SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 000-09613
FAXSAV INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 11-3025769
(State of Incorporation) (I.R.S. Employer Identification
Number)
399 Thornall Street
Edison, New Jersey 08837
(732) 906-2000
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
-----------
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK $.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
|X| Yes |_| No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
|_|
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 24, 1999 was $89,006,467 (based on the last reported sale
price on the NASDAQ National Market on that date).
The number of shares outstanding of the registrant's common stock as of
March 24, 1999 was 14,067,105
DOCUMENTS INCORPORATED BY REFERENCE
Portions of FaxSav Incorporated's definitive Proxy Statement relating to
its 1999 Annual Meeting of the Stockholders to be held on June 4, 1999, which is
to be filed with the Securities and Exchange Commission no later than 120 days
after the end of the fiscal year covered by this report, are incorporated by
reference into Part III of this report.
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THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT
EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT FAXSAV AND OUR
INDUSTRY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES.
FAXSAV'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, AS MORE FULLY
DESCRIBED IN THIS SECTION AND ELSEWHERE IN THIS REPORT. FAXSAV UNDERTAKES NO
OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON,
EVEN IF NEW INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE.
ITEM 1. BUSINESS
General
FaxSav Incorporated (the "Company") designs, develops and markets a
variety of business-to-business facsimile transmission services, including
computer-to-fax, fax-to-fax, enhanced fax and broadcast fax services. The
Company has developed proprietary software which enables its customers to
specify on a call-by-call basis whether a facsimile transmission will be
delivered through FaxSav's real-time, "virtual real-time (Internet fax)" or
broadcast services. This software, coupled with FaxSav's fax-only network of
three interconnected switching nodes in the United States and Internet-capable
facsimile nodes located in twenty-one countries as of December 31, 1998,
automatically delivers each outgoing transmission through the route that
provides the lowest cost and the highest transmission quality available on the
FaxSav network. Pre-negotiated volume-based arrangements with several telephony
common carriers, the major carrier being MCI WorldCom, and the cost savings
available for transmission through the Internet enable FaxSav to transmit its
customers' documents and images to fax machines worldwide at rates that are
below the international rates charged by long distance voice carriers. While
FaxSav generates cost savings for customers transmitting faxes to international
destinations, many FaxSav customers use the Company's services for ease of use
and productivity improvements rather than cost savings.
The Company has deployed Internet-capable facsimile nodes in twenty-one
key international telecommunications markets to enable it to migrate a portion
of its customer traffic off of its telephony-based network and to route it over
the Internet. This global Internet backbone, which seamlessly integrates with
FaxSav's telephony-based network, enables the Company to bypass long distance
common carriers for transmissions originating and terminating in countries where
such nodes have been deployed, thereby further reducing its customers'
international transmission costs. FaxSav believes that the combination of its
telephony-based network and its growing Internet-based network will enable it to
emerge as a leading supplier of comprehensive, convenient, low-cost global
faxing services.
Industry Background
The Market For Facsimile Services
Technological advances over the past decade have improved the speed and
quality of facsimile transmissions and reduced the cost of fax machines to
consumers, resulting in a large and increasing worldwide installed base of fax
machines. In addition, there recently has been a rapid increase in the installed
base of fax-capable personal computers. The proliferation of fax machines and
fax capable computers, and improvements in the transmission quality of domestic
and international telephone networks, have resulted in facsimile transmission
being the preferred means of immediate business-to-business document delivery.
Traditional International Facsimile Transmission
A facsimile message typically is transmitted by means of a telephone call
from one fax machine to another over the voice telephony network. Once a
connection has been established between the two machines, the scanned image from
the originating fax machine is electronically transmitted to the destination fax
machine. Facsimile transmissions historically have been, and substantially all
of such transmissions continue to be, implemented on a real-time continuous
connection basis using the voice telephony network as a transmission medium.
An international facsimile transmission from the United States typically
is routed as follows: (i) the sending fax machine accesses the local exchange
carrier (an "LEC"), which then routes the fax to the customer's long distance
carrier; (ii) the long distance carrier then routes the fax via its voice
telephony network to the telephone company of the destination country; and (iii)
the foreign telephone company then routes the fax to a local telephone number to
which the destination fax machine is attached. In this example, the long
distance company will bill the customer to cover the LEC access fee, the fee for
use of its
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voice telephony network and the fee for the connection between the long distance
carrier's network and the foreign telephone company, which includes the fee for
delivery to the destination fax machine. The majority of the cost for
international transmissions from the United States to destinations outside of
North America is attributable to the inter-country connection fee.
Document Delivery Over The Internet
Substantially all inter-country facsimile traffic worldwide is transmitted
through voice telephony networks at rates which are largely dictated by the
inter-country connection fees. Unlike traditional public and private
telecommunications networks, which are individually managed, the Internet is a
collection of connected computer systems and networks that link millions of
public and private computers to form what is essentially the largest computer
network in the world and enables businesses, educational institutions,
government agencies and individuals to transmit data internationally without
incurring inter-country voice telephony connection fees.
Although the Internet has been used for a number of years as a medium for
the international delivery of documents from computer to computer, substantially
all facsimile traffic worldwide continues to originate and terminate on fax
machines. The ability to effectively capture the savings enabled by Internet
document delivery in the international facsimile market therefore requires the
deployment, on a global basis, of a network of Internet-capable facsimile nodes
to bridge the gap between the Internet and the fax machine.
The FaxSav Solution
FaxSav has deployed an international network of Internet-capable facsimile
nodes in twenty-one countries as of December 31, 1998 which are designed to
provide a reliable means to deliver facsimile transmissions to fax machines
worldwide at substantially reduced costs. This global Internet backbone, which
seamlessly integrates with FaxSav's telephony-based network, enables the Company
to bypass inter-country connection fees for transmissions originating and
terminating through such nodes.
FaxSav, through its integrated Internet and telephony network, provides a
comprehensive range of services for the global transmission of documents and
images, including computer-to-fax, fax-to-fax, enhanced fax and broadcast fax
services. In addition, to position itself in the emerging desktop-to-fax market,
the Company has developed several proprietary software products which enable the
transmission of documents or images created in any Windows, Macintosh or e-mail
application to be routed directly from an Internet-connected computer desktop
through the FaxSav network to fax machines worldwide.
The FaxSav solution provides substantial ease of use to the customer.
Customers may begin transmitting faxes at substantially reduced costs without
any upfront investment or complex system installation. FaxSav is quickly and
easily installed by the customer and does not require any changes in customer
business practices. Customers connect to the FaxSav network from a fax machine
by simply installing a faxSAV Connector, a small proprietary device that easily
plugs between the customer's fax machine and the wall jack, or by simply
installing FaxSav's proprietary desktop software on an Internet-connected
personal computer. FaxSav's proprietary routing algorithms then automatically
deliver each facsimile transmission, through either FaxSav's telephony network
or Internet backbone in order to optimize the lowest cost and the highest
transmission quality available on the FaxSav network. Additionally, the FaxSav
solution is both modular and scalable to meet customer business needs in that it
can be easily deployed across multiple fax machines or personal computers within
an organization on an unlimited basis.
The FaxSav Network
Overview
Traditional International Facsimile Transmission. In the United States,
traditional international facsimile transmission begins when the originating fax
machine places a call over the local telephone network. Because the number
dialed has an international prefix, the Local Exchange Carrier ("LEC") switches
the call to the sender's long distance carrier (typically AT&T Corp. ("AT&T")
MCI WorldCom ("MCI"), or Sprint Corp., ("Sprint"). The long distance carrier
("LDC") delivers the call to the corresponding long distance company (the "PTT")
in the country of destination, which in turn completes the call by providing a
connection through the local telephone network to the receiving fax machine.
Thus a real-time connection is established over the traditional telephony
networks, and the originating fax machine sends a data stream, comprising a
scanned image, to the receiving fax machine.
Facsimile Transmission via FaxSav's Network. FaxSav's services, which are
targeted at businesses and professionals, are designed to reduce the cost of
sending international faxes, and to make the process of sending faxes easier and
less
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time-consuming. The FaxSav network offers its customers the benefits of
increased savings and convenience by bypassing parts or all of the traditional
network described above. For example, an international fax-to-fax message
delivered through FaxSav's Internet-based network utilizes the Internet as a
delivery medium, bypassing the long distance carriers and thereby avoiding
expensive inter-country connection fees. In addition, a customer using the
faxSAV for Internet suite of services accesses the FaxSav network through its
Internet service provider (an "ISP") rather than through the local telephone
network; the Company's proprietary software then either routes the call over
FaxSav's telephony network or bypasses the long distance carriers and the
associated inter-country connection fees by routing the call through FaxSav's
Internet-based network.
The FaxSav Network
The FaxSav network is designed to minimize the cost of sending faxes
internationally by selecting the optimal route and carrier for each facsimile
transmission. Currently FaxSav provides its customers with the ability to reach
fax machines worldwide via its telephony-based network. FaxSav's telephony-based
services are competitively priced and, on faxes to most international
destinations, FaxSav customers are expected to realize substantial savings as
compared to the rates charged by traditional long distance carriers.
In addition to its telephony-based network, FaxSav has deployed an
Internet-based network which connects key telecommunications markets worldwide.
FaxSav's Internet-based network complements its telephony-based network and
provides the Company with the opportunity to further lower the retail price of
its customers' international facsimile transmissions while increasing its market
share. As FaxSav continues to deploy its Internet nodes internationally, it will
be able to route an increasing portion of its customers' traffic over the
Internet.
FaxSav believes that the combination of its telephony-based network and
its Internet-based network is critical to achieving its objective of emerging as
the leading provider of comprehensive low-cost global faxing solutions.
Therefore FaxSav intends to maintain both a telephony-based and an
Internet-based network but with an increasing level of customer traffic being
routed through the Internet.
Network Infrastructure
At the core of the FaxSav network are three main switching nodes,
installed in New York, New Jersey and Washington, D.C. These switching nodes
utilize FaxSav's proprietary messaging software to provide the full range of the
Company's service offerings, including real-time delivery, "virtual real-time
(Internet fax)" delivery, least cost fax routing, e-mail to fax conversion,
Internet access, broadcast delivery, customer registration and customer query
capabilities. Each switching node employs switch-to-host architecture and fully
redundant hardware and software, and is interconnected to the others through a
private intranet utilizing T1 links. A backup connection is also provided
through separate T1 links to the Internet via firewalls. The switching nodes are
installed in secure locations and are supported by uninterruptible power
supplies with emergency power generators as further backup. The main switching
nodes are connected through the Internet to the Internet facsimile nodes
installed by FaxSav overseas, extending access to the Company's service in the
markets where such nodes are located. Internet nodes provide "virtual real-time"
fax delivery, least-cost fax routing via the best node, e-mail to fax conversion
and broadcast delivery capabilities. FaxSav has designed a network-wide
redundancy into its nodes, such that if any particular node fails for any reason
to complete a transmission, an alternative route through the FaxSav network will
automatically be selected. In addition, in the event of an Internet failure, the
Internet nodes have a spanning (multiple simultaneous calling) dial backup
capability to connect via telephony lines to the nearest node. This node-based
and network wide redundancy is designed to allow FaxSav to reliably provide
service to its customers without interruption. Additionally, RSA encryption is
provided in each Internet node such that each file delivered through FaxSav's
Internet nodes is encrypted, addressing security concerns of its customers. All
nodes are designed for unattended operation, provide a full range of system
monitoring and control capability and can be upgraded and maintained remotely.
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Services
faxSAV
faxSAV, the Company's first fax-to-fax service, is a real-time fax
transmission service that is delivered through the Company's telephony-based
network. The faxSAV service is accessed by customers through the installation of
a faxSAV Connector, a small proprietary device which is plugged between the fax
machine and the telephone jack. The faxSAV Connector, which is programmable
directly from FaxSav headquarters based on the customer's specified needs,
automatically identifies each outgoing call which the customer has pre-selected
for delivery by the Company and routes the call to the FaxSav network. The
faxSAV Connector is provided by FaxSav free of charge with no installation cost
to the customer. The Company believes that, depending on the volume and
destinations of the customer's traffic, the faxSAV service provides significant
savings to customers on fax usage costs in comparison to the international rates
charged by the major long distance carriers. faxSAV customers are charged on a
per-minute basis for the transmission time to the destination fax machine, and
are billed monthly. The Company also offers customized pricing plans based on
the customer's volume of traffic to individual countries.
faxSAV Assured
faxSAV Assured is a "virtual real-time" enhanced delivery option available
to all faxSAV customers through the faxSAV Connector which may be selected for
all of the customer's traffic or on a call by call basis. faxSAV Assured shifts
the responsibility for repetitive completion attempts to the FaxSav network,
thereby reducing indirect costs and increasing the reliability, timeliness and
predictability of difficult facsimile deliveries. The standard faxSAV Assured
service immediately begins to attempt delivery, and makes multiple attempts for
a period of one hour. If the fax has not been successfully completed within that
time, the customer is sent a "Non-Delivery" notice. The Company also offers
customized faxSAV Assured services to meet customer-specific delivery schedules.
faxSAV EZ-List
faxSAV EZ-List is an easy to use fax broadcast service which, from a fax
machine, utilizes the capabilities of the faxSAV Connector to capture the fax
message and the customer's list identification number in a single transmission.
During 1997, the Company introduced its Broadcast List Manager software product
which enables customers to manage and submit broadcast lists from their
desktops. faxSAV EZ-List enables customers to send the same fax message to
multiple recipients by transmitting a single fax message to the FaxSav network
and identifying a specific list of fax addresses previously stored in the
Company's customer database. faxSAV EZ-List customers are charged on a
per-minute basis for the transmission time to each destination fax machine, and
are billed monthly. The Company also offers customized pricing plans based on
the customer's volume of traffic to individual countries.
faxSAV PLUS
In the third quarter of 1996 the Company introduced faxSAV PLUS, a new
"virtual real-time" Internet fax service which is designed to provide reliable
delivery of facsimile transmissions at substantially reduced costs. This service
is designated as Internet fax because the Company utilizes a combination of its
traditional telephony-based network and its growing Internet-based network to
deliver faxSAV PLUS transmissions to fax machines worldwide. The Company is
currently implementing the faxSAV PLUS service with a two-tiered pricing
structure. Pricing for delivery to the key telecommunications markets that
either have Internet nodes installed or are currently targeted for Internet node
deployment is based on the economics of delivery through a planned Internet
backbone. Pricing for delivery to other destinations worldwide continues to be
based on the economics of delivery through the Company's telephony-based
network, which prices may or may not be reduced in the event that the Company
deploys Internet-capable facsimile nodes in such markets. faxSAV PLUS customers
are charged on a per-minute basis for the transmission time to the destination
fax machine, and are billed monthly.
faxSAV for Internet Suite of Services
The faxSAV for Internet suite of services, introduced in stages during the
first half of 1996, enables Internet-connected customers to send faxes directly
from their computer desktops, either from their e-mail package or from a Windows
or Macintosh software application, through the Internet to fax machines
worldwide via the FaxSav network. The Company's World Wide Web site includes a
detailed explanation of these services, installation instructions and service
registration forms. Customers are charged on a per-page basis for the faxSAV for
Internet suite of services and generally are billed in advance of use. The
faxSAV for Internet suite of services includes the following discrete services:
o faxLauncher enables customers to fax documents created in any Windows or
Macintosh application directly from an
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Internet-connected computer desktop to fax machines worldwide. faxLauncher also
supports documents scanned through sheet-fed scanners manufactured by Visioneer,
Inc., Hewlett-Packard Co. or Compaq Computer Corporation. A new version of this
software, faxLauncher Pro, provides users with additional features including
on-line fax status checking, off-line queuing, account code support and storage
of sent faxes. faxLauncher software is provided to customers in diskette form or
it may be downloaded from the Company's World Wide Web site.
o faxMailer using FaxSav's patented e-mail security technology, enables
customers to transmit messages from e-mail packages over the Internet to the
FaxSav network for delivery to fax machines worldwide. faxMailer provides the
desktop e-mail customer with the ability to reach the fax machine of anyone not
yet connected to the Internet without the necessity of creating hard copy and
manually sending a fax. Customers may register for the faxMailer service through
the Company's World Wide Web site.
o faxScan enables customers to send documents scanned in any
TWAIN-compliant scanner over the Internet to the FaxSav network for delivery to
fax machines worldwide. The combination of a scanner and faxScan software puts a
virtual fax machine at the desktop for the customer. faxScan software is
provided to customers in diskette form.
o Serverlink enables any fax software or applications developer the
flexibility of linking to the FaxSav Network in order to facilitate the seamless
distribution of fax documents worldwide. Use of Serverlink results in least
cost-routing and expanded availability of fax software or applications to
multiple users. Serverlink is provided to potential partners and customers
electronically.
o faxCourier which was introduced in the first quarter of 1998 enables
customers to route faxes straight to their email address. A local or toll-free
fax number in the FaxSav Network is allocated to the user. All faxes sent to
these numbers are automatically converted to a standard TIFF file format and
forwarded as attachments to email to the customer's email address. Users can
view or print their faxes using standard, freely available TIFF viewing
software.
faxSAV Custom Corporate Solutions
faxSAV Custom Corporate Solutions are specialized services developed by
the Company to meet customer needs for specific volume fax applications. FaxSav
will custom tailor a software, networking and telecommunications solution
designed to provide the customer with additional savings in time and money.
Customer Support Services
The Company believes that customer support is important in differentiating
its facsimile delivery services from other delivery approaches. The customer
support services provided by the Company include installation assistance on an
as-requested basis, facilitation of international fax completion and monitoring
the performance of faxSAV Connectors. The Company currently provides customer
support and network/faxSAV Connector monitoring functions twenty-four hours a
day, seven days a week. The Company's support personnel respond to telephone
inquiries and e-mail inquiries. The Company also provides information about its
services and new desktop software upgrades on its World Wide Web site.
To provide immediate response to customer inquiries, the Company has
developed a wide area network that provides a real-time fax tracking system and
allows network operations and customer service personnel to redirect, reschedule
or repair fax transmissions that are experiencing completion difficulty. The
system accesses fax traffic information via an Oracle database that is updated
from the Company's three switching nodes in the United States and provides an
on-line connectivity to the Company's master customer database.
Sales and Marketing
Domestic Sales and Marketing
The Company offers its services in the United States through multiple
sales channels which include a direct field sales force, an agent and dealer
distribution network, and promotional activities at trade shows and on the
FaxSav World Wide Web site. Through the first quarter of 1997, the Company had
employed a direct mail and direct response program supported by multiple third
party telemarketing firms. However, thereafter the Company changed its focus by
expanding its direct sales approach to reach larger prospective customers.
During 1995 the Company established a direct field sales force to address
the specialized faxing needs of major accounts
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and to manage and support the Company's agent channel. The Company's agent and
dealer distribution network consists of organizations which sell office
equipment, office supplies and telephony services, as well as independent
marketing companies. These agents offer FaxSav services as a companion offering
to their other products lines. The Company has also entered into agreements for
the bundling faxSAV for Internet suite of services with the products of computer
hardware, software and Internet services companies although revenues from these
agreements have been insignificant.
The Company has used computer and Internet trade shows as forums to
introduce the faxSAV for Internet suite of services to prospective customers and
partners. The Company's promotions have included the distribution of free
software to access its services and free faxing during a trial period and the
Company currently offers 5 free pages of faxes to each new subscriber that
registers through the company's World Wide Web home page. The Company has
promoted its faxLauncher software on the World Wide Web since February 1996.
International Alliances
In connection with the installation of Internet-capable facsimile nodes in
certain foreign countries, the Company has formed strategic sales and marketing
alliances with local Internet service providers, telecommunications companies
and resellers. The Company anticipates that these organizations will use their
knowledge of the local market, language, customs and regulations, as well as
their existing distribution, customer support and billing infrastructures, to
establish, grow and properly service an international FaxSav customer base. In
return, the Company is offering these organizations either exclusive or
non-exclusive rights to market the Company's services in their territories and
offering to provide such services at a discount to the Company's retail prices.
In addition to the strategic alliances, the Company has developed a
network of commission-based agents to sell the faxSAV for Internet suite of
services in foreign markets. To date, this network consists of over 200 agents
representing the Company in over 70 foreign markets. The Company has also
implemented a reseller program for those agents who have the infrastructure to
generate invoices and perform collections. Under this program, participating
agents are provided detailed billing information on their accounts from which
they can create and distribute invoices in the local language and currency, and
locally service customer billing inquiries.
Customers
The Company sells its services primarily to businesses throughout the
world. Customers can install FaxSav's services at individual fax machine or
desktop locations, across departments or throughout organizations by simply
plugging the faxSAV Connector, a small proprietary device, between their fax
machine and the telephone jack or by simply installing FaxSav's desktop software
on an Internet connected personal computer. Through 1995, all of the Company's
customers were located in the United States. In 1996, with the introduction of
the faxSAV for Internet suite of services, the Company began to expand its
customer base to include foreign desktop customers. In the first quarter of
1997, the Company began offering fax-to-fax services through its international
marketing alliances in certain countries where an Internet node was installed.
In 1997, revenues from these international customers amounted to $2.3 million or
13.2% of total revenues and in 1998, revenues from these international customers
amounted to $5.9 million or 27.9% of total revenues.
Competition
The market for facsimile transmission services is intensely competitive
and there are limited barriers to entry. The Company expects that competition
will intensify in the future. The Company believes that its ability to compete
successfully will depend upon a number of factors, including market presence;
the capacity, reliability and security of its network infrastructure; the
pricing policies of its competitors and suppliers; the timing of introductions
of new services and service enhancements by the Company and its competitors; and
industry and general economic trends. A key element of the Company's strategy is
to expand its market presence by leveraging its price leadership strategy both
domestically and internationally. The Company intends to maintain and improve
the capacity, reliability and security of its network infrastructure through
continued research and development activities and will continue to place
significant emphasis on the ongoing development of new services and applications
of its existing services.
The Company's current and prospective competitors generally fall into the
following groups: (i) telecommunication companies, such as AT&T, MCI WorldCom,
Sprint, and the regional Bell operating companies, and telecommunications
resellers, (ii) Internet service providers, such as Uunet Technologies, Inc. (an
affiliate of MCI WorldCom) and NETCOM On-Line Communications Services, Inc.;
(iii) on-line services providers, such as Microsoft Corporation and America
Online, Inc. and (iv) direct fax delivery competitors, including Premiere
Document Distribution (formerly Xpedite Systems, Inc.), and IDT Corporation.
Many of these competitors have greater market presence, engineering and
marketing capabilities, and financial,
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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 MCI WorldCom . There can be no assurance that these
companies will not discontinue or otherwise alter their relationships with the
Company in a manner that would have a material adverse effect upon the Company's
business, financial condition and results of operations. In addition, current
and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their services to address the needs of the Company's current and prospective
customers. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. In addition
to direct competitors, many of the Company's larger potential customers may seek
to internally fulfill their fax communication needs through the deployment of
their own computerized fax communications systems or network infrastructures for
intra-company faxing.
Intellectual Property
The Company's success is dependent upon its proprietary technology. The
Company relies primarily on a combination of contract, copyright and trademark
law, trade secrets, confidentiality agreements and contractual provisions to
protect its proprietary rights. The Company has been granted patents related to
its faxSAV Connector and for its "e-mail Stamps" security technology
incorporated into its faxMailer service. There can be no assurance that the
present or future patents will provide sufficient protection to the Company's
present or future technologies, products and processes. In addition, there can
be no assurance that others will not independently develop substantially
equivalent proprietary information or obtain access to the Company's know-how.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of the Company's services or to obtain and
use information that the Company regards as proprietary. In addition, the laws
of some foreign countries do not protect the Company's proprietary rights to the
same extent as do the laws of the United States. There can be no assurance that
the steps taken by the Company to protect its proprietary rights will be
adequate or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technologies.
Effective September 22, 1998 the Company settled all outstanding
litigation with AudioFAX IP, L.L.P. ("AudioFAX") to avoid the expense and
disruption of protracted litigation. In 1997 the Company had filed a lawsuit
against AudioFAX seeking declaratory relief that FaxSav services did not
infringe on any valid claims in certain AudioFAX's patents relating to
store-and-forward technology or that certain claims of the AudioFAX patents are
not valid. Immediately after the filing of FaxSav's complaint, AudioFAX filed a
lawsuit against FaxSav alleging patent infringement. The terms of the settlement
agreement required the Company to issue 275,000 shares of common stock to
AudioFAX and to register such shares for resale in exchange for a fully paid-up
license to the patents in the dispute. Although under certain circumstances the
Company would have been required to issue additional shares or pay a certain
amount of cash to AudioFAX, these requirements are no longer applicable. The
Company has recorded a charge of $1,025,000 in 1998 representing all costs
associated with the settlement. No costs have been capitalized, as the Company
could not determine the future economic benefit, if any, to the Company of the
patent licenses acquired.
There can be no assurance that other third parties will not assert
infringement claims against the Company in the future. Patents have been granted
recently on fundamental technologies in the communications and desktop software
areas, and patents may issue which relate to fundamental technologies
incorporated in the Company's services. As patent applications in the United
States are not publicly disclosed until the patent issues, applications may have
been filed which, if issued as patents, could relate to the Company's services.
The Company could incur substantial costs and diversion of management resources
with respect to the defense of any claims that the Company has infringed upon
the proprietary right of others, which costs and diversion could have a material
adverse effect on the Company's business, financial condition and results of
operations. Furthermore, parties making such claims could secure a judgment
awarding substantial damages, as well as injunctive or other equitable relief
which could effectively block the Company's ability to license and sell its
services in the United States or abroad. Any such judgment could have a material
adverse effect on the Company's business, financial condition and results of
operations. In the event a claim relating to proprietary technology or
information is asserted against the Company, the Company may seek licenses to
such intellectual property. There can be no assurance, however, that licenses
could be obtained on terms acceptable to the Company, or at all. The failure to
obtain any necessary licenses or other rights could have a material adverse
effect on the Company's business, financial condition and results of operations.
Government Regulation
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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.
Employees
As of December 31, 1998, the Company had 133 full-time employees,
including 17 in research and development, 45 in network operations and support,
55 in sales and marketing and 16 in finance and administration. The Company's
employees are not covered by any collective bargaining agreements. The Company
believes that its relations with its employees are good.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in Edison, New Jersey in
facilities consisting of approximately 18,900 square feet of office space
occupied under two leases expiring in August 1999 and May 2002. The Company's
three U.S. Network facilities are co-located in telehousing facilities under
short term leases. In addition, the Company leases offices for its sales staff
in the Chicago, Dallas, Ft. Lauderdale, Los Angeles, New York and San Francisco
metropolitan areas. While it believes that these facilities are adequate for its
present needs, the Company is continually reviewing its needs and may add
facilities in the future. The Company believes that any required additional
space would be available on commercially reasonable terms. Finally, in
connection with its deployment of Internet-capable facsimile nodes, the Company
has entered into, and will continue to enter into, short-term leases in
telehousing facilities worldwide.
ITEM 3. LEGAL PROCEEDINGS
Effective September 22, 1998 the Company settled all outstanding
litigation with AudioFAX IP, L.L.P. ("AudioFAX") to avoid the expense and
disruption of protracted litigation. In 1997 the Company had filed a lawsuit
against AudioFAX seeking
9
<PAGE>
declaratory relief that FaxSav services did not infringe on any valid claims in
certain AudioFAX's patents relating to store-and-forward technology or that
certain claims of the AudioFAX patents are not valid. Immediately after the
filing of FaxSav's complaint, AudioFAX filed a lawsuit against FaxSav alleging
patent infringement. The terms of the settlement agreement required the Company
to issue 275,000 shares of common stock to AudioFAX and to register such shares
for resale in exchange for a fully paid-up license to the patents in the
dispute. Although under certain circumstances the Company would have been
required to issue additional shares or pay a certain amount of cash to AudioFAX,
these requirements are no longer applicable. The Company has recorded a charge
of $1,025,000 in 1998 representing all costs associated with the settlement. No
costs have been capitalized, as the Company could not determine the future
economic benefit, if any, to the Company of the patent licenses acquired.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been quoted on the Nasdaq National Market
under the symbol "FAXX." The following table sets forth for 1997 and 1998, the
range of high and low sales prices for the Common Stock of the Company on the
Nasdaq National Market. These prices do not include retail mark-up, mark-down or
commissions.
1997 High Low
First Quarter.........................................$7.50 $4.00
Second Quarter.........................................5.25 1.25
Third Quarter..........................................1.75 1.00
Fourth Quarter.........................................3.00 1.00
1998
First Quarter.........................................$4.00 $2.38
Second Quarter.........................................5.06 2.56
Third Quarter..........................................8.31 2.38
Fourth Quarter........................................11.00 3.00
On December 31, 1998, the last reported sale price of the common stock on
the Nasdaq National Market was $6.19 per share. On March 24, 1999 the last
reported sale price of the common stock on the Nasdaq National Market was $8.44
per share.
HOLDERS
As of March 24, 1999, there were approximately 132 holders of record of
the common stock.
DIVIDEND POLICY
FaxSav has never declared or paid any cash dividends on its capital stock.
FaxSav currently intends to retain future earnings, if any, to finance the
operation and expansion of its business and does not expect to pay any cash
dividends for the foreseeable future.
SALES OF UNREGISTERED SECURITIES DURING THE YEAR ENDED DECEMBER 31, 1998
During the year ended December 31, 1998, the Company issued and sold the
following securities without registration under the Securities Act of 1933, as
amended (the "Securities Act"):
(1) In September 1998, the Company issued to AudioFAX 275,000 shares
of Common Stock in consideration for a fully paid-up license to certain
AudioFAX patents in settlement of a dispute between the parties.
(2) In July 1998, the Company issued 2,000,000 shares of Common
Stock for cash consideration of $7,000,000.
(3) In December 1998, the Company issued to the Tail Wind Fund Ltd.
645,161 shares of Common Stock and warrants to purchase 64,516 shares of
Common Stock for aggregate cash consideration of $3,500,000.
No underwriter was involved in any of the above sales of securities. All
of the above securities were issued in reliance upon the exemption set forth in
Section 4(2) of the Securities Act on the basis that they were issued under
circumstances not involving a public offering.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to FaxSav's
statement of operations for the five years ended December 31, 1998, and with
respect to FaxSav's balance sheet as of December 31, 1998, 1997, 1996, 1995 and
1994, are derived from the audited financial statements of FaxSav which are
included elsewhere herein. The selected consolidated financial data set forth
below is qualified in its entirety by, and should be read in conjunction with,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and the notes to those
statements included elsewhere herein.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands, except for share and per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues .......................... $ 21,117 $ 17,418 $ 15,036 $ 11,649 $ 3,449
Cost of service ................... 11,129 10,414 8,898 7,021 2,297
----------- ----------- ----------- ----------- -----------
Gross margin ...................... 9,988 7,004 6,138 4,628 1,152
Operating expenses:
Network operations and
support ....................... 3,608 2,287 1,985 1,183 851
Research and
development ................... 1,995 1,909 1,772 840 613
Sales and marketing ............. 6,640 5,268 6,065 4,238 2,337
General and
administrative ................ 3,285 3,132 2,495 2,007 970
Depreciation and
amortization .................. 1,492 1,702 1,437 928 242
Other ........................... 1,025 -- -- (441) (309)
----------- ----------- ----------- ----------- -----------
Total operating
expenses .................... 18,045 14,298 13,754 8,755 4,704
----------- ----------- ----------- ----------- -----------
Operating loss .................... (8,057) (7,294) (7,616) (4,127) (3,552)
Interest (expense)
income, net ..................... (134) 79 46 46 45
Other income (expense),
net ............................. 106 96 94 (4) 14
----------- ----------- ----------- ----------- -----------
Loss before income taxes .......... (8,085) (7,119) (7,476) (4,085) (3,493)
Provision for income
taxes ........................... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Net loss .......................... $ (8,085) $ (7,119) $ (7,476) $ (4,085) $ (3,493)
=========== =========== =========== =========== ===========
Net loss per common and
equivalent share ................ $ (0.68) $ (0.72) $ (2.74) $ (12.48) $ (10.70)
=========== =========== =========== =========== ===========
Weighted average common
and equivalent shares
outstanding (1).................. 11,842,956 9,880,681 2,724,651 327,353 326,410
=========== =========== =========== =========== ===========
Pro forma net loss per
common and equivalent
share (1) ....................... $ (0.68) $ (0.72) $ (0.86) $ (0.45) $ (0.50)
=========== =========== =========== =========== ===========
Shares used in computing
pro forma net loss per common
and equivalent share (1)......... 11,842,956 9,880,681 8,712,054 9,079,566 6,957,411
=========== =========== =========== =========== ===========
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital (deficit) ......... $ 3,724 $ 1,333 $ 7,080 $ (849) $ (385)
Total assets ...................... 14,488 10,496 14,448 4,840 2,430
Total long-term debt .............. 1,540 1,169 678 326 --
Total stockholders'
equity .......................... 8,050 4,664 9,659 687 621
</TABLE>
- ----------
(1) See Note 2 of Notes to Financial Statements: "Summary of Significant
Accounting Policies -- Earnings Per Share" and " -- Pro Forma Earnings Per
Share."
12
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF FAXSAV TOGETHER WITH THE FINANCIAL STATEMENTS AND THE
NOTES TO SUCH STATEMENTS INCLUDED ELSEWHERE IN THIS REPORT. THIS DISCUSSION
CONTAINS FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT EXPECTATIONS,
ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT FAXSAV AND OUR INDUSTRY. THESE
FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. FAXSAV'S ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS, AS MORE FULLY DESCRIBED IN THE "RISK
FACTORS" SECTION AND ELSEWHERE IN THIS REPORT. WE UNDERTAKE NO OBLIGATION TO
UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON, EVEN IF NEW
INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE.
Overview
FaxSav derives its revenues from the provision of a variety of facsimile
services largely to businesses and professionals. Through the end of 1995, the
Company offered its services exclusively to customers located in the United
States. In the first quarter of 1996, the Company began to focus on the broader
worldwide market for facsimile services through the introduction of client
software to enable faxing from the computer desktop using the Internet as the
means to access the FaxSav network. In the first quarter of 1997, the Company
also expanded its fax-to-fax service offerings to certain international markets
where it had installed an Internet node. In 1998, revenues from international
customers were $5.9 million, or 27.9% of total revenues.
The Company's network includes interconnection in the United States with
the existing worldwide telephony network through three network sites enabling
delivery of facsimile transmissions to virtually any domestic or international
destination. The Company also had Internet nodes installed in twenty-one
countries as of December 31, 1998.
As the Company's customer base has expanded, the Company has invested in
the design, development and marketing of its newer services, including the
faxSAV for Internet suite of services and faxSav EZ-List, a fax broadcast
service.
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Results of Operations
The following table sets forth certain operating data expressed as a
percentage of total revenues for the periods indicated (subtotals not adjusted
for rounding):
Years Ended December 31,
------------------------------
1998 1997 1996
---- ---- ----
Percentages of Revenues:
Revenues ................................ 100.0% 100.0% 100.0%
Cost of service ......................... 52.7 59.8 59.2
----- ----- -----
Gross margin ............................ 47.3 40.2 40.8
Operating expenses:
Network operations and support ........ 17.0 13.1 13.2
Research and development .............. 9.4 11.0 11.8
Sales and marketing ................... 31.4 30.2 40.3
General and administrative ............ 15.6 18.0 16.6
Depreciation and amortization ......... 7.1 9.8 9.6
Other ................................. 4.9 -- --
----- ----- -----
Total operating expenses ........... 85.4 82.1 91.5
----- ----- -----
Operating loss .......................... (38.1) (41.9) (50.7)
Interest income (expense), net .......... (0.6) 0.5 0.3
Other income (expense), net ............. 0.5 0.5 0.6
----- ----- -----
Loss before income taxes ................ (38.2) (40.9) (49.8)
Provision for income taxes .............. -- -- --
----- ----- -----
Net loss ................................ (38.2)% (40.9)% (49.8)%
===== ===== =====
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues. Revenues, which consist primarily of customer usage charges,
grew 21.3% to $21.1 million in the year ended December 31, 1998 from $17.4
million in the year ended December 31, 1997 primarily as a result of the
continued expansion of the Company's customer base, particularly in
international markets. The increased revenues resulted largely from the
Company's Internet desktop-to-fax and faxSAV EZ-List broadcast services. Fax
volumes in total, representing faxes delivered to domestic and international
destinations, grew 58.0% to 62.4 million minutes in 1998 as compared with 39.5
million minutes in 1997, while faxes routed through the internet grew 127.4% to
50.7 million minutes in 1998 from 22.3 million minutes in 1997.
Cost of service. Cost of service consists of local access charges, leased
network backbone circuit costs and long distance and international termination
charges. These are primarily variable costs based on actual facsimile volumes.
Cost of service increased in 1998 as a result of the increase in facsimile
volume for the year but decreased as a percentage of revenues to 52.7% in 1998
from 59.8% in 1997. The decreased percentage is a result of transmitting an
increased level of customer faxes over the Company's Internet Fax Network and
lower costs for international fax charges.
Network operations and support. Network operations and support costs
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 $3.6 million in
the year ended December 31, 1998 from $2.3 million in the year ended December
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 days per week / 24-hour basis. As a percentage of revenues, these costs
increased to 17.0% from 13.1% in 1997.
Research and development. Research and development expenses consist
primarily of salaries and consulting fees paid to software engineers and
development personnel. Research and development expenses increased to $2.0
million for the year ended December 31, 1998 compared with $1.9 million for the
year ended December 31, 1997 due to the continuing development efforts for
enhancements to the Company's Internet desktop-to-fax services both in client
software and network enhancements, and continuing development of the Company's
faxSAV EZ-List broadcast service. As a percentage of revenues, these expenses
decreased to 9.4% in 1998 from 11.0% in 1997 as a result of increased revenues
in 1998.
Sales and marketing. Sales and marketing expenses consist primarily of
salaries and commissions for sales and marketing staffs, promotion material
preparation and mailing costs, third-party telemarketing charges and agent and
dealer commissions. Sales and marketing expenses increased to $6.6 million and
31.4% of revenues for the year ended December 31, 1998 compared with $5.3
million and 30.2% for the year ended December 31, 1997. The higher costs in 1998
relate to
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<PAGE>
additional expenses to support the growth in international revenues, the
expansion of the Company's direct sales staff in the U.S. and increased spending
for U.S. marketing programs.
General and administrative. General and administrative expenses consist of
expenses associated with the Company's management, accounting, finance, billing
and administrative functions. General and administrative expenses increased to
$3.3 million in the year ended December 31, 1998 from $3.1 million in the year
ended December 31, 1997. The increases in total expenses result from personnel
increases to support the increased customer base and expenses incurred for
management information systems improvements. As a percentage of revenues, these
expenses decreased to 15.6% in 1998 from 18.0% in 1997 as a result of increased
revenues in 1998.
Depreciation and amortization. Depreciation and amortization decreased to
$1.5 million and 7.1% of revenues in the year ended December 31, 1998 in
comparison to $1.7 million and 9.8% of revenues in the year ended December 31,
1997, primarily reflecting reduced charges for faxSAV Connectors installed on
fax machines at customer premises, resulting from the Company's shift in its
business to desktop originated services.
Other. The Company incurred other expenses in 1998 of $1.0 million or 4.9%
of revenues for settlement of the AudioFAX litigation. No such expenses were
incurred in 1997.
Provision for income taxes. The Company had losses for income tax purposes
for the years ended December 31, 1998 and 1997. Accordingly, there was no
provision or credit for income taxes. Any income tax benefits at the Company's
expected effective tax rate for these losses has been offset by a valuation
allowance for deferred tax assets.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues. Revenues, which consist primarily of customer usage charges,
grew 15.8% to $17.4 million in the year ended December 31, 1997 from $15.0
million in the year ended December 31, 1996 primarily as a result of increased
revenues from (i) the Company's faxSAV for Internet suite of services first
introduced in 1996, (ii) the Company's faxSAV EZ-List broadcast service and
(iii) an international fax-to-fax customer base developed in 1997. Fax volumes
in total, representing faxes delivered to domestic and international
destinations, grew 40.0% to 39.5 million minutes in 1997 as compared to 28.3
million minutes in 1996, while faxes to international destinations grew 33.0% to
22.0 million minutes in 1997 from 16.5 million minutes in 1996.
Cost of service. Cost of service consists of local access charges, leased
network backbone circuit costs and long distance and international termination
charges. These are primarily variable costs based on actual facsimile volumes.
Cost of service increased in 1997 as a result of the increase in facsimile
volume for the year and also increased as a percentage of revenues to 59.8% in
1997 from 59.2% in 1996. The increased percentage is a result of a higher cost
of service for the revenues generated from the Company's lower priced Internet
services. These revenues were generated without the complete benefit of the
lower cost Internet network deployment that is still in process. As of December
31, 1997 the Company had completed the installation of Internet nodes in
eighteen of the planned thirty countries.
Network operations and support. Network operations and support costs
consist primarily of the expenses of operating and expanding the network
infrastructure, monitoring network traffic and quality of service and providing
customer support in service installations, fax deliveries and message reporting
and billing. Network operations and support costs increased to $2.3 million in
the year ended December 31, 1997 from $2.0 million in the year ended December
31, 1996 as a result of hiring additional personnel to implement the Internet
fax node deployment plan and to support the Company's expanding customer base.
As a percentage of revenues, these costs remained relatively unchanged amounting
to 13.1% in 1997 and 13.2% in 1996.
Research and development. Research and development expenses consist
primarily of salaries and consulting fees paid to software engineers and
development personnel. Research and development expenses increased to $1.9
million for the year ended December 31, 1997 in comparison to $1.8 million for
the year ended December 31, 1996 due to the continuing development efforts for
enhancements to the Company's Internet desktop-to-fax services both in client
software and network enhancements, and enhancements to the Company's faxSAV
EZ-List broadcast service. As a percentage of revenues, these expenses decreased
to 11.0% in 1997 from 11.8% in 1996 as a result of increased revenues in 1997.
Sales and marketing. Sales and marketing expenses consist primarily of
salaries and commissions for sales and marketing staffs, promotion material
preparation and mailing costs, third-party telemarketing charges and agent and
dealer commissions. Sales and marketing expenses decreased to $5.3 million and
30.2% of revenues for the year ended December 31,1997 in comparison to $6.1
million and 40.3% for the year ended December 31, 1996. These costs decreased as
a result of reduced spending for third party telemarketing programs in 1997 in
connection with the Company's change in focus to a direct selling staff and as a
result of higher expenses incurred in 1996 for trade shows and an advertising
and promotion campaign for
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<PAGE>
the introduction of the faxSAV for Internet suite of services.
General and administrative. General and administrative expenses consist of
expenses associated with the Company's management, accounting, finance, billing
and administrative functions. General and administrative expenses increased to
$3.1 million and 18.0% of revenues in the year ended December 31, 1997 from $2.5
million and 16.6% of revenues for the year ended December 31, 1996. The
increases in total expenses and in the percentage of revenues result from
personnel increases to support the increased customer base, expenses incurred
for management information systems improvements and from expenses incurred in
1997 related to the public ownership of the Company's common stock.
Depreciation and amortization. Depreciation and amortization increased to
$1.7 million and 9.8% of revenues in the year ended December 31, 1997 in
comparison to $1.4 million and 9.6% of revenues in the year ended December 31,
1996, primarily reflecting depreciation of the company's increased investment in
international Internet nodes as part of the Company's strategy to deploy a
global Internet network and in faxSAV Connectors installed at customer premises
to allow access to the FaxSav network.
Provision for income taxes. The Company had losses for income tax purposes
for the years ended December 31, 1997 and 1996. Accordingly, there was no
provision or credit for income taxes. Any income tax benefits at the Company's
expected effective tax rate for these losses has been offset by a valuation
allowance for deferred tax assets.
Liquidity and Capital Resources
The Company has financed its cash requirements for operations and
investments in equipment through public and private sales of equity securities,
bank borrowings and capital lease financing. During the year ended December 31,
1997, the Company entered into (1) an agreement for a $0.8 million secured
equipment line of credit with Silicon Valley Bank and (2) an agreement for a
$0.5 million equipment loan facility from Phoenix Growth Capital Corp. In 1998
both of these agreements were amended to increase available borrowings by $0.5
million and $1 million for Silicon Valley Bank and Phoenix Growth Capital Corp.
respectively. All amounts available to the Company under these agreements had
been advanced by December 31, 1998. The net proceeds from the Company's initial
public offering completed in October 1996 amounted to $10.6 million. Cash flows
from the private sales of equity securities amounted to $10.5 million in 1998,
$2.1 million in 1997 and $7.9 million in 1996, net of issuance costs. $2.2
million of the 1996 proceeds were used to repurchase shares of the Company's
Series D Preferred Stock from a major stockholder pursuant to a pre-existing
option.
As a result of operating losses, cash used in operating activities
amounted to $6.6 million in 1998, as compared with $5.5 million in 1997. Cash
used for the purchase of equipment amounted to $3.1 million in 1998 and $2.9
million in 1997. The equipment includes network equipment and faxSAV Connectors
(in 1997) purchased by the Company for installation at customer locations. The
Company has committed to minimum monthly usage levels with its primary
telecommunications carriers. The commitments require minimum monthly payments,
exclusive of usage discounts, of $0.7 million per month through June 1999 and
$0.5 million per month thereafter through January 2001.
The Company's principal sources of liquidity at December 31, 1998 included
cash and cash equivalents of $5.3 million. In February 1999, the Company entered
into a $1 million equipment line of credit. Draw downs are to be paid over a
term of 42 months with an effective interest rate of 16%. The Company believes
that its current cash and cash equivalents and available equipment financing
facility will be sufficient to meet its anticipated cash needs for working
capital and capital expenditure requirements through at least the end of 1999.
However, our cash requirements may vary materially from those now planned as a
result of unforeseen changes that could consume a significant portion of our
available resources before such time. To the extent that funds expected to be
generated from our operations are insufficient to meet current or planned
operating requirements or to maintain a Nasdaq listing, we will seek to obtain
additional funds through bank facilities, equity or debt financing,
collaborative or other arrangements with corporate partners and from other
sources. Additional funding may not be available when needed or on terms
acceptable to us, which could have a material adverse effect on our business,
financial condition and results of operations. If adequate funds are not
available, we may be required to delay or to eliminate certain expenditures or
to license to third parties the rights to commercialize technologies that we
would otherwise seek to develop ourselves. In addition, in the event that we
obtain any additional funding, such financings may have a dilutive effect on the
holders of our securities.
YEAR 2000 COMPLIANCE
OVERVIEW
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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 a year, computer systems and/or
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements or risk system failure or miscalculations causing
disruptions of normal business activities.
STATE OF READINESS. We have conducted a study of the Year 2000 readiness
of our information technology systems, including our computing and networking
systems, and our non-information technology systems. Our study consisted of:
o Inventory and Assessment - conducting an inventory and review of
faxSAV software, third-party software and hardware, and
telecommunications and Internet service providers; contacting
third-party vendors and licensors of material hardware, software and
services that are both directly and indirectly related to the
delivery of the our faxSAV for internet suite of services and the
faxSAV Connector; contacting third-party vendors and licensors of
material hardware, software and services that are both directly and
indirectly related to the delivery of the our faxSAV for internet
suite of services and the faxSAV Connector
o Review - conducting a review of faxSAV's application and product
software code to determine Year 2000 compliance; assessment of
repair or replacement requirements
o Correction and Testing - implementing code modifications and
complete system re-testing where necessary; modification, upgrade,
repair or replacement of all non-compliant systems
We have completed a test our information technology systems to verify the
results of our study. We are currently in the process of remedying certain minor
discrepancies that were discovered and plan to complete this process during the
first half of 1999. We have been informed by many of our vendors of material
hardware and software components of our information technology systems that the
products that we use are currently Year 2000 compliant. The computing systems
that provide application layer services (i.e., FaxSav customer services) within
the FaxSav network are based upon some variant of the Unix operating system,
which adequately represents dates beyond the year 2000. Many of the computing
systems that support the internal operations of our business have the similar
capacity to represent dates beyond the year 2000. In addition, for all of our
internal accounting applications, we have purchased new accounting system
software that the manufacturer specifies as Year 2000 compliant. We will require
vendors of our other material hardware and software components of our
information technology systems to provide assurances of their Year 2000
compliance, and we plan to complete this process during the first half of 1999.
We will also seek assurances of Year 2000 compliance from providers of our
material non-information technology systems.
COSTS. To date, we have not incurred any material expenditures in
connection with identifying or evaluating Year 2000 compliance issues. Most of
our expenses have related to, and are expected to continue to relate to, the
operating costs associated with time spent by employees in the evaluation
process and Year 2000 compliance matters generally. Our expected cost to
purchase and implement the new accounting software mentioned above is
approximately $0.2 million.
RISKS. We are not currently aware of any Year 2000 compliance problems
relating to the faxSAV for internet suite of services, the faxSAV Connector or
our other information technology or non-information technology systems that
would have a material adverse effect on our business, financial condition and
results of operations, without taking into account our efforts to avoid or fix
such problems. There can be no assurance that our software contains all
necessary date code changes or that all problems can be identified by our study
and subsequent testing. Compliance with Year 2000 requirements may disrupt our
ability to continue developing and marketing facsimile transmission products and
services. The failure to adequately address Year 2000 compliance issues in our
products and services, and in our information technology and non-information
technology systems could result in claims of mismanagement, misrepresentation or
breach of contract and related litigation, which could be costly and
time-consuming to defend. In addition, there can be no assurance that
governmental agencies, utility companies, Internet access companies, third-party
service providers and others outside of our control will be Year 2000 compliant.
The failure by such entities to be Year 2000 compliant could result in a
systemic failure beyond our control, such as a prolonged Internet,
telecommunications or electrical failure, which could also prevent us from
delivering services to our customers, which could have a material adverse effect
on our business, financial condition and results of operations.
CONTINGENCY PLAN. As discussed above, we intend to conduct further tests
of our Year 2000 compliance to confirm the results of our study, including
frequent re-testing of the integrity of the FaxSav network, and have not yet
developed any
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contingency plans. The results of our tests and the responses received from
third-party vendors and service providers will be taken into account in
determining the nature and extent of any contingency plans.
FORWARD-LOOKING STATEMENTS. The foregoing Year 2000 discussion and the
information contained herein is provided as a "Year 2000 Readiness Disclosure"
as defined in the Year 2000 Information and Readiness Disclosure Act of 1998
(Public Law 105-271, 112 Stat. 2386) enacted on October 19, 1998 and contains
"forward-looking statements" within the meaning of the Private Securities
Litigation reform Act of 1995. Such statements, including without limitation,
anticipated costs and the dates by which FaxSav expects to complete certain
actions, are based on management's best current estimates, which were derived
utilizing numerous assumptions about future events, including the continued
availability of certain resources, representations received from third parties
and other factors. However, there can be no guarantee that these estimates will
be achieved, and actual results could differ materially form those anticipated.
Specific factors that might cause such material difference include, but are not
limited to, the ability to identify and remediate all relevant systems, results
of Year 2000 testing, adequate resolution of Year 2000 issues by governmental
agencies, businesses and other third parties who are outsourcing service
providers, suppliers, and vendors of FaxSav, unanticipated system costs, the
adequacy of and ability to implement contingency plans and uncertainties. The
"forward-looking statements" made in the foregoing Year 2000 discussion speak
only as of the date on which such statements are made, and FaxSav undertakes no
obligation to update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made or to reflect the
occurrence of unanticipated events. governmental agencies, businesses and other
third parties who are outsourcing service providers, suppliers, and vendors of
FaxSav, unanticipated system costs, the adequacy of and ability to implement
contingency plans and uncertainties. The "forward-looking statements" made in
the foregoing Year 2000 discussion speak only as of the date on which such
statements are made, and FaxSav undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events.
RISK FACTORS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT
EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT FAXSAV AND OUR
INDUSTRY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES.
FAXSAV'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, AS MORE FULLY
DESCRIBED IN THIS SECTION AND ELSEWHERE IN THIS REPORT. FAXSAV UNDERTAKES NO
OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON,
EVEN IF NEW INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE.
RISK FACTORS
Risks Related to our Business
We have a history of net losses and expect future losses.
From our inception in 1989 through the year ending December 31, 1998, we have
experienced significant net losses. We incurred net losses of $7.5 million, $7.1
million and $8.1 million during the years ended December 31, 1996, 1997 and
1998, respectively. We currently anticipate that we will have additional net
losses as we attempt to expand our business and we may not have positive
operating or net income in the future. As of December 31, 1998, we had an
accumulated deficit of $40.3 million.
Since inception, we have incurred substantial costs to develop and enhance our
technology and to create, introduce and enhance our service and product
offerings. We intend to continue these efforts and, in addition, to increase our
marketing spending. In early 1999, we announced a new marketing campaign which
will involve significant expenditures by us, including the hiring of an outside
advertising agency. As a result of these expenditures, we expect to continue to
experience operating losses. There can be no assurance that these expenditures
will result in any increase in revenues.
We may not be able to use our net operating loss carryforwards which could
increase the amount of taxes that we are required to pay when we become
profitable
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We generated net operating loss carryforwards for income tax purposes of
approximately $35.0 million through December 31, 1998. These net operating loss
carryforwards have been recorded as a deferred tax asset of approximately $13.7
million. Based on our history of operating losses and overall financial
condition, management has determined that it is more likely than not that we
will be unable to generate sufficient taxable income prior to the expiration of
these net operating loss carryforwards in order to receive the benefit of them
and has accordingly reduced our deferred tax assets to zero with a full
valuation allowance. Additionally, as we have experienced a change in ownership
of over 50% of our common stock, the amount of net operating loss carryforwards
that we will be able to use to offset any future taxable income will be limited.
We have many competitors and we may not be able to compete effectively against
them.
The market for facsimile transmission services is intensely competitive and the
industry is characterized by low barriers to entry. We expect that competition
will intensify in the future. Our failure to compete successfully could have a
material adverse affect on our business, financial condition and results of
operations.
We believe that our ability to compete successfully will depend upon a number of
factors, including:
o market presence;
o the capacity, reliability and security of our network
infrastructure;
o the pricing policies of our competitors and suppliers;
o the timing of introductions of new services and service enhancements
by us and our competitors; and
o industry and general economic trends.
Our current and future competitors generally fall into the following groups:
o telecommunications companies, such as AT&T, MCI WorldCom, Sprint,
the regional Bell operating companies and telecommunications
resellers;
o Internet service providers, such as Uunet Technologies, Inc., a
subsidiary of MCI WorldCom, and NETCOM On-Line Communications, Inc.;
o on-line services providers, such as Microsoft Corporation and
America Online, Inc.; and
o direct fax delivery competitors, including Premiere Document
Distribution (formerly Xpedite Systems, Inc.) and IDT Corporation.
Many of these competitors have greater market presence, engineering and
marketing capabilities, and financial, technological and personnel resources
than we do. As a result, they may be able to:
o develop and expand their communications and network infrastructures
more quickly;
o adapt more swiftly to new or emerging technologies and changes in
customer requirements;
o take advantage of acquisition and other opportunities more readily;
and
o devote greater resources to the marketing and sale of their products
and services than we can.
Further, the foundation of our telephony network infrastructure consists of the
right to use the telecommunications lines of several of the above-mentioned long
distance carriers, including MCI WorldCom. There can be no assurance that these
companies will not discontinue or otherwise change their relationships with us
in a manner that would have a material adverse effect upon our 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 our 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 our 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 our market
share, any of which would have a material adverse effect on our business,
financial condition and results of operations. There can be no assurance that we
will be able to compete successfully against current or future competitors or
that competitive pressures will not have a material adverse effect on our
business, financial condition and results of operations.
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On August 7, 1997, the Federal Communications Commission issued new rules which
may significantly reduce the cost of international calls originating in the
United States. The five-year phase-in period began 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, we will face
increased competition for our international fax services which may have a
material adverse effect on our business, financial condition or results of
operations.
We are uncertain about our need for and availability of additional funds.
We believe that our current cash and cash equivalents will be sufficient to meet
our presently anticipated cash needs for working capital and our capital
expenditure requirements through at least December 31, 1999. However, our cash
requirements may vary materially from those now planned as a result of
unforeseen changes that could consume a significant portion of our available
resources before such time. To the extent that funds expected to be generated
from our operations are insufficient to meet current or planned operating
requirements or to maintain a Nasdaq listing, we will seek to obtain additional
funds through bank facilities, equity or debt financing, collaborative or other
arrangements with corporate partners and from other sources. See "--We may be
delisted from Nasdaq which would affect your ability to sell our stock."
Additional funding may not be available when needed or on terms acceptable to
us, which could have a material adverse effect on our business, financial
condition and results of operations. If adequate funds are not available, we may
be required to delay or to eliminate certain expenditures or to license to third
parties the rights to commercialize technologies that we would otherwise seek to
develop ourselves. In addition, in the event that we obtain any additional
funding, such financings may have a dilutive effect on the holders of our
securities.
We may be unable to protect our intellectual property rights.
Our success is dependent upon our proprietary technology. We rely primarily on a
combination of contract, copyright and trademark law, trade secrets,
confidentiality agreements and contractual provisions to protect our proprietary
rights. We were granted patents related to our faxSAV Connector and our "e-mail
Stamps" security technology incorporated into our faxMailer service. There can
be no assurance that present or future patents will provide sufficient
protection to our 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 our
know-how. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our services or to obtain and use
information that we regard as proprietary. In addition, the laws of some foreign
countries do not protect our proprietary rights to the same extent as do the
laws of the United States. There can be no assurance that the steps taken by us
to protect our proprietary rights will be adequate or that our competitors will
not independently develop technologies that are substantially equivalent or
superior to our technologies.
There can be no assurance that other third parties will not assert infringement
claims against us in the future. Patents have been granted recently on
fundamental technologies in the communications and desktop software areas, and
patents may issue which relate to fundamental technologies incorporated in our
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 our services. We could incur substantial costs and
diversion of management resources with respect to the defense of any claims that
we have infringed upon the proprietary rights of others, which costs and
diversion could have a material adverse effect on our 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 our ability to license and
sell our services in the United States or abroad. Any such judgment could have a
material adverse effect on our business, financial condition and results of
operations. In the event a claim relating to proprietary technology or
information is asserted against us, we may seek licenses to such intellectual
property. There can be no assurance, however, that licenses could be obtained on
terms acceptable to us, or at all. The failure to obtain any necessary licenses
or other rights could have a material adverse effect on our business, financial
condition and results of operations.
We are dependent on the reliability and expansion of our network infrastructure.
Our future success will depend in part upon the capacity, reliability and
security of our network infrastructure and in part upon our ability to expand
the deployment of an international network of Internet-capable facsimile nodes.
We must continue to expand and adapt our network infrastructure as the number of
customers and the volume of traffic they wish to transmit increases. The
expansion and adaptation of our network infrastructure will require substantial
financial, operational and management resources.
There can be no assurance that we will be able to expand or adapt our 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 we will be able to deploy
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additional contemplated Internet-capable facsimile nodes on a timely basis, at a
commercially reasonable cost, or at all. Any failure to expand our network
infrastructure on a timely basis, to adapt it to changing customer requirements
or evolving industry standards or to expand our Internet-capable facsimile node
infrastructure on a timely basis would have a material adverse effect on our
business, financial condition and results of operations. Further, there can be
no assurance that we will be able to satisfy the regulatory requirements in each
of the countries currently targeted for node deployment, which may prevent us
from installing Internet-capable facsimile nodes in such countries and may have
a material adverse effect on our business, financial condition and results of
operations.
Our failure to manage growth could adversely affect us.
We have rapidly and significantly expanded our operations and anticipate 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 our
expenses. Our inability to promptly address and respond to these circumstances
could have a material adverse effect on our business, financial condition and
results of operations.
Because we are dependent on computer systems, a systems failure could cause a
significant disruption to our business.
Our business depends upon the efficient and uninterrupted operation of our
computer and communications hardware systems and infrastructure. We currently
maintain our computer hardware and switching equipment, including our processing
equipment, at three sites. While we have taken precautions against systems
failure, interruptions could result from natural disasters as well as power
loss, telecommunications failure and similar events. Any damage or failure that
disrupts or delays our operations could have a material adverse effect on our
business, financial condition and results of operations.
If our security measures are inadequate, our business will be adversely
affected.
We have taken measures to protect the integrity of our infrastructure and
the privacy of confidential information. Nonetheless, our infrastructure is
potentially vulnerable to physical or electronic break-ins, viruses or similar
problems. If a person circumvents our security measures, he or she could
jeopardize the security of confidential information stored in and transmitted
through the computer systems of the individual, businesses and financial
institutions utilizing our services. This may result in significant liability to
us and may also deter potential customers from using our services. Any security
breach that causes interruptions or data loss in our operations or in the
computer systems of our customers could have a material adverse effect on our
business, financial condition and results of operations.
We are dependent upon our current suppliers, and may not be able to obtain some
products or services from other suppliers.
We rely on third parties to supply key components of our network infrastructure,
including long distance telecommunications services and telecommunications node
equipment, many of which are available only from sole or limited sources. MCI
WorldCom is our primary provider of long distance telecommunications services.
We have from time-to-time experienced partial interruptions of service from our
telecommunications carriers which have temporarily prevented customers in
limited geographical areas from reaching the FaxSav network. There can be no
assurance that we will not experience partial or complete service interruptions
in the future. There can be no assurance that MCI WorldCom and our other
telecommunications providers will continue to provide long distance services to
us at attractive rates, or at all, or that we will be able to obtain such
services in the future from these or other long distance providers on the scale
and within the time frames we require. 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 our
business, financial condition and results of operations.
All of the faxboards used in our telecommunications nodes are supplied by
Brooktrout Technology, Inc. We purchase Brooktrout faxboards on a non-exclusive
basis pursuant to purchase orders placed from time-to-time, carry a limited
inventory of faxboards and have no guaranteed supply arrangement with
Brooktrout. In addition to faxboards, many of the routers, switches and other
hardware components used in our network infrastructure are supplied by sole or
limited sources on a non-exclusive, purchase order basis. There can be no
assurance that Brooktrout or our other suppliers will not enter into exclusive
arrangements with our competitors, or cease selling these components to us at
commercially reasonable prices, or at all.
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The anticipated expansion of our network infrastructure is expected to place a
significant demand on our suppliers, some of which may have limited resources
and production capacity. In addition, certain of our suppliers, in turn, may
rely on sole or limited sources of supply for components included in their
products. Should our suppliers fail to adjust to meet such increasing demand,
they may be unable to continue to supply components and products in the
quantities and quality and at the times required by us, or at all. Our 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 our network infrastructure or in our inability to
properly maintain the existing network infrastructure, which would have a
material adverse effect on our business, financial condition and results of
operations.
We may experience development delays or have software defects which could
adversely affect our business.
Software-based services and equipment, such as our 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 us and by current and potential customers, errors will
not be found in such software or other releases after commencement of commercial
shipments, or that we 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 our business, financial
condition and results of operations.
We may not be able to retain the key personnel we need to succeed.
Our future performance depends in significant part upon the continued service of
our 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 we can retain our key technical, sales and managerial
employees or that we can attract, assimilate or retain other highly qualified
technical, sales and managerial personnel in the future.
We depend on our international strategic alliances to expand our international
customer base.
We have established and intend 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 we will be able to establish additional strategic alliances or to maintain
such strategic alliances. Our success in expanding our 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 our services.
The failure to maintain such strategic alliances or the failure of these
partners to successfully develop and sustain a market for our services will have
a material adverse effect on our ability to expand our international customer
base, which could have a material adverse effect on our business, financial
condition and results of operations.
We face risks associated with international operations which could materially
and adversely affect our business.
In 1998, we derived approximately $5.9 million, or 27.9% of our total revenues
from customers outside of the United States. We expect that such revenues will
represent an increasing percentage of our total revenues in the future. Risks
inherent in our international business activities generally include 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 our future international revenues and, consequently, on our business,
financial condition and results of operations.
Problems relating to the "Year 2000 Issue" could adversely affect our business.
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 a year, computer systems and/or
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements or risk system failure or miscalculations causing
disruptions of normal business activities.
We have conducted a study of the Year 2000 readiness of our information
technology systems, including our computing and networking systems, and our
non-information technology systems and believe that they are currently Year 2000
compliant. Additionally, We have been informed by many of our vendors of
material hardware and software components of our information technology systems
that the products that we use are currently Year 2000 compliant. Despite our
efforts, there can be no assurance that our software contains all necessary date
code changes or that all Year 2000 problems were identified by our study
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and subsequent testing. Compliance with Year 2000 requirements may disrupt our
ability to continue developing and marketing facsimile transmission products and
services. The failure to adequately address Year 2000 compliance issues in our
products and services, and in our information technology and non-information
technology systems could result in claims of mismanagement, misrepresentation or
breach of contract and related litigation, which could be costly and
time-consuming to defend.
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside of our control will be Year 2000 compliant. The failure by such entities
to be Year 2000 compliant could result in a systemic failure beyond our control,
such as a prolonged Internet, telecommunications or electrical failure, which
could also prevent us from delivering services to our customers, which could
have a material adverse effect on our business, financial condition and results
of operations.
Risks Related to Our Industry
Our future growth depends upon an increase in the use of the Internet as a
medium for facsimile transmissions.
We believe that our future success will depend in part upon our ability to
significantly expand our base of Internet-capable nodes and route more of our
customers' traffic through the Internet. Our 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.
We access the Internet from our Internet-capable nodes by dedicated connection
to third party internet service providers. We pay fixed monthly fees for such
Internet access, regardless of our usage or the volume of our 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, our business, financial condition and results of operations
would be materially and adversely affected. In addition, our 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 our business, financial
condition and results of operations.
Our success depends on keeping up with rapid technological changes in our
markets.
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 we provide or reduce the cost of existing
products or services, any of which could enable our existing or potential
customers to fulfill their fax communications needs more cost efficiently. There
can be no assurance that we 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 our services noncompetitive.
Our inability 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 our services
noncompetitive would have a material adverse effect on our business, financial
condition and results of operations.
We are subject to extensive government regulation which could negatively impact
our business.
We are subject to regulation by various state public service and public utility
commissions and by various international regulatory authorities. We are licensed
by the FCC as an authorized telecommunications company and are 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 us and to change our regulatory
classification. There can be no assurance that the FCC will not change our
regulatory classification or otherwise subject us to more burdensome regulatory
requirements.
In connection with the deployment of Internet-capable nodes in countries
throughout the world, we are required to satisfy a variety of foreign regulatory
requirements. We intend 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 we will be able to satisfy the
regulatory requirements in each of the countries currently targeted for node
deployment, and the failure to satisfy such
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requirements may prevent us 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 our business, operating results and financial
condition.
Our nodes and 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. We have the
authority to export such encryption technology except 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 our ability to distribute our services outside of the United
States or electronically. While we take precautions against unlawful exportation
of our software, the global nature of the Internet makes it virtually impossible
to effectively control the distribution of our 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 our services, or new legislation or regulation could
have a material adverse effect on our business, financial condition and results
of operations.
Risks Related to our Common Stock
We may be delisted from Nasdaq which would affect your ability to sell our
stock.
Our common stock is currently traded on the Nasdaq National Market. In order to
continue to trade on Nasdaq, we need to maintain at least $4.0 million in net
tangible assets. In the past, we have not been in compliance with this
requirement. We believe that we are currently in compliance with Nasdaq's
requirements. However, if in the future we are unable to satisfy Nasdaq's
requirements, our securities may be delisted from Nasdaq. There can be no
assurance that our common stock will not be delisted, which would materially
affect your ability to buy or sell shares of our common stock.
Fluctuations in our quarterly results may negatively impact our stock price.
We may experience significant quarter to quarter fluctuations in our results of
operations, which may result in volatility in the price of our common stock.
Quarterly results of operations may fluctuate as a result of a variety of
factors, including:
o demand for our services;
o the introduction of new services and service enhancements by us or
our competitors;
o market acceptance of new services;
o the mix of revenues between Internet-based versus telephony-based
deliveries;
o the timing of significant marketing programs;
o the number and timing of the hiring of additional personnel;
o competitive conditions in the industry; and
o general economic conditions.
Our revenues are difficult to forecast. Shortfalls in revenues may adversely and
disproportionately affect our results of operations because a high percentage of
our operating expenses are relatively fixed, and planned expenditures, such as
the anticipated expansion of our 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
our common stock. Accordingly, we believe 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 we will be profitable in any future quarter. Due to the foregoing factors,
it is likely that in one or more future quarters our 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 our common stock.
Future sales of our common stock could cause the price of our shares to decline
and affect our ability to raise capital.
The market price of our common stock could drop as a result of sales of
substantial amounts of common stock in the public market or the perception that
such sales could occur. Registration statements are in effect covering the sale
of up to 2,000,000 shares of our common stock. In addition, we have also filed a
registration statement covering the sale of up to 709,677 shares of our common
stock which has not yet been declared effective by the Securities and Exchange
Commission. Such a price drop may make it more difficult for us to raise the
capital necessary to fund our future operations by selling common stock. As of
24
<PAGE>
March 24, 1998, without taking into account shares of common stock issued upon
exercise of stock options, warrants or other rights to acquire common stock
after such date, we had outstanding 14,067,105 shares of common stock.
Substantially all of the shares of common stock already outstanding will be
freely tradeable in the public market without restriction under the Securities
Act, except that any shares held by our "affiliates", as such term is defined in
Rule 144(a) under the Securities Act, may generally only be sold in compliance
with the applicable provisions of Rule 144 of the Securities Act. In general,
under Rule 144 an "affiliate" is entitled to sell within any three-month period
a number of shares that does not exceed the greater of 1% of the then
outstanding shares of our common stock, approximately 140,671 shares, or the
average weekly trading volume in our common stock on Nasdaq during the four
calendar weeks preceding the date on which notice of such sale was filed under
Rule 144. Sales under Rule 144 are also subject to certain provisions relating
to the manner and notice of sale and the availability of current public
information about us. Additional shares of common stock, including shares
issuable upon exercise of options, warrants and other rights to acquire common
stock, will also become eligible for sale in the public market from time to time
in the future. Furthermore, certain holders of common stock have the right to
cause us to register their shares under the Securities Act in the future. We are
required to bear the expenses of all such required registrations, except
underwriting discounts and commissions. We are required to use our best efforts
to effect such registrations, subject to certain conditions and limitations.
Our certificate of incorporation and bylaws, and Delaware laws make it more
difficult for a third party to acquire us.
Our sixth amended and restated certificate of incorporation authorizes the board
of directors to issue, without stockholder approval, up to 1,000,000 shares of
preferred stock with voting, conversion and other rights and preferences that
could adversely affect the voting power or other rights of the holders of common
stock. Our certificate of incorporation also provides for staggered terms for
the members of the board of directors. In addition, we will be subject to the
provisions of Section 203 of the Delaware General Corporation Law, which will
generally prohibit us from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. The foregoing and other
provisions of our certificate of incorporation and our by-laws, as amended and
the application of Section 203 of the Delaware General Corporation Law could
have the effect of deterring certain takeovers or delaying or preventing certain
changes in our control or management, including transactions in which
stockholders might otherwise receive a premium for their shares over then
current market prices.
We do not intend to pay cash dividends and, as a result, stockholders will need
to sell shares to realize a return on their investment.
We have never paid any cash dividends on our common stock and do not intend to
pay any cash dividends in the foreseeable future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information in response to this item is set forth in the Financial
Statements beginning on page [F-3] of this report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
25
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the information contained in the Company's Proxy Statement
to be mailed to Stockholders on or about April 29, 1999, which information is
incorporated herein by reference. Information on compliance with Section 16(a)
of the Exchange Act is incorporated herein by reference to "Compliance with
Section 16(a) of the Securities Exchange Act of 1934" in the Company's Proxy
Statement to be mailed to Stockholders on or about April 29, 1999, which
information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the information contained in the Company's Proxy Statement
to be mailed to Stockholders on or about April 29, 1999, which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the information contained in the Company's Proxy Statement
to be mailed to Stockholders on or about April 29, 1999, which information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the information contained in the Company's Proxy Statement
to be mailed to Stockholders on or about April 29, 1999, which information is
incorporated herein by reference.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
Page No.
--------
Report of Independent Accountants ......................................F-2
Balance Sheets as of December 31, 1998 and 1997 ........................F-3
Statements of Operations for the years ended December 31, 1998,
1997 and 1996 .....................................................F-4
Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996......................................................F-5
Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996 ..................................F-6
Notes to Financial Statements ..................................F-7 to F-19
(2) Financial Statement Schedule
Report of Independent Accountants on Financial Statement Schedule .....F-20
Supplemental Schedule to Financial Statements .........................F-21
(b) Reports on Form 8-K
None
<PAGE>
(c) Exhibits
3.1 Registrant's Sixth Amended and Restated Certificate of Incorporation
(incorporated by reference to exhibit 3.3 to the Registrant's
Registration Statement on Form S-1, Registration No. 333-09613
("Registrant's Registration Statement")).
3.2 By-laws of the Registrant (incorporated by reference to exhibit 3.4 and
3.5 to the Registrant's Registration Statement and Exhibit 3.3 to the
Registrants. Report on Form 10-Q for the quarter ended June 30, 1997).
4.1 Specimen Common Stock Certificate (incorporated by reference to exhibit
4.1 to the Registrant's Registration Statement).
4.2 See Exhibits 3.1 and 3.2 for provisions of the Certificate of
Incorporation and Bylaws of the Registrant defining rights of holders of
Common Stock of the Registrant.
10.1 Fifth Amended and Restated Investor Rights Agreement, as amended
(incorporated by reference to exhibits 10.1 and 10.2 to the Registrant's
Registration Statement).
10.2 1990 Stock Option Plan (incorporated by reference to exhibit 10.3 to the
Registrant's Registration Statement).
10.3 1996 Stock Option/Stock Issuance Plan (incorporated by reference to
exhibit 10.4 to the Registrant's Registration Statement).
10.4 Form of Officer Severance Agreement (incorporated by reference to exhibit
10.5 to the Registrant's Registration Statement).
10.5 Form of Director Severance Agreement (incorporated by reference to
exhibit 10.6 to the Registrant's Registration Statement).
10.6* Telecommunications Services Agreement, between LDDS WorldCom and the
Registrant, dated
<PAGE>
December 1, 1996 (incorporated by reference to exhibit 10.8 to the
Registrant's Report on Form 10-Q for the quarter ended March 31, 1997).
10.7* Agreement between MCI Telecommunications Corporation and the Registrant,
effective March 1, 1996 (incorporated by reference to exhibit 10.9 to the
Registrant's Registration Statement).
10.8 Lease Agreement, dated May 28, 1992, between Metro Four Associates
Limited Partnership, Thornall Associates and the Registrant (the "Metro
Four Lease"), as extended and amended prior to May 5, 1997 (incorporated
by reference to exhibit 10.10 to the Registrant's Registration
Statement).
10.9 Amendment to Metro Four Lease, dated May 5, 1997.
10.10 Loan and Security Agreement, dated September 26, 1997, between the
Company and Silicon Valley Bank.
10.11 Letter Agreement, dated November 1, 1994 between Telstra Incorporated and
the Registrant (incorporated by reference to exhibit 10.12 to the
Registrant's Registration Statement).
10.12 Series B Preferred Stock Warrant between the Registrant and Comdisco,
Inc., dated May 30, 1991 (incorporated by reference to exhibit 10.14 to
the Registrant's Registration Statement).
10.13 Series B Preferred Stock Warrant between the Registrant and Comdisco,
Inc., dated September 16, 1992 (incorporated by reference to exhibit
10.15 to the Registrant's Registration Statement).
10.14 Series D Preferred Stock Warrant between the Registrant and Comdisco,
Inc., dated October 28, 1993 (incorporated by reference to exhibit 10.16
to the Registrant's Registration Statement).
10.15 Common Stock Warrant between the Registrant and LTI Ventures Leasing
Corp., dated February 15, 1993 (incorporated by reference to exhibit
10.17 to the Registrant's Registration Statement).
10.16 Common Stock Warrant between the Registrant and LTI Ventures Leasing
Corp., dated May 5, 1994 (incorporated by reference to exhibit 10.18 to
the Registrant's Registration Statement).
10.17 Common Stock Warrant between the Registrant and Silicon Valley
Bancshares, dated April 6, 1992 (incorporated by reference to exhibit
10.19 to the Registrant's Registration Statement).
10.18 Common Stock Warrant between the Registrant and Silicon Valley
Bancshares, dated July 7, 1995 (incorporated by reference to exhibit
10.20 to the Registrant's Registration Statement).
10.19 Form of Common Stock Purchase Agreement, dated November 21, 1997
(incorporated by reference to Exhibit 10.1 to the Registrant's
Registration Statement on Form S-3, Registration No. 333-43929).
10.20** Loan and Security Agreement, dated March 27, 1998, between the Company
and Silicon Valley Bank.
10.21 Form of Common Stock Purchase Agreement, dated July 22, 1998.
(incorporated by reference to Exhibit 10.1 to the Registrant's
Registration Statement on Form S-3, Registration No. 333-64515).
10.22 Rights Agreement, dated September 17, 1998 between the Registrant and
AudioFax IP LLC. (incorporated by reference to Exhibit 10.1 to the
Registrant's Registration Statement on Form S-3, Registration No.
333-67355).
10.23 Purchase Agreement, dated December 24, 1998, between the Registrant and
the Tail Wind Fund Ltd. (incorporated by reference to Exhibit 10.1 to the
Registrant's Registration Statement on Form S-3, Registration No.
333-70915).
10.24 Common Stock Warrant between the Registrant and the Tail Wind Fund Ltd.,
dated December 28, 1998 (incorporated by reference to Exhibit 10.2 to the
Registrant's Registration Statement on Form S-3, Registration No.
333-70915).
<PAGE>
23.** Consent of PricewaterhouseCoopers LLP, independent accountants
27.** Financial Data Schedule.
99. Proxy Statement of FaxSav Incorporated relative to the 1999 Annual
Meeting of the Stockholders to be held on June 4, 1999, which is
incorporated by reference into Part III of this Form 10-K.
- ----------
* Confidential treatment granted.
** Filed herewith.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf of the undersigned, thereunto duly authorized.
FAXSAV INCORPORATED
By: /s/ Thomas F. Murawski
-----------------------------------------------
Thomas F. Murawski
Chief Executive Officer, President and Chairman
of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities indicated on
March 25, 1999:
Signature Title(s)
- --------- --------
/s/ Thomas F. Murawski Chief Executive Officer (Principal Executive
- --------------------------- Officer), President and Chairman of the Board
of Directors
/s/ Peter S. Macaluso Chief Financial Officer (Principal Financial
- --------------------------- and Accounting Officer), Vice President,
Treasurer and Secretary
/s/ Jeffrey M. Drazan Director
- ---------------------------
/s/ Peter A. Howley Director
- ---------------------------
/s/ Robert Labant Director
- ---------------------------
/s/ Richard Miller Director
- ---------------------------
<PAGE>
FaxSav Incorporated
(Formerly Digitran Corporation)
Index to Financial Statements
Page
----
Report of Independent Accountants ...........................................F-2
Balance Sheets as of December 31, 1998 and 1997 .............................F-3
Statements of Operations for the years ended December 31, 1998,
1997 and 1996 ...........................................................F-4
Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996............................................................F-5
Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996 .........................................F-6
Notes to Financial Statements .......................................F-7 to F-19
Report of Independent Accountants on Financial Statement Schedule ..........F-20
Supplemental Schedule to Financial Statements ..............................F-21
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of FaxSav Incorporated:
In our opinion, the accompanying balance sheets and the related statements of
operations, stockholders' equity and cash flows present fairly, in all material
respects, the financial position of FaxSav Incorporated (formerly Digitran
Corporation) (the "Company") at December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Florham Park, New Jersey
February 3, 1999
F-2
<PAGE>
FaxSav Incorporated
Balance Sheets
as of December 31, 1998 and 1997
<TABLE>
<CAPTION>
December 31,
------------ ------------
1998 1997
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 5,260,450 $ 3,680,185
Accounts receivable, less allowances of $220,076 and
$330,724 as of December 31, 1998 and 1997, respectively 3,198,688 2,280,119
Prepaid expenses and other current assets 162,218 35,844
------------ ------------
Total current assets 8,621,356 5,996,148
Property and equipment, net 5,487,221 4,175,264
Other assets, net 379,148 324,173
------------ ------------
Total assets $ 14,487,725 $ 10,495,585
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,153,688 $ 658,703
Accrued expenses and other liabilities 2,654,658 3,219,846
Current portion of notes payable 992,960 469,217
Obligation under capital lease 95,804 315,370
------------ ------------
Total current liabilities 4,897,110 4,663,136
Notes payable 1,540,481 1,083,190
Obligation under capital lease 85,551
------------ ------------
Total liabilities 6,437,591 5,831,877
------------ ------------
Commitments and contingencies (Notes 7 and 12)
Stockholders' equity:
Common stock, $0.01 par value; 40,000,000 shares authorized;
13,904,203 and 10,806,466 shares issued and outstanding as of
December 31, 1998 and 1997, respectively 139,042 108,065
Additional paid-in capital 48,171,015 36,730,388
Accumulated deficit (40,259,923) (32,174,745)
------------ ------------
Total stockholders' equity 8,050,134 4,663,708
------------ ------------
Total liabilities and stockholders' equity $ 14,487,725 $ 10,495,585
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
FaxSav Incorporated
Statements of Operations
for the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenue $ 21,116,726 $ 17,418,333 $ 15,035,711
Cost of service 11,128,752 10,413,797 8,898,308
------------ ------------ ------------
Gross margin 9,987,974 7,004,536 6,137,403
------------ ------------ ------------
Operating expenses:
Network operations and support 3,608,129 2,286,594 1,984,607
Research and development 1,995,039 1,909,137 1,771,822
Sales and marketing 6,639,575 5,268,099 6,065,045
General and administrative 3,285,126 3,132,438 2,495,624
Depreciation and amortization 1,492,493 1,702,054 1,436,673
Patent litigation settlement 1,025,000
------------ ------------ ------------
Total operating expenses 18,045,362 14,298,322 13,753,771
------------ ------------ ------------
Operating loss (8,057,388) (7,293,786) (7,616,368)
------------ ------------ ------------
Other income (expense):
Interest income 123,838 240,987 188,680
Interest expense (257,264) (162,218) (142,269)
Other 105,636 96,115 93,568
------------ ------------ ------------
(27,790) 174,884 139,979
------------ ------------ ------------
Net loss $ (8,085,178) $ (7,118,902) $ (7,476,389)
============ ============ ============
Historical basic and diluted net loss per
common share $ (0.68) $ (0.72) $ (2.74)
============ ============ ============
Shares used in computing historical
net loss per common share 11,842,956 9,880,681 2,724,651
============ ============ ============
Unaudited pro forma data (Note 2):
Pro forma basic and diluted
net loss per common share $ (0.68) (0.72) $ (0.86)
============ ============ ============
Shares used in computing pro
forma net loss per common
share 11,842,956 9,880,681 8,712,054
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
FaxSav Incorporated
Statements of Cash Flows
for the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (8,085,178) $ (7,118,902) (7,476,389)
Adjustments to reconcile net loss to net cash used in
Operating activities:
Depreciation and amortization expense 1,492,493 1,702,054 1,436,673
Patent litigation settlement 1,000,000
Provision for doubtful accounts 269,470 230,520 219,400
Gain on sale of property and equipment (26,860) (18,791)
Changes in assets and liabilities:
Accounts receivable (1,188,039) (495,484) 123,497
Prepaid expenses and other current assets (126,374) 215,573 (184,111)
Other assets 186,975 (182,462) (80,199)
Accounts payable 494,985 395,257 (40,961)
Accrued expenses and other liabilities (565,188) (193,941) 1,086,523
------------ ------------ ------------
Net cash used in operating activities (6,547,716) (5,466,176) (4,915,567)
Cash flows used in investing activities:
Proceeds/(purchase) of marketable securities 1,002,513 (1,002,513)
Purchase of property and equipment (2,761,566) (2,856,952) (2,328,829)
Purchase of intangibles (314,223)
Proceeds from sales of property and equipment 56,250 112,770
------------ ------------ ------------
Net cash used in investing activities (3,019,539) (1,741,669) (3,331,342)
------------ ------------ ------------
Cash flows from financing activities:
Principal payments made under capital lease obligation (305,117) (280,517) (219,201)
Borrowings under line of credit 1,522,845 1,299,797 956,334
Repayments of notes payable (541,812) (178,372) (1,525,352)
Proceeds from issuance of preferred stock, net 7,933,434
Proceeds from issuance of common stock
and exercise of stock options and warrants, net 10,471,604 2,124,017 10,636,307
Treasury stock acquired - preferred (2,163,878)
------------ ------------ ------------
Net cash provided by financing activities 11,147,520 2,964,925 15,617,644
------------ ------------ ------------
Net increase (decrease) in cash 1,580,265 (4,242,920) 7,370,735
Cash and cash equivalents at beginning of period 3,680,185 7,923,105 552,370
------------ ------------ ------------
Cash and cash equivalents at end of period $ 5,260,450 $ 3,680,185 $ 7,923,105
============ ============ ============
Supplemental disclosure:
Cash paid for interest $ 117,556 $ 45,918 $ 68,421
============ ============ ============
Noncash investing and financing activities:
Equipment acquired under capital lease $ 0 $ 0 $ 421,805
============ ============ ============
Issuance of common stock pursuant to
patent litigation settlement $ 1,000,000 $ 0 $ 0
============ ============ ============
Issuance of common stock under option
pursuant to severance agreement $ 0 $ 0 $ 42,091
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
FaxSav Incorporated
Statements of Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Convertible Preferred Stock Common Stock Additional
---------------------------- --------------------------- Paid-in
Shares Amount Shares Amount Capital
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 58,769,921 $ 58,770 327,353 $ 3,274 $ 18,204,438
Issuance of Series F preferred stock 19,999,988 20,000 7,979,998
Treasury stock acquired - Series D preferred stock (8,655,510) (2,155,222)
Conversion of preferred stock into common stock (70,127,830) (78,783) 7,791,981 77,920 (7,793)
Issuance of common stock in connection with
Initial public offering 1,600,000 16,000 11,888,000
Expense in connection with stock issuances (1,343,035)
Exercise of warrants 13,431 13 131 8,765
Exercise of stock options 51,156 512 41,579
Net loss
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 0 0 9,770,621 97,706 34,616,730
------------ ------------ ------------ ------------ ------------
Issuance of common stock in connection with private
Placement 1,000,000 10,000 2,165,000
Exercise of stock options 35,746 358 27,277
Exercise of warrants 99 1 539
Expenses in connection with stock issuance (79,158)
Net loss
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997 0 0 10,806,466 108,065 36,730,388
------------ ------------ ------------ ------------ ------------
Issuance of common stock in connection with private
Placements 2,645,161 26,452 10,153,251
Exercise of stock options 143,560 1,435 279,774
Receivable from sale of stock (203,598)
Stock issuance 34,016 340 101,708
Stock issuance in connection with settlement of litigation 275,000 2,750 997,250
Expenses in connection with stock issuance (208,055)
Net loss
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 0 $ 0 13,904,203 $ 139,042 $ 47,850,718
------------ ------------ ------------ ------------ ------------
<CAPTION>
Accumulated Treasury
Warrants Deficit Stock Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 $(17,579,454) $ 687,028
Issuance of Series F preferred stock 7,999,998
Treasury stock acquired - Series D preferred stock $ (8,656) (2,163,878)
Conversion of preferred stock into common stock 8,656
Issuance of common stock in connection with
Initial public offering 11,904,000
Expense in connection with stock issuances (1,343,035)
Exercise of warrants 8,778
Exercise of stock options 42,091
Net loss (7,476,389) (7,476,389)
------------ ------------ ------------
Balance at December 31, 1996 (25,055,843) 0 9,658,593
------------ ------------ ------------
Issuance of common stock in connection with private
Placement 2,175,000
Exercise of stock options 27,635
Exercise of warrants 540
Expenses in connection with stock issuance (79,158)
Net loss (7,118,902) (7,118,902)
------------ ------------ ------------
Balance at December 31, 1997 (32,174,745) 0 4,663,708
------------ ------------ ------------
Issuance of common stock in connection with private
Placements $ 320,297 10,500,000
Exercise of stock options 281,209
Receivable from sale of stock (203,598)
Stock issuance 102,048
Stock issuance in connection with settlement of litigation 1,000,000
Expenses in connection with stock issuance (208,055)
Net loss (8,085,178) (8,085,178)
------------ ------------ ------------ ------------
Balance at December 31, 1998 $ 320,297 $(40,259,923) $ 0 $ 8,050,134
------------ ------------ ------------ ------------
</TABLE>
The Company has 1,000,000 authorized shares of preferred stock at $0.01 par
value. No preferred stock is currently issued or outstanding
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
FaxSav Incorporated
Notes to Financial Statements:
1. Organization and Nature of Operations:
FaxSav Incorporated, formerly known as Digitran Corporation (the "Company"), was
formed in November 1989 to engage in the sale of network services customized for
the transmission of data, facsimile and graphical information. In February 1996,
the Company changed its name to FaxSav Incorporated.
The Company designs, develops, and markets a variety of business-to-business
facsimile transmission services, including desktop to fax, enhanced fax and
broadcast fax services. Through the use of its integrated Internet-based and
telephony-based network and its proprietary software, the Company enables its
customers to send documents and images to fax machines worldwide. The Company
initially offered services (the "legacy fax services") through its
telephony-based network with termination by long distance carriers. In early
1996, the Company began to deploy a global Internet-based network of nodes that
enable it to bypass the long distance carriers' networks when sending faxes to
or from international areas serviced by these nodes. Prior to 1997, most of the
Company's revenues have been derived from delivering facsimile transmissions to
locations outside the United States from customers located throughout the United
States. In 1997, the Company expanded its customer base in international markets
through the development of a wholesale business in desktop to fax services and a
fax-to-fax business in certain markets in the Asia Pacific region. In 1997,
revenues from international customers amounted to $2.3 million or 13.2% of total
revenues and in 1998, revenues from international customers amounted to $5.9
million or 27.9% of total revenues.
In 1998, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related
Information". Although the services provided to its customers are the same in
the U.S. and international markets, management views the two as separate
businesses and measures the results for both to the gross margin level. The
ubiquitous nature of the Company's network and its centralized operations in the
U.S. prohibit the allocation of expenses beyond that level. Accordingly, 1998
and 1997 segment Gross Margin and Assets for the Company were as follows:
<TABLE>
<CAPTION>
Gross Margin 1998 1997
--------------------------------------- ---------------------------------------
U.S. International Total U.S. International Total
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Internet Fax
Revenues $ 9,069,808 $ 5,884,596 $14,954,404 $ 6,116,576 $ 2,306,249 $ 8,422,825
Cost of Service 4,379,264 3,292,542 7,671,806 3,459,849 1,335,140 4,794,989
----------- ----------- ----------- ----------- ----------- -----------
Gross Margin 4,690,544 2,592,054 7,282,598 2,656,727 971,109 3,627,836
Telephony Fax
Revenues 6,162,322 6,162,322 8,995,508 8,995,508
Cost of Service 3,456,946 3,456,946 5,618,808 5,618,808
----------- ----------- ----------- -----------
Gross Margin 2,705,376 2,705,376 3,376,700 3,376,700
Total
Revenues 15,232,130 5,884,596 21,116,726 15,112,084 2,306,249 17,418,333
Cost of Service 7,836,210 3,292,542 11,128,752 9,078,657 1,335,140 10,413,797
----------- ----------- ----------- ----------- ----------- -----------
Gross Margin $ 7,395,920 $ 2,592,054 $ 9,987,974 $ 6,033,427 $ 971,109 $ 7,004,536
=========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE>
FaxSav Incorporated
Notes to Financial Statements (Continued):
1. Organization and Nature of Operations (Continued):
<TABLE>
<CAPTION>
Assets 1998 1997
--------------------------------------- ---------------------------------------
U.S. International Total U.S. International Total
----------- ------------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash and Cash Equivalents $ 5,260,450 $ 5,260,450 $ 3,680,185 $ 3,680,185
Accounts Receivable, net 2,037,549 $ 1,161,139 3,198,688 1,756,353 $ 523,766 2,280,119
Property & Equipment, net 4,623,455 863,766 5,487,221 3,175,848 999,416 4,175,264
----------- ----------- ----------- ----------- ----------- -----------
Sub-total $11,921,454 $ 2,024,905 13,946,359 $ 8,612,386 $ 1,523,182 10,135,568
=========== =========== =========== =========== =========== ===========
Other unallocated amounts 541,366 360,017
----------- -----------
Total Assets $14,487,725 $10,495,585
=========== ===========
</TABLE>
The Company is subject to risks common to rapidly growing technology-based
companies, including limited operating history, dependence on key personnel,
raising capital, rapid technological change, dependence on network
infrastructure, competition from substitute products and larger companies, and
the successful development and marketing of commercial products and services.
The Company currently believes its cash and cash equivalents will be sufficient
to meet its presently anticipated cash needs through at least the end of 1999.
Even if the Company's cash requirements vary materially from those now planned
as a result of unforeseen changes, management believes that its current sources
of liquidity are sufficient for it to continue operations through the end of
1999. In this regard, the Company is prepared to limit its network expansion and
reduce or eliminate research and development activities, and sales and marketing
expenditures, if necessary.
Fax boards used in the Company's telecommunications network are supplied by one
vendor on a non-exclusive basis. Other components of the Company's operating
network are supplied by a limited number of vendors, also on a non-exclusive
basis. Management believes that other suppliers could be identified to provide
this equipment at a competitive price if this supplier was unable to provide
equipment.
Operation of the Company's network is dependent upon long distance
telecommunications companies transmitting information for the Company. The
Company has typically utilized only a limited number of these providers to
generate volume discounts. The Company's business strategy is also dependent
upon providing this service at the lowest possible cost which is greatly
affected by the cost of long distance transmission service. Management believes
that its long-distance transmissions could be made at competitive rates with any
number of companies providing long distance service.
In October 1996, the Company completed an initial public offering of 1.6 million
shares of its common stock. The aggregate gross proceeds of the offering were
approximately $12 million.
In connection with the offering, the Company filed an amendment to its Fifth
Amended and Restated Certificate of Incorporation to effect a one-for-nine
reverse stock split at a par value of $0.01 and to change the authorized number
of common shares to 40,000,000. All share and per share amounts in the financial
statements have been retroactively restated to reflect the reverse stock split.
The Company also filed immediately prior to the closing of the offering its
Sixth Amended and Restated Certificate of Incorporation which changed the
authorized amount of preferred stock. All outstanding shares of preferred stock
were converted at the consent of the holders into an aggregate of 7,791,981
shares of common stock.
F-8
<PAGE>
FaxSav Incorporated
Notes to Financial Statements (Continued):
2. Summary of Significant Accounting Policies:
A. Revenue Recognition and Cost of Service:
The Company recognizes revenue as services are provided to customers
and records the related cost of service as incurred. Cost of service
consists of local access charges, leased network backbone circuit
costs and long distance domestic and international termination
charges.
B. Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates. Significant estimates made by
management and included in the financial statements are the
allowance for bad debts, the valuation allowance for deferred tax
assets, and the accrual for legal defense.
C. Reverse Stock Split and Conversion of Preferred Stock:
In October 1996, in connection with an initial public offering of
the Company's common stock, the Company effectuated a reverse stock
split for common shares of one-for-nine shares. The effect of this
reverse stock split on all share and per share amounts has been
retroactively restated in the financial statements.
The Company also converted all of its outstanding preferred stock at
the election of the holders into 7,791,981 shares of common stock in
connection with the offering.
D. Earnings Per Share:
In February 1998, the SEC issued Staff Accounting Bulletin No. 98
("SAB 98"), which revised the views of the staff contained in
previous staff accounting bulletins, to be consistent with the
provisions of SFAS 128. All prior periods have been restated in
accordance with SAB 98.
Stock options outstanding of approximately 2,065,000, 1,523,000 and
1,256,000 for the years ended December 31, 1998, 1997, and 1996,
respectively, have been excluded from the calculation of diluted
earnings per share, since their effect would be antidilutive.
In addition, approximately 169,000 warrants outstanding for the year
ended December 31, 1998, and 100,000 warrants for the two years
ended December 31, 1997 have been excluded from diluted earnings per
share, since their effect would be antidilutive.
F-9
<PAGE>
FaxSav Incorporated
Notes to Financial Statements (Continued):
2. Summary of Significant Accounting Policies (Continued):
E. Pro Forma Earnings Per Share:
Pro forma basic and diluted net loss per common shares is based on
the weighted average number of shares outstanding during the periods
presented, including the effect of pro forma conversion for all
periods of all outstanding preferred stock into 7,791,981 shares of
common stock in October 1996 in connection with the initial public
offering of the Company. Pro forma basic and diluted net loss per
share has been presented as additional information to enhance the
comparability of results for all periods presented assuming
conversion of the preferred stock into common shares of the Company.
F. Cash Equivalents:
The Company considers all highly liquid debt instruments purchased
with an original maturity of three months or less to be cash
equivalents.
G. Property and Equipment:
Property and equipment are stated at cost, net of accumulated
depreciation and amortization. Depreciation of furniture and
equipment, except enhanced fax equipment, is calculated using the
straight-line method over their estimated useful lives of five
years. Enhanced fax equipment is included in equipment and is
depreciated over its estimated life of 30 months. Leasehold
improvements are amortized using the straight-line method over the
lesser of the lease term or the estimated useful life of the related
asset. Repairs and maintenance costs are expensed as incurred; major
renewals and betterments are capitalized.
When assets are sold or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any gain
or loss on the disposition is reflected in current operations.
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not
be recoverable. If the sum of the expected future undiscounted cash
flows is less than the carrying amount of the asset, a loss is
recognized for the difference between the estimated fair value and
carrying value of the assets.
H. Income Taxes:
The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income
Taxes". This statement requires an asset and liability approach for
deferred taxes that recognizes deferred tax assets and liabilities
for the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns.
I. Concentration of Credit Risk:
Statement of Financial Accounting Standards No. 105, "Disclosure of
Information about Financial Instruments with Off-Balance-Sheet Risk
and Financial Instruments with Concentration of Credit Risk"
requires disclosure of any significant off-balance-sheet and
F-10
<PAGE>
FaxSav Incorporated
Notes to Financial Statements (Continued):
2. Summary of Significant Accounting Policies (Continued):
I. Concentration of Credit Risk (Continued):
credit risk concentrations. Financial instruments that potentially
subject the Company to concentrations of credit risk consist
primarily of cash and cash equivalents and accounts receivable. From
time to time, the Company had concentrations of cash in several
banks in the form of demand deposits and money market accounts. The
Company believes that concentrations of credit risk with respect to
trade accounts receivable are limited due to the large number of
entities comprising the Company's customer base.
J. Financial Instruments:
The estimated fair value of the Company's financial instruments,
which include cash, cash equivalents, accounts receivable, and
amounts outstanding under line of credit, approximates their
carrying value.
The fair value of cash and cash equivalents and accounts receivable
approximates their carrying value because their maturity is
generally less than one year in duration. The fair value of amounts
outstanding under the line of credit was determined using valuation
techniques that considered cash flow discounted at current rates.
K. Legal Defense:
The Company accrues the estimated future cost of defending itself
against lawsuits or other claims when management has determined, in
consultation with its legal counsel, that these matters are probable
of assertion against the Company.
L. Reclassification:
Certain items in 1997 have been reclassified to conform to the 1998
presentation.
3. Property and Equipment:
Property and equipment is comprised of the following:
December 31,
-------------------------
1998 1997
----------- -----------
Equipment $10,232,895 $ 7,844,450
Computer software 625,413 364,385
Furniture and fixtures 132,609 113,386
Leasehold improvements 168,265 160,008
----------- -----------
11,159,182 8,482,229
Less, accumulated depreciation and
amortization 5,671,961 4,306,965
----------- -----------
$ 5,487,221 $ 4,175,264
=========== ===========
F-11
<PAGE>
FaxSav Incorporated
Notes to Financial Statements (Continued):
3. Property and Equipment (Continued):
Included in the equipment balance is certain equipment under capital
leases of approximately $966,058 at December 31, 1998 and 1997.
Accumulated amortization of equipment under capital leases approximated
$588,079 and $394,867 as of December 31, 1998 and 1997, respectively.
Depreciation and amortization expense for owned property and equipment for
the years ended December 31, 1998, 1997, and 1996, amounted to $1,420,208,
$1,674,554 and $1,388,753, respectively.
4. Accrued Expenses and Other Liabilities:
Accrued expenses and other liabilities is comprised of the following:
December 31,
-----------------------
1998 1997
---------- ----------
Accrued carrier charges $1,834,894 $1,926,925
Accrued salaries, bonuses and commissions 224,933 195,688
Excise and state taxes payable 132,219 269,245
Accrual for legal defense 251,917
Insurance premiums payable 79,449
Other 462,612 496,622
---------- ----------
$2,654,658 $3,219,846
========== ==========
5. Notes Payable:
Long-term debt includes the following:
December 31,
-----------------------
1998 1997
---------- ----------
1996 notes payable to bank - $750,000 $ 126,760 $ 278,871
1997 notes payable to bank - $800,000 559,935 799,908
1997 notes payable - $500,000 418,009 473,628
1998 notes payable to bank - $500,000 449,942
1998 notes payable - $1,000,000 978,795
---------- ----------
Total notes payable 2,533,441 1,552,407
Less current portion 992,960 469,217
---------- ----------
Non-current portion $1,540,481 $1,083,190
========== ==========
As of December 31, 1998, the Company had $126,760 outstanding under a line of
credit established in 1996, which will be repaid in equal installments over
the first ten months of 1999.
During 1997, the Company entered into two new loan agreements. The first
agreement was an equipment line of credit with the Bank, in the form of a
promissory note, in the amount of $800,000. In 1998 this agreement was amended
to increase available borrowings by an additional $500,000. The new line is also
evidenced by the Company's promissory notes which are payable over 30 months.
Interest on advances, if any, are at the Bank's prime rate plus an applicable
margin, as defined in the credit agreement, which resulted in a borrowing rate
of 9.5% for 1997 and 8.9% in 1998. Among the covenants stated in the agreement,
specific liquidity ratios, debt service ratios, and net worth ratios are
required to be maintained and
F-12
<PAGE>
FaxSav Incorporated
Notes to Financial Statements (Continued):
5. Notes Payable (Continued):
disclosed to the Bank on a monthly basis. As of December 31, 1998, the
Company had fully utilized these lines of credit.
The second agreement in 1997 was for an equipment loan line of $500,000
with another lender and is in the form of two secured promissory notes,
both of which the Company is required to pay over a term of forty-eight
months with an effective interest rate of 16%. In 1998 this agreement was
amended to increase available borrowings by an additional $1,000,000. The
new line is also evidenced by the Company's promissory notes which are
payable over 42 months at an effective interest rate of 16%. The new line
was fully utilized by December 31, 1998. The equipment purchased with the
proceeds of these loans serve as collateral.
6. Related Party Transactions:
During 1998 the Company loaned two officers a total of $203,598. These
recourse loans bear interest at a rate of 5% and are collateralized by
approximately 61,000 shares of the Company's common stock. The loans are
due and payable in November 2003.
7. Commitments:
Telecommunications Lines
The Company has committed to minimum monthly usage levels with its primary
telecommunications carriers. The commitments require minimum monthly
payments, exclusive of usage discounts, of $700,000 per month through June
1999 and $500,000 per month thereafter through January 2001. The Company
also leases space under co-locate agreements for certain of its
telecommunications equipment.
Leases
Total rent expense for office facilities for the years ended December 31,
1998, 1997 and 1996 amounted to $470,959, $302,643 and $181,594,
respectively.
The Company leases certain computer equipment pursuant to operating leases
which expire through 2000. Rent expense related to these leases for the
years ended December 31, 1998, 1997 and 1996 amounted to $69,313, $120,085
and $168,666, respectively.
The Company acquired equipment for $421,805 under capital lease
obligations during the year ended December 31, 1996. Interest paid for
capital lease obligations during the years ended December 31, 1998, 1997
and 1996 was $27,064, $59,658 and $69,682, respectively.
F-13
<PAGE>
FaxSav Incorporated
Notes to Financial Statements (Continued):
7. Commitments (Continued):
The Company was obligated under these agreements to make the following
payments for office facilities and equipment:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
---------------------- -----------------------
Operating Capital Operating Capital
Lease Lease Lease Lease
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
1998 316,641 $ 331,716
1999 $ 368,428 $ 103,126 311,808 103,126
2000 274,404 295,400
2001 274,404 275,173
2002 and thereafter 102,595 102,595
----------- ---------- ----------- ------------
Total minimum lease payments $1,019,831 103,126 $1,301,617 434,842
Less, amount representing interest 7,322 33,921
Less, current principal maturities of
obligation under capital lease 95,804 315,370
---------- ------------
Long-term lease obligation $ 0 $ 85,551
========== ============
</TABLE>
8. Capital Stock and Warrants:
Convertible Preferred Stock
Prior to October 1996, the Company was authorized to issue 1,400,000
shares of Series A Preferred Stock, 4,000,000 shares of Series B Preferred
Stock, 8,700,000 shares of Series C Preferred Stock, 26,600,000 shares of
Series D Preferred Stock, 19,500,000 shares of Series E Preferred Stock
and 20,000,000 shares of Series F Preferred Stock (collectively, "the
Preferred Stock"). Holders of the Preferred Stock were entitled to
dividends at the rate of $0.075 per share for Series A, $0.10 per share
for Series B, $0.06 per share for Series C, $0.01733 per share for Series
D, $0.022 per share for Series E and $0.04 per share for Series F when and
if declared by the Company's Board of Directors. Such dividends were not
cumulative. Holders of the Series A, B, C, D, E and F Preferred Stock were
entitled to a liquidation preference per share of $0.75, $1.00, $0.60,
$0.1733, $0.22 and $0.40, respectively. No dividends had been declared on
the Preferred Stock.
In February 1996 and March 1996, the Company issued 19,999,988 shares of
Series F Preferred Stock for an aggregate purchase price of $7,979,998 to
certain existing as well as other new investors in the Company. In
accordance with a December 1995 Stock Option Agreement between the Company
and Telstra, the Company on March 18, 1996 repurchased 8,655,510 shares of
Series D Preferred Stock held by Telstra for $0.25 per share for a total
of $2,163,878.
All shares of Series A, B, C, D, E, and F Preferred Stock were converted
into common stock of the Company in connection with the initial public
offering of its common stock in October 1996.
F-14
<PAGE>
FaxSav Incorporated
Notes to Financial Statements (Continued):
8. Capital Stock and Warrants (Continued):
Warrants
On July 8, 1993, the Company agreed to grant warrants to purchase 5,556
shares of common stock to a firm providing equipment to the Company under
a Master Lease Agreement. The exercise price was $5.40 per share and the
warrants were to expire ten years from the date of grant. On May 5, 1994,
the Company granted additional warrants, which were to expire ten years
from the date of grant, to purchase 9,889 shares of common stock at $1.80
per share to this firm in connection with an increase in the equipment
covered by the Master Lease Agreement. On July 7, 1995, the Company
granted warrants to purchase 28,889 shares of common stock to a bank in
connection with the issuance of the working capital line of credit. The
exercise price was $1.98 per share and the warrants were to expire five
years from the date of grant.
The number and purchase price of the shares could have been adjusted by
the occurrence of certain events, as defined in the warrant agreements.
On December 30, 1998, the Company granted warrants to purchase 64,516
shares of common stock to an investor in connection with a private
placement of 645,161 new unregistered shares of common stock. The exercise
price is $5.425 per share and the warrants will expire three years from
the date of grant.
9. Stock Options:
The Company has a stock option plan which authorized up to 1,794,175
shares of common stock to be issued. During 1998, the shareholders
approved an amendment to the plan increasing the authorized number of
shares by 650,000 to 2,444,175. Under the stock option plan, the Company
may grant incentive stock options or nonqualified stock options. The
option exercise price of stock options may not be less than 85% of the
fair value of a share of common stock on the date of the option grant, and
the options expire in ten years. The shares issuable upon the exercise of
nonqualified options generally vest over one or two years from the date of
grant. The shares issuable upon the exercise of incentive stock options
generally vest 20% upon completion by the optionee of one year of service
and the remaining 80% over 48 equal months of service thereafter based on
continued service. Stock option transactions under the plan are as
follows:
F-15
<PAGE>
FaxSav Incorporated
Notes to Financial Statements (Continued):
9. Stock Options (Continued):
<TABLE>
<CAPTION>
Weighted
Average
Incentive Exercise
Nonqualified Stock Available Price Per
Options Options for Grant Share
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
January 1, 1996 364,777 702,108 181,795 $ 0.533
Available for Grant 533,066
Granted 133,334 111,778 (245,112) $ 3.44
Exercised (51,156) $ 0.823
Canceled (4,927) 4,927 $ 2.63
--------- --------- ----------
December 31, 1996 493,184 762,730 474,676 $ 1.09
Granted 173,329 392,280 (565,609) $ 3.38
Exercised (35,746) $ 0.80
Canceled (8,333) (254,602) 262,935 $ 1.63
--------- --------- ----------
December 31, 1997 658,180 864,662 172,002 $ 1.28
Available for Grant 650,000
Granted 517,580 318,474 (836,054) $ 3.41
Exercised (55,555) (88,005) $ 4.63
Canceled (113,859) (36,561) 150,420 $ 4.40
--------- --------- ----------
December 31, 1998 1,006,346 1,058,570 136,368 $ 1.80
========= ========= ==========
</TABLE>
At December 31, 1998, 1997 and 1996, options for 905,483, 785,584 and
626,277 shares were vested and exercisable.
In October 1995, The Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." The standard establishes a
fair value method for accounting for or disclosing stock-based
compensation plans. The Company discloses the pro forma net loss and loss
per share amounts assuming the fair value method.
Accordingly, if the Company had elected to recognize compensation costs in
accordance with SFAS No. 123 the reported net loss and loss per share for
1998, 1997 and 1996, respectively, would have been as follows:
F-16
<PAGE>
FaxSav Incorporated
Notes to Financial Statements (Continued):
9. Stock Options (Continued):
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net loss as reported $ (8,085,178) $ (7,118,902) $ (7,476,389)
Net loss - pro forma (8,482,567) (7,260,113) (7,583,417)
Loss per share - as reported (0.68) (0.72) (2.74)
Loss per share - pro forma (0.72) (0.73) (2.78)
</TABLE>
The Company estimated the fair value, as of the date of grant, of options
outstanding in the plan using the Black-Scholes option pricing model with
the following assumptions:
1998 1997 1996
------------- ------------- -------------
Expected life 5 years 5 years 10 years
Risk free interest rate 5.3% 6.3% 4.9%
Expected future dividend yield 0% 0% 0%
Expected volatility 127.2% 85.2% 34.4%
In accordance with SFAS 123, the Company has utilized peer information
when using the Black-Scholes option pricing model. As the Company develops
historical information, the Company will modify these assumptions
accordingly.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- -------------------------
Weighted
Average Weighted Number Weighted
Number Remaining Average Exercisable Average
Outstanding Contractual Exercise as of Exercise
Range of Exercise Prices 12/31/98 Life Price 12/31/98 Price
- ------------------------ ----------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.23 - $0.23 502,713 6.24 $ 0.23 375,265 $ 0.23
$0.72 - $1.50 639,383 5.98 1.12 463,003 0.99
$2.13 - $2.94 528,722 9.38 2.81 22,733 2.49
$3.00 - $5.38 386,898 9.17 3.47 41,116 3.66
$6.38 - $6.38 7,200 8.08 6.38 3,366 6.38
$0.23 - $6.38 2,064,916 7.52 $ 1.80 905,483 $ 0.86
</TABLE>
10. Patent Litigation Settlement:
Effective September 22, 1998 the Company settled all outstanding
litigation with AudioFAX IP,L.L.P. ("AudioFAX") to avoid the expense and
disruption of protracted litigation. In 1997 the Company had filed a
lawsuit against AudioFAX seeking declaratory relief that FaxSav services
did not infringe on any valid claims in certain AudioFAX's patents
relating to store-and-forward technology or that certain claims of the
AudioFAX patents are not valid. Immediately after the filing of FaxSav's
complaint, AudioFAX filed a lawsuit against FaxSav alleging patent
infringement.
The terms of the settlement agreement required the Company to issue
275,000 shares of common stock to AudioFAX and to register such shares for
resale in exchange for a fully paid-up license to the patents in the
dispute. Although under certain circumstances the Company
F-17
<PAGE>
FaxSav Incorporated
Notes to Financial Statements (Continued):
10. Patent Litigation Settlement (Continued):
would have been required to issue additional shares or pay a certain
amount of cash to AudioFAX, these requirements are no longer applicable.
The Company has recorded a charge of $1,025,000 in 1998 representing all
costs associated with the settlement. No costs have been capitalized, as
the Company could not determine the future economic benefit, if any, to
the Company of the patent licenses acquired.
11. Income Taxes:
The Company continues to incur operating losses and currently pays no
income taxes and no provision or benefit for income taxes has been
recorded.
The income tax benefit at the United States federal statutory rate on the
Company's operating loss, for all periods presented, has been eliminated
by an increase in the valuation allowance for deferred tax assets and
operating losses not recognized.
At December 31, 1998, the Company had net operating loss carryforwards
available for income tax purposes of approximately $35,000,000 which start
to expire in 2005. Net operating loss carryforwards are subject to review
and possible adjustment by the Internal Revenue Service and may be limited
in the event of certain cumulative changes in the ownership interests of
significant stockholders over a three-year period in excess of 50%. The
Company has experienced changes in ownership in excess of 50% but does not
believe that these changes in ownership will significantly impact the
Company's ability to utilize its net operating loss carryforwards assuming
the Company can generate sufficient taxable income. The components of the
Company's deferred tax asset are as follows:
December 31,
-----------------------------
1998 1997
------------ ------------
Operating loss carryforwards $ 12,765,029 $ 10,225,730
Temporary differences 914,450 691,560
------------ ------------
13,679,479 10,917,290
Less - valuation allowance (13,679,479) (10,917,290)
------------ ------------
$ 0 $ 0
============ ============
In evaluating the realization of these deferred tax assets, management has
considered the market in which the Company operates, the operating losses
incurred to date and the operating losses anticipated for the future, and
believes that given the significance of this evidence, a full valuation
allowance against its deferred tax assets is required as of December 31,
1998, 1997, and 1996.
F-18
<PAGE>
FaxSav Incorporated
Notes to Financial Statements (Continued):
12. Contingencies:
The Company is involved in various disputes, claims or legal proceedings
related to its normal course of business. In the opinion of management,
all such matters are without merit or involve amounts, if disposed of
unfavorably, which would not have a material adverse effect on the
financial position or results of operations of the Company.
13. Subsequent Event (Unaudited):
In February 1999, the company entered into a new $1,000,000 equipment line
of credit with a lender. Draw-downs are to be paid over a term of 42
months with an effective interest rate of 16%.
F-19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL
STATEMENT SCHEDULE
To the Board of Directors of FaxSav, Incorporated
Our audits of the financial statements referred to in our report dated February
3, 1999 appearing on page F-2 of the 1998 Annual Report to Shareholders of
FaxSav, Incorporated (formerly Digitran Corporation) also included an audit of
the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In
our opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related financial statements.
PRICEWATERHOUSECOOPERS LLP
Florham Park, New Jersey
February 3, 1999
F-20
<PAGE>
FaxSav Incorporated
Supplemental Schedule
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Additions
--------------------------
Balance at Charges to Charges to Balance at
Beginning Cost And Other End of
of Period Expenses Accounts Deductions Period
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Provisions for bad debts $ 174,737 $ 219,400 $ 37,268(a) $ 202,029(b) $ 229,376
Accrual for legal defense 400,000 18,927 381,073
Deferred tax asset valuation allowance 5,662,093 2,661,207 8,323,300
----------- ----------- ----------- ----------- -----------
$ 6,236,830 $ 219,400 $ 2,698,475 $ 220,956 $ 8,933,749
=========== =========== =========== =========== ===========
Year ended December 31, 1997
Provisions for bad debts $ 229,376 $ 230,520 $ 29,819(a) $ 158,991(b) $ 330,724
Accrual for legal defense 381,073 129,156 251,917
Deferred tax asset valuation allowance 8,323,300 2,593,990 10,917,290
----------- ----------- ----------- ----------- -----------
$ 8,933,749 $ 230,520 $ 2,623,809 $ 288,147 $11,499,931
=========== =========== =========== =========== ===========
Year ended December 31, 1998
Provisions for bad debts $ 330,724 $ 269,470 $ 21,422(a) $ 401,540(b) $ 220,076
Accrual for legal defense 251,917 251,917
Deferred tax asset valuation allowance 10,917,290 2,762,189 13,679,479
----------- ----------- ----------- ----------- -----------
$11,499,931 $ 269,470 $ 2,783,611 $ 653,457 $13,899,555
=========== =========== =========== =========== ===========
</TABLE>
(a) Recoveries of accounts receivable
(b) Write-offs
F-21
Exhibit 10.20
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
6.6 Insurance .................................................. 17
<PAGE>
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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
12.3 Time of Essence ............................................ 26
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-iv-
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
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.
"Advance" or "Advances" means a loan advance under the Equipment
Line.
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"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;
(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
<PAGE>
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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.
"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
<PAGE>
-4-
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.
"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
<PAGE>
-5-
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 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 February 26, 2001.
<PAGE>
-6-
"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 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
<PAGE>
-7-
(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 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.
<PAGE>
-8-
"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 or 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
or more Affiliates of such Person.
"Tangible Net Worth" means as of any applicable date, the
consolidated total assets of Borrower and the Subsidiaries minus, without
duplication, (i) the sum of any amounts attributable to (a) goodwill, (b)
intangible items such as unamortizied debt discount and expenses, 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 service marks 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>
-9-
"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.
(a) 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.
(b) 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.
(c) 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.
2.3 Interest Rates Payments, and Calculations.
(a) 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.
<PAGE>
-10-
(b) 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.
(c) 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.
(d) 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.
2.5 Fees. Borrower shall pay to Bank the following:
(a) 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 nonrefundable;
(b) 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;
<PAGE>
-11-
(c) 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):
(a) 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);
(b) 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
(c) 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.
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:
<PAGE>
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(a) this Agreement and the Note;
(b) a certificate of the Secretary of Borrower with respect to
articles, bylaws, incumbency and resolutions authorizing the execution and
delivery of this Agreement;
(c) an opinion of Borrower's counsel;
(d) confirmatory financing statements (Forms UCC-1);
(e) insurance certificate;
(f) payment of the fees and Bank Expenses then due specified in
Section 2.5 hereof; and
(g) Certificate of Legal Existence and Foreign Qualification for the
states of Delaware and New Jersey; and
(h) 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:
(a) timely receipt by Bank of the Payment/Advance Form as provided
in Section 2.1;
(b) 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
(c) the representations and warranties contained in Section 5 shall
be true and correct in all material respects on and as of the date of such
Payment/Advance Form and on the effective date of each Advance as though made at
and as of each such date, and no Event of Default shall have occurred and be
continuing, or would result from such Advance. The making of each Advance shall
be deemed to be a representation and warranty by Borrower on the date of such
Advance as to the accuracy of the facts referred to in this Section 3.2(b).
4. CREATION OF SECURITY INTEREST
4.1 Grant of Security Interest. Borrower 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
<PAGE>
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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.
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
<PAGE>
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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.
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
<PAGE>
-15-
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.
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
<PAGE>
-16-
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 1OQ 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 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).
<PAGE>
-17-
6.5 Taxes. Borrower shall make, and shall cause each Subsidiary to
make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicting 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. Borrow 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 to 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 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.
<PAGE>
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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 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 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.
<PAGE>
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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.
(a) 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
(b) If Borrower fails or neglects to perform, keep, or observe any
other material term, provision, condition, covenant, or agreement contained in
this Agreement, in any of the Loan Documents, or in any other present or future
agreement between Borrower and Bank and as to any default under such other term,
provision, condition, covenant or agreement that can be cured, has failed to
cure such default within ten (10) days after the occurrence thereof; provided,
however, that if the default cannot by its nature be cured within the ten (10)
day period or cannot after diligent attempts by Borrower be cured within such
ten (10) day period, and such default is likely to be cured within a reasonable
time, then Borrower shall have an additional reasonable period (which shall not
in any case exceed thirty (30) days) to attempt to cure such default, and within
such reasonable time period the failure to have cured such default shall not be
deemed an Event of Default (provided that no Advances will be required to be
made during such cure period);
8.3 Material Adverse Change. If there (i) occurs a change in the
business, operations, or condition (financial or otherwise) of the Borrower
which has a Material
<PAGE>
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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 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.
<PAGE>
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9. BANK'S RIGHTS AND REMEDIES
9.1 Rights and Remedies. Upon the occurrence and during the
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without demand, do any one or more of the following, all of
which are authorized by Borrower:
(a) 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);
(b) 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;
(c) Settle or adjust disputes and claims directly with account
debtors for amounts, upon terms and in whatever order that Bank reasonably
considers advisable;
(d) Without notice to or demand upon Borrower, make such payments
and do such acts as Bank considers necessary or reasonable to protect its
security interest in the Collateral. Borrower agrees to assemble the Collateral
if Bank so requires, and to make the Collateral available to Bank as Bank may
designate. Borrower authorizes Bank to enter the premises where the Collateral
is located, to take and maintain possession of the Collateral, or any part of
it, and to pay, purchase, contest, or compromise any encumbrance, charge, or
lien which in Bank's determination appears to be prior or superior to its
security interest and to pay all expenses incurred in connection therewith. With
respect to any of Borrower's premises, Borrower hereby grants Bank a license to
enter such premises and to occupy the same, without charge, in order to exercise
any of Bank's rights or remedies provided herein, at law, in equity, or
otherwise;
(e) 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;
(f) 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;
(g) 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
<PAGE>
-23-
apply the proceeds thereof to the Obligations in whatever manner or order it
deems appropriate;
(h) Bank may credit bid and purchase at any public sale, or private
sale as permitted by law;
(i) Any deficiency that exists after disposition of the Collateral
as provided above will be paid immediately by Borrower; and
(j) 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 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
<PAGE>
-24-
with respect to such policies as Bank deems prudent. Any amounts so paid or
deposited by Bank shall constitute Bank Expenses, shall be immediately due and
payable, and shall bear interest at the then applicable rate hereinabove
provided, and shall be secured by the Collateral. Any payments made by Bank
shall not constitute an agreement by Bank to make similar payments in the future
or a waiver by Bank of any Event of Default under this Agreement.
9.5 Bank's Liability for Collateral. So long as Bank complies with
reasonable banking practices, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of
loss, damage or destruction of the Collateral shall be borne by Borrower.
9.6 Remedies Cumulative. Bank's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not expressly set forth herein
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
<PAGE>
-25-
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
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
<PAGE>
-26-
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.
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.
<PAGE>
-27-
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, images, 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 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: /s/ Peter S. Macaluso
------------------------------------
Name: Peter S. Macaluso
Title: Vice President and CFO
SILICON VALLEY BANK, doing business
as SILICON VALLEY EAST
By: /s/ Jane A. Braun
------------------------------------
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
(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 REOUEST:
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)____________________________
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 aspects as of the
date hereof. Attached herewith are the required documents supporting the above
certification. The Officer further certifies that these are prepared in
accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes. The Officer expressly acknowledges that h no
borrowings may be requested by the Borrower at any time or date of determination
that Borrower is not in compliance with any of the terms of the Agreement, and
that such compliance is determined not just at the date this certificate is
delivered.
Please indicate compliance status by circling Yes/No under "Complies"
column.
<TABLE>
<CAPTION>
Reporting Covenant Required Complies
- ------------------ -------- --------
<S> <C> <C> <C>
Monthly financial statements Monthly within 30 days (except Yes No
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 with SEC Yes No
Reports
</TABLE>
<TABLE>
<CAPTION>
Financial Covenant Required Actual Complies
- ------------------ -------- ------ --------
<S> <C> <C> <C> <C>
Liquidity Ratio (tested 1.75:1.0 (2.0:1.0 $_______ to Yes No
monthly) of Unrestricted upon a Capital Event)** $_______ or
Cash, plus Borrowing Base to _____:1.0
Aggregate Equipment Advance
Obligations (Terminates upon
a Debt Service Coverage
Event)*
Debt Service Coverage Ratio 1.5:1.0 $_______ to Yes No
(tested quarterly). Ratio of $_______ or
EBIDTA to Long-Term _____:1.0
Indebtedness, Interest and
Capital Lease Obligation
(triggered only upon
Borrower's meeting this test
for two consecutive
quarters, a "Debt Service
Coverage Event")*
</TABLE>
<PAGE>
-2-
<TABLE>
<CAPTION>
<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 75% of of $_______
Net Income (with no
offset for losses) there-
after.)
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 a
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>
PROMISSORY NOTE
$500,000.00 Wellesley, Massachusetts
As of March 27, 1998
For value received, the undersigned, FAXSAV INCORPORATED, a Delaware
corporation (the "Borrower"), promises to pay to SILICON VALLEY BANK (the
"Bank") at the office of the Bank located at 3003 Tasman Drive, Santa Clara,
California 95054, or to its order, the lesser of (a) Five Hundred Thousand
Dollars ($500,000) or (b) the outstanding principal amount hereunder, on
September 26, 1998 in thirty (30) consecutive equal monthly installments payable
on the 26th day of each month, commencing April 26, 1998 and ending February 26,
2001 (the "Maturity Date"), together with interest on the principal amount
hereof from time to time outstanding at a fluctuating rate per annum equal to
the Prime Rate (as defined below) plus 1 % until the Maturity Date, payable
monthly in arrears on fifth first day of each calendar month occurring after the
date hereof and on the Maturity Date. The Borrower promises to pay on demand
interest at a per annum rate of interest equal to 5% per annum in excess of the
rate otherwise then in effect on any overdue principal (and to the extent
permitted by law, overdue interest). The Bank's "Prime Rate" is the per annum
rate of interest from time to time announced and made effective by the Bank as
its Prime Rate (which rate may or may not be the lowest rate available from the
Bank at any given time).
Computations of interest shall be made by the Bank on the basis of a year
of 360 days for the actual number of days occurring in the period for which such
interest is payable.
This note is the Note referred to in the loan and security agreement of
even date herewith between the Bank and the Borrower (together with all related
schedules), as the same may be amended, modified or supplemented from time to
time (the "Loan and Security Agreement"), and is entitled to the benefits
thereof and of the other Loan Documents referred to therein, and is subject to
optional and mandatory prepayment as provided therein. This note is secured
inter alia by the Loan and Security Agreement.
Upon the occurrence of any Event of Default under, and as defined in, the
Loan and Security Agreement, at the option of the Bank, the principal amount
then outstanding of and the accrued interest on the advances under this note and
all other amounts payable under this note shall become immediately due and
payable, without notice (including, without limitation, notice of intent to
accelerate), presentment, demand, protest or other formalities of any kind, all
of which are hereby expressly waived by the Borrower.
The Bank shall keep a record of the amount and the date of the making of
each advance pursuant to the Loan and Security Agreement and each payment of
principal with respect thereto by maintaining a computerized record of such
information and printouts of
<PAGE>
-2-
such computerized record, which computerized record, and the printouts thereof,
shall constitute prima facie evidence of the accuracy of the information so
endorsed.
The undersigned agrees to pay all reasonable costs and expenses of the
Bank (including, without limitation, the reasonable fees and expenses of
attorneys) in connection with the enforcement of this note and the other Loan
Documents and the preservation of their respective rights hereunder and
thereunder.
No delay or omission on the part of the Bank in exercising any right
hereunder shall operate as a waiver of such right or of any other right of the
Bank, nor shall any delay, omission or waiver on any one occasion be deemed a
bar to or waiver of the same or any other right on any future occasion. The
Borrower and every endorser or guarantor of this note regardless of the time,
order or place of signing waives presentment, demand, protest and notices of
every kind and assents to any one or more extensions or postponements of the
time of payment or any other indulgences, to any substitutions, exchanges or
releases of collateral for this note, and to the additions or releases of any
other parties or persons primarily or secondarily liable.
THIS NOTE HAS BEEN DELIVERED TO THE BANK AND ACCEPTED BY THE BANK IN THE
STATE OF CALIFORNIA.
THE BORROWER HEREBY EXPRESSLY WAIVES ANY RIGHT IT MAY NOW OR HEREAFTER
HAVE TO A JURY TRIAL IN ANY SUIT, ACTION OR PROCEEDING WHICH ARISES OUT OF OR BY
REASON OF THIS NOTE, ANY LOAN DOCUMENT (AS DEFINED IN THE LOAN AND SECURITY
AGREEMENT), OR THE TRANSACTIONS CONTEMPLATED HEREBY.
BY ITS EXECUTION AND DELIVERY OF THIS NOTE, THE BORROWER ACCEPTS FOR
ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE
NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT
JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTES, 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, IN ANY ACTION,
SUIT OR PROCEEDING OF ANY KIND AGAINST IT WHICH ARISES OUT OF OR BY REASON OF
THIS NOTE, ANY LOAN DOCUMENT (AS DEFINED IN THE LOAN AND SECURITY AGREEMENT), OR
THE TRANSACTIONS CONTEMPLATED HEREBY, IN ADDITION TO ANY OTHER COURT IN WHICH
SUCH ACTION, SUIT OR PROCEEDING MAY BE BROUGHT, IRREVOCABLY AGREES TO BE BOUND
BY ANY FINAL JUDGMENT RENDERED BY ANY SUCH COURT IN ANY SUCH ACTION, SUIT OR
PROCEEDING IN WHICH IT SHALL HAVE BEEN SERVED WITH PROCESS IN THE MANNER
HEREINAFTER PROVIDED, SUBJECT TO EXERCISE AND EXHAUSTION OF ALL RIGHTS OF APPEAL
AND TO THE EXTENT THAT IT MAY LAWFULLY DO SO, WAIVES AND AGREES NOT TO ASSERT,
BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE, IN SUCH ACTION, SUIT OR PROCEEDING
ANY CLAIMS THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT,
THAT ITS
<PAGE>
-3-
PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE ACTION, SUIT
OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE THEREOF IS
IMPROPER, AND AGREES THAT PROCESS MAY BE SERVED UPON IT IN ANY SUCH ACTION, SUIT
OR PROCEEDING IN THE MANNER PROVIDED BY CHAPTER 223A OF THE GENERAL LAWS OF
MASSACHUSETTS, RULE 4 OF THE MASSACHUSETTS RULES OF CIVIL PROCEDURE OR RULE 4 OF
THE FEDERAL RULES OF CIVIL PROCEDURE.
ALL RIGHTS AND OBLIGATIONS HEREUNDER SHALL BE GOVERNED BY THE LAW OF THE
COMMONWEALTH OF MASSACHUSETTS AND THIS NOTE SHALL BE DEEMED TO BE UNDER SEAL.
FAXSAV INCORPORATED
By:
------------------------------
Name:
----------------------------
<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
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
FaxSav Incorporated on Form S-3 (File No. 333-64515 and File No. 333-67355) and
Form S-8 (File No. 333-17293) of our report dated February 3, 1999 on our audits
of the financial statements and financial statement schedule of FaxSav
Incorporated (formerly Digitran Corporation) as of December 31, 1998 and 1997
and for each of the three years in the period ended December 31, 1998, which
report is included in this Annual Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Florham Park, New Jersey
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the FaxSav
Incorporated Financial Statements, and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,260,450
<SECURITIES> 0
<RECEIVABLES> 3,198,688
<ALLOWANCES> 220,076
<INVENTORY> 0
<CURRENT-ASSETS> 8,621,356
<PP&E> 11,159,182
<DEPRECIATION> 5,671,961
<TOTAL-ASSETS> 14,487,725
<CURRENT-LIABILITIES> 4,897,110
<BONDS> 0
0
0
<COMMON> 139,042
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 14,487,725
<SALES> 21,116,726
<TOTAL-REVENUES> 21,116,726
<CGS> 11,128,752
<TOTAL-COSTS> 18,045,362
<OTHER-EXPENSES> (105,636)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 133,426
<INCOME-PRETAX> (8,085,178)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,085,178)
<EPS-PRIMARY> (.68)
<EPS-DILUTED> (.68)
</TABLE>
