SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from_________________ to ________________
Commission file number 0-09613
FAXSAV INCORPORATED
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(Exact name of registrant as specified in its character)
Delaware 11-3025769
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
399 Thornall Street, Edison, New Jersey 08837
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(Address of principal executive offices)
Registrant's telephone number, including area code (732) 906-2000
Former name, former address and former fiscal year, if
changed since last report.
Indicate by a check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 10,813,541 shares of the
Company's Common Stock, $.01 par value, were outstanding as of May 8, 1998.
<PAGE>
FAXSAV INCORPORATED
Index to March 31, 1998 Form 10-Q
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Page
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Part I - Financial Information
Item 1. Financial Statements
Condensed Balance Sheets - March 31, 1998 and December 31, 1997.... 3
Condensed Statements of Operations -
Three Months Ended March 31, 1998 and 1997......................... 4
Condensed Statements of Cash Flow - Three Months Ended
March 31, 1998 and 1997............................................ 5
Notes to Condensed Financial Statements............................ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................... 7
Part II - Other Information
Item 1. Legal Proceedings.................................................. 16
Item 2. Changes in Securities.............................................. 16
Item 3. Defaults upon Senior Securities.................................... 16
Item 4. Submission of Matters to a Vote of Security Holders................ 16
Item 5. Other Information.................................................. 16
Item 6. Exhibits and Reports on Form 8-K................................... 16
Signatures......................................................... 18
2
<PAGE>
FAXSAV INCORPORATED
CONDENSED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,935,182 $ 3,680,185
Accounts receivable, net of allowances of $332,717
and $330,724 for March 31, 1998 and
and December 31, 1997 3,000,813 2,280,119
Prepaid expenses and other current assets 59,103 35,844
------------ ------------
Total current assets 4,995,098 5,996,148
Property and equipment, net 4,480,353 4,175,264
Other assets, net 288,022 324,173
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Total assets $ 9,763,473 $ 10,495,585
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,211,002 $ 658,703
Accrued expenses and other liabilities 3,280,620 3,219,846
Obligation under capital lease 263,727 315,370
Current portion of notes payable 556,095 469,217
------------ ------------
Total current liabilities 5,311,444 4,663,136
Obligation under capital lease 58,351 85,551
Notes payable 1,171,876 1,083,190
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Total liabilities 6,541,671 5,831,877
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Stockholders' equity:
Common stock, $0.01 par value;40,000,000 shares
authorized; 10,834,930 and 10,827,855 shares issued
and 10,813,541 and 10,806,466 shares outstanding as of
March 31, 1998 and December 31, 1997, respectively 108,135 108,065
Additional paid-in capital 36,735,889 36,730,403
Accumulated deficit (33,622,207) (32,174,745)
Treasury stock, at cost 21,389 common shares
as of March 31, 1998 and December 31, 1997 (15) (15)
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Total stockholders' equity 3,221,802 4,663,708
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Total liabilities and stockholders' equity $ 9,763,473 $ 10,495,585
============ ============
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements
3
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FAXSAV INCORPORATED
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
March 31,
---------
1998 1997
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Revenues $ 4,977,255 $ 4,069,608
Cost of service 2,606,686 2,644,593
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Gross margin 2,370,569 1,425,015
Operating expenses:
Network operations and support 741,578 526,189
Research and development 579,764 463,375
Sales and marketing 1,420,070 1,453,022
General and administrative 780,137 805,512
Depreciation and amortization 305,472 431,286
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Total operating expenses 3,827,021 3,679,384
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Operating loss (1,456,452) (2,254,369)
Other income, net 8,990 82,599
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Net loss ($ 1,447,462) ($ 2,171,770)
============ ============
Historical basic and diluted net loss per
common and equivalent share ($ 0.13) ($ 0.22)
============ ============
Shares used in computing historical
net loss per common and
equivalent share 10,811,405 9,787,798
============ ============
The accompanying notes are an integral part of the condensed financial
statements
4
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FAXSAV INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($1,447,462) ($2,171,770)
Adjustments to reconcile net loss to net cash used
In operating activities:
Depreciation and amortization expense 305,472 431,286
Other adjustments 29,337 54,404
Changes in assets and liabilities:
Accounts receivable (760,594) (321,522)
Accounts payable 552,299 360,506
Other, net 70,367 (130,184)
----------- -----------
Net cash used in operating activities (1,250,581) (1,777,280)
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CASH FLOWS USED IN INVESTING ACTIVITIES:
Proceeds received from marketable securities 0 1,002,513
Purchase of property and equipment, net (596,700) (1,059,709)
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Net cash used in investing activities (596,700) (57,196)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of notes payable and capital lease obligation (155,640) (108,722)
Borrowings under line of credit 252,362 0
Proceeds from issuance of common stock and
exercise of stock options and warrants, net 5,556 16,862
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net cash provided by financing activities 102,278 (91,860)
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NET INCREASE(DECREASE) (1,745,003) (1,926,336)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 3,680,185 7,923,105
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,935,182 $ 5,996,769
=========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements
5
<PAGE>
FAXSAV INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited condensed financial statements included herein have been
prepared by the Company in accordance with the requirements of Form 10-Q, and
consequently do not include disclosures normally made in the annual report on
Form 10-K. The December 31, 1997 results included herein have been derived from
the audited financial statements included in the Company's annual report on Form
10-K. However, the Company believes that the disclosures are adequate to make
the information presented not misleading. These condensed financial statements
should be read in conjunction with the financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
The unaudited condensed financial statements included herein reflect
all adjustments (which include only normal, recurring adjustments) which are, in
the opinion of management, necessary to state fairly the results for the three
month period ended March 31, 1998. The results for the three month period ended
March 31, 1998 are not necessarily indicative of the results expected for the
full fiscal year.
2. Earnings Per Share
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share". In accordance with SFAS 128, both basic
and diluted net loss per share are presented in the financial statements. Stock
options outstanding of approximately 1,665,000 and 1,273,000 for the three
months ended March 31, 1998 and 1997, respectively, have been excluded from the
calculation of diluted earnings per share, since their effect would be
antidilutive. In addition, approximately 100,000 warrants outstanding have been
excluded from diluted earnings per share, since their effect would be
antidilutive.
3 Contingencies
The Company is involved in various disputes, claims or legal
proceedings and may be included in future actions including infringement on
intellectual property rights, related to its normal course of business. In the
opinion of management, all such matters are without merit or involve amounts, if
disposed of unfavorably, which would not have a material adverse effect on the
financial position or results of operations of the Company.
4. Impact of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income". SFAS No. 130 establishes the standards
for reporting and displaying comprehensive income and its components (revenues,
expenses, gains, and losses) as part of a full set of financial statements. This
statement requires that all elements of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The Company adopted SFAS 130 during first quarter of 1998,
but presently the Company's Comprehensive Loss and Net Loss are equal.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
FaxSav Incorporated (the "Company") derives its revenues from the provision of a
variety of facsimile services largely to businesses and professionals involved
in international commerce. Through the end of 1995, the Company offered its
services exclusively to customers located in the United States. In the first
quarter of 1996, the Company began to focus on the broader worldwide market for
facsimile services through the introduction of client software to enable faxing
from the computer desktop using the Internet as the means to access the FaxSav
network. In the fourth quarter of 1996, the Company began offering fax-to-fax
services through local resellers in certain countries where an Internet node was
installed. The Company's network in the United States includes interconnection
with the existing worldwide telephony network, enabling delivery of facsimile
transmissions to virtually any domestic or international destination. The
Company plans to continue to install Internet nodes in key international
telecommunications markets to enable the Company ultimately to route a majority
of its customers' traffic through the Internet.
This report contains certain statements of a forward-looking nature relating to
future events of the future financial performance of the Company. Stockholders
are cautioned that such statements are only predictions and that actual events
or results may differ materially. In evaluating such statements, prospective
investors should specifically consider the various factors identified in this
report, including the matters set forth under the caption "Certain Factors That
May Affect Future Results, Financial Condition and the Market Price of
Securities," which could cause actual results to differ materially from those
indicated by such forward-looking statements.
Results of Operations
The following table represents unaudited financial information expressed as a
percentage of total revenues for the periods indicated. The Company believes
that this information has been presented on a basis consistent with the
Company's audited financial statements and includes all adjustments, consisting
only of normal recurring adjustments, that management considers necessary for a
fair presentation for the periods presented.
Three Months Ended
March 31,
1998 1997
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Percentage of Revenues:
Revenues 100.0% 100.0%
Cost of service 52.4 65.0
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Gross margin 47.6 35.0
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Operating expenses:
Net operations and support 14.9 12.9
Research and development 11.7 11.4
Sales and marketing 28.5 35.7
General and administrative 15.7 19.8
Depreciation and amortization 6.1 10.6
------ ------
Total operating expenses 76.9 90.4
Operating loss (29.3) (55.4)
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Other income, net 0.2 2.0
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Loss before income taxes (29.1) (53.4)
Provision for income taxes -- --
------ ------
Net loss (29.1)% (53.4)%
====== ======
7
<PAGE>
Three Months Ended March 31, 1998 and 1997
Revenues. Revenues, which consist primarily of customer usage charges, grew
22.3% to $5.0 million in the three months ended March 31, 1998 from $4.1 million
in the three months ended March 31, 1997 primarily as a result of the continued
expansion of the Company's customer base, particularly in international markets.
The increased revenues result largely from the Company's Internet desktop-to-fax
and faxSAV EZ-List broadcast services.
Cost of service. Cost of service consists of local access charges, leased
network backbone circuit costs and long distance domestic and international
termination charges. These are primarily variable costs based on actual
facsimile volume. Cost of service amounted to $2.6 million for each of the three
month periods ended March 31, 1998 and 1997 but decreased as a percentage of
revenues in the three months ended March 31, 1998 to 52.4% from 65.0% in the
three months ended March 31, 1997. The decreased percentage is a result of
transmitting an increased level of customer faxes over the Company's Internet
Fax Network and lower costs for international telephony termination fax charges.
Network operations and support. Network operations and support costs consist
primarily of the expenses of operating and expanding the network infrastructure,
monitoring network traffic and quality of service and providing customer support
in service installations, fax deliveries and message reporting and billing.
Network operations and support costs increased to $0.7 million and 14.9% of
revenues in the three months ended March 31, 1998 in comparison to $0.5 million
and 12.9% of revenues in the three months ended March 31, 1997 as a result of
hiring additional personnel to implement the Internet fax node deployment plan
and to support the Company's expanding customer base on a 7 day per week/ 24
hour per day basis.
Research and Development. Research and development expenses consist primarily of
salaries and consulting fees paid to software engineers and development
personnel largely for the continuing development efforts for enhancements to the
Company's Internet desktop-to-fax services and faxSAV EZ-List broadcast service.
Research and development expenses increased to $0.6 million for the three months
ended March 31, 1998 in comparison to $0.5 million in the three months ended
March 31, 1997, due to expansion of these development efforts but, as a
percentage of revenues, these costs only increased marginally to 11.7% of
revenues in the 1998 period from 11.4% of revenue in the 1997 period.
Sales and Marketing. Sales and marketing expenses consist primarily of salaries
and commissions for sales and marketing staffs, promotional material preparation
and mailing costs, agent and dealer commissions and third-party telemarketing
charges in 1997. Sales and marketing expenses decreased to $1.4 million for the
three months ended March 31, 1998 in comparison to $1.5 million in the three
months ended March 31, 1997, primarily as a result of reduced spending for trade
shows and promotional materials and elimination of third party telemarketing
programs in 1997. As a percentage of revenues, these costs decreased to 28.5%
from 35.7% for the 1998 and 1997 periods, respectively, as a result of reduced
spending and higher revenues.
General and administrative. General and administrative expenses consist of
expenses associated with the Company's management, accounting, finance, billing
and administrative functions. General and administrative expenses amounted to
$0.8 million in the three months ended March 31, 1998 and 1997. As a percentage
of revenues, these expenses decreased to 15.7% in the three months ended March
31, 1998 from 19.8% in the three months ended March 31, 1997 as a result of
increased revenues.
Depreciation and amortization. Depreciation and amortization decreased to $0.3
million in the three months ended March 31, 1998 from $0.4 million in the three
months ended March 31, 1997 primarily reflecting reduced depreciation charges
for faxSAV Connectors installed on fax machines at customer premises, resulting
from the Company shift in its business to desktop originated services. As a
percentage of revenues, depreciation and amortization expenses decreased to 6.1%
in the three months ended March 31, 1998 in comparison to 10.6% in the three
months ended March 31, 1997, as a result of increased revenues.
8
<PAGE>
Other income, net. Other income, net decreased to $0.01 million and .2% of
revenues in the three months ended March 31, 1998 from $0.08 million and 2.0% of
revenues in the three months ended March 31, 1997. In the 1998 period, the
Company incurred increased interest expense of $0.02 million and earned $0.06
million less interest income in comparison to the 1997 period. In 1997, the
Company had less outstanding debt and more funds available for temporary
investment as a result of the proceeds still on hand from its October 1996
initial public offering of securities.
Provision for income taxes. The Company had losses for income tax purposes for
the three months ended March 31, 1998 and 1997. Accordingly, there was no
provision or credit for income taxes for those periods. Any income tax benefits
at the Company's expected effective tax rate for these losses has been offset by
a valuation allowance for deferred tax assets.
Liquidity and Capital Resources
The Company has financed its cash requirements for operations and investments in
equipment primarily through public and private sales of equity securities, bank
borrowings and capital lease financing. During the three months ended March 31,
1998, the Company entered into an agreement for a $0.5 million secured equipment
line of credit with Silicon Valley Bank, $0.25 million of which was outstanding
as of March 31, 1998. In addition, the Company has accepted a $0.5 million
expansion of its equipment loan facility with Phoenix Growth Capital Corp.
subsequent to March 31, 1998.
As a result of operating losses, cash used in operating activities amounted to
$1.3 million in the three months ended March 31, 1998, as compared to $1.8
million for the comparable period in 1997. Cash used in investing activities,
largely consisting of the purchase of equipment, amounted to $0.6 million for
the three months ended March 31, 1998 and $1.1 million for the comparable period
in 1997. The equipment primarily consisted of network equipment (particularly in
the 1998 period) and faxSAV Connectors purchased by the Company for installation
at customer locations. The Company is obligated to MCI Communications Corp. for
a minimum monthly usage commitment of $0.2 million for total long distance
service through June 1999.
The Company's principal sources of liquidity at March 31, 1998 included cash and
cash equivalents of $1.9 million and $0.75 million in net balances of the
financing agreements with Silicon Valley Bank and Phoenix Growth Capital Corp.
The Company believes that its current cash and cash equivalents and available
equipment financing facilities will be sufficient to meet its anticipated cash
needs for working capital and capital expenditure requirements through at least
the end of 1998, but, in order to meet minimum requirements for the Nasdaq
National Market, 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 three month period ended March 31,1998, the Company has
experienced significant operating losses. The Company incurred operating losses
of $7.1 million, $7.5 million and $4.1 million during the years ended December
31, 1997, 1996 and 1995, respectively and $1.4 million during the three months
ended March 31, 1998. The Company currently anticipates incurring further
operating losses as it attempts to expand its business and there can be no
assurance that its future operations will generate positive operating income. As
of March 31, 1998, the Company had an accumulated deficit of $33.6 million.
9
<PAGE>
The Company has generated net operating loss ("NOL") carryforwards for
income tax purposes of approximately $30.0 million through December 31, 1997.
These NOL carryforwards have been recorded as a deferred tax asset of
approximately $9.5 million. Based upon the Company's history of operating losses
and presently known factors, management has determined that it is more likely
than not that the Company will be unable to generate sufficient taxable income
prior to the expiration of these NOL carryforwards and has accordingly reduced
its deferred tax assets to zero with a full valuation allowance.
Intense Competition. The market for facsimile transmission services is
intensely competitive and there are limited barriers to entry. The Company
expects that competition will intensify in the future. The Company believes that
its ability to compete successfully will depend upon a number of factors,
including market presence; the capacity, reliability and security of its network
infrastructure; the pricing policies of its competitors and suppliers; the
timing of introductions of new services and service enhancements by the Company
and its competitors; and industry and general economic trends.
The Company's current and prospective competitors generally fall into
the following groups: (i) telecommunication companies, such as AT&T, MCI,
Sprint, WorldCom and the regional Bell operating companies, and
telecommunications resellers; (ii) Internet service providers, such as Uunet
Technologies, Inc. and NETCOM On-Line Communications Services, 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 March 31, 1998, the Company had net
tangible assets of approximately $3.2 million and is not in compliance with the
net tangible assets maintenance requirement. 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 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
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<PAGE>
securities than might otherwise be attained and could also result in a larger
spread between the bid and asked prices for the Company's 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 a 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 March 31, 1999. However, the
Company's cash requirements may vary materially from those now planned as a
result of unforeseen changes that could consume a significant portion of the
available resources before such time. To the extent that funds expected to be
generated from the Company's operations are insufficient to meet current or
planned operating requirements or to maintain a Nasdaq listing, the Company will
seek to obtain additional funds through bank facilities, equity or debt
financing, collaborative or other arrangements with corporate partners and
others and from other sources. See "-- Possible Delisting from Nasdaq 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 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
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<PAGE>
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 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
12
<PAGE>
Internet-capable nodes by dedicated connection to third party internet service
providers. The Company pays fixed monthly fees for such Internet access,
regardless of the Company's usage or the volume of its customers' traffic. There
can be no assurance that the current pricing structure for access to and use of
the Internet will not change unfavorably. If material capacity constraints
develop on the Internet or the current Internet pricing structure changes
unfavorably, the Company's business, financial condition and results of
operations would be materially and adversely affected. In addition, the
Company's future success is dependent upon the increased acceptance by potential
customers of the Internet as the preferred medium for transmission of documents.
There can be no assurance that such market acceptance shall continue to
increase. Lack of increased market acceptance would materially and adversely
affect the Company's business, financial condition and results of operations.
No Assurance of Successful Management of Growth. The Company has
rapidly and significantly expanded its operations and anticipates that
significant expansion will continue to be required in order to address potential
market opportunities. There can be no assurance that such expansion will be
successfully completed or that it will generate sufficient revenues to cover the
Company's expenses. The inability of the Company to promptly address and respond
to these circumstances could have a material adverse effect on the Company's
business, financial condition and results of operations.
Rapid Industry Change. The telecommunications industry in general, and
the facsimile transmission business in particular, are characterized by rapid
and continuous technological change. Future technological advances in the
telecommunications industry may result in the availability of new services or
products that could compete with the facsimile transmission services provided by
the Company or reduce the cost of existing products or services, any of which
could enable the Company's existing or potential customers to fulfill their fax
communications needs more cost efficiently. There can be no assurance that the
Company will be successful in developing and introducing new services that meet
changing customer needs and respond to technological changes or evolving
industry standards in a timely manner, if at all, or that services or
technologies developed by others will not render the Company's services
noncompetitive. The inability of the Company to respond to changing market
conditions, technological developments, evolving industry standards or changing
customer requirements, or the development of competing technology or products
that render the Company's services noncompetitive would have a material adverse
effect on the Company's business, financial condition and results of operations.
Risk of System Failure; Security Risks. The Company's operations are
dependent on its ability to protect its network from interruption by damage from
fire, earthquake, power loss, telecommunications failure, unauthorized entry,
computer viruses 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
13
<PAGE>
time frames required by the Company. Any failure to obtain such services on a
timely basis at an affordable cost, or any significant delays or interruptions
of service from such carriers, would have a material adverse effect on the
Company's business, financial condition and results of operations.
All of the faxboards used in the Company's telecommunications nodes are
supplied by Brooktrout Technology, Inc. ("Brooktrout"). The Company purchases
Brooktrout faxboards on a non-exclusive basis pursuant to purchase orders placed
from time-to-time, carries a limited inventory of faxboards and has no
guaranteed supply arrangement with Brooktrout. In addition to faxboards, many of
the routers, switches and other hardware components used in the Company's
network infrastructure are supplied by sole or limited sources on a
non-exclusive, purchase order basis. There can be no assurance that Brooktrout
or the Company's other suppliers will not enter into exclusive arrangements with
the Company's competitors, or cease selling these components to the Company at
commercially reasonable prices, or at all. The anticipated expansion of the
Company's network infrastructure is expected to place a significant demand on
the Company's suppliers, some of which have limited resources and production
capacity. In addition, certain of the Company's suppliers, in turn, rely on sole
or limited sources of supply for components included in their products. Failure
of the Company's suppliers to adjust to meet such increasing demand may prevent
them from continuing to supply components and products in the quantities and
quality and at the times required by the Company, or at all. The Company's
inability to obtain sufficient quantities of sole or limited source components
or to develop alternative sources if required could result in delays and
increased costs in the expansion of the Company's network infrastructure or in
the inability of the Company to properly maintain the existing network
infrastructure, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
Risk of Software Defects or Development Delays. Software-based services
and equipment, such as the Company's faxSAV for Internet suite of services and
the faxSAV Connector, may contain undetected errors or failures when introduced
or when new versions are released. There can be no assurance that, despite
testing by the Company and by current and potential customers, errors will not
be found in such software or other releases after commencement of commercial
shipments, or that the Company will not experience development delays, resulting
in delays in the shipment of software and a loss of or delay in market
acceptance, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence on Key Personnel. The Company's future performance depends
in significant part upon the continued service of its key technical, sales and
senior management personnel, none of whom is bound by an employment agreement.
Competition for such personnel is intense, and there can be no assurance that
the Company can retain its key technical, sales and managerial employees or that
it can attract, assimilate or retain other highly qualified technical, sales and
managerial personnel in the future.
Reliance on International Strategic Alliances; Risks Associated with
International Operations. The Company has established and intends to expand an
international customer base by forming strategic sales and marketing alliances
with foreign Internet service providers, telecommunications companies and
resellers. There can be no assurance that the Company will be able to establish
additional strategic alliances or to maintain such strategic alliances. The
Company's success in expanding its international customer base depends not only
on the formation of additional strategic alliances but also on the success of
these partners and their ability to market the Company's services. The failure
to maintain such strategic alliances or the failure of these partners to
successfully develop and sustain a market for the Company's service will have a
material adverse effect on the Company's ability to expand its international
customer base, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company derived approximately $1.1 million or 22.3% of its total
revenues, from customers outside of the United States in 1997. The Company
expects that such revenues will represent an increasing percentage of its total
revenues in the future. Risks inherent in the Company's international business
activities generally include foreign currency exchange risk, unexpected changes
in regulatory requirements, tariffs and other trade barriers, costs of
localizing products for foreign countries, lack of acceptance of localized
products in foreign markets, longer accounts receivable payment cycles,
difficulties in managing international operations, potentially adverse tax
consequences, and the burdens of complying with a wide variety of foreign laws.
There can be no assurance that such factors will not have a material adverse
effect on the Company's future international revenues and, consequently, on the
Company's business, financial condition and results of operations.
14
<PAGE>
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 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.
15
<PAGE>
PART II X OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No.
- -----------
3.1 Registrant's Sixth Amended and Restated Certificate of Incorporation
(incorporated by reference to exhibit 3.3 to the Registrant's
Registration Statement on Form S-1, Registration No. 333-09613
("Registrant's Registration Statement")).
3.2 By-laws of the Registrant (incorporated by reference to exhibit 3.4
and 3.5 to the Registrant's Registration Statement and Exhibit 3.3
to the Registrant's Report on form 10-Q for the quarter ended June
30, 1997).
4.1 Specimen Common Stock Certificate (incorporated by reference to
exhibit 4.1 to the Registrant's Registration Statement).
4.2 See Exhibits 3.1 and 3.2 for provisions of the Certificate of
Incorporation and Bylaws of the Registrant defining rights of
holders of Common Stock of the Registrant.
10.1 Fifth Amended and Restated Investor Rights Agreement, as amended
(incorporated by reference to exhibit 10.1 and 10.3 to the
Registrant's Registration Statement
10.2 1990 Stock Option Plan (incorporated by reference to exhibit 10.3 to
the Registrant's Registration Statement).
10.3 1996 Stock Option/Stock Issuance Plan (incorporated by reference to
exhibit 10.4 to the Registrant's Registration Statement).
10.4 Form of Officer Severance Agreement (incorporated by reference to
exhibit 10.5 to the Registrant's Registration Statement).
10.5 Form of Director Severance Agreement (incorporated by reference to
exhibit 10.6 to the Registrant's Registration Statement).
10.6* Telecommunications Services Agreement, between LDDS World Com and
the Registrant, dated December 1, 1996 (incorporated by reference to
Exhibit 10.7 to the Registrant's Report on Form 10-Q for the quarter
ended March 31, 1997).
10.7* Agreement between MCI Telecommunications Corporation and the
Registrant, effective March 1, 1996 (incorporated by reference to
exhibit 10.9 to the Registrant's Registration Statement).
10.8 Lease Agreement, dated May 28, 1992, between Metro Four Associates
Limited Partnership, Thornall Associates and the Registrant, as
extended and amended to date (incorporated by reference to exhibit
10.10 to the Registrant's Registration Statement).
16
<PAGE>
10.10 Credit Agreement, dated July 7, 1995, between the Company and
Silicon Valley Bank, as amended to date (incorporated by reference
to exhibit 10.11 to the Registrant's Registration Statement).
10.11 Letter Agreement, dated November 1, 1994 between Telstra
Incorporated and the Registrant (incorporated by reference to
exhibit 10.12 to the Registrant's Registration Statement).
10.12 Series B Preferred Stock Warrant between the Registrant and
Comdisco, Inc., dated May 30, 1991 (incorporated by reference to
exhibit 10.14 to the Registrant's Registration Statement).
10.13 Series B Preferred Stock Warrant between the Registrant and
Comdisco, Inc., dated September 16, 1992 (incorporated by reference
to exhibit 10.15 to the Registrant's Registration Statement).
10.14 Series D Preferred Stock Warrant between the Registrant and
Comdisco, Inc., dated October 28, 1993 (incorporated by reference to
exhibit 10.16 to the Registrant's Registration Statement).
10.15 Common Stock Warrant between the Registrant and LTI Ventures Leasing
Corp., dated February 15, 1993 (incorporated by reference to exhibit
10.17 to the Registrant's Registration Statement).
10.16 Common Stock Warrant between the Registrant and LTI Ventures Leasing
Corp., dated May 5, 1994 (incorporated by reference to exhibit 10.18
to the Registrant's Registration Statement).
10.17 Common Stock Warrant between the Registrant and Silicon Valley
Bancshares, dated April 6, 1992 (incorporated by reference to
exhibit 10.19 to the Registrant's Registration Statement).
10.18 Common Stock Warrant between the Registrant and Silicon Valley
Bancshares, dated July 7, 1995 (incorporated by reference to exhibit
10.20 to the Registrant's Registration Statement).
10.19 Form of Common Stock Purchase Agreement, dated November 21, 1997
(incorporated by reference to Exhibit 10.1 to the Registrant's
Registration Statement on form S-3, Registration No. 333-43939)
10.20 Loan and Security Agreement, dated as of March 27, 1998, between
Silicon Valley Bank and the Registrant.
27. Financial Data Schedule.
- ----------
* Confidential treatment granted
(b) Reports on Form 8-K
No reports on Form 8-K.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FAXSAV INCORPORATED
(Registrant)
Date: May 14, 1998 /s/ Thomas F. Murawski
-------------------------------------------
Thomas F. Murawski
Chief Executive Officer, President and
Chairman of the Board of Directors
Date: May 14, 1998 /s/ Peter S. Macaluso
-------------------------------------------
Peter S. Macaluso
Chief Financial Officer
Treasurer and Secretary,
(Principal Financial and Accounting Officer)
18
<PAGE>
FAXSAV INCORPORATED
Exhibit Index
Exhibit No.
- -----------
3.1 Registrant's Sixth Amended and Restated Certificate of Incorporation
(incorporated by reference to exhibit 3.3 to the Registrant's
Registration Statement on Form S-1, Registration No. 333-09613
("Registrant's Registration Statement")).
3.2 By-laws of the Registrant (incorporated by reference to exhibit 3.4
and 3.5 to the Registrant's Registration Statement).
3.3 Amendment to the By-laws of the Registrant, dated April 25, 1997.
4.1 Specimen Common Stock Certificate (incorporated by reference to
exhibit 4.1 to the Registrant's Registration Statement).
4.2 See Exhibits 3.1, 3.2 and 3.3 for provisions of the Certificate of
Incorporation and Bylaws of the Registrant defining rights of
holders of Common Stock of the Registrant.
10.1 Fifth Amended and Restated Investor Rights Agreement (incorporated
by reference to exhibit 10.1 to the Registrant's Registration
Statement).
10.2 Amendment and waiver to Fifth Amended and Restated Investor Rights
Agreement (incorporated by reference to exhibit 10.2 to the
Registrant's Registration Statement).
10.3 1990 Stock Option Plan (incorporated by reference to exhibit 10.3 to
the Registrant's Registration Statement).
10.4 1996 Stock Option/Stock Issuance Plan (incorporated by reference to
exhibit 10.4 to the Registrant's Registration Statement).
10.5 Form of Officer Severance Agreement (incorporated by reference to
exhibit 10.5 to the Registrant's Registration Statement).
10.6 Form of Director Severance Agreement (incorporated by reference to
exhibit 10.6 to the Registrant's Registration Statement).
10.7* Telecommunications Services Agreement, between LDDS WorldCom and the
Registrant, dated December 1, 1996 (incorporated by reference to
Exhibit 10.7 to the Registrant's Report on Form 10-Q for the quarter
ended March 31, 1997).
10.8* Agreement between MCI Telecommunications Corporation and the
Registrant, effective March 1, 1996 (incorporated by reference to
exhibit 10.9 to the Registrant's Registration Statement).
10.9 Lease Agreement, dated May 28, 1992, between Metro Four Associates
Limited Partnership, Thornall Associates and the Registrant, as
extended and amended to date (incorporated by reference to exhibit
10.10 to the Registrant's Registration Statement).
10.10 Credit Agreement, dated July 7, 1995, between the Company and
Silicon Valley Bank, as amended to date (incorporated by reference
to exhibit 10.11 to the Registrant's Registration Statement).
10.11 Letter Agreement, dated November 1, 1994 between Telstra
Incorporated and the Registrant (incorporated by reference to
exhibit 10.12 to the Registrant's Registration Statement).
10.12 Series B Preferred Stock Warrant between the Registrant and
Comdisco, Inc., dated May 30, 1991 (incorporated by reference to
exhibit 10.14 to the Registrant's Registration Statement).
10.13 Series B Preferred Stock Warrant between the Registrant and
Comdisco, Inc., dated September 16, 1992 (incorporated by reference
to exhibit 10.15 to the Registrant's Registration Statement).
<PAGE>
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).
10.20 Loan and Security Agreement, dated as of March 27, 1998, between
Silicon Valley Bank and the Registrant.
27. Financial Data Schedule.
- ----------
* Confidential treatment granted
(b) Reports on Form 8-K
No reports on Form 8-K.
FAXSAV INCORPORATED
LOAN AND SECURITY AGREEMENT
March 27, 1998
<PAGE>
TABLE OF CONTENTS
1. DEFINITIONS AND CONSTRUCTION.....................................1
1.1 Definitions................................................1
1.2 Accounting and Other Terms.................................8
2. LOANS AND TERMS OF PAYMENT.......................................9
2.2 Overadvances...............................................9
2.3 Interest Rates, Payments, and Calculations.................9
2.4 Crediting Payments........................................10
2.5 Fees......................................................10
2.6 Additional Costs..........................................11
2.7 Term......................................................11
3. CONDITIONS OF LOANS.............................................11
3.1 Conditions Precedent to Initial Advance...................11
3.2 Conditions Precedent to all Advances......................12
4. CREATION OF SECURITY INTEREST...................................12
4.1 Grant of Security Interest................................12
4.2 Delivery of Additional Documentation Required.............13
4.3 Right to Inspect..........................................13
5. REPRESENTATIONS AND WARRANTIES..................................13
5.1 Due Organization and Qualification........................13
5.2 Due Authorization; No Conflict............................13
5.3 No Prior Encumbrances.....................................13
5.4 Merchantable Inventory....................................13
5.5 Intellectual Property.....................................13
5.6 Name; Location of Chief Executive Office..................14
5.7 Litigation................................................14
5.8 No Material Adverse Change in Financial Statements........14
5.9 Solvency..................................................14
5.10 Regulatory Compliance.....................................14
5.11 Environmental Condition...................................14
5.12 Taxes.....................................................15
5.13 Subsidiaries..............................................15
5.14 Government Consents.......................................15
5.15 Full Disclosure...........................................15
6. AFFIRMATIVE COVENANTS...........................................15
6.1 Good Standing.............................................15
6.2 Government Compliance.....................................15
6.3 Financial Statements, Reports, Certificates...............16
6.4 Inventory; Returns........................................16
6.5 Taxes.....................................................17
<PAGE>
6.6 Insurance.................................................17
6.7 Principal Depository......................................17
6.8 Liquidity.................................................17
6.9 Total Liabilities to Net Worth Ratio......................18
6.11 Maximum Churn Rate........................................18
6.12 Further Assurances........................................18
7. NEGATIVE COVENANTS..............................................18
7.1 Dispositions..............................................18
7.2 Changes in Business, Ownership, or Management, Business
Locations..............................................19
7.3 Mergers or Acquisitions...................................19
7.4 Indebtedness..............................................19
7.6 Distributions.............................................19
7.7 Investments...............................................19
7.8 Transactions with Affiliates..............................19
7.9 Subordinated Debt.........................................19
7.10 Inventory.................................................20
7.11 Compliance................................................20
8. EVENTS OF DEFAULT...............................................20
8.1 Payment Default...........................................20
8.2 Covenant Default..........................................20
8.3 Material Adverse Change...................................20
8.4 Attachment................................................21
8.5 Insolvency................................................21
8.6 Other Agreements..........................................21
8.7 Subordinated Debt.........................................21
8.8 Judgments.................................................21
8.9 Misrepresentations........................................21
9. BANK'S RIGHTS AND REMEDIES......................................22
9.1 Rights and Remedies.......................................22
9.2 Power of Attorney.........................................23
9.3 Accounts Collection.......................................23
9.4 Bank Expenses.............................................23
9.5 Bank's Liability for Collateral...........................24
9.6 Remedies Cumulative.......................................24
9.7 Demand; Protest...........................................24
10. NOTICES.........................................................24
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER......................25
12. GENERAL PROVISIONS..............................................26
12.1 Successors and Assigns....................................26
12.2 Indemnification...........................................26
<PAGE>
12.3 Time of Essence...........................................26
12.4 Severability of Provisions................................26
12.5 Amendments in Writing, Integration........................26
12.6 Counterparts..............................................26
12.7 Survival..................................................27
12.8 Countersignature..........................................27
<PAGE>
Exhibits and Schedules
Exhibits
A - Description of Collateral
B - Loan Payment/Advance Telephone Request Form
C - Borrowing Base Certificate
D - Compliance Certificate
E - Promissory Note
Schedules
A - Disclosure Schedule
<PAGE>
This LOAN AND SECURITY AGREEMENT is entered into as of March 27, 1998, by
and between SILICON VALLEY BANK ("Bank"), a California-chartered bank with its
principal place of business at 3003 Tasman Drive, Santa Clara, California 95054
with a loan production office located at 40 William Street, Wellesley,
Massachusetts 02181 doing business under the name "Silicon Valley East", and
FAXSAV INCORPORATED (f/k/a Digitran Corporation), a Delaware corporation with
its principal place of business located at 399 Thornall Street, Edison, New
Jersey ("Borrower").
RECITALS
1. Borrower and Bank are parties to a Credit Agreement dated July 7, 1995,
as amended as of April 15, 1996, August 12, 1996 and November 15, 1996 (the
"1995 Loan Agreement") pursuant to which Borrower issued to Bank its Promissory
Note (Equipment Line of Credit Loans) dated as of April 15, 1996 in the initial
principal amount of $750,000.
2. Borrower and Bank are also parties to a Loan and Security Agreement
dated as of September 28, 1997 (the "1997 Loan Agreement") pursuant to which the
Bank committed to make further advances in a principal amount up to $800,000 to
finance equipment purchases by Borrower.
3. Borrower wishes to obtain additional credit from time to time from
Bank, and Bank additional desires to extend credit to Borrower on the terms set
forth herein. This Agreement sets forth the terms on which Bank will advance
additional 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.
<PAGE>
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"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.
"Aggregate Equipment Advance Obligations" means the outstanding
aggregate principal amount of Equipment Advances under this Agreement together
with the outstanding aggregate principal amount of advances under the 1995 Loan
Agreement and the 1997 Loan Agreement.
"Availability Expiration Date" has the meaning set forth in Section
2.1(a).
"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, as of any applicable date, ninety percent
(90%) of Borrower's Net Revenue for the immediately preceding month. For
purposes hereof, "Net Revenue" means Borrower's gross revenues from sales less
returns and allowances.
"Business Day" means any day that is not a Saturday, Sunday, or
other day on which banks in the State of California or 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;
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-3-
(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 credit extensions of up to Five
Hundred Thousand Dollars ($500,000) hereunder.
"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.
<PAGE>
-4-
"Daily Balance" means the amount of the Obligations owed at the end
of a given day.
"Debt Service Ratio" shall mean, for any fiscal period, the ratio of
(a) Net Income (Net Loss) plus the sum of depreciation and amortization for such
period, plus Interest Expense for such period to (b) the sum of Interest
Expense, the current portion of Long-Term Indebtedness and obligations of the
Borrower and its Subsidiaries in respect of any capital leases under GAAP.
"Eligible Equipment" means any item of equipment that the Borrower
has requested that the Bank finance the purchase of through an Equipment Advance
under this Agreement, and which, both on the date of such request and the date
of such loan, meets the following requirements:
(a) such equipment is not (i) a motor vehicle, airplane or similar
mode of transportation, (ii) a fixture or leasehold improvement, or (iii)
intended by the Borrower to become a fixture or leasehold improvement;
(b) No more than twenty-five percent (25%) of the aggregate purchase
price of Eligible Equipment financed hereunder may consist of software;
(c) such equipment has been purchased by the Borrower from the
manufacturer or a distributor thereof, has not been put in service by any
Person prior to the date of the invoice furnished to the Borrower by such
manufacturer or distributor, and has an invoice date after November 30,
1997;
(d) such equipment is owned solely by the Borrower and is not
subject to any leasehold interest, assignment, claim, lien or security
interest, other than a security interest in favor of the Bank pursuant to
the 1997 Loan Agreement; and
(e) such equipment is in the possession of the Borrower and is
located at the principal office of Borrower in the State of New Jersey or
another jurisdiction of which the Borrower has given the Bank written
notice.
"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.
<PAGE>
-5-
"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 obligations in respect of capital leases under GAAP 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.
"Interest Expense" means, for any fiscal period, the aggregate
amount of interest required to be paid in cash during such period on
Indebtedness of Borrower and its Subsidiaries (on a consolidated basis and
without duplication).
"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.
"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 present or future agreement entered into
between Borrower and/or for the benefit of
<PAGE>
-6-
Bank in connection with this Agreement, all as amended, extended or restated
from time to time.
"Long-Term Indebtedness" means Indebtedness of the Borrower and its
Subsidiaries that is characterized as long-term under GAAP.
"Mask Works" means all mask work or similar rights available for the
protection of semiconductor chips, now owned or hereafter acquired.
"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 March 26, 2001.
"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.
"Net Income" or "Net Loss" shall have the respective meanings
ascribed to such terms under GAAP.
"Note" means that certain promissory note of the Borrower, payable
to the order of the Bank, the form of which is attached hereto as Exhibit E.
"Obligations" means all debt, principal, interest, Bank Expenses and
other amounts owed to Bank by Borrower pursuant to this Agreement, the 1995 Loan
Agreement, the 1997 Loan 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 26th day of each month commencing on the
first such date after the Closing Date and ending on the Maturity Date.
"Periodic Payments" means all installments or similar recurring
payments that Borrower may now or hereafter become obligated to pay to Bank
pursuant to the terms and provisions of
<PAGE>
-7-
any instrument, or agreement now or hereafter in existence between Borrower and
Bank.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising under this
Agreement, any other Loan Document, the 1995 Agreement or the 1997
Agreement;
(b) Indebtedness existing on the Closing Date and disclosed in the
Schedule A;
(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.
(c) Depository accounts at the Bank or maintained at other banks
listed on Schedule A or otherwise disclosed to the Bank in writing
subsequent to the date hereof.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and disclosed in Schedule
A 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
<PAGE>
-8-
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.
"Responsible Officer" means each of the Chief Executive Officer, the
President, the Chief Financial Officer and the Controller of Borrower.
"Schedule A" means the schedule of exceptions attached hereto.
"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
of more Affiliates of such Person.
"Tangible Net Worth" means as of any applicable date, the
consolidated total assets of Borrower and its Subsidiaries minus, without
duplication, (i) the sum of any amounts attributable to (a) goodwill, (b)
intangible items such as
<PAGE>
-9-
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 servicemarks rights, whether
registered or not, applications to register and registration 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 and cash equivalents (determined
in accordance with GAAP) which are not subject to a Lien other than to the Bank
and excluding any amounts due, allocated or reserved 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
<PAGE>
-10-
1.3 "including"/"includes" shall always be read as meaning
"including (or includes) without limitation", when used herein or in any other
Loan Document.
2. LOANS 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 September 26, 1998 (the "Availability
Expiration 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
Advances, Borrower shall deliver to Bank a promissory note on the form of
Exhibit E hereto (the "Note"). The Equipment Advances shall be used only to
purchase or refinance Eligible Equipment and shall not exceed one hundred
percent (100%) of the aggregate invoice amount of such Eligible Equipment
approved from time to time by Bank, excluding taxes, shipping, warranty charges,
freight discounts and installation expense.
(2) Interest shall accrue from the date of each Equipment Advance at
the rate specified in Section 2.3(a) and shall be payable monthly for each month
through the month in which the Availability Expiration Date falls. Any Equipment
Advances that are outstanding on the Availability Expiration Date will be
payable in thirty (30) equal monthly installments of principal plus all accrued
interest thereon, beginning on the Payment Date of each month following the
Availability Expiration Date and ending on the Maturity Date.
Equipment Advances, once repaid, may not be reborrowed.
(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 copies of the invoices for the
Eligible Equipment to be financed.
2.2 Overadvances. If, at any time or for any reason (i) the
aggregate outstanding principal amount of Equipment Advances owed by Borrower to
Bank hereunder is greater than the Committed Equipment Line or (ii) the amount
of the Aggregate Equipment Advance Obligations owed by Borrower to the Bank is
greater than the current Reserve Position, Borrower shall immediately pay to
Bank, in cash, the amount of such excess.
<PAGE>
-11-
2.3 Interest Rates, Payments, and Calculations.
(1) Interest Rate. Except as set forth in Section 2.3(b), all
Equipment Advances shall bear interest, on the average Daily Balance, at a rate
equal to one (1) percent per annum 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) percent
per annum 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 0700347170 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., California time, 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.
<PAGE>
-12-
2.5 Fees. Borrower shall pay to Bank the following:
(1) Facility Fee. A Facility Fee equal Twenty-Five Hundred Dollars
($2,500.00) shall be due on the Closing Date, which fee shall be fully earned
and non- refundable;
(2) Financial Examination and Appraisal Fees. Bank's customary fees
and out-of-pocket expenses for Bank's audits of Borrower's Accounts, and for
each appraisal of Collateral 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 (including attorney's fees
of up to $5,000 plus disbursements) incurred through the date hereof, including
reasonable attorneys' fees and expenses, and, after the date hereof, all Bank
Expenses, including reasonable attorneys fees as and when they become due;
provided that all attorneys fees and expense reimbursement is subject to the
receipt by FaxSav of reasonable supporting documentation.
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 increase the cost to Bank, reduce
the income receivable by Bank or impose any 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.
<PAGE>
-13-
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 Credit Extensions 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 and the Note;
(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) confirmatory financing statements (Forms UCC-1);
(5) insurance certificate;
(6) payment of the fees and Bank Expenses then due specified in
Section 2.5 hereof; and
(7) Certificate 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;
(2) timely receipt of a Borrowing Base Certificate as of a recent
date appropriately completed and indicating a Reserve Position in an amount at
least equal to the requested Advance; and
(3) 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
<PAGE>
-14-
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 hereby grants and pledges
(and confirms its previous grant and pledge to Bank under the 1997 Agreement) of
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 (including without limitation any and all obligations of Borrower to
Bank hereunder) 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
Schedule A, 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. The Borrower has no Subsidiaries.
<PAGE>
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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 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 Merchantable Inventory. All Inventory of Borrower is in all
material respects of good and marketable quality, free from all material
defects.
5.5 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. To the best of
Borrower's knowledge, no part of the Intellectual Property Collateral infringes
or violates the rights of any other Person.
5.6 Name; Location of Chief Executive Office. Except as disclosed in
Schedule A, 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.
5.7 Litigation. Except as set forth in Schedule A, 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 could have a Material Adverse Effect or a material
adverse effect on Borrower's interest or Bank's security interest in the
Collateral. Borrower does not have knowledge of any such pending or threatened
actions or proceedings.
5.8 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 reasonably be expected to have a Material Adverse Effect.
<PAGE>
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5.9 Solvency. The fair saleable value of Borrower's assets
(including goodwill minus disposition costs) exceeds the fair value of its
liabilities; the Borrower is not left with unreasonably small capital after the
transactions contemplated by this Agreement; and Borrower is able to pay its
debts (including trade debts) as they mature.
5.10 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 the 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 all the provisions of the Federal
Fair Labor Standards Act. Borrower has not violated any statutes, laws,
ordinances or rules applicable to it, violation of which could have a Material
Adverse Effect.
5.11 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 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.
5.12 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,
except those being contested in good faith by proper proceedings with adequate
reserves under GAAP.
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5.13 Subsidiaries. Borrower does not own any stock, partnership
interest or other equity securities of any Person, except for Permitted
Investments.
5.14 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,
except where the failure to do so would not have a Material Adverse Effect.
5.15 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 or omits to state a material
fact necessary in order to make the statements contained in such certificates or
statements not misleading.
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
a Credit Extension 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, (except month end which is also a quarter end
which shall be covered by timely submission to the Bank of Borrower's report on
SEC Form 10Q in accordance with clause (c) below), a Borrower 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
<PAGE>
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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.
Within 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.
Within 30 days after the last day of each month (except in the case of
month ends which are also quarter ends, then at the time of submission of
Borrower's report on SEC Form 10-Q pursuant to clause (c) above), 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 every six (6) months 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
<PAGE>
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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.
(a) 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.
(b) All such policies of insurance shall be in such form, with such
companies, and in such amounts as 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 the month ending March 31, 1998,
Borrower shall maintain, as of the day of the last day of each calendar month, a
ratio of Unrestricted Cash, plus the amount of the Borrowing Base based upon the
Borrowing Base Certificate for such month end, to the Aggregate Equipment
Advance Obligations, of at least 1.75 to 1.0, increasing 2.0 to 1.0 upon the
occurrence of any Capital Event, provided, however, the requirements of this
Section 6.8 shall terminate from and after the Borrower shall have delivered to
the Bank financial statements and compliance certificates evidencing that it has
maintained a minimum Debt Service Ratio is 1.5 to 1.0 for two consecutive fiscal
quarters.
<PAGE>
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6.9 Total Liabilities to Net Worth Ratio. Beginning as of month
ending March 31, 1998, Borrower shall maintain, as of the last day of each
calendar month, 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.
March 31, 1998.................................. 2.0 to 1.0
Beginning April 30, 1998 through June 30, 1998.. 3.0 to 1.0
Beginning July 31, 1998 and monthly thereafter.. 2.0 to 1.0
6.10 Tangible Net Worth. Borrower shall maintain, as of the last day
of each calendar month, a Tangible Net Worth of not less than the following
amounts, for the corresponding periods:
Months ending March 31, 1998 through June 30, 1998 $2,500,000.00
Month ending September 30, 1998, and for each fiscal monthly
thereafter, an amount equal to $3,000,000.00, plus
seventy-five (75.0%) of cumulative (from July 1, 1998 forward)
monthly Net Income (with no reduction for Net Losses)
6.11 Maximum Churn Rate The Borrower will not permit Customer
Cancellations during any month to exceed five percent (5%) of Borrower's
Aggregate Customer Base at the end of the immediately preceding month. For
purposes hereof, "Customer Cancellations" means the number of customers who have
cancelled or communicated their intent to cancel their contractual arrangements
with Borrower and "Aggregate Customer Base" means the total number of customers
of the Borrower.
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 Credit Extension
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
<PAGE>
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or property, other than 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 course of business; (iii)
that constitute payment of normal and usual operating expenses in the ordinary
course of business; or (iv) 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
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 so 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% of 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
<PAGE>
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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 with the Federal Fair Labor Standards Act or violate any other law or
regulation, which violation could have a Material Adverse Effect or a material
adverse effect on the Collateral or the priority of Bank's Lien on the
Collateral; 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.
8.2 Covenant Default.
(1) If Borrower fails to perform any obligation under Sections 6.3,
6.6 through 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
<PAGE>
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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 Equipment 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 thirty (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
<PAGE>
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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 ten (10) days (provided that no
Equipment 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.
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,
the 1995 Loan Agreement, the 1997 Loan Agreement or 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
<PAGE>
-25-
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. 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,
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 private
sale as permitted by law;
(9) Any deficiency that exists after disposition of the Collateral
as provided above will be paid immediately by Borrower; and
(10) Bank shall have a non-exclusive, royalty-free license to use
the Intellectual Property Collateral to the extent reasonably necessary to
permit Bank to exercise its rights and remedies upon the occurrence of an Event
of Default.
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: (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
<PAGE>
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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; 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;
provided Bank may exercise such power of attorney to sign the name of Borrower
on any of the documents described in Section 4.2 regardless of whether an Event
of Default has occurred. 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 Equipment 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
<PAGE>
-27-
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
inconsistent herewith 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 was 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.
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: Brian B. Mangolis, Esq.
Fax: (212) 586-7878
If to Bank:
Silicon Valley Bank
3003 Tasman Drive
Santa Clara, California 95054
Attn: Amy Young, Vice President
<PAGE>
-28-
FAX: (408) 496-2429
With copies to:
Silicon Valley East
40 William Street
Wellesley, Massachusetts 02181
Attn: Jane A. Braun, Vice President
FAX: (617) 431-9906
Sullivan & Worcester LLP
One Post Office Square
Boston, MA 02109
Attn: Dennis J. White, Esq.
Fax: (617) 338-2880
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 TRIAL WAIVER
THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
INTERNAL LAWS OF THE COMMONWEALTH OF MASSACHUSETTS TO PRINCIPLES OF CONFLICTS OF
LAW. EACH OF BORROWER AND BANK HEREBY SUBMITS TO THE EXCLUSIVE JURISDICTION OF
THE STATE AND FEDERAL COURTS LOCATED IN THE COMMONWEALTH OF MASSACHUSETTS, BUT
IF FOR ANY REASON THE BANK IS DENIED ACCESS TO SUCH COURTS, THEN IN SUCH EVENT
THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF SANTA CLARA, STATE OF
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 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.
<PAGE>
-29-
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, provided,
however, the 1995 Loan Agreement and the 1997 Loan Agreement shall continue in
full force and effect in accordance with their terms except that the definition
of "Borrowing Base" set forth therein shall be superseded by the definition of
such term in this Agreement and that the financial covenants set forth therein
which shall be superseded in their entirety by the financial covenants set forth
in Sections 6.8 through 6.12 above.
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
Advance or to make any other loans to Borrower, Bank shall release all security
<PAGE>
-30-
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 the
Bank in California.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
FAXSAV INCORPORATED
By:_________________________________
Name:
Title:
SILICON VALLEY BANK, doing business
as SILICON VALLEY EAST
By:________________________________
Name: Jane A. Braun
Title: Vice President
SILICON VALLEY BANK
By:________________________________
Name:
Title:
(signed in Santa Clara, California)
<PAGE>
EXHIBIT A
The Collateral shall consist of all right, title and interest of Borrower
in and to the following:
(a) 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;
(b) 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;
(c) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, leases, license agreements,
franchise agreements, blueprints, drawings, purchase orders, customer lists,
route lists, claims, literature, reports, catalogs, income tax refunds, payments
of insurance and rights to payment of any kind;
(d) 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;
(e) All documents, cash, deposit accounts, securities, investment
property, letters of credit, certificates of deposit, instruments and chattel
paper now owned or hereafter acquired;
(f) All copyright rights, copyright applications, copyright registrations
and like protections in each work for 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 or any past, present and future infringement of any of
the foregoing; and
<PAGE>
(g) Any and all claims, rights and interests in any of the above and all
substitutions for, additions and accessions to and proceeds thereof.
(h) All Borrower's Books relating to the foregoing and any and all claims,
rights and interest 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#: _______________________________________ TIME:______________________
FROM: FAXSAV INCORPORATED
CLIENT NAME (BORROWER)
REQUESTED BY: __________________________________________________________________
________________________________________________________________________________
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE: _________________________________________________________
PHONE NUMBER: _________________________________________________________________
FROM ACCOUNT #_____________________ TO ACCOUNT # _________________
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
- -------------------------- ---------------------
PRINCIPAL INCREASE (ADVANCE) $
PRINCIPAL PAYMENT (ONLY) $
INTEREST PAYMENT (ONLY) $
PRINCIPAL 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________________________________________________
Received By (Bank)__________________________________________________
Authorized Signature (Bank)_________________________________________
================================================================================
<PAGE>
================================================================================
Phone No.___________________________________________________________
================================================================================
<PAGE>
EXHIBIT C
BORROWING BASE CERTIFICATE
Borrower: FaxSav Incorporated
Bank: Silicon Valley Bank
1. Net Revenue(1) for month ending __/__/__. $______________
2. Borrowing Base: Loan Value of Net Income
(90% of #1) $______________
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.
COMMENTS:
By: ___________________________________
Authorized Signer
- ----------
(1) Net Revenue means gross revenues from sales less returns and allowances.
<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.
Reporting Covenant Required Complies
- ------------------ -------- --------
Monthly financial statements Monthly within 30 days Yes No
(except quarter ends by
furnishing SEC report in
timely manner)
Annual (CPA Audited) FYE within 90 days Yes No
10Q and 10K and other SEC Within 5 days after filing Yes No
Reports with the SEC
<TABLE>
<CAPTION>
Financial Covenant Required Actual Complies
- ------------------ -------- ------ --------
<S> <C> <C> <C> <C>
Liquidity Ratio (tested monthly) 1.75:1.0 (2.0:1.0 $___________ to Yes No
of Unrestricted Cash, plus upon a Capital $___________ or
Borrowing Base to Event)** ____:1.0
Aggregate Equipment Advance
Obligations (Terminates upon a
Debt Service Coverage Event)*
Debt Service Coverage Ratio (tested 1.5:1.0 $__________ to Yes No
quarterly). Ratio of EBIDTA to Long- $__________ or
Term Indebtedness, Interest and ____:1.0
Capital Lease Obligation (triggered
only upon Borrower's meeting this
test for two consecutive quarters,
a "Debt Service Coverage Event")*
</TABLE>
<PAGE>
-2-
<TABLE>
<S> <C> <C> <C> <C>
Tangible Net Worth (tested monthly) $2.5 million through $_________ plus Yes
No 6/30/98; $3.0 million $_________,
Total at 7/31/98 plus of $________
75% of Net Income (with
no offset for losses)
thereafter.)
Leverage, (tested monthly) Total 2.0:1.0 at 3/31/98; $_____ to Yes No
Liabilities less Subordinated Debt 3.0:1.0 at 4/30/98 $_____ or
to Tangible Net Worth through 6/30/98; ___:1.0
2.0:1.0 at 7/31/98
and thereafter
Maximum Churn Rate (tested
monthly) Monthly 5% ____% Yes No
Customer Cancellations as
percentage of Total Customer
Base
</TABLE>
*|_| check here if a Debt Service Coverage Event has occurred and indicate the
date thereof: __/__/__
**|_| check here if a Capital Event has incurred and indicate the date thereof:
__/__/__.
Comments Regarding Exceptions: See Attached.
Sincerely,
___________________________
Signature
Title
Date
<PAGE>
EXHIBIT E
PROMISSORY NOTE
<PAGE>
DISBURSEMENT REQUEST AND AUTHORIZATION
Borrower: FaxSav Incorporated Bank: Silicon Valley Bank
LOAN TYPE. This is a Variable Rate, Equipment Line of Credit of a principal
amount up to $500,000.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for business.
SPECIFIC PURPOSE. The specific purpose of this loan is to finance equipment
purchases.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be
disbursed until all of Bank's conditions for making the loan have been
satisfied. Please disburse the loan proceeds as follows:
Equipment Line
--------------
Amount paid to Borrower directly $_____
Undisbursed Funds $_____
Principal $_____
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the
following charges:
Prepaid Finance Charges Paid in Cash: $_____
$2,500 Loan Fee
N/A Accounts Receivables Audit
Other Charges Paid in Cash: $_____
$_____ UCC Search Fees
$_____ UCC Filing Fees
N/A Patent Filing Fees
N/A Trademark Filing Fees
N/A Copyright Filing Fees
$_____ Outside Counsel Fees and Expenses (ESTIMATE, DO NOT LEAVE
BLANK)
Total Charges Paid in Cash $_____
AUTOMATIC PAYMENTS. Borrower hereby authorizes Bank automatically to deduct from
Borrower's account numbered _________________ the amount of any loan payment. If
the funds in the account are insufficient to cover any payment, Bank shall not
be obligated to advance funds to cover the payment.
<PAGE>
-2-
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO BANK THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS
DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO BANK. THIS
AUTHORIZATION IS DATED AS OF _______________________, 19___.
BORROWER:
___________________________________
Authorized Officer
<PAGE>
AGREEMENT TO PROVIDE INSURANCE
Grantor: FaxSav Incorporated Bank: Silicon Valley Bank
INSURANCE REQUIREMENTS. FaxSav Incorporated ("Grantor") understands that
insurance coverage is required in connection with the extending of a loan or the
providing of other financial accommodations to Grantor 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 cancelled or diminished
without a minimum of twenty (20) days' prior
written notice to Bank.
INSURANCE COMPANY. Grantor may obtain insurance from any insurance company
Grantor may choose that is reasonably acceptable to Bank. Grantor understands
that credit may not be denied solely because insurance was not purchased through
Bank.
FAILURE TO PROVIDE INSURANCE. Grantor 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. Grantor acknowledges
and agrees that if Grantor fails to provide any required insurance or fails to
continue such insurance in force, Bank may do so at Grantor'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. GRANTOR 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, GRANTOR'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,
Grantor 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.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT TO
PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED
__________________________ , 19___.
GRANTOR:
___________________________________
X
<PAGE>
Authorized Officer
================================================================================
FOR BANK USE ONLY
INSURANCE VERIFICATION
DATE: PHONE:
AGENT'S NAME:
INSURANCE COMPANY:
POLICY NUMBER:
EFFECTIVE DATES:
COMMENTS:
================================================================================
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the FaxSav,
Inc. financial statements, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,935,182
<SECURITIES> 0
<RECEIVABLES> 3,333,530
<ALLOWANCES> 332,717
<INVENTORY> 0
<CURRENT-ASSETS> 4,995,098
<PP&E> 9,062,787
<DEPRECIATION> 4,582,434
<TOTAL-ASSETS> 9,763,473
<CURRENT-LIABILITIES> 5,311,444
<BONDS> 0
0
0
<COMMON> 108,135
<OTHER-SE> (15)
<TOTAL-LIABILITY-AND-EQUITY> 9,763,473
<SALES> 4,977,255
<TOTAL-REVENUES> 4,977,255
<CGS> 2,606,686
<TOTAL-COSTS> 3,827,021
<OTHER-EXPENSES> (31,452)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,462
<INCOME-PRETAX> (1,447,462)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,447,462)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,447,462)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
