
<PAGE>
FaxSav Incorporated
Notes to Financial Statements (Continued)
9. Stock Options (Continued):
Stock option transactions under the plan are as follows:
Weighted
Average
Incentive Exercise
Nonqualified Stock Available Price Per
Options Options for Grant Share
-------- --------- --------- ----------
December 31, 1994 44,347 440,703 308,074 $ 0.90
Available for Grant 455,556
Granted 320,430 290,360 (610,790) $ 0.235
Exercised -- -- -- --
Canceled -- (28,955) 28,955 $ 0.355
-------- --------- ---------
December 31, 1995 364,777 702,108 181,795 $ 0.533
Available for Grant 533,066
Granted 133,334 111,778 (245,112) $ 3.44
Exercised -- (51,156) -- $ 0.823
Canceled (4,927) -- 4,927 $ 2.63
-------- --------- ---------
December 31, 1996 493,184 762,730 474,676 $ 1.09
Granted 173,329 392,280 (565,609) $ 3.38
Exercised (35,746) -- $ 0.80
Canceled (8,333) (254,602) 262,935 $ 1.63
-------- --------- ---------
December 31, 1997 658,180 864,662 172,002 $ 1.28
======== ========= =========
At December 31, 1997, 1996 and 1995, options for 785,584, 626,277 and
404,833 shares, were vested and exercisable.
In October 1995, The Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." The standard establishes a
fair value method for accounting for or disclosing stock-based compensation
plans. The Company adopted this standard by disclosing the pro forma net
loss and loss per share amounts assuming the fair value method.
F-18
<PAGE>
FaxSav Incorporated
Notes to Financial Statements (Continued)
9. Stock Options (Continued):
Accordingly, if the Company had elected to recognize compensation costs in
accordance with SFAS No. 123 the reported net loss and loss per share for
1997, 1996 and 1995, respectively, would have been as follows:
1997 1996 1995
------------ --------------------------
Net loss as reported $ (7,118,902) $ (7,476,389) $ (4,085,447)
Net loss - pro forma (7,260,113) (7,583,417) (4,139,737)
Loss per share - as reported (0.72) (2.60) (7.46)
Loss per share - pro forma (0.73) (2.64) (7.56)
The Company estimated the fair value, as of the date of grant, of options
outstanding in the plan using the Black-Scholes option pricing model with
the following assumptions:
1997 1996 1995
-------------------------- -------------
Expected life 5 years 10 years 10 years
Risk free interest rate 6.3% 4.9% 5.5%
Expected future dividend yield 0% 0% 0%
Expected volatility 85.2% 34.4% 34.6%
In accordance with SFAS 123, the Company has utilized peer information when
using the Black-scholes option pricing model. As the Company develops
historical information, the Company will modify these assumptions
accordingly.
F-19
<PAGE>
FaxSav Incorporated
Notes to Financial Statements (Continued)
9. Stock Options (Continued):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- -----------------------
Weighted
Average Weighted Number Weighted
Number Remaining Average Exercisable Average
Outstanding Contractual Exercise as of Exercise
Range of Exercise Prices 12/31/97 Life Price 12/31/97 Price
------------ -------- ------- ---------- -------
<S> <C> <C> <C> <C> <C>
$0.23 - $0.23 544,577 7.24 $ 0.23 313,846 $ 0.23
$0.90 - $1.50 681,042 6.99 1.12 403,221 0.91
$2.13 - $3.60 262,501 8.67 3.10 60,723 3.60
$5.38 - $8.00 34,722 8.84 7.30 7,794 7.82
------------ -------- ------- ---------- -------
$0.23 - $8.00 1,522,842 7.41 $ 1.28 785,584 $ 0.92
============ ======== ======= ========== =======
</TABLE>
10. Income Taxes:
The Company continues to incur operating losses and currently pays no
income taxes and no provision or benefit for income taxes has been
recorded.
The income tax benefit at the United States federal statutory rate on the
Company's operating loss, for all periods presented, has been eliminated by
an increase in the valuation allowance for deferred tax assets and
operating losses not recognized.
At December 31, 1997, the Company had net operating loss carryforwards
available for income tax purposes of approximately $30,000,000, which start
to expire in 2005. Net operating loss carryforwards are subject to review
and possible adjustment by the Internal Revenue Service and may be limited
in the event of certain cumulative changes in the ownership interests of
significant stockholders over a three-year period in excess of 50%. The
Company has experienced changes in ownership in excess of 50% but does not
believe that these changes in ownership will significantly impact the
Company's ability to utilize its net operating loss carryforwards assuming
the Company can generate sufficient taxable income.
F-20
<PAGE>
FaxSav Incorporated
Notes to Financial Statements (Continued)
10. Income Taxes (Continued):
The components of the Company's deferred tax asset are as follows:
December 31,
--------------------------
1997 1996
------------ ------------
Operating loss carryforwards $10,225,730 $ 7,730,622
Temporary differences 691,560 592,678
------------ ------------
9,534,170 8,323,300
Less - valuation allowance (9,534,170) (8,323,300)
------------ ------------
$ - $ -
============ ============
In evaluating the reliability of these deferred tax assets, management has
considered the market in which the Company operates, the operating losses
incurred to date and the operating losses anticipated for the future, and
believes that given the significance of this evidence, a full valuation
allowance against its deferred tax assets is required as of December 31,
1997, 1996, and 1995.
11. Contingencies:
The Company is involved in various disputes, claims or legal proceedings
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.
On September 5, 1997, the Company filed a compliant for declaratory
judgement against AudioFAX, IP, L.L.P. ("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 compliant
against the Company in the United States District Court for the District of
Georgia alleging patent infringement, seeking a preliminary and permanent
injunction against the Company's alleged infringement and damages. 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.
F-21
<PAGE>
FaxSav Incorporated
Supplemental Schedule
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Additions
-----------------------------
Balance at Charges to Charges to Balance at
Beginning Cost And Other end of
of Period Expenses Accounts Deductions Period
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995
Provisions for bad debts $ 90,193 $ 194,720 $ 20,397(a) $ 130,573(b) $ 174,737
Accrual for legal defense 400,000 0 400,000
Deferred tax asset valuation
allowance 4,033,899 1,628,194 5,662,093
-------------- -------------- -------------- -------------- --------------
$ 4,124,092 $ 594,720 $ 1,648,591 $ 130,573 $ 6,236,830
============== ============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Additions
-----------------------------
Balance at Charges to Charges to Balance at
Beginning Cost And Other end of
of Period Expenses Accounts Deductions Period
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Provisions for bad debts $ 174,737 $ 219,400 $ 37,268(a) $ 202,029(b) $ 229,376
Accrual for legal defense 400,000 18,927 381,073
Deferred tax asset valuation
allowance 5,662,093 2,661,207 8,323,300
-------------- -------------- -------------- -------------- --------------
$ 6,236,830 $ 219,400 $ 2,698,475 $ 220,956 $ 8,933,749
============== ============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Additions
-----------------------------
Balance at Charges to Charges to Balance at
Beginning Cost And Other end of
of Period Expenses Accounts Deductions Period
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Provisions for bad debts $ 229,376 $ 230,520 $ 29,819(a) $ 158,991(b) $ 330,724
Accrual for legal defense 381,073 129,156 251,917
Deferred tax asset valuation
allowance 8,323,300 1,210,870 9,534,170
-------------- -------------- -------------- -------------- --------------
$ 8,933,749 $ 230,520 $ 1,240,689 $ 288,147 $ 10,116,811
============== ============== ============== ============== ==============
</TABLE>
(a) Recoveries of accounts receivable
(b) Write-offs
F-22
Exhibit 10.9
THIRD AMENDMENT TO LEASE AGREEMENT
BETWEEN THORNALL ASSOCIATES,
AS LANDLORD), AND FAXSAV INC.
(formerly DIGITRAN CORP.), AS TENANT
THIS THIRD AMENDMENT TO LEASE, made this 5th day of May, 1997 by and
between THORNALL ASSOCIATES ("Landlord"), a New Jersey Limited Partnership, c/o
Alfieri Property Management, 399 Thornall Street, P.O. Box 2911, Edison, New
Jersey 08818-2911 and FAXSAV INC., (the Successor to Digitran Corp. and
hereinafter referred to as the "Tenant"), a Delaware Corporation, having its
principal office at 399 Thornall Street, Edison, New Jersey.
W I T N E S S E T H:
WHEREAS, Metro Four Associates Limited Partnership ("Prior Landlord") and
Digitran Corp. entered into a Lease dated May 28, 1992 (the "Lease") wherein
Prior Landlord let unto Digitran Corp. and Digitran Corp. hired from Prior
Landlord 6,465 rentable square feet on a portion of the second floor ("Original
Demised Premises") of a certain office building commonly known as 379 Thornall
Street, Edison, New Jersey, ("Original Building"); and
WHEREAS, Prior Landlord and Digitran Corp. entered into a First Amendment
to Lease dated June 6, 1994 wherein the term of the Lease was extended; and
WHEREAS, Prior Landlord, Thornall Associates ("Landlord") and Digitran
Corp. entered into a Second Amendment to Lease dated May 23, 1995 wherein the
term of the Lease was extended, the parties agreed to relocate Digitran Corp.
from the Original Demised Premises to new premises consisting of 8,441 rentable
square feet ("Existing Demised Premises") in the building owned by Landlord
known as 399 Thornall Street, Edison, New Jersey ("Building"); and
WHEREAS, the parties hereto acknowledge and confirm that the Tenant, FaxSav
Inc., is the legal successor in interest to Digitran Corp. and has succeeded to
all of the obligations of Digitran Corp. under the Lease, First Amendment to
Lease and Second Amendment to Lease; and
WHEREAS, Landlord and Tenant have agreed that Tenant shall demise an
additional 4,847 rentable square feet on the 3rd floor of the Building, have
agreed to further extend the term of the Lease and have agreed that certain
provisions of the Lease, as amended, shall be modified.
NOW THEREFORE, in consideration of the mutual covenants and undertakings
hereinafter set forth between the parties, it is agreed as follows:
<PAGE>
1. Landlord hereby demises to Tenant and Tenant hereby lets from Landlord
4,847 rentable square feet of space on the 3rd floor of the Building ("Expansion
Space") as set forth in Exhibit A attached hereto and made a part hereof.
Hereinafter, the Existing Demised Premises and the Expansion Space shall be
known as the "Demised Premises" and shall consist of 13,288 rentable square
feet.
2. The term of the Lease, as amended, is hereby extended for 60 months from
the Commencement Date of the Expansion Space. The Commencement Date for the
Expansion Space shall be the day on which the Expansion Space is ready for
occupancy or the day Tenant, or anyone claiming under or through Tenant, first
occupies the Demised Premises for business. The existing Expiration Date of the
Lease, as amended, shall become co-terminous with the Expiration Date of the
Expansion Space.
3. Tenant hereby agrees to take occupancy of the Expansion Space in an
"AS-IS" condition as set forth in Exhibit B and Landlord shall have no
responsibility to perform any repairs, alterations or improvements to prepare
the Expansion Space for Tenant's occupancy and use of same, except Landlord's
affiliate, Alfieri Property Management, shall perform the work described in the
Tenant Work Estimate attached as Exhibit D, dated March 14, 1997, to be paid by
Tenant as set forth in the Tenant Work Estimate. Such work shall be done during
normal business hours. Tenant shall be responsible for moving all of Tenant's
Property in order for such work to be performed. Tenant recognizes and agrees
that there may be some inconvenience to Tenant during the work and agrees that
performance of the work shall not constitute a actual or constructive eviction
in whole or in part, or entitle Tenant to any abatement of rent, or relieve
Tenant from any of its obligations under this Lease or impose any liability upon
Landlord or its agents.
4. As of the Commencement Date of the Expansion Space, the fixed annual
rent for the Demised Premises during the Renewal Period shall be $239,184.00 per
year (calculated on the basis of $18.00 per rentable square foot for 13,288
rentable square feet) payable in advance in equal monthly installments of
$19,932.00.
5. As of the Commencement Date of the Expansions Space, Tenant's
Proportionate Share of Increase in Taxes and Operating Expenses for the Demised
Premises shall be 4.06%.
6. As of the Commencement Date of the Expansion Space, Tenant's monthly
charge for electricity for the Demised Premises shall be $2,768.33 per month and
shall be subject to future electric surveys as set forth in Article 15 of the
Lease. Upon completion of the next survey, there shall be an adjustment for the
period from the Commencement Date of the Expansion Space through the date that
the results of the survey shall be effectuated.
7. Paragraph 5 of the First Amendment to Lease (Relocation) is hereby null
and void and of no further force and effect and shall be substituted with the
following:
2
<PAGE>
Landlord at its sole expense, on at least sixty (60) days prior
written notice, may require Tenant to move from the Demised Premises to another
location of comparable size and decor in the Building or in the building(s)
commonly known and designated as 379 Thornall Street and 499 Thornall Street,
Edison, New Jersey. By written notice to Landlord served within five (5) days of
Tenant's receipt of the relocation notice, Tenant may elect not to move to the
other space and in lieu thereof may terminate this Lease. In the event of any
such relocation, Landlord shall be responsible for the expenses of preparing and
decorating the relocated premises so that they will be substantially similar to
the Demised Premises. Notwithstanding the foregoing, Landlord shall be entitled
to rescind its notice of relocation within forty-five (45) days of its having
forwarded to Tenant the notice of relocation or, if Tenant has properly elected
to terminate this Lease, within forty-eight (48) hours of Tenant having properly
elected to terminate this Lease. In the event Landlord rescinds the notice as
aforesaid, this Lease shall continue in full force and effect.
8. Landlord and Tenant hereby acknowledge that Landlord is presently
holding the sum of $20,472.50 as Tenant's security.
9. After August 1, 1998, the Landlord, at any time during the remaining
term of the Lease, as amended, may recapture a portion of the Demised Premises
specified in Exhibit C (the "Space") dated January 23, 1997, attached hereto and
made a part hereof. Landlord shall give Tenant written notice of its desire to
recapture the Space and Tenant shall vacate the Space within sixty (60) days of
receipt of such written notice by Landlord. Tenant's rent, as set forth in
paragraph 4 above shall be reduced proportionately based on rentable square
footage of the Space. Tenant recognizes and agrees that there may be some
inconvenience to Tenant as a result of Landlord recapturing the Space and agrees
that any work, such as the erection of a demising wall, associated with the
recapture shall not constitute a actual or constructive eviction in whole or in
part, or entitle Tenant to any abatement of rent, or relieve Tenant from any of
its obligations under this Lease or impose any liability upon Landlord or its
agents.
10. Landlord and Tenant covenant, warrant and represent that there was no
broker instrumental in consummating this Third Amendment to Lease and that no
conversations or negotiations were had with any broker concerning the renting of
the Demised Premises. Tenant agrees to hold Landlord harmless against any claims
for a brokerage commission arising out of any conversations or negotiations had
by Tenant with any broker and Landlord agrees to hold Tenant harmless against
any claims for a brokerage commission arising out of any conversations or
negotiations had by Landlord with any broker.
11. Paragraph 11 of the Second Amendment to Lease is hereby null and void
and of no further force or effect.
3
<PAGE>
12. Section 2.02 of the Lease shall be replaced with the following:
"2.02. The use of the Demised Premises for the purposes specified in
Section 2.01 shall not include, and Tenant shall not use or permit the use
of the Demised Premises or any part thereof, for:
(a) A school of any kind other than for the training of Tenant's
employees;
(b) An employment agency;
(c) An office any governmental or quasi governmental bureau,
department, agency, foreign or domestic, including any autonomous
governmental corporation or diplomatic or trade mission;
(d) Any telemarketing activities or other direct selling
activities, however, Landlord recognizes that Tenant is currently in
the business of marketing and selling facsimile services which is a
permitted use provided such use does not violate (e) below; or
(e) Any use, including executive and general office use, which
results in a density of a population of more than one person for every
144 square feet."
13. The following shall be added as Article 17.08 of the Lease:
"17.08. Tenant acknowledges that as part of the consideration for this
Lease, and in order not to interfere with the rights of other tenants or
other tenants' quiet enjoyment of the common areas of the Building and
otherwise prevent Landlord from performing its services without causing
increases to the cost of such services, Tenant agrees that it shall not
permit its employees to congregate in hallways or elevators, shall not
permit its employees to create an unsightly condition in or about any
passageway from the Building or the common areas or to the parking
lot/deck, with regard to smoking, including the disposal of cigarettes, in
the courtyard and/or outer areas adjacent to the Building and will
otherwise require its employees to act and conduct themselves in the common
areas in such a manner as will not disturb other tenants or the use and
enjoyment by other tenants of the Building."
4
<PAGE>
14. At or before the Expiration Date of the Lease, Tenant agrees to perform
the following restoration to the Demised Premises:
Tenant shall remove from the Demised Premises all equipment comprising Tenant's
Voice, Data and Security Systems, including associated outlets, wires, wiring
trays and other equipment, materials and facilities, whether located in the
ceiling, floor and/or walls which in any way relates, pertains to, constitutes
or is connected with Tenant's Voice, Data and/or Security Systems and regardless
of whether Landlord or Tenant installed and/or paid for the installation of such
systems.
15. All the terms, covenants and conditions of the Lease, as amended,
remain the same and continue in full force and effect, except as said terms,
covenants and conditions have been modified by the First Amendment to Lease, the
Second Amendment to Lease and this Third Amendment to Lease.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands
and seals and caused these presents to be signed by the proper corporate
officers the proper corporate seal to be hereunto affixed, the day and year
first above written.
LANDLORD;
WITNESS: THORNALL ASSOCIATES
A New Jersey Limited Partnership
/s/ Dominick Alfieri
- ---------------------------- --------------------
BY: DOMINICK ALFIERI
General Partner
TENANT:
WITNESS: FAXSAV INC.,
(Formerly Digitran Corp.)
a Delaware Corporation
/s/ Peter S. Macaluso
- ---------------------------- ---------------------
BY: Peter S. Macaluso
TITLE: Vice President and CFO
6
<PAGE>
EXHIBIT A
[Blueprint of Leased Expansion Space]
A-1
<PAGE>
THORNALL ASSOCIATES, AS LANDLORD
FAXSAV INC., AS TENANT
EXHIBIT B
LANDLORD'S WORK
1. HVAC - Perimeter baseboard electric heat, central high velocity fan system
with Barber Coleman mixing boxes, featuring return heat of light
recaptured. System utilizes a minimum of 10% to a maximum of 100% fresh air
to maintain no less than 68 degrees interior at zero degrees exterior, with
a 15-mile per hour wind. Air cooling shall maintain no more than 78 degrees
F dry bulb with approximately 50% relative humidity when the outdoor
conditions are 91 degrees F dry bulb. Duel system - building standard. The
above standard is for normal office use only which shall be deemed to be
one person for every 200 sq. ft. in any given or confined area which shall
not include areas with special HVAC requirements such as computer rooms,
conference rooms, cafeterias, high density or excessive heat producing
equipment. Perimeter baseboard electric heat is used during winter
operations and an air cooling system is utilized during summer operations.
One (1) diffuser per 250 sq. ft. of usable area.
2. Window covering - one (1) building-standard venetian blind per window.
3. The Tenant will accept the space in an "As Is" condition.
4. The Tenant will contract from the Landlord additional work at the Tenant's
cost and expense. This will be outlined by a separate contract.
5. Landlord shall permit Tenant and/or its agents or labor to enter the
Premises prior to the Commencement Date of the Lease upon prior reasonable
written request Tenant, at a time designated by Landlord consistent with
Landlord's construction schedule in order to install telephone outlets and
data lines. The foregoing right to enter prior to the Commencement Date,
however, is conditioned upon Tenant's not interfering with Landlord's
labor. If at any time such entry shall cause disharmony, interference, or
union disputes of any nature whatsoever, or if Landlord shall, in
Landlord's sole judgment, determine that such entry, such work and the
continuance thereof shall interfere with, hamper or prevent Landlord from
proceeding with the completion of the Demised Premises at the earliest
possible date, this right of entry may be withdrawn by Landlord immediately
upon written notice to Tenant but shall be reinstated as soon as Landlord
deems Tenant's re-entry practicable. Such entry shall be at Tenant's sole
risk. In the event that Tenant's agents or labor incur any charges from
Landlord, including but not limited to, charges for clean-up costs
necessitated by Tenant's entry, such charges
B-1
<PAGE>
shall be deemed an obligation of Tenant and shall be collectible as
additional rent pursuant to the Lease. Landlord shall have no liability for
any furnishings, equipment or other items placed in the Demised Premises
and Tenant shall indemnify, defend and hold Landlord harmless for any
damage, loss or expense caused by it or its contractors or agents. Tenant
must also provide evidence of insurance in accordance with the Lease and
evidence of Worker's Compensation to protect Landlord and Tenant during the
period of Tenant's entry prior to the Commencement Date.
6. At any time after substantial completion of Landlord's Work, Landlord, upon
reasonable notice to Tenant, may enter the Demised Premises to complete
unfinished details of Landlord's Work and entry by Landlord, its agents,
servants, employees or contractors for such purpose shall not constitute an
actual or constructive eviction, in whole or in part, or entitle Tenant to
any abatement of rent, or relieve Tenant from any of its obligations under
this Lease, or impose any liability upon Landlord or its agents.
B-2
<PAGE>
EXHIBIT C
DATED 1/23/97
[Blueprint of Premises Subject to Landlord Recapture Provision]
C-1
<PAGE>
EXHIBIT D
ALFIERI PROPERTY MANAGEMENT
399 Thornall Street - PO Box 2911 - Edison, NJ 08818-2911
Phone (908) 549-4200 Fax (908) 548-5755
TENANT WORK ESTIMATE
Tenant: Fax Sav
Contact Name: Peter Macaluso
Building / Floor: 399 Thornall Street, 3rd Floor
Date: March 14, 1997
Delivery Method: Fax - (908) 906-1113
Job / Estimate Number: E5574
THE UNDERSIGNED PROPOSES TO SUPPLY THE NECESSARY LABOR AND MATERIAL TO PERFORM
THE FOLLOWING:
o Furnish and install new electric for modular furniture as required.
o Remove existing carpet and base from perimeter office and add new Welco
Producer IV (Cobalt / Coba) and Mercer 317 vinyl base (see attached).
o Furnish and install wall covering to the Vice President's office and all
bare walls in open area. Patch existing carpet as needed.
o Clean entire space, replace ceiling tiles as needed, and add lighting as
required.
$6,763.00
405.78 tax
----------
$7,168.78
FOR THE SUM OF Seven thousand one hundred sixty-eight DOLLARS and seventy-eight
CENTS.
THIS ESTIMATE WILL BE NULL AND VOID IF NOT RECEIVED WITHIN 30 DAYS.
It is understood that Tenant shall be obligated to restore and/or remove:
XX (i) all of the work described in this Estimate, or
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____ (ii) the identified portions of the work described in this
Estimate, or
____ (iii) none of the work described in this Estimate.
It is understood and agreed that Tenant will be subject to holdover rent if the
restoration work required by this estimate is not completed on or before the
expiration of the Lease.
It is understood that work will be done during regular working hours of regular
working days. If overtime work is required and is not specified above, the
additional price will be charged by the undersigned in addition to the contract
price above named.
It is expressly understood that all agreements are contingent upon strikes,
fires, accidents, and other delays beyond our control.
All estimates are subject to immediate acceptances and when so accepted this
instrument becomes an order which shall constitute exclusively the contract
between the parties, and all prior representations or agreements whether written
or verbal and not incorporated in are suspended.
D-1
<PAGE>
It is understood that any work, repairs or alterations not specifically included
herein made necessary by the performance of the above described work shall be
paid for by the tenant on the basis of time and material in addition to the
contract price above named. It is further understood that payment for work
performed under this estimate is payable immediately upon presentation of bill.
Signed and accepted March 17, 1997 Sign and return one copy to:
TENANT: FaxSav Incorporated ALFIERI PROPERTY MANAGEMENT
-------------------
BY: /s/ Peter Macaluso BY: /s/ Alfieri Property Management
------------------ -------------------------------
TITLE: Vice President/CFO TITLE: Property Manager
------------------ ----------------
D-2
EXHIBIT 10.10
LOAN AND SECURITY AGREEMENT
This LOAN AND SECURITY AGREEMENT is entered into as of September 26, 1997,
by and between SILICON VALLEY BANK, a California-chartered bank ("Bank"), with
its principal place of business at 3003 Tasman Drive, Santa Clara, California
95054 and with a loan production office located at Wellesley Office Park, 40
William Street, Suite 350, Wellesley, Massachusetts 02181, doing business under
the name "Silicon Valley East" ("Bank") and FAXSAV INCORPORATED, a Delaware
corporation with its principal place of business located at 399 Thornall Street,
Edison, New Jersey ("Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
1.1 Definitions. As used in this Agreement, the following terms shall have
the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the
rendering of services by Borrower, whether or not earned by performance,
and any and all credit insurance, guaranties, and other security therefor,
as well as all merchandise returned to or reclaimed by Borrower and
Borrower's Books relating to any of the foregoing.
"Advance" or "Advances" means a loan advance under the Equipment Line.
"Affiliate" means, with respect to any Person, any Person that owns or
controls directly or indirectly such Person, any Person that controls or is
controlled by or is under common control with such Person, and each of such
Person's senior executive officers, directors, partners and, for any Person
that is a limited liability company, such Persons, managers and members.
"Bank Expenses" means all reasonable costs or expenses (including
reasonable attorneys' fees and expenses) incurred in connection with the
preparation, negotiation, administration, and enforcement of the Loan
Documents; and Bank's reasonable attorneys' fees and expenses incurred in
amending, enforcing or defending the Loan Documents, (including fees and
expenses of appeal or review, or those incurred in any Insolvency
Proceeding) whether or not suit is brought.
"Borrower's Books" means all of Borrower's books and records
including, without limitation: ledgers; records concerning Borrower's
assets or liabilities, the Collateral, business operations or financial
condition; and all computer programs, or tape files, and the equipment,
containing such information.
"Borrowing Base" means an amount equal to sixty percent (60.0%) of
Eligible Accounts, as determined by Bank with reference to the most recent
Borrowing Base Certificate delivered by Borrower.
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<PAGE>
"Business Day" means any day that is not a Saturday, Sunday, or other
day on which banks in the Commonwealth of Massachusetts are authorized or
required to close.
"Capital Event" means any of the following capitalization events:
(i) issuance by Borrower of any securities (including, without
limitation, common stock, preferred stock, convertible stock/debentures,
options, warrants and the like;
(ii) debentures, including, without limitation, notes, or
subordinated debt; or
(iii) any other infusion of capital in any form whatsoever,
"Capital Event" does not include the (a) issuance of options to purchase
common stock of Borrower (or common stock issued upon exercise of such
options) pursuant to Borrower's stock option plan, or (b) issuance of
common stock upon the exercise of any warrants outstanding as of the date
hereof.
"Closing Date" means the date of this Agreement.
"Code" means the Massachusetts Uniform Commercial Code.
"Collateral" means the property described on Exhibit A attached
hereto.
"Committed Equipment Line" means a credit extension of the lesser of
(a) up to Eight Hundred Thousand Dollars ($800,000.00), or (b) sixty
percent (60%) of the value of Borrower's Eligible Accounts, as determined
by the Bank with reference to the most recent Borrowing Base Certificate
delivered by the Borrower.
"Contingent Obligation" means, as applied to any Person, any direct or
indirect liability, contingent or otherwise, of that Person with respect to
(i) any indebtedness, lease, dividend, letter of credit or other obligation
of another, including, without limitation, any such obligation directly or
indirectly guaranteed, endorsed, co-made or discounted or sold with
recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or
other agreement or arrangement designated to protect a Person against
fluctuation in interest rates, currency exchange rates or commodity prices;
provided, however, that the term "Contingent Obligation" shall not include
endorsements for collection or deposit in the ordinary course of business.
The amount of any Contingent Obligation shall be deemed to be an amount
equal to the stated or determined amount of the primary obligation in
respect of which such Contingent Obligation is made or, if not stated or
determinable, the maximum reasonably anticipated liability in respect
thereof as determined by such Person in good faith; provided, however, that
such amount shall not in any event exceed the maximum amount of the
obligations under the guarantee or other support arrangement.
"Copyrights" means any and all copyright rights, copyright
applications, copyright registrations and like protections in each work or
authorship and derivative work thereof, whether published or unpublished
and whether or not the same also constitutes a trade secret, now or
hereafter existing, created, acquired or held.
"Current Assets" means, as of any applicable date, all amounts that
should, in accordance with GAAP, be included as current assets on the
consolidated balance sheet of Borrower and its Subsidiaries as at such
date.
"Current Liabilities" means, as of any applicable date, all amounts
that should, in accordance with GAAP, be included as current liabilities on
the consolidated balance sheet of Borrower and its Subsidiaries, as at such
date, plus, to the extent not already included therein, all outstanding
Advances made under this Agreement, including all Indebtedness that is
payable upon demand or within one year from the date of
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<PAGE>
determination thereof unless such Indebtedness is renewable or extendable
at the option of Borrower or any Subsidiary to a date more than one year
from the date of determination, but excluding Subordinated Debt.
"Debt Service Coverage" means, as of any applicable date, the
Borrower's net profit (or loss), plus depreciation plus all amortization
required or paid, plus interest, divided by the sum of current maturities
of long-term debt, and capital leases (for such quarter), plus interest.
"Eligible Accounts" means those Accounts that arise in the ordinary
course of Borrower's business that comply with all of Borrower's
representations and warranties to Bank set forth in Section 5.4. Unless
otherwise agreed to by Bank in writing, Eligible Accounts shall not include
the following:
(a) Accounts that the account debtor has failed to pay within
ninety (90) days of invoice date;
(b) Accounts with respect to an account debtor, fifty percent
(50%) of whose Accounts the account debtor has failed to pay within
ninety (90) days of invoice date;
(c) Accounts with respect to an account debtor, including
Affiliates, whose total obligations to Borrower exceed twenty-five
percent (25%) of all Accounts, to the extent such obligations exceed
the aforementioned percentage, except as approved in writing by Bank;
(d) Accounts with respect to which the account debtor does not
have its principal place of business in the United States;
(e) Accounts with respect to which the account debtor is a
federal, state, or local governmental entity or any department,
agency, or instrumentality thereof;
(f) Accounts with respect to which Borrower is liable to the
account debtor for goods sold or services rendered by the account
debtor to Borrower, but only to the extent of any amounts owing to the
account debtor (sometimes referred to as "contra" accounts, e.g.
accounts payable, customer deposits, credit accounts etc.) against
amounts owed to Borrower;
(g) Accounts generated by demonstration or promotional equipment,
or with respect to which goods are placed on consignment, guaranteed
sale, sale or return, sale on approval, bill and hold, or other terms
by reason of which the payment by the account debtor may be
conditional;
(h) Accounts with respect to which the account debtor is an
Affiliate, officer, employee, or agent of Borrower;
(i) Accounts with respect to which the account debtor disputes
liability or makes any claim with respect thereto as to which Bank
reasonably believes, in its business judgment, that there may be a
basis for dispute (but only to the extent of the amount subject to
such dispute or claim), or is subject to any Insolvency Proceeding, or
becomes insolvent, or goes out of business; and
(k) Accounts the collection of which Bank reasonably determines
to be doubtful.
"Equipment" means all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments
in which Borrower has any interest.
"Equipment Advance" has the meaning set forth in Section 2.1.
"Equipment Availability End Date" has the meaning set forth in Section
2.1.
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<PAGE>
"ERISA" means the Employment Retirement Income Security Act of 1974,
as amended, and the regulations thereunder.
"GAAP" means generally accepted accounting principles as in effect in
the United States from time to time.
"Indebtedness" means (a) all indebtedness for borrowed money or the
deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds
and letters of credit, (b) all obligations evidenced by notes, bonds,
debentures or similar instruments, (c) all capital lease obligations and
(d) all Contingent Obligations.
"Insolvency Proceeding" means any proceeding commenced by or against
any person or entity under any provision of the United States Bankruptcy
Code, as amended, or under any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, formal or informal
moratoria, compositions, extension generally with its creditors, or
proceedings seeking reorganization, arrangement, or other relief.
"Intellectual Property Collateral" means
(a) Copyrights, Trademarks, Patents, and mask marks;
(b) Any and all trade secrets, and any and all intellectual
property rights in computer software and computer software products
now or hereafter existing, created, acquired or held;
(c) Any and all design rights which may be available to Borrower
now or hereafter existing, created, acquired or held;
(d) Any and all claims for damages by way of past, present and
future infringement of any of the rights included above, with the
right, but not the obligation, to sue for and collect such damages for
said use or infringement of the intellectual property rights
identified above;
(e) All licenses or other rights to use any of the Copyrights,
Patents, Trademarks, or mask works, and all license fees and royalties
arising from such use to the extent permitted by such license or
rights;
(f) All amendments, renewals and extensions of any of the
Copyrights, Trademarks, Patents, or mask works; and
(g) All proceeds and products of the foregoing, including without
limitation all payments under insurance or any indemnity or warranty
payable in respect of any of the foregoing.
"Inventory" means all present and future inventory in which Borrower
has any interest, including merchandise, raw materials, parts, supplies,
packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service,
of every kind and description now or at any time hereafter owned by or in
the custody or possession, actual or constructive, of Borrower, including
such inventory as is temporarily out of its custody or possession or in
transit and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any
of the foregoing and any documents of title representing any of the above.
"Investment" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance
or capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
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<PAGE>
"Lien" means any mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, any note or
notes executed by Borrower, and any other present or future agreement
entered into between Borrower and/or for the benefit of Bank in connection
with this Agreement, all as amended, extended or restated from time to
time.
"Material Adverse Effect" means a material adverse effect on (i) the
business operations or condition (financial or otherwise) of Borrower and
its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay
the Obligations or otherwise perform its obligations under the Loan
Documents.
"Maturity Date" means thirty (30) months from the Equipment
Availability End Date.
"Negotiable Collateral" means all of Borrower's present and future
letters of credit of which it is a beneficiary, notes, drafts, instruments,
securities, documents of title, and chattel paper.
"Obligations" means all debt, principal, interest, Bank Expenses and
other amounts owed to Bank by Borrower pursuant to this Agreement or any
other agreement, whether absolute or contingent, due or to become due, now
existing or hereafter arising, including any interest that accrues after
the commencement of an Insolvency Proceeding and including any debt,
liability, or obligation owing from Borrower to others that Bank may have
obtained by assignment or otherwise.
"Patents" means all patents, patent applications and like protections
including without limitation improvements, divisions, continuations,
renewals, reissues, extensions and continuations-in-part of the same.
"Payment Date" means the first calendar day of each month commencing
on the first such date after the Closing Date and ending on the Maturity
Date.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising under this
Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and disclosed in
the Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the ordinary
course of business; and
(e) Indebtedness secured by Permitted Liens.
"Permitted Investment" means:
(a) Investments existing on the Closing Date disclosed in the
Schedule; and
(b) (i) marketable direct obligations issued or unconditionally
guaranteed by the United States of America or any agency or any State
thereof maturing within one (1) year from the date of acquisition
thereof, (ii) commercial paper maturing no more than one (1) year from
the date of creation thereof and currently having the highest rating
obtainable from either Standard & Poor's Corporation or Moody's
Investors Service, Inc., and (iii) certificates of deposit maturing no
more than one (1) year from the date of investment therein issued by
Bank; and
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<PAGE>
(c) Investments in any presently existing Subsidiaries of
Borrower, and Investments in Borrower by any presently existing
Subsidiary; and
(d) Depository accounts at Bank or maintained at banks listed on
Schedule or otherwise disclosed to Bank in writing subsequent to the
date hereof; and
(e) Stock or obligations issued to Borrower in settlement of
claims against others by reason of an event of bankruptcy or other
composition or the readjustment of debt or a reorganization of any
debtor of the Borrower.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and disclosed in the
Schedule or arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good
faith by appropriate proceedings and as to which adequate reserves are
maintained on Borrower's Books in accordance with GAAP, provided the
same have no priority over any of Bank's security interests;
(c) Liens (i) upon or in any Equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price of
such Equipment or indebtedness incurred solely for the purpose of
financing the acquisition of such Equipment, or (ii) existing on such
equipment at the time of its acquisition, provided that the Lien is
confined solely to the property so acquired and improvements thereon,
and the proceeds of such equipment;
(d) Leases or subleases and licenses or sublicenses granted to
others in the ordinary course of Borrower's business not interfering
in any material respect with the business of Borrower and its
Subsidiaries taken as a whole, and any interest or title of a lessor,
licensor or under any lease or license provided that such leases,
subleases, licenses and sublicenses do not prohibit the grant of the
security interest granted hereunder; and
(e) Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type described
in clauses (a) through (c) above, provided that any extension, renewal
or replacement Lien shall be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness being
extended, renewed or refinanced does not increase.
"Person" means any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit
corporation, firm, joint stock company, estate, entity or governmental
agency.
"Prime Rate" means the variable rate of interest, per annum, most
recently announced by Bank, as its "prime rate," whether or not such
announced rate is the lowest rate available from Bank.
"Quick Assets" means, as of any applicable date, the consolidated
cash, cash equivalents, accounts receivable and investments with maturities
of fewer than 90 days of Borrower determined in accordance with GAAP.
"Responsible Officer" means each of the Chief Executive Officer, the
President, the Chief Financial Officer and the Controller of Borrower.
"Schedule" means the schedule of exceptions attached hereto, if any.
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<PAGE>
"Subordinated Debt" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms acceptable to
Bank (and identified as being such by Borrower and Bank).
"Subsidiary" means with respect to any Person, corporation,
partnership, company association, joint venture, or any other business
entity of which more than fifty percent (50%) of the voting stock or other
equity interests is owned or controlled, directly or indirectly, by such
Person or one or more Affiliates of such Person.
"Tangible Net Worth" means as of any applicable date, the consolidated
total assets of Borrower and its Subsidiaries plus Subordinated Debt minus,
without duplication, (i) the sum of any amounts attributable to (a)
goodwill, (b) intangible items such as unamortized debt discount and
expense, patents, trade and service marks and names, copyrights and
research and development expenses except prepaid expenses, and (c) all
reserves not already deducted from assets, and (ii) Total Liabilities.
"Total Liabilities" means as of any applicable date, any date as of
which the amount thereof shall be determined, all obligations that should,
in accordance with GAAP be classified as liabilities on the consolidated
balance sheet of Borrower, including in any event all Indebtedness, but
specifically excluding Subordinated Debt.
"Trademarks" means any trademark and servicemark rights, whether
registered or not, applications to register and registrations of the same
and like protections, and the entire goodwill of the business of Assignor
connected with and symbolized by such trademarks.
"Unrestricted Cash" means all cash or cash equivalents (determined in
accordance with GAAP) which are not subject to a lien other than to the
Bank, and arise out of the Borrower's Accounts. Unrestricted Cash shall
exclude, without limitation, any amounts due or allocated for taxes.
1.2 Accounting and Other Terms. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP and all calculations
and determinations made hereunder shall be made in accordance with GAAP. When
used herein, the term "financial statements" shall include the notes and
schedules thereto. The terms "including"/ "includes" shall always be read as
meaning "including (or includes) without limitation", when used herein or in any
other Loan Document.
2. LOAN AND TERMS OF PAYMENT
2.1 Equipment Advances.
(1) Subject to and upon the terms and conditions of this Agreement, at
any time from the date hereof through February 28, 1998 (the "Equipment
Availability End Date"), Bank agrees to make advances (each an "Equipment
Advance" and collectively, the "Equipment Advances") to Borrower in an aggregate
outstanding amount not to exceed the Committed Equipment Line. To evidence the
Equipment Advance or Equipment Advances, Borrower shall deliver to Bank, at the
time of each Equipment Advance request, an invoice for the equipment to be
purchased. The Equipment Advances shall be used only to purchase or refinance
Equipment and shall not exceed One Hundred Percent (100%) of the invoice amount
of such equipment approved from time to time by Bank, excluding taxes, shipping,
warranty charges, freight discounts and installation expense. Software may,
however, constitute up to twenty-five percent (25.0%) of aggregate Equipment
Advances.
(2) Interest shall accrue from the date of each Equipment Advance at
the rate of one percent (1.0%) per annum in excess of the Bank's Prime Rate as
amended by the Bank from time to time and shall be payable monthly for each
month through the month in which the Equipment Availability End Date falls. Any
Equipment Advances that are outstanding on the Equipment Availability End Date
will be payable in thirty (30) equal monthly installments of principal, plus all
accrued interest, beginning on the Payment Date of each month following the
Equipment Availability End Date and ending on the Maturity Date. Equipment
Advances, once repaid, may not be reborrowed.
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(3) When Borrower desires to obtain an Equipment Advance, Borrower
shall notify Bank (which notice shall be irrevocable) by facsimile transmission
to be received no later than 3:00 p.m. Pacific time one (1) Business Day before
the day on which the Equipment Advance is to be made. Such notice shall be
substantially in the form of EXHIBIT B. The notice shall be signed by a
Responsible Officer or its designee and include a copy of the invoice for the
Equipment to be financed.
2.2 Overadvances. If, at any time or for any reason up to and including the
Equipment Availability End Date, the amount of Obligations owed by Borrower to
Bank pursuant to Section 2.1 of this Agreement is greater than the Borrowing
Base, Borrower shall immediately pay to Bank, in cash, the amount of such
excess.
2.3 Interest Rates, Payments, and Calculations.
(1) Interest Rate. Except as set forth in Section 2.3(b), any Advances
shall bear interest, on the average daily balance thereof, at a per annum rate
equal to one (1.0%) percentage point above the Prime Rate.
(2) Default Rate. All Obligations shall bear interest, from and after
the occurrence of an Event of Default, at a rate equal to five (5) percentage
points above the interest rate applicable immediately prior to the occurrence of
the Event of Default.
(3) Payments. Interest hereunder shall be due and payable on each
Payment Date. Borrower hereby authorizes Bank to debit any accounts with Bank,
including, without limitation, Account Number _____________________ for payments
of principal and interest due on the Obligations and any other amounts owing by
Borrower to Bank. Bank will notify Borrower of all debits which Bank has made
against Borrower's accounts. Any such debits against Borrower's accounts in no
way shall be deemed a set-off. Any interest not paid when due shall be
compounded by becoming a part of the Obligations, and such interest shall
thereafter accrue interest at the rate then applicable hereunder.
(4) Computation. In the event the Prime Rate is changed from time to
time hereafter, the applicable rate of interest hereunder shall be increased or
decreased effective as of 12:01 a.m. on the day the Prime Rate is changed, by an
amount equal to such change in the Prime Rate. All interest chargeable under the
Loan Documents shall be computed on the basis of a three hundred sixty (360) day
year for the actual number of days elapsed.
2.4 Crediting Payments. Prior to the occurrence of an Event of Default,
Bank shall credit a wire transfer of funds, check or other item of payment to
such deposit account or Obligation as Borrower specifies. After the occurrence
of an Event of Default, the receipt by Bank of any wire transfer of funds,
check, or other item of payment, whether directed to Borrower's deposit account
with Bank or to the Obligations or otherwise, shall be immediately applied to
conditionally reduce Obligations, but shall not be considered a payment in
respect of the Obligations unless such payment is of immediately available
federal funds or unless and until such check or other item of payment is honored
when presented for payment. Notwithstanding anything to the contrary contained
herein, any wire transfer or payment received by Bank after 12:00 noon Pacific
time shall be deemed to have been received by Bank as of the opening of business
on the immediately following Business Day. Whenever any payment to Bank under
the Loan Documents would otherwise be due (except by reason of acceleration) on
a date that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall accrue
and be payable for the period of such extension.
2.5 Fees. Borrower shall pay to Bank the following:
(1) Facility Fee. A Facility Fee equal to Four Thousand Dollars
($4,000.00), which fee shall be due on the Closing Date and shall be fully
earned and non-refundable;
(2) Financial Examination and Appraisal Fees. Bank's customary fees
and out-of-pocket expenses for an annual audit of Borrower's Accounts by
the Bank, and for each appraisal of Collateral (upon
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Borrower's consent, such consent not to be unreasonably withheld, prior to
the occurrence of an Event of Default, and at any time after the occurrence
of an Event of Default) and financial analysis and examination of Borrower
performed from time to time by Bank or its agents;
(3) Bank Expenses. Upon demand from Bank, including, without
limitation, upon the date hereof, all Bank Expenses incurred through the
date hereof, including reasonable attorneys' fees and expenses, and, after
the date hereof, all Bank Expenses, including reasonable attorneys' fees
and expenses, as and when they become due.
2.6 Additional Costs. In case any law, regulation, treaty or official
directive or the interpretation or application thereof by any court or any
governmental authority charged with the administration thereof or the compliance
with any guideline or request of any central bank or other governmental
authority (whether or not having the force of law):
(1) subjects Bank to any tax with respect to payments of principal or
interest or any other amounts payable hereunder by Borrower or otherwise
with respect to the transactions contemplated hereby (except for taxes on
the overall net income of Bank imposed by the United States of America or
any political subdivision thereof);
(2) imposes, modifies or deems applicable any deposit insurance,
reserve, special deposit or similar requirement against assets held by, or
deposits in or for the account of, or loans by, Bank; or
(3) imposes upon Bank any other condition with respect to its
performance under this Agreement,
and the result of any of the foregoing is to materially increase the cost to
Bank, materially reduce the income receivable by Bank or impose any material
expense upon Bank with respect to any loans, Bank shall notify Borrower thereof.
Borrower agrees to pay to Bank the amount of such increase in cost, reduction in
income or additional expense as and when such cost, reduction or expense is
incurred or determined, upon presentation by Bank of a statement of the amount
and setting forth Bank's calculation thereof, all in reasonable detail, which
statement shall be deemed true and correct absent manifest error.
2.7 Term. Except as otherwise set forth herein, this Agreement shall become
effective on the Closing Date and, subject to Section 12.7, shall continue in
full force and effect for a term ending on the Maturity Date. Notwithstanding
the foregoing, Bank shall have the right to terminate its obligation to make
Advances under this Agreement immediately and without notice upon the occurrence
and during the continuance of an Event of Default. Notwithstanding termination
of this Agreement, Bank's lien on the Collateral shall remain in effect for so
long as any Obligations are outstanding.
3. CONDITIONS OF LOANS
3.1 Conditions Precedent to Initial Advance. The obligation of Bank to make
the initial Advance is subject to the condition precedent that Bank shall have
received, in form and substance satisfactory to Bank, the following:
(1) this Agreement;
(2) a certificate of the Secretary of Borrower with respect to
articles, bylaws, incumbency and resolutions authorizing the execution and
delivery of this Agreement;
(3) an opinion of Borrower's counsel;
(4) financing statements (Forms UCC-1);
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(5) insurance certificate;
(6) payment of the fees and Bank Expenses then due specified in
Section 2.5 hereof;
(7) Certificates of Legal Existence and Foreign Qualification for the
states of Delaware and New Jersey; and
(8) such other documents, and completion of such other matters, as
Bank may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to all Advances. The obligation of Bank to make
each Advance, including the initial Advance, is further subject to the following
conditions:
(1) timely receipt by Bank of the Payment/Advance Form as provided in
Section 2.1; and
(2) the representations and warranties contained in Section 5 shall be
true and correct in all material respects on and as of the date of such
Payment/Advance Form and on the effective date of each Advance as though
made at and as of each such date, and no Event of Default shall have
occurred and be continuing, or would result from such Advance. The making
of each Advance shall be deemed to be a representation and warranty by
Borrower on the date of such Advance as to the accuracy of the facts
referred to in this Section 3.2(b).
4. CREATION OF SECURITY INTEREST
4.1 Grant of Security Interest. Borrower grants and pledges to Bank a
continuing security interest in all presently existing and hereafter acquired or
arising Collateral in order to secure prompt payment of any and all Obligations
and in order to secure prompt performance by Borrower of each of its covenants
and duties under the Loan Documents. Except as set forth in the Schedule, such
security interest constitutes a valid, first priority security interest in the
presently existing Collateral, and will constitute a valid, first priority
security interest in Collateral acquired after the date hereof. Borrower
acknowledges that Bank may place a "hold" on any Deposit Account pledged as
Collateral to secure the Obligations. Notwithstanding termination of this
Agreement, Bank's Lien on the Collateral shall remain in effect for so long as
any Obligations are outstanding.
4.2 Delivery of Additional Documentation Required. Borrower shall from time
to time execute and deliver to Bank, at the request of Bank, all Negotiable
Collateral, all financing statements and other documents that Bank may
reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 Right to Inspect. Bank (through any of its officers, employees, or
agents) shall have the right, upon reasonable prior notice, from time to time
during Borrower's usual business hours, to inspect Borrower's Books and to make
copies thereof and to check, test, and appraise the Collateral in order to
verify Borrower's financial condition or the amount, condition of, or any other
matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1 Due Organization and Qualification. Borrower and each Subsidiary is a
corporation duly existing and in good standing under the laws of its state of
incorporation and qualified and licensed to do business in, and is in good
standing in, any state in which the failure to do so would have a Material
Adverse Effect.
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5.2 Due Authorization; No Conflict. The execution, delivery, and
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles/Certificate of Incorporation or
Bylaws, nor will they constitute an event of default under any material
agreement to which Borrower is a party or by which Borrower is bound. Borrower
is not in default under any agreement to which it is a party or by which it is
bound, which default could have a Material Adverse Effect.
5.3 No Prior Encumbrances. Borrower has good and indefeasible title to the
Collateral, free and clear of Liens, except for Permitted Liens.
5.4 Bona Fide Eligible Accounts. The Eligible Accounts are bona fide
existing obligations. The service or property giving rise to such Eligible
Accounts has been performed or delivered to the account debtor or to the account
debtor's agent for immediate shipment to and unconditional acceptance by the
account debtor. Borrower has not received notice of actual or imminent
Insolvency Proceeding of any account debtor whose accounts are included in any
Borrowing Base Certificate as an Eligible Account.
5.5 Merchantable Inventory. All Inventory is in all material respects of
good and marketable quality, free from all material defects.
5.6 Intellectual Property. Borrower is the sole owner of the Intellectual
Property Collateral, except for non-exclusive licenses granted by Borrower to
its customers in the ordinary course of business.
5.7 Name; Location of Chief Executive Office. Except as disclosed in the
Schedule, Borrower has not done business and will not without at least thirty
(30) days prior written notice to Bank do business under any name other than
that specified on the signature page hereof. The chief executive office of
Borrower is located at the address indicated in Section 10 hereof.
5.8 Litigation. Except as set forth in the Schedule, there are no actions
or proceedings pending, or, to Borrower's knowledge, threatened by or against
Borrower or any Subsidiary before any court or administrative agency in which an
adverse decision would have a Material Adverse Effect.
5.9 No Material Adverse Change in Financial Statements. All consolidated
financial statements related to Borrower and any Subsidiary that have been
delivered by Borrower to Bank fairly present in all material respects Borrower's
consolidated financial condition as of the date thereof and Borrower's
consolidated results of operations for the period then ended. Since the date of
the most recent of such financial statements submitted to Bank on or about the
Closing Date, there has been no development or event which has had or could have
a Material Adverse Effect.
5.10 Solvency. Borrower is able to pay its debts (including trade debts) as
they mature.
5.11 Regulatory Compliance. Borrower and each Subsidiary has met the
minimum funding requirements of ERISA with respect to any employee benefit plans
subject to ERISA. No event has occurred resulting from Borrower's failure to
comply with ERISA that is reasonably likely to result in Borrower's incurring
any liability that could have a Material Adverse Effect. Borrower is not an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940. Borrower is not engaged
principally, or as one of its important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulations G, T and U of the Board of Governors of the Federal
Reserve System). Borrower has complied with the provisions of the Federal Fair
Labor Standards Act in all material respects. Borrower has not violated any
statutes, laws, ordinances or rules applicable to it, violation of which could
have a Material Adverse Effect.
5.12 Environmental Condition. None of Borrower's or any Subsidiary's
properties or assets has ever been used by Borrower or any Subsidiary or, to the
best of Borrower's knowledge, by previous owners or operators, in the disposal
of, or to produce, store, handle, treat, release, or transport, any hazardous
waste or hazardous substance other
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than in accordance with applicable law; to the best of Borrower's knowledge,
none of Borrower's properties or assets has ever been designated or identified
in any manner pursuant to any environmental protection statute as a hazardous
waste or hazardous substance disposal site, or a candidate for closure pursuant
to any environmental protection statute; no lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by Borrower or any Subsidiary; and neither Borrower nor any
Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the release, or other disposition of hazardous waste or
hazardous substances into the environment.
5.13 Taxes. Borrower and each Subsidiary has filed or caused to be filed
all tax returns required to be filed on a timely basis, and has paid, or has
made adequate provision for the payment of, all taxes reflected therein.
5.14 Subsidiaries. Borrower does not own any stock, partnership interest or
other equity securities of any Person, except for Permitted Investments.
5.15 Government Consents. Borrower and each Subsidiary has obtained all
consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are necessary
for the continued operation of Borrower's business as currently conducted, the
failure of which would have a Material Adverse Effect.
5.16 Full Disclosure. No representation, warranty or other statement made
by Borrower in any certificate or written statement furnished to Bank contains
any untrue statement of a material fact.
6. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
an Advance hereunder, Borrower shall do all of the following:
6.1 Good Standing. Borrower shall maintain its and each of its
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which could have a Material
Adverse Effect.
6.2 Government Compliance. Borrower shall meet, and shall cause each
Subsidiary to meet, the minimum funding requirements of ERISA with respect to
any employee benefit plans subject to ERISA. Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect or a material adverse effect on the
Collateral or the priority of Bank's Lien on the Collateral.
6.3 Financial Statements, Reports, Certificates. Borrower shall deliver to
Bank: (a) as soon as available, but in any event within thirty (30) days after
the end of each month, a company prepared consolidated balance sheet and income
statement covering Borrower's consolidated operations during such period, in a
form and certified by an officer of Borrower reasonably acceptable to Bank; (b)
as soon as available, but in any event within ninety (90) days after the end of
Borrower's fiscal year, audited consolidated financial statements of Borrower
prepared in accordance with GAAP, consistently applied, together with an
unqualified opinion on such financial statements of an independent certified
public accounting firm reasonably acceptable to Bank; (c) within five (5) days
of filing, copies of all statements, reports and notices sent or made available
generally by Borrower to its security holders or to any holders of Subordinated
Debt and all reports on Form 10-K, 10-Q and 8-K filed with the Securities and
Exchange Commission; (d) promptly upon receipt of notice thereof, a report of
any legal actions pending or threatened against Borrower or any Subsidiary that
could result in damages or costs to Borrower or any Subsidiary of One Hundred
Thousand Dollars ($100,000) or more; and (e) such budgets, sales projections,
operating plans or other financial information as Bank may reasonably request
from time to time.
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Within thirty (30) days after the last day of each month, Borrower shall
deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in
substantially the form of EXHIBIT C hereto, together with aged listings of
accounts receivable.
Within thirty (30) days after the last day of each month, and within five
(5) days after filing, Borrower shall deliver to Bank with the monthly financial
statements a Compliance Certificate signed by a Responsible Officer in
substantially the form of EXHIBIT D hereto.
Bank shall have a right from time to time hereafter to audit Borrower's
Accounts at Borrower's expense, provided that such audits will be conducted no
more often than annually, unless an Event of Default has occurred and is
continuing.
6.4 Inventory; Returns. Borrower shall keep all Inventory in good and
marketable condition, free from all material defects. Returns and allowances, if
any, as between Borrower and its account debtors shall be on the same basis and
in accordance with the usual customary practices of Borrower, as they exist at
the time of the execution and delivery of this Agreement. Borrower shall
promptly notify Bank of all returns and recoveries and of all disputes and
claims, where the return, recovery, dispute or claim involves more than Fifty
Thousand Dollars ($50,000).
6.5 Taxes. Borrower shall make, and shall cause each Subsidiary to make,
due and timely payment or deposit of all material federal, state, and local
taxes, assessments, or contributions required of it by law, and will execute and
deliver to Bank, on demand, appropriate certificates attesting to the payment or
deposit thereof; and Borrower will make, and will cause each Subsidiary to make,
timely payment or deposit of all material tax payments and withholding taxes
required of it by applicable laws, including, but not limited to, those laws
concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal
income taxes, and will, upon request, furnish Bank with proof satisfactory to
Bank indicating that Borrower or a Subsidiary has made such payments or
deposits; provided that Borrower or a Subsidiary need not make any payment if
the amount or validity of such payment is (I) contested in good faith by
appropriate proceedings , (ii) is reserved against (to the extent required by
GAAP) by Borrower and (iii) no lien other than a Permitted Lien results.
6.6 Insurance.
(1) Borrower, at its expense, shall keep the Collateral insured
against loss or damage by fire, theft, explosion, sprinklers, and all other
hazards and risks, and in such amounts, as ordinarily insured against by other
owners in similar businesses conducted in the locations where Borrower's
business is conducted on the date hereof. Borrower shall also maintain insurance
relating to Borrower's ownership and use of the Collateral in amounts and of a
type that are customary to businesses similar to Borrower's.
(2) All such policies of insurance shall be in such form, with such
companies, and in such amounts as are reasonably satisfactory to Bank. All such
policies of property insurance shall contain a lender's loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional loss
payee thereof and all liability insurance policies shall show the Bank as an
additional insured, and shall specify that the insurer must give at least twenty
(20) days notice to Bank before canceling its policy for any reason. At Bank's
request, Borrower shall deliver to Bank certified copies of such policies of
insurance and evidence of the payments of all premiums therefor. All proceeds
payable under any such policy shall, at the option of Bank, be payable to Bank
to be applied on account of the Obligations.
6.7 Principal Depository. Borrower shall maintain its principal depository
and operating accounts with Bank.
6.8 Liquidity. Beginning as of month ending April 30, 1997, and ending upon
the effective date of the Debt Service Coverage covenant below, Borrower shall
maintain, as of the last day of each calendar month, a ratio of
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Unrestricted Cash, plus amounts available under the Committed Equipment Line, to
Obligations, of at least 1.75 to 1.0, increasing to 2.0 to 1.0 after any Capital
Event.
6.9 Debt Service Coverage. Beginning as of month ending April 30, 1997,
Borrower shall maintain Debt Service Coverage of at least 1.5 to 1.0. This
covenant shall only be effective the second consecutive quarter in which Debt
Service Coverage is 1.5 to 1.0; thereafter, the Liquidity Covenant at Section
6.8 hereof shall no longer be applicable and Debt Service Coverage shall be
tested on a quarterly basis.
6.10 Total Liabilities to Net Worth Ratio. Beginning as of month ending
April 30, 1997, Borrower shall maintain a ratio of Total Liabilities less
Subordinated Debt to Tangible Net Worth of not more than the following amounts,
for each month during the corresponding periods:
Beginning April 30, 1997 through June 30, 1997 1.35 to 1.0
Beginning July 1, 1997 through September 30, 1997 1.75 to 1.0
Beginning October 1, 1997 through March 31, 1998 2.20 to 1.0
Beginning April 1, 1998 and monthly thereafter 2.0 to 1.0
6.11 Tangible Net Worth. Borrower shall maintain a Tangible Net Worth of
not less than the following amounts, for the corresponding periods:
Quarter ending June 30, 1997 $5,000,000.00
Quarter ending September 30, 1997 $3,750,000.00
Quarter ending December 31, 1997, and for each fiscal
quarter thereafter, an amount equal to $3,000,000.00, plus
seventy-five percent (75.0%) of the cumulative (from
October 1, 1997) quarterly profitability (with no reduction
for losses)
6.12 Further Assurances. At any time and from time to time Borrower shall
execute and deliver such further instruments and take such further action as may
reasonably be requested by Bank to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS
Borrower covenants and agrees that, so long as any Advance hereunder shall
be available and until payment in full of the outstanding Obligations or for so
long as Bank may have any commitment to make any Advances, Borrower will not do
any of the following:
7.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose of
(collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer, all
or any part of its business or property, other than as set forth on Schedule or
Transfers: (i) of inventory in the ordinary course of business, (ii) of
non-exclusive licenses and similar arrangements for the use of the property of
Borrower or its Subsidiaries in the ordinary course of business; (iii) that
constitute payment of normal and usual operating expenses in the ordinary course
of business;; or (iii) of worn-out or obsolete Equipment.
7.2 Changes in Business, Ownership, or Management, Business Locations.
Engage in any business, or permit any of its Subsidiaries to engage in any
business, other than the businesses currently engaged in by Borrower and any
business substantially similar or related thereto (or incidental thereto), or
suffer a change in Borrower's ownership or management, Borrower will not,
without at least thirty (30) days prior written notification to Bank, relocate
its chief executive office or add any new offices or business locations.
7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of its
Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
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substantially all of the capital stock or property of another Person; provided
that any Subsidiary may merge into Borrower or any wholly-owned Subsidiary of
Borrower; and provided further that Borrower or Subsidiary may acquire the
business of another Person or merge with another Person as long as (a) no Event
of Default has occurred and is continuing or would otherwise result therefrom,
(b) the other Person is in the same or a related line of business, (c) Borrower
or the Subsidiary is the surviving corporation, (d) there would be no resulting
change in senior management of Borrower or the Subsidiary, and (e) the
acquisition or merger would not result in a change in excess of 25% in the net
worth of the Borrower or the Subsidiary.
7.4 Indebtedness. Create, incur, assume or be or remain liable with respect
to any Indebtedness, or permit any Subsidiary so to do, other than Permitted
Indebtedness.
7.5 Encumbrances. Create, incur, assume or suffer to exist any Lien with
respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.
7.6 Distributions. Pay any dividends or make any other distribution or
payment on account of or in redemption, retirement or purchase of any capital
stock.
7.7 Investments. Directly or indirectly acquire or own, or make any
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
7.8 Transactions with Affiliates. Directly or indirectly enter into or
permit to exist any material transaction with any Affiliate of Borrower except
for transactions that are in the ordinary course of Borrower's business, upon
fair and reasonable terms that are no less favorable to Borrower than would be
obtained in an arm's length transaction with a nonaffiliated Person.
7.9 Subordinated Debt. Make any payment in respect of any Subordinated
Debt, or permit any of its Subsidiaries to make any such payment, except in
compliance with the terms of such Subordinated Debt, or amend any provision
contained in any documentation relating to the Subordinated Debt without Bank's
prior written consent.
7.10 Inventory. Store the Inventory with a bailee, warehouseman, or similar
party unless Bank has received a pledge of any warehouse receipt covering such
Inventory. Except for Inventory sold in the ordinary course of business and
except for such other locations as Bank may approve in writing, Borrower shall
keep the Inventory only at the location set forth in Section 10 hereof and such
other locations of which Borrower gives Bank prior written notice and as to
which Borrower signs and files a financing statement where needed to perfect
Bank's security interest.
7.11 Compliance. Become an "investment company" or a company controlled by
an "investment company," within the meaning of the Investment Company Act of
1940, or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Advance for such purpose; fail
to meet the minimum funding requirements of ERISA; permit a Reportable Event or
Prohibited Transaction, as defined in ERISA, to occur; fail to comply in all
material respects with the Federal Fair Labor Standards Act or violate any other
law or regulation, which violation could have a Material Adverse Effect; or
permit any of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:
8.1 Payment Default. If Borrower fails to pay, when due, any of the
Obligations.
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8.2 Covenant Default.
(1) If Borrower fails to perform any obligation under Sections 6.3,
6.6, 6.7, 6.8, 6.9, 6.10, 6.11, or 6.12 or violates any of the covenants
contained in Article 7 of this Agreement, or
(2) If Borrower fails or neglects to perform, keep, or observe any
other material term, provision, condition, covenant, or agreement contained in
this Agreement, in any of the Loan Documents, or in any other present or future
agreement between Borrower and Bank and as to any default under such other term,
provision, condition, covenant or agreement that can be cured, has failed to
cure such default within ten (10) days after the occurrence thereof; provided,
however, that if the default cannot by its nature be cured within the ten (10)
day period or cannot after diligent attempts by Borrower be cured within such
ten (10) day period, and such default is likely to be cured within a reasonable
time, then Borrower shall have an additional reasonable period (which shall not
in any case exceed thirty (30) days) to attempt to cure such default, and within
such reasonable time period the failure to have cured such default shall not be
deemed an Event of Default (provided that no Advances will be required to be
made during such cure period);
8.3 Material Adverse Change. If there (i) occurs a change in the business,
operations, or condition (financial or otherwise) of the Borrower which has a
Material Adverse Effect, or (ii) is a material impairment of the prospect of
repayment of any portion of the Obligations or (iii) is a material impairment of
the value or priority of Bank's security interests in the Collateral;
8.4 Attachment. If any material portion of Borrower's assets is attached,
seized, subjected to a writ or distress warrant, or is levied upon, or comes
into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within thirty (30) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within thirty (30)
days after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Advances will be required to be made during such cure period);
8.5 Insolvency. If Borrower becomes insolvent, or if an Insolvency
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is not dismissed or stayed within 30 days (provided that no
Advances will be made prior to the dismissal of such Insolvency Proceeding);
8.6 Other Agreements. If there is a default in any agreement to which
Borrower is a party with a third party or parties resulting in a right by such
third party or parties, whether or not exercised, to accelerate the maturity of
any Indebtedness in an amount in excess of One Hundred Thousand Dollars
($100,000) or that could have a Material Adverse Effect;
8.7 Subordinated Debt. If Borrower makes any payment on account of
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
8.8 Judgments. If a judgment or judgments for the payment of money in an
amount, individually or in the aggregate, of at least Fifty Thousand Dollars
($50,000) shall be rendered against Borrower and shall remain unsatisfied and
unstayed for a period of thirty (30) days (provided that no Advances will be
made prior to the satisfaction or stay of such judgment); or
8.9 Misrepresentations. If any material misrepresentation or material
misstatement exists now or hereafter in any warranty or representation set forth
herein or in any certificate or writing delivered to Bank by Borrower or any
Person acting on Borrower's behalf pursuant to this Agreement or to induce Bank
to enter into this Agreement or any other Loan Document.
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9. BANK'S RIGHTS AND REMEDIES
9.1 Rights and Remedies. Upon the occurrence and during the continuance of
an Event of Default, Bank may, at its election, without notice of its election
and without demand, do any one or more of the following, all of which are
authorized by Borrower:
(1) Declare all Obligations, whether evidenced by this Agreement, by
any of the other Loan Documents, or otherwise, immediately due and payable
(provided that upon the occurrence of an Event of Default described in
Section 8.5 all Obligations shall become immediately due and payable
without any action by Bank);
(2) Cease advancing money or extending credit to or for the benefit of
Borrower under this Agreement or under any other agreement between Borrower
and Bank;
(3) Settle or adjust disputes and claims directly with account debtors
for amounts, upon terms and in whatever order that Bank reasonably
considers advisable;
(4) Without notice to or demand upon Borrower, make such payments and
do such acts as Bank considers necessary or reasonable to protect its
security interest in the Collateral. Borrower agrees to assemble the
Collateral if Bank so requires, and to make the Collateral available to
Bank as Bank may designate. Borrower authorizes Bank to enter the premises
where the Collateral is located, to take and maintain possession of the
Collateral, or any part of it, and to pay, purchase, contest, or compromise
any encumbrance, charge, or lien which in Bank's determination appears to
be prior or superior to its security interest and to pay all expenses
incurred in connection therewith. With respect to any of Borrower's
premises, Borrower hereby grants Bank a license to enter such premises and
to occupy the same, without charge in order to exercise any of Bank's
rights or remedies provided herein, at law, in equity, or otherwise;
(5) Without notice to Borrower set off and apply to the Obligations
any and all (i) balances and deposits of Borrower held by Bank, or (ii)
indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank;
(6) Ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sale, and sell (in the manner provided for herein)
the Collateral. Subject to the rights of any licensees of the following
rights, Bank is hereby granted a non-exclusive, royalty-free license or
other right, solely pursuant to the provisions of this Section 9.1, to use,
without charge, Borrower's labels, patents, copyrights, mask works, rights
of use of any name, trade secrets, trade names, trademarks, service marks,
and advertising matter, or any property of a similar nature, as it pertains
to the Collateral, in completing production of, advertising for sale, and
selling any Collateral and, in connection with Bank's exercise of its
rights under this Section 9.1, Borrower's rights under all licenses and all
franchise agreements shall inure to Bank's benefit;
(7) Sell the Collateral at either a public or private sale, or both,
upon reasonable notification to Borrower, by way of one or more contracts
or transactions, for cash or on terms, in such manner and at such places
(including Borrower's premises) as Bank determines is commercially
reasonable, and apply the proceeds thereof to the Obligations in whatever
manner or order it deems appropriate;
(8) Bank may credit bid and purchase at any public sale, or at any
private sale as permitted by law; and
(9) Any deficiency that exists after disposition of the Collateral as
provided above will be paid immediately by Borrower.
-17-
<PAGE>
9.2 Power of Attorney. Effective only upon the occurrence and during the
continuance of an Event of Default, Borrower hereby irrevocably appoints Bank
(and any of Bank's designated officers, or employees) as Borrower's true and
lawful attorney to the extent permitted by law to exercise any of the following
powers with respect to all or any of the Collateral to: (a) send requests for
verification of Accounts or notify account debtors of Bank's security interest
in the Accounts; (b) endorse Borrower's name on any checks or other forms of
payment or security that may come into Bank's possession; (c) sign Borrower's
name on any invoice or bill of lading relating to any Account, drafts against
account debtors, schedules and assignments of Accounts, verifications of
Accounts, and notices to account debtors; (d) make, settle, and adjust all
claims under and decisions with respect to Borrower's policies of insurance
covering the Collateral; and (e) settle and adjust disputes and claims
respecting the accounts directly with account debtors, for amounts and upon
terms which Bank determines to be reasonable; (f) to file, in its sole
discretion, one or more financing or continuation statements and amendments
thereto, relative to any of the Collateral without the signature of Borrower
where permitted by law; and (g) provided Bank may exercise such power of
attorney to sign the name of Borrower on any of the documents described in
Section 4.2 after the occurrence of an Event of Default. The appointment of Bank
as Borrower's attorney in fact, and each and every one of Bank's rights and
powers, being coupled with an interest, is irrevocable until all of the
Obligations have been fully repaid and performed and Bank's obligation to
provide advances hereunder is terminated.
9.3 Accounts Collection. Upon the occurrence and during the continuance of
an Event of Default, Bank may notify any Person owing funds to Borrower of
Bank's security interest in such funds and verify the amount of such Account.
Borrower shall collect all amounts owing to Borrower for Bank, receive in trust
all payments as Bank's trustee, and if requested or required by Bank,
immediately deliver such payments to Bank in their original form as received
from the account debtor, with proper endorsements for deposit.
9.4 Bank Expenses. If Borrower fails to pay any amounts or furnish any
required proof of payment due to third persons or entities, as required under
the terms of this Agreement, then Bank may do any or all of the following: (a)
make payment of the same or any part thereof; (b) set up such reserves under the
Committed Revolving Line as Bank deems necessary to protect Bank from the
exposure created by such failure; or (c) obtain and maintain insurance policies
of the type discussed in Section 6.6 of this Agreement, and take any action with
respect to such policies as Bank deems prudent. Any amounts so paid or deposited
by Bank shall constitute Bank Expenses, shall be immediately due and payable,
and shall bear interest at the then applicable rate hereinabove provided, and
shall be secured by the Collateral. Any payments made by Bank shall not
constitute an agreement by Bank to make similar payments in the future or a
waiver by Bank of any Event of Default under this Agreement.
9.5 Bank's Liability for Collateral. So long as Bank complies with
reasonable banking practices, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of
loss, damage or destruction of the Collateral shall be borne by Borrower.
9.6 Remedies Cumulative. Bank's rights and remedies under this Agreement,
the Loan Documents, and all other agreements shall be cumulative. Bank shall
have all other rights and remedies not expressly set forth herein as provided
under the Code, by law, or in equity. No exercise by Bank of one right or remedy
shall be deemed an election, and no waiver by Bank of any Event of Default on
Borrower's part shall be deemed a continuing waiver. No delay by Bank shall
constitute a waiver, election, or acquiescence by it. No waiver by Bank shall be
effective unless made in a written document signed on behalf of Bank and then
shall be effective only in the specific instance and for the specific purpose
for which it is given.
9.7 Demand; Protest. Borrower waives demand, protest, notice of protest,
notice of default or dishonor, notice of payment and nonpayment, notice of any
default, nonpayment at maturity, release, compromise, settlement, extension, or
renewal of accounts, documents, instruments, chattel paper, and guarantees at
any time held by Bank on which Borrower may in any way be liable.
-18-
<PAGE>
10. NOTICES
Unless otherwise provided in this Agreement, all notices or demands by any
party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
delivery service, by certified mail, postage prepaid, return receipt requested,
or by telefacsimile to Borrower or to Bank, as the case may be, at its addresses
set forth below:
If to Borrower FaxSav Incorporated
399 Thornall Street
Edison, New Jersey 08837
Attn: Mr. Peter Macaluso, CFO
FAX: (908) 906-1008
With a copy to Brobeck, Phleger & Harrison
1633 Broadway - 47th Floor
New York, New York 10019
Attn: Kenneth E. Eheman, Esquire
FAX: (212) 586-7878
If to Bank Silicon Valley East
Wellesley Office Park
40 William Street - Suite 350
Wellesley, Massachusetts 02181
Attn: Ms. Jane A. Braun, Vice President
FAX: (617) 431-9906
With a copy to Riemer & Braunstein
Three Center Plaza
Boston, Massachusetts 02108
Attn: David A. Ephraim, Esquire
FAX: (617) 723-6831
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
11. CHOICE OF LAW AND VENUE; JURY WAIVER
The laws of the Commonwealth of Massachusetts shall apply to this
Agreement. BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES,
UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF
COMPETENT JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS IN ANY ACTION, SUIT,
OR PROCEEDING OF ANY KIND, AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS
AGREEMENT; PROVIDED, HOWEVER, THAT IF FOR ANY REASON BANK CANNOT AVAIL ITSELF OF
THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS, BORROWER ACCEPTS JURISDICTION
OF THE COURTS AND VENUE IN SANTA CLARA COUNTY, CALIFORNIA.
BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL
OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN
DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT
CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER
CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH
PARTY REPRESENTS AND
-19-
<PAGE>
WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS
12.1 Successors and Assigns. This Agreement shall bind and inure to the
benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights hereunder
may be assigned by Borrower without Bank's prior written consent, which consent
may be granted or withheld in Bank's sole discretion. Bank shall have the right
without the consent of or notice to Borrower to sell, transfer, negotiate, or
grant participation in all or any part of, or any interest in, Bank's
obligations, rights and benefits hereunder.
12.2 Indemnification. Borrower shall , indemnify ,defend, protect and hold
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by the Loan Documents;
and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by
Bank as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under the Loan Documents, or
otherwise (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 Time of Essence. Time is of the essence for the performance of all
obligations set forth in this Agreement.
12.4 Severability of Provisions. Each provision of this Agreement shall be
severable from every other provision of this Agreement for the purpose of
determining the legal enforceability of any specific provision.
12.5 Amendments in Writing, Integration. This Agreement cannot be amended
or terminated except by a writing signed by Borrower and Bank. All prior
agreements, understandings, representations, warranties, and negotiations
between the parties hereto with respect to the subject matter of this Agreement,
if any, are merged into this Agreement and the Loan Documents.
12.6 Counterparts. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
12.7 Survival. All covenants, representations and warranties made in this
Agreement shall continue in full force and effect so long as any Obligations
remain outstanding. The obligations of Borrower to indemnify Bank with respect
to the expenses, damages, losses, costs and liabilities described in Section
12.2 shall survive until all applicable statute of limitations periods with
respect to actions that may be brought against Bank have run; provided that so
long as the obligations referred to in the first sentence of this Section 12.7
have been satisfied, and Bank has no commitment to make any Advances or to make
any other loans to Borrower, Bank shall release all security interests granted
hereunder and redeliver all Collateral held by it in accordance with applicable
law.
12.8 Countersignature. This Agreement shall become effective only when it
shall have been executed by Borrower and Bank (provided, however, in no event
shall this Agreement become effective until signed by an officer of Bank in
California).
-20-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the date first above written.
FAXSAV INCORPORATED
By: /s/ Thomas F. Murawski
------------------------
Title: Chairman, President and CEO
----------------------------
By: /s/ Peter S. Macaluso
------------------------
Title: Vice President and CFO
----------------------------
SILICON VALLEY BANK, d/b/a SILICON VALLEY EAST
By: /s/ Doug Marshall
------------------------
Name: Douglas Marshall
----------------------------
Title: AVP
----------------------------
SILICON VALLEY BANK
By: /s/ Amy Young
------------------------
Name: Amy Young
----------------------------
Title: Vice President
----------------------------
(Signed in Santa Clara County, California)
-21-
<PAGE>
EXHIBIT A
The Collateral shall consist of all right, title and interest of Borrower
in and to the following:
(1) All goods and equipment now owned or hereafter acquired,
including, without limitation, all machinery, fixtures, vehicles (including
motor vehicles and trailers), and any interest in any of the foregoing, and
all attachments, accessories, accessions, replacements, substitutions,
additions, and improvements to any of the foregoing, wherever located;
(2) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any
of the foregoing and any documents of title representing any of the above;
(3) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks,
servicemarks, trade styles, trade names, patents, patent applications,
leases, license agreements, franchise agreements, blueprints, drawings,
purchase orders, customer lists, route lists, infringements, claims,
computer programs, computer discs, computer tapes, literature, reports,
catalogs, design rights, income tax refunds, payments of insurance and
rights to payment of any kind;
(4) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods, the licensing of
technology or the rendering of services by Borrower, whether or not earned
by performance, and any and all credit insurance, guaranties, and other
security therefor, as well as all merchandise returned to or reclaimed by
Borrower;
(5) All documents, cash, deposit accounts, securities, investment
property, letters of credit, certificates of deposit, instruments and
chattel paper now owned or hereafter acquired and Borrower's Books relating
to the foregoing;
(6) All copyright rights, copyright applications, copyright
registrations and like protections in each work of authorship and
derivative work thereof, whether published or unpublished, now owned or
hereafter acquired; all trade secret rights, including all rights to
unpatented inventions, know-how, operating manuals, license rights and
agreements and confidential information, now owned or hereafter acquired;
all mask work or similar rights available for the protection of
semiconductor chips, now owned or hereafter acquired; all claims for
damages by way of any past, present and future infringement of any of the
foregoing; and
All Borrower's Books relating to the foregoing and any and all claims, rights
and interests in any of the above and all substitutions for, additions and
accessions to and proceeds thereof.
<PAGE>
EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE: ______________________________
FAX#: (408) __________________________ TIME: _______________________
FROM: FAXSAV INCORPORATED
-----------------------------------------------
BORROWER'S NAME
FROM:___________________________________________________________________________
AUTHORIZED SIGNER'S NAME
________________________________________________________________________________
AUTHORIZED SIGNATURE
PHONE:__________________________________________________________________________
FROM ACCOUNT #______________________________ TO ACCOUNT#________________________
- --------------------------------------------------------------------------------
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
-------------------------- ---------------------
PRINCIPAL INCREASE (ADVANCE) $
PRINCIPAL PAYMENT (ONLY) $
INTEREST PAYMENT (ONLY) $
PRINCIPAL AND INTEREST (PAYMENT) $
OTHER INSTRUCTIONS:
- --------------------------------------------------------------------------------
All representations and warranties of Borrower stated in the Loan and
Security Agreement are true, correct and complete in all material respects as of
the date of the telephone request for and Advance confirmed by this Advance
Request; provided, however, that those representations and warranties expressly
referring to another date shall be true, correct and complete in all material
respects as of such date.
- --------------------------------------------------------------------------------
BANK USE ONLY:
TELEPHONE REQUEST:
------------------
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
- -------------------------
Authorized Requester
-----------------------------------
Authorized Signature (Bank)
Phone #____________________________
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT C
BORROWING BASE CERTIFICATE
Borrower: FaxSav Incorporated Bank: Silicon Valley Bank
Commitment Amount: $800,000.00
ACCOUNTS RECEIVABLE
1. Accounts Receivable Book Value as of _________ $ __________
2. Additions (please explain on reverse) $ __________
3. TOTAL ACCOUNTS RECEIVABLE $ __________
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4. Amounts over 90 days due $ __________
5. Balance of 50% over 90 day accounts $ __________
6. Concentration Limits $ __________
7. Foreign Accounts $ __________
8. Governmental Accounts $ __________
9. Contra Accounts $ __________
10. Promotion or Demo Accounts $ __________
11. Intercompany/Employee Accounts $ __________
12. Other (please explain on reverse) $ __________
13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $ __________
14. Eligible Accounts (#3 minus #13) $ __________
15. LOAN VALUE OF ACCOUNTS (____% of #14) $ __________
INVENTORY
16. Inventory Value as of $ N/A
----------
17. LOAN VALUE OF INVENTORY (____% of #16) $ N/A
----------
BALANCES
18. Maximum Loan Amount $ 800,000.00
----------
19. Total Funds Available [Lesser of #18 or (#15 plus #17)] $ __________
20. Present balance owing on Line of Credit $ __________
21. Outstanding under Sublimits ( ) $ __________
22. RESERVE POSITION (#19 minus #20 and #21) $ __________
The undersigned represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan and
Security Agreement between the undersigned and Silicon Valley Bank.
Date:________________
=============
BANK USE ONLY
=============
FAXSAV INCORPORATED ================================
Received
Reviewed By:____________________
Compliance Status: Yes / No
================================
By: _______________________
Authorized Signer
<PAGE>
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: FAXSAV INCORPORATED
The undersigned authorized officer of FaxSav Incorporated hereby certifies
that in accordance with the terms and conditions of the Loan and Security
Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is in
complete compliance for the period ending ____________ with all required
covenants except as noted below and (ii) all representations and warranties of
Borrower stated in the Agreement are true and correct in all material respects
as of the date hereof. Attached herewith are the required documents supporting
the above certification. The Officer further certifies that these are prepared
in accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes. The Officer expressly acknowledges that h no
borrowings may be requested by the Borrower at any time or date of determination
that Borrower is not in compliance with any of the terms of the Agreement, and
that such compliance is determined not just at the date this certificate is
delivered.
Please indicate compliance status by circling Yes/No under "Complies"
column.
<TABLE>
<CAPTION>
Reporting Covenant Required Complies
------------------ -------- --------
<S> <C> <C>
Monthly financial statements Monthly within 30 days, quarterly,
within 5 days of filing Yes No
Annual (CPA Audited) FYE within 90 days Yes No
10Q and 10K Within 5 days after filing with the SEC Yes No
A/R Agings Monthly within 30 days Yes No
</TABLE>
<TABLE>
<CAPTION>
Financial Covenant Required Actual Complies
------------------ -------- ------ --------
Maintain on a Monthly Basis (except for Debt Service, which shall be quarterly):
<S> <C> <C> <C>
Minimum Liquidity Ratio __1.75:1.0 _____:1.0 Yes No
(After a Capital Event, 2.0:1.0)
Minimum Debt Service (quarterly) __1.5:1.0 _____:1.0 Yes No
Minimum Tangible Net Worth See Loan Agreement $________ Yes No
Maximum Total Liabilities
/Tangible Net Worth See Loan Agreement _____:1.0 Yes No
</TABLE>
=============
BANK USE ONLY
=============
================================
Received
Reviewed By:____________________
Compliance Status: Yes / No
Comments Regarding Exceptions: ================================
Sincerely,
_______________________ Date:_______________
SIGNATURE
_______________________
TITLE
<PAGE>
AGREEMENT TO PROVIDE INSURANCE
Borrower: FaxSav Incorporated Bank: Silicon Valley Bank
INSURANCE REQUIREMENTS. FAXSAV INCORPORATED ("Borrower") understands that
insurance coverage is required in connection with the extending of a loan or the
providing of other financial accommodations to Borrower by Bank. These
requirements are set forth in the Loan Documents. The following minimum
insurance coverages must be provided on the following described collateral (the
"Collateral"):
Collateral: All Inventory, Equipment and Fixtures.
Type: All risks, including fire, theft and liability.
Amount: Full insurable value.
Basis: Replacement value.
Endorsements: Loss payable clause to Bank with stipulation that
coverage will not be canceled or diminished
without a minimum of twenty (20) days' prior
written notice to Bank.
INSURANCE COMPANY. Borrower may obtain insurance from any insurance company
Borrower may choose that is reasonably acceptable to Bank. Borrower understands
that credit may not be denied solely because insurance was not purchased through
Bank.
FAILURE TO PROVIDE INSURANCE. Borrower agrees to deliver to Bank, on or
before closing, evidence of the required insurance as provided above, with an
effective date of ______________, 19___, or earlier. Borrower acknowledges and
agrees that if Borrower fails to provide any required insurance or fails to
continue such insurance in force, Bank may do so at Borrower's expense as
provided in the Loan and Security Agreement. The cost of such insurance, at the
option of Bank, shall be payable on demand or shall be added to the indebtedness
as provided in the security document. BORROWER ACKNOWLEDGES THAT IF BANK SO
PURCHASES ANY SUCH INSURANCE, THE INSURANCE WILL PROVIDE LIMITED PROTECTION
AGAINST PHYSICAL DAMAGE TO THE COLLATERAL, UP TO THE BALANCE OF THE LOAN;
HOWEVER, BORROWER'S EQUITY IN THE COLLATERAL MAY NOT BE INSURED. IN ADDITION,
THE INSURANCE MAY NOT PROVIDE ANY PUBLIC LIABILITY OR PROPERTY DAMAGE
INDEMNIFICATION AND MAY NOT MEET THE REQUIREMENTS OF ANY FINANCIAL
RESPONSIBILITY LAWS.
AUTHORIZATION. For purposes of insurance coverage on the Collateral,
Borrower authorizes Bank to provide to any person (including any insurance agent
or company) all information Bank deems appropriate, whether regarding the
Collateral, the loan or other financial accommodations, or both.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT TO
PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED
_________________, 19___.
BORROWER:
x______________________________
Authorized Officer
================================================================================
FOR BANK USE ONLY
INSURANCE VERIFICATION
DATE:
PHONE:
AGENT'S NAME:
INSURANCE COMPANY:
POLICY NUMBER:
EFFECTIVE DATES:
COMMENTS:
================================================================================
EXHIBIT 11
FAXSAV INCORPORATED
Pro Forma Earnings Per Share
For The Twelve Months Ended
December 31
----------------------------
1997 1996
---------- ----------
Net loss (7,118,902) (7,476,389)
========== ==========
Weighted average number of
common and equivalent shares
used in computing pro
forma loss per share:
Actual 9,880,681 2,724,651
Effect of fully dilutive shares 0 5,987,403
---------- ----------
9,880,681 8,712,054
========== ==========
Pro forma net loss per common
and equivalent share (0.72) (0.86)
========== ==========
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
FaxSav Incorporated on Form S-8 (File No. 333-17293) of our report dated
February 4, 1998 on our audits of the financial statements and financial
statement schedule of FaxSav Incorporated (formerly Digitran Corporation) as of
December 31, 1997 and 1996 and for each of the three years in the period ended
December 31, 1997, which report is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Parsippany, New Jersey
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the FaxSav
Incorporated Financial Statements, and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,680,185
<SECURITIES> 0
<RECEIVABLES> 2,610,843
<ALLOWANCES> 330,724
<INVENTORY> 0
<CURRENT-ASSETS> 5,996,148
<PP&E> 8,482,229
<DEPRECIATION> 4,306,965
<TOTAL-ASSETS> 10,495,585
<CURRENT-LIABILITIES> 4,663,136
<BONDS> 0
0
0
<COMMON> 108,065
<OTHER-SE> (15)
<TOTAL-LIABILITY-AND-EQUITY> 10,495,585
<SALES> 17,418,333
<TOTAL-REVENUES> 17,418,333
<CGS> 10,413,797
<TOTAL-COSTS> 14,298,322
<OTHER-EXPENSES> (96,115)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (78,769)
<INCOME-PRETAX> (7,118,902)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,118,902)
<EPS-PRIMARY> (.72)
<EPS-DILUTED> (.72)
</TABLE>
