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As Filed with the Securities and Exchange Commission on August 28, 2000
Registration No. 333-_______
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
__________________
JFAX.COM, INC.
(Exact Name of Registrant as specified in its Charter)
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Delaware 4822 51-0371142
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
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JFAX.COM, Inc.
d.b.a. j2 Global Communications, Inc.
6922 Hollywood Boulevard, Suite 900
Hollywood, California 90028
(323) 860-9200
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
Steven J. Hamerslag
President and Chief Executive Officer
j2 Global Communications, Inc.
6922 Hollywood Boulevard, Suite 900
Hollywood, California 90028
(323) 860-9200
(Name, Address, Including Zip Code, and Telephone Number, including Area Code,
of Agent for Service)
With Copies To:
Frank H. Golay, Jr., Esq. Joseph B. Hershenson, Esq.
Sullivan & Cromwell Howard, Rice, Nemerovski, Canady, Falk & Rabkin
1888 Century Park East A Professional Corporation
Los Angeles, CA 90067 Three Embarcadero Center, 7th Floor
(310) 712-6600 San Francisco, California 94111
(415) 434-1600
__________________
Approximate Date of Commencement of Proposed Sale to the Public:
Upon consummation of the merger described herein.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement number for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
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Title of Each Amount
Class of Securities to be Proposed Maximum Proposed Maximum Amount of
to be Registered Registered(1) Offering Price per Unit(2) Aggregate Offering Price(2) Registration Fee(2)
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Common stock, par value
$0.01 per share.......... 11,000,000 shares $1.3864 $15,250,622 $4,027
=================================================================================================================================
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(1) Based upon the maximum number of shares of common stock of the Registrant
which may be issued to stockholders of eFax.com pursuant to the merger
described herein, giving effect to the conversion of all shares of Series D
Convertible Preferred Stock of eFax.com. Also includes warrants,
exercisable at $0.01 per share, to purchase common stock of the Registrant
which may be issuable in lieu of certain shares of common stock of the
Registrant in the case of issuance to the holders of Series D Convertible
Preferred Stock of eFax.com.
(2) Pursuant to Rule 457(c) and (f) under the Securities Act of 1933, as
amended, the registration fee has been calculated based on the average of
the bid and asked price per share of eFax.com's common stock ($0.39) on
August 23, 2000 as reported on the over-the-counter electronic bulletin
board sponsored by Nasdaq, and reflects the exchange ratio of 0.2813 of a
share of the Registrant's common stock for each share of eFax.com common
stock in the merger.
__________________
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ The information in this proxy statement/prospectus is not complete and may +
+ be changed. These securities may not be sold until the registration +
+ statement filed with the Securities and Exchange Commission is effective. +
+ This proxy statement/prospectus is not an offer to sell nor does it seek an +
+ offer to buy these securities in any jurisdiction where the offer or sale is +
+ not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[j2 GLOBAL LOGO] [EFAX.COM LOGO]
A Merger Proposal -- Your Vote is Very Important
Dear Stockholder:
The boards of directors of JFAX.COM, Inc. and eFax.com have agreed on a
merger involving our two companies. JFAX.COM is now doing business as j2 Global
Communications, Inc. and is referred to throughout this document as j2 Global
Communications, Inc. or j2 Global.
If the merger is completed, holders of eFax.com common stock will receive a
fraction of a share of j2 Global common stock for each share of eFax.com common
stock they own. The exact fraction will be determined by a formula that in part
is based on:
. The amounts owing by eFax.com to j2 Global on the date the merger is
completed under their loan agreement;
. The amount of cash, prepaid expenses and overdue payables of eFax.com
on the date the merger is completed;
. The number of shares of eFax.com common stock issued or issuable upon
conversion of shares of eFax.com Series D Convertible Preferred Stock prior to
completion of the merger; and
. The date on which the merger occurs.
Because the exchange ratio formula depends on information as of the date
the merger is completed, the exact exchange ratio is not determinable as of this
time. However, each share of eFax.com common stock would be converted into 0.281
of a share of j2 Global common stock based on that formula if the merger occurs
on October 31, 2000 and on that date:
. eFax.com owes j2 Global $5 million under their loan agreement;
. eFax.com has no cash on hand and it has no prepaid expenses or
accounts payable which affect the exchange ratio; and
. The same number of shares of eFax.com common stock is outstanding as
is outstanding on the date of this proxy statement/prospectus.
Subject to limitations described in this proxy statement/prospectus,
holders of Series D Preferred Stock will receive 4,960.15 shares of j2 Global
common stock for each share of Series D Preferred Stock, which amount will
increase between the date of this proxy statement/prospectus and the time the
merger is completed at an annualized rate of 3.5%. The receipt of the merger
consideration by eFax.com stockholders will generally be a taxable event.
We cannot complete the merger unless we receive the appropriate approvals
from both companies' stockholders. Each of j2 Global and eFax.com is holding a
meeting of its stockholders to consider the applicable merger proposal. For j2
Global, that meeting will be its annual meeting of stockholders and j2 Global
stockholders will be asked to vote on a number of other important proposals.
Your vote on all applicable proposals is very important. Whether or not you
plan to attend your stockholders meeting, please complete, sign, date and return
the accompanying proxy in the enclosed self-addressed stamped envelope or follow
the telephone or Internet voting instructions at the bottom of your proxy card.
Returning the proxy or voting by telephone or Internet does not deprive you of
your right to attend the applicable meeting and to vote your shares in person.
After careful consideration, the board of directors of each company
unanimously determined the merger to be fair to, and in the best interests of,
the stockholders of their respective company, approved the merger agreement and
declared the merger advisable.
You should carefully consider the discussion in the section entitled "Risk
Factors" commencing on page __ of this proxy statement/prospectus.
[SIGNATURE] [SIGNATURE]
Steven J. Hamerslag Michael Crandell
President and Chief Executive Officer Executive Vice President and
j2 Global Communications, Inc. Chief Technology Officer
eFax.com
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the merger described in this proxy
statement/prospectus or the shares of j2 Global common stock to be issued in
connection with the merger or determined if this proxy statement/prospectus is
adequate or accurate. Any representation to the contrary is a criminal offense.
This proxy statement/prospectus is dated ___________, 2000 and was first
mailed to stockholders on or about __________, 2000.
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JFAX.COM, INC.
d.b.a. j2 Global Communications, Inc.
6922 Hollywood Boulevard, Suite 900
Hollywood, California 90028
________________
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
__________, 2000
TO ALL STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that the 2000 Annual Meeting of Stockholders of
JFAX.COM, Inc., a Delaware corporation, will be held at the Hollywood Roosevelt
Hotel, 7000 Hollywood Boulevard, Los Angeles, California 90028, on _________,
2000 at 10:00 a.m., local time, for the following purposes:
1. To approve the issuance of shares of JFAX.COM common stock, par value
$0.01 per share, pursuant to the terms of the Agreement and Plan of Merger,
dated as of July 13, 2000, among JFAX.COM, JFAX.COM Merger Sub, Inc., a wholly-
owned subsidiary of JFAX.COM, and eFax.com, a Delaware corporation, pursuant to
which JFAX.COM Merger Sub will merge with and into eFax.com and eFax.com will
survive the merger as a wholly-owned subsidiary of JFAX.COM.
2. To approve an amendment to JFAX.COM's certificate of incorporation to
change the corporate name from JFAX.COM, Inc. to j2 Global Communications, Inc.
3. To elect eight directors to serve for the ensuing year and until their
successors are elected.
4. To ratify an amendment to the JFAX.COM 1997 Stock Option Plan in order
to increase the number of shares of JFAX.COM common stock reserved for issuance
thereunder by 3,625,000 shares to an aggregate of 8,000,000 shares.
5. To ratify the selection of KPMG LLP as independent auditors for
JFAX.COM.
6. To transact such other business as may properly come before the
meeting and any adjournment(s) and postponement(s) thereof.
Only stockholders of record at the close of business on ___________, 2000
are entitled to notice of and to vote at the annual meeting. The attached proxy
statement/prospectus contains a more complete description of these items of
business. Any action may be taken on any of the foregoing proposals at the
annual meeting on the date specified above or on any date to which the annual
meeting may properly be postponed or adjourned. You may vote in person at the
JFAX.COM annual meeting even if you have returned a proxy or voted by telephone
or Internet.
By Order of the Board of Directors,
Nicholas V. Morosoff
Secretary
________, 2000
Hollywood, California
YOUR VOTE IS IMPORTANT.
IN ORDER TO ENSURE YOUR REPRESENTATION AT THE MEETING, YOU ARE
REQUESTED TO COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AS PROMPTLY
AS POSSIBLE AND RETURN IT IN THE ENCLOSED ENVELOPE OR TO VOTE BY
TELEPHONE OR INTERNET.
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EFAX.COM
1378 Willow Road
Menlo Park, California 94025
_________________
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
__________, 2000
TO ALL STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that a Special Meeting of stockholders of eFax.com,
a Delaware corporation, will be held at the Hollywood Roosevelt Hotel, 7000
Hollywood Boulevard, Los Angeles, California 90028, on _________, 2000 at 10:00
a.m., local time, for the following purposes:
1. To consider and vote on a proposal to adopt the Agreement and Plan of
Merger, dated as of July 13, 2000, among JFAX.COM, Inc. (currently doing
business as j2 Global Communications, Inc.), a Delaware corporation, JFAX.COM
Merger Sub, Inc., a wholly-owned subsidiary of JFAX.COM, and eFax.com, pursuant
to which JFAX.COM Merger Sub will merge with and into eFax.com and eFax.com will
survive the merger as a wholly-owned subsidiary of JFAX.COM.
2. To transact such other business as may properly come before the
meeting and any adjournment(s) and postponement(s) thereof.
Only stockholders of record at the close of business on ___________, 2000
are entitled to notice of and to vote at the special meeting. The attached proxy
statement/prospectus contains a more complete description of the proposed merger
agreement and merger. Any action may be taken on the merger proposal at the
special meeting on the date specified above or on any date to which the special
meeting may properly be postponed or adjourned. You may vote in person at the
eFax.com special meeting even if you have returned a proxy or voted by telephone
or Internet.
If you make a written demand for appraisal of your shares of eFax.com
common stock prior to the vote on the merger agreement and other conditions are
satisfied, you may be entitled to receive cash in an amount equal to the fair
market value of your shares, exclusive of any element of value arising from the
accomplishment or expectation of the merger, in lieu of receiving shares of
JFAX.COM common stock in the merger. In order to do so, you must comply with
Section 262 of the Delaware General Corporation Law. A summary of the material
provisions of Section 262 of the DGCL is included in the proxy
statement/prospectus in the section entitled "The Merger--Appraisal Rights." The
complete text of Section 262 is set forth as Appendix E to the proxy
statement/prospectus.
By Order of the Board of Directors,
Todd J. Kenck
Secretary
________, 2000
Menlo Park, California
YOUR VOTE IS IMPORTANT.
IN ORDER TO ENSURE YOUR REPRESENTATION AT THE MEETING, YOU ARE
REQUESTED TO COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AS PROMPTLY
AS POSSIBLE AND RETURN IT IN THE ENCLOSED ENVELOPE OR TO VOTE BY
TELEPHONE OR INTERNET.
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TABLE OF CONTENTS
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Page
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REFERENCES TO ADDITIONAL INFORMATION........................................................................ 1
NOTE AS TO ASSUMPTIONS...................................................................................... 1
QUESTIONS AND ANSWERS ABOUT THE MERGER...................................................................... 3
SUMMARY .................................................................................................... 5
Market Price and Dividend Information.................................................................... 12
Comparison of Unaudited Per Share Data................................................................... 14
Selected Financial Data of j2 Global..................................................................... 15
Selected Financial Data of eFax.com...................................................................... 16
Unaudited Pro Forma Financial Data....................................................................... 18
RISK FACTORS................................................................................................ 23
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS................................................... 42
THE j2 GLOBAL ANNUAL MEETING................................................................................ 43
General.................................................................................................. 43
Record Date and Outstanding Shares....................................................................... 43
Revocability of Proxies.................................................................................. 44
Voting and Solicitation.................................................................................. 45
Proposal 1-- Issuance of Shares in Merger................................................................ 45
Proposal 2-- Amendment to j2 Global Certificate of Incorporation......................................... 46
Proposal 3-- Election of Directors....................................................................... 46
Proposal 4-- Amendment To 1997 Stock Option Plan......................................................... 66
Proposal 5-- Ratification Of Selection Of Independent Auditors........................................... 70
THE eFAX.COM SPECIAL MEETING................................................................................ 71
General.................................................................................................. 71
Record Date and Outstanding Shares....................................................................... 71
Revocability of Proxies.................................................................................. 71
Voting and Solicitation.................................................................................. 72
THE MERGER.................................................................................................. 74
General.................................................................................................. 74
Background of the Merger................................................................................. 75
Reasons of eFax.com for the Merger and Recommendation of the eFax.com Board.............................. 79
Reasons of j2 Global for the Merger and Recommendations of the j2 Global Board........................... 81
Opinion of eFax.com's Financial Advisor.................................................................. 82
Opinion of j2 Global's Financial Advisor................................................................. 86
Interests of Management and Directors in the Merger...................................................... 90
Accounting Treatment..................................................................................... 91
Federal Income Tax Considerations of the Merger.......................................................... 91
Appraisal Rights......................................................................................... 92
THE MERGER AGREEMENT AND RELATED AGREEMENTS................................................................. 96
Introduction............................................................................................. 96
Consideration in the Merger.............................................................................. 96
Closing and Effective Time of the Merger................................................................. 99
Corporate Governance after the Merger.................................................................... 99
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i
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Conditions of the Merger................................................................................. 99
Post-Merger Compensation and Benefits.................................................................... 101
Treatment of Stock Options under Employee Stock Plans.................................................... 102
Treatment of Warrants.................................................................................... 102
Distribution of Certificates............................................................................. 102
Conduct of Business Pending the Merger................................................................... 103
Amendment, Waiver and Termination........................................................................ 104
Expenses and Termination Fee............................................................................. 105
Nasdaq Listing of j2 Global Common Stock................................................................. 105
Indemnification of eFax.com's Officers and Directors..................................................... 105
Agreements with eFax.com Preferred Stockholders.......................................................... 105
Agreements with Integrated Global Concepts............................................................... 108
Term Loan Agreement...................................................................................... 109
Other Agreements and Arrangements Involving j2 Global and eFax.com....................................... 109
INFORMATION ABOUT j2 GLOBAL................................................................................. 110
Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 110
Business................................................................................................. 116
j2 GLOBAL HISTORICAL FINANCIAL STATEMENTS................................................................... 132
INFORMATION ABOUT eFAX.COM.................................................................................. 174
General.................................................................................................. 174
Recent Developments...................................................................................... 174
Additional Information................................................................................... 175
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS................................................. 176
DESCRIPTION OF j2 Global CAPITAL STOCK...................................................................... 183
Common Stock............................................................................................. 183
Preferred Stock.......................................................................................... 184
Warrants and Options..................................................................................... 184
Registration Rights...................................................................................... 185
Securityholders' Agreement............................................................................... 185
Anti-Takeover Effects of Delaware Law.................................................................... 186
Director and Officer Liability........................................................................... 186
Notice Provisions........................................................................................ 187
Transfer Agent and Registrar............................................................................. 187
COMPARISON OF STOCKHOLDERS' RIGHTS.......................................................................... 188
Capitalization........................................................................................... 188
Number of Directors...................................................................................... 189
Voting Rights............................................................................................ 189
Classified Board of Directors............................................................................ 190
Director Voting.......................................................................................... 190
Removal of Directors..................................................................................... 190
Filling Vacancies on the Board of Directors.............................................................. 190
Advance Notice of Stockholder Proposals.................................................................. 190
Power to Call Special Meetings of Stockholders........................................................... 191
Action by Written Consent of Stockholders................................................................ 191
Business Combination Following a Change of Control....................................................... 191
Amendment of Charter Documents........................................................................... 192
Indemnification.......................................................................................... 192
Restriction on Sales of Stock............................................................................ 192
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Inspection of Stockholders List.......................................................................... 192
Appraisal Rights......................................................................................... 193
Rights Plans............................................................................................. 193
Preemptive Rights........................................................................................ 193
Dividends................................................................................................ 194
EXPERTS .................................................................................................... 195
VALIDITY OF j2 GLOBAL COMMON STOCK.......................................................................... 195
OTHER MATTERS............................................................................................... 195
j2 GLOBAL STOCKHOLDER PROPOSALS............................................................................. 195
eFAX.COM STOCKHOLDER PROPOSALS.............................................................................. 195
WHERE YOU CAN FIND MORE INFORMATION......................................................................... 196
</TABLE>
APPENDICES:
Appendix A -- Agreement and Plan of Merger, dated as of July 13, 2000, among
eFax.com, JFAX.COM, Inc. and JFAX.COM Merger Sub, Inc.
Appendix B -- Opinion of Pacific Growth Equities, Inc.
Appendix C -- Opinion of Tucker Anthony Cleary Gull Incorporated
Appendix D -- eFax.com Annual Report on Form 10-K for the fiscal year ended
January 1, 2000, as amended on May 1, 2000, and Quarterly
Report on Form 10-Q for the quarterly period ended July 1,
2000
Appendix E -- Delaware General Corporation Law Section 262
Appendix F -- JFAX.COM's Amended and Restated 1997 Stock Option Plan
Appendix G -- JFAX.COM Audit Committee Charter
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REFERENCES TO ADDITIONAL INFORMATION
The stockholders of JFAX.COM are being asked to approve an amendment to
JFAX.COM's certificate of incorporation to change the name of the corporation to
j2 Global Communications, Inc. JFAX.COM has already begun using the new name as
a trade name. For convenience, in this proxy statement/prospectus, we usually
refer to the corporation as "j2 Global." The term j2 Global refers to the
corporation both before and after the name change. In some instances involving
historical data, in particular, the corporation's financial data, we use
JFAX.COM or JFAX.
This proxy statement/prospectus incorporates important business and
financial information about eFax.com from documents that are not included in or
delivered with this proxy statement/prospectus. You can obtain documents
incorporated by reference in this proxy statement/prospectus by requesting them
in writing or by telephone from eFax.com at the following address:
eFax.com
1378 Willow Road
Menlo Park, California 94025
Attn: Todd J. Kenck, Secretary
(650) 324-0600
You will not be charged for any of the documents that you request. If you
would like to request documents, please do so by __________, 2000 in order to
receive them before your stockholders meeting.
A copy of each of eFax.com's Form 10-K for the fiscal year ended January 1,
2000, as amended on May 1, 2000, and Form 10-Q for the quarterly period ended
July 1, 2000 is attached as Appendix D to this proxy statement/prospectus.
See "Where You Can Find More Information" on page ____.
NOTE AS TO ASSUMPTIONS
The merger consideration to be received by the eFax.com stockholders is
based on an exchange ratio formula. The formula determines the fraction of a
share of j2 Global common stock into which each share of eFax.com common stock
will be converted.
Because the exchange ratio formula depends on information that cannot be
known until the date the merger is completed, the exact exchange ratio cannot be
determined at this time.
In an effort to help you understand the exchange ratio formula, we have
assumed that the exchange ratio is 0.281. If this assumption is correct, a share
of eFax.com common stock will be converted into 0.281 of a share of j2 Global
common stock if the merger occurs.
Our estimated exchange ratio assumes:
. The merger occurs on October 31, 2000;
. No additional shares of j2 Global or eFax.com common stock are issued
prior to the merger;
. eFax.com owes j2 Global $5 million under their loan agreement;
. At the time of the merger, eFax.com has no cash on hand and it has no
prepaid expenses or accounts payable which affect the exchange ratio; and
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. All 1,421 shares of Series D Preferred Stock which are outstanding as
of the date of this proxy statement/prospectus are outstanding immediately prior
to the merger and the preferred stockholders own no shares of eFax.com or j2
Global common stock immediately prior to the merger.
Our assumptions are our current best estimates. While we believe that it is
probable that the final exchange ratio will not be significantly different from
0.281, no assurance can be given. The actual exchange ratio may differ
substantially from our estimate and individual assumptions that make up the
exchange ratio could, and in some cases are likely to, deviate significantly
from those listed above. In particular, a delay in completing the merger to
substantially beyond October 31, 2000 is likely to result in a significant
reduction in the exchange ratio.
You should not solely rely on our assumptions, but should read this proxy
statement/prospectus in its entirety, including, in particular, the following
sections:
. "Risk Factors" beginning on page __;
. "The Merger" beginning on page __; and
. "The Merger Agreement and Related Agreements" beginning on page __.
You should also carefully read the merger agreement which is attached as
Appendix A to this proxy statement/prospectus. It is the legal document that
governs the merger. The actual exchange ratio formula is attached as Exhibit B
to the merger agreement. The formula is also included on page ___ of this proxy
statement/prospectus.
2
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QUESTIONS AND ANSWERS ABOUT THE MERGER
The questions and answers on this page relate to your vote to adopt the merger
agreement, in the case of eFax.com stockholders, and the issuance of j2 Global
common stock in connection with the merger, in the case of j2 Global
stockholders, and do not necessarily apply to the non-merger related proposals
to be voted on by j2 Global's stockholders.
Q: When will the merger occur?
A: The merger will occur after approval of the stockholders of each of j2
Global and eFax.com is obtained and the other conditions to the merger are
satisfied or waived. j2 Global and eFax.com are working towards completing
the merger as quickly as possible.
Q: What do I need to do now?
A: Following your review of this proxy statement/prospectus, mail your signed
proxy card in the enclosed return envelope as soon as possible so that your
shares can be voted at the annual meeting of j2 Global stockholders or the
special meeting of eFax.com stockholders, as the case may be. You may also
grant your proxy by using the toll-free telephone number included on your
proxy card or by Internet in the manner discussed on your proxy card.
Q: What happens if I return my proxy card but don't indicate how to vote?
A: If you sign your proxy properly but do not include instructions on how to
vote, your shares will be voted "FOR" approval of each proposal included in
the proxy.
Q: What happens if I don't vote?
A: If you are an eFax.com stockholder, not returning your proxy card and not
voting by telephone, Internet or in person will have the same effect as
voting against the adoption of the merger agreement. If you are a j2 Global
stockholder, not returning your proxy card or voting by telephone, Internet
or in person will only affect whether sufficient shares of j2 Global common
stock are considered present at the annual meeting in order to constitute a
quorum.
Q: Can I change my vote after I have mailed my signed proxy card or voted by
telephone or Internet?
A: Yes. You can change your vote at any time before your proxy is voted at the
meeting. You can do this in one of three ways. First, you can send a
written notice to j2 Global or eFax.com, as the case may be, stating that
you would like to revoke your proxy. Second, you can complete and submit a
new proxy card or change your vote by telephone or Internet. Third, you can
attend the meeting and vote in person.
Q: When and where will the stockholder meetings take place?
A: Both j2 Global and eFax.com will hold their stockholders meeting on , 2000
at 10:00 a.m., local time, at the Hollywood Roosevelt Hotel, 7000 Hollywood
Boulevard, Los Angeles, California 90028.
Q: If my broker holds my shares in street name, will my broker vote my shares
for me for the merger-related proposal?
A: No. Your broker will not be able to vote your shares for the merger-related
proposal without instructions from you. If you do not provide your broker
with voting instructions, your shares will be considered present at the
applicable meeting for purposes of determining a quorum, but will not be
considered to have been voted in favor of adoption of the merger-related
proposals. If you have instructed a broker to vote your shares, you must
follow directions received from your broker to change those instructions.
Q: Should I send in my stock certificates now?
A: No. If you hold j2 Global stock certificates, the merger will have no
effect on your shares. If you hold eFax.com stock certificates, after the
merger is completed, j2 Global will send you
3
<PAGE>
written instructions for exchanging your eFax.com stock certificates for j2
Global stock certificates.
Q: Who can help answer my questions?
A: You can write or call j2 Global's Investor Relations at 6922 Hollywood
Boulevard, Hollywood, California 90028, telephone (323) 860-9200 or
eFax.com's Investor Relations at 1378 Willow Road, Menlo Park, California
94025, telephone (650) 324-0600 with any questions about the merger and the
respective meetings or, for j2 Global stockholders, with any questions
about the other matters to be voted on at the j2 Global annual meeting. You
may also contact Georgeson Shareholder Communications Inc., eFax.com's
proxy solicitation firm, by telephone at 1-800-223-2064.
4
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--------------------------------------------------------------------------------
SUMMARY
This summary, together with the preceding Questions and Answers section,
highlights selected information from this proxy statement/prospectus. It does
not contain all of the information that is important to you. We urge you to read
carefully the entire proxy statement/prospectus and the other documents to which
we refer to fully understand the merger and other related transactions and the
other proposals to be voted on at the j2 Global annual meeting and the eFax.com
special meeting. See "Where You Can Find More Information" on page _____. Each
item in this summary includes a page reference directing you to a more complete
description of that item, if applicable. The merger agreement is attached as
Appendix A to this proxy statement/prospectus. We encourage you to read the
merger agreement because it is the legal document that governs the merger.
What you will receive as merger consideration
Holders of j2 Global common stock will continue to hold j2 Global common stock
after the merger (see page ____)
The merger will have no effect on the ownership of shares of j2 Global
common stock by j2 Global stockholders.
eFax.com stockholders will receive shares of j2 Global common stock or warrants
(see page ___)
Holders of eFax.com common stock will receive a fraction of a share of j2
Global common stock in exchange for each of their shares of eFax.com common
stock. The fraction of a share will be based on an exchange ratio formula that
takes into consideration, among other things:
. the amounts owing by eFax.com to j2 Global at the completion of the
merger under their loan agreement;
. the amount of cash, prepaid expenses and overdue payables of eFax.com
on the date the merger is completed;
. the number of shares of eFax.com common stock issued or issuable upon
conversion of shares of Series D Preferred Stock prior to completion of the
merger; and
. the date on which the merger occurs.
Because the exchange ratio formula depends on information that cannot be known
until the date the merger is completed, the exact exchange ratio cannot be
determined at this time. However, each share of eFax.com common stock would be
converted into 0.281 of a share of j2 Global common stock based on that formula
if the merger occurs on October 31, 2000 and on that date:
. eFax.com owes j2 Global $5 million under their loan agreement;
. eFax.com has no cash on hand and it has no prepaid expenses or
accounts payable which affect the exchange ratio; and
. The same number of shares of eFax.com common stock is outstanding as
is outstanding on the date of this proxy statement/prospectus.
The exact formula is included on page __ and is attached to the merger agreement
as Exhibit B which is itself attached to this proxy statement/prospectus as
Appendix A.
Holders of Series D Preferred Stock will receive 4,960.15 shares of j2
Global common stock for each share of Series D Preferred Stock, which amount
will increase between the date of this proxy statement/prospectus and the time
the merger is completed at an annualized rate of 3.5%. Pursuant to an agreement
among the holders of the Series D Preferred Stock, eFax.com and j2 Global, each
holder of Series D Preferred Stock agreed that it would receive shares of j2
Global common stock in the merger to the extent that the number of shares of j2
Global common stock held by the holder and its
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5
<PAGE>
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affiliates did not exceed 10% of the j2 Global common stock outstanding
immediately after the merger. In addition, each holder will receive a warrant,
exercisable for j2 Global common stock at $0.01 per share, to acquire the number
of shares of j2 Global common stock to which the holder would have been entitled
as merger consideration, but could not receive because of the 10% limitation.
j2 Global will not issue fractional shares in the merger. Instead, each
holder that would otherwise be entitled to a fractional share will receive a
cash payment in lieu of that fractional share.
Generally, the receipt of the merger consideration will be a taxable transaction
to eFax.com stockholders (see page __)
The receipt by eFax.com stockholders of shares of j2 Global common stock
and warrants in the merger will generally be a taxable event to eFax.com
stockholders.
j2 Global and eFax.com boards unanimously recommend stockholder approval
Each of the j2 Global and eFax.com boards of directors believes that the
merger is fair to and in the best interests of its respective stockholders. In
addition, the j2 Global board of directors believes that approval of each of the
other matters to be considered at the j2 Global annual meeting is in the best
interest of its stockholders.
j2 Global (see page ___)
j2 Global's board of directors unanimously recommends that j2 Global
stockholders vote "FOR" approval of:
. The issuance of shares of j2 Global common stock pursuant to the terms
of the merger agreement;
. The amendment to the j2 Global certificate of incorporation to change
the corporate name from JFAX.COM, Inc. to j2 Global Communications, Inc.;
. The election of eight directors;
. An increase in the number of shares subject to the j2 Global 1997
Stock Option Plan to 8,000,000; and
. The ratification of the selection of KPMG LLP as the independent
auditors for j2 Global.
eFax.com (see page ___)
eFax.com's board of directors unanimously recommends that eFax.com
stockholders vote "FOR" the adoption of the merger agreement.
Financial advisors say merger consideration is fair to eFax.com and j2 Global
stockholders (see pages ___ and ___)
Pacific Growth Equities, Inc. has served as financial advisor to eFax.com
in connection with the merger and has rendered an opinion to the eFax.com board
of directors that, as of July 12, 2000, the merger consideration pursuant to the
merger agreement to be paid to eFax.com stockholders in the merger is fair, from
a financial point of view, to eFax.com stockholders.
Tucker Anthony Cleary Gull has served as financial advisor to j2 Global for
the merger and has rendered an opinion to the j2 Global board of directors that,
as of July 12, 2000, the consideration to be paid by j2 Global in connection
with the merger is fair, from a financial point of view, to the j2 Global
stockholders.
You should read the opinions of Pacific Growth Equities and Tucker Anthony
completely in order to understand the assumptions made, matters considered and
limitations of the review undertaken in providing the opinions. The opinion of
Pacific Growth Equities is attached as Appendix B to this proxy
statement/prospectus and the opinion of Tucker Anthony is attached as Appendix C
to this proxy statement/prospectus.
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6
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eFax.com agreed to pay Pacific Growth Equities $250,000 for delivering its
fairness opinion. In addition, eFax.com agreed to pay Pacific Growth Equities'
expenses related to delivering the opinion.
j2 Global agreed to pay Tucker Anthony $200,000 for delivering its fairness
opinion. In addition, j2 Global agreed to pay up to $25,000 of Tucker Anthony's
out-of-pocket expenses related to delivering the opinion.
The j2 Global annual meeting
2000 annual meeting to be held on _______, 2000 (see page ___)
The j2 Global 2000 annual meeting will be held at the Hollywood Roosevelt
Hotel, 7000 Hollywood Boulevard, Los Angeles, California 90028, on _________,
2000 at 10:00 a.m., local time. At the meeting, you will be asked:
1. To approve the issuance of shares of j2 Global common stock, par value
$0.01 per share, pursuant to the terms of the Agreement and Plan of Merger,
dated as of July 13, 2000, among j2 Global, JFAX.COM Merger Sub, Inc., a
wholly-owned subsidiary of j2 Global, and eFax.com, a Delaware corporation,
pursuant to which JFAX.COM Merger Sub will merge with and into eFax.com and
eFax.com will survive the merger as a wholly-owned subsidiary of j2 Global;
2. To approve an amendment to j2 Global's certificate of incorporation to
change the corporate name from JFAX.COM, Inc. to j2 Global Communications,
Inc.;
3. To elect eight directors to serve for the ensuing year and until their
successors are elected;
4. To ratify an amendment to the j2 Global 1997 Stock Option Plan in order to
increase the number of shares of j2 Global common stock reserved for
issuance thereunder by 3,625,000 shares to an aggregate of 8,000,000
shares;
5. To ratify the selection of KPMG LLP as independent auditors for j2 Global;
and
6. To transact such other business as may properly come before the meeting and
any adjournment(s) thereof.
Record date set at ________, 2000; majority vote of shares present at the
meeting is required for approval of all proposals, except that proposal 2
requires a majority vote of all outstanding shares of j2 Global common stock.
(see page ____)
You can vote at the j2 Global annual meeting if you owned j2 Global common
stock at the close of business on ______, 2000. As of that date, there were
_________ shares of j2 Global common stock entitled to be voted at the annual
meeting. A majority of the outstanding shares of j2 Global common stock must be
present at the annual meeting for there to be a quorum, and approval of any of
the proposals requires that a majority of the shares of j2 Global present at the
annual meeting be voted in favor of such proposal, except that proposal 2
requires a majority vote of all outstanding shares of j2 Global common stock.
As of August 1, 2000, directors and executive officers of j2 Global and
their affiliates, owned approximately 45% of the outstanding shares of j2 Global
common stock. The directors and executive officers have indicated their
intention to vote the shares held by them and their affiliates in favor of
adoption of each of the proposals.
The eFax.com special meeting
Special meeting to be held on _______, 2000 (see page ___)
The eFax.com special meeting will be held at the Hollywood Roosevelt Hotel,
7000 Hollywood Boulevard, Los Angeles, California 90028, on _________, 2000 at
10:00 a.m., local time. At the meeting, you will be asked:
1. To consider and approve a proposal to adopt the Agreement and Plan of
Merger, dated as of July 13, 2000,
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7
<PAGE>
among j2 Global, Inc., a Delaware corporation, JFAX.COM Merger Sub, Inc., a
wholly-owned subsidiary of j2 Global, and eFax.com pursuant to which
JFAX.COM Merger Sub will merge with and into eFax.com and eFax.com will
survive the merger as a wholly-owned subsidiary of j2 Global; and
2. To transact such other business as may properly come before the meeting and
any adjournment(s) thereof.
Record date set at ________, 2000; majority vote of outstanding shares of common
stock is required to approve the merger agreement (see page ____)
You can vote at the eFax.com special meeting if you owned eFax.com common
stock at the close of business on ______, 2000. As of that date, there were
_________ shares of e.Fax.com common stock entitled to be voted at the special
meeting. Approval of the merger agreement requires that a majority of the
outstanding shares of eFax.com common stock be voted at the special meeting in
favor of the adoption of the merger agreement.
As of ________, 2000, directors and executive officers of eFax.com and
their affiliates, owned approximately 4.5% of the outstanding shares of eFax.com
common stock and 7.8% of the outstanding shares of eFax.com common stock if
shares into which options owned by such persons and exercisable within 60 days
are included. The directors and executive officers have indicated their
intention, and have contractually agreed, to vote the shares held by them and
their affiliates in favor of adoption of the merger agreement.
Information regarding j2 Global and eFax.com
j2 Global
6922 Hollywood Boulevard, Suite 900
Hollywood, California 90028
(323) 860-9200
j2 Global is an Internet-based messaging and communications service
provider to individuals and businesses throughout the world. j2 Global's
services enable the user's e-mail box to function as a single repository for all
e-mail, fax and voice-mail and permit convenient advanced message management
through e-mail or by phone. j2 Global is traded on The Nasdaq National Market
under the symbol "JCOM."
eFax.com
1378 Willow Road
Menlo Park, California 94025
(650) 324-0600
eFax.com is a leading provider of Internet communications services.
eFax.com provides its free and fee-based Internet communications services to
more than 2.0 million users, consisting of fax-to-e-mail, voice-mail and voice-
to-e-mail capabilities. The eFax.com services provide users with the capability
to receive facsimile transmissions as e-mail attachments by way of the Internet.
eFax.com is currently traded on the over-the-counter electronic bulletin board
sponsored by Nasdaq under the symbol "EFAX."
Appraisal rights of stockholders (see page ___)
Under Delaware law, eFax.com stockholders are entitled to an appraisal of
the fair value of their shares of eFax.com common stock and preferred stock and
to receive this value entirely in cash. The holders of eFax.com's Series D
Preferred Stock have agreed to waive their appraisal rights. To exercise
appraisal rights, an eFax.com stockholder must not vote for the adoption of the
merger agreement and must strictly comply with all of the procedures required by
Delaware law. These procedures are described more fully later in this document,
and a copy of the relevant portions of Delaware law is attached as Appendix E to
this document.
j2 Global stockholders are not entitled to appraisal rights in connection
with the merger.
The merger (see page ___)
We propose a merger in which eFax.com will be merged with a subsidiary of
j2
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Global and survive the merger as a wholly-owned subsidiary of j2 Global.
Pursuant to the merger agreement, j2 Global will issue shares of j2 Global
common stock in exchange for shares of eFax.com common stock and j2 Global
common stock and warrants in exchange for shares of eFax.com preferred stock.
j2 Global and eFax.com believe that the merger offers both companies'
stockholders the opportunity to benefit from the synergies and growth
opportunities expected to result from combining the two companies. For a more
detailed discussion of the reasons for the merger, see pages ___ through ___.
Assuming, for example only, that:
. No shares of eFax.com Series D Preferred Stock are converted into
common stock prior to the merger;
. The eFax.com preferred stockholders own no shares of eFax.com or j2
Global common stock immediately prior to the merger;
. The exchange ratio is 0.281; and
. No additional shares of j2 Global common stock are issued prior to the
closing of the merger,
then holders of j2 Global common stock immediately before the merger will own
approximately 77.3% of j2 Global common stock immediately after the merger,
holders of eFax.com common stock will own approximately 8.4% of j2 Global common
stock and holders of eFax.com preferred stock will own approximately 10.0% of j2
Global common stock. The eFax.com preferred stockholders will also receive as
merger consideration warrants to acquire 2,397,137 shares of j2 Global common
stock for $0.01 per share. In addition, 4.3% of j2 Global common stock will be
held by a service provider of eFax.com which is being issued 2.0 million shares
of j2 Global common stock immediately prior to the merger.
Certain members of the management and directors of eFax.com have interests in
the merger (see page ___)
When considering the recommendations of the eFax.com and j2 Global boards
of directors that you vote for the adoption of the merger agreement, in the case
of eFax.com stockholders, or the issuance of shares of j2 Global common stock as
merger consideration, in the case of the j2 Global stockholders, you should be
aware that the directors and executive officers of eFax.com may have interests
that are different from, or in addition to, your interests as a stockholder.
If the merger is completed:
. A change of control event will occur under the change in control
agreements between eFax.com and its two executive officers and the executive
officers' stock options will have their vesting accelerated by one year. In
addition, if within one year of the merger, an eFax.com executive is
involuntarily terminated without cause or resigns for good reason, then all of
the executive's unvested options will fully vest and become immediately
exercisable. An executive officer will be considered to have resigned for good
reason if his compensation is reduced, or his title, status, position or
responsibilities are adversely changed;
. Immediately prior to the merger, each non qualified stock option held
by an eFax.com executive officer will be amended to provide that the option can
be exercised for a period up to the lesser of 18 months after the termination of
the officer's continuous status as an employee of the company or the expiration
date of the option. Currently, the options expire 90 days after the officer is
no longer employed by eFax.com;
. Each of eFax.com's executive officers has been guaranteed a severance
payment of four or six months of his base pay in the event that he is terminated
for other than for cause or resigns for good reason on or prior to July 13,
2001;
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. Douglas Y. Bech, a director of eFax.com, will be nominated to be a
director of j2 Global;
. j2 Global will indemnify for six years the existing and past directors
and officers of eFax.com and will maintain directors' and officers' liability
insurance of at least $20 million for a period of six years so long as the
annual insurance premiums do not exceed 150% of the last annual premium paid by
eFax.com;
. Stock options held by eFax.com's officers and directors, as well as
other employees of eFax, will be converted into stock options to acquire j2
Global common stock;
. Warrants held by Steven Carnavale and Thomas Akin, directors of
eFax.com, to acquire 139,125 and 33,472 shares of eFax.com common stock,
respectively, will be converted into warrants to acquire shares of j2 Global
common stock; and
. Michael Crandell, eFax.com's Executive Vice President and Chief
Technology Officer, will enter into an employment agreement with j2 Global at
the time of the merger; provided that j2 Global can waive the obligation that
Mr. Crandell sign the employment agreement.
Accounting treatment of the merger (page ___)
j2 Global will account for the merger under the purchase method of
accounting.
Conditions that must be satisfied for the merger to occur (see page ___)
Completion of the merger is subject to various conditions, including:
. Approval of the issuance of j2 Global common stock pursuant to the
merger agreement by the j2 Global stockholders and approval of the merger
agreement by the eFax.com stockholders;
. Receipt of all governmental consents and approvals that are necessary
to permit completion of the merger;
. The holders of eFax.com Series D Preferred Stock remain obligated to
have their shares converted into shares of j2 Global common stock and warrants
to acquire j2 Global common stock as part of the merger; and
. Other usual conditions.
If the law permits, either of j2 Global or eFax.com could choose to waive a
condition to its obligation to complete the merger even though that condition
has not been satisfied. We cannot be certain when, or if, the conditions to the
merger will be satisfied or waived, or that the merger will be completed.
Regulatory approvals we must obtain for the merger
We believe there are no material regulatory approvals required to complete
the merger.
Merger expected to occur as soon as all conditions are satisfied (see page ___)
Under the merger agreement, the closing of the merger will occur at 9:00
a.m., California time, on the first business day on which the last of the
conditions shall be satisfied or waived.
Termination of the merger agreement (see page ___)
j2 Global and eFax.com can agree to abandon the merger, and terminate the
merger agreement, at any time prior to the time the merger is completed, even if
the stockholders of j2 Global have approved the issuance of j2 Global common
stock pursuant to the merger agreement or the stockholders of eFax.com have
approved the merger agreement. Also, either j2 Global or eFax.com can decide,
without the consent of the other, to abandon the merger if any of the following
occurs:
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. The merger has not been completed by December 31, 2000;
. The required approval of stockholders is not obtained at the
applicable meeting or any adjournment or postponement of that meeting;
. Any regulatory authority denies an approval we need to complete the
merger or issues any order preventing the merger; or
. The other party breaches a provision contained in the merger agreement
and does not (or cannot) correct the breach within 30 days after receiving
written notice that it is in breach.
In addition, eFax.com may terminate the merger agreement if it receives an
acquisition proposal from a third party that is more favorable to its
stockholders than the merger with j2 Global and additional conditions are met.
j2 Global, without the consent of eFax.com, can abandon the merger if the
holders of 5% or more of eFax.com common stock request appraisal rights.
If the merger does not occur and eFax.com, within two years of the
termination of the merger discussions with j2 Global, is acquired by another
entity or it receives at least $5 million from a securities offering or
offerings, eFax.com will be required to pay j2 Global an amount equal to:
. 1,750,000, times
. The fair market value of one share of eFax.com common stock at the
time of the acquisition or the securities offering, less $0.10.
The 1,750,000 amount will be reduced to 750,000 if the termination of the merger
agreement occurs because j2 Global's stockholders do not approve the merger or
if j2 Global materially breaches the merger agreement. If eFax.com is acquired
by another entity, it must pay the amount to j2 Global promptly following the
consummation of the acquisition. If eFax.com does a securities offering, it is
required to make the payment within 270 days of the offering. In addition,
eFax.com is required to pay j2 Global for any of j2 Global's out-of-pocket
expense related to the merger agreement or the term loan agreement between the
two parties if the merger agreement is terminated because of a failure of
eFax.com's stockholders to approve the merger agreement or as a result of any
action by eFax.com's board of directors or eFax.com's material breach of the
merger agreement.
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Market Price and Dividend Information
The following table lists, for the calendar quarters indicated, the high
and low sales prices per share of j2 Global common stock and eFax.com common
stock. j2 Global common stock did not trade prior to July 23, 1999. The prices
for j2 Global common stock are as reported on The Nasdaq National Market. The
prices for eFax.com on or prior to August 8, 2000 are as reported on The Nasdaq
National Market. As of August 9, 2000, the eFax.com common stock was delisted
from The Nasdaq National Market and began to trade on the over-the-counter
electronic bulletin board sponsored by Nasdaq. Neither j2 Global nor eFax.com
has ever declared or paid any cash dividends on its common stock.
<TABLE>
<CAPTION>
j2 Global Common Stock eFax.com Common Stock
---------------------- ---------------------
Calendar Quarter High Low High Low
---------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
1998
First Quarter.......................... $ - $ - $ 8.000 $ 2.875
Second Quarter......................... - - 7.500 4.125
Third Quarter.......................... - - 4.875 2.375
Fourth Quarter......................... - - 2.938 1.438
1999
First Quarter.......................... - - 33.000 2.500
Second Quarter......................... - - 32.500 10.563
Third Quarter.......................... 10.313 4.438 19.500 7.063
Fourth Quarter......................... 8.625 3.813 13.625 6.656
2000
First Quarter.......................... 7.125 4.438 9.469 4.813
Second Quarter......................... 5.063 1.250 5.594 0.813
Third Quarter
(through August 22).................... 3.500 1.000 1.156 0.250
</TABLE>
Dividend Policy
It is not anticipated that j2 Global will pay cash dividends for any
foreseeable period following the merger.
Recent Closing Prices
Shares of j2 Global common stock are quoted on The Nasdaq National Market
under the symbol "JCOM." Shares of eFax.com common stock are quoted on the over-
the-counter electronic bulletin board sponsored by Nasdaq under the symbol
"EFAX." Prior to August 9, 2000, the eFax.com common stock was traded on The
Nasdaq National Market.
The following table lists the last sales prices per share of the j2 Global
common stock and the eFax.com common stock on The Nasdaq National Market on July
13, 2000, the last trading day before public announcement of the merger, and the
last sales prices per share of j2 Global common stock on The Nasdaq National
Market and the eFax.com common stock on the over-the-counter electronic bulletin
board on ___________, 2000 the last practicable trading day prior to the date of
this proxy statement/prospectus. The table also presents implied equivalent per
share values for eFax.com common stock by multiplying the price per share of j2
Global common stock on the dates indicated by an assumed exchange ratio of
0.281. For a description of how the exact exchange ratio will be determined, see
"The Merger Agreement and Related Agreements--Consideration in the Merger"
beginning on page ____.
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<TABLE>
<CAPTION>
eFax.com Common Stock
Equivalent Value
(0.281 Share of j2
j2 Global eFax.com Global
Common Stock Common Stock Common Stock)
------------ ------------ ---------------------
<S> <C> <C> <C>
July 13, 2000................... $ 1.50 $ 1.03 $ 0.42
__________, 2000................ $ $ $
</TABLE>
The market price of both j2 Global common stock and eFax.com common stock
will fluctuate prior to the merger. Similarly, the market value of the shares of
j2 Global common stock following the merger will fluctuate. You should obtain
current market quotations for j2 Global common stock and eFax.com common stock.
The future prices for j2 Global common stock or eFax.com common stock cannot be
predicted.
Number of Stockholders
As of July 31, 2000, there were approximately 210 stockholders of record
who held shares of j2 Global common stock as shown on the records of j2 Global's
transfer agent for such shares.
As of August 21, 2000, there were approximately 268 stockholders of record
who held shares of eFax.com common stock, as shown on the records of eFax.com's
transfer agent for such shares, and two stockholders of record who held shares
of Series D Preferred Stock, as shown on eFax.com's records.
The numbers of common stockholders of j2 Global and eFax.com do not include
stockholders whose shares are held by other persons in a fiduciary capacity. The
actual number of beneficial owners of j2 Global common stock and eFax.com common
stock are substantially greater in number than the number of holders of record.
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Comparison of Unaudited Per Share Data
The following table shows information about our historical per share net
loss and book value and such information after giving effect to the merger,
which we refer to as "pro forma" information, and such information on a pro
forma equivalent basis, which is explained below. The pro forma information
gives effect to the merger under purchase accounting in accordance with
generally accepted accounting principles. In presenting the pro forma
information for certain periods, we assumed that j2 Global and eFax.com had been
merged throughout those periods. The pro forma comparative per share data are
derived from the unaudited pro forma condensed combined financial statements and
the related notes beginning on page __ of this proxy statement/prospectus. The
pro forma equivalent per share data are derived by multiplying the pro forma
comparative per share amounts by an assumed exchange ratio of 0.281, which is
what the parties reasonably estimate the exchange ratio to be based on currently
available information and assuming that the merger occurs on October 31, 2000.
We cannot assure you that this will be the actual exchange ratio upon completion
of the merger. The pro forma data do not attempt to predict or suggest future
results, or show how j2 Global would actually have performed had the merger been
completed throughout those periods.
You should read the following table together with the historical financial
information that we have presented in our prior filings with the Securities and
Exchange Commission. We have included or incorporated by reference this material
in this proxy statement/prospectus. See the historical financial information of
j2 Global and eFax.com included in or incorporated into this proxy
statement/prospectus and "Where You Can Find More Information" on page __ on how
to obtain additional information regarding j2 Global and eFax.com.
<TABLE>
<CAPTION>
Year ended Six Months ended
December 31, 1999 June 30, 2000
----------------- -------------
<S> <C> <C>
Book value per common share:
JFAX historical $ 1.48 $ 1.31
EFAX historical .62 .16
JFAX pro forma combined 1.84 1.49
EFAX proforma equivalent(1) 0.52 0.42
Loss per common share:
JFAX Historical:
Continuing operations $(0.47) $(0.36)
Basic and diluted available to common shareholders (0.68) (0.31)
EFAX Historical:
Continuing operations (2.00) (0.58)
Basic and diluted available to common shareholders (2.04) (0.93)
JFAX proforma combined:
Continuing operations (1.28) (0.56)
Basic and diluted available to common shareholders (1.42) (0.50)
EFAX proforma equivalent(1):
Continuing operations (0.36) (0.16)
Basic and diluted available to common shareholders (0.40) (0.14)
</TABLE>
----------------
(1) Amount is calculated by multiplying the JFAX pro forma combined amount by
the exchange ratio of 0.281
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Selected Financial Data of j2 Global
The following table presents selected historical financial data of j2
Global derived from j2 Global's previously filed financial statements. The
interim financial information has been derived from unaudited financial
statements of j2 Global. j2 Global believes that these financial statements
include all adjustments of a normal, recurring nature and all disclosures that
are necessary for a fair statement of the results for the unaudited interim
periods. Results for the interim periods do not necessarily indicate results
which may be expected for any other interim or annual period.
You should read the following table together with the historical financial
information that j2 Global has included in this proxy statement/prospectus
beginning at page ___.
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
----------------------------------------------------------------- ------------------------
1995 1996 1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ---------- ---------- ----------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue............................. $ -- $ 105 $ 685 $ 3,520 $ 7,643 $ 3,058 $ 5,873
Cost of revenue..................... 1 150 858 3,398 4,641 2,233 3,037
---------- ---------- ----------- ----------- ----------- ----------- -----------
Gross profit (loss)........ (1) (45) (173) 122 3,002 825 2,836
---------- ---------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing................ -- 150 1,069 4,990 6,355 1,365 4,618
Research and development........... -- 61 793 1,226 1,829 897 1,353
General and administrative......... 20 512 2,962 4,948 7,976 3,529 7,772
Amortization of goodwill and
other intangibles................. -- -- -- -- -- -- 1,801
Total operating expenses... 20 723 4,824 11,164 16,160 5,791 15,544
---------- ---------- ----------- ----------- ----------- ----------- -----------
Operating loss............. (21) (768) (4,997) (11,042) (13,158) (4,966) (12,708)
Other income (expense) net.......... -- -- 215 (933) 230 (883) 1,474
Loss from joint venture............. -- -- -- -- (82) -- --
Increase in market value of put
warrants........................... -- -- -- 5,256 -- -- --
Income tax expense.................. -- 1 2 2 2 -- --
---------- ---------- ----------- ----------- ----------- ----------- -----------
Net loss before extraordinary
item............................ $ (21) $ (769) $ (4,784) $ (17,233) $ (13,012) $ (5,849) $ (11,234)
========== ========== =========== =========== =========== =========== ===========
Extraordinary item.................. -- -- -- -- 4,428 -- --
========== ========== =========== =========== =========== =========== ===========
Net loss............................ $ (21) $ (769) $ (4,784) $ (17,233) $ (17,440) $ (5,849) $ (11,234)
========== ========== =========== =========== =========== =========== ===========
Net loss attributable to common
shares.......................... $ (21) $ (769) $ (4,784) $ (17,728) $ (19,012) $ (6,374) $ (11,234)
========== ========== =========== =========== =========== =========== ===========
Basic and diluted net loss per
common share...................... $ (0.00) $ (0.12) $ (0.30) $ (0.80) $ (0.68) $ (.26) $ (0.31)
========== ========== =========== =========== =========== =========== ===========
Weighted average common shares
used in determining net loss per
share ividends per share......... 5,575,000 6,406,666 15,738,334 22,181,960 28,098,994 24,310,263 35,373,365
========== ========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, June 30,
------------------------------------------------------- ----------
1995 1996 1997 1998 1999 2000
--------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................... $ -- $ 656 $ 23 $ 7,279 $ 12,256 $ 15,048
Short term investments...................... -- -- -- -- 23,511 7,519
Working capital (deficiency)................ (11) 479 58 6,735 36,555 23,368
Total assets................................ -- 896 2,613 10,513 58,625 61,251
Long term debt and put warrants............. -- -- -- 12,455 1,537 1,001
Redeemable common and preferred stock(1).... -- -- -- 9,317 7,065 7,065
Total stockholders' equity (deficiency).... (11) 677 1,618 (13,317) 45,147 47,177
</TABLE>
_____________
(1) See Note 4 of the notes to the j2 Global consolidated financial statements
for the conditions applicable to the redeemable securities.
--------------------------------------------------------------------------------
15
<PAGE>
--------------------------------------------------------------------------------
Selected Financial Data of eFax.com
The following table presents selected historical financial data of
eFax.com derived from eFax.com's previously filed financial statements. The
interim financial information has been derived from unaudited financial
statements of eFax.com. eFax.com believes that these financial statements
include all adjustments of a normal, recurring nature and all disclosures that
are necessary for a fair statement of the results for the unaudited interim
periods. Results for the interim periods do not necessarily indicate results
which may be expected for any other interim or annual period.
You should read the following table together with the historical financial
information that eFax.com has included with this proxy statement/prospectus
and/or presented in its prior filings with the SEC. eFax.com has incorporated
certain of these materials into this proxy statement/prospectus by reference to
those other filings. See "Where You Can Find More Information" on page __ on how
to obtain this information. In addition, a copy of each of eFax.com's Form 10-K
for the fiscal year ended January 1, 2000, as amended on May 1, 2000, and Form
10-Q for the quarterly period ended July 1, 2000 is attached as Appendix D to
this proxy statement/prospectus.
<TABLE>
<CAPTION>
Fiscal Year Nine Months
Ended Ended Six Months
March 31, December 31, Year Ended December 31(1), Ended June 30(1),
------------------------------------ -------------------
1996 1996(1) 1997 1998 1999 1999 2000
---------- ----------- ---------- ----------- ----------- --------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues:
Product.............................. $ 11,143 $ 10,205 $ 16,281 $ 23,385 $ 18,817 $ 11,159 $ 5,240
Software and technology license
fees.............................. 3,413 3,200 4,493 5,069 3,629 2,181 2,182
Development fees..................... 720 1,468 2,246 1,779 1,059 679 --
eFax services........................ -- -- -- -- 1,200 33 2,732
---------- ---------- --------- --------- --------- -------- --------
Total revenues.................... 15,276 14,873 23,020 30,233 24,705 14,052 10,154
---------- ---------- --------- --------- --------- -------- --------
Costs and expenses:
Cost of product revenues............. 11,102 8,441 11,886 16,005 13,540 7,725 3,753
Inventory write-down -
hardware products................. -- -- -- -- 1,060 -- --
Cost of software and technology
license fees revenues............. 587 517 770 710 584 279 193
Cost of eFax services................ -- -- -- -- 2,400 688 3,280
Research and development............. 2,318 2,554 5,355 5,445 6,188 3,234 2,524
Selling and marketing................ 5,216 5,212 6,046 7,267 19,972 6,495 4,793
General and administrative........... 1,652 1,726 3,031 2,592 5,320 3,195 3,238
Restructuring costs.................. -- -- -- -- 872 -- --
Acquisition and related expenses..... -- -- 2,106 -- -- -- --
---------- ---------- --------- --------- --------- -------- --------
Total costs and expenses.......... 20,875 18,450 29,194 32,019 49,936 21,596 17,781
---------- ---------- --------- --------- --------- -------- --------
Loss from operations................... (5,599) (3,577) (6,174) (1,786) (25,231) (7,544) (7,627)
---------- ---------- --------- --------- --------- -------- --------
Interest and other income
(expense), net.................... (259) -- 111 365 335 79 (299)
---------- ---------- --------- --------- --------- -------- --------
Loss before income taxes............... (5,858) (3,577) (6,063) (1,421) (24,896) (7,465) (7,926)
Provision for income taxes............. 35 107 96 80 67 39 15
---------- ---------- --------- --------- --------- -------- --------
Net loss............................... (5,893) (3,684) (6,159) (1,501) (24,963) (7,504) (7,941)
Preferred stock dividends and
accretion......................... -- (116) (68) -- (769) (171) (4,358)
---------- ---------- --------- --------- --------- -------- --------
Net loss applicable to common
stockholders...................... $ (5,893) $ (3,800) $ (6,227) $ (1,501) $ (25,732) $ (7,675) $(12,299)
---------- ---------- --------- --------- --------- -------- --------
Net loss per share:
Basic................................ $ (3.86) $ (2.13) $ (0.84) $ (0.13) $ (2.04) $ (0.63) $ (0.93)
========== ========== ========= ========= ========= ======== ========
Diluted.............................. $ (3.86) $ (2.13) $ (0.84) $ (0.13) $ (2.04) $ (0.63) $ (0.93)
========== ========== ========= ========= ========= ======== ========
Shares used in computing per share
amounts:
Basic................................ 1,526 1,784 7,389 11,784 12,585 12,273 13,198
========== ========== ========= ========= ========= ======== ========
Diluted.............................. 1,526 1,784 7,389 11,784 12,585 12,273 13,198
========== ========== ========= ========= ========= ======== ========
</TABLE>
--------------------------------------------------------------------------------
16
<PAGE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, December 31, June 30,
----------------------------------------------
1996 1996 1997(1) 1998 1999 2000
------------ ---------- ----------- ---------- --------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital............................ $ 4,978 $ 542 $ 12,814 $ 10,928 $ 1,946 $ (3,561)
Total assets............................... 12,031 7,092 18,856 16,215 15,508 8,831
Long term note payable, less current
portion.................................. -- 198 -- -- -- --
Redeemable preferred stock................. 2,610 2,726 -- -- -- --
Convertible preferred stock................ -- -- -- -- 7,467 11,886
Total stockholders' equity (deficit)....... 2,708 (861) 15,271 13,837 8,070 2,108
</TABLE>
________________
(1) Effective December 31, 1996, eFax.com changed its fiscal year end from
March 31 to a 52-53 week reporting year ending on the first Saturday on or
after December 31. For presentation purposes, the Company refers to its
six-month periods and twelve-month periods as ending on June 30 and
December 31, respectively.
--------------------------------------------------------------------------------
17
<PAGE>
--------------------------------------------------------------------------------
Unaudited Pro Forma Financial Data
The following table presents summary financial data for j2 Global and
eFax.com after giving effect to the merger, which we refer to as "pro forma"
information. The pro forma financial data give effect to the merger under the
purchase accounting method in accordance with generally accepted accounting
principles. In presenting the pro forma information for certain time periods, we
assumed that j2 Global and eFax.com had been merged throughout those periods.
Net loss per share amounts and weighted average shares have been adjusted to
reflect the conversion of each outstanding share of eFax.com common stock into
0.281 of a share of j2 Global common stock, the receipt by the holders of the
Series D Preferred Stock of 4,672,546 shares of j2 Global common stock and
warrants exercisable for 2,397,137 shares of j2 Global common stock at $0.01 per
share, and the receipt by a service provider of eFax.com of 2.0 million shares
of j2 Global common stock. We have assumed that 1,421 shares of eFax.com Series
D Preferred Stock will be outstanding immediately prior to the merger and that
the number of shares of eFax.com common stock outstanding immediately prior to
the merger is the same as the number outstanding on the date of this proxy
statement/prospectus.
We have based the information in the following tables on our historical
financial information that we have included in or with this proxy
statement/prospectus. When you read the summary financial information provided
in the following tables, you should also read the historical financial
information and the more detailed financial information we provide in or with
this proxy statement/prospectus, which you can find beginning at pages __ and __
and in Appendix D to this proxy statement/prospectus.
--------------------------------------------------------------------------------
18
<PAGE>
--------------------------------------------------------------------------------
j2 GLOBAL COMMUNICATIONS, INC.
Unaudited Pro Forma Condensed Combining
Statement of Operations
For the year ended December 31, 1999
<TABLE>
<CAPTION>
Historical
--------------------------------------- Proforma Proforma
JFAX EFAX Suretalk Adjustments Combined
---------- ------- ---------- ----------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenue:
Internet Services $ 7,643 1,200 159 -- 9,002
Product -- 18,817 -- c (18,817) --
Software and technology license fees -- 3,629 -- -- 3,629
Development Fees -- 1,059 -- c (1,059) --
-------------------------------------------------------------------------
Total revenues 7,643 24,705 159 (19,876) 12,631
Costs of Revenue:
Internet Services 4,641 2,400 214 d,e (1,088) 6,167
Product -- 15,472 -- c (15,472) --
Software and technology license fees -- 584 -- -- 584
----------- --------- -------- ----------------------------
Total cost of revenue 4,641 18,456 214 (16,560) 6,751
----------- --------- -------- ----------------------------
Gross profit (loss) 3,002 6,249 (55) (3,316) 5,880
Operating expenses:
Sales and marketing 6,354 19,972 308 c,d (2,463) 24,171
Research and development 1,828 6,188 458 c (2,488) 5,986
General and administrative 7,976 5,320 2,770 b,d,e 3,251 19,317
Goodwill and other Intangibles -- -- -- a 8,551 8,551
----------- --------- ---------------------------------------------
Total Operating Expenses 16,158 31,480 3,536 6,851 58,025
Loss from Continuing Operations (13,156) (25,231) (3,591) (10,167) (52,145)
Basic and Diluted loss per common share
from continuing operations (0.47) (1.28)
========== ==========
Weighted average shares oustanding 28,098,994 40,614,539
========== ==========
</TABLE>
<TABLE>
<S> <C>
Notes
(A) To adjust for goodwill and technology amortization as if the
companies had been combined as of January 1, 1999
Total goodwill and other intangibles
EFAX $ 15,361
Suretalk 10,293
-----------
25,654
Proforma amortization period 3 years
Proforma goodwill amortization for 1999 8,551
(B) To record the issuance of 2,000,000 shares at $1.75
per share to a third party service provider $ 3,500
(C) To reclassify Product and development fee
revenue and cost of revenue as a
discontinued operation
Revenues:
Product revenue 18,817
Development fees 1,059
Cost of revenue:
Product (15,472)
Development fees --
Sales and marketing (1,790)
Research and development (2,488)
----------
Net amount to be reclassified to discontinued
operations 126
===========
(D) to eliminate EFAX salary expense
which would not be incurred after
the acquisition
Portion allocable to the following:
Cost of service 353
General and administrative 984
Sales and Marketing 673
(E) Reclassification of cost of sales
to conform to JFAX presentation
General and Administative 735
</TABLE>
--------------------------------------------------------------------------------
19
<PAGE>
--------------------------------------------------------------------------------
j2 GLOBAL COMMUNICATIONS, INC.
Unaudited Pro Forma Condensed Combining
Statement of Operations
For the Six Months Ended June 30, 2000
<TABLE>
<CAPTION>
Historical
------------------------- Proforma Proforma
JFAX EFAX Adjustments Combined
---------- ------- ----------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenue:
Internet Services $ 5,873 $ 2,732 -- $ 8,605
Product -- 5,240 c (5,240) --
Software and technology license fees -- 2,182 -- 2,182
---------- ------- ------ ----------
Total revenues 5,873 10,154 (5,240) 10,787
Costs of Revenue:
Internet Services 3,037 3,280 d,e (1,152) 5,165
Product -- 3,753 c (3,753) --
Software and technology license fees -- 193 -- 193
---------- ------- ------ ----------
Total cost of revenue 3,037 7,226 (4,905) 5,358
---------- ------- ------ ----------
Gross profit 2,836 2,928 (335) 5,429
Operating expenses:
Sales and marketing 4,618 4,793 d,e (954) 8,457
Research and development 1,353 2,524 d (612) 3,265
General and administrative 7,772 3,238 b,d,e 3,422 14,432
Goodwill and other Intangibles 1,801 a 3,356 5,157
---------- ------- ------ ----------
Total Operating Expenses 15,544 10,555 5,212 31,311
Loss from Continuing Operations (12,708) (7,627) (5,547) (25,882)
Basic and Diluted Loss per common
share from continuing operations (0.36) (0.56)
========== ==========
Weighted average shares oustanding 35,373,365 46,373,365
========== ==========
</TABLE>
<TABLE>
<S> <C>
Notes
(A) To adjust for goodwill and technology amortization as if the
companies had been combined as of January 1, 2000
Total goodwill as reported in the combining condensed
balance sheet $20,136
Proforma amortization period 3 years
Proforma goodwill amortization for the six months ended
June 30, 2000 3,356
(B) To record the issuance of 2,000,000 shares at $1.75
per share to a third party service provider $ 3,500
(C) To reclassify Product revenue and cost of revenue as a
discontinued operation
Product revenue 5,240
Cost of product revenue (3,753)
-------
Net amount to be reclassified to discontinued
operations 1,487
=======
(D) to eliminate EFAX salary expense which would not be incurred
after the acquisition
Portion allocable to the following:
Cost of service 369
Engineering 612
General and administrative 700
Sales and Marketing 1,115
(E) Reclassification of cost of sales to conform to JFAX
presentation
General and Administative 622
Sales and marketing 161
-------
783
</TABLE>
--------------------------------------------------------------------------------
20
<PAGE>
--------------------------------------------------------------------------------
j2 Global believes that the foregoing Unaudited Pro Forma Condensed
Combining Statement of Operations for the Six Months Ended June 30, 2000 and the
Twelve Months Ended December 31, 1999 (the "Pro Forma Operating Statements") do
not fully reflect how the combined companies will perform following consummation
of the merger and completion of the integration of the two companies. In
particular, the Pro Forma Operating Statements assume that revenues from
eFax.com's Internet business are included in the pro forma j2 Global Internet
revenues at a cost that includes all of eFax.com's network operations costs.
However, j2 Global believes that the actual cost associated with this
incremental revenue is likely to be lower because:
. Historically, gross margins associated with the operation of j2 Global's
network are significantly higher than those associated with the operation of
eFax.com's network;
. The j2 Global network should be able to operate more efficiently (in
terms of per unit costs) following the integration of eFax.com's substantial
customer base; and
. A substantial portion of the costs reflected in the respective companies'
network operations costs are likely to be redundant.
In addition, the Pro Forma Operating Statements do not reflect the strong
quarter-to quarter Internet-related revenue growth which eFax.com has
experienced during the three fiscal quarters ended July 1, 2000 (as a result of
eFax.com's relatively recent efforts to convert free subscribers to paid
subscribers). Accordingly, following the integration of the eFax.com customer
base into the j2 Global network (which is not expected to be completed before
the second quarter of 2001), j2 Global believes that eFax.com's Internet
revenues will be higher than those reflected in the Pro Forma Operating
Statements and should be included in j2 Global's operating results at a lower
cost than that reflected in the Pro Forma Operating Statements. j2 Global
believes that the incremental cash expenditures to be incurred post-closing in
future quarterly periods and associated with the addition of eFax.com Internet
revenue will ultimately be immaterial.
Additionally, following the merger and integration, the companies will be
better positioned to generate revenues from their combined base of free
subscribers (either by converting free subscribers to paid subscribers, by
offering paid advertising in the customer interface utilized by free
subscribers, or by offering third-party promotions to free subscribers). j2
Global believes that this position will result in revenue generation
opportunities that are not reflected in the Pro Forma Operating Statements.
--------------------------------------------------------------------------------
21
<PAGE>
--------------------------------------------------------------------------------
j2 GLOBAL COMMUNICATIONS, INC.
Unaudited Pro Forma Condensed Combining Balance Sheet
June 30, 2000
<TABLE>
<CAPTION>
Historical
----------------------------- Proforma Proforma
JFAX EFAX Adjustments Combined
----------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $15,048 175 15,223
Short term Investments 7,519 7,519
Accounts receivable 972 1,451 c (1,160) 1,263
Inventories -- 368 c (368) --
Notes receivable 1,500 -- b (1,500) --
Prepaid expenses and other current assets marketing costs 3,160 1,168 4,328
---------------------------------------------------------------------
Total current assets 28,199 3,162 (3,028) 28,333
Furniture, fixtures and equipment, net 5,791 2,156 7,947
Long term Investments 15,169 -- 15,169
Capitalized Software Costs 2,138 -- 2,138
Goodwill and other Intangibles 8,301 -- a 20,136 28,437
Other long-term assets 1,653 3,513 5,166
---------------------------------------------------------------------
$61,251 8,831 17,108 87,190
=====================================================================
Liabilities, Redeemable Securities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 2,503 5,282 a 1,600 7,751
b (1,500)
c (134)
Deferred revenue 316 1,028 1,210
Current portion of capital lease obligations 236 -- 236
Current portion of long-term debt 1,359 -- 1,359
Other 417 413 830
---------------------------------------------------------------------
Total current liabilities 4,831 6,723 (34) 11,520
Capital lease obligations 179 -- 179
Long-term debt 1,001 -- 1,001
Redeemable common stock 7,065 -- 7,065
Common Stock subject to put option 998 -- 998
Total stockholders' equity (deficiency) 47,177 2,108 a,c 17,142 66,427
---------------------------------------------------------------------
$61,251 8,831 17,108 87,190
=====================================================================
</TABLE>
<TABLE>
<S> <C>
Notes
(A) Purchase price of 11,000,000 shares at $1.75 per
share (August 23, 2000) is $19,250,000 in total
consideration
Purchase price $19,250
Add estimated merger related transaction costs 1,600
Less fair value of assets in excess of liabilities
assumed (714)
---------
Total Goodwill and other intangibles acquired
attributable to EFAX $20,136
=========
(B) Elimination of advances to EFAX as of June 30, 2000 $ 1,500
(C) To record the liquidation of certain assets and
liabilities related to the discontinuation of the
EFAX product business:
Inventories at book value $ 368
Accounts receivable 1,160
Less-accounts payable (134)
---------
1,394
=========
</TABLE>
--------------------------------------------------------------------------------
22
<PAGE>
Risk Factors
By voting in favor of the adoption of the merger agreement, eFax.com
stockholders will be choosing to invest in j2 Global common stock. An investment
in j2 Global common stock involves a high degree of risk. In addition to the
other information contained in or incorporated by reference into this proxy
statement/prospectus, you should carefully consider the following risk factors
in deciding whether to vote for the adoption of the merger agreement.
Risks Related to the Merger
Holders of eFax.com common stock will receive a fraction of a share of j2 Global
common stock for each share of eFax.com common stock based on a formula which is
subject to the amount owing to j2 Global under the term loan agreement, the
amount of cash on hand at eFax.com and other factors
Upon completion of the merger, each share of eFax.com common stock will be
exchanged for a fraction of a share of j2 Global common stock based upon an
agreed upon formula. See "The Merger Agreement and Related Agreements--
Consideration in the Merger" beginning on page ____. There will be no adjustment
for changes in the market price of eFax.com common stock. A number of factors
will affect the final exchange ratio, including:
. A downward adjustment in the fraction of a share to be received for
increases in the amount which is outstanding under the term loan agreement
between the parties;
. An upward adjustment for increases in the amount of cash on hand at
eFax.com at the time of completion of the merger;
. The number of shares, if any, of eFax.com Series D Preferred Stock
converted into shares of eFax.com common stock prior to the merger; and
. Any change in the market price of j2 Global common stock. An increase
in the market price of j2 Global common stock will cause a downward adjustment
in the fraction of a share to be received if on the closing date of the merger
the sum of:
. $5 million;
. eFax.com's cash on hand other than cash held in an asset sales
account and cash received by eFax.com (a) upon the exercise of stock
options under eFax.com's stock option plans, (b) from purchases under
eFax.com's employee stock purchase plan and (c) upon the exercise of any of
eFax.com's warrants; plus
. The amount of eFax.com's prepaid rents and some of its prepaid
insurance premiums;
is greater than the sum of:
. The amount outstanding from eFax.com to j2 Global under the loan
agreement between the two parties; plus
23
<PAGE>
. eFax.com's payables which are 45 days or more past due.
j2 Global and eFax.com are not permitted to withdraw from the merger or
resolicit the vote of their stockholders solely because of changes in the market
price of j2 Global common stock or the amount outstanding under the loan
agreement at the time of completion of the merger. All of the preceding factors
will affect the specific number of shares and the total dollar value of the
shares of j2 Global common stock to be received by holders of eFax.com common
stock. The merger may not be completed immediately following the j2 Global and
eFax.com stockholder meetings if all regulatory approvals have not yet been
obtained. We cannot assure you of the exact value of the shares of j2 Global
common stock for which the shares of eFax.com common stock will be exchanged,
and this value may increase or decrease to the detriment of either the present
stockholders of j2 Global or eFax.com.
Rights of the eFax.com preferred stockholders could affect the consideration to
be received by the holders of the eFax.com common stock and the ability to
finalize the merger
The consideration to be received for each share of eFax.com Series D
Preferred Stock is 4,960.15 shares of j2 Global common stock, which amount will
increase between the date of this proxy statement/prospectus and the time the
merger is completed at an annualized rate of 3.5%. Any downward fluctuation in
the total consideration to be received by all of the eFax.com stockholders will
only affect the holders of eFax.com common stock.
The eFax.com preferred stockholders will have a right to require a cash
redemption for the Series D Preferred Stock if the total merger consideration to
be received by the eFax.com common stockholders and the eFax.com preferred
stockholders exceeds 12,000,000 shares of j2 Global common stock. The cash
redemption amount of the Series D Preferred Stock on the date of this proxy
statement/prospectus is $19.4 million. In determining the 12 million figure,
each share of j2 Global common stock which can be acquired upon the exercise of
any warrant received by a preferred stockholder as merger consideration will be
included. If, for example only, the exchange ratio is 0.281 and the merger
occurs on October 31, 2000, the total merger consideration to be received by
eFax.com's common and preferred stockholders will consist of 11.0 million shares
of j2 Global common stock, including the shares of common stock for which the
warrants granted as merger consideration are exercisable. However, no assurance
can be given that the total merger consideration will not exceed 12.0 million
shares of j2 Global common stock under the exchange ratio formula. If events
occur which would cause the merger consideration to exceed 12.0 million shares,
there can be no assurance that the preferred stockholders would not exercise
their cash redemption rights or would not require additional consideration in
order to permit the completion of the merger.
Although j2 Global and eFax.com expect that the merger will result in benefits,
those benefits may not be realized
Achieving the benefits of the merger may depend in part on the integration
of technology, operations and personnel. The integration of j2 Global and
eFax.com will be a complex, time consuming and expensive process and may disrupt
the business of either or both if not completed in a timely and efficient
manner. The challenges involved in this integration include the following:
. Combining product offerings and product lines effectively and quickly;
. Integrating sales efforts so that customers can do business easily
with all parts of j2 Global after the merger;
24
<PAGE>
. Bringing together the companies' marketing efforts so that the
industry receives useful information about the merger;
. Coordinating research and development activities to enhance
introduction of new products and technologies;
. Achieving synergies that have a positive impact on cash flow; and
. Persuading employees that j2 Global's and eFax.com's business cultures
are compatible.
It is not certain that the businesses of j2 Global and eFax.com can be
successfully integrated in a timely manner or at all or that any of the
anticipated benefits will be realized. Failure to do so could materially harm
the business and operating results of j2 Global after the merger. Also, neither
j2 Global nor eFax.com can assure you that the growth rate of j2 Global after
the merger will equal the historical growth rate experienced by either j2 Global
or eFax.com.
In addition, the physical integration of the two companies' operating
systems will depend to a significant degree on the work of third parties. On the
closing date for the merger, j2 Global will issue 2,000,000 shares of its common
stock to one of the third parties in part as compensation for transition
services to be provided to eFax.com and to acquire a license to intellectual
property developed by the third party as part of the services which it had
previously provided to eFax.com.
Some of the products and services offered by either eFax.com or j2 Global
may not be offered by the combined company, resulting in the potential loss of
customers.
Customer and employee uncertainty related to the merger could harm the combined
company
j2 Global's or eFax.com's customers may, in response to the announcement of
the merger, delay or defer purchasing decisions. Any delay or deferral in
purchasing decisions by j2 Global's or eFax.com's customers could seriously harm
the business of the combined company. Similarly, j2 Global and eFax.com
employees may experience uncertainty about their future role with the combined
company until or after strategies with regard to eFax.com are announced or
executed. This may adversely affect the combined company's ability to attract
and retain key management, marketing and technical personnel. Additionally, a
number of eFax.com employees, including three of its five executive officers,
have left the company since the initial announcement of the proposed merger and
additional key personnel may leave. These departures may affect the ability to
integrate the two companies and to operate the combined company after the
merger.
j2 Global's operating results will suffer as a result of purchase accounting
treatment, the impact of amortization of goodwill and other intangibles relating
to its proposed combination with eFax.com
Under U.S. generally accepted accounting principles, j2 Global will account
for the merger using the purchase method of accounting. Under purchase
accounting, j2 Global will record the market value of its common stock issued in
connection with the merger, the fair value of the options and warrants to
purchase eFax.com common stock, which became options and warrants to purchase
its common stock, and the amount of direct transaction costs as the cost of
acquiring the business of eFax.com. j2 Global will allocate that cost to the
individual assets acquired and liabilities assumed, including various
identifiable intangible assets such as acquired technology, acquired trademarks
and trade names and acquired workforce, and to in-process research and
development based on their respective fair values. Intangible assets including
goodwill will be generally amortized over a three year period. As described in
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the Unaudited Pro Forma Condensed Combined Consolidated Financial Statements
beginning on page ___, the amount of purchase cost allocated to goodwill and
other intangibles is estimated to be approximately $20.1 million. If goodwill
and other intangible assets were amortized in equal quarterly amounts over a
three year period following completion of the merger, the accounting charge
attributable to these items would be approximately $1.7 million per quarter and
$6.7 million per fiscal year. As a result, purchase accounting treatment of the
merger will increase the net loss for j2 Global in the foreseeable future which
could have a material and adverse effect on the market value of j2 Global common
stock following completion of the merger.
j2 Global and eFax.com expect to incur significant costs associated with the
merger
j2 Global estimates that it will incur direct transaction costs of
approximately $800,000 associated with the merger, which will be included as a
part of the total purchase cost for accounting purposes. In addition, eFax.com
estimates that it will incur direct transaction costs of approximately $800,000
in connection with the merger other than expenses related to transitioning the
eFax.com operating system to the operating system of the combined company. j2
Global and eFax.com believe j2 Global after the merger may incur charges to
operations, which we cannot currently estimate, in the quarter in which the
merger is completed or the following quarters, to reflect costs associated with
integrating the two companies. After the merger, j2 Global may incur additional
material charges in subsequent quarters to reflect additional costs associated
with the merger.
The price of j2 Global common stock may be affected by j2 Global's assumption of
options and warrants
The price of j2 Global common stock may also be affected by the number of
warrants and stock options which j2 Global will assume as a result of the merger
and which will be exercisable for j2 Global common stock. eFax.com currently has
outstanding stock options and warrants to acquire 4,045,628 shares of eFax.com
common stock which may be exercise for shares of j2 Global common stock after
the merger. These stock options and warrants will be converted into options and
warrants to acquire an amount of j2 Global common stock based on the same
exchange ratio used to determine the fraction of a share of j2 Global common
stock into which a share of eFax.com common stock will be converted in the
merger. Assuming, for example only, an exchange ratio of 0.281, the current
eFax.com options and warrants would convert into a right to receive 1,136,821
shares of j2 Global common stock. In addition, the eFax.com preferred
stockholders will have a warrant to acquire j2 Global common stock for $0.01 per
share. Based on the assumptions discussed on page ____, it is estimated that the
warrants issued to the preferred stockholders as merger consideration will be
exercisable for 2,397,137 shares of j2 Global common stock. The overhang on the
market created by these additional stock options and warrants could negatively
affect the price of j2 Global's common stock.
If the merger is not completed, j2 Global's and eFax.com's stock prices and
future business and operations could be harmed
If the merger is not completed, j2 Global and eFax.com may be subject to
the following material risks, among others:
. The prices of j2 Global and eFax.com common stock may decline to the
extent that the current market price of j2 Global and eFax.com common stock are
higher based on a market assumption that the merger will be completed; and
. j2 Global's and eFax.com's costs related to the merger, such as legal,
accounting and some of the fees of its financial advisor, must be paid even if
the merger is not completed.
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Further, with respect to eFax.com:
. If the merger is terminated and eFax.com's board of directors
determines to seek another merger or business combination, it is uncertain that
it will be able to find a partner willing to pay an equivalent or more
attractive price than that which would be paid in the merger;
. eFax.com will be required to repay to j2 Global the amounts due under
the term loan agreement. At present, eFax.com does not have sufficient cash to
repay the amounts outstanding under the term loan agreement and has no current
prospects for raising the money. In addition, eFax.com has granted j2 Global a
security interest in most of eFax.com's assets as collateral for the amounts
outstanding under the term loan agreement;
. If the merger is terminated, the holders of eFax.com Series D
Preferred Stock are expected to have the right to require eFax.com to redeem all
of the outstanding preferred stock in cash (approximately, $19.4 million on the
date of this proxy statement/prospectus). At present, eFax.com does not have
sufficient cash to redeem its outstanding preferred stock; and
. Unless eFax.com can raise substantial additional funds, it will be
unable to continue its operations as they are currently being conducted.
eFax.com does not currently have any prospects for obtaining significant
additional financing and no assurance can be given that eFax.com will be able to
obtain the necessary funds to continue its business.
Third-party litigation claims may affect the value of eFax.com to the j2 Global
stockholders
On June 20, 2000, Jerry Kirsch filed a lawsuit against eFax.com
asserting infringement of a United States patent. Although the suit relates to a
line of business which is being discontinued by eFax.com, if the suit is
successful it could have a material adverse effect on eFax.com and j2 Global
after the merger. Even if the claim is unsuccessful, it could require eFax.com
and j2 Global after the merger to spend significant time and money in
litigation.
Risks Related to j2 Global which will Include eFax.com Following the Completion
of the Merger
Because j2 Global has a limited operating history, it is difficult to evaluate
its business
j2 Global has a limited operating history. j2 Global was formed in December
1995, and its services became commercially available in 1996. Because of j2
Global's limited operating history, you have limited operating and financial
data about the company upon which to base an evaluation of its performance and
an investment in its common stock or other securities. You should consider j2
Global's prospects in light of the risks, expenses and difficulties it may
encounter, including those frequently encountered by new companies competing in
rapidly evolving markets.
These risks include j2 Global's ability to:
. Acquire businesses and technologies;
. Integrate the operations of the companies that it has recently
acquired;
. Integrate the operations of eFax.com;
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. Manage growing domestic and international operations;
. Create and maintain strategic relationships;
. Expand sales and marketing activities;
. Expand its customer base and retain key clients;
. Introduce new services;
. Compete in a highly competitive market;
. Upgrade its systems and infrastructure to handle any increases in
messaging traffic;
. Reduce service interruptions; and
. Recruit and retain key personnel.
If j2 Global is unable to execute its plans and grow its business, either
as a result of the risks identified in this section or for any other reason,
this failure would have a material adverse effect on its business, prospects,
financial condition and results of operations.
j2 Global expects its losses and negative cash flow to continue, which may
aversely impact its business and its stockholders
j2 Global has incurred substantial operating losses, net losses and
negative cash flows on both an annual and quarterly basis. For the year ended
December 31, 1999, j2 Global had an operating loss of $13.2 million, a net loss
attributable to common shares of $19.0 million and negative cash flow from
operating activities of $12.1 million. For the six-months ended June 30, 2000,
j2 Global had an operating loss of $12.7 million, a net loss attributable to
common shares of $11.2 million and negative cash flow from operating activities
of $6.2 million. j2 Global expects to continue to incur net losses for the
foreseeable future and cannot assure you that it will ever achieve profitability
or generate positive cash flow.
j2 Global expects its expenses to increase, and its expenses may exceed its
revenues for a significant period, which could delay or prevent altogether its
achieving profitability, and harm its stockholders
j2 Global expects its operating expenses and capital expenditures to
increase significantly, especially in the areas of sales and marketing expenses,
operating and infrastructure expenses and general and administrative expenses,
as it develops and expands its business. As a result, j2 Global will need to
increase its revenue significantly and/or reduce expenses to become profitable.
In order to grow j2 Global's revenue, it needs to add customers for its services
and increase the usage of its services by its customers, thereby increasing the
fees and usage charges that it collects. If j2 Global's revenue does not
increase as much as it expects or if increases in j2 Global's expenses are in
excess of its projections, there could be a material adverse effect on its
business, prospects, financial condition and results of operations.
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j2 Global may need and be unable to obtain additional funding on satisfactory
terms, which could dilute its stockholders or impose burdensome financial
restrictions on its business
If j2 Global's capital requirements or revenue vary materially from its
current plans or if unforeseen circumstances occur, j2 Global may require
additional financing sooner than it anticipates. This may not be available on a
timely basis, in sufficient amounts or on terms acceptable to j2 Global.
Recently, a number of Internet companies, including eFax.com, have had
difficulty obtaining financing. Any new financing may also dilute existing
stockholders. Any debt financing or other financing of securities senior to
common stock will likely include financial and other covenants that will
restrict j2 Global's flexibility. At a minimum, j2 Global expects these
covenants to include restrictions on its ability to pay dividends on its common
stock. Any failure to comply with these covenants would have a material adverse
effect on j2 Global's business, prospects, financial condition and results of
operation.
Further acquisitions could result in dilution, operating difficulties and other
harmful consequences
j2 Global expects to acquire or invest in additional businesses, products,
services and technologies that complement or augment its service offerings and
customer base. Since January 2000, j2 Global has completed the acquisition of
one company (SureTalk.com, Inc.) and certain assets of another company
(TimeShift, Inc.) Pursuant to the merger agreement, j2 Global will acquire
eFax.com if the transaction is approved by the stockholders of both companies
and the conditions to closing are met. To be successful, j2 Global will need to
identify suitable acquisition candidates, integrate disparate technologies and
corporate cultures and manage a geographically dispersed company. j2 Global
cannot assure you that it will be able to do this successfully. Acquisitions
could divert attention from other business concerns and could expose j2 Global
to unforeseen liabilities. In addition, j2 Global may lose key employees while
integrating any new companies. j2 Global expects to pay for some acquisitions by
issuing additional common stock, which would dilute current stockholders. j2
Global may also use cash to make acquisitions. It may be necessary for j2 Global
to raise additional funds through public or private financings. j2 Global cannot
assure you that it will be able to raise additional funds at any particular
point in the future or on favorable terms. In addition, j2 Global may be
required to amortize significant amounts of goodwill and other intangible assets
in connection with future acquisitions, which would materially increase
operating expenses.
j2 Global will face technical, operational and strategic challenges that may
prevent it from successfully integrating SureTalk.com and TimeShift
Acquisitions involve risks related to the integration and management of
acquired technology, operations and personnel. The integration of SureTalk.com,
Inc. and TimeShift, Inc. into j2 Global's business has been and will be a
complex, time consuming and expensive process and may disrupt its business if
not completed in a timely and efficient manner. j2 Global must operate as a
combined organization utilizing common information and communication systems,
operating procedures, financial controls and human resources practices. j2
Global may encounter substantial difficulties, costs and delays involved in
integrating the operations of its subsidiaries and businesses, including:
. Potential incompatibility of business cultures;
. Perceived adverse changes in business focus;
. Potential conflicts in advertising or strategic relationships; and
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. The loss of key employees and diversion of the attention of management
from other on-going business concerns.
Consequently, j2 Global may not be successful in integrating acquired
businesses or technologies and may not achieve anticipated revenue and cost
benefits. j2 Global also cannot guarantee that these acquisitions will result in
sufficient revenues or earnings to justify its investment in, or expenses
related to, these acquisitions or that any synergies will develop. If j2 Global
fails to execute its acquisition strategy successfully for any reason, its
business will suffer significantly.
j2 Global has experienced rapid growth which has placed a strain on resources
and its failure to manage growth could cause its business to suffer
j2 Global has expanded its operations rapidly and intends to continue this
expansion. The number of j2 Global employees increased from 68 on December 31,
1998 to over 100 on July 31, 2000. This expansion has placed, and is expected to
continue to place, a significant strain on managerial, operational and financial
resources. To manage any further growth, j2 Global will need to improve or
replace its existing operational, customer service and financial systems,
procedures and controls. Any failure to properly manage these systems and
procedural transitions could impair j2 Global's ability to attract and service
customers, and could cause it to incur higher operating costs and delays in the
execution of its business plan. j2 Global will also need to continue the
expansion of its operations and employee base. j2 Global's management may not be
able to hire, train, retain, motivate and manage required personnel. In
addition, j2 Global's management may not be able to successfully identify,
manage and exploit existing and potential market opportunities. If j2 Global
cannot manage growth effectively, its business and operating results could
suffer.
j2 Global may not be able to respond to the rapid technological change of the
Internet messaging and communications industry
The Internet messaging and communications industry is characterized by
rapid technological change, changes in user and customer requirements and
preferences, and the emergence of new industry standards and practices that
could render j2 Global's existing services, proprietary technology and systems
obsolete. j2 Global must continually improve the performance, features and
reliability of its services, particularly in response to competitive offerings.
j2 Global's success depends, in part, on its ability to enhance its existing
messaging and communications services and to develop new services, functionality
and technology that address the increasingly sophisticated and varied needs of
prospective subscribers. If j2 Global does not properly identify the feature
preferences of prospective subscribers, or if it fails to deliver features which
meet the standards of these subscribers, j2 Global's ability to market its
service successfully and to increase revenues could be impaired. The development
of proprietary technology and necessary service enhancements entail significant
technical and business risks and require substantial expenditures and lead-time.
j2 Global may not be able to keep pace with the latest technological
developments. j2 Global may also be unable to use new technologies effectively
or adapt services to customer requirements or emerging industry standards.
If j2 Global does not successfully address service design risks, its reputation
could be damaged and its business and operating results could suffer
j2 Global must accurately forecast the features and functionality required
by target subscribers. In addition, j2 Global must design and implement service
enhancements that meet customer requirements in a timely and efficient manner.
j2 Global may not successfully determine customer requirements and may be unable
to satisfy subscriber demands. Furthermore, j2 Global may not be able to design
and implement a service incorporating desired features in a timely and efficient
manner. In addition, if any new service j2
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Global launches is not favorably received by customers and end-users, its
reputation could be damaged. If j2 Global fails to accurately determine customer
feature requirements or service enhancements or to market services containing
such features or enhancements in a timely and efficient manner, its business and
operating results could suffer materially.
j2 Global cannot predict whether it will be successful because its business
model is unproven and its market is developing
j2 Global's business strategy is unproven, and it is too early to reliably
gauge market penetration rates for its services. To date, j2 Global has not
established a definite demand or a reliable cost to add a subscriber for these
services. In addition, there can be no assurance that j2 Global will be
successful in the offering of any additional services that it is currently
planning. If the demand is lower than anticipated, or the cost to add a
subscriber is higher, j2 Global's business, prospects, financial condition and
results of operations would be materially and adversely affected.
Other companies are offering free services supported by advertising, which may
cause subscribers to become unwilling to pay for j2 Global's services
Many services provided over the Internet are provided free of charge to
attract traffic to the service provider's web site. These free services include
free voice-mail, free e-mail and free facsimile-to-e-mail services, which are
being offered by other companies in competition with j2 Global's services. The
providers of free services attempt to recover their expenses and make a profit
by selling advertising based on the traffic generated from users of free
services. For example, free voice-mail may require users to listen to taped ads
before they can access their messages. j2 Global expects that as these free
services become popular with consumers, they will require its subscription
services to provide clear incremental benefits over free services to justify
paying for its services. In addition, to the extent free services of another
provider are used by a potential j2 Global customer, it may be harder for j2
Global to persuade that potential customer to try its services.
j2 Global's failure to achieve or sustain market acceptance at desired pricing
levels could impair its ability to achieve profitability or positive cash flow
The widespread availability of free services, including j2 Global's own,
may result in consumers being unwilling to pay for messaging services. Even if
customers are willing to pay for these services to avoid the advertising
associated with free services, or to obtain the benefits of unified messaging in
its complete form, j2 Global expects prices in its industry will continue to
fall. Therefore j2 Global may need to reduce prices for its existing and future
services. j2 Global cannot predict whether its pricing schedule will prove to be
viable, whether demand for its services will materialize at the prices it
expects to charge or whether it will be able to sustain adequate future pricing
levels as competitors introduce competing services, including free services.
Customers may be unwilling to pay j2 Global's prices, either because they
find free services to be satisfactory, or because they find other paid services
to offer better value for the cost involved. The prices for j2 Global's services
are in some cases higher than those charged by its competitors. j2 Global's
failure to achieve or sustain desired pricing levels would have a material
adverse effect on its business, prospects, financial condition and results of
operations.
The recent introduction of free fax services may harm j2 Global's business
In 1999, j2 Global introduced free services. j2 Global expects to generate
revenues from its free service customers by selling them additional services for
which charges are usage-based. j2 Global will
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also encourage free service customers to convert to paid subscriptions. j2
Global has a limited track record from which to predict levels of revenue to be
achieved from customers who are attracted by its free services. The availability
of free services may cause some of j2 Global's paying customers to switch to its
free services and discontinue their payments to j2 Global.
j2 Global introduced its free services principally as a promotional tool,
and partially in response to the introductions by competing companies. j2 Global
expects the trend for free services will continue in its industry. There can be
no assurance that the recent introduction of these competing services will not
have a material adverse effect on j2 Global's business, prospects, financial
condition and results of operations.
j2 Global's operating results in one or more future periods are likely to
fluctuate significantly and may negatively impact its stock price
j2 Global's annual and quarterly operating results may fluctuate
significantly in the future as a result of numerous factors, including:
. The rate at which j2 Global is able to add subscriptions and sell
additional usage-based services to both free and paid customers of its
subscription services;
. The amount and timing of expenditures to form strategic relationships,
to enhance sales and marketing and to expand j2 Global's infrastructure;
. Technical difficulties, system failures or network downtime;
. Delays in implementing strategic alliances or loss of strategic
alliances; and
. Economic and competitive conditions specific to j2 Global's industry.
As a result, it is likely that in some future periods j2 Global's
operating results will be below the expectations of securities analysts and
investors. If this happens, the trading price of j2 Global's common stock would
likely be materially adversely affected.
If j2 Global fails to expand and adapt its network infrastructure, its business
may be harmed
j2 Global must continue to expand and adapt its network
infrastructure, both domestically and internationally, as the number of
customers and the volume of messages they wish to transmit increases. The
expansion and adaptation of j2 Global's network infrastructure will require
substantial financial, operational and management resources, even if the
expansion is primarily for its free service offerings. There can be no assurance
that j2 Global will be able to expand or adapt its network infrastructure to
meet any additional demand on a timely basis, at a commercially reasonable cost
or at all.
In addition, future growth in j2 Global's subscriber base for both
free and paid services, together with growth in the subscriber bases of other
companies which have recently introduced free facsimile-to-e-mail services and
other Internet-dependent services, will increase the demand for available
network infrastructure and Internet data transmission capacity. This could lead
to insufficient capacity and an inability on j2 Global's part to accommodate its
future growth. Insufficient network capacity could lead to a reduction in the
reliability of j2 Global's services. Since customers will not tolerate a service
hampered by slow delivery times or unreliable service levels, insufficient
network capacity could have a material adverse effect on j2 Global's business,
prospects, financial condition and results of operations.
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j2 Global's business could suffer if it cannot obtain telephone numbers
j2 Global's future success will depend upon its ability to procure large
quantities of telephone numbers in the United States and foreign countries. j2
Global's ability to procure telephone numbers depends on applicable regulations,
the practices of telecommunications carriers that provide telephone numbers and
the level of demand for new telephone numbers. Failure to obtain these numbers
in a timely and cost-effective manner may prevent j2 Global from entering some
foreign markets or hamper its growth in domestic markets, and may have a
material adverse effect on j2 Global's business, prospects, financial condition
and results of operations.
j2 Global's ability to procure large quantities of phone numbers will be
particularly limited in area codes of large metropolitan areas, and j2 Global
may at some point be unable to provide its customers with phone numbers in the
most desirable area codes (e.g., 212 in Manhattan and 171 in London) in such
areas, having to rely instead on new area codes created for these areas. j2
Global does not allow customers of its free services to choose the area code for
the phone number it provides, and to some extent this makes its free services
less attractive, particularly in comparison to its subscription services, or
subscription services provided by others where the customer may select an area
code.
In addition, future growth in j2 Global's subscriber base for both free and
paid services, together with growth in the subscriber bases of providers of free
fax to e-mail services, will increase the demand for large quantities of
telephone numbers, which could lead to insufficient capacity and an inability on
j2 Global's part to acquire the necessary phone numbers to accommodate its
future growth.
Any failure of the Internet as a message transmission medium could harm j2
Global's business
j2 Global's future success will depend upon its ability to route its
customers' traffic through the Internet and through other data transmission
media. For j2 Global's services, other data transmission media include fiber
optic or copper lines owned and operated by third parties, with portions of the
capacity on these media being dedicated for its use. j2 Global's success is
largely dependent upon the viability of the Internet as a medium for the
transmission of documents. j2 Global also depends on the continued operation of
a user's e-mail system. To date, j2 Global has transmitted a limited amount of
customer traffic. There can be no assurance that these will prove to be viable
communications media, that document transmission will be reliable or that
capacity constraints which inhibit efficient document transmission will not
develop.
j2 Global accesses the Internet and other data transmission media through
dedicated or shared connections to third party service providers. In many cases,
j2 Global pays fixed monthly fees for Internet and other access, regardless of
its usage or the volume of its customers' traffic. There can be no assurance
that the current pricing structure for access to and use of these media will not
change unfavorably and, if the pricing structure changes unfavorably, j2
Global's business, prospects, financial condition and results of operations
could be materially and adversely affected.
If the Internet stops growing, our business will suffer
j2 Global's future success is substantially dependent upon continued growth
in the use of the Internet in order to support the sale of its services. There
can be no assurance that the number of Internet users will continue to grow. As
is typical in the case of a new and rapidly evolving industry, demand and market
acceptance for recently introduced services are subject to a high level of
uncertainty. The Internet may not prove to be a viable avenue to transmit
communications for a number of reasons, including lack of acceptable security
technologies, lack of access and ease of use, traffic congestion, inconsistent
quality or speed of service, potentially inadequate development of the necessary
infrastructure, excessive
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governmental regulation, uncertainty regarding intellectual property ownership
or lack of timely development and commercialization of performance improvements,
including high-speed modems.
The market may not switch to j2 Global's services due to concerns about the
reliability of Internet communications, which may significantly impair its
business and prevent the execution of its business plan
j2 Global's ability to route existing customers' traffic through the
Internet and to sell its services to new customers may be inhibited by, among
other factors, the reluctance of some customers to switch from traditional fax
delivery to delivery over the Internet, and by widespread concerns over the
adequacy of security in the exchange of information over the Internet.
Additionally, there may be delays in any transmission over the Internet which
may result in j2 Global's service being regarded as less timely than a
traditional fax delivery. If j2 Global's existing and potential customers do not
accept delivery through the Internet as a means of sending and receiving
documents via fax, its business, prospects, financial condition and results of
operations would be materially and adversely affected.
In addition, j2 Global faces similar risks regarding the market acceptance
of the delivery of customers' voice-mail messages and "real time" voice
communications over the Internet. As a result, j2 Global's business, prospects,
financial condition and results of operations may be materially and adversely
affected.
j2 Global's business may be constrained because it supports a limited number of
operating system platforms
j2 Global's services can be utilized only by those users whose computers
are run by Windows 3.1, Windows 95, Windows 98, Windows NT, Macintosh and UNIX
operating systems. Since there are other operating system platforms, j2 Global
cannot provide its services to all potential customers for its services. To the
extent other operating systems proliferate in the future, j2 Global's ability to
attract new customers and keep existing customers could be significantly
impaired.
The market in which j2 Global operates is highly competitive, and it may be
unable to compete successfully against new entrants and established industry
competitors with significantly greater financial resources
Competition in the converging Internet and telecommunications industries is
becoming increasingly intense. j2 Global faces competition for its services
from, among others, voice-mail providers, fax providers, paging companies,
Internet service providers, e-mail providers and telephone companies.
The recent trend of competitors of j2 Global providing free services has
increased these competitive pressures. j2 Global has responded to this trend by
introducing its own free services. Competitive pressures may impair j2 Global's
ability to achieve profitability. The increased competition may also make it
more difficult for j2 Global to successfully enter into strategic relationships
with major companies, particularly if its goal is to have an exclusive
relationship with a particular company.
j2 Global competes against other companies that provide one or more of the
services that it does. In addition, these competitors may add services to their
offerings to provide unified messaging services comparable to j2 Global's.
Future competition could come from a variety of companies both in the Internet
industry and the telecommunications industry, which could include some of j2
Global's strategic alliances. These industries include major companies which
have much greater resources than j2 Global does, have been in operation for many
years and have large subscriber bases. These companies may be
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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 j2 Global can. There can be no assurance that
additional competitors will not enter markets that j2 Global plans to serve or
that it will be able to compete effectively.
j2 Global may have difficulty in retaining its customers, which may prevent its
long term success
j2 Global's sales and marketing and other costs of acquiring new
subscriptions are substantial relative to the monthly fees derived from
subscriptions. Accordingly, j2 Global believes that its long term success
depends largely on its ability to retain its existing customers while continuing
to attract new ones. j2 Global continues to invest significant resources in its
network infrastructure and customer and technical support capabilities to
provide high levels of customer service. j2 Global cannot be certain that these
investments will maintain or improve customer retention. j2 Global believes that
intense competition from its competitors, some of which offer free service or
other enticements for new subscriptions, has caused, and may continue to cause,
some of its customers to switch to its competitors' services. In addition, some
new customers use the Internet only as a novelty and do not become consistent
users of Internet services and, therefore, may be more likely to discontinue
their service. These factors adversely affect j2 Global's customer retention
rates. Any decline in customer retention rates could have a material adverse
effect on j2 Global's business, prospects, financial condition and results of
operations.
The messaging and communications industry is undergoing rapid technological
changes and new technologies may be superior to the technologies j2 Global uses
The messaging and communications industry is subject to rapid and
significant technological change. j2 Global cannot predict the effect of
technological changes on its business. Additionally, widely accepted standards
have not yet developed for the technologies j2 Global uses.
j2 Global expects that new services and technologies will emerge in the
market in which it competes. These new services and technologies may be superior
to the services and technologies that j2 Global uses or these new services may
render its services and technologies obsolete. In addition, these services and
technologies may not be compatible or operate in a manner sufficient for j2
Global to execute its business plan, which could have a material adverse effect
on its business, prospects, financial condition and results of operations.
A system failure or breach of network security could delay or interrupt service
to j2 Global's customers
j2 Global's operations are dependent on its ability to protect its network
from interruption by damage from fire, earthquake, power loss,
telecommunications failure, unauthorized entry, computer viruses or other events
beyond its control. There can be no assurance that j2 Global's existing and
planned precautions of backup systems, regular data backups and other procedures
will be adequate to prevent significant damage, system failure or data loss.
Despite the implementation of security measures, j2 Global's infrastructure
may also be vulnerable to computer viruses, hackers or similar disruptive
problems caused by its customers or other Internet users. Persistent problems
continue to affect public and private data networks, including computer break-
ins and the misappropriation of confidential information. Computer break-ins and
other disruptions may jeopardize the security of information stored in and
transmitted through the computer systems of the individuals and businesses
utilizing j2 Global's services, which may result in significant liability to j2
Global and also may deter current and potential customers from using its
services. Any
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damage, failure or security breach that causes interruptions or data loss in j2
Global's operations or in the computer systems of its customers could have a
material adverse effect on its business, prospects, financial condition and
results of operations.
j2 Global's software may have defects and j2 Global may encounter development
delays
Software-based services and equipment, such as j2 Global's services, may
contain undetected errors or failures when introduced or when new versions are
released. There can be no assurance that, despite testing by j2 Global and by
current and potential customers, errors will not be found in its software after
commercial release, or that it will not experience development delays, resulting
in delays in market acceptance, any of which could have a material adverse
effect on its business, prospects, financial condition and results of
operations.
j2 Global depends on third parties to market its services, and the failure by
these third parties to market its services may hinder its marketing efforts
Currently, j2 Global relies on third parties, including e-mail providers,
Internet service providers, online service providers and telecommunications
companies as a means of marketing its services. j2 Global is also in the early
stages of marketing its services through systems integrators. Systems
integrators are businesses that bundle j2 Global's services with services of
other companies to be sold as a convenient package of services to the customer.
In the event of any prolonged technical problems or failures experienced by
these third parties or the termination of these marketing agreements, j2
Global's marketing capabilities would be significantly hindered, which could
have a detrimental effect on its business, prospects, financial condition or
results of operations. For example, j2 Global's failure to achieve technical
integration with America Online's e-mail system resulted in a renegotiation of
its agreement with America Online and a suspension of its advertising on America
Online from late 1998 through 2000. This resulted in a reduction in j2 Global's
America Online subscribers, from over 4,000 net additions in 1998 to an
approximately 1,400 net reduction in 1999.
Many of these relationships are terminable at will or upon short notice.
Furthermore, none of j2 Global's relationships with these third parties includes
long term contractual commitments to continue the relationship, and many of
these relationships are in the early stages of development. Because many of j2
Global's strategic allies view unified messaging as important to their future,
they may elect to directly compete with j2 Global in the provision of unified
messaging services.
In addition, j2 Global's success in developing an international customer
base depends on the formation of alliances with foreign companies and their
ability to successfully market its services. In any relationship with a third
party, particularly internationally, there may be difficulties in integrating or
coordinating j2 Global's services and systems with those of the other party. The
failure to form and maintain these strategic alliances or the failure of these
companies to successfully develop and sustain a market for j2 Global's services
could have a material adverse effect on its business, prospects, financial
condition and results of operations.
j2 Global's success depends on its retention of its executive officers and its
ability to hire and retain additional key personnel
j2 Global's success depends on the skills, experience and performance
of senior management and other key personnel, many of whom have worked together
for only a short period of time. For example, j2 Global's President and Chief
Executive Officer and Chief Technology Officer have joined j2 Global since the
beginning of 2000.
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The loss of the services of one or more of j2 Global's executive officers
or other key employees could have a material adverse effect on its business,
prospects, financial condition and results of operations. j2 Global's future
success also depends on its continuing ability to attract and retain highly
qualified technical, sales and managerial personnel. Competition for these
personnel is intense, and there can be no assurance that j2 Global can retain
its key employees or that it can attract, assimilate or retain other highly
qualified technical, sales and managerial personnel in the future.
j2 Global's international operations are exposed to regulatory, management,
credit card, currency and other risks that may prevent j2 Global from being
successful in international markets
At the end of 1999, foreign telephone numbers represented a significant
portion of j2 Global's total telephone numbers. These foreign numbers were sold
through j2 Global's U.S. web site. j2 Global intends to continue to expand into
international markets and to spend significant financial and managerial
resources to do so. If revenues from international operations do not exceed the
expense of establishing and maintaining these operations, j2 Global's business,
financial condition and operating results will suffer. At present, j2 Global has
international operations in Australia, Canada, Finland, France, Germany,
Ireland, Italy, Japan, the Netherlands, New Zealand, Switzerland and the United
Kingdom. j2 Global has limited experience in international operations and may
not be able to compete effectively in international markets. International sales
are subject to inherent risks, including:
. Unexpected changes in regulatory requirements and tariffs;
. A more complex process to acquire telephone numbers;
. Difficulties in staffing and managing foreign operations;
. The possibility of subsidization of j2 Global's competitors and the
nationalization of business;
. Longer payment cycles and greater difficulty in accounts receivable
collection;
. Differing technology standards;
. Potentially adverse tax consequences;
. Imposition of currency exchange controls; and
. Greater exposure to credit card fraud due to weaker forms of
verification when compared to domestic credit card controls.
To the extent the services j2 Global sells are priced and paid for in
foreign currencies, gains and losses on the conversion into U.S. dollars of
receivables and payables arising from international operations could in the
future contribute to fluctuations in its results of operations. Additionally,
fluctuations in exchange rates could adversely affect demand for j2 Global's
services and have a material adverse effect on its business, prospects,
financial condition and results of operations.
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The price of j2 Global common stock may decline due to shares eligible for
future sale
As of August 22, 2000, j2 Global had approximately 36.1 million shares of
common stock outstanding. Most of these shares are available for sale, subject
to compliance with Rule 144 in certain cases. Sales of a substantial number of
shares of common stock in the public market could cause the market price of j2
Global common stock to decline. Assuming, for example only, an exchange ratio of
0.281 then, immediately after the merger, approximately 49.1 million shares of
j2 Global common stock or shares of j2 Global common stock which can be acquired
upon the exercise of warrants exerciseable at $0.01 per share issued by j2
Global in the merger will be eligible for resale either without registration or
under registration statements that j2 Global has filed or will file to meet its
registration rights obligations.
Anti-takeover provisions could negatively impact j2 Global's stockholders
Provisions of Delaware law and of j2 Global's certificate of incorporation
and bylaws could make it more difficult for a third party to acquire control of
j2 Global. For example, j2 Global is subject to Section 203 of the Delaware
General Corporation Law which would make it more difficult for another party to
acquire j2 Global without the approval of j2 Global's board of directors.
Additionally, j2 Global's certificate of incorporation authorizes its board of
directors to issue preferred stock without requiring any stockholder approval,
and preferred stock could be issued as a defensive measure in response to a
takeover proposal. These provisions could make it more difficult for a third
party to acquire j2 Global even if an acquisition might be in the best interest
of its stockholders.
j2 Global's stock price may be volatile or may decline
j2 Global's stock price and trading volumes have been highly volatile since
its initial public offering on July 23, 1999. j2 Global expects that this
volatility will continue in the future due to factors such as:
. Assessments of j2 Global's progress in adding paid subscriptions or
free customers, and comparisons of its results in these areas versus its
competitors;
. Variations between j2 Global's actual results and analyst and investor
expectations;
. New service or technology announcements by j2 Global or others, and
regulatory or competitive developments affecting its markets;
. Investor perceptions of j2 Global and comparable public companies;
. Conditions and trends in the communications, messaging and Internet
related industries;
. Announcements of technological innovations and acquisitions;
. Introduction of new services by j2 Global or its competitors;
. Developments with respect to intellectual property rights;
. Conditions and trends in the Internet and other technology industries;
and
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. General market conditions.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have affected the market prices for the
common stocks of technology companies, particularly Internet companies. These
broad market fluctuations may result in a material decline in the market price
of j2 Global's common stock. In the past, following periods of volatility in the
market price of a particular company's securities, securities class action
litigation has often been brought against that company. j2 Global may become
involved in this type of litigation in the future. Litigation is often expensive
and diverts management's attention and resources, which could have a material
adverse effect on j2 Global's business and operating results.
j2 Global may have liability for Internet content and it may not have adequate
liability insurance
As a provider of messaging and communications services, j2 Global faces
potential liability for defamation, negligence, copyright, patent or trademark
infringement and other claims based on the nature and content of the materials
transmitted via its services. j2 Global does not and cannot screen all of the
content generated by its users, and it could be exposed to liability with
respect to this content. Furthermore, some foreign governments, such as Germany,
have enforced laws and regulations related to content distributed over the
Internet that are more strict than those currently in place in the United
States. Although j2 Global carries general liability and umbrella liability
insurance, its insurance may not cover claims of these types or may not be
adequate to indemnify it for all liability that may be imposed. There is a risk
that a single claim or multiple claims, if successfully asserted against j2
Global, could exceed the total of its coverage limits. There is also a risk that
a single claim or multiple claims asserted against j2 Global may not qualify for
coverage under its insurance policies as a result of coverage exclusions that
are contained within these policies. Should either of these risks occur, capital
contributed by j2 Global's stockholders may need to be used to settle claims.
Any imposition of liability, particularly liability that is not covered by
insurance or is in excess of insurance coverage, could have a material adverse
effect on j2 Global's reputation and business and operating results, or could
result in the imposition of criminal penalties.
Inadequate intellectual property protections could prevent j2 Global from
enforcing or defending its proprietary technology
j2 Global's success depends to a significant degree upon its proprietary
technology. j2 Global relies on a combination of trademark, trade secret and
copyright law and contractual restrictions to protect its proprietary
technology. However, these measures provide only limited protection, and j2
Global may not be able to detect unauthorized use or take appropriate steps to
enforce its intellectual property rights, particularly in foreign countries
where the laws may not protect its proprietary rights as fully as in the United
States. In addition, j2 Global may face challenges to the validity and
enforceability of its proprietary rights and may not prevail in any litigation
regarding those rights. Companies in the messaging industry have experienced
substantial litigation regarding intellectual property. Any litigation to
enforce j2 Global's intellectual property rights would be expensive and time-
consuming, would divert management resources and may not be adequate to protect
its business.
j2 Global may be found to have infringed the intellectual property rights of
others which could expose it to substantial damages or restrict its operations
j2 Global could be subject to claims that it has infringed the intellectual
property rights of others. In addition, j2 Global may be required to indemnify
its resellers and users for similar claims made against them. Any claims against
j2 Global could require it to spend significant time and money in litigation,
pay damages, develop new intellectual property or acquire licenses to
intellectual property that is the subject
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of the infringement claims. These licenses, if required, may not be available at
all or on acceptable terms. As a result, intellectual property claims against j2
Global could have a material adverse effect on its business, prospects,
financial conditions and results of operations. For example, on October 28,
1999, AudioFAX IP LLC filed a lawsuit against j2 Global asserting infringement
upon the ownership of certain United States and Canadian patents. See
"Information About j2 Global--Business--Legal Proceedings" beginning on page __
for additional discussion.
j2 Global's services may become subject to burdensome telecommunications
regulation which could increase its costs or restrict its service offerings
j2 Global provides its services through data transmissions over public
telephone lines and other facilities provided by telecommunications companies.
These transmissions are subject to regulation by the Federal Communications
Commission, state public utility commissions and foreign governmental
authorities. These regulations affect the prices j2 Global pays for transmission
services, the competition it faces from telecommunications services and other
aspects of its market.
As an Internet messaging services provider, j2 Global is not subject to
direct regulation by the FCC. However, as Internet services and
telecommunications services converge and as the services j2 Global offers
expand, there may be increased regulation of its business. Therefore, in the
future, j2 Global may become subject to FCC or other regulatory agency
regulation. Changes in the regulatory environment could decrease j2 Global's
revenues, increase its costs and restrict its service offerings.
If regulation of the Internet increases, j2 Global's business may be adversely
affected
There have been various regulations and court cases relating to the
liability of Internet service providers and other online service providers for
information carried on or through their services or equipment, including in the
areas of copyright, indecency, obscenity, defamation and fraud. For example,
federal and state statutes prohibit the online distribution of obscene
materials. The law in this area is unsettled, and there may be new legislation
and court decisions that expose companies such as j2 Global to liabilities or
affect their services.
Additional laws and regulations may be adopted with respect to the
Internet, covering issues such as support payments to fund Internet
availability, content, user privacy, pricing, libel, obscene material,
indecency, gambling, intellectual property protection and infringement and
technology export and other controls. Other federal Internet-related legislation
has been introduced which may limit commerce and discourse on the Internet.
Because j2 Global's services relate principally to the Internet, but
convert voice and fax transmissions into e-mails, j2 Global is necessarily
exposed to legal or regulatory developments affecting either Internet services
or telecommunications services. Regulatory developments could cause j2 Global's
business, prospects, financial condition and results of operations to be
materially adversely affected.
j2 Global could be required to register as an investment company and become
subject to substantial regulation that would interfere with its ability to
conduct its business
As of June 30, 2000, j2 Global had significant cash and cash equivalents,
short term investments and long term investments representing proceeds from its
July 23, 1999 initial public offering. j2 Global invests such cash in short and
long term instruments consistent with prudent cash management and not primarily
for the purpose of achieving investment returns. Investment in securities
primarily for the purpose of achieving investment returns could result in j2
Global being treated as an "investment company" under the Investment Company Act
of 1940. In addition, the Investment Company Act requires
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the registration of companies that are primarily in the business of investing,
reinvesting or trading securities or that fail to meet certain statistical tests
regarding their composition of assets and sources of income even though they
consider themselves not to be primarily engaged in investing, reinvesting or
trading securities.
If j2 Global is required to register as an investment company pursuant to
the Investment Company Act, it would become subject to substantial regulation
with respect to its capital structure, management, operations, transactions with
affiliated persons and other matters. Application of the provisions of the
Investment Company Act to j2 Global would materially and adversely affect its
business, prospects, financial condition and results of operations.
j2 Global's principal stockholders and management own a significant percentage
of its stock and will be able to exercise significant influence
After the merger, j2 Global's executive officers and directors and
principal stockholders together will beneficially own approximately 45% of its
common stock, including shares subject to options and warrants that confer
beneficial ownership of the underlying shares. Accordingly, these stockholders
will continue to have significant influence over j2 Global's affairs. This
concentration of ownership could have the effect of delaying or preventing a
change in control of j2 Global or otherwise discouraging a potential acquirer
from attempting to obtain control of j2 Global, which in turn could have a
material and adverse effect on the market price of the common stock or prevent
j2 Global's stockholders from realizing a premium over the market prices for
their shares of common stock.
j2 Global may have a contingent liability arising out of a possible violation of
Section 5 of the Securities Act of 1933 in connection with e-mails sent to
subscribers
As part of a reserved share program in connection with j2 Global's July 23,
1999 initial public offering, j2 Global reserved up to 300,000 shares at the
initial public offering price for offering to up to 3,000 U.S. residents who
were randomly selected from the pool of j2 Global subscribers as of June 30,
1999. On or about July 6, 1999 j2 Global sent e-mails to approximately 150,000
of its subscribers informing them of this program and briefly explaining the
procedures to be followed. On or about July 9, 1999 j2 Global sent e-mails to
the 3,000 subscribers who had been randomly selected, explaining the procedures
in greater detail, and indicating that these subscribers would have the
opportunity to purchase shares through this subscriber program. As of the
applicable deadline, 181 of j2 Global's subscribers had opened an account in
accordance with the procedures and indicated an interest, so as to qualify for
this reservation. No further subscribers were accepted in this reservation,
which therefore was reduced to a maximum of 18,100 shares. j2 Global may have a
contingent liability arising out of a possible violation of Section 5 of the
Securities Act of 1933 in connection with the e-mails sent to the approximately
150,000 subscribers and later to the 3,000 subscribers selected under this
program. Any liability would depend upon the number of shares purchased by the
recipients of such e-mails. If any such liability is asserted, j2 Global intends
to contest the matter vigorously. j2 Global does not believe that any such
liability would be material to its financial condition.
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Cautionary Statement Regarding Forward-Looking Statements
This proxy statement/prospectus, including the information incorporated by
reference, contains certain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 with respect to the financial
condition, results of operations and business of each of j2 Global and eFax.com.
These statements may be made directly in this proxy statement/prospectus
referring to j2 Global or eFax.com, or may be incorporated in this proxy
statement/prospectus by reference to other documents and may include statements
regarding the projected performance of j2 Global and eFax.com for the period
following the completion of the merger. Statements in this proxy
statement/prospectus that are not historical facts are identified as "forward-
looking statements" for the purpose of the safe harbor provided by Section 21E
of the Securities Exchange Act of 1934 and Section 27A of the Securities Act.
You can find many of these statements by looking for words such as "believes,"
"expects," "anticipates," "estimates" or similar words or expressions. These
forward-looking statements involve substantial risks and uncertainties. Some of
the factors that may cause actual results to differ materially from those
contemplated by such forward-looking statements include, but are not limited to,
the following possibilities:
. Combining the businesses of j2 Global and eFax.com may cost more than
we expect;
. The timing of the completion of the proposed merger and new operations
may be delayed or prohibited;
. General economic conditions or conditions in securities markets may be
less favorable than j2 Global currently anticipates;
. Expected cost savings from the merger may not be fully realized or
realized within the expected time frame;
. Integrating the businesses of j2 Global and eFax.com and retaining key
personnel may be more difficult than j2 Global expects;
. Contingencies may arise of which j2 Global is not aware or of which j2
Global underestimated the significance;
. j2 Global's revenues after the merger may be lower than j2 Global
expects;
. j2 Global may lose more business or customers after the merger than j2
Global expects; or
. j2 Global's operating costs may be higher than j2 Global expects.
Because such statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by such
statements. j2 Global and eFax.com stockholders are cautioned not to place undue
reliance on such statements, which speak only as of the date of this proxy
statement/prospectus or as of the date of any document incorporated by
reference.
All subsequent written and oral forward-looking statements attributable to
j2 Global or eFax.com or any person acting on their behalf are expressly
qualified in their entirety by the cautionary statements contained or referred
to in this section. Neither j2 Global nor eFax.com undertakes any obligation to
release publicly any revisions to such forward-looking statements to reflect
events or circumstances after the date of this proxy statement/prospectus or to
reflect the occurrence of unanticipated events.
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THE j2 Global ANNUAL MEETING
General
The j2 Global board of directors is providing this proxy
statement/prospectus to j2 Global stockholders in connection with the
solicitation of proxies for use at the annual meeting of j2 Global stockholders
and at any adjournment(s) or postponement(s) of the meeting. The annual meeting
is scheduled to be held at the Hollywood Roosevelt Hotel, 7000 Hollywood
Boulevard, Los Angeles, California 90028, on ________, 2000 at 10:00 a.m., local
time.
The purpose of the j2 Global annual meeting is to consider and vote on:
1. The issuance of shares of j2 Global common stock pursuant to the terms
of the merger agreement;
2. The amendment to the j2 Global certificate of incorporation to change
the corporate name from JFAX.COM, Inc. to j2 Global Communications,
Inc.;
3. The election of eight directors to serve on the board of j2 Global for
the ensuing year;
4. An amendment to the j2 Global 1997 Stock Option Plan to increase the
amount of shares subject to the plan by 3,625,000 to 8,000,000;
5. The ratification of the selection of KPMG LLP as independent auditors
for j2 Global; and
6. Such other business as may properly come before the j2 Global annual
meeting.
Record Date and Outstanding Shares
The j2 Global board has fixed the close of business on ______, 2000 as
the record date for determining which j2 Global stockholders are entitled to
receive notice of and vote at the annual meeting At the record date,
____________ shares of j2 Global common stock were outstanding. We were aware of
the following beneficial owners of more than 5% of j2 Global common stock as of
the record date:
<TABLE>
<CAPTION>
Name and Address Number of Percentage
----------------
Shares of Class
------ --------
<S> <C> <C>
Richard S. Ressler 13,273,073/(1)/ 36.43%
c/o Orchard Capital Corporation
6922 Hollywood Boulevard, 9th Floor
Los Angeles, CA 90028
Boardrush Media LLC 3,030,820 8.39%
972 Putney Road, Suite 299
Brattleboro, VT 05301
Pecks Management Partners Ltd. 2,676,488/(2)/ 7.32%
One Rockefeller Plaza
New York, NY 10020
</TABLE>
-------------------
(1) Consists of 12,574,515 shares of stock owned by Orchard/JFAX Investors,
LLC, 390,244 shares of stock owned by The Ressler Family Foundation,
and 308,314 shares of stock which Orchard/JFAX Investors may purchase
pursuant to warrants which are exercisable in full at this time. Mr.
Ressler is the manager of Orchard/JFAX Investors and a trustee of the
The Ressler
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Family Foundation, but has disclaimed beneficial ownership of any
shares of stock in which he has no pecuniary interest.
(2) Consists of:
. 1,391,084 shares of common stock and vested warrants to
acquire 295,625 shares of j2 Global common stock held by Delaware State
Employees Retirement Fund;
. 382,979 shares of common stock and vested warrants to
acquire 81,250 shares of j2 Global common stock held by ICI American
Holdings, Inc. Defined Benefit Plan;
. 257,070 shares of common stock and vested warrants to
acquire 54,375 shares of j2 Global common stock held by Zeneca Holdings
Inc. Defined Benefit Plan; and
. 176,565 shares of common stock and vested warrants to
acquire 37,500 shares of j2 Global common stock held by the JW McConnell
Family Foundation.
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of j2 Global common stock is necessary to
constitute a quorum at the annual meeting. Abstentions and broker non-votes (as
described below) will be counted solely for purposes of determining whether a
quorum exists. Under the applicable rules of the National Association of
Securities Dealers, Inc., without the instruction of the beneficial
stockholders, brokers or members who hold shares in street name for customers
who are the beneficial owners of such shares are prohibited from giving a proxy
to vote those shares with respect to the approval of the matters to be
considered at the j2 Global annual meeting other than the approval of KPMG LLP
and the election of directors. Broker non-votes represent shares counted toward
a quorum at the annual meeting, but brokers or members who hold shares in street
name for customers and who have not received voting instructions from the
beneficial owners are not permitted to vote the shares without the beneficial
holders' instructions. Abstentions and broker non-votes will not be deemed to be
cast either "FOR" or "AGAINST" any of the matters to be voted upon at the j2
Global annual meeting.
Revocability of Proxies
Any j2 Global proxy given pursuant to this solicitation may be revoked
by the person giving it at any time before its use by delivering to j2 Global
before the annual meeting a written notice of revocation or a duly executed
proxy bearing a later date, by changing your vote by telephone or Internet or by
attending the annual meeting and voting in person.
All written notices of revocation and other communications with respect to
the revocation of j2 Global proxies should be addressed to j2 Global, 6922
Hollywood Boulevard, Suite 900, Hollywood, California, 90028, Attention:
Secretary. A stockholder whose shares are held in street name should follow the
instructions of his or her broker regarding revocation of proxies. A j2 Global
proxy appointment will not be revoked by the death or incapacity of the
stockholder executing the proxy unless, before the shares are voted, notice of
such death or incapacity is filed with the secretary of j2 Global or other
person responsible for tabulating votes on behalf of j2 Global.
j2 Global stockholders should not send j2 Global common stock certificates
with their j2 Global proxy cards. j2 Global stock certificates will not be
exchanged in the merger.
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Voting and Solicitation
On all matters, each share of j2 Global common stock has one vote. In the
case of the election of directors, each stockholder is entitled to one vote for
each of the eight directorships to be filled at the meeting.
This proxy statement/prospectus is accompanied by a form of proxy for use
at the j2 Global annual meeting. Holders of record of j2 Global common stock on
the record date may submit their proxies either by telephoning the toll-free
number included on the enclosed proxy card, by Internet in accordance with the
instructions included on the enclosed proxy card or by returning a properly
signed proxy card in the enclosed postage-paid envelope. When you use the
telephone or Internet systems, the selected system will verify that you are a
stockholder through the use of a unique control number that is assigned to you.
The telephone and Internet systems allow you to instruct the proxies how to vote
your shares and to confirm that your instructions have been properly recorded.
Beneficial owners of common shares of j2 Global that hold their shares through
brokers, banks or other nominees will receive voting instructions from their
nominee which must be followed in order to vote their shares. If you complete
the enclosed proxy card and return it in time or vote by telephone or Internet,
your proxy holder will vote your shares according to the instructions indicated
on the proxy. Except for broker non-votes, if no instructions are indicated,
such proxies will be voted "FOR" approval of each of proposals one through five
set forth in this proxy statement/prospectus and, as determined by a majority of
the j2 Global board, as to any other matter that may come before the j2 Global
annual meeting. Those other matters may include, among other things, a motion to
adjourn or postpone the j2 Global annual meeting to another time and/or place
for the purpose of soliciting additional proxies or otherwise. No proxy with
instructions to vote against any of the proposals, however, will be voted in
favor of any adjournment or postponement of the j2 Global annual meeting.
The cost of soliciting j2 Global proxies will be borne by j2 Global. j2
Global may reimburse brokerage firms and other persons representing beneficial
owners of shares for their expenses in forwarding solicitation materials to such
beneficial owners. Proxies may be solicited by certain of j2 Global's directors,
officers and regular employees, without additional compensation, personally or
by telephone, telegram or e-mail.
Proposal 1 -- Issuance of Shares in Merger
At the annual meeting, j2 Global stockholders are being asked to approve
the issuance of shares of j2 Global common stock in the merger. A vote for this
proposal will be a vote to approve the issuance of j2 Global common stock to be
issued at the time of the merger and j2 Global common stock that, pursuant to
the merger agreement, may be issued at a later date, including the shares of j2
Global common stock for which the warrants to be issued to eFax.com's preferred
stockholders as merger consideration are exercisable. Please see "The Merger"
beginning on page ____ for a discussion of this proposal. Approval of this
proposal requires the affirmative vote of the holders of a majority of all
shares of j2 Global common stock casting votes, provided that the total vote
cast represents more than 50% in interest of all common stock of j2 Global
entitled to vote.
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THE j2 GLOBAL BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 1,
ISSUANCE OF SHARES IN THE MERGER.
Proposal 2 -- Amendment to j2 Global Certificate of Incorporation
General
At the annual meeting, j2 Global stockholders are being asked to approve
an amendment to the j2 Global certificate of incorporation that will change the
corporate name from "JFAX.COM, Inc." to "j2 Global Communications, Inc."
JFAX.COM has already begun using j2 Global Communications, Inc. as a trade name.
In the judgment of the j2 Global board of directors, the change of the corporate
name better reflects j2 Global's evolution from an Internet-based faxing and
voice-mail business to a global, real-time communications and messaging business
using a combination of traditional telephony, Internet and other advanced
transmission networks and methods. j2 Global also believes the name change will
enable it to better create brand identity of its services. If the proposed name
change is adopted, j2 Global intends to continue to use the name j2 Global
Communications, Inc. in its communications with stockholders and the investment
community and j2 Global's common stock will continue to trade under the symbol
"JCOM" on The Nasdaq National Market.
If approved by the j2 Global stockholders, the amendment to the
certificate of incorporation will become effective upon the filing of a
certificate of amendment to the certificate of incorporation with the Secretary
of State of the State of Delaware, which filing is expected to take place
shortly after the annual meeting.
Vote Required
Approval of the amendment to the j2 Global's certificate of incorporation
requires the affirmative vote of the holders of a majority of the outstanding j2
Global common stock, which are entitled to vote at the j2 Global annual meeting.
THE j2 GLOBAL BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 2, AMENDMENT
TO j2 GLOBAL'S CERTIFICATE OF INCORPORATION TO CHANGE THE CORPORATE NAME FROM
JFAX.COM, INC. TO j2 GLOBAL COMMUNICATIONS, INC.
Proposal 3 -- Election of Directors
General
A board of eight directors is to be elected at the j2 Global annual
meeting. Unless otherwise instructed, the proxy holders will vote the proxies
received by them for j2 Global's eight nominees named below, each of whom,
except for Steven J. Hamerslag and Douglas Y. Bech, is currently a director of
j2 Global. In the event that any nominee of j2 Global is unable or declines to
serve as a director at the time of the annual meeting, neither of which events
is expected, the proxies will be voted for such nominee as shall be designated
by the current j2 Global board of directors to fill the vacancy.
Vote Required
Each share of j2 Global common stock may vote for up to eight director-
nominees. Votes may not be cumulated. If a quorum is present, the eight nominees
receiving the highest number of votes will be elected to the j2 Global board of
directors, whether or not such number of votes for any individual represents a
majority of the votes cast.
46
<PAGE>
The term of office of each person elected as a director will continue until
the next j2 Global annual meeting or until his or her successor has been elected
and qualified.
THE j2 GLOBAL BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE
NOMINEES LISTED BELOW.
Nominees
The names of the nominees, their ages at the record date and certain
other information about them are set forth below:
<TABLE>
<CAPTION>
Director
--------
Name Age Principal Occupation Since
---- --- -------------------- -----
<S> <C> <C> <C>
Richard S. Ressler 42 President, Orchard Capital Corporation 1997
John F. Rieley 55 Co-Founder and Vice-Chairman, j2 Global Communications, Inc. 1995
Michael P. Schulhof 57 Private Investor 1997
Zohar Loshitzer 43 Chief Information Officer, j2 Global Communications, Inc. 1997
Robert J. Cresci 56 Managing Director of Pecks Management Partners Ltd. 1998
R. Scott Turicchi 36 Executive Vice President, Corporate Development 1998
Steven J. Hamerslag 44 President and CEO, j2 Global Communications, Inc. --
Douglas Y. Bech 55 Chairman and CEO of Raintree Resorts International, Inc. --
</TABLE>
There is no family relationship between any director of j2 Global and any
executive officers of j2 Global.
Douglas Y. Bech is being nominated for election as a director of j2 Global
in the capacity as the representative of eFax.com. If, for any reason, the
merger fails to occur, Mr. Bech has indicated his intention to resign from the
board of directors of j2 Global. If Mr. Bech is elected and then resigns from
the Board, the board will consist of seven persons unless Mr. Bech is replaced
by the remaining members of the board.
Richard S. Ressler has been Chairman of the Board and a director since
1997. He is the managing member of Orchard/JFAX Investors, LLC, one of j2
Global's principal stockholders. He was the chief executive officer of j2 Global
from March 1997 until January 2000. Mr. Ressler is a co-founder and principal of
CIM Group, LLC, a real estate investment, development and management company. He
has been a principal of CIM Group since 1994. Mr. Ressler has been the Chairman
of the Board of MAI Systems Corporation, a software and network computing
company, since 1995. He served as MAI's chief executive officer from 1995 to
1997. Since March 2000, Mr. Ressler has been Chairman of the Board of Express
One International, Inc., an ACMI (aircraft, crew, maintenance and insurance)
operator of cargo aircraft. Mr. Ressler is the founder and president of Orchard
Capital Corporation, a firm which provides investment capital and advice to
companies in which Orchard Capital or its affiliates have made investments. Mr.
Ressler has been a principal of Orchard Capital since 1994.
John F. Rieley is a co-founder and has been a director of j2 Global since
1995. From December 1995 when j2 Global was founded until March 1997, he held
various offices with j2 Global. After March 1997, he has provided consulting
services to j2 Global under an agreement between j2 Global and Boardrush Media
LLC, one of j2 Global's principal stockholders. He has managed, marketed and
consulted on other projects in the media field, the airline industry and in
public affairs.
47
<PAGE>
Michael P. Schulhof has been a director of j2 Global since 1997. Mr.
Schulhof is a private investor in the media, communications and entertainment
industry. From 1993 to 1996, he was president and chief executive officer of
Sony Corporation of America. Mr. Schulhof is a trustee of Brandeis University,
the Lincoln Center for the Performing Arts, New York University Medical Center
and the Brookings Institution. He is a member of the Council on Foreign
Relations and the Investment and Services Policy Advisory Committee to the U.S.
Trade Representative. Mr. Schulhof is a director of SportsLine, USA, Inc., an
Internet-based sports media company.
Robert J. Cresci has been a director of j2 Global since 1998. Mr. Cresci
has been a managing director of Pecks Management Partners Ltd., an investment
management firm, since 1990. Mr. Cresci currently serves on the boards of
Sepracor, Inc., Aviva Petroleum Ltd., Film Roman, Inc., Quest Education
Corporation, Castle Dental Centers, Inc., Candlewood Hotel Co., Inc., SeraCare,
Inc., E-Stamp Corporation, and several private companies.
Zohar Loshitar has been j2 Global's Chief Information Officer and a
director of j2 Global since 1997. Since 1995, he has been a managing director of
Orchard Telecom, Inc., a telecommunications consulting company. From 1987 to
1995, Mr. Loshitzer was the general manager and part owner of Life Alert, a
nationwide emergency response service. Mr. Loshitzer has been a director of MAI
Systems Corporation since 1998.
R. Scott Turicchi has been j2 Global's Executive Vice President, Corporate
Development, since March 2000. He has also been director of j2 Global since
1998. From 1990 to 2000, Mr. Turicchi was a managing director in Donaldson,
Lufkin & Jenrette Securities Corporation's investment banking department. At
DLJ, he was responsible for corporate finance activities, including public
equity offerings, high grade and high yield debt offerings, private equity
placements and mergers and acquisitions advisory services.
Steven J. Hamerslag has been j2 Global's Chief Executive Officer and
President since January 2000. Previously, since July 1999, he had been chief
executive officer of SureTalk.com, Inc., a closely held Internet-based messaging
and communications company which j2 Global acquired on January 26, 2000. Prior
to joining SureTalk, Mr. Hamerslag was vice chairman, until May 1998, and prior
to that chief executive officer, until April 1996, of MTI Technology, Inc., a
leading international provider of data storage management products and services.
Douglas Y. Bech has served as a director of eFax.com since August 1988.
Since August 1997, Mr. Bech has served as chairman and chief executive officer
of Raintree Resorts International, Inc., a company that owns and operates luxury
vacation ownership resorts. Mr. Bech was a founding partner of and, since August
1994, has served as a managing director of Raintree Capital Company, LLC, a
merchant banking firm. In addition, from October 1994 to October 1997, Mr. Bech
was a partner of Akin, Gump, Strauss, Hauer & Feld, L.L.P., a law firm. From May
1993 through July 1994, Mr. Bech was a partner of Gardere & Wynne, L.L.P., a law
firm. From September 1970 to May 1993, Mr. Bech was associated with and a senior
partner of the law firm Andrews & Kurth L.L.P. Mr. Bech holds a B.A. in
Political Science from Baylor University and a J.D. from The University of Texas
Law School. Mr. Bech is a director of Frontier Oil Corporation, Pride Companies,
L.P. and several private companies.
Executive Officers
The name, age and title of each of j2 Global's executive officers (other
than executive officers who are nominees for director), business experience for
at least the past five years and certain other information concerning each
executive officer have been furnished by the executive officer and are
48
<PAGE>
included below. Executive officers are elected by the j2 Global board of
directors following the annual meeting of our stockholders.
Nehemia Zucker, 43, has been j2 Global's Chief Financial Officer since
1996. Prior to joining j2 Global in 1996, he was chief operations manager of
Motorola's EMBARC division, which packages CNBC and ESPN for distribution to
paging and wireless networks. From 1980 to 1996, Mr. Zucker held various
positions in finance, operations and marketing at Motorola in the United States
and abroad.
Amit Kumar, 30, has been j2 Global's Vice President, Engineering, since
October 1999. He joined j2 Global in August 1997 as a senior systems analyst and
served as j2 Global's Director, Research and Development, from May 1998 until
October 1999. Prior to joining j2 Global, beginning in 1995, Mr. Kumar served as
a software engineer for IBM.
Timothy Johnson, 36, has been j2 Global's Vice President, Product Marketing
and Business Development, since January 2000. Previously, since September, 1999,
he had been vice president, business development, of SureTalk.com, Inc., a
closely held Internet-based messaging and communications company which j2 Global
acquired on January 26, 2000. Prior to joining SureTalk, since September 1997,
Mr. Johnson served first as western regional sales manager, then as director of
product marketing and finally as senior director, business development, at
Iomega Corp. Prior to September 1997, since 1988, Mr. Johnson served as
executive vice president of Markman Carter Corporation, a manufacturer's
representation firm.
Leo D'Angelo, 37, has been j2 Global's Chief Technology Officer since March
2000. Mr. D'Angelo previously held the position of founder and chief technology
officer at TimeShift, Inc., a developer of technology for accessing and managing
communications services via the Internet. j2 Global acquired the assets of
TimeShift on March 1, 2000. Before founding TimeShift in 1997, Mr. D'Angelo was
responsible for the design and implementation of Fidelity Investments' equity
trading floor.
Bita Klein, 41, has been j2 Global's Vice President, Customer Service,
since March 2000. From March 1999 until she joined j2 Global, Ms. Klein served
as director of support and services at iSearch, an Internet company providing
software for career centers. Prior to that, beginning 1997, Ms. Klein served as
director of customer care at IMA, a customer relationship software company.
Prior to IMA, Ms. Klein held various managerial and technical positions at
FileNET, a software imaging company.
Board Meetings and Committees
The j2 Global board of directors held four meetings during the year ended
December 31, 1999 and conducted business by written consent. The j2 Global board
of directors has a compensation committee and an audit committee. It does not
have a nominating committee.
The j2 Global audit committee currently consists of Messrs. Cresci,
Schulhof and Ressler. The audit committee did not hold any meetings during 1999.
The audit committee recommends engagement of j2 Global's independent auditors
and is primarily responsible for approving the services performed by the
independent auditors and reviewing and evaluating j2 Global accounting policies
and systems of internal accounting controls. The j2 Global board of directors
has adopted a written charter for the audit committee, and a copy of the audit
committee charter is attached to this proxy statement/prospectus as Appendix G.
The j2 Global compensation committee currently consists of Messrs. Cresci,
Schulhof and Ressler. The compensation committee held one meeting during 1999
and conducted business by written
49
<PAGE>
consent. The compensation committee reviews and approves j2 Global's executive
compensation policies and is responsible for administering j2 Global's 1997
Stock Option Plan.
During 1999, each incumbent j2 Global director attended at least seventy-
five percent (75%) of the aggregate of all of the meetings of the board of
directors and the committees of which he was a member.
Director Compensation
j2 Global's directors, who are also officers or consultants of j2 Global,
receive no separate compensation for serving as directors. j2 Global's outside
directors, Messrs. Schulhof and Cresci, are themselves, or are representatives
of, significant stockholders. They receive no fees for serving as directors.
They are, however, reimbursed for their expenses in attending directors'
meetings and committee meetings.
j2 Global's directors are eligible to participate in j2 Global's 1997
Stock Option Plan. In July 1999, Messrs. Cresci, Rieley, Schulhof and Turicchi
(who was then an outside director) were each granted 40,000 options, and Mr.
Ressler was granted 500,000 options, to purchase shares of j2 Global common
stock at an exercise price of $8.00 per share. In July 2000, Messrs. Cresci,
Rieley, Schulhof, Loshitzer and Ressler were each granted 50,000 options to
purchase shares of j2 Global common stock at an exercise price of $1.72 per
share. See "--Executive Compensation--1997 Stock Option Plan" beginning on page
__ for a description of the terms of j2 Global's 1997 Stock Option Plan.
The services of Mr. Ressler, formerly as Chief Executive Officer and
currently as Chairman, are provided to j2 Global pursuant to a consulting
agreement. See "--Executive Compensation--Certain Transactions" beginning on
page ____.
No options or warrants were exercised by any of j2 Global's directors
in 1999.
Compensation Committee Interlocks and Insider Participation
The j2 Global compensation committee currently consists of Messrs. Cresci,
Schulhof and Ressler. j2 Global has no interlocking relationships or other
transactions involving any of its compensation committee members that are
required to be reported pursuant to applicable SEC rules. One of j2 Global's
former officers, Richard S. Ressler, but no current officer, serves on the
compensation committee.
Security Ownership of Management
The following table sets forth the beneficial ownership of j2 Global common
stock as of the record date, by each director, by each director nominee, by each
of the executive officers named in the Summary Compensation Table under "--
Executive Compensation" beginning on page __ and by all such directors, director
nominees and executive officers as a group.
<TABLE>
<CAPTION>
Number of Shares Approximate
Name/(1)/ Beneficially Owned/(2)/ Percentage
------------------------------------------------------------------ --------------------- -----------
<S> <C> <C>
Richard S. Ressler............................................... 13,273,073/(3)/ 36.43%
Zohar Loshitzer.................................................. 241,667/(4)/ *
John F. Rieley................................................... 175,000 *
Michael P. Schulhof.............................................. 1,103,104/(5)/ 2.98%
R. Scott Turicchi................................................ 143,750/(6)/ *
</TABLE>
50
<PAGE>
<TABLE>
<S> <C> <C>
Robert J. Cresci................................................. 0 *
Steven J. Hamerslag.............................................. 517,617 1.43%
Douglas Y. Bech.................................................. 0 *
Timothy Johnson.................................................. 9,538 *
Leo D'Angelo..................................................... 30,000 *
Bita Klein....................................................... 0 *
Amit Kumar....................................................... 25,083(7) *
Gary H. Hickox................................................... 187,083(8) *
Nehemia Zucker................................................... 516,072(9) 1.42%
Anand Narasimhan................................................. 160,959 *
All directors, director nominees and named executive
officers as a group (15 persons).............................. 16,382,946 43.03%
</TABLE>
__________________
* Less than 1%
(1) The address for all executive officers, directors and director nominees is
c/o j2 Global, Inc., 6922 Hollywood Blvd., Suite 900, Los Angeles, CA
90028.
(2) At the record date for the j2 Global annual meeting, ________ shares of j2
Global common stock were outstanding.
(3) Consists of 12,574,515 shares of j2 Global common stock owned by
Orchard/JFAX Investors, LLC, 390,244 shares of j2 Global common stock owned
by The Ressler Family Foundation, and 308,314 shares of j2 Global common
stock which Orchard/JFAX Investors may purchase pursuant to warrants which
are exercisable in full at this time. See "--Executive
Compensation--Certain Transactions" beginning on page ___. Mr. Ressler is
the manager of Orchard/JFAX Investors and a trustee of the The Ressler
Family Foundation, but has disclaimed beneficial ownership of any shares of
j2 Global common stock in which he has no pecuniary interest.
(4) Consists of options that are exercisable to acquire 241,667 shares of j2
Global common stock within 60 days of the record date for the j2 Global
annual meeting.
(5) Consists of 263,104 shares of j2 Global common stock and vested warrants to
acquire 840,000 shares of j2 Global common stock.
(6) Consists of vested warrants to acquire 143,750 shares of j2 Global common
stock.
(7) Consists of 10,333 shares of j2 Global common stock and options to acquire
14,750 shares of j2 Global common stock that are exercisable within 60 days
of the record date for the j2 Global annual meeting.
(8) Consists of 41,250 shares of j2 Global common stock and options to acquire
145,833 shares of j2 Global common stock that are exercisable within 60
days of the record date for the j2 Global annual meeting.
(9) Consists of 261,739 shares of j2 Global common stock and options to acquire
254,333 shares of j2 Global common stock that are exercisable within 60
days of the record date for the j2 Global annual meeting.
51
<PAGE>
Executive Compensation
Summary Compensation Table
The following table shows, as to j2 Global's Chairman and former Chief
Executive Officer, and each of j2 Global's other four most highly compensated
executive officers who were serving as executive officers during the last fiscal
year, information concerning all compensation paid for services to j2 Global in
all capacities during the last three fiscal years.
<TABLE>
<CAPTION>
Long Term
Compensation
------------
Annual Compensation Securities
------------------- Underlying All Other
Name and Principal Position Year Salary($) Bonus($) Options(#) Compensation($)
--------------------------- ---- --------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Richard S. Ressler/(1)/ 1999 237,500 0 500,000 0
Chairman and Former 1998 200,000 0 0 0
Chief Executive Officer 1997 175,000 0 0 0
Gary H. Hickox/(2)/ 1999 220,000 71,291 500 0
Former President and 1998 60,874/(3)/ 0 375,000 40,542/(4)/
Chief Operating Officer 1997 0 0 0 0
Nehemia Zucker 1999 150,000 43,125 20,500 0
Chief Financial Officer 1998 150,000 31,250 12,500 0
1997 150,000 34,361 250,000 20,000/(5)/
Zohar Loshitzer 1999 175,000 65,625 20,500 0
Chief Information Officer 1998 140,000 34,936 50,000 0
1997 74,407 30,000 225,000 0
Anand Narasimhan/(6)/ 1999 165,000 45,662 10,500 0
Former Chief 1998 137,453 28,673 112,500 0
Technology 1997 94,423 20,219 75,000 10,000/(7)/
Officer
</TABLE>
________________
(1) Mr. Ressler is an employee of Orchard Capital Corporation, which provides
his services to j2 Global through a consulting agreement. Mr. Ressler
served as j2 Global's Chief Executive Officer from March 1997 until January
2000.
(2) Mr. Hickox was j2 Global's President and Chief Operating Officer from
September 1998 until January 2000.
(3) Represents compensation for the period from September 1998 to December
1998.
(4) Consists of re-location expenses reimbursed to Mr. Hickox.
(5) Consists of re-location expenses reimbursed to Mr. Zucker.
(6) Mr. Narasimhan was j2 Global's Chief Technology Officer from 1996 until
March 2000.
(7) Consists of re-location expenses reimbursed to Mr. Narasimhan.
52
<PAGE>
Options Granted in Last Fiscal Year
The following table sets forth certain information regarding grants of
stock options made during the fiscal year ended December 31, 1999 to j2 Global's
executive officers named in the Summary Compensation Table, to all current
executive officers as a group, to all current directors who are not executive
officers as a group and to all other employees as a group:
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
---------------------------------------------------------------------------------------- Value at Assumed Annual
Number of Rates of Stock Price
Securities % of Total Appreciation For
Underlying Options Granted Option Term /(1)/
Options To Employees In Exercise Price ---------------------
Name Granted (#)/(2)/ Fiscal Year/(3)/ ($/SH)/(4)(5)/ Expiration 5% ($) 10% ($)
---- ---------------- ---------------- -------------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Richard S. Ressler 500,000 33.50% 8.00 7/19/09 2,515,579 6,374,970
Gary H. Hickox 500 0.03% 8.00 7/19/09 2,516 7,969
Nehemia Zucker 500 0.03% 8.00 7/19/09 2,516 7,969
20,000 1.34% 4.28 12/22/09 53,833 136,424
Zohar Loshitzer 500 0.03% 8.00 7/19/09 2,516 7,969
20,000 1.34% 4.28 12/22/09 53,833 136,424
Anand Narasimhan 500 0.03% 8.00 7/19/09 2,516 7,969
10,000 0.67% 4.28 12/22/09 26,917 68,212
All current 41,500 2.78% 8.00 7/19/09 208,793 510,716
executive officers 140,000 9.38% 4.28 12/22/09 376,833 954,970
as a group (8
officers)
All current directors 620,000 37.52% 8.00 7/19/09 3,124,349 7,919,306
who are not
executive officers
as a group (4
directors)
All other employees 196,500 13.17% 8.00 7/19/09 988,622 2,505,363
as a group 614,500 41.17% 4.28 12/22/09 1,654,030 4,191,638
</TABLE>
_____________________
(1) Potential realizable value is based on the assumption that the j2 Global
common stock appreciates at the annual rate shown (compounded annually)
from the date of grant until the expiration of the option term. These
numbers are calculated based on the requirements promulgated by the SEC and
do not represent an estimate of future stock price growth.
(2) All stock options granted have 10-year terms and are exercisable with
respect to 33-1/3% of the shares covered thereby on the anniversary of the
date of grant, with full vesting occurring three years following the date
of grant. See "--Employment Contracts, Termination of Employment and Change
of Control Agreements" beginning on page __ for provisions regarding
acceleration of the vesting of options.
(3) There were stock options and warrants granted to j2 Global employees in
1999 to acquire a total of 1,492,500 shares of j2 Global common stock,
including all options granted to Mr. Ressler, but excluding options granted
to our outside directors.
53
<PAGE>
(4) Options were granted at an exercise price equal to the market value of the
j2 Global common stock as listed on The Nasdaq National Market.
(5) The exercise price and tax withholding obligations may be paid in cash and,
subject to certain conditions or restrictions, by delivery of already-owned
shares.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
No options were exercised by any of j2 Global's executive officers during
the year ended December 31, 1999. The value of the options held at the end of
the year are set forth in the following table:
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options at Fiscal In-The-Money Options at Fiscal
Year-End (#) Year-End ($) (1)
Name Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------------------- -------------------------
<S> <C> <C>
Richard S. Ressler.......................... 0 / 500,000 0 / 0
Gary H. Hickox.............................. 125,000 / 250,500 539,850 / 1,079,700
Nehemia Zucker.............................. 233,333 / 49,667 1,381,051 / 208,072
Zohar Loshitzer............................. 166,667 / 128,833 959,800 / 636,646
Anand Narasimhan............................ 87,500 / 110,500 487,895 / 1,175,208
</TABLE>
________________
(1) Market value of underlying securities at fiscal year-end ($6.7188 per
share), minus the exercise price.
Employment Contracts, Termination of Employment and Change of Control
Arrangements
j2 Global currently has employment contracts with Steven J. Hamerslag,
R. Scott Turicchi and Nehemia Zucker. j2 Global also has a consulting agreement
with Orchard Capital Corporation, which supplies the services of Richard S.
Ressler, j2 Global's Chairman, and a consulting agreement with Boardrush Media
LLC, which supplies the services of John F. Rieley, j2 Global's Vice Chairman.
See "--Certain Transactions" beginning on page __.
Mr. Hamerslag's Contract. This agreement has a four-year term, and is
automatically renewed for successive one-year terms unless either j2 Global or
Mr. Hamerslag gives prior notice of termination. The agreement contains no
severance obligations.
In connection with the agreement, j2 Global issued 120 shares of j2
Global Series B Convertible Preferred Stock to Mr. Hamerslag. Each share of j2
Global Series B Convertible Preferred Stock is convertible into 10,000 shares
(for a total of 1.2 million shares) of j2 Global common stock, at the election
of Mr. Hamerslag, but only following the expiration of j2 Global's repurchase
rights, which are described below, with respect to each share of Series B
Convertible Preferred Stock and repayment by Mr. Hamerslag of the applicable
portion of the promissory note, which is described below. As consideration for
the shares of Series B Convertible Preferred Stock, Mr. Hamerslag issued to j2
Global a promissory note for $7,125,000, or $5.9375, the market price per share
for the j2 Global common stock on the date Mr. Hamerslag commenced employment,
multiplied by 1.2 million. The note is non-recourse, but secured by a pledge of
Mr. Hamerslag's shares of Series B Convertible Preferred Stock, accrues interest
at the one-year Treasury-note rate, with interest payable annually in arrears,
and matures five years following issuance. Mr. Hamerslag has granted j2 Global
the right to repurchase his Series B
54
<PAGE>
Convertible Preferred Stock at a price per share equal to $59,375 in the event
that Mr. Hamerslag's employment terminates for any reason. This repurchase
right:
. Applies to all 120 shares prior to the first anniversary of Mr.
Hamerslag's employment by j2 Global;
. Only applies to 90 shares following the first anniversary of Mr.
Hamerslag's employment or in the event of a termination by j2 Global without
cause or by Mr. Hamerslag with good reason during the first year of his
employment, to 60 shares following the second anniversary of Mr. Hamerslag's
employment or in the event of a termination by us without cause or by Mr.
Hamerslag with good reason during the second year of his employment, and to 30
shares following the third anniversary of Mr. Hamerslag's employment or in the
event of a termination by us without cause or by Mr. Hamerslag with good reason
during the third year of his employment;
. Expires completely following the fourth anniversary of Mr. Hamerslag's
employment or in the event of a termination by us without cause or by Mr.
Hamerslag with good reason during the fourth year of his employment; and
. Expires completely upon a change of control.
"Good reason" is defined as a change in the reporting relationship between Mr.
Hamerslag and the j2 Global board or directors, the committees of the j2 Global
board of directors or j2 Global's Chairman, or a re-location of Mr. Hamerslag.
"Change of control" is defined as a single party or affiliated group not
currently affiliated with j2 Global, excluding any of j2 Global's employee
benefit plans and excluding j2 Global's Chairman, Richard S. Ressler, or any of
his affiliates, acquiring a majority of the outstanding shares of the j2 Global
common stock or substantially all of j2 Global's assets.
On July 12, 2000, j2 Global granted to Mr. Hamerslag, subject to an
increase in the number of shares reserved for issuance under the j2 Global 1997
Stock Option Plan, options to purchase 1.2 million shares of j2 Global common
stock at an exercise price of $2.06 per share in accordance with the 1997 Stock
Option Plan. These options have a term of five years. Options to acquire one-
quarter, or 300,000, of the shares of j2 Global common stock vest on January 30,
2001 and on each anniversary thereafter, subject to the following:
. In the event of a termination by j2 Global without cause or by
Mr. Hamerslag with "good reason" during the first year of his employment,
Mr. Hamerslag will vest in all unvested options otherwise scheduled to vest on
his first anniversary;
. In the event of a termination by j2 Global without cause or by Mr.
Hamerslag with "good reason" during the second year of his employment, Mr.
Hamerslag will vest in all unvested options otherwise scheduled to vest on his
second anniversary;
. In the event of a termination by j2 Global without cause or by Mr.
Hamerslag with "good reason" during the third year of his employment, Mr.
Hamerslag will vest in all unvested options otherwise scheduled to vest on his
third anniversary;
. In the event of a termination by j2 Global without cause or by Mr.
Hamerslag with "good reason" during the fourth year of his employment, Mr.
Hamerslag will vest in all unvested options otherwise scheduled to vest on his
fourth anniversary; and
. All options will vest upon a change of control.
Under the agreement, j2 Global reimburses Mr. Hamerslag for up to $50,000
of discretionary business expenses incurred by Mr. Hamerslag per year, and Mr.
Hamerslag participates in all of j2 Global's benefits programs, including j2
Global's semi-annual incentive compensation bonus plan.
Mr. Turicchi's Contract. This agreement has no specified term. If j2 Global
terminates Mr. Turicchi without cause or Mr. Turicchi resigns following a
constructive without cause termination, j2 Global will be required to pay Mr.
Turicchi 12 months' severance, in the event of a termination occurring during
the first year of Mr. Turicchi's employment, six months' severance, in the event
of a termination occurring during the second year of Mr. Turicchi's employment,
and three months' severance, in the event of a termination occurring during the
third year of Mr. Turicchi's employment. A "constructive without cause
termination" is defined as a relocation of Mr. Turicchi, a material change in
Mr. Turicchi's duties, responsibilities or reporting relationship directly to
the Chief Executive Officer or board of directors, or a termination by Mr.
Turicchi upon or within 12 months after the occurrence of a change-in-control,
as defined in j2 Global's 1997 Stock Option Plan.
In connection with the agreement, j2 Global committed to grant to Mr.
Turicchi, subject to an increase in the number of shares reserved for issuance
under j2 Global's 1997 Stock Option Plan, options to purchase 850,000 shares of
j2 Global common stock in accordance with j2 Global's 1997 Stock Option
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Plan. j2 Global granted these options to Mr. Turicchi on July 12, 2000 at an
exercise price of $2.06 per share. These options have a term of 10 years.
Options to acquire one-quarter, or 212,500, of the shares of j2 Global common
stock vest on each anniversary of the date Mr. Turicchi commenced employment
with j2 Global, subject to the following:
. In the event of a termination by j2 Global without cause or a
"constructive without cause termination" during the first year of his
employment, Mr. Turicchi will vest in all unvested options otherwise scheduled
to vest on his first anniversary;
. In the event of a termination by j2 Global without cause or a
"constructive without cause termination" during the second year of Mr.
Turicchi's employment, Mr. Turicchi will vest in one-half of the unvested
options otherwise scheduled to vest on his second anniversary; and
. All options will vest upon a change of control.
"Change of control" is defined as a single party or affiliated group, not
currently affiliated with j2 Global, acquiring a majority of j2 Global's
outstanding shares of common stock.
Under the agreement, Mr. Turicchi participates in all of j2 Global's
benefits programs including j2 Global's semi-annual incentive compensation bonus
plan.
Mr. Zucker's Contract. This employment agreement has no specified term and
is terminable at will by either party, but provides for severance payments equal
to six months' salary in the event of a termination by j2 Global without cause.
This agreement does not provide for accelerated vesting of any employee options
upon termination for any reason, but does provide for accelerated vesting in the
event of a change in control of j2 Global.
1997 Stock Option Plan
j2 Global's 1997 Stock Option Plan was adopted by the board of
directors and approved by the stockholders in November 1997. A total of
4,375,000 shares of j2 Global common stock have been reserved for issuance under
the plan. However, on July 12, 2000, the j2 Global board of directors approved
an increase, to 8,000,000, of the number of shares reserved for issuance under
the plan. See "Proposal 4 -- Amendment to 1997 Stock Option Plan" beginning on
page __. As of the record date, options to purchase 3,671,521 shares of common
stock were outstanding under the plan, and 145,138 shares had been issued upon
exercise of previously granted options. In addition, during July 2000, options
to acquire 2,050,000 shares of j2 Global common stock were issued to two of j2
Global's executive officers pursuant to the 1997 Stock Option Plan. These
options are subject to the approval of the increase in the number of shares for
which options may be granted under the 1997 Stock Option Plan.
The plan provides for grants to employees, including officers and
employee directors, of "incentive stock options" within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended, and for grants of
nonstatutory stock options to employees, including officers and employee
directors, and consultants, who may be non-employee directors.
The plan is administered by the compensation committee of the j2
Global board of directors. The plan administrator may determine the terms of the
options granted, including the exercise price, the number of shares subject to
each option and the exercisability of the option. The plan administrator also
has the full power to select the individuals to whom options will be granted and
to make any combination of grants to any participants.
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Options generally have a term of 10 years. For options granted in 1999
and prior years, one-third of the options vest on the one-year anniversary of
the grant date and each of the remaining one-third portions of the options vest
on each annual anniversary of the grant date thereafter. For options granted
after 1999, one-quarter of the options vest on the one-year anniversary of the
grant date and each of the remaining one-quarter portions of the options vest on
each annual anniversary of the grant date thereafter.
The option exercise price may not be less than the higher of the par
value or 100% of the fair market value of j2 Global common stock on the date of
grant; provided, however, that nonstatutory options may be granted at exercise
prices of not less than the higher of the par value or 85% of the fair market
value on the date the option is granted. In the case of an incentive option
granted to a person who at the time of the grant owns stock representing more
than 10% of the total combined voting power of all classes of j2 Global stock,
the option exercise price for each share of common stock covered by such option
may not be less than 110% of the fair market value of a share of j2 Global
common stock on the date of grant of such option.
In the event of a sale of all or substantially all of j2 Global's
assets, or j2 Global's merger with or into another corporation, each option will
become immediately exercisable in full unless the board of directors determines
that the optionee has been offered substantially identical replacement options
and a comparable position at the acquiring company.
Certain Transactions
Indebtedness of Officers and Directors. The following directors, officers
and beneficial owners of more than 5% of j2 Global's common stock are indebted
to j2 Global:
. Nehemia Zucker is indebted to j2 Global in the amount of $120,644.
This amount represents the principal balance of a loan in the original principal
amount of $100,000 that was advanced to Mr. Zucker on April 11, 1997. The loan
matures on March 31, 2001 and bears interest at the rate of 6.32% per annum.
However, interest is not paid periodically, but rather is accrued and added to
principal each September 30 and March 31. This note is secured by a pledge of
220,000 shares of j2 Global common stock owned by Mr. Zucker.
. Boardrush Media LLC is indebted to j2 Global in the amount of
approximately $1,050,000. The loan to Boardrush was advanced to Boardrush on
March 17, 1997 and the principal amount of the loan was originally $2,250,000.
The loan to Boardrush matures on December 31, 2002. This loan bears interest at
the rate of 6.32% per annum with interest payments offset against amounts due
and owing to Boardrush under the consulting agreement described below.
. Gary H. Hickox, j2 Global's former President and Chief Operating
Officer, is indebted to j2 Global in the approximate amount of $106,713. This
amount represents the principal balance of a loan in the original principal
amount of $99,000 that was advanced to Mr. Hickox in October 1998 when he joined
j2 Global together with accrued interest through August 7, 2000. Mr. Hickox used
the proceeds of this loan to purchase 41,250 shares of j2 Global common stock.
The loan matures on October 7, 2001 and bears interest at 4.25% per annum.
However, interest is not paid periodically, but rather is accrued and payable on
maturity.
. Steven J. Hamerslag is indebted to j2 Global in the amount of
$7,125,000. This loan was made to Mr. Hamerslag in connection with his
employment agreement and the terms of the loan are discussed above. See "--
Executive Compensation--Employment Contracts, Termination of Employment and
Change of Control Arrangements" beginning on page __ for a description of these
arrangements.
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Consulting Agreements. j2 Global is a party to a consulting agreement with
Boardrush Media LLC, a limited liability company that owns approximately 8.39%
of the j2 Global common stock and of which Jens Muller, a former director, is
the manager and therefore the controlling person. Pursuant to this agreement,
Boardrush provides the services of Mr. Muller and John F. Rieley, one of j2
Global's directors and j2 Global's Vice Chairman, to j2 Global for a maximum of
two days each per month. j2 Global considers Messrs. Muller and Rieley to be the
co-founders of j2 Global. The term of the consulting agreement runs through the
earlier of the date on which the Boardrush loan is repaid in full as described
above and December 31, 2002. Therefore, there can be no assurance that upon the
repayment of the Boardrush loan, Messrs. Muller and Rieley will continue to
provide any consulting services to j2 Global. Until March 17, 1999, j2 Global
paid Boardrush $400,000 per year, payable in equal monthly payments, pursuant to
the consulting agreement. From and after March 17, 1999, Boardrush's
compensation under the consulting agreement consists of forgiveness of interest
and principal under the loan discussed above, with principal reductions being
made pro rata over the five-year period from March 17, 1999 through March 17,
2004. The consulting agreement originally expired, and the Boardrush loan
originally matured, on March 17, 2004. In July 2000, j2 Global entered into a
modification agreement which amended the terms of the consulting agreement and
loan. Terms of the amendments are as follows:
. The term of the loan was shortened so that the maturity date is now
December 31, 2002 instead of March 17, 2004;
. The term of the consulting agreement was shortened so that the term
now expires on December 31, 2002 instead of March 17, 2004; however, the amount
and schedule of the deemed principal reductions on the loan payable under the
consulting agreement have remained unchanged, i.e., $37,500 per month;
. The deemed principal reductions under the consulting agreement, by the
terms of the modification agreement, are not earned until the maturity date of
the loan;
. Boardrush was given the right to repay the loan at any time either in
cash or in j2 Global common stock valued at the then current market price; and
. In the event that, at any time prior to December 31, 2002, Boardrush
prepays approximately $760,000 of the loan either in cash or j2 Global common
stock, then (a) the requirement that Boardrush repay the loan with the proceeds
of any sale of j2 Global common stock after it has received in excess of $6
million in such proceeds would expire and (b) Boardrush's pledge of 2,925,000
shares of j2 Global common stock would be extinguished.
On July 27, 2000, Boardrush prepaid $760,000 of the loan by delivering to
j2 Global approximately 250,000 shares of j2 Global common stock, valued at
$3.03125 per share, the closing trading price for the j2 Global common stock on
that date. This caused the events described in clauses (a) and (b) of the
immediately preceding bullet point to occur. Pursuant to the consulting
agreement, j2 Global also reimburses Boardrush for expenses it incurs on j2
Global's behalf.
Richard S. Ressler's services as Chairman, and formerly as Chief Executive
Officer, have been provided pursuant to a consulting arrangement with Orchard
Capital Corporation, a company controlled by Mr. Ressler. Mr. Ressler is also a
member and the manager of Orchard/JFAX Investors, LLC, one of j2 Global's
principal stockholders. Under this consulting arrangement, j2 Global paid
Orchard Capital $200,000 per year through June 30, 1999 and $275,000 per year
from July 1, 1999 though March 31, 2000, in each case payable in equal monthly
payments, for the services of Mr. Ressler. These arrangements were not pursuant
to a written agreement. Effective April 1, 2000, Orchard Capital's
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compensation was reduced to $144,000 per year to reflect Mr. Ressler's decreased
role in management following the hiring of Steven J. Hamerslag as Chief
Executive Officer. Orchard Capital's revised consulting arrangement was
reflected in a new written agreement between j2 Global and Orchard Capital. This
agreement expires October 1, 2000.
As a director, Mr. Ressler is eligible to participate in j2 Global's 1997
Stock Option Plan. In July 1999, he was granted options to purchase 500,000
shares of j2 Global common stock at an exercise price of $8.00 per share and in
July 2000, he was granted options to purchase 50,000 shares of j2 Global common
stock at an exercise price of $1.72 per share. See "--1997 Stock Option Plan"
beginning on page ___ for a description of the terms of j2 Global's 1997 Stock
Option Plan.
Other than reimbursement for reasonable expenses incurred in connection
with the services it renders to j2 Global, neither Orchard Capital nor Mr.
Ressler receives any other compensation from j2 Global.
In January 1997, j2 Global entered into a consulting agreement with Michael
P. Schulhof, now a member of j2 Global's board of directors. Pursuant to this
agreement, Mr. Schulhof agreed to provide financial, investment and operational
advice to j2 Global's management team. In consideration for these services, Mr.
Schulhof was granted a warrant to purchase 420,000 shares of j2 Global common
stock at an exercise price of $0.70 per share and a second warrant to purchase
420,000 shares of j2 Global common stock at an exercise price of $1.80 per
share. Each of these warrants is currently exercisable and expires in January
2007. The consulting agreement had a two-year term and expired by its terms in
January 1999.
Shared Space and Services. j2 Global currently leases approximately 28,000
square feet of office space for j2 Global's headquarters in Hollywood,
California under a lease that expires in January 2010. j2 Global leases the
space from CIM/Hollywood, LLC, a limited liability company indirectly controlled
by j2 Global's Chairman, Richard S. Ressler. Additionally, j2 Global subleases
approximately 26% of this space to CIM Group, LLC, another limited liability
company indirectly controlled by Mr. Ressler. This sublease is cancelable by
either party on six months' notice. j2 Global's share of the monthly rent is
approximately $36,000 and CIM Group's share of the monthly rent is approximately
$12,500.
j2 Global also shares and prorates certain administrative costs with other
entities that are controlled by j2 Global's Chairman. The other administrative
costs include the costs of a shared receptionist and routine office and
telephone expenses. j2 Global also makes available the services of j2 Global's
general counsel to these other entities and charges them for the proportionate
cost of the services of j2 Global's general counsel that they incur. The
entities involved are Orchard Capital, CIM Group, LLC and MAI Systems
Corporation. These arrangements are not pursuant to written agreements and are
adjusted from time to time according to the relative benefits given and
received. Monthly reimbursements from Orchard Capital, CIM and MAI to j2 Global
are currently approximately $20,000. This amount reflects j2 Global's business
activity, compared to the other affiliated entities, as of July 31, 2000, and
could increase or decrease as j2 Global and/or these affiliated entities grow.
Investments in j2 Global by Officers, Directors and Principal Stockholders.
Between December 1995, when j2 Global was founded, and March 1997, when
Orchard/JFAX Investors, LLC invested in j2 Global, j2 Global issued a total of
6,910,000 shares of j2 Global common stock to j2 Global's founders, Messrs.
Muller and Rieley, in exchange for cash investments. In March 1997, j2 Global
issued 5,375,000 shares of j2 Global common stock to Boardrush in exchange for
an equivalent number of Mr. Muller's then-current stock holdings, which holdings
were canceled. At the same time, j2 Global issued 10,060,000 shares of j2 Global
common stock to Orchard/JFAX Investors, LLC in exchange for a cash investment of
$7,750,000. In March and May 1997, j2 Global issued 220,000 shares and 150,000
shares, respectively, to Nehemia Zucker and Anand Narasimhan, upon the exercise
by Messrs. Zucker and
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Narasimhan of employee options granted to them when they joined j2 Global in
1996 and payment by each of them of the option price of $0.0002 per share. In
connection with the investments by Boardrush, Orchard/JFAX Investors, LLC and
Messrs. Zucker and Narasimhan, j2 Global entered into a registration rights
agreement with those investors as well as Messrs. Rieley and Muller. Under that
registration rights agreement, the investors have the right to participate in
registrations initiated by j2 Global, but they have no right to demand that j2
Global effect a registration. These registration rights will expire on March 17,
2007.
In March 1998, j2 Global issued a total of 3,750,000 shares of j2 Global
common stock at $0.80 per share pursuant to a rights offering that was made
available to all of j2 Global's then stockholders and warrant holders on the
same terms. The principal stockholders, officers and directors who participated
and the number of shares purchased by each were as follows: Orchard/JFAX
Investors, LLC, 3,080,776 shares; Michael P. Schulhof, 263,104 shares; Nehemia
Zucker, 41,739 shares; and Anand Narasimhan 28,459 shares. A portion of the
proceeds of the rights offering was used to repay a loan to j2 Global from
Orchard/JFAX Investors. That loan was in the principal amount of $1,400,000,
accrued interest at a rate of 15% per annum and was repaid for an aggregate of
$1,444,100.
In June 1998, j2 Global's issued $10 million of its 10% senior subordinated
notes due 2004 together with 2,101,971 shares of j2 Global common stock to an
investor group advised by Pecks Management Partners Ltd., consisting of
Declaration of Trust for Defined Benefit Plans of Zeneca Holdings, Inc.,
Declaration of Trust for Defined Benefit Plans of ICI American Holdings, Inc.,
Delaware State Employees' Retirement Fund and the J.W. McConnell Family
Foundation. Robert J. Cresci, one of j2 Global's directors, is a managing
director of Pecks Management Partners, Ltd. Pursuant to the terms of the notes,
which permitted j2 Global to make some payments of interest by issuing
additional notes and shares of j2 Global common stock, j2 Global subsequently
issued an additional $512,500 principal amount of notes and 105,727 shares of j2
Global common stock to that investor group. The total purchase price was $10
million.
In July 1998, j2 Global also issued $5 million in liquidation preference of
its Series A Usable Redeemable Preferred Stock and related warrants to acquire
3,125,000 shares of j2 Global common stock. The total purchase price was $5
million. The warrants issued in connection with the preferred stock have an
exercise price of $2.40 per share and expire on July 1, 2005. Donaldson, Lufkin
& Jenrette Securities Corporation acted as placement agent for the offerings of
notes and preferred stock and received warrants to acquire 247,250 shares of j2
Global common stock and a cash payment of $870,000, as compensation for its
services. Mr. Turicchi, one of j2 Global's directors and j2 Global's Executive
Vice President, Corporate Development, is a former managing director of
Donaldson, Lufkin & Jenrette Securities Corporation. The purchasers of the
preferred stock and related warrants included the following entities in the
following amounts:
. Affiliates of Donaldson, Lufkin and Jenrette Securities Corporation
purchased 3,500 shares and received warrants to acquire 2,187,500 shares of
j2 Global common stock;
. Orchard/JFAX Investors, LLC purchased 500 shares and received warrants
to acquire 312,500 shares of j2 Global common stock; and
. The investor group managed by Pecks Management Partners, Ltd.
purchased 750 shares and received warrants to acquire 469,750 shares of j2
Global common stock.
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A portion of the proceeds of the notes and preferred stock offerings
was used to repay a loan to j2 Global from Orchard/JFAX Investors. That loan was
in the principal amount of $1,000,000, accrued interest at a rate of 15% per
annum and was repaid for an aggregate of $1,013,625.
The holders of j2 Global common stock and warrants issued in connection
with the notes and the preferred stock offerings are entitled to registration
rights pursuant to an agreement between j2 Global and those investors entered
into at the time of the notes and preferred stock offerings. Under that
agreement, among other things, the holders are generally entitled to demand two
registrations of the j2 Global common stock issued in connection with the notes
offering or of the j2 Global common stock issued upon exercise of the warrants.
In addition, the holders are entitled to participate in registrations initiated
by j2 Global. Finally, under the registration rights agreement, j2 Global has
also agreed to file a registration statement on Form S-3 permitting resales of
the shares of j2 Global common stock held by such investors when j2 Global is
eligible to use that form.
In addition, the holders of the j2 Global common stock and warrants
issued in connection with the notes and preferred stock offerings are entitled
to have j2 Global repurchase such shares of j2 Global common stock issued upon
exercise of the warrants in the event of a change of control of j2 Global. In
such event, the shares of j2 Global common stock issued at the time of the notes
and preferred stock offerings are to be repurchased at $3.20 per share, the
warrants to be redeemed at $1.60 per underlying share and the shares issued upon
exercise of warrants to be repurchased at $4.00 per share.
j2 Global is also party to a securityholders' agreement, dated June 30,
1998, with the holders of the notes and preferred stock, including those listed
above, and other stockholders, including Orchard/JFAX Investors. Under that
agreement, j2 Global has agreed to take all action within its power to cause the
election of, and the stockholders have agreed to vote their shares of j2 Global
common stock in favor of, one designee to the board of directors selected by the
initial purchasers of the notes and one designee to the board of directors
selected by the initial purchasers of the preferred stock. Currently, Mr. Cresci
has been elected to the board of directors as the designee of the initial
purchasers of the notes and Mr. Turicchi has been elected to the board of
directors as the designee of the initial purchasers of the preferred stock.
Although most provisions in the securityholders' agreement have terminated, the
rights of the initial purchasers of the notes to designate a director as
described survive for so long as such purchasers continue to hold at least 25%
of the shares of j2 Global common stock issued in connection with the notes
offering and the right of the initial purchasers of preferred stock to designate
a director as described above survive for so long as such purchasers continue to
hold at least 25% of the shares issued or issuable upon exercise of the related
warrants.
The senior subordinated notes were repaid in full and the Series A
Usable Redeemable Preferred Stock was redeemed in full in July and August 1999
for approximately $10,591,000 and $6,818,000, respectively, including accrued
and unpaid interest of $85,000 and dividends of $940,000, respectively. Persons
participating in these investments have retained their shares of j2 Global
common stock and warrants to acquire j2 Global common stock.
In October 1998, we issued 41,250 shares of j2 Global common stock to
Mr. Hickox, j2 Global's former President and Chief Operating Officer, in
exchange for the proceeds of the loan discussed above.
In connection with the warrants granted to Mr. Schulhof, j2 Global also
granted to him registration rights with respect to the shares issued upon
exercise of the warrants. Mr. Schulhof is entitled to participate in
registrations initiated by j2 Global and is entitled to demand registration of
the shares owned by him. Mr. Schulhof's rights to demand a registration of his
shares will expire in January 2007, but there is no express termination of his
right to participate in registrations effected by j2 Global.
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In January 2000, j2 Global acquired the outstanding stock of
SureTalk.Com, Inc., a closely held Internet-based faxing, messaging and
communications company based in Carlsbad, California. The stock was acquired
directly from the shareholders of SureTalk.Com, Inc. in a stock-for-stock
purchase transaction valued at approximately $9.28 million. The shareholders of
SureTalk.Com included Steven J. Hamerslag, Timothy Johnson and Lester Morales,
who joined j2 Global as executive officers following the closing. Mr. Morales no
longer is a j2 Global executive officer. At closing, Mr. Hamerslag received
231,411 shares of j2 Global common stock, Mr. Johnson received 9,538 shares of
j2 Global common stock and Mr. Morales received 68,634 shares of j2 Global
common stock, in each case in satisfaction of j2 Global's obligations to them as
selling SureTalk.Com shareholders. In connection with the sale, the selling
stockholders of SureTalk.Com, including Messrs. Hamerslag, Johnson and Morales,
were granted registration rights with respect to the shares of j2 Global common
stock they received in connection with the sale pursuant to an agreement between
j2 Global and those stockholders entered into at the time of the closing. Under
that agreement, j2 Global agreed to file a registration statement on Form S-1
permitting resales of the shares of j2 Global common stock held by such
stockholders and to have the registration statement declared effective no later
than June 30, 2000. This registration statement has been filed and was declared
effective by the SEC on May 19, 2000.
At the time of j2 Global's acquisition of SureTalk.com, SureTalk.com
was a party to an administrative services agreement with Capitol Communications,
Inc. pursuant to which Capitol Communications provided office space, personnel
and administrative services with respect to SureTalk.com's telemarketing
operation in Livonia, Michigan. Lester Morales, the former vice president,
sales, of SureTalk.com and j2 Global's Senior Vice President, Sales through July
2000, is the president and sole stockholder of Capitol Communications. This
administrative services agreement continued in place and j2 Global paid
approximately $70,000 under this agreement through its termination in July 2000.
In March 2000, j2 Global acquired substantially all of the assets of
TimeShift, Inc., a developer of technology for accessing and managing
communications services via the Internet. A former employee of TimeShift, Leo
D'Angelo, joined j2 Global as an executive officer following the closing. At
closing, Mr. D'Angelo received 30,000 shares of j2 Global common stock as a
stock-out of any claims he had to the assets of TimeShift, Inc. that were being
transferred to j2 Global.
j2 Global believes that the transactions described above were made on
terms no less favorable than could have been obtained from third parties. At the
time of the transactions concerned--the initial Orchard/JFAX Investors, LLC
investment in j2 Global, the June 1998 issuance of notes and j2 Global common
stock, the July 1998 issuance of preferred stock and warrants and the January
and March 2000 SureTalk.Com and TimeShift acquisitions--those transactions were
negotiated at arms' length with previously unaffiliated parties. j2 Global
intends to have all future transactions between j2 Global and its officers,
directors and affiliates be approved by a majority of disinterested directors of
the board of directors or one of its committees, as appropriate, in a manner
consistent with Delaware law and the fiduciary duties of j2 Global's directors.
Report of the Compensation Committee of the Board of Directors on Executive
Compensation
General. The policy of j2 Global regarding the compensation of its
executive officers is to maintain a total compensation program which would
retain the services of key executives and:
. Assure the availability of their skills for the benefit of j2
Global;
. Secure to j2 Global freedom from competition by such persons
within reasonable and lawful limits; and
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. Provide appropriate base compensation, benefits and financial
incentives through bonus, severance and other employment-related
programs.
The compensation committee of the j2 Global board of directors
recommends, subject to the board's approval, executive compensation, including
the compensation of the Chairman and the Chief Executive Officer. The
compensation committee determines and approves stock option grants for all
employees, including the Chief Executive Officer. The committee currently
comprises two independent, non-employee directors, and one director whose
services to j2 Global are provided pursuant to a consulting agreement with his
employer.
Compensation Philosophy. j2 Global operates in the highly competitive
and rapidly changing Internet industry. The goals of j2 Global's compensation
program are to align compensation with j2 Global's overall business objectives
and performance, to foster teamwork and to enable j2 Global to attract, retain
and reward employees who contribute to its long term success. The committee also
seeks to establish compensation policies that allow j2 Global flexibility to
respond to changes in its business environment.
Compensation Components. Compensation for j2 Global's executive
officers generally consists of salary, semi-annual incentive compensation bonus
plan payments and stock option awards. The committee assesses past performance
and anticipated future contribution of each executive officer in establishing
the total amount and mix of each element of compensation.
Salary. The salaries of the executive officers are determined annually
by the compensation committee based upon various subjective factors such as the
executive's responsibilities, position, qualifications, years of experience and
individual performance. In no such case does the committee undertake a formal
survey of analysis of compensation paid by other companies.
Annual Incentives. j2 Global has also established a semi-annual
incentive compensation bonus plan designed to recognize efforts required to
achieve j2 Global's annual objectives. A management committee consisting of
Richard S. Ressler, Chairman, R. Scott Turicchi, Executive Vice President,
Corporate Development, and Steven J. Hamerslag, President and Chief Executive
Officer, currently administers the plan. This committee is exclusively
responsible for determining and approving the following:
. Financial planning and setting of corporate goals;
. Eligibility of plan participants;
. Bonus structure amounts, which are based on base salary; and
. Individual assessment guidelines and goals.
Corporate attainment of goals drives the funding of the bonus plan. If
j2 Global meets or exceeds the semi-annual revenue and/or paid subscriptions
goals set by the management committee, a fixed percentage of a targeted bonus
pool is funded. The fixed percentage is either 80%, 100% or 110%, depending on
the extent to which the goals are met or exceeded. Assuming that the plan is
funded, the individual funding is based on a targeted bonus amount, which is set
by the management committee as a percentage of the individual's salary. A
percentage of the target amount is paid, which percentage is based on the extent
to which the aggregate bonus pool has been funded and on an individual's
attainment of his or her goals, which may be either quantitative goals or
numerical goals. An individual's supervisor
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determines what percentage of that individual's goals have been attained, and
recommends a bonus accordingly. In 1999, the total targeted bonus pool was
$853,001, out of which a total of $632,392 in bonuses was paid. Each of Gary H.
Hickox, Zohar Loshitzer, Nehemia Zucker and Anand Narasimhan participated in the
bonus plan in 1999, as to the first half of the year only in the case of Messrs.
Hickox and Narasimhan. These executive officers were allocated aggregate
targeted bonus payments of $300,000, representing 50% of their aggregate base
salaries during the periods of participation, and received a total of $217,141
in bonus payments, for 1999.
Stock Options. Stock option awards are designed to align the interests
of executives with the long term interests of the stockholders. The compensation
committee approves option grants subject to vesting periods to retain executives
and encourage sustained contributions. For options granted prior to 2000, the
vesting period was usually over a three-year period or as to 100% of the grant
on the third anniversary of the grant. Effective January 1, 2000, the typical
vesting period was changed to a four-year period or as to 100% of the grant on
the fourth anniversary of the grant. The exercise price of options is generally
the market price on the date of grant.
Compensation of Chairman and Former Chief Executive Officer. Mr.
Ressler's services as Chairman, and formerly as Chief Executive Officer, have
been provided pursuant to a consulting arrangement with Orchard Capital
Corporation, a company controlled by Mr. Ressler, who is also a member and the
manager of Orchard/JFAX Investors, LLC, one of j2 Global's principal
stockholders. Under this consulting arrangement, j2 Global paid Orchard Capital
$200,000 per year through June 30, 1999 and $275,000 per year from July 1, 1999
though March 31, 2000, in each case payable in equal monthly payments, for the
services of Mr. Ressler. These arrangements were not pursuant to a written
agreement. Effective April 1, 2000, Orchard Capital's compensation was reduced
to $144,000 per year, to reflect Mr. Ressler's decreased role in the management
of j2 Global following the hiring of Steven J. Hamerslag as Chief Executive
Officer, and Orchard Capital's revised consulting arrangement was reflected in a
new written agreement between j2 Global and Orchard Capital.
As a director, Mr. Ressler is eligible to participate in j2 Global's
1997 Stock Option Plan. In July 1999, he was granted options to purchase 500,000
shares of j2 Global common stock at an exercise price of $8.00 per share and in
July 2000, he was granted an option to purchase 50,000 shares of j2 Global
common stock at an exercise price of $1.72 per share. See "--1997 Stock Option
Plan" beginning on page __ for a description of the terms of j2 Global's 1997
Stock Option Plan.
The compensation paid to Orchard Capital pursuant to the consulting
arrangement was determined by the compensation committee based upon various
subjective factors such as Mr. Ressler's responsibilities, qualifications, years
of experience, individual performance and perceived contributions to j2 Global.
The committee did not undertake a formal survey of analysis of compensation paid
by other companies.
Other than reimbursement for reasonable expenses incurred in connection
with the services Orchard Capital renders to j2 Global, neither Orchard Capital
nor Mr. Ressler receives any other compensation from j2 Global.
Respectfully submitted,
Robert J. Cresci
Michael P. Schulhof
Richard S. Ressler
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Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires j2
Global's officers (as defined in Rule 16a-1(f)), directors and persons who own
more than 10% of a registered class of the company's equity securities to file
reports of ownership and changes in ownership with the SEC. Such persons are
required by SEC regulations to furnish j2 Global with copies of all Section
16(a) forms they file. Based solely on j2 Global's review of the copies of such
forms received by j2 Global and written representations from certain reporting
persons that they have complied with the relevant filing requirements, j2 Global
believes that all filing requirements applicable to its officers, directors and
10% stockholders were complied with during the fiscal year ended December 31,
1999.
Performance Graph
The following line graph compares the cumulative total return to
stockholders on j2 Global common stock since July 23, 1999, the date j2 Global
first became subject to the reporting requirements of the Securities Exchange
Act of 1934. The graph compares stockholder return on j2 Global common stock
with the same cumulative total return on the TheStreet.Com E-Commerce Index and
the Nasdaq Composite Index. The information contained in the performance graph
shall not be deemed to be "soliciting material" or to be "filed" with the SEC,
nor shall such information be incorporated by reference into any future filing
under the Securities Act of 1933 or the Exchange Act, except to the extent that
j2 Global specifically incorporates it by reference into such filing. The graph
assumes that $100 was invested on July 23, 1999 in j2 Global common stock at the
initial public offering price of $9.50 per share and in the indexes, and that
all dividends were reinvested. No dividends have been declared or paid on j2
Global common stock. Stockholder returns over the period indicated should not be
considered indicative of future stockholder returns.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG j2 GLOBAL COMMUNICATIONS, INC.,
THESTREET.COM E-COMMERCE INDEX AND NASDAQ COMPOSITE INDEX
[PERFORMANCE GRAPH FOR THE PERIOD JULY 23, 1999 THROUGH
DECEMBER 31, 1999 APPEARS HERE]
The following table lists the data points used in preparing the performance
graph:
<TABLE>
<CAPTION>
j2 GLOBAL THESTREET.COM
COMMUNICATIONS, E-COMMERCE NASDAQ
Measurement Date INC. INDEX COMPOSITE INDEX
<S> <C> <C> <C>
07/23/99 $ 100.00 $100.00 $100.00
07/31/99 $ 90.79 $ 96.56 $ 97.85
08/31/99 $ 72.37 $ 89.86 $101.59
09/30/99 $ 52.30 $ 93.21 $101.84
10/31/99 $ 45.72 $105.09 $110.01
11/30/99 $ 61.51 $129.05 $123.73
12/31/99 $ 70.72 $117.55 $150.92
</TABLE>
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Proposal 4 -- Amendment To 1997 Stock Option Plan
General
At the j2 Global annual meeting, the stockholders are being asked to
ratify an amendment to j2 Global's 1997 Stock Option Plan in order to increase
the number of shares reserved for issuance under the plan to 8,000,000 shares of
j2 Global common stock. A total of 4,375,000 shares of j2 Global common stock
have been reserved for issuance under the 1997 Stock Option Plan. However, on
July 12, 2000, the j2 Global board of directors approved an increase, to
8,000,000, of the number of shares reserved for issuance under the 1997 Stock
Option Plan. The text of the proposed amendment is set out in Appendix F.
At the record date for the annual meeting of j2 Global, no shares of j2
Global common stock were available for issuance under the 1997 Stock Option
Plan, exclusive of the increase in shares for which stockholder ratification is
sought at this annual meeting. In addition, at the record date for the annual
meeting of j2 Global, options to purchase 3,671,521 shares of j2 Global common
stock were outstanding under the 1997 Stock Option Plan, and 145,138 shares had
been issued upon exercise of previously granted options at an average exercise
price per share of $1.11. In addition, during July 2000, options to acquire
2,050,000 shares of j2 Global common stock were issued to two of j2 Global's
executive officers pursuant to the 1997 Stock Option Plan. These options are
subject to the approval of the increase in the number of shares for which
options may be granted under the 1997 Stock Option Plan.
If the merger occurs, each option granted under the eFax.com stock
plans, whether vested or not, will be deemed to constitute an option to acquire,
on the same terms and conditions applicable to the option before the merger, a
number of shares of j2 Global common stock equal to the number of shares
underlying the option before the merger multiplied by the exchange ratio
(rounded to the nearest whole number) at a price per share (rounded to the
nearest whole number) equal to the exercise price of the shares otherwise
purchasable pursuant to the option before the merger divided by the exchange
ratio, subject to adjustments to satisfy the requirements of Section 424(a) of
the Internal Revenue Code. At present, there are outstanding eFax.com options to
acquire 3,525,531 shares of eFax.com common stock. Assuming, for example only,
an exchange ratio of 0.281, these options will convert into options to acquire
990,674 shares of j2 Global common stock with an average exercise price of
$18.832 per share.
The 1997 Stock Option Plan is structured to allow the board of
directors, the compensation committee or other authorized committee designated
by the board of directors broad discretion in determining the participants and
the extent of their participation in the 1997 Stock Option Plan for the purposes
of attracting, retaining and motivating the best available talent for the
successful conduct of j2 Global's business. The board of directors believes the
remaining shares under the 1997 Stock Option Plan may be insufficient to
accomplish these purposes. Therefore, the board has increased the shares
reserved under the 1997 Stock Option Plan.
Summary of the 1997 Stock Option Plan
The essential features of the j2 Global 1997 Stock Option Plan are
outlined below.
Purpose. The purpose of the 1997 Stock Option Plan is to advance the
interests of j2 Global and its stockholders by providing significant incentives
to selected directors, officers, employees and consultants who contribute and
are expected to contribute to its success, and to enhance the interest of the
directors, officers, employees and consultants in its success and progress by
providing them with an opportunity to become stockholders. Further, the 1997
Stock Option Plan is designed to enhance j2 Global's ability to attract and
retain qualified employees necessary for its success and progress.
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Eligibility. Key employees, consultants and directors whom the j2
Global board of directors, the compensation committee or other committee
designated by the board of directors to administer the 1997 Stock Option Plan
deems to be of special importance to the growth and success of j2 Global are
eligible participants in the plan.
Administration. The 1997 Stock Option Plan is administered by the board
of directors, the compensation committee or other committee, which are
collectively referred to as the Committee, as may be appointed by the board of
directors of j2 Global, which Committee shall consist of not less than two
members. The Committee has full and final authority:
. To interpret the 1997 Stock Option Plan and each option agreement;
. To prescribe, amend and rescind rules and regulations, if any,
relating to the 1997 Stock Option Plan;
. To make all determinations necessary or advisable for the
administration of the 1997 Stock Option Plan; and
. To correct any defect, supply any omission and reconcile any
inconsistency in the 1997 Stock Option Plan and any option agreement.
Committee members receive no additional compensation for their services in
connection with the 1997 Stock Option Plan.
Options. The 1997 Stock Option Plan permits the granting of
non-transferable options that either are intended to qualify as incentive stock
options ("ISOs") or are not intended to so qualify ("NSOs").
The exercise price of each ISO may not be less than the higher of the
par value or 100% of the fair market value of the shares of j2 Global common
stock subject to the option on the date the option is granted. The exercise
price of each NSO will be the amount determined by the Committee, provided that
the amount will not be less than the higher of par value or 85% of the fair
market value of the shares of j2 Global common stock subject to the option on
the date the option is granted, provided that options may only be granted at
less than 100% of the fair market value of the shares of common stock subject to
the option on the date of grant if the discount is expressly in lieu of a
reasonable amount of salary or cash bonus, as determined by the Committee in its
sole discretion. To date, j2 Global has granted only ISOs and has not granted
options at exercise prices less than fair market value on the date of grant.
No ISO may be granted to any holder of 10% or more of the total
combined voting power of all classes of stock of j2 Global unless at the time of
the grant of such option, the exercise price is equal to or greater than 110% of
the fair market value of the shares of j2 Global common stock subject to the
option, and the term of the option is five years or less.
To the extent that the aggregate fair market value of the j2 Global
common stock with respect to which ISOs are exercisable for the first time by an
optionee during any calendar year exceeds $100,000, such options shall be
treated as NSOs.
The term of each option will be fixed by the Committee but may not
exceed 10 years from the date of grant. Each option becomes exercisable, on a
cumulative basis, with respect to 25% of the aggregate number of the shares of
j2 Global common stock covered
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thereby on the first anniversary of the date of grant and with respect to an
additional 25% of the shares of j2 Global common stock covered thereby on each
of the next three succeeding anniversaries of the date of grant; provided,
however, the Committee may establish a different vesting schedule for any
optionee or group of optionees. Any portion of an option which has become
exercisable shall remain exercisable until it is exercised in full or terminates
pursuant to the terms of the 1997 Stock Option Plan or applicable option
agreement pursuant to which it is granted.
The exercise price of options granted under the 1997 Stock Option Plan
must be paid in full by :
. Cash;
. Certified check payable to the order of j2 Global;
. Outstanding shares of j2 Global duly endorsed to j2 Global, which
shares of common stock shall be valued at their fair market value as of the day
preceding the date of such exercise,
. Any combination of the foregoing; or
. Such other method of payment as may be provided in the applicable
option agreement.
Under the 1997 Stock Option Plan, in the event of termination of an
optionee's employment other than for cause, an option must be exercised within
three months following termination of employment or the date of expiration of
the option, whichever occurs first, unless the applicable option agreement
provides otherwise. In the event an optionee dies while he or she is an employee
of j2 Global or during the three-month period following his or her termination,
the period within which the option must be exercised is one year from the date
of death, unless the option agreement provides otherwise. In the event of
termination for cause, any option theretofore granted to such employee shall
expire and cease to be exercisable on the date notice of such termination is
delivered to the optionee.
Options granted pursuant to the 1997 Stock Option Plan become
immediately exercisable without any further action upon the occurrence of a
"change of control" as that term is defined in the plan.
The granting of options under the 1997 Stock Option Plan by the
Committee is subjective and is dependent upon, among other things, an employee's
individual performance. Therefore, future option grants to executive officers or
employees under the 1997 Stock Option Plan are not determinable.
Adjustments for Stock Dividends and Other Events. The Committee is
authorized to make appropriate adjustments in connection with outstanding awards
under the 1997 Stock Option Plan to reflect stock dividends, stock splits and
similar events.
Amendment and Termination. The j2 Global board of directors may amend
the 1997 Stock Option Plan at any time and from time to time. Rights and
obligations under any option granted before amendment of the 1997 Stock Option
Plan may not be materially altered, or impaired adversely, by an amendment,
except with consent of the optionee. An amendment of the 1997 Stock Option Plan
is subject to the approval of j2 Global's stockholders only to the extent
required by applicable laws, regulations or rules.
To the extent applicable, the 1997 Stock Option Plan is intended to
permit the issuance of ISOs to employees in accordance with the provisions of
Section 422 of the Internal Revenue Code. Subject to the previous paragraph, the
1997 Stock Option Plan and option agreements may be modified or amended at any
time, both prospectively and retroactively, and in a manner that may affect ISOs
previously granted,
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if such amendment or modification is necessary for the 1997 Stock Option Plan
and ISOs granted thereunder to qualify under the provisions of the Internal
Revenue Code.
The board may at any time terminate the 1997 Stock Option Plan as of
any date specified in a resolution adopted by the board. If not earlier
terminated, the 1997 Stock Option Plan will terminate on November 11, 2007. No
options may be granted after the 1997 Stock Option Plan has terminated, but the
Committee will continue to supervise the administration of options previously
granted.
Certain United States Federal Income Tax Information. The following is
only a brief summary of the effect of federal income taxation upon the recipient
and j2 Global under the 1997 Stock Option Plan based upon the Internal Revenue
Code. This summary does not purport to be complete and does not discuss the
income tax laws of any municipality, state or country outside of the United
States in which an optionee may reside.
Incentive Stock Options. If an option granted under the 1997 Stock
Option Plan is an ISO, the optionee will recognize no income upon grant of the
ISO and will incur no tax liability due to the exercise unless the optionee is
subject to the alternative minimum tax. j2 Global will not be allowed a
deduction for federal income tax purposes as a result of the exercise of an ISO
regardless of the applicability of the alternative minimum tax. Upon the sale or
exchange of the shares at least two years after the grant of the ISO and one
year after the exercise by the optionee, any gain (or loss) will be treated as
long term capital gain (or loss). If these holding periods are not satisfied,
the optionee will recognize ordinary income equal to the difference between the
exercise price and the lower of the fair market value of the stock at the date
of the option exercise or the sale price of the stock. j2 Global will be
entitled to a deduction in the same amount as the ordinary income recognized by
the optionee subject to reasonableness. Any gain (or loss) recognized on a
premature disposition of the shares in excess of the amount treated as ordinary
income will be characterized as a capital gain (or loss).
Nonstatutory Stock Options. All options that do not qualify as ISOs are
taxed as NSOs. An optionee will not recognize any taxable income at the time he
or she is granted an NSO. However, upon the exercise of an NSO, the optionee
will recognize ordinary income measured by the excess of the then fair market
value of the shares over the option exercise price. The income recognized by an
optionee who is also an employee of j2 Global will be subject to withholding by
j2 Global by payment in cash or out of the current earnings paid to the
optionee. Upon resale of the shares by the optionee, any difference between the
sales price and the exercise price, to the extent not recognized as ordinary
income as provided above, will be treated as capital gain (or loss). Net capital
gain recognized from the sale of shares held more than one year generally will
be taxed at a rate not to exceed 20%. j2 Global will be entitled to a tax
deduction in the same amount as the ordinary income recognized by the optionee
with respect to shares acquired upon exercise of an NSO, subject to
reasonableness.
Participation in the 1997 Stock Option Plan. The grant of options under
the 1997 Stock Option Plan is subject to the discretion of the Committee. As of
the date of this proxy statement/prospectus, there have been grants of awards to
approximately 200 directors and employees representing 4,921,667 options to
acquire shares of j2 Global common stock, including options that have lapsed or
been exercised, but excluding options that are subject to the proposed increase
in the 1997 Stock Option Plan. Future awards are not determinable. See
"--Proposal 3 -- Election of Directors" on page __ for a table that includes
information with respect to the grant of options to the executive officers named
in the Summary Compensation Table, to all current executive officers as a group,
to all current directors who are not executive officers as a group, and to all
other employees as a group during the last fiscal year.
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Required Vote and Recommendation. Ratification of the amendment to the
1997 Stock Option Plan requires the affirmative vote of the holders of a
majority of shares of j2 Global common stock present or represented and entitled
to vote at the annual meeting.
THE j2 GLOBAL BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 4,
THE AMENDMENT TO THE 1997 STOCK OPTION PLAN.
Proposal 5 -- Ratification Of Selection Of Independent Auditors
The j2 Global board of directors has selected KPMG LLP, independent
auditors, to audit the consolidated financial statements for the fiscal year
ending December 31, 2000. KPMG LLP has served as j2 Global's independent
auditors since j2 Global's inception. Notwithstanding the selection, the board,
in its discretion, may direct appointment of new independent auditors at any
time during the year, if the board feels that such a change would be in the best
interests of j2 Global and its stockholders. Representatives of KPMG LLP are
expected to be present at the annual meeting and are expected to be available to
respond to appropriate questions.
Ratification of KPMG LLP as j2 Global's auditors requires the
affirmative vote of the holders of a majority of shares of j2 Global common
stock present or represented and entitled to vote at the annual meeting.
THE j2 GLOBAL BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 5,
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS.
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The eFAX.COM SPECIAL Meeting
General
The eFax.com board of directors is providing this proxy
statement/prospectus to eFax.com stockholders in connection with the
solicitation of proxies for use at the special meeting of eFax.com stockholders
and at any adjournment(s) or postponement(s) of the meeting. The special meeting
is scheduled to be held at the Hollywood Roosevelt Hotel, 7000 Hollywood
Boulevard, Los Angeles, California 90028, on _________, 2000 at 10:00 a.m.,
local time.
The purpose of the eFax.com special meeting is to consider and vote on:
1. The adoption of the merger agreement; and
2. Such other business as may properly come before the eFax.com
special meeting.
Record Date and Outstanding Shares
The eFax.com board has fixed the close of business on ______________,
2000 as the record date for determining which eFax.com stockholders are entitled
to receive notice of and vote at the special meeting. At the record date,
_____________ shares eFax.com common stock were outstanding. There were also
____________ shares of eFax.com Series D Convertible Preferred Stock
outstanding.
The presence, in person or by properly executed proxy, of the holders
of a majority of the outstanding shares of eFax.com common stock is necessary to
constitute a quorum at the annual meeting. Abstentions and broker non-votes (as
described below) will be counted solely for purposes of determining whether a
quorum exists. Under the applicable rules of the National Association of
Securities Dealers, Inc., brokers or members who hold shares in street name for
customers who are the beneficial owners of such shares are prohibited from
giving a proxy to vote those shares with respect to the approval of the matters
to be considered at the eFax.com annual meeting. We refer to these as "broker
non-votes." Abstentions and broker non-votes will have the effect of a vote
against the adoption of the merger agreement.
Revocability of Proxies
Any proxy given pursuant to eFax.com's solicitation may be revoked by
the person giving it at any time before it is voted. Proxies may be revoked by:
. Filing with the secretary of eFax.com at or before the taking of
the vote at the eFax.com special meeting a written notice of revocation bearing
a later date than the proxy;
. Fully executing a later dated proxy relating to the same shares and
delivering it to the secretary of eFax.com at or before the taking of the vote
at the eFax.com special meeting;
. Submitting a new proxy by telephone or Internet; or
. Attending the eFax.com special meeting and voting in person.
Attendance at the special meeting will not in and of itself constitute a
revocation of a proxy. If your shares of eFax.com common stock are held in
street name, you must obtain a proxy, signed in your favor, from the institution
that holds your shares in order to vote in person at the eFax.com special
meeting.
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All written notices of revocation and other communications with respect
to the revocation of eFax.com proxies should be addressed to eFax.com, 1378
Willow Road, Menlo Park, California, 94025, Attention: Secretary. A stockholder
whose shares are held in street name should follow the instructions of his or
her broker regarding revocation of proxies. An eFax.com proxy appointment will
not be revoked by the death or incapacity of the stockholder executing the proxy
unless, before the shares are voted, notice of the death or incapacity is filed
with the secretary of eFax.com or other person responsible for tabulating votes
on behalf of eFax.com.
eFax.com stockholders should not send eFax.com common stock
certificates with their eFax.com proxy cards. If the merger is completed,
holders of eFax.com common stock and Series D Preferred Stock will be mailed a
transmittal form with instructions on how to exchange their current stock
certificates for stock certificates of j2 Global.
Voting and Solicitation
On all matters, each share of eFax.com common stock has one vote.
Shares of eFax.com's Series D Preferred Stock do not have a vote on the adoption
of the merger agreement. The adoption of the merger agreement will require the
affirmative vote of a majority of the votes eligible to be cast by holders of
eFax.com common stock issued and outstanding on _________ , 2000.
This proxy statement/prospectus is accompanied by a form of proxy for
use at the eFax.com special meeting. Holders of record of eFax.com common stock
on the record date may submit their proxies either by telephoning the toll-free
number included on the enclosed proxy card, by Internet in accordance with the
instructions included on the enclosed proxy card or by returning a properly
signed proxy card in the enclosed postage-paid envelope. When you use the
telephone or Internet systems, the selected system will verify that you are a
stockholder through the use of a unique control number that is assigned to you.
The telephone and Internet systems allow you to instruct the proxies how to vote
your shares and to confirm that your instructions have been properly recorded.
Beneficial owners of common shares of eFax.com that hold their shares through
brokers, banks or other nominees will receive voting instructions from their
nominee which must be followed in order to vote their shares.
If you complete the enclosed proxy card and return it in time or vote
by telephone or the Internet, your proxy holder will vote your shares according
to the instructions indicated on the proxy. Except for broker non-votes, if no
instructions are indicated, such proxies will be voted "FOR" approval of the
merger agreement and, as determined by a majority of the eFax.com board, as to
any other matter that may come before the eFax.com special meeting. Those other
matters may include, among other things, a motion to adjourn or postpone the
eFax.com special meeting to another time and/or place for the purpose of
soliciting additional proxies or otherwise. No proxy with instructions to vote
against the merger proposals, however, will be voted in favor of any adjournment
or postponement of the eFax.com special meeting.
eFax.com will bear the cost of soliciting its proxies. The cost is
estimated to be $15,000. eFax.com has retained Georgeson Shareholder
Communications Inc. to assist in its solicitation of proxies from brokers,
nominees, institutions and individuals.
Georgeson Shareholder Communications' services will include:
. Delivering proxy materials to banks, brokerage firms and other
nominees for redelivery to beneficial owners of shares eFax.com common stock;
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. Placing follow-up calls to individuals and institutions to ensure
receipt of the proxy materials and to encourage them to vote; and
. Answering routine telephone inquiries from stockholders.
Arrangements will also be made with custodians, nominees and
fiduciaries for forwarding of proxy solicitation materials to beneficial owners
of shares held of record by the custodians, nominees and fiduciaries. eFax.com
will reimburse these parties for their reasonable expenses. In addition, proxies
may be solicited by directors, officers and employees of eFax.com in person or
by telephone, telegram, e-mail or other means of communication, provided that no
additional compensation will be paid for these services. Georgeson Shareholder
Communications will be paid a base fee and allowance for expenses for providing
solicitation services.
Only shares affirmatively voted for the adoption of the merger
agreement, including properly signed proxies that do not contain voting
instructions, will be counted as favorable votes for that proposal. If an eFax
stockholder abstains from voting or does not vote, either in person or by proxy,
it will count as a vote against the adoption of the merger agreement. Brokers,
banks or other nominees who hold shares of eFax common stock in street name for
customers who are the beneficial owners of those shares may not give a proxy to
vote those customers' shares in the absence of specific instructions from those
customers.
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THE MERGER
The discussion in this proxy statement/prospectus of the merger and the
principal terms of the merger agreement does not purport to be complete and is
subject to, and qualified in its entirety by, the merger agreement, a copy of
which is attached as Appendix A to this proxy statement/prospectus. We urge you
to read Appendix A in its entirety.
General
We are furnishing this proxy statement/prospectus to j2 Global and eFax.com
stockholders in connection with the solicitation of proxies by the boards of
directors of j2 Global and eFax.com for use at their respective meetings of
stockholders, and at any adjournment(s) or postponement(s) thereof.
At the j2 Global annual meeting, j2 Global stockholders will be asked to
consider and vote upon, among other things, a proposal to approve the issuance
of shares of j2 Global common stock in the merger. At the eFax.com special
meeting, eFax.com stockholders will be asked to consider and to vote upon a
proposal to adopt the merger agreement.
Under the merger agreement, a subsidiary of j2 Global will merge with and
into eFax.com and eFax.com will survive the merger as a wholly-owned subsidiary
of j2 Global. In addition, in the merger:
. Each share of eFax.com common stock issued and outstanding immediately
prior to the merger will be converted into a fraction of a share of j2 Global
common stock based on an exchange ratio formula. The exact formula is included
on page __ and is attached to the merger agreement as Exhibit B which is itself
attached to this proxy statement/prospectus as Appendix A. The exchange ratio
formula takes into consideration, among other things:
. The amounts owing by eFax.com to j2 Global at the completion of
the merger under their loan agreement;
. The amount of cash, prepaid expenses and overdue payables at
eFax.com on the date the merger is completed;
. The number of shares of eFax.com common stock issued in
connection with the conversion of shares of Series D Preferred Stock prior
to completion of the merger; and
. The date on which the merger occurs;
. Each share of eFax.com Series D Preferred Stock will be converted into
4,960.15 shares of j2 Global common stock, which amount will increase between
the date of this proxy statement/prospectus and the time the merger is completed
at an annualized rate of 3.5%. Pursuant to an agreement among the holders of the
Series D Preferred Stock, eFax.com and j2 Global, each holder of Series D
Preferred Stock has agreed that it would receive shares of j2 Global common
stock in the merger to the extent that the number of shares of j2 Global common
stock held by the holder and its affiliates did not exceed 10% of the j2 Global
common stock outstanding immediately after the merger. In addition, each
preferred stockholder will receive a warrant, exercisable for j2 Global common
stock at $0.01 per share, to acquire the number of shares of j2 Global common
stock to which the holder would have been entitled as merger consideration, but
could not receive because of the 10% limitation;
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. In lieu of fractional shares, a cash payment will be made; and
. Each share of j2 Global common stock issued and outstanding
immediately prior to the merger will remain issued and outstanding.
Because the exchange ratio formula depends on information that cannot be
known until the date the merger is completed, the exact exchange ratio cannot be
determined at this time. However, each share of eFax.com common stock would be
converted into 0.281 of a share of j2 Global common stock based on the formula
if the merger occurs on October 31, 2000 and on that date:
. eFax.com owes j2 Global $5 million under their loan agreement;
. eFax.com has no cash on hand and it has no prepaid expenses or
accounts payable which affect the exchange ratio; and
. The same number of shares of eFax.com common stock is outstanding as
is outstanding on the date of this proxy statement/prospectus.
The receipt of the merger consideration will generally be a taxable event
to eFax.com stockholders.
The merger will become effective when a certificate of merger is filed
with the Secretary of State of the State of Delaware, or at a later date or time
as j2 Global and eFax.com shall agree and specify in the certificate of merger.
Background of the Merger
In July 1999, Steven J. Hamerslag, currently the President and Chief
Executive Officer of j2 Global, but at that time the president and chief
executive officer of SureTalk.com, Inc. (previously known as Fax4Free.com),
initiated discussions with eFax.com with respect to a potential merger between
SureTalk.com and eFax.com. However, on January 26, 2000, j2 Global acquired
SureTalk.com, at which time Mr. Hamerslag joined j2 Global as President and
Chief Executive Officer.
During the first calendar quarter of 2000, eFax.com had discussions with a
number of potential investors in an attempt to obtain financing, including
discussing a potential private placement of eFax.com convertible preferred
stock. Due to a number of factors, including eFax.com's capital structure,
eFax.com was unable to find an interested investor or lender.
On February 16, 2000, Ron Brown, then eFax.com's President, Michael
Crandell, eFax.com's Executive Vice President and Chief Technology Officer, and
Todd Kenck, eFax.com's Vice President and Chief Financial Officer, met with Mr.
Hamerslag and Scott Turicchi, a director of j2 Global (who subsequently became
j2 Global's Executive Vice President, Corporate Development), at eFax.com's
Menlo Park, California offices to ascertain whether a merger between eFax.com
and j2 Global was feasible and whether j2 Global could also provide bridge
financing to eFax.com to enable eFax.com to have necessary funds until the
merger could be completed. Mr. Hamerslag indicated that j2 Global would be
interested and the parties held several subsequent discussions concerning
potential terms of the merger and the potential bridge loan. On March 28, 2000,
Messrs. Brown, Crandell, Kenck, Hamerslag and Turicchi and other representatives
of the two companies met at j2 Global's offices in Hollywood, California to
begin negotiations of a letter of intent. The parties continued to negotiate the
letter of intent until it was executed on April 5, 2000.
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On April 2, 2000, eFax.com began negotiations with representatives of the
holders of its Series A Convertible Preferred Stock in order to permit the
merger transaction to proceed. Upon the occurrence of an organic change to
eFax.com, which would include eFax.com's merger with a subsidiary of j2 Global,
the holders of the Series A Preferred Stock had a right to receive a cash
payment equal to 125% of the liquidation value of the Series A Preferred Stock,
plus any accrued, but unpaid dividends. j2 Global's management had indicated
that it was unwilling to make any cash payments to the preferred stockholders in
connection with the merger and that the preferred stockholders would have to
agree to accept shares of j2 Global common stock as merger consideration.
eFax.com and the representatives of the preferred stockholders agreed that the
preferred stockholders would exchange their shares of Series A Preferred Stock
for a new Series B Convertible Preferred Stock. Under the terms of the Series B
Preferred Stock, eFax.com could cause the preferred stockholder to receive j2
Global securities as merger consideration provided that the merger occurred on
the terms included in the letter of intent between eFax.com and j2 Global.
On April 2, 2000, eFax.com's board of directors held a special meeting in
which the company's financial advisor, Pacific Growth Equities, Inc., discussed
the potential fairness of eFax.com's proposed merger with j2 Global. The
eFax.com board had previously met on March 30, 2000 and March 31, 2000 and also
met on April 3, 2000 to discuss the potential merger with j2 Global, the terms
of the letter of intent and the negotiations with the preferred stockholders.
On April 4, 2000, the eFax.com board of directors authorized the entering
into of the letter of intent with j2 Global and an exchange agreement with
eFax.com's preferred stockholders setting forth the terms of the exchange of the
Series A Preferred Stock into the Series B Preferred Stock.
On April 5, 2000, eFax.com and j2 Global signed the letter of intent to
merge. On April 5, 2000, eFax.com also entered into the exchange agreement with
its preferred stockholders.
On April 5, 2000, eFax.com and j2 Global executed the commitment letter for
the term loan agreement and eFax.com issued a warrant to j2 Global to acquire
250,000 shares of eFax.com common stock at an exercise price of $4.4375 per
share. The exercise price of the warrant resets to $1.00 per share if the
definitive merger agreement is terminated for any reason.
On April 7, 2000, the preferred stockholders exchanged their shares of
Series A Preferred Stock for shares of Series B Preferred Stock.
On April 10, 2000, Josh Mailman, then eFax.com's Vice President of
Operations, met with management of Integrated Global Concepts, Inc. to discuss
the proposed merger and the services which would be necessary to transition
eFax.com's operations system to the system of the combined company after the
merger. Integrated Global Concepts has provided development and co-location
services necessary for eFax.com's operation, including creating software used by
eFax.com.
Between April 11, 2000 and May 5, 2000, a loan agreement and related
documents were negotiated between j2 Global and eFax.com. The eFax.com board of
directors approved eFax.com's entering into the definitive loan agreement and
related documents with j2 Global on May 1, 2000. j2 Global and eFax.com entered
into the loan agreement and related documents on May 5, 2000. On May 5, 2000,
eFax.com received an initial drawdown of $750,000 under the term loan agreement.
In addition, eFax.com received drawdowns of $750,000 on each of June 9, 2000 and
July 3, 2000 and drawdowns of $250,000 and $750,000 on July 28, 2000 and August
1, 2000, respectively.
On April 28, 2000, j2 Global retained Tucker Anthony Cleary Gull to prepare
a fairness opinion with respect to a possible business combination with
eFax.com.
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During April and May 2000, Messrs. Mailman and Crandell held discussions
with Integrated Global Concepts concerning:
. Obtaining Integrated Global Concepts' assistance in transitioning
eFax.com's operating system to the system of the combined company;
. eFax.com's obtaining a license from Integrated Global Concepts for
software previously developed by Integrated Global Concepts for eFax.com and
currently used by eFax.com in its operating systems; and
. Integrated Global Concepts' relinquishing any claims which it might
have against eFax.com for past services provided by Integrated Global Concepts
to eFax.com.
From April 2000 to July 2000, each of eFax.com and j2 Global and their
representatives reviewed each other's operations, financial conditions,
prospects and otherwise conducted and completed their due diligence review.
On May 8, 2000, May 19, 2000, May 31, 2000 and June 15, 2000, the eFax.com
board of directors met and received updates from eFax.com's management and
attorneys in connection with the status of the merger negotiations, discussions
with Integrated Global Concepts and other matters.
On May 18, 2000, Mr. Hamerslag informed Mr. Crandell that the merger
agreement could not be executed until eFax.com reached an agreement with
Integrated Global Concepts on the issues which Messrs. Mailman and Crandell had
been discussing with Integrated Global Concepts.
On May 31, 2000, eFax.com, Integrated Global Concepts and j2 Global reached
a tentative agreement that as consideration in connection with an agreement of
understanding, Integrated Global Concepts would receive 2.0 million shares of j2
Global common stock immediately prior to the merger.
On June 14, 2000, eFax.com was informed by The Nasdaq Stock Market that,
subject to an appeal, eFax.com's common stock would be delisted from The Nasdaq
National Market on June 22, 2000. eFax.com formally requested an appeal of
Nasdaq's decision.
On June 16, 2000, Messrs. Hamerslag and Turicchi informed Messrs. Brown,
Crandell and Kenck that j2 Global could not complete the merger unless the
exchange ratio which determines the fraction of a share of j2 Global common
stock which would be received for each share of eFax.com common stock was
altered to substantially reduce the merger consideration to be paid by j2
Global. Mr. Hamerslag stated that the reduction was necessary primarily as a
result of the significant decrease in each company's market value and j2
Global's desire to have its stockholders maintain, on an enterprise value basis,
their relative percentage ownership in the combined company. In addition, j2
Global stated that eFax.com's relationship with Integrated Global Concepts was
not as initially understood by j2 Global.
On June 19, 2000, eFax.com's management informed its board of directors of
the proposed reduction in merger consideration.
On June 19, 2000, after additional negotiations, eFax.com and j2 Global
tentatively agreed that the exchange ratio formula would be adjusted to provide
that the total merger consideration to be paid to eFax.com's common and
preferred stockholders would be an estimated 11.0 million shares of j2 Global
common stock and j2 Global would agree to issue an additional 2.0 million shares
of its common stock to Integrated Global Concepts.
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On June 27, 2000, the eFax.com board of directors met to discuss merger-
related issues.
On June 28, 2000, Mr. Kenck contacted the representatives of the preferred
stockholders to inform them of the proposed changes in the company's proposed
merger with j2 Global, including the reduction in total merger consideration and
the potential issuance of 2.0 million shares of j2 Global common stock to
Integrated Global Concepts. Prior to meeting with the representatives of the
preferred stockholders, eFax.com and j2 Global had determined that the proposed
merger was no longer on the terms set forth in the letter of intent and eFax.com
no longer had a contractual right to require its preferred stockholders to
convert their shares of Series B Preferred Stock into securities of j2 Global in
the merger.
The eFax.com board of directors approved the entering into of the agreement
of understanding with j2 Global and Integrated Global Concepts on June 30, 2000.
The agreement of understanding provided for the issuance of 2.0 million shares
of j2 Global common stock to Integrated Global Concepts in the merger as
consideration for Integrated Global Concepts' grant of the software license,
provision of the transition services and relinquishment of any claims which it
might have against eFax.com. The j2 Global board of directors subsequently
approved the entering into the agreement of understanding with eFax.com and
Integrated Global Concepts on July 12, 2000. On June 30, 2000, eFax.com and j2
Global entered into the agreement of understanding with Integrated Global
Concepts.
The representatives of the preferred stockholders informed eFax.com on July
5, 2000 that the preferred stockholders would agree to exchange their Series B
Preferred Stock for a new Series D Convertible Preferred Stock which at the time
of the merger could be required to be exchanged for securities of j2 Global. The
preferred stockholders also indicated that they would agree to execute a side
agreement with eFax.com and j2 Global providing that the preferred stockholders
would receive a warrant to acquire shares of j2 Global common stock for $.01 per
share to the extent that the merger consideration to which they were entitled
would cause them and their affiliates to own more than 10% of the j2 Global
common stock after the merger. The eFax.com board of directors approved the
terms of the new exchange agreement with the preferred stockholders on July 5,
2000.
On July 12, 2000, the j2 Global board of directors held a special meeting
in which the company's financial advisor, Tucker Anthony, rendered its oral
opinion that, as of that date, the exchange ratio of shares of j2 Global common
stock to be exchanged for shares of eFax.com common stock was fair to the
stockholders of j2 Global from a financial point of view. The j2 Global board of
directors suggested changes to the terms of the merger agreement.
On July 12, 2000, the eFax.com board of directors also held a special
meeting. Pacific Growth Equities render its oral opinion that, as of that date,
the merger consideration to be paid by j2 Global to the eFax.com stockholders in
the merger was fair from a financial point of view to the eFax.com stockholders.
The eFax.com board then approved the merger agreement and the execution of the
exchange agreement and side agreement with its preferred stockholders.
Following the meeting of the eFax.com board, Mr. Hamerslag informed Mr.
Crandell that the j2 Global board had approved the merger agreement, subject to
additional changes. After further negotiations with j2 Global and confirmation
that the changes would not affect Pacific Growth Equities' fairness opinion, the
eFax.com board on July 13, 2000 approved the additional changes to the merger
agreement.
The merger agreement was signed by j2 Global and eFax.com on July 13, 2000.
On July 13, 2000, eFax.com and its preferred stockholders executed the
exchange agreement and eFax.com, the eFax.com preferred stockholders and j2
Global executed the side agreement.
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Also on July 13, 2000, eFax.com appealed Nasdaq's delisting decision before
a qualifications hearing. eFax.com requested that Nasdaq permit the continued
listing of eFax.com common stock pending the completion of the merger.
The preferred stockholders exchanged their shares of Series B Preferred
Stock for Series D Preferred Stock on July 17, 2000.
On August 8, 2000, Nasdaq informed eFax.com that its shares of common stock
would be delisted from The Nasdaq National Market on August 9, 2000.
On August 9, 2000, eFax.com common stock was delisted from The Nasdaq
National Market and began trading on the over-the-counter electronic bulletin
board sponsored by Nasdaq.
Reasons of eFax.com for the Merger and Recommendation of the eFax.com Board
In reaching its decision to approve the merger and the merger agreement and
to recommend that eFax.com stockholders vote to adopt the merger agreement,
eFax.com's board of directors consulted with senior management and its financial
and legal advisors and considered a number of factors. In view of the variety of
material factors considered in connection with the evaluation of the merger, the
eFax.com board did not find it practicable to, and did not, quantify or
otherwise assign relative weights to the specific factors considered in reaching
its determination. However, the board's decision was substantially based upon
the following factors:
. eFax.com's cash position was insufficient to permit it to operate
beyond the immediate time period and eFax.com's independent auditors, on January
24, 2000, had rendered an opinion with an explanatory paragraph in which they
raised "substantial doubt about [eFax.com's] ability to continue as a going
concern;"
. eFax.com had solicited potential investors to determine if any of them
had any interest in acquiring the company and also had held discussions with
other entities about potential equity or debt financings of eFax.com. Based on
the responses of these parties, management believed that there was no
transaction which could be completed in a manner which would permit eFax.com to
retain value for its stockholders and concluded that the two primary options for
eFax.com were to be acquired by a third party or to liquidate the company; and
. The most likely alternative to the merger was to liquidate eFax.com.
Additional Factors
In addition to the preceding factors, in reaching its decision that the
merger will be beneficial to eFax.com and its stockholders, the eFax.com board
of directors considered a number of additional factors, including:
. As part of the initial merger negotiations, j2 Global agreed to enter
into a loan agreement with eFax.com pursuant to which eFax.com could borrow
up to $5 million, which funding was necessary for eFax.com to conduct its
operations. While it was not a condition to the continuation of the loan
agreement that eFax merge with j2 Global, eFax.com prior to the execution
of the merger agreement was unable to find any additional third party
financing and no third party demonstrated that it was willing to make an
offer for eFax.com which was superior to j2 Global's proposal;
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. eFax.com's preferred stockholders were willing to accept j2 Global
securities as merger consideration and to forego their right to require a cash
payment of approximately $20 million at the time of the merger;
. Pacific Growth Equities' opinion and discussion of its opinion that
the merger consideration to be paid to eFax.com's stockholders in the merger is
fair from a financial point of view to the eFax.com stockholders;
. As a combined company, j2 Global and eFax.com would have a better long
term ability to compete against larger, better financed entities than either
company would alone;
. Historical information concerning eFax.com's and j2 Global's
respective businesses, financial performance and condition, operations,
technology, management and competitive position, including filings with the SEC
concerning the results of operations;
. The terms of the merger agreement, the agreements with eFax.com's
preferred stockholders and the loan agreement with j2 Global; and
. Measures for cutting costs at eFax.com to enable the company to remain
independent, including reducing staff and selling assets.
Potentially Negative Factors
The eFax.com board of directors also identified and considered a number of
potentially negative factors in its deliberations, including:
. The possibility that the merger might not be consummated, including
the amount of resources to be expended prior to the merger and merger
termination payments which eFax.com may be required to make to j2 Global;
. The uncertainty as to the final merger consideration to be received by
the holders of eFax.com common stock. As the amount of eFax.com's borrowings and
cash reserves fluctuate, so does the exchange ratio used to determine the merger
consideration;
. If events occur which require eFax.com and j2 Global to significantly
revise the terms of the merger agreement, eFax.com would have to obtain approval
of such changes from its preferred stockholders; and
. The merger will be a taxable event for eFax.com stockholders.
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FOR THE PRECEDING REASONS, THE eFAX.COM BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT eFAX.COM STOCKHOLDERS VOTE "FOR" THE
ADOPTION OF THE MERGER AGREEMENT AND THE TRANSACTIONS DISCUSSED IN
THE AGREEMENT, INCLUDING THE MERGER.
Reasons of j2 Global for the Merger and Recommendations of the j2 Global Board
In reaching its decision to approve the merger and the merger agreement and
to recommend that j2 Global stockholders vote to adopt the merger agreement and
to issue the shares of j2 Global common stock to be issued in connection with
the merger, j2 Global's board of directors consulted with senior management and
its financial and legal advisors and considered a number of factors. In reaching
its decision that the merger will be beneficial to j2 Global and its
stockholders, the j2 Global board of directors considered a number of factors,
including:
. Tucker Anthony Cleary Gull's opinion and discussion of the opinion
that the merger consideration to be paid by j2 Global in the merger is fair from
a financial point of view to the j2 Global stockholders;
. Historical information concerning j2 Global's and eFax.com's
respective businesses, financial performance and condition, operations,
technology, management and competitive position, including filings with the SEC
concerning the results of operations; and
. The terms of the merger agreement, the agreements with eFax.com's
preferred stockholders and the loan agreement with eFax.com.
In view of the variety of material factors considered in connection with
the evaluation of the merger, the j2 Global board did not find it practicable
to, and did not, quantify or otherwise assign relative weights to the specific
factors considered in reaching its determination. However, the board's decision
was substantially based upon the following factors:
. The belief that the proposed combination of the companies represents a
unique opportunity to acquire a large base of free and paid subscribers,
together with the fact that, on a combined basis, the companies will be much
better positioned to generate revenues from the free subscriber base by
converting free subscribers to paid subscribers, offering paid advertising in
the customer interface utilized by free subscribers and offering third-party
promotions to free subscribers;
. The value to j2 Global of certain of eFax.com's development personnel
and technology; and
. As a combined company, j2 Global and eFax.com would have a better long
term ability to compete against larger, better financed entities than either
company would alone, including as a result of measures that could be implemented
to cut costs of the combined entities, including reducing staff and selling
assets.
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The j2 Global board of directors also identified and considered in its
deliberations a number of factors weighing against the proposed merger,
including:
. The possibility that the merger might not be consummated, including
due to the possible failure of the eFax.com stockholders to approve the merger,
and the amount of resources that would be expended and wasted if that were the
case;
. The integration of j2 Global and eFax.com will be a complex, time
consuming and expensive process and may disrupt the business of either or both
if not completed in a timely and efficient manner; and
. A likely alternative to the merger would be a liquidation of eFax.com,
which liquidation would provide some of the benefits of the proposed merger (in
particular, enhancing j2 Global's competitive position) without the issuance of
additional j2 Global common stock.
After considering the various factors weighing against the proposed merger,
the j2 Global board of directors concluded that the factors in favor of the
merger (as described above) outweighed the negative factors.
FOR THE PRECEDING REASONS, THE j2 GLOBAL BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT j2 GLOBAL STOCKHOLDERS VOTE "FOR" THE ISSUANCE OF
SHARES OF j2 GLOBAL COMMON STOCK PURSUANT TO THE MERGER AGREEMENT.
Opinion of eFax.com's Financial Advisor
eFax.com retained Pacific Growth Equities to evaluate the terms of the
merger with j2 Global and render an opinion as to its fairness. On July 12,
2000, Pacific Growth Equities rendered its oral opinion, subsequently confirmed
in writing, to the board of directors of eFax.com that the merger consideration
to be paid by j2 Global to eFax.com stockholders in the merger is fair from a
financial point of view to eFax.com stockholders.
THE FULL TEXT OF PACIFIC GROWTH EQUITIES' WRITTEN OPINION DATED JULY 11,
2000 WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED, AND LIMITATIONS
ON THE REVIEW UNDERTAKEN, IS ATTACHED AS APPENDIX B TO THIS PROXY
STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. THIS SUMMARY IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION. HOLDERS
OF eFAX.COM COMMON STOCK ARE URGED TO, AND SHOULD, READ THIS OPINION CAREFULLY
IN ITS ENTIRETY. THE ENGAGEMENT OF PACIFIC GROWTH EQUITIES AND ITS OPINION ARE
FOR THE BENEFIT OF THE eFAX.COM BOARD OF DIRECTORS AND ITS OPINION WAS DELIVERED
TO THE eFAX.COM BOARD IN CONNECTION WITH ITS CONSIDERATION OF THE MERGER.
PACIFIC GROWTH EQUITIES' OPINION ADDRESSES ONLY THE FAIRNESS OF THE MERGER
CONSIDERATION FROM A FINANCIAL POINT OF VIEW TO eFAX.COM, AND IT DOES NOT
ADDRESS ANY OTHER ASPECT OF THE MERGER NOR DOES IT CONSTITUTE A RECOMMENDATION
TO ANY HOLDER OF eFAX.COM COMMON STOCK AS TO HOW TO VOTE WITH RESPECT TO THE
MERGER.
In connection with the Pacific Growth Equities opinion, Pacific Growth
Equities:
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. Reviewed certain publicly available financial information and other
information concerning eFax.com and j2 Global and certain internal analyses and
other information furnished to it by eFax.com and j2 Global; and
. Held discussions with the members of senior management of eFax.com
regarding the businesses and prospects of the respective companies and the joint
prospects of a combined company.
In addition, Pacific Growth Equities:
. Reviewed the historical reported prices and trading activity for
eFax.com common stock and j2 Global common stock;
. Compared certain financial information for both eFax.com and j2 Global
with similar information for selected companies whose securities are publicly
traded;
. Compared certain stock market information and valuations to eFax.com
and j2 Global with similar information for certain companies whose securities
are publicly traded;
. Analyzed information about prices paid in acquisitions of other
similar companies; and
. Performed other studies and analyses and considered other factors as
it deemed appropriate.
In conducting its review and arriving at its opinion, Pacific Growth
Equities assumed and relied upon, without independent verification, the
accuracy, completeness and fairness of the information furnished to or otherwise
reviewed by or discussed with it for the purposes of rendering its opinion.
Pacific Growth Equities assumed, with the consent of eFax.com, that the merger
would qualify for purchase accounting treatment and as a taxable transaction for
the stockholders of eFax.com for federal income tax purposes, and that the
merger would be consummated in accordance with the terms of the merger agreement
without any amendment thereto and without waiver by eFax.com or j2 Global of any
of the conditions to their respective obligations thereunder. Pacific Growth
Equities did not make an independent evaluation or appraisal of the assets of
eFax.com or j2 Global nor was Pacific Growth Equities furnished with any such
evaluations or appraisals. The Pacific Growth Equities opinion is based on
market, economic and other conditions as they existed and could be evaluated as
of the date of the opinion letter.
The following is a summary of the analyses performed and factors considered
by Pacific Growth Equities in connection with the rendering of the Pacific
Growth Equities opinion.
Historical Financial Position. In rendering its opinion, Pacific Growth
Equities reviewed and analyzed the historical financial position of eFax.com and
j2 Global, which included:
. An assessment of each of eFax.com's and j2 Global's recent financial
statements;
. An analysis of each of eFax.com's and j2 Global's revenue, growth and
operating performance trends; and
. An assessment of eFax.com's and j2 Global's balance sheet information.
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Historical Stock Price Performance. Pacific Growth Equities reviewed and
analyzed the daily closing per share market prices and trading volume for
eFax.com common stock and j2 Global common stock from June 27, 2000 to July 11,
2000.
Analysis of Selected Publicly Traded Companies. This analysis examines a
company's valuation in the public market as compared to the valuation in the
public market of other selected publicly traded companies. Pacific Growth
Equities compared certain financial information (based on the commonly used
valuation measurements described below) relating to eFax.com to certain
corresponding information for a group of selected publicly traded companies.
Such financial information included, among other things:
. Common equity market capitalization;
. Cash position;
. Ratios of market capitalization to revenues; and
. Discount of common stock market price relative to 52-week high per
share market price.
The financial information used in connection with the analysis provided
below with respect to eFax.com was based on information made available to
Pacific Growth Equities by eFax.com. In the case of the selected comparable
companies, the financial information used in connection with the analysis
provided below was based on the most recent publicly available income statement,
balance sheet and other information. Pacific Growth Equities noted that, based
on the last reported financial information and most recent common equity prices
as of July 11, 2000, the mean multiple of market capitalization to projected
calendar year 2001 revenues was 19.5x for the selected comparable companies.
Analysis of Selected Mergers and Acquisitions. Pacific Growth Equities
reviewed the financial terms, to the extent publicly available, of 18 completed
mergers and acquisitions since June 1997 through May 2000 in the
Internet-related commerce and technology sectors. The 18 Internet-related and
technology transactions, in chronological order of public announcement, were:
. DIGEX, Inc. / Intermediate Communications - June 5, 1997;
. CompuServe, Inc. / WorldCom, Inc. - September 8, 1997;
. Netcom On-Line Communications / ICG Communications, Inc. - October 13,
1997;
. CKS Group, Inc. / USWeb Corp. - September 2, 1998;
. Broadcast.com / Yahoo! Inc. - April 1, 1999;
. AboveNet Communications, Inc. / Metromedia Fiber Network, Inc. - June
22, 1999;
. Think New Ideas, Inc. / AnswerThink Consulting Group - June 24, 1999;
. iMall, Inc./ Excite At Home - July 13, 1999;
. Egghead.com, Inc. / ONSALE Inc. - July 14, 1999;
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. Telescan, Inc. / NBC - July 27, 1999;
. AdForce, Inc. / CMGI, Inc. - September 20, 1999;
. NewsEDGE Corp. / RoweCom, Inc. - December 7, 1999;
. Concentric Network Corp. / NextLink Communications, Inc. - January 10,
2000;
. InterVU, Inc. / Akamai Technologies, Inc. - February 7, 2000;
. uBID / CMGI, Inc. - February 10, 2000;
. OnHealth Network Co / Healtheon/WebMD, Inc. - February 16, 2000;
. Medscape, Inc. / MedicaLogic, Inc. - February 22, 2000; and
. Exactis.com, Inc. / 24/7 Media Inc. - February 29, 2000.
Premiums Paid Analysis. Pacific Growth Equities compared the premiums paid
for the comparable transactions one day prior, one week prior and four weeks
prior to the announcement date. Pacific Growth Equities noted that these
comparable transactions were effected at a mean premium of 26.8% one day prior
to announcement, 35.7% one week prior to announcement and 52.4% four weeks prior
to announcement. Applying the mean multiple premium of 26.8% for transactions
one day prior to announcement and 35.7% for transactions one week prior to
announcement to eFax.com market capitalization of $13.9 million, Pacific Growth
Equities arrived at a valuation of $17.7 million and $18.9 million,
respectively. All multiples for these comparable transactions were based on
public information available at the time of the announcement of such
transaction, without taking into account specific market and other conditions
during the three year period during which these comparable transactions
occurred.
Analysis of Discounted Cash Flow. Pacific Growth Equities analyzed the
discounted cash flow for eFax.com using financial and operating data made
available from the internal records of eFax.com projections of eFax.com for the
fiscal years 2000 through 2004. Pacific Growth Equities used a terminal value of
2004 net income of $6.5 million and applied an earnings multiple of 25x, based
upon an analysis of publicly traded comparable companies and discount rates from
35% to 40%. The implied value of the company based on this valuation method was
$24.7 million.
No company used in the above analysis of selected comparable companies nor
any transaction used in the analysis of the comparable companies summarized
above is identical to eFax.com, j2 Global or the merger. Accordingly, such
analyses must take into account differences in the financial and operating
characteristics of the selected comparable companies and the comparable
transactions and other factors that would affect the public trading value and
acquisition value of the selected comparable companies and the comparable
transactions, respectively.
While the foregoing summary describes analyses and factors that Pacific
Growth Equities deemed material in its presentation to eFax.com's board of
directors, it is not a comprehensive description of all analyses and factors
considered by Pacific Growth Equities. The preparation of a fairness opinion is
a complex process involving various determinations as to the most appropriate
and relevant methods of financial analysis and the applications of these methods
to the particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Pacific Growth Equities believes that
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its analyses must be considered as a whole and that selecting portions of its
analyses and the factors considered by it, without considering all analyses and
factors, would create an incomplete view of the evaluation process underlying
Pacific Growth Equities' opinion. In performing its analyses, Pacific Growth
Equities considered general economic, market and financial conditions and other
matters, many of which are beyond the control of eFax.com and j2 Global. The
analyses performed by Pacific Growth Equities are not necessarily indicative of
actual values or future results, which may be significantly more or less
favorable than those suggested by such analyses. Accordingly such analyses are
subject to substantial uncertainty. Additionally, analyses relating to the value
of a business do not purport to be appraisals or to reflect the prices at which
the business actually may be sold.
Pursuant to a letter agreement dated April 1, 2000 between eFax.com and
Pacific Growth Equities, the fees to date payable to Pacific Growth Equities for
rendering the Pacific Growth Equities opinion have been $250,000, of which
$100,000 was payable upon execution of the letter agreement and $150,000 at the
time Pacific Growth Equities notified eFax.com of its preparedness to render the
opinion (whether in oral or written form). In addition to the fee provided for
above, eFax.com agreed to promptly reimburse Pacific Growth Equities, upon
request, for all of Pacific Growth Equities' reasonable and accountable
out-of-pocket expenses, including, without limitation, travel expenses, charges
for public reference documents and database services, and Pacific Growth
Equities' data and legal fees and expenses, incurred by Pacific Growth Equities
in connection with the performance of Pacific Growth Equities' services under
the letter agreement up to a maximum of $25,000. eFax.com has agreed to
indemnify Pacific Growth Equities and its directors, officers, agents, employees
and controlling persons, for certain costs, expenses, losses, claims, damages
and liabilities related to or arising out of its rendering of services under its
engagement.
The eFax.com board retained Pacific Growth Equities based upon Pacific
Growth Equities' qualifications, reputation, experience and expertise. Pacific
Growth Equities, as a customary part of its investment banking business, is
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, public equity underwritings, private placements and
valuations for corporate and other purposes. Pacific Growth Equities maintains a
market in the common stock of many publicly traded Internet-related and other
companies and regularly publishes research reports regarding companies in the
Internet-related industry and publicly traded companies in the Internet-related
industry.
Prior to joining eFax.com, Todd Kenck, eFax.com's Vice President and
Chief Financial Officer, was an investment banker employed by Pacific Growth
Equities.
Opinion of j2 Global's Financial Advisor
j2 Global's board of directors retained Tucker Anthony Cleary Gull to
render an opinion with respect to the fairness to the stockholders of j2 Global
from a financial point of view of the consideration to be paid by j2 Global in
its proposed merger with eFax.com. The j2 Global board selected Tucker Anthony
to act as j2 Global's financial advisor based upon its qualifications, expertise
and reputation. Tucker Anthony specializes in rendering a range of investment
banking services and regularly engages in the valuation of businesses and their
securities in connection with mergers and acquisitions, secondary distributions
of listed and unlisted securities, private placements and asset management.
On July 12, 2000, at the meeting at which the j2 Global's board
approved and adopted the merger agreement and authorized the transactions
contemplated by the merger agreement, Tucker Anthony rendered its oral opinion
to the j2 Global board that, as of such date, the merger consideration to be
paid by j2 Global was fair to the stockholders of j2 Global from a financial
point of view. Tucker Anthony did not opine on j2 Global's underlying business
decision to proceed with or consummate the merger, whether the terms contained
in the merger agreement were the best available terms to j2 Global, whether
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stockholders should vote in favor of the proposed merger or whether the
allocation of the consideration among eFax.com common and preferred stockholders
was appropriate.
THE FULL TEXT OF THE OPINION OF TUCKER ANTHONY, WHICH SETS FORTH A
DESCRIPTION OF THE PROCEDURES FOLLOWED, ASSUMPTIONS MADE, MATTERS CONSIDERED AND
LIMITS ON THE REVIEW UNDERTAKEN IN CONNECTION WITH SUCH OPINION, IS ATTACHED TO
THIS PROXY STATEMENT/PROSPECTUS AS APPENDIX C AND IS INCORPORATED HEREIN BY
REFERENCE. STOCKHOLDERS ARE URGED TO READ THE OPINION IN ITS ENTIRETY. TUCKER
ANTHONY'S OPINION IS DIRECTED TO THE j2 GLOBAL BOARD AND RELATES ONLY TO THE
FAIRNESS OF THE MERGER CONSIDERATION IN THE MERGER AGREEMENT FROM A FINANCIAL
POINT OF VIEW, DOES NOT ADDRESS ANY OTHER ASPECT OF THE PROPOSED MERGER OR ANY
RELATED TRANSACTION AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDERS
AS TO HOW THE STOCKHOLDERS SHOULD VOTE AT THE ANNUAL MEETING. THE TERMS AND
CONDITIONS OF THE MERGER WERE DETERMINED WITHOUT TUCKER ANTHONY'S INVOLVEMENT.
THE FOLLOWING SUMMARY OF THE OPINION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO THE FULL TEXT OF THE OPINION.
In rendering its opinion, Tucker Anthony reviewed, analyzed and relied
upon the following material relating to the financial and operating condition of
j2 Global and eFax.com:
. The draft of the merger agreement dated July 10, 2000;
. The draft exchange agreement by and between eFax.com and the
investors listed on the schedule of investors attached thereto dated July 10,
2000;
. The draft side agreement among eFax.com, Fisher Capital Ltd. and
Wingate Capital Ltd. and j2 Global dated July 10, 2000;
. The agreement of understanding by and among eFax.com, j2 Global and
Integrated Global Concepts, Inc. dated June 30, 2000;
. The term loan agreement by and between eFax.com and j2 Global dated
May 5, 2000;
. Other legal documents relating to the transactions;
. Publicly available financial statements, research reports and
earnings estimates by research analysts covering j2 Global and eFax.com, and
other business and financial information regarding j2 Global and eFax.com; and
. Internal financial statements, forecasts and other financial and
operating data provided to Tucker Anthony by and concerning j2 Global and
eFax.com.
Tucker Anthony also reviewed and discussed the business, financial
condition, assets, earnings and prospects of j2 Global and eFax.com with
representatives of j2 Global's and eFax.com's management. In arriving at their
opinion, Tucker Anthony considered:
. The trading history of the two companies' common shares and the
average ratio of eFax.com's share price to j2 Global's share price over several
periods of time;
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. Merger premiums/discounts for a group of comparable transactions;
. The relative contributions of j2 Global and eFax.com with respect
to a group of financial and operational statistics;
. Financial and stock market data of publicly held companies in
businesses considered to be generally comparable to j2 Global and eFax.com;
. Publicly available information concerning the nature and terms of a
group of transactions that Tucker Anthony believed to be relevant on a
comparative basis;
. The impact of the merger on j2 Global's projected earnings per
share; and
. Such other information, financial studies, analyses and financial,
economic and market criteria as Tucker Anthony deemed relevant and appropriate.
Tucker Anthony's opinion was based upon conditions as they existed and
could be evaluated on the date thereof. The opinion was based upon information
made available to Tucker Anthony through July 12, 2000.
In conducting its review and arriving at its opinion, Tucker Anthony
relied upon and assumed the accuracy and completeness of all of the financial
and other information provided to it or obtained from publicly available
sources, and Tucker Anthony did not attempt to verify such information
independently. Tucker Anthony relied upon the managements of j2 Global and
eFax.com as to the reasonableness and achievability of the financial plans,
estimates and analyses provided to Tucker Anthony and assumed that such
information reflected the best available knowledge, estimates and judgments of
such managements. Tucker Anthony also assumed that the executed merger agreement
would be in the same form as the draft of the merger agreement dated July 10,
2000, without any waiver of any material term or condition, and that obtaining
any necessary regulatory or third-party approval for the merger would not have a
material adverse effect on either j2 Global or eFax.com. Tucker Anthony did not
interview customers, evaluate technologies or conduct a complete inspection of
the property or facilities of either j2 Global or eFax.com. Tucker Anthony also
assumed that j2 Global had, or at closing would have, financing adequate to
complete the merger in accordance with the merger agreement.
The following is a summary of the material financial analyses employed
by Tucker Anthony in connection with providing its oral opinion of July 12,
2000. In evaluating the consideration to be paid by j2 Global in the merger,
Tucker Anthony included the issuance of 2.0 million shares of j2 Global common
stock to Integrated Global Concepts, Inc. as part of the merger consideration.
Discussions of the exchange rate and exchange ratio below include the 2.0
million shares issuable to Integrated Global Concepts.
Historical Exchange Ratio Analysis. Tucker Anthony reviewed and
analyzed the average closing stock prices of j2 Global and eFax.com from October
8, 1999 to July 7, 2000, the last closing price available prior to the
preparation of the fairness opinion. Tucker Anthony then calculated the implied
exchange ratios for these averages based upon no premium to the average closing
stock prices of eFax.com, a 20% premium and a 70% premium. These premiums were
selected based upon an analysis of stock-for-stock mergers since January 1,
1998. Tucker Anthony then compared these implied exchange ratios to the exchange
rate offered by j2 Global and determined that the exchange rate offered by j2
Global was below the range of the implied exchange ratios.
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Transaction Premium Analysis. Tucker Anthony reviewed and analyzed the
premium and stock price four weeks prior, one week prior and one day prior to
stock for stock mergers since January 1, 1998. Tucker Anthony then calculated
the implied exchange ratio based upon these averages. Tucker Anthony then
compared these implied exchange ratios to the exchange rate offered by j2 Global
and determined that the exchange rate offered by j2 Global was below the range
of the implied exchange ratios.
Relative Contribution Analysis. Tucker Anthony analyzed the relative
contribution of selected assets, including phone numbers and customers, revenues
and gross profits of each of j2 Global and eFax.com to the combined enterprise
and calculated implied exchange ratios. Tucker Anthony then compared these
implied exchange ratios to the exchange rate offered by j2 Global and determined
that the exchange rate offered by j2 Global appeared high based on each firm's
relative contribution of revenues and gross profit, but the exchange rate was
below the range of these implied exchange ratios based upon each company's
relative contribution of phone numbers and customers.
Comparable Company Analysis. A set of 18 comparable companies was
identified as peers of j2 Global and revenue multiples of each company were
compared. Tucker Anthony calculated eFax.com's implied revenue multiple by
comparing eFax.com's implied value to historic and projected revenues. Tucker
Anthony determined that the implied revenue multiples for the merger were within
the range of revenue multiples of the comparable companies.
Comparable Transaction Analysis. A set of 28 comparable transactions
dating from January 14, 1998 involving mergers of Internet companies was
reviewed. Tucker Anthony calculated the implied revenue multiples for these
transactions and for the merger. Tucker Anthony determined that the implied
revenue multiples for the merger were within the range of revenue multiples of
the comparable transactions.
Pro Forma Earnings Analysis. Tucker Anthony analyzed certain pro forma
effects resulting from the merger during the year ending December 31, 2001. This
analysis indicated that the merger would have an accretive effect on j2 Global's
operating results.
The summaries set forth above provide a description of the material
analyses prepared by Tucker Anthony in connection with the rendering of its
opinion. The summary does not purport to be a complete description of the
analyses performed by Tucker Anthony in connection with the rendering of its
opinion. The preparation of a fairness opinion is not necessarily susceptible to
partial analysis or summary description. Tucker Anthony believes that its
analyses and the summary set forth above must be considered as a whole and that
selecting portions of its analyses without considering all analyses or selecting
part of the above summary, without considering all factors and analyses, would
create an incomplete view of the processes underlying the analyses set forth in
Tucker Anthony's presentations and opinion. The ranges of valuations resulting
from any particular analysis described above should not be taken to be Tucker
Anthony's view of the actual value of j2 Global and eFax.com. The fact that any
specific analysis has been referred to in the summary above is not meant to
indicate that such analysis was given greater weight than any other analysis.
In performing its analyses, Tucker Anthony made numerous assumptions
with respect to industry performance, general business and economic conditions
and other matters, many of which are beyond the control of j2 Global and
eFax.com. The analyses performed by Tucker Anthony are not necessarily
indicative of actual values or actual future results which may be significantly
more or less favorable than suggested by such analyses. Such analyses were
prepared solely as part of Tucker Anthony's analysis of the fairness, from a
financial point of view, of the proposed transaction and were provided to the j2
Global board in connection with the delivery of Tucker Anthony's opinion. The
analyses do not purport to be appraisals or to reflect the prices at which a
company actually might be sold or the prices at which
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any securities may trade at the present time or at any time in the future. In
addition, as described above, Tucker Anthony's opinion, along with its
presentation to the j2 Global board, was just one of many factors taken into
consideration by the j2 Global board in unanimously approving the merger
agreement.
Pursuant to an engagement letter dated April 28, 2000, j2 Global agreed
to pay Tucker Anthony a financial advisory fee of $200,000, payable on delivery
of the fairness opinion. j2 Global has also agreed to reimburse Tucker Anthony
for its reasonable and properly documented out-of-pocket expenses, not to exceed
$25,000. j2 Global has also agreed to indemnify Tucker Anthony, its affiliates
and their respective partners, directors, officers, agents, consultants,
employees and controlling persons against certain liabilities, including
liabilities under the federal securities laws. No financial advisory retainer or
contingent fees are payable by j2 Global to Tucker Anthony in connection with
the merger.
Interests of Management and Directors in the Merger
When considering the recommendations of the eFax.com board of directors
that eFax.com stockholders vote in favor of the adoption of the merger
agreement, eFax.com stockholders should be aware that directors and executive
officers of eFax.com have interests in the merger as directors or officers that
are different from, or in addition to, those of an eFax.com stockholder as
described below. The eFax.com board was aware of, and took into account the
interests of, its directors and executive officers when it considered and
approved the merger agreement and the merger.
eFax.com's executive officers, of whom, on the date of this proxy
statement/prospectus, there are two, entered into change in control agreements
with eFax.com on January 25, 2000. These agreements provide that upon a change
in control event, which would include the merger, any unvested stock options
held by the executives will have their vesting accelerated by one year. If,
within one year of the merger, an executive is involuntary terminated without
cause or resigns for good reason, then all of the executive's unvested options
will fully vest and become immediately exercisable. An executive is deemed to
have resigned for good reason if his compensation is reduced, or his title,
status, position or responsibilities are adversely changed.
On July 27, 2000, the compensation committee of eFax.com's board
granted options to acquire 1,084,000 shares of eFax.com common stock to the
company's employees, including options to acquire 80,000 shares of eFax.com
common stock which were granted to eFax.com's two executive officers. As of
August 21, 2000, 726,187 shares of eFax.com common stock were subject to stock
options granted to eFax.com's executive officers and 145,000 shares of eFax.com
common stock were subject to stock options granted to members of the eFax.com
board of directors. j2 Global has agreed to assume all of the outstanding stock
options of eFax.com, including those held by eFax.com's directors and executive
officers. All assumed options will be exercisable for the number of shares of j2
Global common stock equal to the number of shares of eFax.com common stock for
which the option is exercisable prior to the merger, times the exchange ratio
into which shares of eFax.com common stock are being converted into shares of j2
Global common stock in the merger, and at an exercise price equal to the
pre-merger exercise price, divided by the exchange ratio.
Both of eFax.com's executive officers, as well as 45 other eFax.com
employees (a number of whom have left eFax.com), have been offered severance
agreements by eFax.com in the event that they are terminated for other than for
cause or resign for good reason on or prior to July 13, 2001. If an employee who
has been offered a severance agreement is terminated, he or she, following
signing the severance agreement, will receive a severance payment equal to the
employee's base salary for a specified number of months. eFax.com's two
executive officers have each been offered a severance agreement with a severance
payment of four or six months of base salary. As a result of the merger, it is
expected that one of the executive officers will be able to resign for good
reason and receive his severance payment.
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As a condition to the closing of the merger, which condition may be
waived by j2 Global, Michael Crandell, eFax.com's Executive Vice President and
Chief Technology Officer, is required to enter into an employment agreement with
j2 Global on terms to be determined prior to the merger and which is expected to
be similar to agreements entered into with j2 Global's current senior
management.
Under the terms of the merger agreement, j2 Global has agreed to
indemnify for six years the existing and past directors and officers of eFax.com
to the fullest extent permitted by law. j2 Global is required to maintain an
independent policy of directors' and officers' liability insurance of at least
$20 million for a period of six years after the merger so long as the annual
insurance premiums do not exceed 150% of the last annual premium paid by
eFax.com.
Steven Carnavale and Thomas Akin, who are directors of eFax.com, have
warrants to acquire 139,125 and 33,472 shares of eFax.com common stock,
respectively, for $1.72 per share. These warrants will be assumed by j2 Global
at the time of the merger and will become exercisable for the number of shares
of j2 Global common stock equal to the number of shares of eFax.com common stock
for which the warrant is exercisable prior to the merger, times the exchange
ratio into which shares of eFax.com common stock are being converted into shares
of j2 Global common stock in the merger, and at an exercise price equal to the
pre-merger exercise price, divided by the exchange ratio.
Under the terms of the merger agreement, eFax.com is permitted to
select one person to be nominated to serve on the j2 Global board of directors
following the merger. The eFax.com board has selected Douglas Y. Bech to be
nominated for the j2 Global board. Mr. Bech is currently a director of eFax.com
and his election is being voted upon at the j2 Global annual meeting. If Mr.
Bech is elected to the j2 Global board and, for any reason, the merger fails to
occur, Mr. Bech has indicated his intention to resign from the board.
Immediately prior to the merger, each non-qualified stock option held
by an eFax.com executive officer will be amended to provide that the option can
be exercised for a period up to the lesser of 18 months after the termination of
the officer's continuous status with the company or the expiration date of the
option. Currently, the options expire 90 days after the officer is no longer
employed by eFax.com.
Accounting Treatment
j2 Global will account for the merger under the purchase method of
accounting.
Federal Income Tax Considerations of the Merger
The following is a summary of material U.S. federal income tax
considerations relevant to:
. Beneficial owners whose shares of eFax.com common stock are
converted in the merger into shares of j2 Global common stock; and
. Beneficial owners whose shares of eFax.com Series D Preferred Stock
are converted in the merger into shares of j2 Global common stock plus warrants
exercisable for j2 Global common stock.
This summary addresses only beneficial owners of shares of eFax.com
common stock or Series D Preferred Stock who hold the shares as capital assets
within the meaning of Section 1221 of the Internal Revenue Code of 1986, as
amended. The summary does not address beneficial owners who received their
shares as part of a hedging, "straddle," conversion or other integrated
transaction, upon conversion of securities or exercise of warrants or other
rights to acquire shares, or pursuant to the exercise of employee stock options
or otherwise as compensation, and may not apply to certain types of beneficial
owners who
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may be subject to special rules such as insurance companies, tax-exempt
organizations, financial institutions, broker-dealers or foreign persons.
The U.S. federal income tax consequences set forth below are included
for general information purposes only. Because individual circumstances may
differ, each beneficial owner of shares of eFax.com common stock or Series D
Preferred Stock should consult the beneficial owner's own tax advisor to
determine the applicability of the rules discussed below to the beneficial owner
and the particular tax effects to the beneficial owner of the merger, including
the application and effect of state, local and other tax laws.
Tax Consequences of the Merger Generally. j2 Global and eFax.com are
treating the merger as a taxable acquisition by j2 Global of the shares of
eFax.com common and preferred stock, rather than as a tax-free reorganization,
because the value of the warrants to be received by the holders of the eFax.com
Series D Preferred Stock will represent more than 20% of the value of the total
consideration to be received by the eFax.com preferred stockholders in the
merger.
As a result, a beneficial owner of shares of eFax.com common stock or
Series D Preferred Stock generally will recognize capital gain or loss in an
amount equal to the difference between the fair market value, on the date of the
completion of the merger, of the total amount of shares of j2 Global common
stock received (plus warrants and cash for fractional shares, if any), and the
beneficial owner's adjusted tax basis in the shares of eFax.com common stock or
Series D Preferred Stock converted. Gain or loss must be determined separately
for each block of eFax.com common stock or Series D Preferred Stock converted in
the merger. Net capital gain recognized by non-corporate taxpayers from the sale
of securities held more than one year generally will be taxed at a rate not to
exceed 20%. Limitations apply to the deductibility of capital losses. The shares
of j2 Global common stock (plus warrants, if any) received in the merger will
take a fair market value basis and will begin a new holding period.
Backup Withholding and Information Reporting. Payments in connection
with the merger may be subject to information reporting and "backup withholding"
at a rate of 31%, unless a beneficial owner of eFax.com common stock or Series D
Preferred Stock:
. Comes within certain exempt categories, which includes
corporations, financial institutions and certain foreign individuals; or
. Provides a certified taxpayer identification number on Form W-9 and
otherwise complies with the backup withholding rules.
Backup withholding is not an additional tax, but merely an advance
payment. Any amount so withheld may be credited against the U.S. federal income
tax liability of the beneficial owner subject to the withholding and may be
refunded to the extent it results in an overpayment of tax. Each beneficial
owner of eFax.com common stock or Series D Preferred Stock should consult with
its own tax advisor as to its qualification for exemption from backup
withholding and the procedure for obtaining this exemption.
Appraisal Rights
The following discussion is directed to the eFax.com common
stockholders. The j2 Global stockholders do not have any statutory right to
demand appraisal of their shares in connection with the merger. Holders of
eFax.com Series D Preferred Stock have waived their appraisal rights.
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Under the Delaware General Corporation Law, any eFax.com stockholder
who does not wish to accept the merger consideration in exchange for his or her
shares of eFax.com common stock may seek an appraisal of, and be paid the fair
cash value of, those shares. If you want to exercise your appraisal rights, you
must fully comply with the provisions of Section 262 of the Delaware General
Corporation Law. We have attached a copy of Section 262 as Appendix E to this
document.
Perfecting your appraisal rights can be complicated. You must follow
the specific procedural rules precisely. Failure to comply with the procedure
may result in your losing your appraisal rights. The following is a summary of
the statutory procedures you must follow to perfect your appraisal rights, but
it is not a complete statement of the law, and it is qualified in its entirety
by the full text of Section 262. We urge you to review Section 262 for the
complete procedure.
If you wish to exercise appraisal rights, you must:
. Not vote in favor of the merger agreement;
. Deliver to eFax.com, before the vote at eFax.com's special meeting,
a written demand for appraisal of your shares of eFax.com common stock; and
. Continuously hold your shares of eFax.com common stock from the
date you make the demand for appraisal through the completion of the merger.
If you sign and return a proxy card without marking it to vote
"Against" or "Abstain" from voting on adoption of the merger agreement and prior
to the special meeting do not change your proxy, your shares will be voted for
adoption of the merger agreement and you will effectively waive your appraisal
rights. Accordingly, if you desire to exercise and perfect appraisal rights with
respect to any of your shares of eFax.com common stock, you must either:
. Refrain from executing and returning the enclosed proxy card or
giving a proxy by telephone or Internet; or
. Check either the box entitled "Against" or "Abstain" next to the
proposal to adopt the merger agreement on your proxy card or note "Against" or
"Abstain" when voting by telephone or Internet; or
. Vote in person against the proposal at the eFax.com special
stockholder meeting; or
. Register in person your abstention with respect to the proposal at
the special stockholder meeting.
Your written demand for appraisal can be any writing that reasonably
informs eFax.com of your identity and your intention to demand appraisal of your
shares of eFax.com common stock. This written demand for appraisal must be
separate from any proxy or vote on adoption of the merger agreement. A vote or
proxy against the merger agreement will not, by itself, constitute a demand for
appraisal.
If you wish to exercise appraisal rights, you must not only be the
record holder of the shares of eFax.com on the date you make your written demand
for appraisal, but you must also continue to hold your shares of eFax.com until
the merger is completed. If you transfer your shares prior to the closing of the
merger, you will lose any right to appraisal with respect to those shares.
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A demand for appraisal must be signed by or on behalf of the holder of
record of the shares to which the demand relates, fully and correctly, as the
holder's name appears on the stock certificates and must state that the holder
intends to demand appraisal of the shares. If you are the beneficial owner of
eFax.com shares, but not the stockholder of record, you must have the
stockholder of record sign a demand for appraisal.
If you own the eFax.com shares in a fiduciary capacity, such as a
trustee, guardian or custodian, you must disclose the fact that you are signing
the demand for appraisal in that capacity. If you own the shares with another
person, as in a joint tenancy or a tenancy in common, each person must sign. If
you are a record holder, such as a broker, who holds eFax.com shares as nominee
for others, you may exercise appraisal rights for the shares held on behalf of
some beneficial owners but not other beneficial owners. Under these
circumstances, you should specify in the written demand the number of shares as
to which you wish to demand appraisal. If you do not expressly specify the
number of shares, we will assume that your written demand covers all of the
shares of eFax.com held in your name as the record holder. If you hold your
shares in brokerage accounts or other nominee form and wish to exercise
appraisal rights, you should consult with your broker to determine the
appropriate procedures for making a demand for appraisal by your nominee.
IF YOU WISH TO EXERCISE YOUR APPRAISAL RIGHTS, YOU SHOULD MAIL OR
DELIVER YOUR WRITTEN DEMAND TO:
. eFAX.COM, 1378 WILLOW ROAD, MENLO PARK, CALIFORNIA 94025, ATTN:
SECRETARY; OR
. PRESENT YOUR DEMAND TO eFAX.COM'S SECRETARY AT THE SPECIAL
STOCKHOLDER MEETING PRIOR TO THE VOTE.
Within 10 days after completion of the merger, eFax.com must give
written notice to each holder of eFax.com common stock who properly asserted
appraisal rights under Section 262 that the merger has been completed.
Within 120 days after completion of the merger, any eFax.com
stockholder who has complied with the provisions of Section 262 may file a
petition in the Delaware Court of Chancery requesting that the Chancery Court
determine the value of the shares of eFax.com common stock held by all of the
stockholders who properly asserted appraisal rights. eFax.com also has the right
to file a petition in the Chancery Court, but it has no obligation or intention
to do so. If you intend to exercise your rights of appraisal, you should file a
petition in the Chancery Court. If no stockholder files a petition within 120
days after the completion of the merger, you will lose your rights to appraisal.
If you have complied with the provisions of Section 262, you are
entitled to receive from eFax.com a statement setting forth the aggregate number
of shares of eFax.com common stock not voted in favor of the merger agreement,
and for which demands for appraisal were received, and the number of persons
holding those shares. In order to receive this statement, you must send a
written request to eFax.com within 120 days after completion of the merger.
eFax.com must mail this statement within 10 days after it receives your written
request.
You may withdraw your demand for appraisal and accept the cash
consideration by delivering to eFax.com a written withdrawal of your demand,
except that:
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. Any attempt to withdraw made more than 60 days after the completion
of the merger will require the written approval of eFax.com; and
. An appraisal proceeding in the Chancery Court cannot be dismissed
unless the Chancery Court approves.
If you properly file a petition for appraisal in the Chancery Court and
deliver a copy to eFax.com, eFax.com will then have 20 days to provide the
Chancery Court with a list of the names and addresses of stockholders who have
demanded appraisal rights and have not reached an agreement with eFax.com as to
the value of their shares. The Chancery Court will then send notice to all of
the stockholders who have demanded appraisal rights. If the Chancery Court
thinks it is appropriate, it has the power to conduct a hearing to determine
whether the stockholders have fully complied with Section 262 and whether they
are entitled to appraisal rights under that section. The Chancery Court may also
require you to submit your stock certificates to the Registry in Chancery so
that it can note on the certificates that an appraisal proceeding is pending. If
you do not follow the Chancery Court's directions, the court may dismiss you
from the proceeding.
After the Chancery Court determines which stockholders are entitled to
appraisal rights, the Chancery Court will appraise the shares. To determine the
fair value of the shares, the Chancery Court will consider all relevant factors
except for any appreciation or depreciation due to the anticipation or
accomplishment of the merger. After the Chancery Court determines the fair value
of the shares, it will direct eFax.com to pay that value to the stockholders who
are entitled to appraisal rights. The Chancery Court can also direct eFax.com to
pay interest, simple or compound, on that value if the Chancery Court determines
that interest is appropriate. In order to receive payment for your shares, you
must surrender your stock certificates to eFax.com at the time of payment.
The Chancery Court could determine that the fair value of shares of
stock is more than, the same as, or less than the merger consideration. In other
words, if you demand appraisal rights, you could receive less consideration than
you would under the merger agreement. An opinion of an investment banking firm
that the merger is fair is not an opinion that the merger consideration is the
same as the fair value under Section 262.
If you demand appraisal rights, after completion of the merger, you
will have no right:
. To vote the shares for which you have demanded appraisal rights for
any purpose;
. To receive payment of dividends or any other distribution with
respect to those shares, except for dividends or distributions, if any, that are
payable to holders of record as of a record date prior to the merger; or
. To receive the payment of the consideration provided in the merger
agreement, unless you properly withdraw your demand for appraisal.
The Chancery Court may assess costs of the appraisal proceeding against
eFax.com and the stockholders participating in the appraisal proceeding as the
court deems equitable under the circumstances. You may request that the Chancery
Court determine the amount of interest, if any, eFax.com should pay on the value
of stock owned by stockholders entitled to the payment of interest. You may also
request that the Chancery Court allocate the expenses of the appraisal
proceeding incurred by any stockholder, including reasonable attorneys' fees and
the fees and expenses of experts participating in the appraisal proceeding, pro
rata against the value of all of the shares entitled to appraisal. If the
Chancery Court does not make a determination or assessment, each party will bear
its own expenses.
Under the terms of the merger agreement, if 5% or more of the total
outstanding shares of eFax.com common stock demand an appraisal, j2 Global will
have the option of terminating the merger agreement and not finalizing the
merger. If the merger does not occur, no eFax.com stockholder will have
appraisal rights.
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THE MERGER AGREEMENT AND RELATED AGREEMENTS
The following describes certain aspects of the proposed merger,
including material provisions of the merger agreement. The following description
of the merger agreement does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the merger agreement, which is
attached as Appendix A to this proxy statement/prospectus. All j2 Global and
eFax.com stockholders are urged to read the merger agreement carefully and in
its entirety.
Introduction
The merger agreement provides for the merger of JFAX.COM Merger Sub,
Inc., a wholly-owned subsidiary of j2 Global, with and into eFax.com, with
eFax.com surviving the merger as a wholly-owned subsidiary of j2 Global. Holders
of eFax.com common stock will receive shares of j2 Global common stock in the
merger, while holders of eFax.com preferred stock will receive shares of j2
Global common stock and warrants to acquire shares of j2 Global common stock.
The receipt of the merger consideration will generally be a taxable event to
eFax.com stockholders.
Consideration in the Merger
In the merger:
(1) Each share of eFax.com common stock issued and outstanding
immediately prior to the merger, other than shares of eFax.com
common stock owned by j2 Global or eFax.com, will be converted
into a fraction of a share of j2 Global common stock according to
the following exchange ratio formula:
CN = 11,000,000 + $5,000,000 - LA + M - O$
---------- ------------------------
N FMV(J) x N
Where:
CN = the Conversion Number (the second of the fractions
comprising CN may be a negative number).
LA = the sum of (x) the amount of loan proceeds
disbursed under the term loan agreement between eFax.com and j2
Global as of the closing date for the merger (the "Closing Date")
which have not been repaid and (y) the amount of payables of
eFax.com that are 45 days or more past due as of the Closing
Date.
FMV(J) = the average closing price of j2 Global common
stock for the five trading days beginning on and including the
seventh trading day prior to the Closing Date.
M = the sum of (x) cash on hand at eFax.com as of the
Closing Date (but not including any cash deposited or required
under the terms of the term loan agreement to be deposited into
the asset sales account (as defined in the term loan agreement))
plus (y) any of eFax.com's prepaid rents and insurance premiums
(but only to the extent a pro-rata refund of any such premium is
available as to insurance policies (other than eFax.com's
directors' and officers' insurance policy) which will be
cancelled, at the election of j2 Global or otherwise, following
the Closing Date) as of the Closing Date (in no event will M
exceed LA).
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O$ = the amount of any cash received by eFax.com upon:
. Exercise of employee stock options under eFax.com's
stock option plans;
. Purchases pursuant to eFax.com's employee stock
purchase plan; or
. Exercise of eFax.com's warrants during the period
between July 13, 2000 and the date of the merger.
N = an amount equal to the sum of:
. 13,520,895 (the number of outstanding shares of
eFax.com common stock on July 13, 2000); plus
. Shares of eFax.com common stock, if any, issued
upon conversion of shares of Series D Preferred Stock during the
period between July 13, 2000 and the time immediately prior to
the time of the merger; plus
. Any other shares of eFax.com common stock issued
during the period between July13, 2000 and the time immediately
prior to the merger, except any shares issued (a) upon exercise
of employee stock options under eFax.com's stock option plans,
(b) upon purchase pursuant to eFax.com's employee stock purchase
plan or (c) upon exercise of eFax.com's warrants; plus
. The total number of shares of eFax.com common stock
that would be issuable upon the conversion of the shares of
Series D Preferred Stock that remain outstanding immediately
prior to the merger, assuming that all such shares of Series D
Preferred Stock were then converted.
In determining N in the formula above, all of the shares
of eFax.com Series D Preferred Stock are treated as if they were
converted immediately prior to the merger into the number of
shares of eFax.com common stock that would then be converted into
the number of shares of j2 Global specified in item (2) below. If
the merger were to occur on October 31, 2000, each share of
eFax.com Series D Preferred Stock would have a right to receive
4,975.15 shares of j2 Global common stock. If, for example only,
the exchange ratio were 0.281 and the merger occurred on October
31, 2000, then for each outstanding share of Series D Preferred
Stock, N would increase by 17,684.48 shares of eFax.com common
stock. In addition, the holders of the Series D Preferred Stock
prior to the merger are permitted, subject to a restriction that
neither a holder nor its affiliates may own in excess of 10% of
the eFax.com common stock, to convert their shares of preferred
stock into shares of eFax.com common stock at a conversion ratio
on the date of this proxy statement/prospectus of one share of
Series D Preferred Stock for 17,414.58 shares of eFax.com common
stock, which number of shares of eFax.com common stock increases
at an annualized rate of approximately 6.5%.
(2) Each share of eFax.com Series D Preferred Stock issued and
outstanding immediately prior to the merger will be converted
into 4,960.15 shares of j2 Global common stock which amount will
increase between the date of this proxy statement/prospectus and
the time the merger is completed at an annualized rate of 3.5%.
Pursuant to an agreement among the
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holders of the Series D Preferred Stock, eFax.com and j2 Global,
each holder of Series D Preferred Stock agreed that it would
receive shares of j2 Global common stock in the merger to the
extent that the number of shares of j2 Global common stock held
by the holder and its affiliates did not exceed 10% of the j2
Global common stock outstanding immediately after the merger. In
addition, each holder will receive a warrant, exercisable for j2
Global common stock at $0.01 per share, to acquire the number of
shares of j2 Global common stock to which the holder would have
been entitled as merger consideration, but could not receive
because of the 10% limitation.
(3) Each share of JFAX.COM Merger Sub common stock issued and
outstanding immediately prior to the merger will be converted
into one share of eFax.com common stock.
Fractional shares of j2 Global will not be issued to eFax.com
stockholders. Instead, each holder that would otherwise be entitled to a
fractional share will receive a cash payment in lieu of that fractional share.
That cash payment will represent the holder's proportionate interest in the net
proceeds from the sale within five business days of the completion of the merger
of all of the aggregate fractional shares of j2 Global common stock that would
otherwise have been issued in the merger.
Following the merger, stockholders of j2 Global will continue to own
the securities which they held prior to the merger.
Assuming, for example only, that:
. The merger occurs on October 31, 2000;
. No additional shares of j2 Global or eFax.com common stock are
issued prior to the merger;
. eFax.com owes j2 Global $5 million under their loan agreement;
. eFax.com has no cash on hand and it has no prepaid expenses or
accounts payable which affect the exchange ratio; and
. All 1,421 shares of Series D Preferred Stock which are outstanding
today are outstanding immediately prior to the merger and the preferred
stockholders own no shares of eFax.com or j2 Global common stock immediately
prior to the merger,
then CN (the exchange ratio) will equal 0.281 and immediately following the
merger:
. The holders of eFax.com's common stock immediately prior to the
merger will own 3,930,317 shares of j2 Global common stock.
. The current eFax.com preferred stockholders will own 4,672,546
shares of j2 Global common stock and warrants to acquire 2,397,137 shares of j2
Global common stock for an exercise price of $0.01 per share.
. Integrated Global Concepts, Inc. will own 2.0 million new shares of
j2 Global common stock in consideration for the provision of transition
services, the relinquishment of potential claims against eFax.com and the
licensing to eFax.com and j2 Global of intellectual property rights.
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. The current holders of j2 Global common stock will own 36,122,600
shares of j2 Global common stock, 77.3% of the outstanding common stock and
73.5% of the common stock taking into account the shares of common stock which
can be acquired for $0.01 per share upon the exercise of the warrants issued to
the eFax.com preferred stockholders.
Closing and Effective Time of the Merger
Under the merger agreement, the closing of the merger will occur at
9:00 a.m. on the first business day on which the last of the conditions shall be
satisfied or waived. For a discussion of those conditions, see "--Conditions of
the Merger" below.
As soon as practicable following the closing, j2 Global and eFax.com
will cause a certificate of merger to be executed, acknowledged and filed with
the Secretary of State of Delaware as provided in Section 251 of the Delaware
General Corporation Law. The merger will become effective at the time when the
certificate of merger has been duly filed with the Secretary of State of
Delaware.
Corporate Governance after the Merger
At the completion of the merger, j2 Global will increase the size of
its board of directors, or exercise its best efforts to secure the resignation
of one of its present directors, in order to allow one individual designated by
eFax.com to be nominated as a director of j2 Global at the first and second
annual meetings of j2 Global with proxy mailing dates after the effectiveness of
the merger. eFax.com has informed j2 Global that it will nominate Douglas Y.
Bech, a director of eFax.com, for the j2 Global board.
The officers and directors of JFAX.COM Merger Sub immediately before
the time of the merger will be the officers and directors, respectively, of
eFax.com upon effectiveness of the merger.
Conditions of the Merger
The respective obligations of each of j2 Global and eFax.com to
complete the merger are subject to the satisfaction or waiver of the following
conditions:
. The approval by the eFax.com stockholders of the merger agreement
and the approval by the j2 Global stockholders of the issuance of j2 Global
common stock pursuant to the merger agreement;
. The j2 Global common stock issuable to the eFax.com stockholders
pursuant to the merger agreement having been approved for quotation on The
Nasdaq National Market;
. The receipt of any consents, waivers, clearances, registrations,
permits, approvals and authorizations of governmental entities necessary to
complete the merger;
. The absence of any legal restriction or action by a government
entity that restrains or prohibits, or seeks to restrain or prohibit, the
completion of the merger;
. The registration statement of which this proxy statement/prospectus
is a part having been declared effective by the SEC, and no stop order having
been issued and no proceeding for that purpose having been initiated and not
withdrawn;
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. j2 Global having received all state securities and "blue sky" permits
and approvals necessary to consummate the transactions contemplated by the
merger agreement;
. The agreement of understanding among j2 Global, eFax.com and
Integrated Global Concepts and the Side Agreement among j2 Global, eFax.com and
the holders of the eFax.com Series D Preferred Stock are in full force and
effect; and
. No holder of shares of eFax.com Series D Preferred Stock will have
elected to receive a cash redemption of such shares.
The obligations of j2 Global to complete the merger are also subject to the
satisfaction or waiver of the following conditions:
. The representations and warranties of eFax.com being true and correct
as of the date of the merger agreement and the date of the merger and the
receipt by j2 Global of a certificate signed on behalf of eFax.com to such
effect, other than inaccuracies that, individually or in the aggregate, do not
have or are not reasonably likely to have a material adverse effect on eFax.com
or prevent or materially burden or materially impair the ability of eFax.com to
complete the merger;
. The performance in all material respects of all obligations of
eFax.com under the merger agreement;
. The receipt of all consents and approvals required for the merger,
other than those the non-receipt of which is not reasonably likely to have a
material adverse effect on eFax.com, or prevent or materially burden or
materially impair the ability of eFax.com to complete the merger;
. The aggregate number of shares of eFax.com common stock for which
appraisal rights are being exercised pursuant to Section 262 of the DGCL at the
time of effectiveness is less than five percent of the total number of
outstanding eFax.com shares;
. The receipt of an opinion of Howard, Rice, Nemerovski, Canady, Falk &
Rabkin, A Professional Corporation, as to specified matters;
. The receipt of resignations of each director and officer of eFax.com
requested by j2 Global;
. The receipt of a comfort letter, in form and substance reasonably
satisfactory to j2 Global, from the accountants for eFax.com;
. The receipt of an opinion of Tucker Anthony as to the fairness of the
merger to j2 Global stockholders, which opinion has already been delivered;
. The receipt of a letter from each affiliate of eFax.com;
. The receipt of appropriate information as to the status of all shares
of eFax.com's preferred stock;
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. The execution of an employment agreement between Michael Crandell,
eFax.com's Executive President and Chief Technology Officer, and j2 Global;
. Termination of eFax.com's stock option and stock purchase plans; and
. No employee of eFax.com having more than six and one-half weeks of
accrued personal time off as of the time of the merger.
The obligations of eFax.com to complete the merger are also subject to
the satisfaction or waiver of the following conditions:
. The representations and warranties of j2 Global and JFAX.COM Merger
Sub being true and correct as of the date of the merger agreement and the date
of the merger and the receipt by eFax.com of a certificate signed on behalf of
j2 Global to such effect, other than inaccuracies that, individually or in the
aggregate, do not have or are not reasonably likely to have a material adverse
effect on j2 Global, or prevent or materially burden or materially impair the
ability of eFax.com to complete the merger;
. The performance in all material respects of all obligations of j2
Global and JFAX.COM Merger Sub under the merger agreement;
. The receipt of all consents and approvals required for the merger,
other than those the non-receipt of which is not reasonably likely to have a
material adverse effect on j2 Global, or prevent or materially burden or
materially impair the ability of j2 Global to complete the merger;
. The receipt of a comfort letter, in form and substance reasonably
satisfactory to eFax.com, from the accountants for j2 Global;
. The registration statement for shares of j2 Global into which
outstanding options issued under eFax.com's stock option plans are convertible
or exercisable having been declared effective by the SEC, and no stop order
having been issued and no proceeding for that purpose having been initiated and
not withdrawn;
. The receipt of an opinion of Pacific Growth Equities as to the
fairness of the merger to eFax.com stockholders, which opinion has already been
delivered;
. The receipt of an opinion of Sullivan & Cromwell as to specified
matters; and
. Each installment requested by eFax.com under the term loan agreement
having been funded except where the conditions of the term loan agreement were
not met.
No assurances can be provided as to when or if all of the conditions to the
merger can or will be satisfied or waived by the appropriate party. As of the
date of this proxy statement/prospectus, we have no reason to believe that any
of these conditions will not be satisfied.
Post-Merger Compensation and Benefits
After completion of the merger, j2 Global will use its reasonable efforts
to cause employees of eFax.com, who are retained by eFax.com following the
merger, to be eligible to participate in j2 Global's
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compensation and employee benefits plans in which similarly situated employees
of j2 Global are eligible to participate. To the extent that any eFax.com
employee participates in any j2 Global compensation and benefit plan providing
for medical, dental or life insurance or 401(k) benefits after the merger, such
employee will be credited under j2 Global's compensation and benefit plan with
his or her service for eFax.com prior to the merger to the same extent as though
such employee had been an employee of j2 Global, but only to the extent a waiver
of any required waiting period is available from the applicable benefits
provider. With respect to the plan year in which the merger occurs, under any j2
Global benefit plan providing for medical or dental benefits, j2 Global will use
its reasonable efforts to obtain the agreement of the plan provider to cause the
dollar amount of expenses incurred by employees under the plan to be credited
for purposes of satisfying the j2 Global benefit plan's deductible and co-
payment limitations for such plan year. eFax.com employees will be subject to
other personnel policies and practices of j2 Global in all respects.
In addition, j2 Global will cause eFax.com following the merger to honor
all written contractual obligations of eFax.com to current and former employees,
directors and independent contractors.
Treatment of Stock Options under Employee Stock Plans
Upon completion of the merger, each option granted under eFax.com stock
plans, whether vested or unvested, will be deemed to constitute an option to
acquire, on the same terms and conditions applicable to the option before the
merger, a number of shares of j2 Global common stock equal to the number of
shares underlying the option before the merger multiplied by the exchange ratio
(rounded to the nearest whole number), at a price per share (rounded to the
nearest whole number) equal to the exercise price of the shares otherwise
purchasable pursuant to the option before the merger divided by the exchange
ratio, subject to adjustments to satisfy the requirements of Section 424(a) of
the Internal Revenue Code. j2 Global will reserve for issuance a sufficient
number of shares of j2 Global common stock for delivery of such shares upon
exercise of eFax.com options after the merger. Following the merger, j2 Global
will file a registration statement on Form S-8 to register shares of j2 Global
common stock to be acquired upon the exercise of the former eFax.com options.
Treatment of Warrants
On the date of this proxy statement/prospectus, eFax.com had outstanding
warrants to acquire 895,092 shares of eFax.com common shares at an average price
of $10.53 per share, including a warrant held by j2 Global to acquire 250,000
shares of eFax.com common stock. One warrant for 124,995 shares of eFax.com
common stock as well as the warrant held by j2 Global will be terminated at the
time of the merger. Warrants to acquire 520,097 shares of eFax.com common stock
at an average exercise price of $9.66 per share, unless exercised prior to the
merger, will be converted at the time of the merger into warrants of j2 Global
for a number of shares of j2 Global common stock equal to 520,097 multiplied by
the exchange ratio (rounded to the nearest whole number), at a price per share
(rounded to the nearest whole cent) equal to the exercise price of the shares
otherwise purchasable pursuant to the warrants before the merger divided by the
exchange ratio. Two of the current eFax.com warrants exercisable for a total of
300,000 shares of eFax.com common stock are held by the holders of the eFax.com
Series D Preferred Stock. j2 Global has agreed to file a registration statement
to register the resale of any shares of j2 Global common stock acquired upon the
exercise of the warrants which will replace the warrants currently held by the
holders of the eFax.com Series D Preferred Stock.
Distribution of Certificates
Promptly following completion of the merger, j2 Global will cause the
exchange agent to send to each holder of record of shares of eFax.com common
stock to be converted in the merger a letter of
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transmittal and instructions for use in surrendering certificates representing
shares of eFax.com common stock in exchange for certificates representing shares
of j2 Global common stock and any unpaid dividends and other distributions of
cash in lieu of fractional shares. Upon surrender of an eFax.com common stock
certificate to the exchange agent together with a duly executed letter of
transmittal, the holder of the certificate will receive a certificate
representing that number of whole shares of j2 Global common stock that the
holder is entitled to receive in exchange therefor and a check in the amount of
cash in lieu of fractional shares.
Conduct of Business Pending the Merger
eFax.com has agreed that from the date of the merger agreement until the
closing of the merger it will:
. Conduct its business in the ordinary and usual course and use all
reasonable efforts to maintain existing relationships and goodwill with
customers, suppliers, distributors, creditors, lessors and business associates,
except that it may make permitted dispositions of assets and continue de-
emphasizing its sales and licensing of its multifunction products business;
. Not (1) issue sell, pledge dispose of or encumber any capital stock
owned by it; (2) amend its certificate of incorporation or bylaws; (3) split,
combine or reclassify its outstanding shares of capital stock; (4) declare, set
aside or pay any dividend payable in cash, stock or property in respect of any
capital stock; or (5) repurchase, redeem or otherwise acquire, except in
connection with stock option plans, any shares of its capital stock or any
securities convertible into or exchangeable or exercisable for its capital
stock;
. Not (1) issue, sell, pledge, dispose of or encumber any shares of,
securities convertible or exchangeable or exercisable for, or options, warrants,
calls, commitments or rights of any kind to acquire, any shares of its capital
stock of any class or any other property or assets, except for common stock
issued pursuant to eFax.com's stock option and stock purchase plans, the
exchange of one series of its preferred stock into the Series D Preferred Stock
and the conversion of preferred stock into shares of eFax.com common stock; (2)
other than in the ordinary and usual course of business and except for sales
permitted by and made in accordance with the term loan agreement, transfer,
lease, license, guarantee, sell, mortgage, pledge, dispose of or encumber any
other property or assets or incur or modify any material indebtedness or other
liability; or (3) make or authorize or commit for any capital expenditures other
than in the ordinary and usual course of business or, by any means, make any
acquisition of, or investment in, assets or stock of or other interest in, any
other entity;
. Except as permitted under the merger agreement, not terminate,
establish, adopt, enter into, make any new grants under, reprice or substitute
any options previously granted or increase the salary, wage, bonus or other
compensation of any employees;
. Not make any tax election or permit any insurance policy naming it as
a beneficiary or loss-payable payee to be cancelled or terminated except in the
ordinary course of business;
. Not take any action or omit to take any action (other than omissions
in good faith) that would cause any of its representations and warranties in the
merger agreement to become untrue in any material respect; or
. Not enter into an agreement to do any of the above.
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j2 Global has agreed that from the date of the merger agreement until the
closing of the merger it will not:
. (1) Amend its certificate of incorporation, (2) split, combine or
reclassify its outstanding shares of capital stock, or (3) declare, set aside or
pay any dividend payable in cash, stock or property in respect of any capital
stock other than dividends from its direct or wholly-owned subsidiaries;
. Take any action or omit to take any action (other than omissions in
good faith) that would cause any of its representations and warranties in the
merger agreement to become untrue in any material respect; or
. Enter into an agreement to do any of the above.
Amendment, Waiver and Termination
Prior to the completion of the merger, provisions of the merger agreement
may be waived by the party benefiting from the provision or may be amended or
modified, by written agreement among j2 Global, JFAX.COM Merger Sub and
eFax.com.
The merger agreement may be terminated and the merger abandoned, at any
time prior to the completion of the merger by the mutual written consent of the
parties. In addition, the merger agreement may be terminated, and the merger
abandoned prior to the completion of the merger by either j2 Global or eFax.com
if:
. The merger is not consummated by December 31, 2000;
. The required approval of stockholders is not obtained at the meeting
convened therefore or any adjournment or postponement thereof;
. Any court order or government action permanently restraining,
enjoining or otherwise prohibiting the consummation of the merger becomes final
and non-appealable;
. The board of directors of the other company withdraws or adversely
modifies its approval or recommendation; or
. The other party breaches any representation, warranty, covenant or
agreement contained in the merger agreement and does not (or cannot) correct the
breach within 30 days.
In addition, eFax.com may terminate the merger agreement if it receives a
proposal for a transaction which its board of directors determines is more
favorable from a financial point of view to the stockholders of eFax.com than
the merger, the proposal remains more favorable after notice and time to respond
is given to j2 Global, eFax.com is not in breach of any provisions of the merger
agreement or the term loan agreement and eFax.com's board of directors approves,
and eFax.com concurrently enters into, a definitive agreement to implement the
more favorable proposal.
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Expenses and Termination Fee
If the merger does not occur and eFax.com, within two years of the
termination of the merger discussions with j2 Global, is acquired by another
entity or it receives at least $5 million from a securities offering or
offerings. eFax.com will be required to pay j2 Global an amount equal to:
. 1,750,000, times
. The fair market value of one share of eFax.com common stock at the
time of the acquisition or the securities offering, less $0.10.
The 1,750,000 amount will be reduced to 750,000 if the termination of the merger
agreement occurs because j2 Global's stockholders do not approve the merger or
if j2 Global materially breaches the merger agreement. If eFax.com is acquired
by another entity, it must pay the amount to j2 Global promptly following the
consummation of the acquisition. If eFax.com does a securities offering, it is
required to make the payment within 270 days of the offering. In addition,
eFax.com is required to pay j2 Global for any of j2 Global's out-of-pocket
expense related to the merger agreement or the term loan agreement between the
two parties if the merger agreement is terminated because of a failure of
eFax.com's stockholders to approve the merger agreement or as a result of any
action by eFax.com's board or directors or eFax.com's material breach of the
merger agreement.
Nasdaq Listing of j2 Global Common Stock
j2 Global has agreed to use its best efforts to cause the shares of j2
Global common stock to be issued in the merger to be approved for quotation on
The Nasdaq National Market.
Indemnification of eFax.com's Officers and Directors
Under the terms of the merger agreement, j2 Global has agreed to indemnify
for six years the existing and past directors and officers of eFax.com to the
fullest extent permitted by law. j2 Global is required to maintain directors'
and officers' liability insurance of at least $20 million for a period of six
years after the merger so long as the annual insurance premiums do not exceed
150% of the last annual premium paid by eFax.com.
Agreements with eFax.com Preferred Stockholders
On May 13, 1999, eFax.com sold 1,500 shares of its Series A Convertible
Preferred Stock to two investors for $15 million. The Certificate of
Designations, Preferences and Rights of the Series A Preferred Stock provided
that if any of a number of organic changes occurred involving eFax.com,
including eFax.com's being involved in a merger in which its common stockholders
receive stock in another company, the holders of the Series A Preferred Stock
would be entitled to require eFax.com to redeem all or a portion of their
preferred stock at a price equal to:
. 125% of the stated value of the preferred stock, $12,500 per share or
$18.75 million for all 1,500 shares; plus
. Accrued and unpaid dividends.
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During their merger negotiations, j2 Global informed eFax.com that it would
be unwilling to merge with eFax.com if, as part of the merger, it was required
to make any substantial cash payment to the holders of the Series A Preferred
Stock.
On April 5, 2000, eFax.com entered into an exchange agreement with its
preferred stockholders. The exchange agreement provided that:
. The preferred stockholders would agree to exchange their shares of
Series A Preferred Stock for shares of a newly created Series B Convertible
Preferred Stock with each share of Series A Preferred Stock being exchanged for
one share of Series B Preferred Stock;
. The Series B Preferred Stock would have a stated value equal to
$13,223, $12,500, plus an amount equal to the accrued but unpaid dividends on
the Series A Preferred Stock;
. The Series B Preferred Stock would be convertible, at the time of the
merger, into a number of shares of eFax.com common stock based on a 20 trading
day average. The holders of the Series B Preferred Stock would have had a right
to receive approximately 5,945 shares of eFax.com common stock for each share of
Series B Preferred Stock converted into eFax.com common stock, assuming a merger
on October 31, 2000;
. No cash payment would be required to be made to the preferred
stockholders at the time of the merger if the merger were completed on
substantially the same terms as presented to the preferred stockholders prior to
the execution of the exchange agreement; and
. If the merger did not occur, the preferred stockholders would have the
option of converting the Series B Preferred Stock into Series C Convertible
Preferred Stock with terms essentially the same as the terms of the Series A
Preferred Stock.
Prior to executing the merger agreement, eFax.com and j2 Global determined
that the terms of the merger would be substantially different from those
previously presented to the holders of the Series B Preferred Stock. As a
result, at the time of the execution of the merger agreement, eFax.com entered
into a new exchange agreement with the preferred stockholders. The new exchange
agreement provided that:
. The preferred stockholders would exchange their Series B Preferred
Stock for a new Series D Convertible Preferred Stock with each share of Series B
Preferred Stock being exchanged for one share of Series D Preferred Stock;
. The Series D Preferred Stock would have a stated value equal to
$13,461, the $13,223 stated value of the Series B Preferred Stock, plus an
amount which had accrued on the Series B Preferred Stock;
. In the merger, each share of Series D Preferred Stock will receive
4,960.15 shares of j2 Global common stock, which amount will increase between
the date of this proxy statement/prospectus and the time of the merger at an
annualized rate of 3.5%. On the date of this proxy statement/prospectus, there
were outstanding 1,421 shares of Series D Preferred Stock;
. The preferred stockholders may convert their shares of Series D
Preferred Stock into shares of eFax.com common stock at any time prior to the
merger. The conversion rate as of the date of this proxy statement/prospectus
was one share of Series D Preferred Stock for 17,414.58 shares of
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eFax.com common stock, which number of eFax.com common stock increases at an
annualized rate of approximately 6.5%;
. No cash payment will be required to be made to the preferred
stockholders at the time of the merger if the merger is completed on
substantially the same terms as set forth in the merger agreement;
The holders of the eFax.com Series D Preferred Stock have a right to have
their shares of preferred stock redeemed for cash if the total merger
consideration to be received by the eFax.com common stockholders and the
eFax.com preferred stockholders exceeds 12,000,000 shares of j2 Global common
stock. The cash redemption amount of the Series D Preferred Stock on the date of
this proxy statement/prospectus is $19.4 million. In determining the 12 million
figure, each share of j2 Global common stock which can be acquired upon the
exercise of any warrant received by a preferred stockholder as merger
consideration will be included. Based on an exchange ratio of 0.281 and
assuming:
. The merger occurs on October 31, 2000;
. No shares of Series D Preferred Stock are converted into common stock
prior to the merger;
. The eFax.com preferred stockholders own no shares of eFax.com or j2
Global common stock immediately prior to the merger; and
. No additional shares of j2 Global common stock are issued prior to the
closing of the merger;
then the total merger consideration will consist of 11.0 million shares of j2
Global common, including shares which can be acquired upon the exercise of the
warrants which are being granted to the preferred stockholders as merger
consideration. However, no assurances can be given that the total merger
consideration will not exceed 12.0 million shares of j2 Global common stock
under the exchange ratio formula.
If the merger does not occur, the preferred stockholders will have the
option of converting the Series D Preferred Stock into Series E Convertible
Preferred Stock with terms essentially the same as the terms of the Series A
Preferred Stock.
Each preferred stockholder agreed that it and its affiliates would
limit their sales of eFax.com common stock before the merger to 400,000 shares
per calendar month and limit their monthly sales of j2 Global common stock after
the merger to 10% of the sum of:
. The shares of j2 Global common stock acquired by the holder as merger
consideration; and
. The shares of j2 Global common stock represented by any warrant issued
by j2 Global to the holder in connection with the merger.
On July 17, 2000, the preferred stockholders exchanged 1,447 outstanding
shares of Series B Preferred Stock for 1,447 shares of Series D Preferred Stock.
Prior to the July 17, 2000 exchange, the
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preferred stockholders had converted 53 shares of Series B Preferred Stock into
shares of eFax.com common stock.
At the time of the execution of the new exchange agreement, eFax.com, j2
Global and the preferred stockholders also entered into a side agreement. The
side agreement provides that:
. If a preferred stockholder is entitled to receive merger consideration
which would cause it and its affiliates to hold more than 10% of the j2 Global
common stock which is outstanding immediately after the merger, the preferred
stockholder will receive as merger consideration:
. The number of shares of j2 Global common stock which would cause
the preferred stockholder and its affiliates to own 10% of the j2 Global
common stock which is outstanding immediately following the merger; and
. A warrant (the "Consideration Warrant") to acquire for $.01 per
share the number of shares of j2 Global common stock to which the preferred
stockholder would have been entitled as merger consideration, but could not
be granted because of the 10% limitation;
. The preferred stockholders agreed to waive any appraisal rights which
they might have in the merger;
. j2 Global will issue new warrants (the "Exchange Warrants") to the
preferred stockholders to acquire an amount of j2 Global common equal to
300,000, times the exchange ratio used to determine the fraction of a share of
j2 Global common stock into which a share of eFax.com common stock will be
converted in the merger. The exercise price of the new warrants will equal
$13.95, divided by the same exchange ratio. The Exchange Warrants would replace
warrants previously issued by eFax.com to the preferred stockholders. If, for
example only, the exchange ratio is 0.281, the Exchange Warrants would be
exercisable for 84,300 shares of j2 Global common stock with an exercise price
of $49.64 per share of j2 Global common stock; and
. j2 Global agreed to file a resale registration statement to permit the
resale of the shares of j2 Global common stock which may be acquired upon the
exercise of the Exchange Warrants and the Consideration Warrants.
Agreements with Integrated Global Concepts
On June 30, 2000, eFax.com and j2 Global entered into an Agreement of
Understanding with Integrated Global Concepts, Inc. Integrated Global Concepts
has been providing eFax.com with development and co-location services necessary
for eFax.com's operations. The Agreement of Understanding provides that at the
time of the closing of the merger:
. Integrated Global Concepts will provide eFax.com with a license to
certain software developed by Integrated Global Concepts which eFax.com uses in
its operations. The license will be granted under a software license agreement
to be signed immediately prior to the merger and will be perpetual, assignable,
non-exclusive, worldwide and royalty free;
. Integrated Global Concepts will relinquish all claims which it may
have against eFax.com in connection with development services it has previously
provided to eFax.com; and
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. j2 Global will issue 2,000,000 shares of j2 Global common stock to
Integrated Global Concepts. In addition, the Agreement of Understanding provides
that j2 Global will file a resale registration statement to permit Integrated
Global Concepts to resell the shares of j2 Global common stock which it is
acquiring.
Term Loan Agreement
On May 5, 2000, eFax.com and j2 Global entered into a term loan agreement
under which j2 Global agreed to lend up to $5 million to eFax.com. The loan is
secured by a substantial portion of eFax.com's assets and has an interest rate
of 13%.
At the date of this proxy statement/prospectus, j2 Global has funded
eFax.com a total of $3.25 million under the loan agreement, consisting of loan
drawdowns of $750,000 on each of May 5, 2000, June 9, 2000 and July 3, 2000 and
loan drawdowns of $250,000 and $750,000 on July 28, 2000 and on August 1, 2000,
respectively. The loan agreement was amended on July 13, 2000 to provide that
repayment be made on the later of:
. October 31, 2000; or
. 60 days after the termination of the merger agreement if the
termination is as a result of a failure of j2 Global's stockholders to approve
the merger or as a result of a material breach of the merger agreement by j2
Global.
If eFax.com's stockholders fail to approve the merger, eFax.com's board
withdraws its support for the merger, eFax.com materially breaches the merger
agreement or eFax.com accepts an offer superior to j2 Global's offer, then the
repayment date will accelerate to the later of the date that the event occurs or
August 31, 2000.
As consideration for entering into the term loan agreement, eFax.com on
April 5, 2000, granted to j2 Global a warrant with a term of two years. The
warrant is exercisable for 250,000 shares of eFax.com common stock at $4.4375
per share which price resets to $1.00 per share if the proposed merger of
eFax.com and j2 Global does not occur.
Other Agreements and Arrangements Involving j2 Global and eFax.com
On July 21, 2000, j2 Global entered into an agreement with Intuit Inc.
pursuant to which j2 Global will enable certain Intuit small business products
with fax sending and receipt capabilities. These fax capabilities will be made
available to Intuit's customers and j2 Global and Intuit will share revenues
from this arrangement. The launch date for these Intuit products will be
determined by Intuit at a later date.
In a related matter, j2 Global and eFax.com entered into a separate
agreement whereby j2 Global and eFax.com will share responsibilities for
developing and servicing the customized faxing products for Intuit's customers.
j2 Global will compensate eFax.com for its development efforts on a monthly
basis, as well as share a portion of the revenues from the j2 Global-Intuit
agreement with eFax.com. j2 Global anticipates that the merger will close prior
to the launch date of the Intuit products containing fax sending and receipt
capabilities described above.
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INFORMATION ABOUT j2 Global
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion should be read in conjunction with "Summary--
Selected Consolidated Financial Data of j2 Global" beginning on page __ and the
financial statements and related notes included elsewhere in this proxy
statement/prospectus.
Overview
j2 Global was founded in 1995 to provide Internet-based messaging and
communications services. j2 Global was initially conceived as a solution to
facilitate the receipt of faxes and voice messages via the Internet. As of
December 31, 1999, j2 Global's unified messaging service had over 56,000 paid
subscriptions.
j2 Global currently derives substantially all revenues from subscription
fees, activation fees and charges for usage-based services. Activation fees
account for approximately 10% of total revenue. j2 Global recognizes revenue for
activation fees when the customer's account is activated, at which time related
direct selling costs are incurred, which offset the activation fee. In the
future, j2 Global expects to derive a growing proportion of its revenues from
selling subscription and usage-based services to its free subscribers. j2
Global's customers are primarily pre-billed on a month-to-month basis. Revenues
are recognized as the service is performed.
Payments made to j2 Global's strategic alliance resellers are typically
made on a commission basis. In j2 Global's domestic alliances, j2 Global
generally pays to the reseller a portion of its activation fees, a percentage of
monthly service fees during the first year that the customer subscribes to the
service, and a lesser percentage of monthly service fees after the first year.
j2 Global also pays a percentage of customer usage fees. j2 Global records the
commission expenses as the related revenues are recognized.
For the years ended December 31, 1999, 1998, and 1997, j2 Global's
strategic alliances contributed 22%, 41%, 11%, respectively, of its net
subscriber additions. The reduction in subscriptions through strategic alliances
from 1998 to 1999 is due to the interruption of advertising with America Online.
In 1999, in the absence of advertising, America Online did not produce net new
subscribers for j2 Global, and in fact there was a net reduction of
approximately 1,400 subscribers. Excluding America Online, net subscriber
additions through strategic alliances would have been 27% and 21% for 1999 and
1998, respectively.
Under j2 Global's renegotiated agreement with America Online, America
Online is committed to deliver $920,000 in advertising owed to j2 Global as a
result of payments made under our previous agreement. j2 Global has resumed
advertising with America Online and j2 Global anticipates that America Online
will again contribute to j2 Global net subscriber additions.
Revenues from subscriptions provided by j2 Global's strategic alliances
represented approximately 28% and 29% of j2 Global's total revenues in 1999 and
1998, respectively. j2 Global believes that the generally increasing trend in
strategic alliance contributions to net subscriber additions, and to our
revenues, will continue in the future.
j2 Global expects to increase its sales and marketing expenses. In the
past, j2 Global has allocated limited resources to marketing its services,
relying on its web site to generate subscriptions and its strategic alliances to
market and sell its services to their customer bases. j2 Global intends to
increase its direct and indirect marketing efforts in order to grow its
subscriber base and to generate sales from its free
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and paying subscribers and businesses looking to outsource their messaging
requirements. These marketing efforts will require a considerable investment on
j2 Global's part.
j2 Global also intends to continue to invest in the development of new
services, complete the development of its services currently under development
and extend and upgrade its network. In particular, j2 Global intends to invest
in additional infrastructure to increase its capacity and enable it to provide
additional Internet-based messaging and communications services.
j2 Global has incurred significant losses since its inception. As of June
30, 2000, j2 Global had an accumulated deficit of approximately $51.5 million.
j2 Global expects to incur substantial operating losses for the foreseeable
future.
Although j2 Global cannot guarantee the success of its business plan, it
expects the increases in sales and marketing expenses and in its investments in
new services and services under development, together with its free services,
will improve its ability to add new subscriptions including paid subscriptions.
j2 Global also expects that the increased subscriptions will result in increased
revenues which will be partially offset, or may be more than offset for some
period, by the expenses incurred. There are numerous factors, however, that may
materially adversely affect j2 Global's business plans and the expectations
noted above.
An increasing number of companies are offering services that compete with
j2 Global's services, and some competitors have recently introduced free
services that are similar to j2 Global's services. The providers of these free
services attempt to recoup their expenses by selling advertising based on the
traffic generated from users of free services. j2 Global also offers some of its
services on a free basis. j2 Global expects to generate revenues from free
subscriptions not through advertising, but by selling to those free
subscriptions usage-based services or by converting some free subscriptions to
paid subscriptions for its unified messaging services. However, j2 Global cannot
guarantee that it will be able to sell any usage-based services or to convert
free subscriptions. In addition, there is a risk that some of j2 Global's paid
subscriptions will convert to free subscriptions or that they will choose to
switch to the free services provided by one of j2 Global's competitors. j2
Global believes that the introduction of free services, by its competitors, has
occurred too recently for it to accurately gauge whether and to what degree they
will negatively impact j2 Global's revenues, cost structure or ability to add
new subscriptions including paid subscriptions.
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Results of Operations
The following table sets forth, for the years ended December 31, 1999,
1998 and 1997 and for the six months ended June 30, 2000 and 1999, information
derived from j2 Global's statements of operations as a percentage of revenues.
This information should be read in conjunction with the consolidated financial
statements and related notes included elsewhere in this proxy
statement/prospectus.
<TABLE>
<CAPTION>
December 31, June 30,
--------------------------------- ------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue................................................. 100% 100% 100% 100% 100%
Cost of revenue......................................... 125 97 61 73 52
---- ---- ---- ---- ----
Gross profit (loss)................................ (25) 3 39 27 48
Operating expenses:
Sales and marketing................................ 156 142 83 45 79
Research and development........................... 116 35 24 29 23
General and administrative......................... 432 141 104 115 132
Amortization of goodwill and other intangibles..... -- -- -- -- 31
---- ---- ---- ---- ----
Total operating expenses.................. 704 318 211 189 265
---- ---- ---- ---- ----
Operating loss............................ (729) (315) (172) (162) (217)
Interest expense (income), net.......................... (31) 27 (3) 29 (26)
Loss in joint venture................................... -- -- (1) -- --
Increase in market value of put warrants................ -- (149) --
---- ---- ---- ---- ----
Loss before income taxes and extraordinary item......... (698) (491) (170) (191) (191)
Extraordinary item-early extinguishment of debt......... -- -- (58) -- --
---- ---- ---- ---- ----
Net loss........................................... (698)% (491)% (228)% (191)% (191)%
==== ==== ==== ==== ====
</TABLE>
Years Ended December 31, 1999, 1998 and 1997
Revenue. Revenue was $7.6 million, $3.5 million, and $685,000 for the
years ended 1999, 1998, and 1997, respectively. The increases in revenue from
year to year were due primarily to increases in the number of subscriptions from
both j2 Global's direct marketing and strategic alliances. j2 Global's number of
subscriptions were 56,010, 27,063, and 7,125 as of December 31, 1999, 1998, and
1997, respectively. Revenue derived from monthly fees from paid subscriptions
accounted for substantially all of the revenue in the years ended December 31,
1999, 1998 and 1997.
Cost of revenue. Cost of revenue is primarily comprised of data and
voice transmission costs, telephone numbers, customer service, online processing
fees and equipment depreciation. Cost of revenue was $4.6 million or 61% of
revenue, $3.4 million or 97% of revenue, and $858,000 or 125% of revenue for the
years ended December 31, 1999, 1998 and 1997, respectively. The increases in
cost of revenue reflect the cost of building and expanding j2 Global's server
and networking infrastructure and customer services to accommodate the growth of
its subscriber base. Cost of revenue as a percentage of revenue decreased from
year to year as a result of the increases in revenue over the same periods.
Sales and Marketing. j2 Global's sales and marketing costs consist
primarily of payments with respect to strategic alliances, advertising, sales
and marketing personnel, public relations, promotions, trade shows and business
development. Sales and marketing expenses were $6.4 million or 83% of revenue,
$5.0 million or 142% of revenue, and $1.1 million or 156% of revenue, for the
years ended December 31, 1999, 1998 and 1997, respectively. The year to year
increases in sales and marketing expenses primarily reflect an increase in
marketing payments as a result of entering into and expanding several key
strategic relationships with leading Internet and telecommunications companies,
and an increase in expenses with respect to sales and marketing personnel.
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In October 1997, j2 Global entered into an interactive marketing
relationship with America Online. As of December 31, 1999, j2 Global had
$920,000 in prepaid advertising costs and such amount is expected to be consumed
in fiscal 2000. During 1999 and 1998, j2 Global incurred $80,000 and $1,250,000,
respectively, in expense for advertising activity through America Online. See
[Note 6(a)] of the notes to j2 Global's consolidated financial statements.
At December 31, 1999, j2 Global was also the exclusive unified
messaging provider for CompuServe and Yahoo! Mail under an interactive marketing
agreement and an advertising and promotion agreement, respectively. These
agreements provide for j2 Global to make certain fixed and revenue share
payments based on advertising amounts placed on the respective sites and
customers acquired. See [Note 6(b)] of the notes to j2 Global's consolidated
financial statements.
Amounts expensed under agreements with all on line service providers
are included in sales and marketing expense. For the years ended December 31,
1999, 1998, and 1997, total amounts of these expenses were $2,220,320,
$2,959,313, and $7,888, respectively. Future annual fixed payments associated
with all arrangements with on line service providers for future services
aggregate $3,156,278 and $658,312 for the years 2000 and 2001, respectively.
Research and Development. j2 Global's research and development costs
consist primarily of personnel related costs. Research and development costs
were $1.8 million or 24% of revenue, $1.2 million or 35% of revenue, and
$793,000 or 116% of revenue for the years ended December 31, 1999, 1998 and
1997, respectively. The year to year increases in research and development costs
primarily reflects increases in personnel related expenses. Research and
development costs as a percentage of revenue decreased from year to year as a
result of increases in revenue over the same periods.
General and Administrative. j2 Global's general and administrative
costs consist primarily of personnel related expenses, professional services,
and occupancy costs. General and administrative costs were $8.0 million or 104%
of revenues, $4.9 million or 141% of revenues, and $3.0 million or 432% of
revenues for the years ended December 31, 1999, 1998 and 1997, respectively. The
increases in general and administrative costs from year to year were primarily
due to increases in personnel as well as increased professional fees. General
and administrative costs as a percentage of revenue decreased from year to year
as a result of increases in revenue over the same periods.
Interest Income (Expense), Net. The change from 1998 to 1999 was
primarily due to investment earnings from j2 Global's IPO proceeds. The change
from 1997 to 1998 was due to borrowings of $10.0 million in senior subordinated
debt in July 1998 which was repaid in July 1999. Interest income (expense), net
was $230,000, $(933,000), $215,000 for the years ended December 31, 1999, 1998
and 1997.
Increase in Value of Put Warrants. Warrants sold by j2 Global in July
1998 included put rights until January 1, 1999. See Note 4 to the consolidated
financial statements. These put rights gave the holders of the warrants the
right to require j2 Global to purchase the warrants at their fair market value
if j2 Global did not complete a public offering of our stock prior to July 1,
2003. In accordance with AICPA Emerging Issues Task Force (EITF) 96-13, the
warrants were recorded at their fair value at the date of issuance $(1,145,000).
In addition, EITF 96-13 requires that any change in the fair value of the
warrants be reflected as a charge to earnings in the period of change. In 1998,
expense associated with this increase in market value aggregated $5,256,000 .
This item will not recur in future periods because of the expiration by
agreement with the holders of the warrants of the put feature effective January
1, 1999.
Income Taxes. As of December 31, 1999, j2 Global had federal and state
net operating
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loss carryforwards of approximately $34.6 million available to offset income in
the future. Such net operating loss carryforwards will begin expiring in the
year 2004. Under the Tax Reform Act of 1986, the amounts of and benefits from
such net operating loss carryforwards may be impaired or limited following
changes in the ownership of our common stock.
Six Months Ended June 30, 2000 and June 30, 1999
Revenue. Revenue was $5.9 million and $3.1 million for the six months
ended June 30, 2000 and 1999, respectively. The increase in revenue was
primarily due to an increased number of subscriptions. j2 Global's paid
subscribers numbered 64,200 and 36,400 as of June 30, 2000 and 1999,
respectively.
Cost of Revenue. Cost of revenue is primarily comprised of data and
voice network costs, customer service, online processing fees and equipment
depreciation. Cost of revenue was $3.0 million or 52% of revenue and $2.2
million or 73% of revenue for the six months ended June 30, 2000 and 1999. The
increase in cost of revenue reflects the cost of building and expanding j2
Global's server and networking infrastructure and customer service to
accommodate growth of j2 Global's subscriber base. Cost of revenue as a
percentage of revenue decreased as a result of the increases in revenue over the
same period last year.
Sales and Marketing. j2 Global's sales and marketing costs consist
primarily of payments with respect to strategic alliances, personnel related
expenses, consulting, advertising, and public relations. Sales and marketing
expenses were $4.6 million or 79% of revenue and $1.4 million or 45% of revenue
for the six months ended June 30, 2000 and 1999, respectively. The increases in
sales and marketing expenses from period to period primarily reflect an increase
in advertising costs associated with payments to strategic alliances and an
increase in personnel related expenses. Sales and marketing as a percentage of
revenue increased over the same period last year, primarily as a result of
strategic alliance payments.
On July 1, 1999, j2 Global entered into an advertising and promotion
agreement with Yahoo! Inc. During the first two quarters of 2000, j2 Global
refined its marketing and customer acquisition strategies. As part of this
review, in July, 2000, Yahoo! and j2 Global concluded negotiations to replace
the existing advertising and promotion agreement with a new, more limited,
arrangement for non-exclusive placement on the Yahoo! web site, including in
Yahoo! Mail. This agreement runs through at least October 15, 2000, and contains
more favorable financial terms for j2 Global than the July 1, 1999 advertising
and promotion agreement.
Research and Development. j2 Global's research and development costs
consist primarily of personnel related expenses. Research and development costs
were $1.4 million or 23% of revenue and $897,000 or 29% of revenue for the six
months ended June 30, 2000 and 1999. The increase in research and development
costs from period to period primarily reflects increases in personnel related
expenses. Research and development as a percentage of revenue decreased as a
result of increases in revenue over the same period last year.
General and Administrative. j2 Global's general and administrative
costs consist primarily of personnel related expenses, professional fees, and
occupancy costs. General and administrative costs were $7.8 million or 132% of
revenue and $3.5 million or 115% of revenue for the six months ended June 30,
2000 and 1999. The cost increases as a percentage of revenue in general and
administrative from period to period were primarily due to increases in the
additional infrastructure to support j2 Global's overall growth and its
conversion to a public company in July 1999. Included in general and
administrative costs is $811,000 and $269,000 in depreciation and amortization
for the six months ended June 30, 2000 and 1999.
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Amortization of goodwill and other intangibles. For the six months
ended June 30, 2000, amortization of goodwill and other intangibles of $1.8
million or 31% of revenue occurred due to the acquisition of SureTalk.com, Inc.
in January 2000. There was no comparable amortization for the six months ended
June 30, 1999.
Interest Income (Expense), Net. Interest income (expense), net was
$1.5 million and ($883,000) for the six months ended June 30, 2000 and 1999,
respectively. For the six months ended June 30, 2000 interest income (expense),
net primarily resulted from interest income earned on j2 Global's cash and cash
equivalents and short and long term investments generated from j2 Global's July
1999 initial public offering. For the six months ended June 30, 1999, interest
income (expense), net was primarily related to interest expense on capital lease
obligations and long term debt.
Liquidity and Capital Resources
As of June 30, 2000, j2 Global had funds on hand for use its business
of approximately $37.7 million. Such funds consisted of $15.0 million in cash
and cash equivalents and $7.5 and $15.2 million in short term and long term
investments, respectively. Short and long term investments consisted of
government and corporate debt securities. Short term maturities range from three
months to one year and long term maturities range from beyond one year up to 18
months.
Net cash used in operating activities increased to $6.2 million for
the six months ended June 30, 2000 from $3.7 million for the same period in
1999. The increase in net cash used in operating activities was primarily due to
an increase in net losses, offset by an increase in depreciation relating to j2
Global's additional infrastructure and amortization of goodwill and other
intangibles from the acquisition of SureTalk.com.
Net cash provided by investing activities was $9.2 million for the six
months ended June 30, 2000. Net cash used in investing activities was $428,000
for the six months ended June 30, 1999. The increase in net cash provided by
investing activities from fiscal 1999 to 2000 was primarily due to the
redemption of short and long term investments reduced by purchases of leasehold
improvements and office equipment for j2 Global's new headquarters in Hollywood,
California, the continuing build-out of j2 Global's network, and advances under
notes receivable to eFax.com.
Net cash used in financing activities of $274,000 for the six months
ended June 30, 2000 was comparable to $123,000 for the same period in 1999 and
primarily consisted of net repayments of loans payable and capital lease
obligations.
j2 Global's capital requirements depend on numerous factors, including
market acceptance of its services, the amount of resources it devotes to
investments in its network and services development, the resources it devotes to
the sales and marketing of its services and its brand promotions and other
factors. j2 Global has experienced a substantial increase in its capital
expenditures and operating lease arrangements since its inception consistent
with the growth in its operations and staffing, and anticipates that this will
continue for the foreseeable future. Additionally, j2 Global expects to make
additional investments in technologies and its network, and plans to expand its
sales and marketing programs and conduct more aggressive brand promotions.
j2 Global currently anticipates that its cash and cash equivalents and
short and long term investments will be sufficient to meet its anticipated needs
for working capital and capital expenditures for at least the next 12 months.
Although operating activities may provide cash in certain periods, to the extent
j2 Global experiences growth in the future, j2 Global anticipates that its
operating and investing
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activities may use cash. Consequently, any such future growth may require j2
Global to obtain additional equity or debt financing, which may not be available
on attractive terms, or at all, or may be dilutive.
Quantitative and Qualitative Disclosures About Market Risk
At June 30, 2000 short and long term investments primarily consisted
of government and corporate debt securities. Short term maturities range from
three months to one year and long term maturities range from beyond one year up
to 18 months. Such securities bear interest at fixed rates ranging from 5.6% to
6.9% and are classified as held to maturity as j2 Global has the ability and
intent to do so. At June 30, 2000, cost approximates fair market value and j2
Global believes it has immaterial market rate risk.
j2 Global believes that its exposure on currency exchange fluctuation
risk is insignificant because its transactions with international vendors and
customers are generally denominated in U.S. dollars.
Business
Company Overview
j2 Global is an Internet-based messaging and communications services
provider to individuals and businesses throughout the world. j2 Global's
services enable the user's e-mail box to function as a single repository for all
e-mail, fax and voice-mail and permit convenient message retrieval through
e-mail or by phone. Customers can sign-up for all of j2 Global's services
through its web site and can promptly receive a j2 Global phone number.
j2 Global provides Internet-based unified messaging services with over
64,000 paid subscriptions as of June 30, 2000. Since j2 Global started offering
its services on a commercial basis in June 1996, j2 Global has expanded its
network to offer services in over 90 area codes in the United States and abroad,
including area codes in 22 of the 25 most populous major metropolitan areas in
the United States. j2 Global has over 15 area codes outside the United States,
including area codes in London, Paris, Frankfurt, Zurich, Milan, Sydney and
Tokyo. j2 Global intends to continue to increase the number of area codes and
target new international locations.
Industry Background
Growth of the Internet and Electronic Commerce
The Internet has experienced rapid growth and has developed into a
significant tool for global communications, commerce and media, enabling
millions of people to share information and transact business electronically.
Internet-based businesses have emerged to offer a variety of products and
services over the Internet. Advances in online security and payment mechanisms
have also prompted more businesses and consumers to engage in electronic
commerce.
E-Mail
E-mail is the most widely adopted Internet application, ranging from a
personal messaging tool to a strategic business tool. E-mail messages have
increased in volume and functionality, and this trend is expected to continue.
For example, e-mail is expected to become a major vehicle for electronic
commerce transactions. The e-mail box as a locating and delivery device has
become the platform for additional applications such as directory services,
scheduling and document sharing. Furthermore, the e-mail box
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can function as a central repository to receive, send, forward, organize and
prioritize voice-mail, fax and e-mail messages, thus creating what is called
unified messaging.
Traditional Faxing
The fax machine is a valuable tool for communication for businesses
and individuals. Although e-mail traffic is growing rapidly, faxing continues to
grow due to decreasing telephone rates and the increasing availability of
software that allows faxes, including broadcast faxes, to be sent from personal
computers.
Trends in Faxing
The transmission of faxes over the Internet has become an increasingly
popular tool and provides a low cost method to send and receive faxes. In
addition to Internet faxing, users are increasingly faxing documents directly
from their computers, thereby growing less dependent on traditional fax
machines. Recent advances in technology allow users to send and receive faxes
from their computers using e-mail to transmit data over the Internet.
Trends in Internet Messaging
With continuing developments in modern technology, various message
media are currently in the process of converging. Communication channels are
becoming interchangeable as consumers can send the same message through e-mail,
voice-mail and fax. With the unification of these functions, consumers
increasingly value messaging services that are "device-independent." Consumers
appreciate the ability to send and retrieve messages in any form and in the most
convenient manner, using e-mail, voice-mail or fax, and accessing messages with
the telephone or personal computer or through the Internet.
Need for Cost-Effective Solutions
Whether it is an individual avoiding the cost of maintaining a fax
machine, answering machine and dedicated fax line or a large corporation
attempting to cost-effectively manage expanding and increasingly sophisticated
communications systems, individuals and businesses alike are making use of third
parties to manage their messaging needs. In addition, businesses often find it
difficult to implement state-of-the-art technology in their own infrastructure,
and individuals with the expertise to maintain a sophisticated messaging system
can be scarce and costly to hire, train and retain. As a result, j2 Global
believes that organizations seeking to lower their costs and to reduce the
amount of time and labor they invest in technological infrastructure and support
systems, such as messaging systems, will look to Internet-based solutions
provided by third parties to maintain competitiveness.
j2 Global's Solution
j2 Global provides individual consumers, end-users and businesses with
convenient, cost-effective and reliable Internet-based messaging and
communications services.
Individual Consumers and End-Users
j2 Global's services are designed to provide the following key
benefits to individual consumers and end-users:
. Unified Messaging. j2 Global believes it was the first company to
provide a commercially available Internet-based messaging service that enables
the end-user's e-mail box to
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function as a single repository for all e-mail, fax and voice-mail and permits
convenient management of their messages through e-mail or by phone.
. Anytime, Anywhere Accessibility. j2 Global has designed its
services to allow easy access by customers seven days a week, 24 hours a day
from any location. j2 Global's customers can listen to their e-mail and voice-
mail and manage their e-mails, faxes and voice-mails from any touch-tone phone.
In addition to these capabilities, j2 Global's customers can listen to their
voice-mail and view their faxes anytime they read their e-mail.
. Access to International Network. j2 Global has built a network
allowing its customers to establish a local phone number in over 90 area codes
in the United States and abroad. Additionally, j2 Global's proprietary Internet-
based solution enables a customer to activate service from j2 Global's web site
or over the phone within minutes.
. Cost Effective Service. j2 Global believes that by using its
service, customers can achieve cost savings and efficiency when compared to
traditional telephone and fax communication.
. Customization. j2 Global's services allow customers to create
their own messaging solutions. They may elect to use j2 Global's free services
or j2 Global's paid subscription services, or they may add any of j2 Global's
usage-based features, such as telephone access to e-mail, outbound voice,
outbound faxing, broadcast voice and broadcast faxing.
. Customer Support. j2 Global offers its customers various levels
of support seven days a week, 24 hours a day.
j2 Global believes a large percentage of its subscribers are
professionals or are employed in upper management positions and that another
large percentage of its subscribers are self-employed or small business owners.
Businesses
In addition to the benefits listed above, j2 Global's service provides
the following key benefits to businesses:
. Cost Effective Service. With j2 Global's service, businesses have
a reduced need for personnel, traditional fax machines, phone lines or other
costly hardware. In addition, j2 Global offers a simple solution priced to
reflect j2 Global's economies of scale.
. Award-Winning Technology. j2 Global provides its customers with
access to advanced, award-winning Internet-based messaging technologies based on
open standards. In addition to being the first to market a unified messaging
service, j2 Global's technology has earned the 1998 CommerceNet award for
Electronic Commerce Excellence in the United States Business-to-Consumer
category.
. Scaleability and Reliability. j2 Global's network of services is
designed to be highly scaleable, meaning that it allows j2 Global to easily add
additional locations to j2 Global's network and additional users at each
location. j2 Global's system is also designed with back-up components, including
back-up power supplies in separate locations and multiple Internet connections,
in the event of a technological failure and is designed to provide reliable
service to j2 Global's customers.
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. Security. j2 Global's fax services provide a type of security not
available with traditional faxing since messages arrive directly into the
customer's e-mail box and do not remain in view on a traditional fax machine. In
addition, all of j2 Global's message transmission services are merely a conduit
for electronic messaging and do not store copies of transmissions in any format,
electronic or otherwise.
j2 Global's Services
j2 Global provides a comprehensive range of Internet-based services to
address the messaging and communication needs of individuals and businesses. All
of j2 Global's inbound services provide a unique telephone number assigned from
available area codes and digitally compress and route messages to the customer's
e-mail box.
j2 Global collects approximately 95% of its fees through billing
customers' credit cards provided at initiation.
If a credit card declines to pay a customer's balance, an e-mail
notice is sent to the customer. If the customer does not respond to that e-mail,
a disconnection warning is sent to the customer who is then allowed up to 15
days to resolve the outstanding bill before being disconnected.
Revenues are accrued upon billing of a customer's credit card.
Uncollected credit card amounts are written off after 30 days. j2 Global writes
off 100% of all amounts declined by credit cards on a monthly basis.
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j2 Global's subscription services are summarized in the following
table:
<TABLE>
<CAPTION>
Subscription Services
Services Description Attributes Pricing*
--------- ------------ ---------- --------
<S> <C> <C> <C>
Free Services
Free Fax Plus Fax/voice to e-mail Free telephone number Free
Unlimited number of incoming
faxes/voice-mails
Only incoming fax/voice capability
User cannot choose area code
Paid Services
Free Fax Plus Send Fax/voice to e-mail User cannot choose area code Setup fee of $5.00 plus $2.95
Unlimited incoming faxes per month plus additional
usage-based charges
Outbound faxing-User can Annotation capability
send faxes
Broadcast fax-User can
send the same fax to
numerous recipients
Personal Telecom Fax/voice to e-mail User can select area code for phone Setup fee of $15.00 plus
number $12.50 per phone number per
month plus additional usage
based charges
Unlimited incoming faxes
Outbound faxing-User can Annotation capability
send faxes
Broadcast fax-User can
send the same fax to
numerous recipients
Phone access-User can Access, manage and/or reply to
call a toll-free number e-mail, voice-mail and faxes
by and access e-mail and phone
voice-mail and fax
headers through a touch
tone telephone
</TABLE>
______________________
* These are United States dollar prices for phone numbers in most countries.
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In addition to j2 Global's subscription services, j2 Global provides a
number of value-added services which are available to free and paid customers of
its subscription services for an incremental usage-based fee. The primary
usage-based services that j2 Global offers or expects to offer in the future are
described in the following table:
<TABLE>
<CAPTION>
Usage Based Services
Services Description Attributes
-------- ----------- ----------
<S> <C> <C>
Current Usage-Based
Services
Outbound Fax User can fax document through his or her e-mail Per minute fax rates
outbox via the Internet by using the intended Paperless forwarding of received fax
recipient's destination fax number followed by
"@jfaxsend.com" as the e-mail destination address
Outbound Voice User can send a voice message through his or her Respond to e-mails with a voice
e-mail outbox via the Internet by using the message
destination phone number "@jfaxsend.com" as the
e-mail destination address
Broadcast Faxing User can send the same outbound fax to multiple Powerful broadcast faxing capabilities
recipients via the Outbound Fax service
Broadcast Voice User can send the same voice message to multiple Powerful broadcast voice messaging
recipients capabilities
Telephone Access to E-mail User can call a toll-free number Access, manage and/or reply to e-mail by phone
and access e-mail through a touch tone telephone
Planned Services
Conference Calling User will be able to set up conference calls and User will be able to set up
speak to more than one party at a time conference calls though web interface
with personalized calendar/contacts
information
Notification Will keep user updated regarding incoming messages User will be able to choose to check
messages immediately or do it later
User will be able to apply rules to filter which
messages are received and which media are used for
notification
Cardless Calling User will be able to make outgoing calls through j2 User will be able to make calls
Global number by entering a PIN number. without having to hang up and
re-enter calling card number
Follow Me Services Will locate user by routing incoming User will be able to assign telephone/cell
calls to any phone number or series of phone phone numbers and a pager number at which
numbers. Callers will have option to leave a user can be located. Service will try all
voice-mail or to search for the user numbers and track down user
</TABLE>
Each of the above services listed under "Current Usage-Based Services"
is currently offered to j2 Global's Unified Personal Telecom on per minute rates
which vary depending on the location of the destination fax/phone number.
Pricing is $0.25 per minute for telephone access to e-mail via a toll-free
telephone number.
There can be no assurance that j2 Global will be successful in
releasing any of the planned services. The first of the planned services,
conference calling, is expected to be offered sometime during the third quarter
of 2000. The other planned services are expected to be offered in 2001. The
introduction of the planned services has required upgrades to j2 Global's
international network, which are in progress. The expansion of j2 Global's
network includes enhancements to its operations center in Los Angeles.
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These upgrades will allow enhanced data transmission over j2 Global's network,
which will be necessary to support the launch of our future services.
Sales and Marketing
j2 Global intends to enhance its market position through development
of, and integration with, online partners and the introduction of new
communications solutions into its suite of products. In April 2000, j2 Global
launched a new life-cycle communication strategy focused on usage and delivering
targeted upsell messages to j2 Global's rapidly expanding base of free
subscribers.
Indirect Marketing
j2 Global recently implemented its new affiliate program, to further
enable companies and individuals to sign up as j2 Global resellers online.
In order to introduce j2 Global's services to end-users, j2 Global has
developed strategic relationships with various online and offline service
providers. These service providers have pre-existing relationships with their
customer bases which consist of individuals and entities that are heavy users of
e-mail and phone services. Those relationships provide j2 Global access to
likely consumers for its services.
On July 1, 1999, j2 Global entered into an advertising and promotion
agreement with Yahoo! Inc. During the first two quarters of 2000, j2 Global
refined its marketing and customer acquisition strategies. As part of this
review, in July 2000, j2 Global and Yahoo! concluded negotiations to replace the
existing advertising and promotion agreement with a new, more limited,
arrangement for non-exclusive placement on the Yahoo! web site, including in
Yahoo! Mail. This agreement runs through at least October 15, 2000, and contains
more favorable financial terms for j2 Global than the July 1, 1999 advertising
and promotion agreement.
Integrated Services
With some of j2 Global's strategic relationships, j2 Global co-brands
its service, allowing the parties with which j2 Global has contracted to
integrate their service with j2 Global's and sell a "powered by j2 Global"
service.
Telecommunications Companies
j2 Global has contracted with Telecom New Zealand and ESAT Telecom in
Ireland to offer services to their customers. These agreements represent a first
step in executing a broad recruitment program targeting traditional telephone
companies, competitive telephone companies, long distance providers and wireless
carriers.
Systems Integrators
j2 Global is still in the relatively early stages of its relationship
with systems integrators, by which is meant businesses that take j2 Global's
services and bundle them with services of other companies to be sold as a
convenient package of services to the customer. j2 Global intends to build a
network of systems integrators that will offer j2 Global's services as part of
an overall information technology solution for corporate and government
customers.
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International Marketing
j2 Global believes that it benefits from local representatives in its
international markets since these representatives have the cultural
understanding and relationships necessary to sell its services. j2 Global's
international department in Los Angeles focuses on recruiting and supporting its
international marketing effort.
Marketing Our Services to Existing Subscribers
j2 Global's unified messaging resources allow j2 Global to execute this
sales and marketing strategy efficiently. As a unified messaging company, j2
Global has access to its subscribers' e-mail and is able to customize its
marketing efforts to specific customers. As a result, j2 Global has a direct,
low cost channel in which to advertise its services by sending the customer a
promotional fax, e-mail or voice-mail message.
International Network and Operations
j2 Global offers its services in over 90 area codes in the United
States and abroad, including in 22 of the 25 most populous major metropolitan
areas in the United States and such international business centers as London,
Paris, Milan, Frankfurt, Zurich, Sydney and Tokyo. j2 Global obtains phone
numbers on an as-needed basis from various local carriers throughout the United
States and internationally with whom it has relationships. As of July 31, 2000,
j2 Global had over 1.2 million phone numbers in use by its subscribers and an
additional 350,000 phone numbers which it has already acquired from local
carriers and which are in its inventory. j2 Global's ability to continue to
acquire additional quantities of phone numbers in the future will depend on its
relationships with its local carriers and its ability to pay market prices for
such phone numbers. j2 Global has pursued two basic types of commercial
relationships in rolling out its network:
. International Strategic Alliances. To expand j2 Global's
international network rapidly, j2 Global is pursuing strategic alliances with
companies in a number of foreign markets. These alliances provide j2 Global with
local marketing, billing and customer support and, in some cases, co-location
and phone numbers. j2 Global's agreements with its international strategic
alliance resellers may provide that the reseller is granted a license as j2
Global exclusive reseller in the particular country in question. The license
generally has an initial term of one-year following commercial launch and is
renewable by the reseller for additional one-year terms, provided that certain
threshold requirements for j2 Global subscribers are met at the expiration of
each term. The reseller agreement provides for the reseller to pay for local
phone numbers and hardware, local marketing expenses, billing and local help
desk support. In exchange, the reseller receives a commission based on the j2
Global revenues associated with the reseller; and
. Co-location. j2 Global's servers are housed in spaces owned by
third parties, frequently local telephone companies, from which they are
connected to a network of phone lines dedicated to j2 Global or connected to the
Internet. j2 Global refers to this service provided by third parties as "co-
location." j2 Global generally arranges independently for the connection of
local phone numbers for its customers and associated trunks to the servers.
Most servers have a direct connection to the Internet. In addition, in
the event that a direct connection is not functioning or a server has no
connection, each server is also connected to a dedicated network of phone lines.
By virtue of that network, each server is connected to at least two of j2
Global's hubs, or central servers, through which messages can be routed to the
Internet. Either the local telephone company or an alternate provides j2 Global
the ability to access its servers through the telephone lines for
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the purposes of maintenance and repair. Given the simple nature of the services
provided by the co-locators, j2 Global's co-location agreements are much simpler
arrangements than the agreements with its strategic alliances and provide for a
fixed monthly fee.
j2 Global has entered into co-location agreements primarily with three
carriers. For locations in the United States, j2 Global generally co-locates
with WorldCom/MFS, which is now MCI WorldCom, or AT&T Corp. For international
locations, j2 Global's co-location agreements are for the most part with a U.S.
subsidiary of Telecom Italia. j2 Global has certain other co-location
agreements, in which j2 Global owns both the lines and equipment. j2 Global's
co-location agreements generally provide for fixed monthly payments and a fixed
term of at least one year. Some are cancellable by j2 Global on either 60 or 90
days' notice.
j2 Global intends to enter additional markets and to expand its
operations outside the United States. International sales and j2 Global's entry
into additional foreign markets are subject to a number of inherent risks. For
example, j2 Global faces a more complex process to acquire telephone numbers
outside the United States due to regulatory constraints or bureaucratic systems
that differ greatly from those in the United States. In many countries, under
local law, j2 Global may not acquire telephone numbers directly, but must use a
local company to procure telephone numbers. This increases the importance of j2
Global's international strategic alliances, but also makes it more difficult to
structure foreign strategic alliances given the preferences the local companies
enjoy. In addition, j2 Global must depend to a greater extent on its foreign
strategic alliances for day-to-day management, including relying on those
foreign strategic alliances to provide help-desk support and other services.
Internationally, j2 Global may encounter different technology standards
that require it to expend time and resources on adapting its proprietary and
other technology to those foreign standards, as well as to ensuring that the
technology, as so adapted, remains compatible with the rest of its network. This
adaptation increases the cost of expanding abroad. Finally, in international
markets, j2 Global is subject to changes in regulatory requirements and tariffs.
Because j2 Global is not familiar with those international environments, and
because the systems of government and regulation that exist abroad are
frequently different from what j2 Global experiences in the United States, it
may be more difficult for j2 Global to anticipate changes and how they will
affect the provision of its services. As a result, it may be more difficult for
j2 Global to accommodate those changes.
Services and Information Systems
Inbound Servers
Inbound servers accept incoming fax and voice-mail messages on
telephone lines from local telephone providers. The servers run on the Unix
operating system, known for reliability in telecom environments, using equipment
supplied by leading hardware manufacturers, and software designed and written by
our programmers. After a fax transmission or a voice-message is received by the
server, it is compressed into a standard form, and sent to the user's e-mail
address via the Internet. By using the Internet, j2 Global is able to connect
efficiently with third parties on a worldwide basis. Voice messages are
typically compressed by a factor of 5 to 1 using the internationally proven
Global Systems for Mobile Communications technology, which results in telephone
quality voice, with small file sizes. Faxes are compressed to the TIF/F format,
an Internet standard for multi-page fax documents, with an average page
requiring about 40 kilobytes of memory.
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Outbound Systems
The outbound system accepts e-mail messages via the Internet that are
addressed to fax machines anywhere in the world, or voice messages that are
addressed to telephones anywhere in the world. After a message is received by
the outbound system, it determines a least cost route for transmitting the
message to the final destination fax machine or telephone. The system comprises
servers in a distributed network with several scheduling, prioritization and
routing procedures designed and written by our programmers, to ensure that the
message is delivered to its destination in a timely and cost-effective manner.
Telephone Access Systems
j2 Global's telephone access system offers users the capability to call
from any touch-tone telephone and listen to their e-mails and voice-mails and
manage their e-mails, faxes and voice-mails. j2 Global's servers connect via the
Internet to the user's e-mail servers, and retrieve all of the user's messages,
permitting customers to listen to their e-mails via a text-to-speech conversion
technology and manage their e-mails, faxes and voice-mails by phone.
Teleconference Management Services
j2 Global's teleconference management service permits a j2 Global
subscriber to launch and manage conference calls between the subscriber - or
call-initiator - and up to seven additional participants, known as additional
call "legs." Calls are managed by the call-initiator via the j2 Global web site.
The call-initiator enters the initial United States or Canadian non-toll-free
number (typically the number of the call-initiator), j2 Global authenticates the
call-initiator (i.e., verifies account status and billing information) and
signals the j2 Global Class 5/4 switch. The switch in turn connects to j2
Global's transmission carrier via a T1 trunk and the carrier terminates the call
at the designated telephone number. Each additional leg is launched in this
manner and hosted by the Class 5/4 switch. During the conference call, the
call-initiator can perform other web-based management functions such as "mute,"
"listen-only" and "termination" of individual legs or the entire call.
Internet Provisioning Systems
j2 Global's Internet-based provisioning systems, by which customers can
initiate its services from its web site, permit j2 Global to provide phone
numbers and manage account information promptly and efficiently. These systems
work on a network of servers connected to a centralized database, and are built
to handle high volume traffic with back-up technology in the event of a failure
and the ability to add servers and users easily.
Reliability and Capacity Issues
While j2 Global intends to add new subscribers and expand its service
offerings, future growth in j2 Global's subscriber base for both free and paid
services, and growth in the subscriber bases of competing companies, will
increase the demand for available network infrastructure and Internet data
transmission capacity. Growth in j2 Global's business, and in that of its
existing or future competitors, could lead to shortages in the capacity required
to operate its business, or could cause capacity to become more expensive. In
either case, j2 Global may be unable to acquire the necessary capacity to
accommodate future growth or to acquire it on a timely basis, which could slow
down or disrupt j2 Global's ability to transmit customers' messages.
Additionally, these trends will increase the demand for large
quantities of telephone numbers and may lead to an inability on j2 Global's part
to acquire the necessary phone numbers, particularly in
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desirable metropolitan areas, to accommodate j2 Global's future growth. If
potential customers encounter difficulty obtaining phone numbers from j2 Global,
or obtaining those phone numbers on a timely basis, they may turn to
competitors' services. In addition, if the growth in j2 Global's subscriber base
or j2 Global's service offerings leads to a reduction in j2 Global's reliability
or perceived reliability, or results in problems for the Internet in general
that are beyond our control, customers or potential customers may turn to its
competitors' services, including traditional faxing services. Thus, while its
growth is crucial to its future success, that very same growth, when combined
with that of its competitors, could lead to slow delivery times or unreliable
service levels, network failures, security breaches, lack of capacity in its
network, insufficient telephone numbers or a slower Internet. Any of the above
could have a material adverse effect on j2 Global's business, prospects,
financial condition and results of operations.
Customer Support Services
j2 Global's customer service department provides various levels of
24-hour support, seven days a week. This department provides support primarily
in English, although this department also has French, Spanish and German
speakers. The department handles all account issues for j2 Global's subscribers,
ranging from initial sales and sign-up to technical support and account
administration. To provide this "one-stop shop," j2 Global has installed a
technology infrastructure for its customer service representatives to leverage
available data from j2 Global's main enterprise database and its customer
database. These databases give j2 Global's customer service representatives the
ability to track purchase, payment, caller and contact history, and report,
analyze and solve technical issues in an efficient and organized manner. j2
Global maintains a list of frequently asked questions for use by customer
service representatives in responding to common queries and issues. This list of
questions is updated to keep j2 Global customer service representatives abreast
of new issues.
Further, j2 Global offers Internet-based online self-help. This allows
customers to resolve simple issues on their own. j2 Global has found that most
customer questions come from new users, and with an online self-help guide it
believes it is able to address the majority of new users' questions efficiently.
Competition
j2 Global principally competes to provide Internet enabled e-mail users
with unified messaging and related communications services. Because unified
messaging is a new service that is designed to consolidate other methods of
messaging (e.g., voice-mail, fax and e-mail) into a single repository, j2 Global
competes with worldwide providers of voice-mail services and products and fax
services and products. Each of these markets on a stand-alone basis is highly
competitive and has numerous service and product providers.
Although j2 Global currently has direct competitors for some of its
services, j2 Global is not aware of any service provider currently offering an
international unified messaging suite of services directly competitive to its
own. j2 Global believes this lack of direct competition will change. For
example, GTE has announced that it will begin offering in 50 United States
markets a unified messaging service. To the extent j2 Global's services face
competition, that competition is based on price, quality, brand recognition,
geography and customer support.
Services similar to j2 Global's have been introduced free to users on
an advertising supported basis. Like many other services provided over the
Internet, such as news feeds and stock quotes, these services are provided free
of charge to attract traffic to the service provider's web site. The providers
of free services attempt to recoup their expenses by selling advertising based
on the traffic generated from users of free services. Examples of free services
similar to j2 Global's include free voice-mail products that require users to
listen to taped ads before they can access their messages, and
facsimile-to-e-mail
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services free to users which require that users view advertisements when they
retrieve their faxes. j2 Global expects that as these free services become more
popular, consumers will require j2 Global's subscription services to provide
clear incremental benefits over free services to justify paying for its
services. In addition, to the extent free services of another provider are used
by a potential j2 Global customer, it may be harder for the company to persuade
the potential customer to try its services. Providers of free services in
addition to those listed above may enter the market and thereby reduce the
perceived value of services to potential customers.
Further, although to date j2 Global has not experienced competition
from any of its strategic alliance resellers, there is a risk that, in the
future, these companies could develop their own competitive services and begin
to compete with j2 Global directly. This represents a particular risk for j2
Global as it relies to a great extent on its strategic alliances to market, and
provide a potential customer base for, its services. As a result, competition
from these entities would have the doubly adverse effect of both subjecting j2
Global's services to competitive pressures and limiting its avenues for
marketing.
Future competition could come from a variety of companies both in the
Internet industry and the telecommunications industry. These industries include
major companies which have much greater resources than j2 Global has, have been
in operation for many years and have large subscriber bases. Such companies 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 j2 Global can. There can be no assurance that
additional competitors will not enter markets that j2 Global plans to serve or
that j2 Global will be able to compete successfully.
j2 Global believes that its solution competes favorably with that of
other current and potential providers with respect to the following:
. Range and quality of service offerings;
. Access to phone numbers in major metropolitan areas in the United
States and abroad;
. Pricing and cost savings for customers;
. Customer support; and
. Brand recognition.
However, j2 Global's solution competes unfavorably at least on price
with those companies which provide for free, i.e. on an advertising supported
basis, one or more of the services that j2 Global provides. In addition, j2
Global is at a disadvantage against established competitors which have greater
efficiencies of scale or easier access to capital due to their financial
strength or size or their better established reputations. Finally, one or more
of the companies offering component portions of j2 Global's service may enhance
their service offerings, and those service offerings might be superior to j2
Global's. If this were to occur, and the company offering those services were
well-established, it would negatively impact j2 Global's competitive position.
j2 Global believes it can compete effectively in unified messaging
because it is a relatively new service and, as the first company offering
unified messaging in its complete form, j2 Global has a head start on current
and potential competitors with respect to these factors. However, j2 Global
faces strong
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<PAGE>
competition in each of the component portions of its service (e.g., voice-mail,
fax and e-mail) from larger, financially stronger and better established
competitors.
Patents and Proprietary Rights
j2 Global relies on a combination of trademark, trade secret and
copyright law and contractual agreements to protect its proprietary technology
and intellectual property rights.
j2 Global has developed substantially all of its software internally.
j2 Global has entered into agreements with its software programmers that provide
for its ownership of all software and intellectual property.
j2 Global has licensed from third parties some components of its
end-user software for unlimited use for one-time, up-front payments pursuant to
written license agreements. Some of j2 Global's license agreements provide for a
modest additional payment in the event of a subsequent major upgrade.
j2 Global has multiple U.S. Patent and Trademark Office applications
pending for proprietary aspects of the major components of its technology, and
one issued patent. Unless and until patents are issued, no patent rights can be
enforced. j2 Global has obtained U.S. copyright registrations for certain
proprietary software.
j2 Global owns registrations in the United States for the service marks
JFAX, JFAX.COM, j2 and its logo, as well as a European Community registration
and a European Community application for registration of JFAX and j2. j2 Global
also owns registrations and applications for registration in the United States
of other service marks and slogans that it uses.
j2 Global holds the Internet domain name "jfax.com" and its new domain
name "j2.com." Under current domain name registration practices, no one else can
obtain an identical domain name, but can obtain a similar name, or the identical
name with a different suffix, such as ".net" or ".org" or with a country
designation. The relationship between regulations governing domain names and the
laws protecting trademarks and similar proprietary rights is evolving. Domain
names are regulated by Internet regulatory bodies, while trademarks are
enforceable under local national law. In addition, the regulation of domain
names in the United States and in foreign countries is subject to change. There
are plans to establish additional top-level domains, appoint additional domain
name registrars or modify the requirements for holding domain names in all of
the countries in which j2 Global conducts business, and j2 Global may be unable
to prevent third parties from acquiring domain names that infringe or otherwise
decrease the value of its domain names or trademarks.
Like other technology-based businesses, j2 Global faces the risk that
it will be unable to protect its intellectual property and other proprietary
rights, and the risk that it will be found to have infringed the proprietary
rights of others.
Government Regulation
There is currently only a small body of laws and regulations directly
applicable to access to, or commerce on, the Internet. However, due to the
increasing popularity and use of the Internet, it is possible that a number of
laws and regulations may be adopted at the international, federal, state and
local levels with respect to the Internet, covering issues such as user privacy,
freedom of expression, pricing, characteristics and quality of products and
services, taxation, advertising, intellectual property rights, information
security and the convergence of traditional telecommunications services with
Internet communications. Moreover, a number of laws and regulations have been
proposed and are currently being
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<PAGE>
considered by federal, state and foreign legislatures with respect to these
issues. The nature of any new laws and regulations and the manner in which
existing and new laws and regulations may be interpreted and enforced cannot be
fully determined. For example, recent laws affecting the Internet include:
. The Digital Millennium Copyright Act, which provides copyright
protection for software, music and other works on the Internet. Under this law,
Internet service providers and web site operators must register with the U.S.
Copyright Office to avoid liability for infringement by their subscribers;
. Child Online Protection Act, which makes illegal the communication
of material that is harmful to minors on the Internet for commercial purposes in
such a manner as to be available to minors. This law also contains a section
that requires web sites to obtain parental consent before collecting information
from children 12 and younger;
. Child Protection and Sexual Predator Punishment Act, which imposes
criminal penalties for using the Internet to solicit minors for sexual purposes
and criminalizes sending obscene material to persons under the age of 16; and
. The Internet Tax Freedom Act, which provides a three-year
moratorium on taxes deemed discriminatory in order to give state and federal
lawmakers time to develop a more comprehensive approach to Internet taxation.
In addition, there is substantial uncertainty as to the applicability
to the Internet of existing laws governing issues such as property ownership,
copyrights and other intellectual property, taxation, libel, obscenity and
personal privacy. The vast majority of these laws were adopted prior to the
advent of the Internet and, as a result, did not contemplate the unique issues
of the Internet. Future developments in the law might decrease the growth of the
Internet, impose taxes or other costly technical requirements, create
uncertainty in the market or in some other manner have an adverse effect on the
Internet. These developments could, in turn, have a material adverse effect on
j2 Global's business, prospects, financial condition and results of operations.
j2 Global provides its services through data transmissions over public
telephone lines and other facilities provided by telecommunications companies.
These transmissions are subject to regulation by the Federal Communications
Commission, state public utility commissions and foreign governmental
authorities. However, as an Internet messaging services provider, j2 Global is
not subject to direct regulation by the FCC or any other governmental agency,
other than regulations applicable to businesses generally. Nevertheless, as
Internet services and telecommunications services converge and the services j2
Global offers expand, there may be increased regulation of its business
including regulation by agencies having jurisdiction over telecommunications
services. Additionally, existing telecommunications regulations affect j2
Global's business through regulation of the prices j2 Global pays for
transmission services, and through regulation of competition in the
telecommunications industry.
The FCC has ruled that calls to Internet service providers are
jurisdictionally interstate and that Internet service providers should not pay
access charges applicable to telecommunications carriers. In that same ruling,
the FCC determined that in the event of continuing disputes between carriers
with respect to inter-carrier compensation, the states will be permitted by the
FCC to intervene and resolve the issue. An Appeals Court has recently remanded
the FCC's ruling concerning the jurisdictional issue for additional
justification. The outcome of this remand, as well as the results of the FCC's
continuing review of the issue of inter-carrier compensation for calls to
Internet service providers, could affect Internet service providers' costs and
consequently substantially increase the costs of communicating via the Internet.
This
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<PAGE>
increase in costs could slow the growth of Internet use and thereby decrease the
demand for j2 Global's services.
The United Kingdom and the European Union have adopted legislation
which has a direct impact on business conducted over the Internet and on the use
of the Internet. For example, the United Kingdom Defamation Act of 1996 protects
an Internet service provider, under certain circumstances, from liability for
defamatory materials stored on its servers. The European Directive on the
Protection of Consumers is expected to have a direct effect on the use of the
Internet for commercial transactions and will create an additional layer of
consumer protection legislation with respect to electronic commerce. In
addition, numerous other regulatory schemes are being contemplated by
governmental authorities in both the United Kingdom and the European Union. As
in the United States, there is uncertainty as to the enactment and impact of
foreign regulatory and legal developments. These developments may have a
material and adverse impact on j2 Global's business, prospects, financial
condition and results of operations.
Seasonality and Backlog
j2 Global's business is not seasonal to any significant extent. Due to
sales almost exclusively by credit card, j2 Global experiences no material
backlog.
Research and Development
The market for j2 Global's services is characterized by rapid change
and technological advances requiring ongoing expenditures for research and
development and the timely introduction of new services and enhancements of
existing services. j2 Global's future success will depend, in part, upon its
ability to enhance its current services, to respond effectively to technological
changes, to sell additional services to its existing customer base and to
introduce new services and technologies that address the increasingly
sophisticated needs of its customers. j2 Global is devoting significant
resources to the development of enhancements to its existing services and the
migration of existing services to new software platforms. There can be no
assurance that j2 Global will successfully complete the development of new
services or the migration of services to new platforms or that current or future
services will satisfy the needs of the market for unified messaging and
communications systems. Further, there can be no assurance that products or
technologies developed by others will not adversely affect j2 Global's
competitive position or render its services or technologies non-competitive or
obsolete.
Facilities
j2 Global currently leases approximately 28,000 square feet of office
space for its headquarters in Hollywood, California under a lease that expires
in January 2010. j2 Global leases the space from CIM/Hollywood, LLC, a limited
liability company indirectly controlled by j2 Global's Chairman. Additionally,
j2 Global subleases approximately 26% of the space back to CIM Group, LLC,
another limited liability company indirectly controlled by j2 Global's Chairman.
This sublease is cancelable by either party on six months' notice. j2 Global's
share of the monthly rent is approximately $36,000.
j2 Global leases an additional 1,200 square feet of office space in
Carlsbad, California under a lease which expires in August 2002, 9,000 square
feet of technology development space in San Francisco, California under a lease
which expires in June 2004, and 1,000 square feet of office space in New York
City under a lease which expires in November 2000.
All of j2 Global's network equipment is housed either at its Los
Angeles or New York leased space or at one of its 52 co-location facilities
around the world.
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<PAGE>
Employees
As of July 31, 2000, j2 Global employed or contracted a total of 105
employees, including 5 consultants on a full or part-time basis. j2 Global has
94 full-time and 11 hourly workers. 31 of j2 Global employees are technical
staff, reflecting its emphasis on the development of new technologies.
j2 Global's future success will depend, in part, on its ability to
continue to attract, retain and motivate highly qualified technical, marketing
and management personnel. j2 Global's employees are not represented by any
collective bargaining unit. j2 Global has never experienced a work stoppage. j2
Global believes its relationship with its employees is good.
Legal Proceedings
The description below of the litigation contains forward-looking
statements with respect to possible events, outcomes or results that are, and
are expected to continue to be, subject to risks, uncertainties and
contingencies, including but not limited to the respective risks, uncertainties
and contingencies identified in such descriptions. See "Cautionary Statement
Regarding Forward-Looking Statements" beginning on page __.
On October 28, 1999, AudioFAX IP LLC filed a lawsuit against j2 Global
in the United States District Court for the Northern District of Georgia
asserting the ownership of certain United States and Canadian patents and
claiming that j2 Global is infringing these patents as a result of j2 Global's
sale of enhanced facsimile services. The suit requests unspecified damages,
treble damages due to willful infringement, and preliminary and permanent
injunctive relief. j2 Global filed an answer to the complaint on December 2,
1999. j2 Global reviewed the AudioFAX patents with its business and technical
personnel and outside patent counsel and has concluded that it does not infringe
these patents. As a result, j2 Global is confident of its position in this
matter and is vigorously defending the suit. However, the outcome of complex
litigation is uncertain and cannot be predicted with certainty at this time. Any
unanticipated adverse result could have a material adverse effect on j2 Global's
financial condition and results of operations.
On May 11, 2000, Inso Chicago Corporation ("Inso") filed a lawsuit
against j2 Global in the United States District Court of for the District of
Massachusetts asserting breach of contract, breach of implied covenant of good
faith and fair dealing, and unfair and deceptive trade practices. The suit
requests unspecified damages, treble damages due to willful unfair or deceptive
acts, and injunctive relief. The lawsuit arises out of a dispute with Inso
regarding amounts which Inso alleges are payable by j2 Global under a software
license pursuant to which Inso provides certain software enabling j2 Global's
subscribers to send faxes from j2 Global's web site. The total license fee due
under the license agreement is $150,000 for a two-year license period commencing
on or about January 1, 2000. j2 Global maintains that the software has not
performed to warranted specifications and that the defects have not been
addressed by Inso, and has withheld payment accordingly. Although j2 Global
intends to vigorously defend the suit, the outcome of litigation is uncertain
and cannot be predicted with certainty. Any unanticipated adverse result could
have a material adverse effect on j2 Global's financial condition and results of
operations.
On or about June 27, 2000, Call Sciences, Inc. filed a demand for
arbitration with the American Arbitration Association asserting breach of
contract on the part of j2 Global. The demand requests unspecified damages. The
arbitration arises out of a dispute with Call Sciences regarding amounts which
Call Sciences alleges are payable by j2 Global under an Agreement for the Resale
of Personal Assistant Services pursuant to which Call Sciences contracted with
j2 Global for Call Sciences to provide certain call handling and call forwarding
services. j2 Global maintains that Call Sciences did not perform as required by
the agreement and that the services in question were never launched as a result
of Call Sciences' failure to so perform. j2 Global has withheld payment
accordingly. Although j2 Global intends to vigorously defend the suit, the
outcome of the arbitration is uncertain and cannot be predicted with certainty.
Any unanticipated adverse result could have a material adverse effect on j2
Global's financial condition and results of operations.
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<PAGE>
j2 GLOBAL HISTORICAL FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
JFAX.COM, Inc. and Subsidiary
Independent Auditors' Report......................................................... 133
Consolidated Balance Sheets.......................................................... 134
Consolidated Statements of Operations................................................ 135
Consolidated Statements of Stockholders' Equity (Deficiency) and
Comprehensive Loss.................................................................. 136
Consolidated Statements of Cash Flows................................................ 137
Notes to Consolidated Financial Statements........................................... 138
SureTalk.com, Inc
Independent Auditors' Report......................................................... 154
Balance Sheet........................................................................ 155
Statement of Operations.............................................................. 156
Statement of Stockholders' Equity (Deficiency)....................................... 157
Statement of Cash Flows.............................................................. 158
Notes to Financial Statements........................................................ 159
JFAX.COM, Inc
Unaudited Proforma Condensed Combining Balance Sheet................................. 165
Unaudited Proforma Condensed Combining Statement of Operations....................... 166
Unaudited Semi-Annual Condensed Consolidated Statements of Operations................ 167
Unaudited Semi-Annual Condensed Consolidated Balance Sheets.......................... 168
Unaudited Semi-Annual Condensed Consolidated Statements of Cash Flows................ 169
Notes to Semi-Annual Condensed Consolidated Financial Statements..................... 170
</TABLE>
132
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
JFAX.COM, Inc.:
We have audited the accompanying consolidated balance sheets of JFAX.COM
and subsidiary as of December 31, 1999 and 1998 and the related consolidated
statements of operations, stockholders' equity (deficiency) and comprehensive
loss, and cash flows for each of the years in the three-year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of JFAX.COM,
Inc. and subsidiary as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Los Angeles, California
January 28, 2000
133
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ...................................................... $ 12,256,487 7,278,873
Short term investments ......................................................... 23,510,623 --
Accounts receivable ............................................................ 275,046 112,729
Due from related parties ....................................................... 95,151 128,578
Interest receivable ............................................................ 600,569 48,603
Prepaid marketing costs ........................................................ 2,725,234 1,000,000
Other current assets ........................................................... 784,760 81,888
------------ ------------
Total current assets ...................................................... 40,247,870 8,650,671
Furniture, fixtures and equipment, net .............................................. 3,344,075 1,777,646
Long term investments ............................................................... 13,558,615 --
Investment in Joint venture ......................................................... 417,773 --
Other long-term assets .............................................................. 1,057,000 84,372
------------ ------------
$ 58,625,333 10,512,689
============ ============
Liabilities, Redeemable Securities and Stockholders' Equity (Deficiency)
Current liabilities:
Accounts payable and accrued expenses .......................................... $ 1,781,088 1,100,544
Deferred revenue ............................................................... 438,722 328,740
Current portion of capital lease obligations ................................... 176,089 89,931
Current portion of long-term debt .............................................. 1,239,650 317,402
Customer deposits .............................................................. 57,267 79,286
------------ ------------
Total current liabilities ................................................. 3,692,816 1,915,903
Capital lease obligations ........................................................... 185,762 141,783
Long-term debt ...................................................................... 1,537,357 6,137,004
Put warrants ........................................................................ -- 6,318,000
Redeemable common stock; issued and outstanding 2,207,698 shares at
December 31, 1999 and 1998, respectively (redemption value of $7,064,633
and $9,074,000 at December 31, 1999 and 1998) .................................... 7,064,633 5,245,975
Mandatorily redeemable Series A preferred stock. Authorized 1,000,000 shares;
issued and outstanding 5,000 shares at December 31, 1998 at par value of
$1,000 (liquidation preference $5,386,915) ....................................... -- 4,070,671
Common stock subject to put option (105,000 shares at December 31, 1999) ............ 997,500 --
Stockholders' equity (deficiency):
Common stock, $0.01 par value. Authorized 100,000,000 shares; total issued
and outstanding 30,542,620 and 22,099,996 shares at December 31, 1999
and 1998, respectively, excluding 2,207,698 issued as redeemable at
December 31, 1999 and 1998 and 105,000 shares subject to a put option
at December 31, 1999 ........................................................ 305,372 221,000
Additional paid-in capital ..................................................... 88,133,250 12,273,793
Notes receivable from stockholders ............................................. (2,279,619) (2,499,000)
Unearned compensation .......................................................... (1,415,443) (506,202)
Accumulated other comprehensive income ......................................... 649,046 --
Accumulated deficit ............................................................ (40,245,341) (22,806,238)
------------ ------------
Total stockholders' equity (deficiency) ................................... 45,147,265 (13,316,647)
Commitments and Contingencies (Note 11)..............................................
Subsequent Events (Note 14)..........................................................
$ 58,625,333 10,512,689
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
134
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenue ................................................................. $ 7,643,442 3,519,836 685,465
Cost of revenue ......................................................... 4,640,668 3,398,243 857,924
------------ ------------ -----------
Gross profit (loss) ........................................... 3,002,774 121,593 (172,459)
Operating expenses:
Sales and marketing ................................................ 6,354,522 4,990,188 1,068,523
Research and development ........................................... 1,828,873 1,225,542 792,985
General and administrative ......................................... 7,976,221 4,948,402 2,962,477
------------ ------------ -----------
Total operating expenses ...................................... 16,159,616 11,164,132 4,823,985
------------ ------------ -----------
Operating loss ............................................... (13,156,842) (11,042,539) (4,996,444)
Other expenses:
Interest expense ................................................... (1,348,667) (1,353,751) --
Interest income .................................................... 1,578,507 420,426 214,663
Equity loss in joint venture ....................................... (82,227) -- --
Increase in market value of put warrants ........................... -- (5,255,669) --
------------ ------------ -----------
Loss before income taxes and extraordinary item ............... (13,009,229) (17,231,533) (4,781,781)
------------ ------------ -----------
Income tax expense ...................................................... 1,500 1,500 1,640
------------ ------------ -----------
Loss before extraordinary item ................................ (13,010,729) (17,233,033) (4,783,421)
Extraordinary Item-Loss on extinguishment of debt ....................... (4,428,374) -- --
------------ ------------ -----------
Net Loss ...................................................... (17,439,103) (17,233,033) (4,783,421)
Premium on Preferred Stock redemption ................................... (877,721) -- --
Cumulative preferred dividends, accretion of discount attributable
to preferred stock, and amortization of preferred stock issuance
costs ................................................................ (694,150) (494,523) --
------------ ------------ -----------
Net loss attributable to common shareholders .................. $(19,010,974) $(17,727,556) (4,783,421)
============ ============ ===========
Net loss per common share:
Basic .............................................................. $ (0.68) (0.80) (0.30)
Diluted ............................................................ $ (0.68) (0.80) (0.30)
============ ============ ===========
Weighted average common shares used in determining loss per share:
Basic and diluted .................................................. 28,098,994 22,181,960 15,738,394
============ ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
135
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) AND COMPREHENSIVE
LOSS
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
-----------
Additional Other
---------- -----
paid-in Accumulated Comprehensive
------- ----------- -------------
Common stock capital deficit Income
------------ ------- ------- ------
Shares Amount
---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996......................... 7,565,000 $ 75,650 1,390,830 (789,784) --
Exercise of stock options.......................... 370,000 74 120,000 --
Repurchase of common stock......................... (200,000) (2,000) (118,000) -- --
Issuance of common stock........................... 10,450,000 108,127 8,016,873 -- --
Issuance of notes receivable from
stockholders..................................... -- -- -- -- --
Net loss........................................... -- -- -- (4,783,421) --
---------- ---------- ---------- ----------- ----------
Balance, December 31, 1997......................... 18,185,000 181,851 9,409,703 (5,573,205) --
========== ========== ========== =========== ==========
Accretion to common stock redemption............... -- -- (314,000) -- --
Dividends on mandatorily redeemable
Preferred Stock.................................. -- -- (386,915) -- --
Amortization of preferred stock
discount......................................... -- -- (107,608) -- --
Issuance of common stock........................... 3,791,250 37,912 3,061,088 -- --
Exercise of stock options.......................... 123,746 1,237 37,775 -- --
Unearned Compensation.............................. -- -- 573,750 -- --
Amortization of unearned compensation.............. -- -- -- -- --
Net loss........................................... -- -- -- (17,233,033) --
---------- ---------- ---------- ----------- ----------
Balance, December 31, 1998......................... 22,099,996 221,000 12,273,793 (22,806,238) --
========== ========== ========== =========== ==========
Accretion to common stock redemption............... -- -- (1,818,658) -- --
Dividends on mandatorily redeemable
Preferred Stock.................................. -- -- (553,064) -- --
Amortization of preferred stock
discount......................................... -- -- (134,994) -- --
Issuance of common stock net of issuance
costs............................................ 8,395,000 83,950 72,742,542 -- --
Exercise of stock options.......................... 47,624 422 41,126 -- --
Unearned Compensation.............................. -- -- 1,323,476 -- --
Amortization of unearned compensation.............. -- -- -- -- --
Compensation Expense in exchange for
Note reduction................................... -- -- -- -- --
Unrealized Gain on Investment...................... -- -- -- -- 649,046
Retirement of Preferred Stock...................... -- -- (2,058,971) -- --
Conversion of put warrants......................... -- -- 6,318,000 -- --
Net loss........................................... -- -- -- (17,439,103) --
---------- ---------- ---------- ----------- ----------
Balance, December 31, 1999......................... 30,542,620 $ 305,372 88,133,250 (40,245,341) 649,046
========== ========== ========== =========== ==========
<CAPTION>
Notes
-----
receivable Stockholders'
---------- -------------
from Unearned equity Comprehensive
---- -------- ------ -------------
stockholders Compensation (deficiency) Loss
------------ ------------ ------------ ----
<S> <C> <C> <C> <C>
Balance, December 31, 1996................................... -- -- 676,696 $ --
Exercise of stock options.................................... -- -- 120,074 --
Repurchase of common stock................................... -- -- (120,000) --
Issuance of common stock..................................... -- -- 8,125,000 --
Issuance of notes receivable from
stockholders............................................... (2,400,000) -- (2,400,000) --
Net loss..................................................... -- -- (4,783,421) (4,783,421)
---------- ---------- ------------ ------------
Balance, December 31, 1997................................... (2,400,000) -- 1,618,349 (4,783,421)
========== ========== ============ ============
Accretion to common stock redemption......................... -- -- (314,000) --
Dividends on mandatorily redeemable
Preferred Stock............................................ -- -- (386,915) --
Amortization of preferred stock
discount................................................... -- -- (107,608) --
Issuance of common stock..................................... (99,000) -- 3,000,000 --
Exercise of stock options.................................... -- -- 39,012 --
Unearned Compensation........................................ -- (573,750) -- --
Amortization of unearned compensation........................ -- 67,548 67,548 --
Net loss..................................................... -- -- (17,233,033) (17,233,033)
---------- ---------- ------------ ------------
Balance, December 31, 1998................................... (2,499,000) (506,202) (13,316,647) (17,233,033)
========== ========== ============ ============
Accretion to common stock redemption......................... -- -- (1,818,658) --
Dividends on mandatorily redeemable
Preferred Stock............................................ -- -- (553,064) --
Amortization of preferred stock
discount................................................... -- -- (134,994) --
Issuance of common stock net of issuance
costs...................................................... -- -- 72,826,492 --
Exercise of stock options.................................... -- -- 41,548 --
Unearned Compensation........................................ -- (1,323,476) -- --
Amortization of unearned compensation........................ -- 414,235 414,235 --
Compensation Expense in exchange for
Note reduction............................................. 219,381 -- 219,381 --
Unrealized Gain on Investment................................ -- -- 649,046 649,046
Retirement of Preferred Stock................................ -- -- (2,058,971) --
Conversion of put warrants................................... -- -- 6,318,000 --
Net loss..................................................... -- -- (17,439,103) (17,439,103)
---------- ---------- ------------ ------------
Balance, December 31, 1999................................... (2,279,619) (1,415,443) 45,147,265 $(16,790,057)
========== ========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
136
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................................................... $ (17,439,103) (17,233,033) (4,783,421)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................. 959,421 634,158 216,553
Stock option compensation expense............................................. -- -- 120,000
Extraordinary item-loss on early extinguishment of debt....................... 4,428,374 -- --
Redeemable common stock issued in lieu of interest............................ -- 251,999 --
Notes issued for payment of interest expense.................................. -- 499,665 --
Increase in market value of put warrants...................................... -- 5,255,669 --
Equity in loss of joint venture............................................... 82,227 -- --
Amortization of note payable discount......................................... 525,621 436,304 --
Amortization of unearned compensation......................................... 414,235 67,548 --
Compensation expense in exchange for note reduction........................... 219,381 -- --
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable........................................................... (162,317) (101,955) 23,892
Due from related parties...................................................... (33,427) (128,578) --
Interest receivable........................................................... (551,966) (43,964) (4,639)
Prepaid marketing costs....................................................... (1,725,234) -- (1,000,000)
Other......................................................................... (356,921) (152,160) (6,100)
(Decrease) increase in:
Accounts payable.............................................................. 680,544 155,380 838,078
Deferred revenue.............................................................. 109,982 279,556 49,184
Customer deposits............................................................. (22,019) 79,286 --
----------- ----------- ----------
Net cash used in operating activities......................................... (12,090,506) (10,000,125) (4,546,453)
Cash flows from investing activities:
Purchase of furniture, fixtures, and equipment................................ (2,525,810) (543,170) (1,579,409)
Purchases of investments, net................................................. (36,420,192) -- --
Investment in joint venture................................................... (500,000) -- --
----------- ----------- ----------
Net cash used in investing activities......................................... (39,446,042) (543,170) (1,579,409)
Cash flows from financing activities:
Proceeds from issuance of common stock........................................ 73,824,413 3,099,000 8,125,000
Issuance of notes receivable from stockholders................................ -- (99,000) (2,400,000)
Common stock repurchased...................................................... -- -- (120,000)
Redemption of preferred stock................................................. (6,817,700) -- --
Exercise of stock options..................................................... 41,126 39,012 --
Proceeds from issuance of mandatorily redeemable preferred stock and put
warrants, net................................................................ -- 4,638,479 --
Proceeds from issuance of notes payable....................................... 703,667 -- --
Repayments of notes payable................................................... (11,367,481) (208,910) --
Proceeds from issuance of redeemable common stock, net........................ -- 4,679,976 --
Repayments of capital lease obligations....................................... 130,137 (48,145) --
Net decrease in due to related parties........................................ -- -- (111,787)
----------- ----------- ----------
Net cash provided by financing activities..................................... 56,514,162 17,799,129 5,493,213
----------- ----------- ----------
Net increase (decrease) in cash and cash equivalents.......................... 4,977,614 7,255,834 (632,649)
Cash and cash equivalents at beginning of year................................ 7,278,873 23,039 655,688
----------- ----------- ----------
Cash and cash equivalents at end of year...................................... $12,256,487 7,278,873 23,039
=========== =========== ==========
Cash paid during the year for:
Income taxes.................................................................. $ 1,500 1,500 721
Interest...................................................................... 609,945 137,148 --
</TABLE>
Supplemental disclosure of noncash investing and financing activities (see notes
3, 4, 9 and 11)
See accompanying notes to consolidated financial statements.
137
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(1) Organization
JFAX.COM, Inc., (the Company or JFAX) was incorporated in the state of
Delaware on December 14, 1995. The Company is engaged in providing delivery of
fax and voice messages via telephone and the Internet network. JFAX has
strategic alliances with online network/service providers (OSPs), Internet
service providers (ISPs), software and hardware producers (OEMs), and other
significant online communities and international resellers.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of JFAX.COM,
Inc. and its wholly owned marketing subsidiary, JFAX.COM Europe Ltd. All
intercompany accounts and transactions have been eliminated in consolidation.
(b) Revenue Recognition
The Company recognizes revenue as services are provided to the customer.
Substantially all of the Company's revenue is collected by use of credit cards
and is paid in advance. The Company provides customer support as an
accommodation to purchasers of its services. These amounts are expensed as
incurred. Deferred revenue represents prepayments received from customers in
advance of services provided.
The Company recognizes revenue for activation fees when the customer's
account is activated at which time related direct selling costs are incurred,
which offset the activation fee.
(c) Research and Development
Research and development costs are expensed as incurred. Costs for software
development incurred subsequent to establishing technological feasibility, in
the form of a working model, are capitalized and amortized over their estimated
useful lives. To date, software development costs incurred after technological
feasibility has been established have not been material.
(d) Prepaid Advertising Costs
Prepaid advertising costs are recorded for amounts paid to online service
providers. The Company expenses advertising cost as advertising is placed on the
providers' respective sites.
(e) Cash Equivalents
The Company considers all highly liquid temporary cash investments with
original maturities of three months or less to be cash equivalents.
(f) Marketable Securities
Short term investments include highly liquid investments with original
maturities in excess of three months but less than one year. The Company's
noncurrent investments consist of investments with original maturities in excess
of one year to 18 months. All marketable securities except an equity investment
are classified as held to maturity and, accordingly, are carried at cost which
approximates market value.
138
<PAGE>
JFAX.COM, INC
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
An equity investment in a foreign publicly traded company is classified as
available for sale as of December 31, 1999 and had a gross unrealized gain of
$649,046 which is classified as accumulated other comprehensive income. As of
December 31, 1999 investments are summarized as follows:
<TABLE>
<S> <C>
Debt Securities:
Government Agencies...................................... $ 8,700,000
Commercial Paper......................................... 12,541,200
Corporate Bonds.......................................... 21,642,623
Equity Investment............................................. 976,046
Money Market Accounts......................................... 5,465,856
------------
Total cash and investments.................................... 49,325,725
Less: Amounts classified as Cash and Cash Equivalents......... (12,256,487)
Less: Short term investments.................................. (23,510,623)
------------
Long term investments......................................... $ 13,558,615
============
</TABLE>
(g) Investment in Joint Venture
As of December 31, 1999, the Company has a marketing related investment of
50% in JFAX Germany LLC, that is accounted for under the equity method of
accounting. Under the equity method, the Company's share of the investee's
earnings or loss is included in consolidated operating results and the Company's
basis in its equity investment is classified in the accompanying consolidated
balance sheet. To date, this investment has not materially impacted the
Company's results of operations or its financial position.
(h) Depreciation and Amortization
Furniture, fixtures and equipment are stated at cost. Depreciation is
provided on furniture and equipment using the straight-line method over a three
to five year period. Leasehold improvements are amortized on a straight-line
basis over the shorter of the lease term or their estimated useful lives.
(i) Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes" (SFAS No.
109). SFAS No. 109 requires that deferred income taxes be recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities and
operating loss carryforwards. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the
enactment date.
(j) Accounting for Stock Options
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. As such, compensation
expense for option grants to employees would be recorded on the date of the
grant only if the current fair value of the underlying stock exceeds the
exercise price. Effective January 1, 1997, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits entities to recognize
as expense over the vesting period the fair value of all stock-based awards on
the date of the grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro-forma net
loss disclosures for employee stock option grants made in 1995 and future years
as if the fair-value based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB No. 25 and
provide the pro-forma disclosure provisions of SFAS No. 123 for options granted
to employees.
139
<PAGE>
JFAX.COM, INC
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
The Company accounts for option grants to non-employees using the guidance
of SFAS No. 123 and Emerging Issues Task Force (EITF) No. 96-18, whereby the
fair value of such options is determined using the Black-Scholes option pricing
model at the earlier of the date at which the non-employee's performance is
complete or a performance commitment is reached.
(k) Use of Estimates
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the dates of the balance sheets and
revenues and expenses for the periods. Actual results could differ from those
estimates.
(l) Long-Lived Assets
Long-lived assets to be held and used by the Company are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future undiscounted net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured as the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets that are to be disposed of are reported at the
lower of the carrying amount or fair value less cost to sell.
(m) Fair Value of Financial Instruments
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments,"
requires entities to disclose the fair value of financial instruments, both
assets and liabilities recognized and not recognized on the balance sheet, for
which it is practicable to estimate fair value. SFAS No. 107 defines fair value
of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties. As of December 31,
1999 and 1998, the carrying value of cash and cash equivalents, short and long
term investments, accounts receivable, interest receivable, accounts payable,
interest payable and customer deposits approximate fair value due to the short-
term nature of such instruments. The carrying value of long-term debt and notes
payable approximate fair value as the related interest rates approximate rates
currently available to the Company.
(n) Loss Per Share of Common Stock
The Company has adopted SFAS No. 128, "Earnings Per Share." Basic net loss
per share is computed using the weighted average number of common shares
outstanding during the period. Dividends on Preferred Stock and amortization of
Preferred Stock issuance costs and mandatory redemption value increase the net
loss for determining basic and diluted net loss per share attributable to Common
Stock. Diluted net loss per share excludes the effect of common stock
equivalents, because their effect would be anti-dilutive.
140
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
(o) Reclassifications
Certain reclassifications have been made to the 1998 and 1997 consolidated
financial statements to conform to the 1999 presentation.
(p) Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
Nos. 130 and 131, "Reporting Comprehensive Income" (SFAS 130) and "Disclosure
about Segments of an Enterprise and Related Information" (SFAS 131),
respectively, (collectively, the Statements). The Statements are effective for
fiscal years beginning after December 15, 1997. SFAS 130 establishes standards
for reporting of comprehensive income and its components in annual financial
statements. SFAS 131 establishes standards for reporting financial and
descriptive information about an enterprise's operating segments in its annual
financial statements and selected segment information in interim financial
reports. Reclassification or restatement of comparative financial statements or
financial information for earlier periods is required upon adoption of SFAS 130
and SFAS 131, respectively. Application of the statement requirements did not
have a material impact on the Company's consolidated financial position, results
of operations or loss per share data as currently reported. With respect to SFAS
130, in 1999 the Company had one element of other comprehensive income, an
unrealized gain on an available for sale investment aggregating $649,046. Prior
to 1999, the Company had no elements of other comprehensive income or loss.
With respect to SFAS 131, the Company operates in one reportable segment:
unified messaging service, which provides delivery of fax and voice messages via
telephone and the Internet network. The Company has a U.K. subsidiary, which
operated as a marketing division for nine months in 1998 and, as such, did not
generate revenue for the years ended December 31, 1999 and 1998. Thus, the
Company considers that thus far it has only operated in one geographic segment.
As the Company operates in one segment, additional disclosure per SFAS 131 has
not been presented.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
About Pensions and Other Postretirement Benefit Plans." This statement is
effective for fiscal years beginning after December 15, 1997 and restatement of
disclosures for earlier periods is required. The Company adopted SFAS No. 132 in
1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for transactions
entered into after January 1, 2000. This statement requires that all derivative
instruments be recorded on the balance sheet at fair value. Changes in the fair
value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and the type of hedge transaction. The ineffective portion
of all hedges will generally be recognized in earnings. The Company does not
presently engage in hedging activities and accordingly the adoption of SFAS No.
133 will not have an impact on its results of operations and financial position.
141
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
(3) Furniture, Fixtures and Equipment
Furniture, fixtures and equipment, stated at cost, at December 31, 1999 and
1998 consists of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Computer and related equipment............................................... $4,381,673 2,232,397
Furniture and equipment...................................................... 47,779 39,729
Capital leases--computer and related equipment............................... 529,926 279,859
Leasehold improvements....................................................... 235,118 116,661
---------- ---------
5,194,496 2,668,646
Less accumulated depreciation and amortization............................... (1,850,421) (891,000)
---------- ---------
$3,344,075 1,777,646
========== =========
</TABLE>
Included in accumulated amortization at December 31, 1999 and 1998 is
$209,865 and $58,791, respectively, related to capital leases.
(4) Redeemable Securities and Stockholders' Equity (Deficiency)
(a) Private Placement Offering
In June 1998, the Company completed a private placement offering of Senior
Subordinated Notes (Notes), Common Stock (Common Shares), and Series A Usable
Redeemable Preferred Stock (Preferred Shares) with 3,125,000 detachable warrants
(Warrants) for proceeds aggregating $15,000,000 before offering expenses. The
private placement offering consisted of the following components:
Notes and Common Shares
$10,000,000 principal amount of Notes (see note 9) together with 2,101,971
Common Shares were issued for combined proceeds of $10,000,000.
The Notes bore interest at 10% per annum of the principal amount and were
due on June 30, 2004. As allowed under the terms of the note, the Company issued
additional interest notes together with a proportionate number of additional
Shares in lieu of interest payments for the period July through December 1998.
As of December 31, 1998, the Company had issued interest notes aggregating
$512,500, and as of December 31, 1999 and 1998, had issued 105,727 shares at a
value of $251,999.
The Notes and Shares were recorded at their fair values at the date of
issuance of $4,955,269 and $5,044,731, respectively. The discount attributable
to the Notes was being amortized to interest expense until redemption occurred,
over the term of the Notes using the interest method.
The Common Shares issued in this transaction including shares issued in
connection with interest notes are subject to certain put rights by the holders
at $3.20 per share upon a change of control on or before July 1, 2003. An
additional fair market value put feature was eliminated upon the company's IPO
in July 1999. Accordingly, the Common Shares issued in the transaction are shown
as redeemable securities in the accompanying 1999 and 1998 consolidated balance
sheets. The Company records to the redemption amount through a charge to
additional paid-in capital.
On July, 30, 1999 the company redeemed all of the notes. Such redemption
aggregated $10,591,000 which included the $10,000,000 principal amount, $511,000
in additional interest notes, and $85,000 in accrued interest. In connection
with this redemption, the company recognized an extraordinary item loss of
$4,428,000.
142
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
Preferred Shares and Warrants
The Company issued $5,000,000 in stated value of Preferred Shares
consisting of 5,000 shares together with 3,125,000 Warrants to acquire a like
number of shares of the Company's common stock, for an exercise price of $2.40
per share, for a combined purchase price of $5,000,000.
The Preferred Shares were entitled to cumulative dividends at 15% per annum
based on the stated value and accrued and unpaid dividends. Until and including
the dividend payment date falling on June 30, 2005, the Company had the option
of accruing dividends or paying in cash.
From date of issuance through August 1999 the company accreted to the
mandatory redemption amount through a charge to additional paid-in capital using
the straight line method.
In August 1999, the company redeemed all of the outstanding preferred
shares. Such amount aggregated $6,818,000 and included premiums of $878,000
(115% of stated value plus cumulative unpaid dividends) and accrued dividends of
$940,000.
The Warrants and/or warrant shares (if converted to common stock) were
subject to certain put rights by the holders, upon a change of control. The
warrants were exercisable by the holders at $2.40 per share at any time until
June 30, 2005 and may be "put" to the Company upon a change in control. Until
December 31, 1998 these warrants could also have been "put" to the Company at
fair market value in the event the Company had not completed a public offering
of its stock by July 2003.
The Warrants were recorded at their estimated fair value of $1,145,000 as
of the date of issuance, as determined using a Black-Scholes model, and as of
December 31, 1998 were reflected outside of stockholders' equity as a reduction
of the proceeds received from the issuance of Preferred Shares in the
accompanying consolidated balance sheets. The increase in fair value of these
put rights above the initially determined amount of $.36 per warrant was
expensed by the Company in its Statements of Operations for the year ended
December 31, 1998 and aggregated $5,255,669.
Effective January 1, 1999, holders of a majority of the put warrants
included in the accompanying December 31, 1998 consolidated balance sheet agreed
to eliminate the fair market value put feature of these warrants for nominal
consideration. As a result of the elimination of the put feature, the Company
reclassified the put warrant liability of $6,318,000 to additional paid in
capital in 1999.
In connection with the placement of Notes, Warrants and Preferred and
Common Shares, an additional 268,750 warrants were issued to the placement
agent. Such warrants carry the same exercise price and put features as those
issued in connection with the preferred shares.
Fees and expenses related to the offering aggregated $1,084,564 which were
allocated based on the relative fair value of the instruments as follows:
<TABLE>
<S> <C>
Notes................ $ 358,288
Common Shares........ 364,755
Preferred Shares..... 278,852
Warrants............. 82,669
----------
$1,084,564
==========
</TABLE>
143
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
Capitalized offering fees and expenses allocated to the Notes and Warrants
are being amortized to interest expense; offering costs attributable to Common
Shares and Preferred Shares were recorded as a reduction of the proceeds
received at the date of issuance.
In addition, warrants to purchase 29,166 common shares at $2.40 per share
were issued in connection with issuance of long-term notes to a financial
institution and warrants to purchase 250,000 common shares at $2.40 per share
were issued to America Online (see note 6).
(b) Notes Receivable from Stockholders
Notes receivable from stockholders were issued in connection with sales of
common stock and consist of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Loan receivable secured by 2,925,000 shares of the Company's common stock held
by the stockholder; interest accrues at 6.32% and is payable monthly, due in
March 2004. This amount will be repaid in services rendered by the
stockholder ratably over five years................................................. $2,030,619 2,250,000
Loan receivable secured by 220,000 shares of the Company's common stock held by
the stockholder; interest accrues at 6.32% with all principal and accrued interest
due in March 2001.................................................................... 100,000 100,000
Loan receivable secured by 150,000 shares of the Company's common stock held by
the stockholder; interest accrues at 8.00% and is payable monthly, due in
September 1999. This note is expected to be repaid in the second quarter of fiscal
2000 ................................................................................ 50,000 50,000
Loan receivable secured by 41,250 shares of the Company's common stock held by
the stockholder; interest accrues at 4.25% and is payable monthly, due in October
2001................................................................................. 99,000 99,000
---------- ---------
$2,279,619 2,499,000
========== =========
</TABLE>
(5) Amounts Due to Related Parties, Principally Stockholders
As of December 31, 1999 and 1998, there were $95,151 and $128,578,
respectively of amounts due from related parties. Such amounts represent salary
advances.
As of December 31, 1999, the Company is involved in a consulting
arrangement with a related party, pursuant to which the Company pays $275,000
per year, for services provided by the related party. For 1998, this consulting
arrangement paid $200,000 per year.
During 1999, 1998, and 1997, Orchard Capital, Orchard Telecom and CIM (all
related parties) incurred approximately $320,000, $336,000, and $312,000,
respectively, in expenses (consisting of rent, telecommunications expenses,
routine office expenses and shared personnel expenses) on the Company's behalf
which were repaid in full. During 1998, the Company also reimbursed the related
party for expenses incurred on the Company's behalf of approximately $19,000 per
month relating to a subleasing arrangement with CIM Group, LLC for office space
to house our headquarters in Los Angeles, California.
144
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
During 1999 and 1998, the Company incurred approximately $210,000 and
$117,000 in expenses (consisting of telecommunications, shared personnel and
routine office expenses) on behalf of the same related parties and MAI Systems
Corporation, also a related party. As of December 31, 1999 and 1998 amounts due
from these related parties were approximately $80,000 and $117,000,
respectively. During 1997, the Company did not incur any expenses on behalf of
these entities.
In January 1998, the Company received bridge financing from a related
party. The borrowings were repaid in full in May 1998 with proceeds received
from a capital stock rights offering. Interest expense related to the borrowings
aggregated $57,725.
In connection with the private placement offering in June 1998, certain
related parties were directly associated with the investor groups that provided
the funding to the Company.
(6) Agreements with OnLine Service Providers
(a) America Online
In October 1997, the Company entered into an interactive marketing
relationship with AOL. In connection with this agreement, the Company issued
warrants to purchase 250,000 common shares at $2.40 per share. The fair value of
the warrants as of the date of issuance was de minimis. Under the agreement, the
Company pays amounts to AOL based on advertising placed on the AOL site. During
1999 and 1998, the Company incurred $80,000 and $1,250,000, respectively, in
advertising expense for advertising activity placed on the site. Such amount is
included in sales and marketing expense in the accompanying consolidated
statement of operations.
As of December 31, 1999 and 1998, the Company had $920,000 and $1,000,000
respectively, in prepaid advertising costs included in the accompanying
consolidated balance sheets. The current agreement stipulates that AOL will
provide the Company with $920,000 in value of impressions on the AOL site which
were previously prepaid by the Company. During 1999, the company expected to
fully amortize the remaining $1,000,000 balance as of December 31, 1998,
however, due to delays by AOL in completing certain functionality adjustments
required for a proper integration in AOL's browser, only $80,000 of the
$1,000,000 was consumed in fiscal 1999. Under an amendment to the agreement with
AOL in January 2000, the required functionality changes are expected to be
completed during the second quarter of fiscal 2000. Based on the AOL timetable,
the company expects to amortize the remaining $920,000 during quarters two and
three of fiscal 2000.
The prepaid expense is allocated evenly between impressions on AOL's Email,
Netmail and various service banners throughout the site. As the impressions are
utilized, the Company expenses the associated value of these impressions in the
period incurred at a predetermined value per impression.
(b) CompuServe and Yahoo
The Company is the exclusive unified messaging provider for CompuServe
and Yahoo Mail under an interactive marketing agreement and an advertising and
promotion agreement, respectively. These agreements provide for the Company to
make certain fixed and revenue share payments based on advertising amounts
placed on the respective sites and customers acquired.
Specific terms of the CompuServe agreement are as follows:
From June 1997 through June 1998, the Company's agreement with CompuServe
provided for the payment of a per-sign-up commission or bounty to CompuServe
for each subscriber who was directed to the JFAX.COM website via the CompuServe
web site. This agreement was modified in June 1998. The modified agreement
required fixed, guaranteed quarterly payments and further provided for
commission payments, based on customer revenues, to the extent such revenues
exceeded the amount targeted.
145
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
Effective February 1, 1999, the agreement was again modified. The
current agreement calls for fixed, guaranteed quarterly payments through
January 31, 2000, as well as a per-sign-up commission or bounty for each
subscriber in excess of a targeted number of sign-ups. CompuServe agrees to
produce a certain number of subscribers each quarter and cumulatively over
the course of the contract. In the event that results are below target,
CompuServe will provide additional advertising to compensate for the
shortfall.
Specific terms of the Yahoo agreement are as follows:
The Company's original agreement with Yahoo was in effect from June 1,
1998 through December 1, 1998. The original agreement required fixed,
guaranteed monthly payments, together with commission payments, based on
customer revenues, to the extent such revenues exceeded targeted revenues.
The agreement was amended effective December 1, 1998 and provided for
fixed, guaranteed monthly payments through May 31, 1999 (later extended
through June 30, 1999), as well as a per-sign-up bounty for each subscriber
(in excess of a targeted number of sign-ups) who signed up in response to
e-mail solicitations, as well as a commission payment based on the customer
revenue received from all other subscribers.
On July 1, 1999, the Company entered into a new advertising and
promotion agreement with Yahoo. The new agreement calls for fixed,
guaranteed quarterly payments. The agreement does not require any
commission payments based on customer sign-ups. The agreement expires on
December 31, 2000.
The fixed guaranteed periodic payments are expensed as advertising
services are provided and are reflected in sales and marketing expense.
Additional sign-up bounty fees and commissions are expensed at the time of
customer subscription and recording of customer revenue.
Amounts expensed under agreements with all on line service providers
are included in sales and marketing expense. For the years ended December
31, 1999, 1998, and 1997, total amounts expensed were $2,220,320,
$2,959,313, and $7,888 respectively. Future annual fixed payments
associated with all arrangements with on line service providers for future
services aggregate $3,156,278 and $658,375 for the years 2000 and 2001,
respectively.
(c) Infobeat
In July 1999 the company entered into a two year marketing agreement with
Infobeat LLC ("Infobeat") a wholly owned subsidiary of Sony Music Entertainment
Inc. ("Sony"). The agreement provides for Infobeat to incorporate a certain
number of JFAX ad impressions, as defined, in the Infobeat e-mail service over
the term of the contract and to guarantee a certain number of customer sign-ups.
In consideration for the services provided by Infobeat, the company made a one
year advance payment of $997,500. Subject to termination rights by both parties,
the agreement stipulates additional fixed quarterly payments in year two.
Concurrent with the company's payment to Infobeat, the agreement provided for
Sony to purchase an equal amount of the company's common stock at the July 23,
1999 IPO date. Such shares are subject to certain lockout provisions during the
first twelve months of the agreement.
Additionally, both Infobeat and the Company have termination options at
various dates during the contract. One of the early buyout provisions allows
Infobeat to buy out its customer sign-up guarantees by returning to the Company,
JFAX.com shares owned by Sony valued at the IPO price. As a result of such a put
feature associated with the shares, the Company classified the $997,500 of
common stock held by Sony outside of stockholders equity in the accompanying
December 31, 1999 balance sheet.
146
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
(7) Income Taxes
The income tax provision for all years presented is comprised of minimum
state tax expense.
Deferred tax assets and liabilities result from differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. The significant components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
----------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................................... $13,846,020 $6,863,361
Accrued expenses.......................................................... $ 70,194 127,350
----------- ----------
$13,916,214 6,990,711
Less valuation allowance.................................................. (13,916,214) (6,990,711)
----------- ----------
Net deferred assets....................................................... $ -- --
=========== ==========
</TABLE>
The Company has recorded a valuation allowance in the amount set forth
above for certain deductible temporary differences and net operating loss
carryforwards where it is not more likely than not the Company will receive
future tax benefits. The net change in the valuation allowance for the years
ended 1999, 1998 and 1997 was $6,925,503, $4,830,814 and $1,867,070,
respectively.
As of December 31, 1999, the Company has Federal and state net operating
losses (NOL) carryforwards of approximately $34,615,000. These NOL carryforwards
will expire through year 2020 for Federal NOLs and 2004 for state NOLs.
The Tax Reform Act of 1986 imposed substantial restrictions on the
utilization of net operating losses in the event of an "ownership change" of a
corporation. Accordingly, the Company's ability to utilize net operating losses
may be limited as a result of such an "ownership change," as defined in the
Internal Revenue Code.
Income tax expense differs from the amount computed by applying the Federal
corporate income tax rate of 34% to loss before income taxes as follows (in
percentages):
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1999 1998 1997
------ ----- -----
<S> <C> <C> <C>
Statutory tax rate................................................ (34.0)% (34.0)% (34.0)%
Change in valuation allowance..................................... 39.7 41.0 40.0
State income taxes, net........................................... (6.0) (5.9) (5.7)
Other............................................................. .3 (.1) (.2)
----- ----- -----
Effective tax rate........................................... 0.0% 0.1% 0.1%
===== ===== =====
</TABLE>
147
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
(8) Stock Option Plan
In November 1997, the Board of Directors adopted the JFAX Communications,
Inc. 1997 Stock Option Plan (the 1997 Plan). Under the 1997 Plan, 4,375,000
authorized shares of common stock are reserved for issuance of options. An
additional 840,000 shares were authorized for issuance of options outside the
1997 Plan. In January, 1997 840,000 options were issued to Michael P. Schulhof,
then a consultant and currently a director, for services to be provided to the
Company under a consulting contract. 420,000 of these options were immediately
exercisable at an exercise price of $0.70; the remaining 420,000 options vested
over a two year period from the date of grant at an exercise price of $1.80. The
Company recorded $120,000 in compensation expense during 1997 relating to these
options as services were provided under the consulting contract. These options
are treated by the Company as warrants. Options under the 1997 Plan may be
granted at exercise prices determined by the Board of Directors, provided that
the exercise prices shall not be less than the fair market value of the
Company's common stock on the date of grant for incentive stock options and not
less than 85% of the fair market value of the Company's common stock on the date
of grant for nonstatutory stock options. At December 31, 1999 and 1998, 690,417
and 340,690 options were exercisable under the 1997 Plan, at a weighted average
exercise price of $1.39. At December 31, 1999 and 1998, 840,000 options were
exercisable outside of the 1997 Plan at a weighted average exercise price of
$1.26. Stock options generally expire after 10 years and vest over a three-year
period. In connection with the grant of 762,000 and 846,875 options during 1999
and 1998, the Company recorded $1,323,476 and $573,750, respectively, of
deferred compensation cost as these options were granted at exercise prices
below the respective market values at the dates of grant. The deferred
compensation cost is amortized to expense over the three year vesting period of
such options using the straight line method.
At December 31, 1999, there were 878,422 additional shares available for
grant under the 1997 Plan and no additional shares available for grant outside
of the 1997 Plan. The per share weighted-average fair value of stock options
granted during 1999, 1997, and 1998 was $2.98, $0.22, and $1.11, respectively,
on the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions: risk-free interest rate of 5.5%, 4.6%,
and 6.5% for 1999, 1998 and 1997, respectively, volatility rate of 50% for 1999,
and an expected life of 5 years.
The Company applies APB Opinion No. 25 in accounting for its stock option
plan and, accordingly, no compensation cost using the intrinsic value method has
been recognized for its stock option grants to employees and members of the
Board of Directors in their Board capacities in the consolidated financial
statements. Had the Company determined compensation cost based on the fair value
at the grant date for its stock options under SFAS No. 123, the Company's net
loss attributable to common shareholders for fiscal 1999, 1998 and 1997 would
have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Net loss attributable to common stockholders
As reported.................................................. $19,010,974 $17,727,556 $4,783,421
Pro forma.................................................... 20,686,600 17,896,556 4,868,421
Basic loss per common share.......................................
As reported.................................................. 0.68 0.80 0.30
Pro forma.................................................... 0.74 0.81 0.30
Diluted loss per common share.....................................
As reported.................................................. 0.68 0.80 0.30
Pro forma.................................................... 0.74 0.81 0.30
</TABLE>
148
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
Weighted-
---------
average
-------
Number of exercise
--------- --------
shares price
----- -----
<S> <C> <C>
Options outstanding at December 31, 1996....................................... -- --
Granted................................................................... 2,291,250 0.82
Exercised................................................................. (370,000) 0.01
---------
Options outstanding at December 31, 1997....................................... 1,921,250 0.99
Granted................................................................... 890,625 2.34
Exercised................................................................. (123,746) 0.31
Canceled.................................................................. (277,228) 0.80
---------
Options outstanding at December 31, 1998....................................... 2,410,901 1.53
Granted................................................................... 1,516,500 6.14
Exercised................................................................. (42,208) .96
Cancelled................................................................. (99,943) 2.60
--------- ---------
Options outstanding at December 31, 1999....................................... 3,785,250 3.37
========= =========
</TABLE>
At December 31, 1999, the exercise prices of options ranged from $.70 to
$8.00 with a weighted-average remaining contractual life of 8.5 years.
<TABLE>
<CAPTION>
Options outstanding Options exercisable
---------------------------- -----------------------
Weighted
--------
Number average Weighted- Number Weighted
------ ------- --------- ------ --------
outstanding remaining average exercisable average
----------- --------- ------- ----------- -------
December 31, contractual exercise December 31, exercise
------------ ----------- -------- ------------ --------
Range of exercise prices 1999 life price 1999 price
------------------------ ---- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C>
$ 0.70-.80............................... 1,062,500 7.2 $ 0.76 848,333 $ 0.75
$1.60-2.40............................... 1,206,250 8.1 $ 2.16 682,084 $ 2.01
$4.28.................................... 754,500 10.0 $ 4.28 -- $ --
$8.00.................................... 762,000 9.6 $ 8.00 -- $ --
--------- ------- ------ --------- ------
3,785,250 8.5 $ 3.37 1,530,417 $ 1.32
========= ======= ====== ========= ======
</TABLE>
At December 31, 1999, 1998, 1997, 1,530,417, 1,180,690, and 434,705,
options, respectively, were exercisable.
149
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
(9) Long Term Debt
Long term debt consists of the following:
<TABLE>
<CAPTION>
December 31, December 31,
------------ ------------
1999 1998
---- ----
<S> <C> <C>
Loan payable secured by certain computer equipment bearing interest at 15%.
Monthly principal and interest payments of $26,086 from April 21, 1998 to
April 2001.......................................................................... $ 421,247 716,155
Loan payable secured by certain computer equipment bearing interest at 15%.
Monthly principal and interest payments of $5,879 from December 22, 1998 to
January 1, 2001..................................................................... 130,114 192,580
Loan payable secured by certain computer equipment bearing interest at rates
ranging from 17.17% to 17.74%. Monthly principal and interest payments range
from $2,867 to $31,077 from June 30, 1999 to December 28, 2000...................... 676,974 --
Unsecured Loan bearing interest at 5.92%. Monthly principal and interest payments
are $65,746 through January 22, 2002................................................ 1,548,672 --
Senior Subordinated Notes with aggregate principal value of $10,000,000 bearing
interest at 10% per annum of principal amount, with maturity date of June 30,
2004, less unamortized debt discount of $4,624,337 and debt issuance costs of
$329,656 at December 31, 1998. The Company also satisfied accrued interest of
$499,664 as of July 1,1998 through the issuance of additional notes payable;
repaid in 1999...................................................................... -- 5,545,671
---------- ---------
2,777,007 6,454,406
Less current installments of long term debt............................................ (1,239,650) (317,402)
---------- ---------
Long term debt, excluding current installments......................................... $1,537,357 6,137,004
========== =========
</TABLE>
At December 31, 1999, annual maturities of long-term debt are as follows:
<TABLE>
<S> <C>
2000 .................................................................. $1,239,650
2001 .................................................................. 1,222,783
2002 .................................................................. 314,574
----------
$2,777,007
==========
</TABLE>
(10) Employee Benefit Plan
The Company has a 401(k) savings plan covering substantially all of its
employees. Eligible employees may contribute through payroll deductions. The
Company matches employees' contributions at the discretion of the Company's
Board of Directors. To date, the Company has not matched employee contributions
to the 401(k) savings plan.
150
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
(11) Commitments and Contingencies
(a) Leases
The Company leases certain facilities and equipment under noncancelable
capital and operating leases which expire at various dates through 2010. The
Company sub-leases its corporate facilities to a related party. The sub-lease
expires 2010 and requires monthly payments of $12,682 plus a pro rata share of
common expenses.
Future minimum lease payments at December 31, 1999, under agreements
classified as capital and operating leases with noncancelable terms in excess of
one year, are as follows:
<TABLE>
<CAPTION>
Capital Operating
------- ---------
leases leases
------ ------
<S> <C> <C>
Fiscal year:
2000 ................................................................... $206,552 440,222
2001 ................................................................... 138,216 433,159
2002 ................................................................... 66,461 433,159
2003 ................................................................... -- 513,974
2004 ................................................................... -- 513,974
Thereafter.............................................................. -- 2,610,280
------------- ----------
Total minimum lease payments....................................... 411,229 4,944,768
==========
Amounts representing interest................................................ (49,378)
-------------
Present value of net minimum lease payments............................. 361,851
Less current maturities...................................................... 176,089
-------------
Long-term maturities.................................................... $185,762
=============
</TABLE>
Rental expense for the years ended December 31, 1999, 1998, and 1997 was
$295,431, $346,515, and $224,289, respectively.
151
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
(12) Loss Per Share
As discussed in note 1, the Company adopted SFAS No. 128 for all periods
presented. The following table illustrates the computation of basic and diluted
loss per common share under the provisions of SFAS No. 128:
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------------
1999 1998 1997
------------ ------------ ----------
<S> <C> <C> <C>
Numerator--numerator for basic and diluted loss per
common share:
Net loss.............................................. $(17,439,103) (17,233,033) (4,783,421)
Premium on Preferred Stock Redemption................. (877,721) -- --
Dividends on Preferred Stock.......................... (553,064) (386,915) --
Accretion to Preferred Stock redemption............... (141,086) (107,608) --
------------ ----------- ----------
Numerator for basic and diluted loss per common share...... $(19,010,974) (17,727,556) (4,783,421)
============ =========== ==========
Denominator:
Denominator for basic loss per common share--weighted
average number of common shares outstanding during
the period ............................................. 28,098,994 22,181,960 15,738,334
------------ ----------- ----------
Denominator for diluted loss per common share.............. 28,098,994 22,181,960 15,738,334
============ =========== ==========
Basic loss per common share................................ $ (.68) (0.80) (0.30)
Diluted loss per common share.............................. $ (.68) (0.80) (0.30)
============ =========== ==========
</TABLE>
The computation of diluted loss per share for the year ended December 31,
1999 excludes the effects of incremental common shares attributable to the
assumed exercise of 7,458,166 outstanding common stock options and warrants
because their effect would be antidilutive (see notes 4 and 8). Redeemable
common shares outstanding have been included in the computation of both basic
and diluted loss per share.
(13) Litigation
On October 28, 1999, AudioFAX IP LLC filed a lawsuit against the Company in
the United States District Court for the Northern District of Georgia asserting
the ownership of certain United States and Canadian patents and claiming that
the Company is infringing these patents as a result of the Company's sale of
enhanced facsimile products. The suit requests unspecified damages, treble
damages due to willful infringement, and preliminary and permanent injunctive
relief. The Company filed an answer to the complaint on December 2, 1999. The
Company has reviewed the AudioFAX patents with our business and technical
personnel and outside patent counsel and has concluded that it does not infringe
these patents. As a result, the Company is confident of its position in this
matter and is vigorously defending the suit. However, the outcome of complex
litigation is uncertain and cannot be predicted with certainty at this time. Any
unanticipated adverse result could have a material adverse effect on the
Company's liquidity, financial condition, and results of operations.
152
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
(14) Subsequent Events
SureTalk.Com, Inc.
On January 26, 2000, the company acquired all of the outstanding stock of
SureTalk.Com, Inc. for $9.3 million in common stock. SureTalk.Com, Inc. was a
closely held Internet-based faxing, messaging and communications company based
in Carlsbad, California. The acquisition will be accounted for as a purchase
transaction with substantially all of the purchase price allocated to goodwill
and other purchased intangibles which will be amortized over 2 to 3 years.
TimeShift, Inc. (Unaudited)
On March 6, 2000 the Company acquired substantially all of the assets of
TimeShift, Inc. for common stock. TimeShift is a closely held internet
technology company based in San Francisco, California.
153
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
SureTalk.com, Inc. (formerly known as Fax4Free.com, Inc.):
We have audited the accompanying balance sheet of SureTalk.com, Inc.
(formerly known as Fax4Free.com, Inc.) as of December 31, 1999 and the related
statements of operations, shareholders' equity (deficiency) and cash flows for
the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of SureTalk.com, Inc.
as of December 31, 1999 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Los Angeles, CA
March 15, 2000
154
<PAGE>
SURETALK.COM, INC. (FORMERLY KNOWN AS FAX4FREE.COM, INC.)
BALANCE SHEET
December 31, 1999
<TABLE>
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 31,671
Other current assets 119,578
-----------
Total current assets 151,249
Capitalized software costs 2,750,000
Net property and equipment, at cost 302,173
-----------
$ 3,203,422
===========
Liabilities and Stockholders' Deficiency
Note payable to shareholder $ 1,700,000
Accounts payable 498,264
Accrued expenses 304,921
Notes payable to officers 335,428
-----------
Total current liabilities 2,838,613
Long term portion of note payable to shareholder 1,000,000
-----------
Shareholders' deficiency:
Series A preferred stock, $0.01 par value. Authorized 2,660,000 26,600
shares; issued and outstanding 2,660,000 shares (liquidation
preference of $505,400)
Series B preferred stock, $0.01 par value. Authorized 3,000,000 29,979
shares; issued and outstanding 2,997,876 shares (liquidation
preference of $1,468,959)
Common stock, $0.001 par value. Authorized 30,000,000 shares; 9,771
issued and outstanding 9,771,314 shares
Additional paid in capital 3,325,515
Note receivable from stockholder (92,100)
Accumulated deficit (3,934,956)
-----------
Net stockholders' deficiency (635,191)
-----------
$ 3,203,422
===========
</TABLE>
See accompanying notes to financial statements
155
<PAGE>
SURETALK.COM, INC. (FORMERLY KNOWN AS FAX4FREE.COM, INC.)
STATEMENT OF OPERATIONS
Year ended December 31, 1999
<TABLE>
<S> <C>
Revenues $ 158,603
Cost of revenue 214,035
-----------
Gross profit (loss) (55,432)
-----------
Operating expenses:
Selling, general and administrative 3,077,732
Research and development 458,482
-----------
Total operating expenses 3,536,214
-----------
Operating loss (3,591,646)
Interest expense, net 97,585
-----------
Loss before income taxes (3,689,231)
Income taxes 800
-----------
Net loss $(3,690,031)
===========
</TABLE>
See accompanying notes to financial statements
156
<PAGE>
SURETALK.COM, INC. (FORMERLY KNOWN AS FAX4FREE.COM, INC.)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Year ended December 31, 1999
<TABLE>
<CAPTION>
Series A Series B
preferred stock preferred stock Common stock
----------------------- ----------------------- ---------------------
Shares Amount Shares Amount Shares Amount
--------- ----------- --------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 -- -- -- -- 8,962,000 8,962
Issuance of stock options below fair market value -- -- -- -- -- --
Issuance of common stock for services -- -- -- -- 253,000 253
Issuance of common stock for cash -- -- -- -- 471,314 471
Exercise of options -- -- -- -- 85,000 85
Issuance of Series A preferred stock for cash 2,660,000 26,600 -- -- -- --
Issuance of Series B preferred stock for services -- -- 99,214 992 -- --
Issuance of Series B preferred stock for cash -- -- 2,898,662 28,987 -- --
ProtoDyne net equity -- -- -- -- -- --
Note receivable for issuance of common stock -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- ----------- --------- ------------ --------- ---------
Balance, December 31, 1999 2,660,000 $ 26,600 2,997,876 $ 29,979 9,771,314 $ 9,771
========= =========== ========= ============ ========= =========
<CAPTION>
Net
Note receivable Accumulated shareholders'
from Stockholder APIC deficit equity (deficiency)
---------------- ---------- ---------- ------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1998 -- 595,788 (268,208) 336,542
Issuance of stock options below fair market value -- 640,566 -- 640,566
Issuance of common stock for services -- 57,897 -- 58,150
Issuance of common stock for cash -- 89,079 -- 89,550
Exercise of options -- 16,065 -- 16,150
Issuance of Series A preferred stock for cash -- 473,400 -- 500,000
Issuance of Series B preferred stock for services -- 90,347 -- 91,339
Issuance of Series B preferred stock for cash -- 1,362,373 -- 1,391,360
ProtoDyne net equity -- -- 23,283 23,283
Note receivable for issuance of common stock (92,000) -- -- (92,100)
Net loss -- -- (3,690,031) (3,690,031)
---------- ---------- ---------- -------------
Balance, December 31, 1999 (92,100) 3,325,515 (3,934,956) (635,191)
========== ========== ========== =============
</TABLE>
See accompanying notes to financial statements.
157
<PAGE>
SURETALK.COM, INC. (FORMERLY KNOWN AS FAX4FREE.COM, INC.)
STATEMENT OF CASH FLOWS
Year ended December 31, 1999
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss $(3,690,031)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 298,817
Stock based compensation expense 788,810
Changes in assets and liabilities:
Prepaid expenses and other current
assets (109,621)
Accounts payable and accrued expenses 1,046,929
-----------
Net cash used in operating activities (1,665,096)
-----------
Cash used in investing activities:
Purchase of technology (100,000)
Purchase of property and equipment (286,819)
-----------
Net cash used in investing activities (386,819)
-----------
Cash flows from financing activities:
Proceeds from issuance of common stock 105,700
Proceeds from issuance of preferred stock 1,891,360
Issuance of note to officer (92,100)
Payment on note payable (200,000)
-----------
Net cash provided by financing
activities 1,704,960
-----------
Net decrease in cash and cash
equivalents (346,955)
Cash and cash equivalents at beginning of period 378,626
-----------
Cash and cash equivalents at end of period $ 31,671
===========
Supplemental disclosure of cash flow information --
cash paid during the period for:
Income taxes $ 800
Interest --
===========
Supplemental disclosure of noncash investing and
financing activity:
During 1999, the Company acquired certain software
technologies totaling $3,000,000 in exchange for
a $2,900,000 note payable and cash of $100,000.
</TABLE>
See accompanying notes to financial statements.
158
<PAGE>
SURETALK.COM, INC. (FORMERLY KNOWN AS FAX4FREE.COM, INC.)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
(1) Summary of Significant Accounting Policies
(a) Organization
SureTalk.com, Inc. (the Company) was incorporated on August 14, 1998 under the
laws of the state of Colorado. In April 1999, the Company was reincorporated
under the laws of the state of Delaware. In December 1999, the Company name was
changed from Fax4Free.com, Inc. to SureTalk.com, Inc. The Company offers a
variety of free and fee-based communications services including Internet-based
fax sending and receiving, and voice mail to consumers, businesses and
qualifying non- profit organizations.
(b) Depreciation and Amortization
Depreciation and amortization of property and equipment is provided using the
straight-line method based on the estimated useful lives, generally ranging from
to one to three years.
(c) Capitalized Software Costs
All research and development costs are expensed as incurred. Purchased
technology is capitalized at cost and amortized over the estimated economic life
of the asset, which is five years.
(d) Revenue Recognition
Revenue is recognized at the time services are rendered or otherwise earned.
(e) Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes." Under the asset
and liability method of Statement 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
(f) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company accounts for long-lived assets (intangible assets and property and
equipment) under the provisions of Statement of Financial Accounting Standards
No. 121 (SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to Be Disposed Of." The statement requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value, less
costs to sell.
(g) Stock-Based Compensation
The Company has adopted Statement of Financial Accounting Standards No. 123
(SFAS No. 123), "Accounting for Stock-Based Compensation," which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to apply the provisions of APB Opinion No. 25 and provide pro forma net
income disclosures for employee stock option grants made in future years as if
the fair-value-based method defined in SFAS No. 123 had been applied.
159
<PAGE>
SURETALK.COM, INC. (FORMERLY KNOWN AS FAX4FREE.COM, INC.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
The Company has elected to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123 (note 6).
(h) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(i) Comprehensive Income
Statement of Financial Accounting Standards ("SFAS") NO. 130, "Reporting
Comprehensive Income" is effective for fiscal years beginning after December 15,
1997. SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components (revenue, expenses, gains and losses) in
a full set of general-purpose financial statements. SFAS 130 requires all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement display with the same
prominence as other financial statements. SFAS 130 is effective for fiscal years
beginning after December 15, 1997. The Company adopted SFAS No. 130 for the
financial statements for the fiscal year ended December 31, 1999.
(2) Property and Equipment
Property and equipment is stated at cost and is summarized as follows:
Computers and equipment $ 332,508
Office furniture 13,041
Leasehold Improvements 5,441
----------
350,990
Less accumulated depreciation and
amortization (48,817)
----------
$ 302,173
==========
(3) Capitalized Software Costs
Capitalized software costs relate to an acquisition of software from ProtoDyne,
Inc. (a related party) completed in July 1999. Mark Schwartz, a co-founder and
principal shareholder of the Company, was the sole shareholder of ProtoDyne and
the recipient of the purchase proceeds. The purchase price was $3,000,000
delivered to Mark Schwartz with a down payment of $100,000 and a promissory note
of $2,900,000 (see note 5). The note is secured by a stock pledge agreement and
guarantee. Software costs are stated at cost and are summarized as follows:
Capitalized software costs $3,000,000
Less accumulated amortization (250,000)
----------
$2,750,000
==========
160
<PAGE>
SURETALK.COM, INC. (FORMERLY KNOWN AS FAX4FREE.COM, INC.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
(4) Income Taxes
Income taxes consist of franchise taxes for the state of California. At December
31, 1999, the Company had available net operating loss carryforwards totaling
approximately $3,500,000, for Federal and state income tax purposes expiring
beginning in the year 2005. Due to the uncertainty surrounding the realization
of the benefits of its tax attributes, including net operating loss
carryforwards in future tax returns, the Company has fully reserved its deferred
tax assets as of December 31, 1999. In assessing the potential realization of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will be realized. The
ultimate realization of deferred tax assets is dependent upon the Company
attaining future taxable income during the periods in which those temporary
differences become deductible. In addition, the utilization of net operating
loss carryforwards may be limited due to restrictions imposed under applicable
Federal and state tax laws due to a change in ownership that occurred subsequent
to December 31, 1999 (Note 9).
(5) Related Party Transactions
In July 1999, the Company purchased all of the outstanding shares of ProtoDyne,
Inc. for $3.0 million. The purchase price was paid as $100,000 in cash plus the
issuance of a promissory note for $2.9 million bearing interest at 8% per annum
and payable in installments over 29 months. During 1999, payments of $200,000
were made toward this note, leaving a balance of $2.7 million as of December 31,
1999. Mark Schwartz, a co-founder and principal shareholder of the Company, was
the sole shareholder of ProtoDyne and the recipient of the purchase proceeds.
As of December 31, 1999 the Company had notes receivable from the sale of common
stock in the amount of $92,100 and notes payable in the amount of $335,000 from
officers of the Company. All such notes bear interest at rates ranging from 6%
to 7% per annum and were established in the ordinary course of business. Certain
payments aggregating $92,000 for the services of Barry Shore (Co-founder,
Director) were made to Dynamic Marketing Group, a corporation for which Mr.
Shore is the sole shareholder.
(6) Stock Options
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. As such, compensation
expense would be recorded on the date of grant only if the current market price
of the underlying stock exceeded the exercise price.
On December 31, 1999, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to apply the provisions
of APB Opinion No. 25 and provide pro forma net income and pro forma earnings
per share disclosures for employee stock option grants made in 1995 and future
years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure provisions of SFAS No. 123.
Summary stock option activity from inception to December 31, 1999 is as follows:
161
<PAGE>
SURETALK.COM, INC. (FORMERLY KNOWN AS FAX4FREE.COM, INC.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
Weighted average
Number of options exercise price
----------------- ----------------
Balance at inception August 1998 -- --
Granted 1,150,000 $ 0.299
Exercised -- --
Canceled (400,000) 0.813
--------- ----------
Balance at December 31, 1998 750,000 $ 0.025
Granted 3,273,289 0.181
Exercised (85,000) 0.190
Canceled (60,000) 0.240
--------- ----------
Balance at December 31, 1999 3,878,289 $ 0.150
========= ==========
There were 1,000,000 options vested at December 31, 1999. All options are
exercisable immediately, even if not vested; however, early exercised shares are
subject to repurchase by the Company at the original exercise price if service
terminates prior to vesting. Additionally, at December 31, 1999 there were
2,878,289 shares outstanding originally issued under stock option agreements,
subject to repurchase by the Company.
In connection with the granting of stock options in 1999 below fair market
value, the Company recorded compensation expense of $649,566 during the year
ended December 31, 1999.
If the Company had elected to recognize compensation cost based on the fair
value at the date of grant, consistent with the method as prescribed by SFAS No.
123, net loss would have changed to the pro forma amounts indicated below:
Net loss:
As reported $ 3,690,031
Pro forma 3,936,138
============
The fair value of options granted during 1999 was determined using a minimum
value pricing model with the following assumptions: risk-free interest rate of
6.00% and an expected life of 10 years.
The following table summarizes information regarding options outstanding and
options exercisable at December 31, 1999:
162
<PAGE>
SURETALK.COM, INC. (FORMERLY KNOWN AS FAX4FREE.COM, INC.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
<TABLE>
<CAPTION>
Options outstanding
------------------------------------------------------------
Options exercisable
-------------------------------------
Weighted
Range of exercise Outstanding at average remaining Weighted average Exercisable at Weighted average
prices December 31, 1999 contractual life exercise price December 31, 1999 exercise price
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.025 950,000 5.7 $ 0.025 950,000 0.025
0.190 2,928,289 9.6 0.190 50,000 0.190
------------------------------------------------------------------------------------------------------------------------
$ 0.025 - 0.190 3,878,289 8.7 $ 0.150 1,000,000 0.033
========================================================================================================================
</TABLE>
(7) Commitments
Lease Commitments
The Company entered into various operating leases for office space and equipment
which expire through the year 2000 and total $79,840. The lease expense included
in the accompanying statement of operations for the year ended December 31, 1999
was $39,920.
Employment Agreements
The Company has entered into employment agreements with two of its officers,
Steven J. Hamerslag and Barry Shore, and a consultant, Mark Schwartz. These
agreements provide for employment terms ranging from 1 year to 30 months and for
continuation of salary, bonuses and vesting of options in the event of early
termination. As of December 31, 1999, $100,000 of severance expense had been
recognized in accordance with these contracts.
(8) Stockholders' Equity (Deficiency)
(a) Capital Stock
The Company's Amended and Restated Articles of Incorporation (Articles)
authorize the issuance of two classes of shares, designated common stock and
preferred stock. The numbers of shares of common stock and preferred stock
authorized totaled 30,000,000 and 5,660,000, shares respectively.
(b) Common Stock
Holders of shares of common stock are entitled, subject to the senior rights of
holders of preferred stock described below, to receive dividends when and as
declared by the Board of Directors, to share ratably in the proceeds of any
dissolution or winding up of the Company and to vote on certain matters as
provided in the Articles. Shares of common stock are subject to transfer
restrictions and certain rights of first refusal relating to the securities
laws, the bylaws of the Company and, in certain cases, specific agreements with
the Company and holders of preferred stock.
163
<PAGE>
SURETALK.COM, INC. (FORMERLY KNOWN AS FAX4FREE.COM, INC.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
(c) Preferred Stock
Of the preferred stock, 2,660,000 shares have been designated Series A and
3,000,000 shares have been designated Series B. In July 1999, the Company issued
and sold 2,660,000 of such shares to a single investor for total cash
consideration of $500,000. Warrants to purchase 1,330,000 shares of common stock
were also issued in conjunction with the sale of Series A stock. In July through
September 1999, the Company issued and sold 2,997,876 shares of Series B stock
to accredited investors for total cash consideration of $1,482,699.
(d) Conversion Rights
Each share of preferred stock outstanding is convertible, at the option of the
holder, into common stock at the rate of one share of common stock for each
share of preferred stock, adjustable for certain dilutive events. Such
conversion will occur automatically upon the closing of a registered public
offering of the Company's common stock or upon the vote in favor of such
conversion by a majority of the holders of Series A or Series B preferred stock
then outstanding.
(e) Dividend Rights
Holders of Series A preferred stock and Series B preferred stock are entitled
to receive dividends, when and as declared by the Company's Board of Directors.
Such dividends are payable in preference and priority to any dividends on common
stock.
(f) Liquidation Preference
In the event of a liquidation, dissolution or winding up of the Company, the
holders of Series A and Series B preferred stock are entitled, sharing pro rata,
to receive a liquidation preference of $0.19 and $0.49 per share, respectively,
plus any accrued but unpaid dividends. The liquidation preferences terminate
upon conversion of the preferred stock to common stock.
(g) Voting Rights
Holders of preferred stock are generally entitled to vote together with holders
of common stock on matters presented for shareholder action as if such shares
were converted to common stock.
(9) Subsequent Events
In November 1999, the Company entered into a letter of intent to be acquired by
JFAX.COM, Inc. (JFAX). Under the terms of the purchase agreement, all equity in
the Company was to be exchanged for 1,515,545 shares of restricted common stock
of JFAX valued at $6.125. This purchase transaction was completed in January
2000. Immediately prior to the closing, the balance of the $2.7 million
promissory note to Mark Schwartz, along with certain additional obligations,
were converted to equity. In addition, the vesting of all outstanding stock
options was accelerated in accordance with the terms of the Stock Option Plan.
Finally, in conjunction with the purchase transaction, Steven J. Hamerslag, the
Company's CEO, entered into an employment agreement to become the CEO of JFAX.
164
<PAGE>
JFAX.COM INC.
UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEET
December 31, 1999
Notes to Unaudited Pro Forma Condensed Combining Financial Statements
The accompanying unaudited pro forma condensed combining financial statements of
JFAX.COM, Inc. and SureTalk.com, Inc. give retroactive effect to the acquisition
which is being accounted for as a purchase and, as a result, the unaudited pro
forma condensed combining balance sheet is presented as if the companies had
combined as of December 31, 1999 and the unaudited pro forma combining statement
of operations is presented as if the combining companies had been combined for
the year then ended. These unaudited pro forma condensed combining financial
statements may not be indicative of the results that actually may be obtained in
the future. The unaudited pro forma condensed combining financial statements
should be read in conjunction with the historical consolidated financial
statements of JFAX.COM, Inc. and SureTalk.com, Inc.
<TABLE>
<CAPTION>
Historical
-------------------------------
Proforma Pro Forma
JFAX.COM Suretalk.COM Adjustments Combined
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $12,256,487 31,671 12,288,158
Short term Investments 23,510,623 23,510,623
Accounts receivable 275,046 275,046
Due from related parties 95,151 95,151
Interest receivable 600,569 600,569
Prepaid marketing costs 2,725,234 2,725,234
Other current assets 784,760 119,578 904,338
------------------------------------------------------------------
40,247,870 151,249 40,399,119
Furniture, fixtures and equipment, net 3,344,075 302,173 3,646,248
Capitalized Software Costs 2,750,000 2,750,000
Long term Investments 13,558,615 13,558,615
Investment in Joint venture 417,773 417,773
Goodwill and other intangibles acquired (A)9,917,904 9,917,904
Other long-term assets 1,057,000 1,057,000
------------------------------------------------------------------
$58,625,333 3,203,422 9,917,904 71,746,659
==================================================================
Liabilities, Redeemable Securities
and Stockholders' Equity (Deficiency)
Current liabilities:
Accounts payable and accrued expenses $ 1,781,088 1,138,613 2,919,701
Deferred revenue 438,722 438,722
Current portion of capital lease obligations 176,089 176,089
Current portion of long-term debt 1,239,650 1,239,650
Current portion of Note payable to shareholder 1,700,000 (B)(1,700,000) -
Customer deposits 57,267 57,267
------------------------------------------------------------------
3,692,816 2,838,613 4,831,429
Capital lease obligations 185,762 185,762
Long-term debt 1,537,357 1,537,357
Note payable to shareholder 1,000,000 (B)(1,000,000) -
Redeemable common stock 7,064,633 7,064,633
Common stock subject to put option 997,500 997,500
Total stockholders' equity (deficiency) 45,147,265 (635,191) (A)9,917,904 57,129,978
(B)2,700,000
------------------------------------------------------------------
$58,625,333 3,203,422 9,917,904 71,746,659
==================================================================
<CAPTION>
Notes
(A) Purchase price of 1,515,545 shares at $6.125 (January 25,
2000) is $9,282,713 in total consideration
Total Consideration 9,282,713
Estimated fair value of net liabilities of
SureTalk assumed (635,191)
-----------
Total Goodwill and other intangibles acquired 9,917,904
===========
(B) To record conversion of notes payable to shareholder to
common stock in connection with purchase transaction.
</TABLE>
165
<PAGE>
JFAX.COM, INC.
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
Year Ended December 31, 1999
<TABLE>
<CAPTION>
Historical
------------------------------ Pro Forma Pro Forma
JFAX.COM SureTalk.COM Adjustments Combined
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 7,643,442 158,603 7,802,045
Costs and expenses 20,800,284 3,750,249 (A)(B) 3,680,968 28,231,501
------------ ----------- ---------------- -----------
Operating loss (13,156,842) (3,591,646) 3,680,968 (20,429,456)
---------------- -----------
Other income (expense) 146,113 (98,385) (C) 98,385 146,113
------------ ----------- ---------------- -----------
Loss before extraordinary item (13,010,729) (3,690,031) (3,582,583) (20,283,343)
Extraordinary Item-Loss on extinguishment of debt (4,428,374) (4,428,374)
------------ ----------- ---------------- -----------
Net Loss $(17,439,103) (3,690,031) (3,582,583) (24,711,717)
============ =========== ================ ===========
Net loss attributable to common shareholders $(19,010,974) (26,288,588)
============ ===========
Net loss per common share:
Basic $ (0.68) (0.89)
Diluted (0.68) (0.89)
Weighted average common shares used in
determining loss per share:
Basic and diluted 28,098,994 (D)29,614,539
</TABLE>
Notes
To adjust for goodwill and technology amortization as if the two companies had
been combined as of January 1, 1999:
<TABLE>
<S> <C>
(A) Total additional goodwill as reported in the combining condensed balance sheet $9,917,904
Pro forma amortization period 3 years
Pro forma goodwill amortization for 1999 3,305,968
(B) Pro forma adjustment for accelerated amortization period for capitalized software costs 375,000
Total pro forma amortization for 1999 $3,680,968
(C) Elimination of interest expense for shareholder notes converted to common stock
(D) Includes additional 1,515,545 shares of common stock issued to acquire SureTalk.com
</TABLE>
166
<PAGE>
JFAX.COM, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------------
2000 1999
----------- ----------
<S> <C> <C>
Revenues $ 5,873 $ 3,058
Cost of revenue 3,037 2,233
----------- ----------
Gross profit 2,836 825
Operating expenses:
Sales and marketing 4,618 1,365
Research and development 1,353 897
General and administrative 7,772 3,529
Amortization of goodwill and other intangibles 1,801 ---
---------- ----------
Total operating expenses 15,544 5,791
---------- ----------
Operating Loss (12,708) (4,966)
Other income (expense), net 1,474 (883)
---------- ----------
Net Loss (11,234) (5,849)
Dividends and accretion on preferred stock --- (525)
---------- ----------
Net loss attributable to
common stockholders $ (11,234) $ (6,374)
========== ==========
Basic and diluted net loss
per common share: $ (0.31) $ (0.26)
========== ==========
Weighted average shares
outstanding 35,373,365 24,310,263
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
167
<PAGE>
JFAX.COM, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
June 30, 2000
-----------------
<S> <C>
ASSETS
Cash and cash equivalents $ 15,048
Short-term investments 7,519
Accounts receivable 972
Note receivable 1,500
Prepaid expenses and other current assets 3,160
-----------------
Total current assets 28,199
Furniture, fixtures and equipment, net 5,791
Goodwill, net 8,301
Other purchased intangibles, net 2,138
Long-term investments 15,169
Other assets 1,653
------------------
Total assets $ 61,251
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 2,503
Deferred revenue 316
Current portion of capital lease payable 236
Current portion of long-term debt 1,359
Other 417
------------------
Total current liabilities 4,831
Capital lease obligations 179
Long-term debt 1,001
-----------------
Total liabilities 6,011
Redeemable common stock 7,065
Common stock subject to put option 998
Total stockholders' equity 47,177
-----------------
Total liabilities and stockholders' equity $ 61,251
=================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
168
<PAGE>
JFAX.COM, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six months ended
June 30
------------------------------------
2000 1999
------------------------------------
<S> <C> <C>
Net cash used in operating activities $ (6,163) $ (3,711)
------------ ------------
Cash flows from investing activities:
Redemption of investments 14,217 0
Investment in joint venture (45) 0
Issuance of Notes receivable (2,200) 0
Purchases of furniture, fixtures and equipment (2,743) (428)
------------ ------------
Net cash provided by (used in) investing activities 9,229 (428)
------------ ------------
Cash flows from financing activities:
Exercise of stock options 89 11
Proceeds from issuance of notes payable 203 91
Repayments of loan payable and capital lease obligations (567) (225)
------------ ------------
Net cash used in financing activities (274) (123)
------------ ------------
Net increase (decrease) in cash and cash equivalents 2,792 (4,262)
Cash and cash equivalents, beginning of period 12,256 7,279
------------ ------------
Cash and cash equivalents, end of period $ 15,048 $ 3,017
============ ============
</TABLE>
Non cash investing activities:
During the six month period ended June 30, 2000 net assets as follows were
acquired though the issuance of common stock:
<TABLE>
<CAPTION>
<S> <C>
Current assets $ 180
Furniture, fixtures, and equipment 585
Goodwill and intangibles 705
Investment in operating lease 12,943
Less: liabilities assumed (149)
-----------
Fair value of common stock issued 14,264
===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
169
<PAGE>
JFAX. COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial information is unaudited but reflects all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the consolidated financial
position and results of operations for the interim periods. The condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, together with management's
discussion and analysis of financial condition and results of operations, for
the fiscal year ended December 31, 1999. The results of operations for the six
months ended June 30, 2000 are not necessarily indicative of the results to be
expected for the entire fiscal year.
NOTE 2 - USE OF 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 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.
NOTE 3 - COMPREHENSIVE LOSS
Comprehensive loss is comprised of net loss and unrealized gains and losses on a
short term investment classified as available for sale. Comprehensive loss was
$6.2 and $3.3 million for the quarters ended June 30, 2000 and 1999,
respectively.
NOTE 4 -- BUSINESS COMBINATIONS
On January 26, 2000, the Company completed the acquisition of Suretalk.com, Inc.
(SureTalk) The acquisition was recorded using the purchase method of accounting
under APB Opinion No. 16. The Company issued an aggregate of approximately
1,515,545 shares of common stock to effect the transaction. The
aggregate purchase price of Suretalk, plus related charges, was approximately
$9.28 million, and was comprised of common stock. Results of operations for
SureTalk have been included in the financial results of the Company from the
closing date of the transaction forward.
In accordance with APB Opinion No. 16, all identifiable assets were assigned a
portion of the cost of the acquired company (purchase price) on the basis of
their respective fair values. Identifiable intangible assets and goodwill are
included in "Goodwill, net" and "Other purchased intangibles, net" in the
accompanying condensed consolidated balance sheets and are amortized over their
average useful lives of 2-3 years. Intangible assets were identified and valued
by
170
<PAGE>
JFAX. COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
(Unaudited)
considering the Company's intended use of acquired assets, and analysis of
data concerning products, technologies, markets, historical financial
performance, and underlying assumptions of future performance. The economic and
competitive environment in which the Company and the acquired company operate
was also considered in the valuation analysis.
The pro forma consolidated financial information for the six months ended June
30, 2000 and 1999, determined as if the acquisition had occurred on January 1
of each year, would have resulted in net sales of $5.9 and $3.3 million , net
loss of $11.7 and $7.2 million, and basic and diluted loss per share of $0.32
and $0.28, respectively. This unaudited pro forma information is presented for
illustrative purposes only and is not necessarily indicative of the results of
operations in future periods or results that would have been achieved had
JFAX.COM and the acquired company been combined during the specified periods.
NOTE 5 - LOSS PER SHARE
The Company has adopted SFAS No. 128, "Earnings Per Share." Basic net loss per
share is computed using the weighted average number of common shares outstanding
during the period.
Dividends and accretion on Preferred Stock increased the net loss for
determining basic and diluted net loss per share attributable to Common Stock in
the applicable periods. Diluted net loss per share excludes the effect of common
stock equivalents, because their effect would be anti-dilutive.
NOTE 6 - LITIGATION
On October 28, 1999, AudioFAX IP LLC filed a lawsuit against the Company in the
United States District Court for the Northern District of Georgia asserting the
ownership of certain United States and Canadian patents and claiming that we are
infringing these patents as a result of our sale of enhanced facsimile services.
The suit requests unspecified damages, treble damages due to willful
infringement, and preliminary and permanent injunctive relief. The Company filed
an answer to the complaint on December 2, 1999. The Company has reviewed the
AudioFAX patents with its business and technical personnel and outside patent
counsel and have concluded that it does not infringe these patents. As a result,
the company is confident of its position in this matter and is vigorously
defending the suit. However, the outcome of complex litigation is uncertain and
cannot be predicted with certainty at this time. Any unanticipated adverse
result could have a material adverse effect on our financial condition and
results of operations.
On May 11, 2000, Inso Chicago Corporation ("Inso") filed a lawsuit against the
Company in the United States District Court of for the District of Massachusetts
asserting breach of contract, breach of implied covenant of good faith and fair
dealing, and unfair and deceptive trade practices. The suit requests
unspecified damages, treble damages due to willful unfair or deceptive acts, and
injunctive relief. The lawsuit arises out of a dispute with Inso regarding
amounts which Inso alleges are payable by the Company under a software license
pursuant to
171
<PAGE>
JFAX. COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
(Unaudited)
which Inso provided certain software that, until July 16, 2000 (when the Company
ceased used of the software) enabled the Company's subscribers to send faxes
from the Company's web site. The total license fee due under the license
agreement is $150,000 for a two-year license period commencing on or about
January 1, 2000. The Company maintains that the software did not perform to
warranted specifications, that Inso misrepresented the level of performance that
could be expected from the software, and that the defects were not addressed by
Inso. The Company withheld payment accordingly. The Company answered Inso's
complaint and filed a counter-claim seeking to recover damages that resulted
from Inso's misrepresentations and delivery of defective products. On June 6,
2000, the Court denied Inso's request for a preliminary injunction. The parties
are currently engaged in discovery. The Company is confident of its position
in this matter and is vigorously defending the suit. However, the outcome of
complex litigation is uncertain and cannot be predicted with certainty at this
time. Any unanticipated adverse result could have a material adverse effct on
our financial condition and results of operations.
NOTE 7- PENDING ACQUISITION OF E-FAX
On July 13, 2000, the Company entered into a merger agreement (the "Merger
Agreement") with eFax.com, Inc. ("EFAX"), and JFAX.COM Merger Sub, Inc., a newly
formed subsidiary of the Company ("Merger Sub"). Under the terms of the
Merger Agreement, EFAX has agreed to merge with the Merger Sub ("Merger")
and become a wholly owned subsidiary of the Company, in exchange for which the
Company will issue a total of approximately 13.0 million shares of its common
stock. As consideration for the Merger, EFAX's stockholders would receive the
following:
For each share of EFAX's common stock, par value $.01 per share ("EFAX
Common Stock"), its holder would receive a fraction of a share of the
Company's 2 common stock, par value $0.01 per share ("JFAX Common Stock"),
determined by a conversion number calculated in accordance with the Merger
Agreement (the "Conversion Number"), which Conversion Number will result in
the issuance to EFAX common stockholders of a total of approximately 3.8
million shares of JFAX Common Stock.
For each share of EFAX's Series D Convertible Preferred Stock, par value
$.01 per share ("Series D Stock"), outstanding at the time of the Merger,
its holder would receive 4,922.75 shares of JFAX Common Stock
(collectively, if all 1,447 shares of Series D Stock are outstanding at the
time of the Merger, approximately 7.1 million shares), which amount will
increase between July 12, 2000 and the time of the Merger at an annualized
rate of 3.5%.
Because the consideration to be received by the EFAX preferred stockholders
is a fixed amount, subject to the 3.5% annualized rate of increase, any increase
or decrease in the total consideration received in the Merger will only affect
the holders of EFAX Common Stock. The Conversion Number will vary depending on
certain events, as described in the Merger Agreement.
The consummation of the Merger will depend upon, in addition to other
conditions, the approval of the Merger by both the holders of a majority of the
outstanding shares of EFAX Common Stock and the holders of a majority of the
outstanding shares of JFAX Common Stock being voted at the meeting to approve
the issuance of JFAX shares in the Merger. If all of the required conditions are
met, the Merger is expected to be completed in the fourth quarter of 2000.
On June 30, 2000, EFAX and the Company entered into an Agreement of
Understanding (the "Agreement of Understanding") with Integrated Global
Concepts, Inc. ("IGC"). IGC has been providing EFAX with development and co-
location services necessary for EFAX's operations. The Agreement of
Understanding provides that at the time of the closing of the Merger, IGC will
grant EFAX a license to certain software developed by IGC which EFAX uses in its
operations, IGC will relinquish all claims which it may have against EFAX in
connection with
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JFAX. COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
(Unaudited)
development services it has previously provided to EFAX and the Company will
issue 2,000,000 shares of JFAX Common Stock to IGC.
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INFORMATION ABOUT eFAX.COM
General
eFax.com is a leading provider of Internet communications services.
eFax.com provides its free and fee-based Internet communications services to
more than 2.0 million users, consisting of:
. Fax-to-e-mail;
. Voice-mail; and
. Voice-to-e-mail capabilities.
Prior to developing its current market, eFax.com had developed and marketed
branded and licensed products and software solutions for the multifunction
product market, which consisted of electronic office devices that combine print,
fax, copy and scan capabilities into a single unit. In addition, eFax.com has
licensed its embedded systems technology and software to a number of
manufacturers of multifunction products. On January 10, 2000, eFax.com announced
that it would focus exclusively on expanding its position as a provider of
enhanced Internet communications services and solutions and discontinue
manufacturing and sales of multifunction products.
eFax.com's revenues are derived from four sources, the first three of which
eFax.com is discontinuing:
. Sales of JetFax branded multifunction products, original equipment
manufacturer (OEM) branded multifunction products, consumables and upgrades;
. Software and technology license fees related to both eFax.com's
embedded system technology for multifunction products and desktop software;
. Development fees for the customization and integration of eFax's.com
embedded system technology and desktop software in OEM products; and
. Internet-based services.
The eFax.com services provide users with the capability to receive
facsimile transmissions as e-mail attachments by way of the Internet. Services
are both on a free and fee basis.
eFax.com was founded in 1988 as a Delaware corporation.
The principal executive offices of eFax.com are located at 1378 Willow
Road, Menlo Park, California 94025. Its telephone number is (650) 324-0600.
Recent Developments
On August 18, 2000, Ronald P. Brown resigned as eFax.com's President.
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Additional Information
For more detailed information about eFax.com, reference is made to the
eFax.com Annual Report on Form 10-K for the fiscal year ended January 1, 2000,
eFax.com Quarterly Reports on Form 10-Q for the quarterly periods ended April 1,
2000 and July 1, 2000 and the Current Reports on Form 8-K filed with the
Securities and Exchange Commission on April 6, 2000, July 14, 2000 and August 9,
2000, which are incorporated by reference in this proxy statement/prospectus.
See "Where You Can Find More Information" on page ____. This proxy
statement/prospectus is accompanied by a copy of eFax.com's Form 10-K for the
year ended January 1, 2000, as amended on May 1, 2000, and its Form 10-Q for the
quarterly period ended July 1, 2000, which are attached to this proxy
statement/prospectus as Appendix D.
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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following pages present the unaudited pro forma condensed combined
financial statements for j2 Global and eFax.com after giving effect to the
merger, which we refer to as "pro forma" information. The pro forma financial
statements give effect to the merger under the purchase accounting method in
accordance with generally accepted accounting principles. In presenting the pro
forma information for certain time periods, we assumed that j2 Global and
eFax.com had been merged throughout those periods. Net loss per share amounts
and weighted average shares have been adjusted to reflect the conversion of each
outstanding share of eFax.com common stock into 0.281 of a share of j2 Global
common stock, the receipt by the holders of the Series D Preferred Stock of
4,672,546 shares of j2 Global common stock and warrants exercisable for
2,397,137 shares of j2 Global common stock at $0.01 per share, and the receipt
by a service provider of eFax.com of 2.0 million shares of j2 Global common
stock. We have assumed that 1,421 shares of eFax.com Series D Preferred Stock
will be outstanding immediately prior to the merger and that the number of
shares of eFax.com common stock outstanding immediately prior to the merger is
the same as the number outstanding on the date of this proxy
statement/prospectus. The unaudited pro forma condensed combined financial
statements also reflect the previously completed acquisition of SureTalk.com,
Inc. which was also accounted for as a purchase under generally accepted
accounting principles.
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j2 GLOBAL COMMUNICATIONS, INC.
Unaudited Pro Forma Condensed Combining
Statement of Operations
For the year ended December 31, 1999
<TABLE>
<CAPTION>
Historical
--------------------------------------- Proforma Proforma
JFAX EFAX Suretalk Adjustments Combined
---------- ------- ---------- ----------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenue:
Internet Services $ 7,643 1,200 159 -- 9,002
Product -- 18,817 -- c (18,817) --
Software and technology license fees -- 3,629 -- -- 3,629
Development Fees -- 1,059 -- c (1,059) --
-------------------------------------------------------------------------
Total revenues 7,643 24,705 159 (19,876) 12,631
Costs of Revenue:
Internet Services 4,641 2,400 214 d,e (1,088) 6,167
Product -- 15,472 -- c (15,472) --
Software and technology license fees -- 584 -- -- 584
----------- --------- -------- ----------------------------
Total cost of revenue 4,641 18,456 214 (16,560) 6,751
----------- --------- -------- ----------------------------
Gross profit (loss) 3,002 6,249 (55) (3,316) 5,880
Operating expenses:
Sales and marketing 6,354 19,972 308 c,d (2,463) 24,171
Research and development 1,828 6,188 458 c (2,488) 5,986
General and administrative 7,976 5,320 2,770 b,d,e 3,251 19,317
Goodwill and other Intangibles -- -- -- a 8,551 8,551
----------- --------- ---------------------------------------------
Total Operating Expenses 16,158 31,480 3,536 6,851 58,025
Loss from Continuing Operations (13,156) (25,231) (3,591) (10,167) (52,145)
Basic and Diluted loss per common share
from continuing operations (0.47) (1.24)
========== ==========
Weighted average shares oustanding 28,098,994 42,133,717
========== ==========
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Notes
(A) To adjust for goodwill and technology amortization as if the
companies had been combined as of January 1, 1999
Total goodwill and other intangibles
EFAX $ 15,361
Suretalk 10,293
-----------
25,654
Proforma amortization period 3 years
Proforma goodwill amortization for 1999 8,551
(B) To record the issuance of 2,000,000 shares at $1.75
per share to a third party service provider $ 3,500
(C) To reclassify Product and development fee
revenue and cost of revenue as a
discontinued operation
Revenues:
Product revenue 18,817
Development fees 1,059
Cost of revenue:
Product (15,472)
Development fees --
Sales and marketing (1,790)
Research and development (2,488)
----------
Net amount to be reclassified to discontinued
operations 126
===========
(D) to eliminate EFAX salary expense
which would not be incurred after
the acquisition
Portion allocable to the following:
Cost of service 353
General and administrative 984
Sales and Marketing 673
(E) Reclassification of cost of sales
to conform to JFAX presentation
General and Administative 735
</TABLE>
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j2 GLOBAL COMMUNICATIONS, INC.
Unaudited Pro Forma Condensed Combining
Statement of Operations
For the Six Months Ended June 30, 2000
<TABLE>
<CAPTION>
Historical
------------------------- Proforma Proforma
JFAX EFAX Adjustments Combined
---------- ------- ----------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenue:
Internet Services $ 5,873 $ 2,732 -- $ 8,605
Product -- 5,240 c (5,240) --
Software and technology license fees -- 2,182 -- 2,182
---------- ------- ------ ----------
Total revenues 5,873 10,154 (5,240) 10,787
Costs of Revenue:
Internet Services 3,037 3,280 d,e (1,152) 5,165
Product -- 3,753 c (3,753) --
Software and technology license fees -- 193 -- 193
---------- ------- ------ ----------
Total cost of revenue 3,037 7,226 (4,905) 5,358
---------- ------- ------ ----------
Gross profit 2,836 2,928 (335) 5,429
Operating expenses:
Sales and marketing 4,618 4,793 d,e (954) 8,457
Research and development 1,353 2,524 d (612) 3,265
General and administrative 7,772 3,238 b,d,e 3,422 14,432
Goodwill and other Intangibles 1,801 -- a 3,356 5,157
---------- ------- ------ ----------
Total Operating Expenses 15,544 10,555 5,212 31,311
Loss from Continuing Operations (12,708) (7,627) (5,547) (25,882)
Basic and Diluted Loss per common
share from continuing operations (0.36) (0.54)
========== ==========
Weighted average shares oustanding 35,373,365 48,373,365
========== ==========
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Notes
(A) To adjust for goodwill and technology amortization as if the
companies had been combined as of January 1, 2000
Total goodwill as reported in the combining condensed
balance sheet $20,136
Proforma amortization period 3 years
Proforma goodwill amortization for the six months ended
June 30, 2000 3,356
(B) To record the issuance of 2,000,000 shares at $1.75
per share to a third party service provider $ 3,500
(C) To reclassify Product revenue and cost of revenue as a
discontinued operation
Product revenue 5,240
Cost of product revenue (3,753)
-------
Net amount to be reclassified to discontinued
operations 1,487
=======
(D) to eliminate EFAX salary expense which would not be incurred
after the acquisition
Portion allocable to the following:
Cost of service 369
Engineering 612
General and administrative 700
Sales and Marketing 1,115
(E) Reclassification of cost of sales to conform to JFAX
presentation
General and Administative 622
Sales and marketing 161
-------
783
</TABLE>
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<PAGE>
j2 Global believes that the foregoing Unaudited Pro Forma Condensed
Combining Statement of Operations for the Six Months Ended June 30, 2000 and the
Twelve Months Ended December 31, 1999 (the "Pro Forma Operating Statements") do
not fully reflect how the combined companies will perform following consummation
of the merger and completion of the integration of the two companies. In
particular, the Pro Forma Operating Statements assume that revenues from
eFax.com's Internet business are included in the pro forma j2 Global Internet
revenues at a cost that includes all of eFax.com's network operations costs.
However, j2 Global believes that the actual cost associated with this
incremental revenue is likely to be lower because:
. Historically, gross margins associated with the operation of j2
Global's network are significantly higher than those associated with the
operation of eFax.com's network;
. The j2 Global network should be able to operate more efficiently (in
terms of per unit costs) following the integration of eFax.com's substantial
customer base; and
. A substantial portion of the costs reflected in the respective
companies' network operations costs are likely to be redundant.
In addition, the Pro Forma Operating Statements do not reflect the strong
quarter-to quarter Internet-related revenue growth which eFax.com has
experienced during the three fiscal quarters ended July 1, 2000 (as a result of
eFax.com's relatively recent efforts to convert free subscribers to paid
subscribers). Accordingly, following the integration of the eFax.com customer
base into the j2 Global network (which is not expected to be completed before
the second quarter of 2001), j2 Global believes that eFax.com's Internet
revenues will be higher than those reflected in the Pro Forma Operating
Statements and should be included in j2 Global's operating results at a lower
cost than that reflected in the Pro Forma Operating Statements. j2 Global
believes that the incremental cash expenditures to be incurred post-closing in
future quarterly periods and associated with the addition of eFax.com Internet
revenue will ultimately be immaterial.
Additionally, following the merger and integration, the companies will be
better positioned to generate revenues from their combined base of free
subscribers (either by converting free subscribers to paid subscribers, by
offering paid advertising in the customer interface utilized by free
subscribers, or by offering third-party promotions to free subscribers). j2
Global believes that this position will result in revenue generation
opportunities that are not reflected in the Pro Forma Operating Statements.
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j2 GLOBAL COMMUNICATIONS, INC.
Unaudited Pro Forma Condensed Combining Balance Sheet
June 30, 2000
<TABLE>
<CAPTION>
Historical
----------------------------- Proforma Proforma
JFAX EFAX Adjustments Combined
----------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $15,048 175 15,223
Short term Investments 7,519 -- 7,519
Accounts receivable 972 1,451 2,423
Inventories -- 368 368
Notes receivable 1,500 -- b (1,500) --
Prepaid expenses and other current assets marketing costs 3,160 1,168 4,328
---------------------------------------------------------------------
Total current assets 28,199 3,162 (1,500) 29,861
Furniture, fixtures and equipment, net 5,791 2,156 7,947
Long term Investments 15,169 -- 15,169
Capitalized Software Costs 2,138 -- 2,138
Goodwill and other Intangibles 8,301 -- a 20,136 28,437
Other long-term assets 1,653 3,513 5,166
---------------------------------------------------------------------
$61,251 8,831 18,636 88,718
=====================================================================
Liabilities, Redeemable Securities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 2,503 5,282 a 1,600 7,885
b (1,500)
Deferred revenue 316 1,028 1,344
Current portion of capital lease obligations 236 -- 236
Current portion of long-term debt 1,359 -- 1,359
Other 417 413 830
---------------------------------------------------------------------
Total current liabilities 4,831 6,723 100 11,654
Capital lease obligations 179 -- 179
Long-term debt 1,001 -- 1,001
Redeemable common stock 7,065 -- 7,065
Common Stock subject to put option 998 -- 998
Total stockholders' equity (deficiency) 47,177 2,108 a 18,536 67,821
---------------------------------------------------------------------
$61,251 8,831 18,636 88,718
=====================================================================
</TABLE>
<TABLE>
<S> <C>
Notes
(A) Purchase price of 11,000,000 shares at $1.75 per
share (August 23, 2000) is $19,250,000 in total
consideration
Purchase price $19,250
Add estimated merger related transaction costs 1,600
Less fair value of assets in excess of liabilities
assumed (714)
---------
Total Goodwill and other intangibles acquired $20,136
=========
(B) Elimination of advances to EFAX as of June 30, 2000 $ 1,500
</TABLE>
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DESCRIPTION OF j2 GLOBAL CAPITAL STOCK
The following summary information is qualified in its entirety by the
provisions of j2 Global certificate of incorporation and proxy statement/bylaws,
copies of which have been filed as exhibits to the registration statement of
which this proxy statement/prospectus is a part. See "Where You Can Find More
Information" beginning on page __ for more information.
j2 Global's authorized capital stock consists of 200,000,000 shares of
common stock, par value $0.01 per share, and 1,000,000 shares of preferred
stock, par value $0.01 per share. As of July 31, 2000, 36,122,600 shares of
common stock were issued and outstanding, and there were 105 stockholders of
record of the common stock, although there are a larger number of beneficial
owners. As of July 31, 2000, 120 shares of Series B Convertible Preferred Stock
were issued and outstanding, and there was one holder of record of preferred
stock. j2 Global also has warrants and stock options outstanding, as described
below.
Common Stock
Dividends
Subject to the prior rights of any outstanding preferred stock, the holders
of common stock are entitled to receive dividends out of assets legally
available for payment of dividends at such times and in such amounts as the
board of directors may from time to time determine.
Voting Rights
Each outstanding share of j2 Global common stock entitles the holder to one
vote on all matters submitted to a vote of stockholders, including the election
of directors, subject to any class or series voting rights granted to the
preferred stock. There is no cumulative voting. The board of directors is
expressly authorized to adopt, amend or repeal the bylaws in any manner not
inconsistent with Delaware law or the certificate of incorporation, subject to
the power of the stockholders to adopt, amend or repeal the bylaws. The
certificate of incorporation may be amended by an affirmative vote of the
holders of a majority of j2 Global's outstanding capital stock entitled to vote
on the matter, subject to any class or series voting rights granted to the
preferred stock.
Liquidation Rights and Other Matters
The shares of common stock are neither redeemable nor convertible, and the
holders of common stock have no preemptive or subscription rights to purchase
any j2 Global securities. Upon the liquidation, dissolution or winding up of j2
Global, the holders of common stock are entitled to receive pro rata any of j2
Global's assets which are legally available for distribution after payment of
all debts and other liabilities and subject to any preferential rights of the
holders of preferred stock.
The holders of 2,207,698 shares of j2 Global common stock were granted put
rights with respect to those shares, which would be available following a change
of control, as defined, in a manner similar to the redemption rights applicable
to warrants as described below. The put price is $3.20 per share, subject to
anti-dilution adjustments. If the put is triggered, the holders of these shares
may require j2 Global to purchase these shares at the put price.
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<PAGE>
Preferred Stock
As of August 15, 2000, j2 Global has one series of preferred stock issued
and outstanding, consisting of 120 shares of Series B Convertible Preferred
Stock. This preferred stock was issued to Steven J. Hamerslag in connection with
his agreeing to join j2 Global as President and Chief Executive Officer. See
"The j2 Global Annual Meeting--Proposal 3 -- Election of Directors--Employment
Contracts, Termination of Employment and Change of Control Arrangements" on page
__.
The j2 Global board of directors may authorize the issuance of one or more
additional series of preferred stock having such rights, including voting,
conversion and redemption rights, and such preferences, including dividend and
liquidation preferences, as the board may determine, without further action by
the stockholders.
The issuance of additional preferred stock by the board of directors could
adversely affect the rights of holders of common stock. For example, the
issuance of preferred stock could result in another series of securities
outstanding with preferences over the common stock with respect to dividends and
in liquidation, with voting rights superior to the common stock, or with rights,
upon conversion or otherwise, the same or superior to the common stock.
j2 Global believes that its board of directors' ability to issue preferred
stock on such a wide variety of terms will enable the preferred stock to be used
for important corporate purposes, such as financing acquisitions or raising
additional capital. However, were it inclined to do so, the board of directors
could issue all or part of the preferred stock with, among other things,
substantial voting power or advantageous conversion rights. This stock could be
issued to persons deemed by the board of directors likely to support current
management in a contest for control of the company, either as a precautionary
measure or in response to a specific takeover threat. The ability of the board
of directors to issue additional preferred stock or the issuance of such
preferred stock could have the effect of delaying, deferring or preventing a
change in control of j2 Global without any further action by the holders of
common stock. j2 Global has no current plans to issue preferred stock for any
purpose.
Warrants and Options
In connection with j2 Global's preferred stock offering in July 1998, it
issued warrants to purchase an aggregate of 3,393,750 shares of common stock at
an exercise price of $2.40 per share, subject to adjustment. These warrants are
currently exercisable and expire in July 2005. Holders of unexercised warrants
do not have voting or any other rights of stockholders. Warrants for 1,112,500
shares remain outstanding.
Upon the occurrence of a change of control, as defined, that is not
approved by the holders of 66-2/3% in interest of the warrants and the shares of
common stock received on the exercise of warrants, the holders of the warrants
and the shares of common stock held as a result of the exercise of the warrants
will have the right to require j2 Global:
. To redeem the warrants at $1.60 for each share of j2 Global common
stock for which the warrant is exercisable, and
. To redeem the shares of common stock received on exercise of any
warrants at $4.00 each, in each case subject to anti-dilution adjustment.
j2 Global has also issued warrants to purchase 420,000 shares of j2 Global
common stock at an exercise price of $0.70 per share, to purchase 420,000 shares
of common stock at $1.80 per share and to
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purchase 29,166 shares of common stock at $2.40 per share, in each case subject
to anti-dilution adjustment. The latter warrants expire in April 1, 2005, and
the former two series of warrants expire in January 2007.
j2 Global also issued warrants to America Online on October 15, 1997 to
purchase 250,000 shares of its common stock at $2.40 per share. These warrants
expire on October 15, 2004.
All of the above warrants are immediately exercisable.
j2 Global also has options outstanding and available for grant under its
stock option plan, including outstanding and currently exercisable options to
acquire 916,005 shares of its common stock as of August 15, 2000. See "The j2
Global Annual Meeting--Proposal 3 -- Election of Directors--1997 Stock Option
Plan" and "--Certain Transactions" beginning on pages __ and __, respectively.
j2 Global has filed a registration statement on Form S-8 covering the shares of
common stock issuable under its stock option plan, including shares subject to
outstanding options, thus permitting the resale of the shares in the public
market without restriction under the Securities Act, other than restrictions
applicable to affiliates.
Registration Rights
Pursuant to various registration rights agreements, including agreements
with most of j2 Global's officers, directors and significant stockholders, the
holders of 22,177,754 shares of j2 Global common stock may make requests that j2
Global register their shares, or include their shares in other registrations,
under the Securities Act, subject to conditions as to the minimum aggregate
value of shares to be sold and other customary conditions. These registration
rights also extend to another 1,952,500 shares not yet issued, for example
shares issuable upon the exercise of warrants, for the benefit of the persons
having these rights. Including the shares not yet issued, these registration
rights cover approximately 63% of j2 Global's outstanding shares of common
stock, including shares issuable upon the exercise of warrants. For a further
description of the terms of the registration rights agreements with j2 Global's
officers, directors and principal stockholders, see "The j2 Global Annual
Meeting--Proposal 3 -- Election of Directors--Certain Transactions" beginning on
page __.
As part of the merger, j2 Global will enter into a registration rights
agreement with the holders of the eFax.com Series D Preferred Stock. Under the
terms of the registration rights agreement, j2 Global agrees to file a
registration statement to permit the resale of the shares of j2 Global common
stock which the current eFax.com preferred stockholders would have a right to
acquire upon the exercise of warrants which j2 Global will grant to the
preferred stockholders in the merger. The exact number of shares for which the
warrants will be exercisable cannot currently be determined and will depend, in
part, on the exchange ratio for calculating the fraction of a share of j2 Global
common stock into which one share of eFax.com common stock will be convertible
in the merger.
In addition, at the time of the closing of the merger, j2 Global will enter
into a registration rights agreement with Integrated Global Concepts, Inc. Under
the terms of this agreement, j2 Global will be required to file a registration
statement to permit the resale of the 2,000,000 shares of j2 Global common stock
which Integrated Global Concepts will acquire at the time of the merger.
Securityholders' Agreement
j2 Global has a securityholders' agreement dated as of June 30, 1998 with
certain of its warrant investors in the June and July 1998 private placements.
For a description of the terms of that
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securityholders' agreement, see "The j2 Global Annual Meeting--Proposal 3--
Election of Directors--Certain Transactions" beginning on page __.
Anti-Takeover Effects of Delaware Law
j2 Global is a Delaware corporation and is subject to Delaware law, which
generally prohibits a publicly held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the time that the person became an interested stockholder, unless:
. Before such time the board of directors of the corporation approved
either the business combination or the transaction in which the person became an
interested stockholder;
. Upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested person owns at least 85% of
the voting stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also officers
of the corporation and by certain employee stock plans; or
. At or after such time the business combination is approved by the
board of directors of the corporation and authorized at an annual or special
meeting of stockholders, and not by written consent, by the affirmative vote of
at least 66-2/3% of the outstanding voting stock of the corporation that is not
owned by the interested stockholder.
A "business combination" generally includes mergers, asset sales and
similar transactions between the corporation and the interested stockholder, and
other transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person:
. Who, together with affiliates and associates, owns 15% or more of the
corporation's outstanding voting stock, or
. Who is an affiliate or associate of the corporation and, together with
his or her affiliates and associates, has owned 15% or more of the corporation's
outstanding voting stock within three years.
The provisions of Delaware law described above would make more difficult or
discourage a proxy contest or acquisition of control by a holder of a
substantial block of j2 Global's stock or the removal of the incumbent board of
directors. The provisions could also have the effect of discouraging an outsider
from making a tender offer or otherwise attempting to obtain control of j2
Global, even though such an attempt might be beneficial to j2 Global and its
stockholders.
Director and Officer Liability
j2 Global's certificate of incorporation and bylaws also:
. Eliminate the personal liability of directors for monetary damages
resulting from breaches of fiduciary duty to the extent permitted by Delaware
law; and
. Indemnify directors and officers to the fullest extent permitted by
Delaware law, including in circumstances in which indemnification is otherwise
discretionary.
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j2 Global believes that these provisions are necessary to attract and
retain qualified directors and officers.
Notice Provisions
j2 Global's bylaws require that any stockholder proposals to be considered
at an annual meeting of stockholders must be delivered to the company not less
than 60 nor more than 90 days prior to the meeting. In addition, in the notice
of any such proposal, the proposing stockholder must state the proposals, the
reasons for the proposal, the stockholder's name and address, the number of
shares held by the stockholder and any material interest of the stockholder in
the proposals. There are additional informational requirements in connection
with a proposal concerning a nominee for the board of directors.
Transfer Agent and Registrar
The transfer agent and registrar for the j2 Global common stock is
Computershare Trust Company, Inc.
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COMPARISON OF STOCKHOLDERS' RIGHTS
This section of the proxy statement/prospectus describes the material
differences between the rights of holders of eFax.com common stock and holders
of j2 Global common stock. While j2 Global and eFax.com believe that the
description covers the material differences between the two, this summary may
not contain all of the information that is important to you. You should
carefully read this entire document and the other documents we refer to for a
more complete understanding of the differences between being a stockholder of
eFax.com and being a stockholder of j2 Global.
j2 Global and eFax.com are incorporated under the laws of the State of
Delaware. The rights of their stockholders are governed by Delaware law and by
their respective certificates of incorporation and bylaws. If the merger is
completed, stockholders of eFax.com will become stockholders of j2 Global and
the rights of stockholders of eFax.com will be governed by Delaware law, the j2
Global certificate and j2 Global bylaws. The following summarizes differences in
the charter documents of eFax.com and j2 Global that could materially affect the
rights of stockholders of eFax.com after completion of the merger. A number of
the provisions of j2 Global's charter documents may have the effect of delaying,
deferring or preventing a change in control of j2 Global.
Capitalization
The total authorized shares of capital stock of eFax.com consist of (1)
35,000,000 shares of common stock, $0.01 par value per share, and (2) 5,000,000
shares of preferred stock, $0.01 par value per share, 1,500 shares of which are
designated as Series A Preferred Stock, 1,500 shares of which are designated as
Series B Preferred Stock, 1,500 shares of which are designated as Series C
Preferred Stock, 1,447 shares of which are designated as Series D Preferred
Stock and 1,447 shares of which are designated as Series E Preferred Stock.
Pursuant to an exchange agreement between eFax.com and its preferred
stockholders, all of the outstanding shares of Series B Preferred were exchanged
for Series D Preferred Stock on a one-for-one basis on July 17 , 2000. As of
August 23, 2000, there were 13,970,565 shares of eFax.com common stock and 1,421
shares of Series D Preferred outstanding.
The eFax.com board of directors is authorized to issue preferred stock from
time to time in one or more series and to determine and fix the designations,
voting powers, preferences and rights of the shares of each such series and the
qualifications, limitations or restrictions thereof. The authority of the board
with respect to each series shall include, but not be limited to, determinations
of the following:
. The number of shares constituting the series and the distinctive
designation of that series;
. The dividend rate on and rights of shares of that series;
. The voting rights of the series;
. The terms and conditions of any conversion privileges of the series;
. The redemption rights of the series;
. Whether the series will have a sinking fund for redemption or purchase
of the shares of the series, and the terms and amount of the sinking fund;
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. The rights of the shares in the event of a liquidation, dissolution or
winding up of the eFax.com; and
. Any other relative rights, preferences and limitations of the series.
The eFax.com board of directors, without stockholder approval, can issue
eFax.com preferred stock with dividend, voting, conversion or other rights that
could adversely affect the voting power and other rights of the holders of
eFax.com common stock. eFax.com preferred stock could thus be issued quickly
with terms calculated to delay or prevent a change in control of eFax.com or
make removal of management more difficult. Additionally, issuing eFax.com
preferred stock may cause the market price of eFax.com common stock to decrease.
The total authorized shares of capital stock of j2 Global consist of (1)
200,000,000 shares of common stock $0.01 par value per share, and (2) 1,000,000
shares of preferred stock, $0.01 par value per share, 120 of which are
designated Series B Convertible Preferred Stock. As of July 31, 2000, 36,122,600
shares of common stock were issued and outstanding, and there were 105
stockholders of record of the common stock, although there are a larger number
of beneficial owners. As of July 31, 2000, 120 shares of Series B Preferred were
issued and outstanding, and there was one holder of record of preferred stock.
j2 Global also has warrants and stock options outstanding.
The j2 Global board of directors' right to issue preferred stock is similar
to the right of the eFax.com board to issue preferred stock.
Number of Directors
j2 Global's bylaws state that the number of directors of j2 Global is set
by the board. Currently, there are six directors of j2 Global, but after the
stockholders meeting to which this proxy statement/prospectus relates it is
expected that there will be eight directors. j2 Global's board of directors or
stockholders may change such number of directors by amending the bylaws. The
merger agreement provides that the board of directors, upon effectiveness of the
merger, shall increase the number of directors on the board or exercise its best
efforts to secure the resignation of current directors in order to cause one
person nominated by eFax.com to be appointed to the j2 Global board and shall
nominate one person designated by the person nominated by eFax.com for the
position of director at each of the first and second j2 Global stockholder
meetings after effectiveness of the merger. eFax.com has designated Douglas Y.
Bech to be its nominee for the j2 Global board of directors.
eFax.com's bylaws fix the authorized number of directors at five.
eFax.com's board of directors or stockholders may change such number by amending
the bylaws.
Voting Rights
Each holder of j2 Global and eFax.com common stock is entitled to one vote
for each share held of record. Elections of j2 Global and eFax.com directors are
determined by a plurality of the votes cast by the stockholders entitled to vote
at the election.
Under Delaware law, unless the corporation's certificate of incorporation
provides otherwise, there can be no cumulative voting for the election of
directors. j2 Global's and eFax.com's certificates do not provide for cumulative
voting.
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Classified Board of Directors
A classified board is one to which some, but not all, of the directors
are elected on a rotating basis each year. Delaware law permits, but does not
require, a classified board of directors with staggered terms under which
one-half or one-third of the directors are elected for terms of two or three
years, respectively. Currently, j2 Global's and eFax.com's certificates of
incorporation do not provide for a classified board.
Director Voting
j2 Global's bylaws provide that the number of directors constituting a
quorum shall be one-third of the number of authorized directors. eFax.com's
bylaws provide that the number of directors constituting a quorum shall be a
majority of the number of directors holding office.
Removal of Directors
Under Delaware law, unless otherwise restricted by the certificate of
incorporation or by the corporation's bylaws, any director or the entire board
of directors may be removed with or without cause by the holders of a majority
of the shares then entitled to vote at an election of directors; provided,
however, that so long as stockholders of the corporation are entitled to
cumulative voting, no individual director may be removed without cause, unless
the entire board is removed, if the number of votes cast against such removal
would be sufficient to elect the director if then cumulatively voted at an
election of the class of directors of which the director is a part. Whenever the
holders of any class or series are entitled to elect one or more directors by
the certificate of incorporation, the director or directors may be removed
without cause only if there are sufficient votes by the holders of the
outstanding shares of that class or series. A vacancy created by the removal of
a director may be filled only by the approval of the stockholders.
j2 Global's bylaws and eFax.com's bylaws provide that the board of
directors or any director may be removed with or without cause by a vote of
stockholders holding a majority of the outstanding shares entitled to vote at an
election of directors.
Under Delaware law, no reduction of the authorized number of directors
shall have the effect of removing any director prior to the expiration of the
director's term of office.
Filling Vacancies on the Board of Directors
Under Delaware law, vacancies and newly created directorships may be
filled by a majority of the directors then in office, even though less than a
quorum, unless otherwise provided in the certificate of incorporation or bylaws
and unless the certificate of incorporation directs that a particular class is
to elect the director, in which case any other directors elected by such class,
or a sole remaining director, shall fill such vacancy. However, a vacancy
created by removal of a director may only be filled by the approval of the
stockholders. j2 Global's and eFax.com's bylaws allow a majority of the
directors then in office to fill any vacancy on the board even if they make up
less than a quorum.
Advance Notice of Stockholder Proposals
j2 Global's and eFax.com's bylaws provide that no matter proposed by
their respective stockholders will be considered at an annual meeting or special
stockholder meeting unless:
. It is specified in the notice of meeting;
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. It is brought by or at the direction of the board of directors; or
. It is brought by a stockholder of the corporation who was a
stockholder of record on the record date and has provided written notice of the
matter to either j2 Global or eFax.com in compliance with the time and content
requirements in j2 Global's and eFax.com's bylaws, as applicable.
Power to Call Special Meetings of Stockholders
Under Delaware law, a special meeting of stockholders may be called by
the board of directors or by any other person authorized to do so in the
certificate of incorporation or the bylaws. Pursuant to j2 Global's bylaws,
special meetings may be called by the chairman of the board, the vice chairman
of the board, the president, the board of directors or the secretary upon the
written request of stockholders owning of record a majority of the outstanding
shares of each class of stock entitled to vote at such meeting. eFax.com's
bylaws provide that special meetings may be called by the board of directors,
the chairman of the board or the president.
Action by Written Consent of Stockholders
Under Section 228 of the Delaware General Corporation Law, unless
otherwise provided in the certificate of incorporation, any action that may be
taken at any annual or special meeting of stockholders may be taken without a
meeting, without prior notice and without a vote through the execution of
written consents by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary that would be necessary to
authorize or take such action at a meeting at which all shares entitled to vote
thereon were present and voted. eFax.com's certificate provides that for any
class of stock which is registered under the Securities Exchange Act of 1934,
stockholders of the class may not take any action by written consent.
Business Combination Following a Change of Control
A number of states have adopted special laws designed to make some
kinds of "unfriendly" corporate takeovers, or other transactions involving a
corporation and one or more of its significant stockholders, more difficult.
Under Section 203 of the Delaware General Corporation Law, some business
combinations by Delaware corporations with interested stockholders are subject
to a three-year moratorium unless specified conditions are met. Section 203
prohibits a Delaware corporation from engaging in a business combination with an
interested stockholder for three years following the date that such person
becomes an interested stockholder. With some exceptions, an interested
stockholder is generally a person or group who or which owns 15% or more of the
corporation's outstanding voting stock, including any rights to acquire stock
pursuant to an option, warrant, agreement, arrangement or understanding, or upon
the exercise of conversion or exchange rights, and stock with respect to which
the person has voting rights only, or is an affiliate or associate of the
corporation and was the owner of 15% or more of such voting stock at any time
within the previous three years.
Because j2 Global's and eFax.com's certificates of incorporation and
bylaws do not contain a provision expressly electing not to be governed by
Section 203 of the Delaware General Corporation Law, they are subject to Section
203. Because the board of directors of eFax.com approved the merger prior to the
execution of the merger agreement, the business combination that will result
from the merger is not affected by Section 203.
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Amendment of Charter Documents
Generally, under Delaware law, an amendment to a corporation's
certificate of incorporation requires the approval of the board of directors and
the approval of holders of a majority of the outstanding stock entitled to vote
on the amendment. The holders of the outstanding shares of a class are entitled
to vote as a separate class on a proposed amendment that would increase or
decrease the aggregate number of authorized shares of their class, increase or
decrease the par value of the shares of their class, or alter or change the
powers, preferences or special rights of the shares of their class in a way that
affects them adversely. j2 Global's certificate can be amended, altered or
repealed or rescinded in any manner now or hereafter prescribed by Delaware law.
eFax.com's certificate can be amended, altered or repealed or rescinded in any
manner now or hereafter prescribed by Delaware law, except that an affirmative
vote of two-thirds of the combined voting power of the then-outstanding shares
is required to alter, amend or repeal the articles governing the adoption,
amendment or repeal of provisions of the bylaws dealing with special meetings of
stockholders, advance notice of stockholder nominees and advance notice of
stockholder business, cumulative voting or the ability of stockholders to act by
written consent. j2 Global's bylaws may be amended or repealed by the board of
directors or by the affirmative vote of a majority of the stockholders.
eFax.com's bylaws may be amended or repealed by an affirmative vote of a
majority of the stockholders or a majority of the board of directors, except
that the certificate of incorporation provides that the affirmative vote of
two-thirds of the stockholders is required to amend or repeal those provisions
of the bylaws dealing with special meetings of stockholders, advance notice of
stockholder nominees and advance notice of stockholder business.
Indemnification
j2 Global's certificate of incorporation indemnifies directors and j2
Global's bylaws and eFax.com's bylaws indemnify directors and officers to the
fullest extent permissible under Delaware law. Under Delaware law, a corporation
may not indemnify directors or officers for the following:
. Breaches of a director's or officer's duty of loyalty to the
corporation or its stockholders;
. Acts or omissions not in good faith or involving intentional
misconduct or knowing violations of law;
. The payment of unlawful dividends or unlawful stock repurchases or
redemptions; or
. Transactions in which the director or officer received an improper
personal benefit.
Restriction on Sales of Stock
j2 Global and eFax.com are public companies. j2 Global lists its shares
of common stock for trading on The Nasdaq National Market and eFax.com common
stock is traded on the over-the-counter electronic bulletin board sponsored by
Nasdaq. j2 Global's and eFax.com's certificates and bylaws do not provide for
any restrictions on the transfer of outstanding shares, other than those imposed
by federal or other securities laws for shares offered under exempt
transactions.
Inspection of Stockholders List
Delaware law permits any stockholder by making a written demand under
oath stating the purpose at the inspection, to inspect a corporation's stock
ledger, a list of its stockholders and its other books and records, and to make
copies of extracts from the books and records for any proper purpose. If
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the corporation refuses such a request, or fails to respond within five business
days after the demand has been made, the stockholder may petition the court for
an order to compel such an inspection. The court may prescribe limitations or
conditions upon the inspection, or award any other or further relief the court
deems just and proper.
Appraisal Rights
Under Delaware law, a stockholder of a corporation participating in
some major corporate transactions may, under varying circumstances, be entitled
to appraisal rights under which the stockholder may receive cash in the amount
of the fair market value of his or her shares instead of the consideration he or
she would otherwise receive in the transaction.
Under Delaware law, appraisal rights are not available to the
stockholders of a corporation:
. In a merger or consolidation if the shares of the corporation are
either listed on a national securities exchange designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or are held of record by more than 2,000 holders,
and the consideration to be received by the stockholders consists of stock or
depository receipts of the corporation surviving or resulting from the merger or
consolidation or shares of stock or depository receipts of any other corporation
that is listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the NASD or held of
record by more than 2,000 holders; or
. To stockholders of a corporation surviving a merger if no vote of
the stockholders of the surviving corporation is required to approve the merger
because the merger agreement does not amend the existing certificate of
incorporation, if each share of the surviving corporation outstanding prior to
the merger is an identical outstanding or treasury share after the merger, and
the number of shares to be issued in the merger does not exceed 20% of the
shares of the surviving corporation outstanding immediately prior to the merger
and if other conditions are met.
Because eFax.com common stock is no longer listed on The Nasdaq
National Market, the holders of eFax.com's common stock will have appraisal
rights in connection with the merger.
Rights Plans
No j2 Global Rights Plan
j2 Global does not maintain a rights plan.
No eFax.com Rights Plan
eFax.com does not maintain a rights plan.
Preemptive Rights
Neither eFax.com nor j2 Global stockholders have preemptive rights
under Delaware law or under either company's bylaws or certificate of
incorporation.
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Dividends
Under Delaware law, a corporation may, unless otherwise restricted by
its certificate of incorporation, declare and pay dividends out of surplus, or,
if no surplus exists, out of net profits for the current or preceding fiscal
year. However, the amount of capital following the declaration and payment of
the dividend may not be less than the aggregate amount of capital represented by
the issued and outstanding stock of all classes having a preference upon the
distribution of the assets of the corporation. Neither eFax.com's nor j2
Global's certificate of incorporation contains any restriction on the payment of
dividends.
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EXPERTS
The consolidated financial statements of j2 Global as of December 31,
1999 and 1998, and for each of the years in the three-year period ended December
31, 1999, and the consolidated financial statements of SureTalk.com, Inc. as of
December 31, 1999 and for the year then ended, have been included herein and in
the registration statement in reliance upon the reports of KPMG LLP, independent
certified public accountants, included in this proxy statement/prospectus, and
upon the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of eFax.com as of December 31,
1999 and 1998 and for each of the years in the three-year period ended December
31, 1999, incorporated by reference in this proxy statement/prospectus from
eFax.com's 1999 Annual Report on Form 10-K, a copy of which is attached to this
proxy statement/prospectus as Appendix D, have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report which is incorporated
herein by reference, and have been so incorporated in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
VALIDITY OF j2 GLOBAL COMMON STOCK
The validity of the shares of j2 Global common stock being offered
hereby will be passed upon for j2 Global by Sullivan & Cromwell, Los Angeles,
California.
OTHER MATTERS
As of the date of this proxy statement/prospectus, the j2 Global and
eFax.com boards know of no matters that will be presented for consideration at
their annual meeting and special meeting, respectively, other than as described
in this proxy statement/prospectus. However, if any other matter shall come
before the relevant annual or special meeting or any adjournments or
postponements thereof and shall be voted upon, the proposed proxy will be deemed
to confer authority to the individuals named as authorized therein to vote the
shares represented by such proxy as to any such matters that fall within the
purposes set forth in the relevant notice of meeting as determined by a majority
of the relevant board; provided, however, that no proxy that is voted against
any proposal described herein will be voted in favor of any adjournment or
postponement of the relevant special meeting.
j2 GLOBAL STOCKHOLDER PROPOSALS
Stockholder proposals for inclusion in proxy material for j2 Global's
next annual meeting of stockholders must be received by j2 Global in writing a
reasonable time before j2 Global begins to print and mail the proxy materials
for such annual meeting. Such proposals must also meet the other requirement of
the rules of the SEC relating to stockholders' proposals, and the notice
requirements of j2 Global's bylaws.
eFAX.COM STOCKHOLDER PROPOSALS
eFax.com will hold a 2000 annual meeting of its stockholders only if
the merger is not completed. The deadline for submission of stockholder
proposals for inclusion in eFax.com's proxy materials for the 2000 eFax.com
annual meeting will be the record date established for the annual meeting.
If the merger is not completed, eFax.com stockholders may present
proper proposals for consideration at the next annual meeting of eFax.com
stockholders by submitting their proposals in writing to the Secretary of
eFax.com in a timely manner.
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The eFax.com bylaws establish an advance notice procedure with regard
to various matters, including stockholder proposals not included in eFax.com's
proxy statement, to be brought before an annual meeting of stockholders.
The only business that will be conducted at an annual meeting of
eFax.com stockholders is business that is brought before the meeting:
. Pursuant to eFax.com's notice of meeting;
. By or at the direction of the eFax.com board of directors; or
. By any eFax.com stockholder of record at the time of giving of the
notice of stockholder action who is entitled to vote at such meeting and who
complies with the advance notice procedures.
WHERE YOU CAN FIND MORE INFORMATION
j2 Global has filed with the SEC a registration statement under the
Securities Act that registers the distribution to eFax.com stockholders of the
shares of j2 Global common stock, and the warrants to acquire shares, to be
issued in connection with the merger. The registration statement, of which this
proxy statement/prospectus is a part, including the attached exhibits and
schedules, contains additional relevant information about j2 Global and j2
Global common stock. The rules and regulations of the SEC allow us to omit
certain information included in the registration statement from this proxy
statement/prospectus.
In addition, j2 Global and eFax.com file reports, proxy statements and
other information with the SEC under the Exchange Act. You may read and copy
this information at the following locations of the SEC:
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Public Reference Room New York Regional Office Pacific Regional Office
450 Fifth Street, N.W. 7 Word Trade Center 3670 Wilshire Boulevard
Room 1024 Suite 1300 11/th/ Floor
Washington, D.C. 20549 New York, New York 10048 Los Angeles, CA 90036
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You may also obtain copies of this information by mail from the Public
Reference Room of the SEC, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549, at prescribed rates. The SEC also maintains a web site that contains
reports, proxy statements and other information about issuers, like j2 Global
and eFax.com, which file electronically with the SEC. The address of the site is
http://www.sec.gov.
You should also be able to inspect reports, proxy statements and other
information about j2 Global at the offices of NASDAQ Operations, 1735 K Street,
N.W., Washington, D.C. 20006.
The SEC allows eFax.com to "incorporate by reference" information into
this proxy statement/prospectus. This means that eFax.com can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is considered to be a part of
this proxy statement/prospectus, except for any information that is superseded
by information that is included directly in this proxy statement/prospectus.
The following documents filed by eFax.com with the Securities and
Exchange Commission are incorporated by reference in this proxy
statement/prospectus:
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1. The eFax.com Annual Report on Form 10-K for the year ended January
1, 2000, as amended on May 1, 2000.
2. The eFax.com Quarterly Report on Form 10-Q for the quarterly period
ended April 1, 2000.
3. The eFax.com Quarterly Report on Form 10-Q for the quarterly period
ended July 1, 2000.
4. The eFax.com Current Report on Form 8-K, filed on April 6, 2000.
5. The eFax.com Current Report on Form 8-K, as amended, filed on July
14, 2000.
6. The eFax.com Current Report on Form 8-K, filed on August 9, 2000.
In the event that eFax.com files any reports or information pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934
subsequent to the date of this proxy statement/prospectus and prior to the date
of its special meeting, which filing contains material modifications,
corrections or additions to information contained in this proxy
statement/prospectus, j2 Global, as appropriate, will file an amendment with the
SEC to the registration statement of which this proxy statement/prospectus is a
part.
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Appendix A
AGREEMENT AND PLAN OF MERGER
Among
JFAX.COM, Inc.
JFAX.COM Merger Sub, Inc.
and
eFax.com
Dated as of July 13, 2000
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Table of Contents
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RECITALS
ARTICLE I
The Merger; Closing; Effective Time
1.1. The Merger...............................................................2
1.2. Closing..................................................................2
1.3. Effective Time...........................................................3
ARTICLE II
Certificate of Incorporation and By-Laws
of the Surviving Corporation
2.1. The Certificate of Incorporation.........................................3
2.2. The By-Laws..............................................................3
ARTICLE III
Officers and Directors
of the Surviving Corporation
3.1. Directors................................................................3
3.2. Officers.................................................................3
ARTICLE IV
Effect of the Merger on Capital Stock;
Exchange of Certificates
4.1. Effect on Capital Stock..................................................4
(a) Merger Consideration................................................4
(b) Cancellation of Shares..............................................4
(c) Merger Sub..........................................................4
(d) Preferred Stock.....................................................5
(e) Warrants............................................................5
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4.2. Exchange of Certificates for Shares................................... 5
(a) Exchange Agent................................................... 5
(b) Exchange Procedures.............................................. 6
(c) Distributions with Respect to Unexchanged Shares; Voting......... 7
(d) Transfers........................................................ 7
(e) Fractional Shares................................................ 7
(f) Termination of Exchange Fund..................................... 8
(g) Lost, Stolen or Destroyed Certificates........................... 8
4.3. No Dissenters' Rights................................................. 8
4.4. Adjustments to Prevent Dilution....................................... 9
ARTICLE V
Representations and Warranties
5.1. Representations and Warranties of the Company......................... 9
(a) Organization, Good Standing and Qualification.................... 9
(b) Capital Structure................................................ 10
(c) Corporate Authority; Approval.................................... 11
(d) Governmental Filings; No Violations.............................. 11
(e) Company Reports; Financial Statements............................ 12
(f) Absence of Certain Changes....................................... 13
(g) Litigation and Liabilities....................................... 14
(h) Employee Benefits................................................ 14
(i) Compliance with Laws; Permits.................................... 16
(j) Takeover Statutes................................................ 16
(k) [Reserved]....................................................... 17
(l) Taxes............................................................ 17
(m) Labor Matters.................................................... 17
(n) Insurance........................................................ 18
(o) Intellectual Property............................................ 18
(p) Brokers and Finders.............................................. 19
(q) Related Agreements............................................... 19
5.2. Representations and Warranties of Parent and Merger Sub............... 19
(a) Capitalization of Merger Sub..................................... 20
(b) Organization, Good Standing and Qualification.................... 20
(c) Parent Capital Structure......................................... 20
(d) Corporate Authority; Approval.................................... 21
(e) Governmental Filings; No Violations.............................. 21
(f) Parent Reports; Financial Statements............................. 22
(g) Absence of Certain Changes....................................... 23
(h) Litigation and Liabilities....................................... 23
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(i) Employee Benefits................................................ 24
(j) Compliance with Laws; Permits.................................... 25
(k) [Reserved.]...................................................... 26
(l) Taxes............................................................ 26
(m) Labor Matters.................................................... 26
(n) Insurance........................................................ 26
(o) Intellectual Property............................................ 27
(p) Brokers and Finders.............................................. 28
(q) Related Agreements............................................... 28
ARTICLE VI
Covenants
6.1. Interim Operations of the Company..................................... 28
6.1.1 Interim Operations of Parent.......................................... 30
6.2. Acquisition Proposals................................................. 30
6.3. Information Supplied.................................................. 32
6.4. Stockholders Meetings................................................. 32
6.5. Filings; Other Actions; Notification.................................. 32
6.6. [Reserved.]........................................................... 34
6.7. Access................................................................ 34
6.8. Affiliates............................................................ 34
6.9. Stock Exchange Listing and De-listing, etc............................ 35
6.10. Publicity............................................................. 35
6.11. Benefits.............................................................. 36
(a) Stock Options.................................................... 36
(b) Registration on Form S-8......................................... 37
(c) Benefit Plans.................................................... 37
(d) Option Issuance.................................................. 37
(e) Obligations...................................................... 38
(f) Severance Agreements............................................. 38
(g) Effect of Section 6.11........................................... 38
(h) Election to Parent's Board of Directors.......................... 39
6.12. Expenses.............................................................. 39
6.13. Indemnification; Directors' and Officers' Insurance................... 39
6.14. Worker Adjustment and Retraining Notification Act ("WARN Act")........ 41
6.15. Parent Vote........................................................... 41
6.16. Parent Vote........................................................... 42
6.17. Related Agreements.................................................... 42
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ARTICLE VII
Conditions
7.1. Conditions to Each Party's Obligation to Effect the Merger............ 42
(a) Stockholder Approval............................................. 42
(b) NASDAQ Listing................................................... 42
(c) Regulatory Consents.............................................. 42
(d) Litigation....................................................... 43
(e) S-4.............................................................. 43
(f) Blue Sky Approvals............................................... 43
(g) Notification Filing Required Under HSR Act....................... 43
(h) Validity of Agreement of Understanding and Side Agreement........ 44
(i) No Cash Redemption of Preferred Shares........................... 44
7.2. Conditions to Obligations of Parent and Merger Sub.................... 44
(a) Representations and Warranties................................... 44
(b) Performance of Obligations of the Company........................ 44
(c) Consents Under Agreements........................................ 44
(d) Dissenting Shares................................................ 45
(e) Legal Opinion.................................................... 45
(f) Resignations..................................................... 45
(g) Accountant Letters............................................... 45
(h) Fairness Opinion................................................. 45
(i) Affiliates Letters............................................... 45
(j) Conversion of Company Preferred Stock............................ 45
(k) Employment Agreements............................................ 46
(l) Plan Terminations................................................ 46
(m) Accrued Vacation................................................. 46
7.3. Conditions to Obligation of the Company............................... 46
(a) Representations and Warranties................................... 46
(b) Performance of Obligations of Parent and Merger Sub.............. 46
(c) Consents Under Agreements........................................ 46
(d) [Reserved.]...................................................... 47
(e) Accountant Letters............................................... 47
(f) Registration Statement........................................... 47
(g) Fairness Opinion................................................. 47
(h) Legal Opinion.................................................... 47
(i) Term Loan Agreement.............................................. 47
</TABLE>
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<PAGE>
<TABLE>
ARTICLE VIII
<S> <C>
Termination
8.1. Termination by Mutual Consent......................................... 47
8.2. Termination by Either Parent or the Company........................... 47
8.3. Termination by the Company............................................ 48
8.4. Termination by Parent................................................. 49
8.5. Effect of Termination and Abandonment................................. 49
ARTICLE IX
Miscellaneous and General
9.1. Survival.............................................................. 50
9.2. Modification or Amendment............................................. 51
9.3. Waiver of Conditions.................................................. 51
9.4. Counterparts.......................................................... 51
9.5. GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL......................... 51
9.6. Notices............................................................... 52
9.7. Entire Agreement; NO OTHER REPRESENTATIONS............................ 53
9.8. No Third-Party Beneficiaries.......................................... 53
9.9. Obligations of Parent and of the Company.............................. 53
9.10. Severability.......................................................... 54
9.11. Interpretation........................................................ 54
9.12. Assignment............................................................ 54
9.13 Term Loan Agreement................................................... 54
</TABLE>
List of Exhibits
----------------
A. Shareholder Agreement
B. Conversion Number
C. New Exchange Warrants
D. Affiliates Letter
E. Current Severance Agreements
F. The Company's Opinion of Counsel
G. Parent's Opinion of Counsel
H. Formula
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<PAGE>
AGREEMENT AND PLAN OF MERGER
----------------------------
AGREEMENT AND PLAN OF MERGER (hereinafter called this "Agreement"),
---------
dated as of July 13, 2000, among eFax.com, a Delaware corporation (the
"Company"), JFAX.COM, Inc., a Delaware corporation ("Parent"), and JFAX.COM
------- ------
Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of Parent
("Merger Sub," the Company and Merger Sub sometimes being hereinafter
----------
collectively referred to as the "Constituent Corporations").
------------------------
RECITALS
WHEREAS, the respective boards of directors of each of Parent, Merger
Sub and the Company have approved the merger of Merger Sub with and into the
Company (the "Merger") and approved the Merger upon the terms and subject to the
------
conditions set forth in this Agreement;
WHEREAS, it is intended that, for federal income tax purposes, the
Merger shall be a taxable transaction under the Internal Revenue Code of 1986,
as amended, and the rules and regulations promulgated thereunder (the "Code");
----
WHEREAS, for financial accounting purposes, it is intended that the
Merger shall be accounted for as a "purchase";
WHEREAS, each of the directors who is a shareholder and certain
officers of the Company, in their capacity as shareholders, in exchange for good
and valuable consideration, have executed and delivered to Parent shareholder
agreements substantially in the form of Exhibit A hereto (the "Shareholder
-----------
Agreements"), committing such persons, among other things, (i) to vote their
----------
shares of Company Common Stock (as defined herein) in favor of the Agreement at
the Stockholders Meeting (as defined herein), (ii) to certain representations
concerning the ownership of Company Common Stock and Parent Common Stock (as
defined herein) to be received in the Merger and (iii) certain other matters;
WHEREAS, the Company, Parent and Fisher Capital Ltd. and Wingate
Capital Ltd. (collectively, Fisher Capital Ltd. and Wingate Capital Ltd. are the
"Investors") have entered into a side agreement, dated July 13, 2000 (the "Side
--------- ----
Agreement"), containing certain provisions with respect to the Series B Shares
---------
(hereinafter defined) of the Company including agreements by the Investors
waiving appraisal rights, terminating or amending certain prior agreements and
agreeing to the treatment of the Series B Shares as set forth in Article IV
hereof;
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<PAGE>
WHEREAS, Parent and the Company have entered into an Agreement of
Understanding (the "Agreement of Understanding") with Integrated Global
--------------------------
Concepts, Inc. ("IGC"), dated June 30, 2000, to resolve certain disputes between
---
the Company and IGC;
WHEREAS, Parent and the Company, for good and valuable consideration,
have executed and delivered a Term Loan Agreement, dated as of May 5, 2000 (the
"Term Loan Agreement"), pursuant to which the Parent has agreed to lend up to $5
-------------------
million to the Company; and
WHEREAS, the Company, Parent and Merger Sub desire to make certain
representations, warranties, covenants and agreements in connection with this
Agreement;
NOW, THEREFORE, in consideration of the premises, and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto agree as follows:
ARTICLE I
The Merger; Closing; Effective Time
1.1 The Merger. Upon the terms and subject to the conditions set
----------
forth in this Agreement, at the Effective Time (as defined in Section 1.3)
Merger Sub shall be merged with and into the Company and the separate corporate
existence of Merger Sub shall thereupon cease. The Company shall be the
surviving corporation in the Merger (sometimes hereinafter referred to as the
"Surviving Corporation"), and the separate corporate existence of the Company
---------------------
with all its rights, privileges, immunities, powers and franchises shall
continue unaffected by the Merger, except as set forth in Article III. The
Merger shall have the effects specified in the Delaware General Corporation Law,
as amended (the "DGCL").
----
1.2 Closing. The closing of the Merger (the "Closing") shall take
------- -------
place (i) at the offices of Sullivan & Cromwell, 1888 Century Park East, Los
Angeles, California 90067 at 9:00 A.M. on the first business day on which the
last to be fulfilled or waived of the conditions set forth in Article VII (other
than those conditions that by their nature are to be satisfied at the Closing,
but subject to the fulfillment or waiver of those
A-2
<PAGE>
conditions) shall be satisfied or waived in accordance with this Agreement or
(ii) at such other place and time and/or on such other date as the Company and
Parent may agree in writing (the "Closing Date").
------------
1.3 Effective Time. As soon as practicable following the Closing,
--------------
the Company and Parent will cause a Certificate of Merger (the "Delaware
--------
Certificate of Merger") to be executed, acknowledged and filed with the
---------------------
Secretary of State of Delaware as provided in Section 251 of the DGCL. The
Merger shall become effective at the time when the Delaware Certificate of
Merger has been duly filed with the Secretary of State of Delaware (the
"Effective Time").
--------------
ARTICLE II
Certificate of Incorporation and By-Laws
of the Surviving Corporation
2.1 The Certificate of Incorporation. The certificate of
--------------------------------
incorporation of the Company as in effect immediately prior to the Effective
Time shall be the certificate of incorporation of the Surviving Corporation
(the "Charter"), until duly amended as provided therein or by applicable law,
-------
except that Article III of the Charter shall be amended to read in its entirety
as follows: "The aggregate number of shares that the Corporation shall have the
authority to issue is 1,000 shares of Common Stock, par value $0.01 per share."
2.2 The By-Laws. The by-laws of the Company in effect at the
-----------
Effective Time shall be the by-laws of the Surviving Corporation (the "By-
--
Laws"), until thereafter amended as provided therein or by applicable law.
----
ARTICLE III
Officers and Directors
of the Surviving Corporation
3.1 Directors. The directors of Merger Sub at the Effective Time
---------
shall, from and after the Effective Time, be the directors of the Surviving
Corporation until their successors have been duly elected or appointed and
qualified or until their earlier death, resignation or removal in accordance
with the Charter and the By-Laws.
3.2 Officers. The officers of Merger Sub at the Effective Time
--------
shall, from and after the Effective Time, be the officers of the Surviving
Corporation until their
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<PAGE>
successors have been duly elected or appointed and qualified or until their
earlier death, resignation or removal in accordance with the Charter and the By-
Laws.
ARTICLE IV
Effect of the Merger on Capital Stock;
Exchange of Certificates
4.1 Effect on Capital Stock. At the Effective Time, as a result of
-----------------------
the Merger and without any action on the part of the holder of any capital stock
of the Company:
(a) Merger Consideration. Each share of the Common Stock, par value
--------------------
$0.01 per share, of the Company (a "Share" or, collectively, the "Shares" and
----- ------
such Common Stock being herein called the "Company Common Stock") issued and
--------------------
outstanding immediately prior to the Effective Time (other than Shares owned by
Parent, Merger Sub or any other direct or indirect subsidiary of Parent
(collectively, the "Parent Companies") or Shares that are owned by the Company
----------------
or any direct or indirect subsidiary of the Company and in each case not held on
behalf of third parties (each, an "Excluded Share" and collectively, "Excluded
-------------- --------
Shares")) shall be converted into, and become exchangeable for, the number of
------
shares (the "Merger Consideration") of Common Stock, par value $0.01 per share,
--------------------
of Parent ("Parent Common Stock") equal to the amount (the "Conversion Number")
------------------- -----------------
determined pursuant to the formula set forth in Exhibit B. At the Effective
Time, all Shares shall no longer be outstanding and shall be cancelled and
retired and shall cease to exist, and each certificate (a "Certificate")
-----------
formerly representing any of such Shares (other than Excluded Shares) shall
thereafter represent only the right to the Merger Consideration and the right,
if any, to receive pursuant to Section 4.2(e) cash in lieu of fractional shares
into which such Shares have been converted pursuant to this Section 4.1(a) and
any distribution or dividend pursuant to Section 4.2(c). Subject to Section
4.3, the Excluded Shares shall also include any Shares ("Dissenting Shares")
-----------------
that are owned by stockholders ("Dissenting Stockholders") exercising appraisal
-----------------------
rights pursuant to Section 262 of the DGCL.
(b) Cancellation of Shares. Each Excluded Share (other than any
----------------------
Dissenting Shares which shall receive payment as required by the DGCL) shall, by
virtue of the Merger and without any action on the part of the holder thereof,
cease to be outstanding, shall be cancelled and retired without payment of any
consideration therefor and shall cease to exist.
(c) Merger Sub. At the Effective Time, each share of Common Stock,
----------
par value $0.01 per share, of Merger Sub issued and outstanding immediately
prior to the
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<PAGE>
Effective Time shall be converted into one share of common stock of the
Surviving Corporation.
(d) Preferred Stock. Each share of Series B Convertible Preferred
---------------
Stock, par value $0.01 per share, and each share of Series D Convertible
Preferred Stock, par value $0.01 per share, of the Company (such shares of
Preferred Stock, whether of Series B or Series D, being herein collectively
called the "Series B Shares," except as the context may require, and the
---------------
particulars of such two Series of Preferred Stock are more fully explained in
Section 5.1(b)), either (x) shall be converted into Shares prior to the
Effective Time, pursuant to the applicable Certificate of Designations,
Preferences and Rights of such Preferred Stock, or (y) in the case of Series B
Shares that are not so converted into Shares prior to the Effective Time, shall
be converted into, and become exchangeable for, shares of Parent Common Stock on
the same basis as if such Series B Shares had been converted into Shares
immediately prior to the Effective Time; provided, however, that pursuant to and
-------- -------
subject to the terms and conditions of the Side Agreement, each Investor shall
receive a Consideration Warrant (as defined in the Side Agreement) in lieu of
some of the shares of Parent Common Stock that they would otherwise receive. In
either such event, the resulting Shares or the Series B Shares (treated for this
purpose as if such Series B Shares had been converted into Shares) shall be
converted into and be exchangeable for Parent Common Stock (together with
Consideration Warrants in lieu of certain shares of Parent Common Stock if the
foregoing proviso becomes applicable) on the same basis as other Shares as
provided in Section 4.1(a) and, at the Effective Time, such Shares or Series B
Shares shall be cancelled and retired and shall cease to exist.
(e) Warrants. At the Effective Time, Parent shall exchange for each
--------
then outstanding warrant of the Company listed on Schedule 4.1(e) under the
caption "Exchange Warrants" (the "Exchange Warrants") new warrants in the form
-----------------
of Exhibit C attached hereto (the "New Exchange Warrants") and exercisable for a
---------------------
corresponding number of shares of Parent Common Stock (on an as converted basis
from the Shares, giving effect to the Conversion Number) acquirable and
receivable upon exercise of the Exchange Warrants. At the Effective Time,
Parent shall assume all obligations pursuant to the other warrants of the
Company set forth on Schedule 4.1(e) (the "Other Warrants"), subject to the same
--------------
adjustment mechanism as set forth in Section 6.11(a) that is applicable to stock
options.
4.2 Exchange of Certificates for Shares.
-----------------------------------
(a) Exchange Agent. As of the Effective Time, Parent shall deposit,
--------------
or shall cause to be deposited, with an exchange agent selected by Parent with
the Company's prior approval, which shall not be unreasonably withheld (the
"Exchange Agent"), for the benefit of the holders of Shares, certificates
---------------
representing the shares of Parent Common Stock and, after the Effective Time, if
applicable, any cash, dividends or
A-5
<PAGE>
other distributions with respect to the Parent Common Stock to be issued or paid
pursuant to the last sentence of Section 4.1(a) in exchange for Shares
outstanding immediately prior to the Effective Time upon due surrender of the
Certificates (or affidavits of loss in lieu thereof) pursuant to the provisions
of this Article IV (such certificates for shares of Parent Common Stock,
together with the amount of any dividends or other distributions payable with
respect thereto, being hereinafter referred to as the "Exchange Fund").
-------------
(b) Exchange Procedures. Promptly after the Effective Time, the
-------------------
Surviving Corporation shall cause the Exchange Agent to mail to each holder of
record of Shares (other than holders of Excluded Shares) (i) a letter of
transmittal specifying that delivery shall be effected, and risk of loss and
title to the Certificates shall pass, only upon delivery of the Certificates (or
affidavits of loss in lieu thereof) to the Exchange Agent, such letter of
transmittal to be in such form and have such other provisions as Parent and the
Company may reasonably agree, and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for (A) certificates representing
shares of Parent Common Stock and (B) any unpaid dividends and other
distributions and cash in lieu of fractional shares. Subject to Section 4.2(g),
upon surrender of a Certificate for cancellation to the Exchange Agent together
with such letter of transmittal, duly executed, the holder of such Certificate
shall be entitled to receive in exchange therefor (x) a certificate representing
that number of whole shares of Parent Common Stock that such holder is entitled
to receive pursuant to this Article IV, (y) a check in the amount (after giving
effect to any required tax withholdings) of (A) any cash in lieu of fractional
shares plus (B) any unpaid non-stock dividends and any other dividends or other
distributions that such holder has the right to receive pursuant to the
provisions of this Article IV, and the Certificate so surrendered shall
forthwith be cancelled. No interest will be paid or accrued on any amount
payable upon due surrender of the Certificates. In the event of a transfer of
ownership of Shares that is not registered in the transfer records of the
Company, a certificate representing the proper number of shares of Parent Common
Stock, together with a check for any cash to be paid upon due surrender of the
Certificate and any other dividends or distributions in respect thereof, may be
issued and/or paid to such a transferee if the Certificate formerly representing
such Shares is presented to the Exchange Agent, accompanied by all documents
required to evidence and effect such transfer and to evidence that any
applicable stock transfer taxes have been paid. If any certificate for shares of
Parent Common Stock is to be issued in a name other than that in which the
Certificate surrendered in exchange therefor is registered, it shall be a
condition of such exchange that the Person (as defined below) requesting such
exchange shall pay any transfer or other taxes required by reason of the
issuance of certificates for shares of Parent Common Stock in a name other than
that of the registered holder of the Certificate surrendered, or shall establish
to the satisfaction of Parent or the Exchange Agent that such tax has been paid
or is not applicable.
A-6
<PAGE>
For the purposes of this Agreement, the term "Person" shall mean any
------
individual, corporation (including not-for-profit), general or limited
partnership, limited liability company, joint venture, estate, trust,
association, organization, Governmental Entity (as defined in Section 5.1(d)) or
other entity of any kind or nature.
(c) Distributions with Respect to Unexchanged Shares; Voting. (i) All
--------------------------------------------------------
shares of Parent Common Stock to be issued pursuant to the Merger shall be
deemed issued and outstanding as of the Effective Time and whenever a dividend
or other distribution is declared by Parent in respect of the Parent Common
Stock, the record date of which is at or after the Effective Time, that
declaration shall include dividends or other distributions in respect of all
shares of Parent Common Stock issuable pursuant to this Agreement. No dividends
or other distributions in respect of the Parent Common Stock shall be paid to
any holder of any unsurrendered Certificate until such Certificate is
surrendered for exchange in accordance with this Article IV. Subject to the
effect of applicable laws, following surrender of any such Certificate, there
shall be issued and/or paid to the holder of the certificates representing whole
shares of Parent Common Stock issued in exchange therefor, without interest, (A)
at the time of such surrender, the dividends or other distributions with a
record date after the Effective Time theretofore payable with respect to such
whole shares of Parent Common Stock and not paid and (B) at the appropriate
payment date, the dividends or other distributions payable with respect to such
whole shares of Parent Common Stock with a record date after the Effective Time
but with a payment date subsequent to surrender.
(ii) Holders of unsurrendered Certificates shall be entitled to vote
after the Effective Time at any meeting of Parent stockholders the number of
whole shares of Parent Common Stock represented by such Certificates, regardless
of whether such holders have exchanged their Certificates.
(d) Transfers. After the Effective Time, there shall be no transfers
---------
on the stock transfer books of the Surviving Corporation of the Shares that were
outstanding immediately prior to the Effective Time.
(e) Fractional Shares. Notwithstanding any other provision of this
-----------------
Agreement, no fractional shares of Parent Common Stock will be issued and any
holder of Shares entitled to receive a fractional share of Parent Common Stock
but for this Section 4.2(e) shall be entitled to receive a cash payment in lieu
thereof, which payment shall represent such holder's proportionate interest in a
net proceeds from the sale by the Exchange Agent on behalf of such holder of the
aggregate fractional shares of Parent Common Stock that such holder otherwise
would be entitled to receive. Any such sale shall be made by the Exchange Agent
within five business days after the date upon which the Certificate(s) (or
affidavit(s) of loss in lieu thereof) that would otherwise result in the
A-7
<PAGE>
issuance of such fractional shares of Parent Common Stock have been received by
the Exchange Agent.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund
----------------------------
(including the proceeds of any investments thereof and any Parent Common Stock)
that remains unclaimed by the stockholders of the Company for one year after the
Effective Time shall be paid to Parent. Any stockholders of the Company who have
not theretofore complied with this Article IV shall thereafter look only to
Parent for payment of their shares of Parent Common Stock and any cash,
dividends and other distributions in respect thereof payable and/or issuable
pursuant to Section 4.1 and Section 4.2(c) upon due surrender of their
Certificates (or affidavits of loss in lieu thereof), in each case, with out any
interest thereon. Notwithstanding the foregoing, none of Parent, the Surviving
Corporation, the Exchange Agent or any other Person shall be liable to any
former holder of Shares for any amount properly delivered to a public official
pursuant to applicable abandoned property, escheat or similar laws.
(g) Lost, Stolen or Destroyed Certificates. In the event any
--------------------------------------
Certificate shall have been lost, stolen or destroyed, upon the making of an
affidavit of that fact by the Person claiming such Certificate to be lost,
stolen or destroyed and, if required by Parent, the posting by such Person of a
bond in customary amount as indemnity against any claim that may be made against
it with respect to such Certificate, the Exchange Agent will issue in exchange
for such lost, stolen or destroyed Certificate the shares of Parent Common Stock
and any cash payable and any unpaid dividends or other distributions in respect
thereof pursuant to Section 4.2(c) upon due surrender of and deliverable in
respect of the Shares represented by such Certificate pursuant to this
Agreement.
4.3 No Dissenters' Rights. In accordance with Section 262 of the
---------------------
DGCL, and after giving effect to the waiver of appraisal rights set forth in the
Side Agreement, no appraisal rights shall be available to holders of Shares in
connection with the Merger, so long as the Shares remain designated as a
national market system security, i.e., designated on the Nasdaq National Market,
----
as provided in Section 262 of the DGCL.
In case dissenter's rights should become applicable to the Shares, the
following provisions are agreed to by the parties. No Dissenting Stockholder
shall be entitled to shares of Parent Common Stock or cash in lieu of fractional
shares thereof or any dividends or other distributions pursuant to this Article
IV unless and until the holder thereof shall have failed to perfect or shall
have effectively withdrawn or lost such holder's right to dissent from the
Merger under the DGCL, and any Dissenting Stock holder shall be entitled to
receive only the payment provided by Section 262 of the DGCL with respect to
Shares owned by such Dissenting Stockholder. If any Person who otherwise would
be deemed a Dissenting Stockholder shall have failed to properly perfect
A-8
<PAGE>
or shall have effectively withdrawn or lost the right to dissent with respect to
any Shares, such Shares shall thereupon be treated as though such Shares had
been converted into shares of Parent Common Stock pursuant to Section 4.1 hereof
and shall no longer be treated as Dissenting Shares. The Company shall give
Parent (i) prompt notice of any written demands for appraisal, attempted
withdrawals of such demands, and any other instruments served pursuant to
applicable law received by the Company relating to stock holders' rights of
appraisal and (ii) the opportunity to direct all negotiations and proceedings
with respect to demand for appraisal under the DGCL. The Company shall not,
except with the prior written consent of Parent, voluntarily make any payment
with respect to any demands for appraisals of Dissenting Shares, offer to settle
or settle any such demands or approve any withdrawal of any such demands.
4.4 Adjustments to Prevent Dilution. In the event that the Company
-------------------------------
changes the number of Shares or securities convertible or exchangeable into or
exercisable for Shares, or Parent changes the number of shares of Parent Common
Stock or securities convertible or exchangeable into or exercisable for shares
of Parent Common Stock, issued and outstanding prior to the Effective Time as a
result of a reclassification, stock split (including a reverse split), stock
dividend or distribution, recapitalization, merger, subdivision, issuer tender
or exchange offer, or other similar transaction, the provisions of the formula,
attached as Exhibit B, that determines the Merger Consideration shall be
adjusted accordingly.
ARTICLE V
Representations and Warranties
5.1 Representations and Warranties of the Company. Except as set
---------------------------------------------
forth in the corresponding sections or subsections of the disclosure letter
delivered to Parent by the Company on or prior to entering into this Agreement
(the "Company Disclosure Letter"), the Company hereby represents and warrants to
-------------------------
Parent and Merger Sub that:
(a) Organization, Good Standing and Qualification. Each of the
---------------------------------------------
Company and its Subsidiaries is a corporation duly organized, validly existing
and in good standing under the laws of its respective jurisdiction of
organization and has all requisite corporate power and authority to own and
operate its properties and assets and to carry on its business as presently
conducted and is qualified to do business and is in good standing as a foreign
corporation in each jurisdiction where the ownership or operation of its assets
or properties or conduct of its business requires such qualification, except
where the failure to be so organized, qualified or in good standing, or to have
such power or authority, when taken together with all other such failures, is
not reasonably likely to have a Company Material Adverse Effect (as defined
below). The Company has
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<PAGE>
made available to Parent a complete and correct copy of the Company's and its
Subsidiaries' organic documents (including certificates of incorporation and by-
laws where applicable), each as amended to date. The Company's and its
Subsidiaries' organic documents so delivered are in full force and effect.
Section 5.1(a) of the Company Disclosure Letter contains a correct and complete
list of each jurisdiction where the Company and each of its Subsidiaries is
organized and qualified to do business.
As used in this Agreement, the term (i) "Subsidiary" means, with
----------
respect to the Company, Parent or Merger Sub, as the case may be, any entity,
whether incorporated or unincorporated, of which at least a majority of the
securities or ownership interests having by their terms ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions is directly or indirectly owned or controlled by such party or by one
or more of its respective Subsidiaries or by such party and any one or more of
its respective Subsidiaries and (ii) "Company Material Adverse Effect" means a
-------------------------------
material adverse effect on the financial condition, properties, prospects,
business or results of operations of the Company and its Subsidiaries taken as a
whole.
(b) Capital Structure. The authorized capital stock of the Company
-----------------
consists of 35,000,000 Shares, of which 13,520,895 Shares were outstanding as of
the close of business on July 6, 2000, and 5,000,000 shares of Preferred Stock,
par value $0.01 per share (the "Preferred Shares"), of which 1,447 shares of the
----------------
Series B Shares were outstanding as of the date hereof. Pursuant to the terms
of the Series B Shares, the Series B Shares are convertible into shares of
Series C Convertible Preferred Stock, under certain circumstances (that will not
become applicable, however, if the Merger occurs), and at the Company's option,
the Series B Shares are convertible, subject to certain limitations, into shares
of Parent Common Stock in connection with the Merger. In addition, the Series B
Shares are exchangeable for shares of Series D Convertible Preferred Stock
("Series D Shares") of the Company, and, at the Company's option, the resulting
---------------
Series D Shares are convertible, subject to certain limitations, indirectly into
shares of the Parent Common Stock in connection with the Merger. The Series D
Shares are convertible into shares of Series E Convertible Preferred Stock under
certain circumstances (that will not become applicable, however, if the Merger
occurs). The Company hereby agrees to cause the exchange of the Series B Shares
into Series D Shares no later than July 31, 2000. Inasmuch as the provisions in
Article IV of this Agreement, and other pertinent provisions, have been prepared
on the basis that such provisions will be correctly applicable to either the
Series B Shares or the Series D Shares, in this Agreement, except as the context
may otherwise require, references to the Series B Shares include both the Series
B Shares and the Series D Shares and the defined term contained in Section
4.1(d) so reflects. All of the outstanding Shares and Series B Shares have been
duly authorized and are validly issued, fully paid and nonassessable. The
Company Disclosure Letter contains a correct and complete list of each
outstanding warrant and each outstanding option to purchase Shares under the
Company's Stock
A-10
<PAGE>
Option Plans (as defined in Section 6.11(a)), such list, however, does not
specify the options to acquire Shares pursuant to the Company's Stock Purchase
Plan (as defined in Section 6.11(a)), but the Company Disclosure Letter does set
forth the terms of the Stock Purchase Plan that determine the maximum number of
Shares that may be issued pursuant thereto. The list required by the preceding
sentence includes the holder, date of grant, exercise price and number of Shares
subject to each warrant and each option (other than options pursuant to the
Stock Purchase Plan). Except as set forth above, there are no preemptive or
other outstanding rights, options, warrants, conversion rights, stock
appreciation rights, redemption rights, repurchase rights, agreements,
arrangements, calls, commitments or rights of any kind that obligate the Company
or any of its Subsidiaries to issue or sell any shares of capital stock or other
securities of the Company or any of its Subsidiaries or any securities or
obligations convertible or exchangeable into or exercisable for, or giving any
Person a right to subscribe for or acquire, any securities of the Company or any
of its Subsidiaries, and no securities or obligations evidencing such rights are
authorized, issued or outstanding. The Company does not have outstanding any
bonds, debentures, notes or other obligations the holders of which have the
right to vote (or convertible into or exercisable for securities having the
right to vote) with the stockholders of the Company on any matter. The Company
Disclosure Letter contains a true and complete list of each person in which the
Company owns, directly or indirectly, any voting interest that may require a
filing by Parent under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended (the "HSR Act").
(c) Corporate Authority; Approval. (i) The Company has all requisite
-----------------------------
corporate power and authority and has taken all corporate action necessary in
order to execute, deliver and perform its obligations under this Agreement and
to consummate, subject only to approval of this Agreement by the holders of a
majority of the outstanding Shares (the "Company Requisite Vote"), the Merger.
----------------------
This Agreement is a valid and binding agreement of the Company enforceable
against the Company in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors' rights and to general
equity principles (the "Bankruptcy and Equity Exception").
-------------------------------
(ii) The board of directors of the Company has approved this Agreement
and the Merger and the other transactions contemplated hereby.
(d) Governmental Filings; No Violations. (i) Other than the filings
-----------------------------------
and/or notices (A) pursuant to Section 1.3, (B) under the HSR Act, the Exchange
Act and the Securities Act of 1933, as amended (the "Securities Act"), (C) to
--------------
comply with state securities or "blue-sky" laws and (D) required to be made with
the NASDAQ, no notices, reports or other filings are required to be made by the
Company with, nor are any consents, registrations, approvals, permits or
authorizations required to be obtained by the Company from, any governmental or
regulatory authority, agency, commission, body or
A-11
<PAGE>
other governmental entity ("Governmental Entity"), in connection with the
-------------------
execution and delivery of this Agreement by the Company and the consummation by
the Company of the Merger and the other transactions contemplated hereby, except
those that the failure to make or obtain are not, individually or in the
aggregate, reasonably likely to have a Company Material Adverse Effect or
prevent, materially delay or materially impair the ability of the Company to
consummate the transactions contemplated by this Agreement.
(ii) The execution, delivery and performance of this Agreement by the
Company do not, and the consummation by the Company of the Merger and the other
transactions contemplated hereby will not, constitute or result in (A) a breach
or violation of, or a default under, the certificate of incorporation or by-laws
of the Company or the comparable governing instruments of any of its
Subsidiaries, (B) a breach or violation of, or a default under, the acceleration
of any obligations or the creation of a lien, pledge, security interest or other
encumbrance on the assets of the Company or any of its Subsidiaries (with or
without notice, lapse of time or both) pursuant to, any agreement, lease,
license, contract, note, mortgage, indenture, arrangement or other obligation
("Contracts") binding upon the Company or any of its Subsidiaries or any Law (as
----------
defined in Section 5.1(i)) or governmental or non-governmental permit or license
to which the Company or any of its Subsidiaries is subject or (C) any change in
the rights or obligations of any party under any of the Contracts, except, in
the case of clause (B) or (C) above, for any breach(es), violation(s),
default(s), acceleration(s), creation(s) or change(s) that individually is, and
in the aggregate are, not reasonably likely to have a Company Material Adverse
Effect or prevent, materially delay or materially impair the ability of the
Company to consummate the transactions contemplated by this Agreement. Section
5.1(d) of the Company Disclosure Letter sets forth, to the knowledge of the
officers of the Company, a correct and complete list of Contracts of the Company
and its Subsidiaries pursuant to which consents or waivers are or may be
required prior to consummation of the transactions contemplated by this
Agreement (whether or not subject to the exception set forth with respect to
clauses (B) and (C) above).
(e) Company Reports; Financial Statements. The Company has delivered
-------------------------------------
to the Parent each registration statement, report, proxy statement or
information statement prepared by it since January 1, 2000 (the "Audit Date"),
----------
including (i) the Company's Annual Report on Form 10-K for the year ended
January 1, 2000, (ii) the Company's Current Report on Form 8-K, filed with the
SEC on April 6, 2000, (iii) the Company's Form 10-K/A filed with the SEC on May
1, 2000, and (iv) the Company's Quarterly Report on Form 10-Q for the quarterly
period ended April 1, 2000, each in the form (including exhibits, annexes and
any amendments thereto) filed with the Securities and Exchange Commission (the
"SEC") and (v) an unaudited consolidated balance sheet for the Company and its
---
Subsidiaries as of June 1, 2000 (collectively, including any such reports filed
subsequent to the date hereof and as amended, the "Company Reports"). As of
---------------
their respective dates (or, if amended, as of the date of such amendment), the
Company
A-12
<PAGE>
Reports did not, and any Company Reports filed with the SEC subsequent to the
date hereof will not, contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances in which they were made,
not misleading. Each of the consolidated balance sheets included in or
incorporated by reference into the Company Reports (including the related notes
and schedules) fairly presents, or will fairly present, the consolidated
financial position of the Company and its Subsidiaries as of its date and each
of the consolidated statements of income and of changes in financial position
included in or incorporated by reference into the Company Reports (including any
related notes and schedules) fairly presents, or will fairly present, the
results of operations, retained earnings and changes in financial position, as
the case may be, of the Company and its Subsidiaries for the periods set forth
therein (subject, in the case of unaudited statements, to notes and normal year-
end audit adjustments that will not be material in amount or effect), in each
case in accordance with generally accepted accounting principles ("GAAP")
----
consistently applied during the periods involved, except as may be noted
therein.
(f) Absence of Certain Changes. Except as disclosed in the Company
--------------------------
Reports filed prior to the date hereof, since the Audit Date the Company and its
Subsidiaries have conducted their respective businesses only in, and have not
engaged in any material transaction other than according to, the ordinary and
usual course of such businesses and there has not been (i) any change in the
financial condition, properties, prospects, business or results of operations of
the Company and its Subsidiaries or any development or combination of
developments of which management of the Company has knowledge that, individually
or in the aggregate, has had or is reasonably likely to have a Company Material
Adverse Effect; (ii) any material damage, destruction or other casualty loss
with respect to any material asset or property owned, leased or otherwise used
by the Company or any of its Subsidiaries, whether or not covered by insurance;
(iii) any declaration, setting aside or payment of any dividend or other
distribution in cash, stock or property in respect of the capital stock of the
Company, except for dividends or other distributions on its capital stock
publicly announced prior to the date hereof and except as expressly permitted
hereby; (iv) any event that would constitute a violation of Section 6.1 hereof
if such event occurred after the date of this Agreement and prior to the
Effective Time; or (v) any change by the Company in accounting principles,
practices or methods. Since the Audit Date, except as provided for herein or as
disclosed in the Company Reports filed prior to the date hereof, there has not
been any increase in the compensation payable or that could become payable by
the Company or any of its Subsidiaries to officers or key employees or any
amendment of any of the Compensation and Benefit Plans (as defined in Section
5.1(h)) other than increases or amendments in the ordinary course.
A-13
<PAGE>
(g) Litigation and Liabilities. Except as disclosed in the Company
--------------------------
Reports filed prior to the date hereof, there are no (i) civil, criminal or
administrative actions, suits, claims, hearings, investigations or proceedings
pending or, to the knowledge of the officers of the Company, threatened against
the Company or any of its Affiliates or (ii) obligations or liabilities, whether
or not accrued, contingent or otherwise and whether or not required to be
disclosed, including those relating to environmental and occupational safety and
health matters, or any other facts or circumstances of which the officers of the
Company has knowledge that could result in any claims against, or obligations or
liabilities of, the Company or any of its Affiliates, except for those that are
not, individually or in the aggregate, reasonably likely to have a Company
Material Adverse Effect or prevent or materially burden or materially impair the
ability of the Company to consummate the transactions contemplated by this
Agreement. For purposes of this Agreement, an "Affiliate" of a specified Person
is a Person that directly, or indirectly through one or more intermediaries,
controls or is controlled by, or is under common control with, the Person
specified, and the term "control" means the possession, direct or indirect, of
the power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities, by contract, or
otherwise.
(h) Employee Benefits.
-----------------
(i) A copy of each bonus, deferred compensation, pension, retirement,
profit-sharing, thrift, savings, employee stock ownership, stock bonus, stock
purchase, restricted stock, stock option (including the Stock Option Plans),
employment, termination, severance, compensation, medical, health or other plan,
agreement, policy or arrangement that covers employees, directors, former
employees or former directors of the Company and its Subsidiaries (the
"Compensation and Benefit Plans") and any trust agreement or insurance contract
------------------------------
forming a part of such Compensation and Benefit Plans has been made available to
Parent prior to the date hereof. The Compensation and Benefit Plans are listed
in Section 5.1(h) of the Company Disclosure Letter and any "change of control"
or similar provisions therein are specifically identified in Section 5.1(h) of
the Company Disclosure Letter.
(ii) All Compensation and Benefit Plans are in substantial compliance
with all applicable law, including the Code and the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"). Each Compensation and Benefit Plan
-----
that is an "employee pension benefit plan" within the meaning of Section 3(2) of
ERISA (a "Pension Plan") and that is intended to be qualified under Section
------------
401(a) of the Code has received a favorable determination letter from the
Internal Revenue Service (the "IRS"), and the Company is not aware of any
---
circumstances likely to result in revocation of any such favorable determination
letter. There is no pending or, to the knowledge of the officers of the
Company, threatened material litigation relating to the Compensation and
A-14
<PAGE>
Benefit Plans. Neither the Company nor any of its Subsidiaries has engaged in a
transaction with respect to any Compensation and Benefit Plan that, assuming the
taxable period of such transaction expired as of the date hereof, would subject
the Company or any of its Subsidiaries to a material tax or penalty imposed by
either Section 4975 of the Code or Section 502 of ERISA.
(iii) As of the date hereof, no liability under Subtitle C or D of
Title IV of ERISA has been or is expected to be incurred by the Company or any
Subsidiary with respect to any ongoing, frozen or terminated "single-employer
plan", within the meaning of Section 4001(a)(15) of ERISA, currently or formerly
maintained by any of them, or the single-employer plan of any entity which is
considered one employer with the Company under Section 4001 of ERISA or Section
414 of the Code (an "ERISA Affiliate"). The Company and its Subsidiaries have
---------------
not incurred and do not expect to incur any withdrawal liability with respect to
a multiemployer plan under Subtitle E to Title IV of ERISA. The Company and its
Subsidiaries have not contributed, or been obligated to contribute, to a
multiemployer plan under Subtitle E of Title IV of ERISA at any time since
September 26, 1980. No notice of a "reportable event", within the meaning of
Section 4043 of ERISA for which the 30-day reporting requirement has not been
waived, has been required to be filed for any Pension Plan or by any ERISA
Affiliate within the 12-month period ending on the date hereof or will be
required to be filed in connection with the transactions contemplated by this
Agreement.
(iv) All contributions required to be made under the terms of any
Compensation and Benefit Plan as of the date hereof have been timely made or
have been reflected on the most recent consolidated balance sheet filed or
incorporated by reference in the Company Reports prior to the date hereof.
Neither any Pension Plan nor any single-employer plan of an ERISA Affiliate has
an "accumulated funding deficiency" (whether or not waived) within the meaning
of Section 412 of the Code or Section 302 of ERISA. Neither the Company nor its
Subsidiaries has provided, or is required to provide, security to any Pension
Plan or to any single-employer plan of an ERISA Affiliate pursuant to Section
401(a)(29) of the Code.
(v) Under each Pension Plan which is a single-employer plan, as of
the last day of the most recent plan year ended prior to the date hereof, the
actuarially determined present value of all "benefit liabilities", within the
meaning of Section 4001(a)(16) of ERISA (as determined on the basis of the
actuarial assumptions contained in the Pension Plan's most recent actuarial
valuation), did not exceed the then current value of the assets of such Pension
Plan, and there has been no material change in the financial condition of such
Pension Plan since the last day of the most recent plan year.
(vi) Neither the Company nor its Subsidiaries have any obligations
for retiree health and life benefits under any Compensation and Benefit Plan,
except as set
A-15
<PAGE>
forth in the Company Disclosure Letter. The Company or its Subsidiaries may
amend or terminate any such plan under the terms of such plan at any time
without incurring any material liability thereunder.
(vii) The consummation of the Merger and the other transactions
contemplated by this Agreement will not (x) entitle any employees of the Company
or its Subsidiaries to severance pay, (y) accelerate the time of payment or
vesting or trigger any payment of compensation or benefits under, increase the
amount payable or trigger any other material obligation pursuant to, any of the
Compensation and Benefit Plans or (z) result in any breach or violation of, or a
default under, any of the Compensation and Benefit Plans.
(i) Compliance with Laws; Permits. The businesses of each of the
-----------------------------
Company and its Subsidiaries have not been, and are not being, conducted in
violation of any federal, state, local or foreign law, statute, ordinance, rule,
regulation, judgment, order, injunction, decree, arbitration award, agency
requirement, license or permit of any Governmental Entity (collectively,
"Laws"), except for violations or possible violations that, individually or in
----
the aggregate, are not reasonably likely to have a Company Material Adverse
Effect or prevent or materially burden or materially impair the ability of the
Company to consummate the transactions contemplated by this Agreement. No
investigation or review by any Governmental Entity with respect to the Company
or any of its Subsidiaries is pending or, to the knowledge of the officers of
the Company, threatened, nor has any Governmental Entity indicated an intention
to conduct the same, except for those the outcome of which are not, individually
or in the aggregate, reasonably likely to have a Company Material Adverse Effect
or prevent or materially burden or materially impair the ability of the Company
to consummate transactions contemplated by this Agreement. To the knowledge of
the officers of the Company, no material change is required in the Company's or
any of its Subsidiaries' processes, properties or procedures in connection with
any such Laws, and the Company has not received any notice or communication of
any material noncompliance with any such Laws that has not been cured as of the
date hereof. The Company and its Subsidiaries each has all permits, licenses,
franchises, variances, exemptions, orders and other governmental authorizations,
consents and approvals necessary to conduct its business as presently conducted
except those the absence of which are not, individually or in the aggregate,
reasonably likely to have a Company Material Adverse Effect or prevent or
materially burden or materially impair the ability of the Company to consummate
the Merger and the other transactions contemplated by this Agreement.
(j) Takeover Statutes. No "fair price," "moratorium," "control
-----------------
share acquisition" or other similar anti-takeover statute or regulation or any
anti-takeover provision in the Company's certificate of incorporation and by-
laws is, or at the Effective
A-16
<PAGE>
Time will be, applicable to the Company, the Shares, the Series B Shares, the
Merger or the other transactions contemplated by this Agreement.
(k) [Reserved].
--------
(l) Taxes. The Company and each of its Subsidiaries (i) have prepared
-----
in good faith and duly and timely filed (taking into account any extension of
time within which to file) all Tax Returns (as defined below) required to be
filed by any of them and all such filed Tax Returns are complete and accurate in
all material respects; (ii) have paid all Taxes (as defined below) that are
shown as due on such filed Tax Returns or that the Company or any of its
Subsidiaries are obligated to withhold from amounts owing to any employee,
creditor or third party, except with respect to matters contested in good faith;
and (iii) have not waived any statute of limitations with respect to Taxes or
agreed to any extension of time with respect to a Tax assessment or deficiency.
As of the date hereof, there are not pending or, to the knowledge of the
officers of the Company threatened in writing, any audits, examinations,
investigations or other proceedings in respect of Taxes or Tax matters. There
are not, to the knowledge of the officers of the Company, any unresolved
questions or claims concerning the Company's or any of its Subsidiaries' Tax
liability that are reasonably likely to have a Company Material Adverse Effect.
The Company has made available to Purchaser true and correct copies of the
United States federal income Tax Returns filed by the Company and its
Subsidiaries for each of the fiscal years ended January 3, 1998, January 2, 1999
and January 1, 2000. Neither the Company nor any of its Subsidiaries has any
liability with respect to income, franchise or similar Taxes that accrued on or
before the end of the latest completed fiscal quarter of the Company in excess
of the amounts accrued with respect thereto that are reflected in the financial
statements included in the Company Reports filed on or prior to the date hereof.
As used in this Agreement, (i) the term "Tax" (including, with
---
correlative meaning, the terms "Taxes", and "Taxable") includes all federal,
----- -------
state, local and foreign income, profits, franchise, gross receipts,
environmental, customs duty, capital stock, severances, stamp, payroll, sales,
employment, unemployment, disability, use, property, withholding, excise,
production, value added, occupancy and other taxes, duties or assessments of any
nature whatsoever, together with all interest, penalties and additions imposed
with respect to such amounts and any interest in respect of such penalties and
additions, and (ii) the term "Tax Return" includes all returns and reports
----------
(including elections, declarations, disclosures, schedules, estimates and
information returns) required to be supplied to a Tax authority relating to
Taxes.
(m) Labor Matters. Neither the Company nor any of its Subsidiaries is
-------------
a party to or otherwise bound by any collective bargaining agreement, contract
or other agreement or understanding with a labor union or labor organization,
nor, as of the date
A-17
<PAGE>
hereof, is the Company or any of its Subsidiaries the subject of any material
proceeding asserting that the Company or any of its Subsidiaries has committed
an unfair labor practice or is seeking to compel it to bargain with any labor
union or labor organization nor is there pending or, to the knowledge of the
officers of the Company, threatened, nor has there been for the past five years,
any labor strike, dispute, walk-out, work stoppage, slow-down or lockout
involving the Company or any of its Subsidiaries.
(n) Insurance. The Company has provided Parent with copies of all
---------
policies of fire, liability, workmen's compensation and other forms of insurance
owned or held by the Company, all of which are listed in Section 5.1(n) of the
Company Disclosure Letter. Except as set forth in Section 5.1(n) of the Company
Disclosure Letter, such policies are in adequate amounts and cover risks
customarily insured against by businesses of the type operated by the Company;
except for any such failures to maintain insurance policies that, individually
or in the aggregate, are not reasonably likely to have a Company Material
Adverse Effect.
(o) Intellectual Property.
---------------------
(i) The Company and/or each of its Subsidiaries owns, or is licensed
or otherwise possesses legally enforceable rights to use all patents,
trademarks, trade names, service marks, copyrights, and any applications
therefor, technology, know-how, computer software programs or applications,
and tangible or intangible proprietary information or materials that are
used in the business of the Company and its Subsidiaries as currently
conducted, except for any such failures to own, be licensed or possess
that, individually or in the aggregate, are not reasonably likely to have a
Company Material Adverse Effect, and to the knowledge of the officers of
the Company all patents, trademarks, trade names, service marks and
copyrights held by the Company and/or its Subsidiaries are valid and
subsisting.
(ii) Except as disclosed in Company Reports filed prior to the date
hereof or as is not reasonably likely to have a Company Material
Adverse Effect:
(A) the Company is not, nor will it be as a result of the execution
and delivery of this Agreement or the performance of its obligations
hereunder, in violation of any licenses, sublicenses and other agreements
as to which the Company is a party and pursuant to which the Company is
authorized to use any third-party patents, trademarks, service marks,
copyrights, trade secrets or computer software (collectively, "Third-Party
-----------
Intellectual Property Rights");
----------------------------
A-18
<PAGE>
(B) no claims with respect to (I) the patents, registered and
material unregistered trademarks and service marks, registered
copyrights, trade names, and any applications therefor, trade secrets
or computer software owned by the Company or any of its Subsidiaries
(collectively, the "Company Intellectual Property Rights"); or (II)
------------------------------------
Third-Party Intellectual Property Rights are currently pending or, to
the knowledge of the officers of the Company, are threatened by any
Person;
(C) there are no valid grounds for any bona fide claims (I) to
the effect that the manufacture, sale, licensing or use of any product
as now used, sold or licensed or proposed for use, sale or license by
the Company or any of its Subsidiaries, infringes on any copyright,
patent, trademark, service mark or trade secret of any Person; (II)
against the use by the Company or any of its Subsidiaries, of any
Company Intellectual Property Right or Third-Party Intellectual
Property Right used in the business of the Company or any of its
Subsidiaries as currently conducted or as proposed to be conducted;
(III) challenging the ownership, validity or enforceability of any of
the Company Intellectual Property Rights; or (IV) challenging the
license or legally enforceable right to use of the Third-Party
Intellectual Rights by the Company or any of its Subsidiaries; and
(D) there is no unauthorized use, infringement or
misappropriation of any of the Company Intellectual Property Rights by
any third party, including any employee or former employee of the
Company or any of its Subsidiaries.
(p) Brokers and Finders. Neither the Company nor any of its
-------------------
officers, directors, employees, representatives or agents has employed any
broker or finder or incurred any liability for any brokerage fees, commissions
or finder's fees in connection with the Merger or the other transactions
contemplated in this Agreement, except that the Company has employed Pacific
Growth Equities, Inc. as its financial advisor, the arrangements with which have
been disclosed in writing to Parent prior to the date hereof.
(q) Related Agreements. Each of the representations and
------------------
warranties of the Company set forth in the Agreement of Understanding and the
Side Agreement, including the other related agreements referred to in any of the
foregoing or exhibited or annexed to any of the foregoing, is true and correct.
5.2. Representations and Warranties of Parent and Merger Sub.
-------------------------------------------------------
Except as set forth in the corresponding sections or subsections of the
disclosure letter delivered to the Company by Parent on or prior to entering
into this Agreement (the "Parent Disclosure Letter"), Parent and Merger Sub each
------------------------
hereby represents and warrants to the Company that:
A-19
<PAGE>
(a) Capitalization of Merger Sub. The authorized capital stock
----------------------------
of Merger Sub consists of 1,000 shares of Common Stock, par value $0.01 per
share, all of which are validly issued and outstanding. All of the issued and
outstanding capital stock of Merger Sub is, and at the Effective Time will be,
owned by Parent, and there are (i) no other shares of capital stock or voting
securities of Merger Sub, (ii) no securities of Merger Sub convertible into or
exchangeable for shares of capital stock or voting securities of Merger Sub and
(iii) no options or other rights to acquire from Merger Sub, and no obligations
of Merger Sub to issue, any capital stock, voting securities or securities
convertible into or exchangeable for capital stock or voting securities of
Merger Sub. Merger Sub has not conducted any business prior to the date hereof
and has no, and prior to the Effective Time will have no, assets, liabilities or
obligations of any nature other than those incident to its formation and
pursuant to this Agreement and the Merger and the other transactions
contemplated by this Agreement.
(b) Organization, Good Standing and Qualification. Each of
---------------------------------------------
Parent and its Subsidiaries is a corporation duly organized, validly existing
and in good standing under the laws of its respective jurisdiction of
organization and has all requisite corporate or similar power and authority to
own and operate its properties and assets and to carry on its business as
presently conducted and is qualified to do business and is in good standing as a
foreign corporation in each jurisdiction where the ownership or operation of its
assets or properties or conduct of its business requires such qualification,
except where the failure to be so organized, qualified or in such good standing,
or to have such power or authority when taken together with all other such
failures, is not reasonably likely to have a Parent Material Adverse Effect (as
defined below). Parent has made available to the Company a complete and correct
copy of Parent's and its Subsidiaries' certificates of incorporation and by-
laws, each as amended to the date hereof. Parent's and its Subsidiaries'
certificates of incorporation and by-laws so delivered are in full force and
effect.
As used in this Agreement, the term "Parent Material Adverse
-----------------------
Effect" means a material adverse effect on the financial condition, properties,
------
business or results of operations of the Parent and its Subsidiaries taken as a
whole.
(c) Parent Capital Structure. The authorized capital stock of
------------------------
Parent consists of 200,000,000 shares of Parent Common Stock, of which
36,122,600 shares were outstanding as of the close of business on July 7, 2000,
and 1,000,000 shares of Preferred Stock, par value $0.01 per share, of which 120
shares of Series B Convertible Stock were outstanding as of the close of
business on July 7, 2000 (the "Parent Preferred Shares"). All of the
-----------------------
outstanding Parent Common Stock and Parent Preferred Shares have been duly
authorized and are validly issued, fully paid and nonassessable. Parent has no
Parent Common Stock or Parent Preferred Shares reserved for issuance, except
that, as of July 7, 2000, there were 4,375,000 shares of Parent Common Stock
reserved for issuance
A-20
<PAGE>
pursuant to the JFAX.Com, Inc. 1997 Stock Option Plan (the "Parent Stock Plan")
-----------------
and an aggregate of 3,431,666 shares of Parent Common Stock reserved for
issuance upon the conversion of the Parent Preferred Shares or upon the exercise
of outstanding warrants. Each of the outstanding shares of capital stock of each
of Parent's Subsidiaries is duly authorized, validly issued, fully paid and
nonassessable and owned by a direct or indirect wholly-owned subsidiary of
Parent, free and clear of any lien, pledge, security interest, claim or other
encumbrance. Except as set forth above or in the Parent Disclosure Letter, there
are no preemptive or other outstanding rights, options, warrants, conversion
rights, stock appreciation rights, redemption rights, repurchase rights,
agreements, arrangements, calls, commitments or rights of any kind that obligate
the Parent or any of its Subsidiaries to issue or to sell any shares of capital
stock or other securities of Parent or any of its Subsidiaries or any securities
or obligations convertible or exchangeable into or exercisable for, or giving
any Person a right to subscribe for or acquire, any securities of the Parent or
any of its Subsidiaries, and no securities or obligation evidencing such rights
are authorized, issued or outstanding. Parent does not have outstanding any
bonds, debentures, notes or other obligations the holders of which have the
right to vote (or convertible into or exercisable for securities having the
right to vote) with the stockholders of Parent on any matter.
(d) Corporate Authority; Approval.
-----------------------------
(i) Each of the Parent and Merger Sub has all requisite
corporate power and authority and has taken all corporate action necessary in
order to execute, deliver and perform its obligations under this Agreement and
to consummate, subject only to any stockholder approval necessary to permit the
issuance of the shares of Parent Common Stock required to be issued pursuant to
Article IV (the "Parent Requisite Vote"), the Merger. This Agreement is a valid
---------------------
and binding agreement of Parent and Merger Sub, enforceable against each of
Parent and Merger Sub in accordance with its terms, subject to the Bankruptcy
and Equity Exception.
(ii) Prior to the Effective Time, Parent will have taken all
necessary action to permit it to issue the number of shares of Parent Common
Stock required to be issued pursuant to Article IV. The Parent Common Stock,
when issued, will be validly issued, fully paid and nonassessable, and no
stockholder of Parent will have any preemptive right of subscription or purchase
in respect thereof. The Parent Common Stock, when issued, will be registered
under the Securities Act and Exchange Act and registered or exempt from
registration under any applicable state securities or "blue sky" laws.
(e) Governmental Filings; No Violations. Other than the filings
-----------------------------------
and/or notices (A) pursuant to Section 1.3, (B) under the HSR Act, the
Securities Act and the Exchange Act, (C) to comply with state securities or
"blue sky" laws and (D) required
A-21
<PAGE>
to be made with the NASDAQ, no notices, reports or other filings are required to
be made by Parent or Merger Sub with, nor are any consents, registrations,
approvals, permits or authorizations required to be obtained by Parent or Merger
Sub from, any Governmental Entity, in connection with the execution and delivery
of this Agreement by Parent and Merger Sub and the consummation by Parent and
Merger Sub of the Merger and the other transactions contemplated hereby, except
those that the failure to make or obtain are not, individually or in the
aggregate, reasonably likely to have a Parent Material Adverse Effect or
prevent, materially delay or materially impair the ability of Parent or Merger
Sub to consummate the transactions contemplated by this Agreement.
(ii) The execution, delivery and performance of this Agreement by
Parent and Merger Sub do not, and the consummation by Parent and Merger Sub of
the Merger and the other transactions contemplated hereby will not, constitute
or result in (A) a breach or violation of, or a default under, the certificate
of incorporation or by-laws of Parent and Merger Sub or the comparable governing
instruments of any of its Subsidiaries, (B) a breach or violation of, or a
default under, the acceleration of any obligations or the creation of a lien,
pledge, security interest or other encumbrance on the assets of Parent or any of
its Subsidiaries (with or without notice, lapse of time or both) pursuant to,
any Contracts binding upon Parent or any of its Subsidiaries or any Law or
governmental or non-governmental permit or license to which Parent or any of its
Subsidiaries is subject or (C) any change in the rights or obligations of any
party under any of the Contracts, except, in the case of clause (B) or (C)
above, for any breach(es), violation(s), default(s), acceleration(s),
creation(s) or change(s) that individually is, and in the aggregate are, not
reasonably likely to have a Parent Material Adverse Effect or prevent,
materially delay or materially impair the ability of Parent or Merger Sub to
consummate the transactions contemplated by this Agreement.
(f) Parent Reports; Financial Statements. Parent has delivered
------------------------------------
to the Company each registration statement, report, proxy statement or
information statement prepared by it since December 31, 1999 (the "Parent Audit
------------
Date"), including (i) Parent's Annual Report on Form 10-K for the year ended
----
December 31, 1999 and (ii) Parent's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2000, each in the form (including exhibits,
annexes and any amendments thereto) filed with the SEC (collectively, including
any such reports filed subsequent to the date hereof, the "Parent Reports"). As
--------------
of their respective dates, the Parent Reports did not, and any Parent Reports
filed with the SEC subsequent to the date hereof will not, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements made therein, in light of the
circumstances in which they were made, not misleading. Each of the consolidated
balance sheets included in or incorporated by reference into the Parent Reports
(including the related notes and schedules) fairly presents, or will fairly
present, the consolidated financial position of Parent and its Subsidiaries as
of its date and each of the consolidated statements of
A-22
<PAGE>
income and of changes in financial position included in or incorporated by
reference into the Parent Reports (including any related notes and schedules)
fairly presents, or will fairly present, the results of operations, retained
earnings and changes in financial position, as the case may be, of Parent and
its Subsidiaries for the periods set forth therein (subject, in the case of
unaudited statements, to notes and normal year-end audit adjustments that will
not be material in amount or effect), in each case in accordance with GAAP
consistently applied during the periods involved, except as may be noted
therein.
(g) Absence of Certain Changes. Except as disclosed in the
--------------------------
Parent Reports filed prior to the date hereof, since the Parent Audit Date
Parent and its Subsidiaries have conducted their respective businesses only in,
and have not engaged in any material transaction other than according to, the
ordinary and usual course of such businesses and there has not been (i) any
change in the financial condition, properties, business or results of operations
of Parent and its Subsidiaries or any development or combination of developments
of which management of Parent has knowledge that, individually or in the
aggregate, has had or is reasonably likely to result in a Parent Material
Adverse Effect; (ii) any material damage, destruction or other casualty loss
with respect to any material asset or property owned, leased or otherwise used
by Parent or any of its Subsidiaries, whether or not covered by insurance; or
(iii) any declaration, setting aside or payment of any dividend or other
distribution in cash, stock or property in respect of the capital stock of
Parent, except for dividends or other distribution on its capital stock publicly
announced prior to the date hereof and except as expressly permitted hereby;
(iv) any event that would constitute a violation of Section 6.1.1 hereof if such
event occurred after the date of this Agreement and prior to the Effective Time;
or (v) any change by Parent in accounting principles, practices or methods.
(h) Litigation and Liabilities. Except as disclosed in the
--------------------------
Parent Reports filed prior to the date hereof, there are no (i) civil, criminal
or administrative actions, suits, claims, hearings, investigations or
proceedings pending or, to the knowledge of the officers of Parent, threatened
against Parent or any of its Affiliates or (ii) obligations or liabilities,
whether or not accrued, contingent or otherwise and whether or not required to
be disclosed, including those relating to environmental and occupational safety
and health matters, or any other facts or circumstances of which the officers of
Parent has knowledge that could result in any claims against, or obligations or
liabilities of, Parent or any of its Affiliates, except for those that are not,
individually or in the aggregate, reasonably likely to have a Parent Material
Adverse Effect or prevent or materially burden or materially impair the ability
of Parent or Merger Sub to consummate the transactions contemplated by this
Agreement.
A-23
<PAGE>
(i) Employee Benefits.
-----------------
(i) A copy of each bonus, deferred compensation, pension,
retirement, profit-sharing, thrift, savings, employee stock ownership, stock
bonus, stock purchase, restricted stock, stock option (including the Parent
Stock Plan), employment, termination, severance, compensation, medical, health
or other plan, agreement, policy or arrangement that covers employees,
directors, former employees or former directors of Parent and its Subsidiaries
(the "Parent Compensation and Benefit Plans") and any trust arrangement or
-------------------------------------
insurance contract forming a part of such Parent Compensation and Benefits Plans
has been made available to the Company prior to the date hereof. The Parent
Compensation and Benefit Plans are listed in Section 5.2(i) of the Parent
Disclosure Letter and any "change of control" or similar provision therein are
specifically identified in Section 5.2.(i) of the Parent Disclosure Letter.
(ii) All Parent Compensation and Benefit Plans are in
substantial compliance with all applicable law, including the Code and ERISA.
Each Parent Compensation and Benefit Plan that is an "employee pension benefit
plan" within the meaning of Section 3(2) of ERISA (a "Parent Pension Plan") and
-------------------
that is intended to be qualified under Section 401(a) of the Code has received a
favorable determination letter from the IRS, and Parent is not aware of any
circumstances likely to result in revocation of any such favorable determination
letter. As of the date hereof, there is no pending or, to the knowledge of the
officers of Parent, threatened material litigation relating to the Parent
Compensation and Benefit Plans. Neither Parent nor any of its Subsidiaries has
engaged in a transaction with respect to any Parent Compensation and Benefit
Plan that, assuming the taxable period of such transaction expired as of the
date hereof, would subject Parent or any of its Subsidiaries to a material tax
or penalty imposed by either Section 4975 of the Code or Section 502 of ERISA.
(iii) As of the date hereof, no liability under Subtitle C or D
of Title IV of ERISA has been or is expected to be incurred by Parent or any
Subsidiary with respect to any ongoing, frozen or terminated "single-employer
plan", within the meaning of Section 4001(a)(15) of ERISA, currently or formerly
maintained by any of them, or the single-employer plan of any entity which is
considered an ERISA Affiliate of Parent. Parent and its Subsidiaries have not
incurred and do not expect to incur any withdrawal liability with respect to a
multiemployer plan under Subtitle E to Title IV of ERISA. Parent and its
Subsidiaries have not contributed, or been obligated to contribute, to a
multiemployer plan under Subtitle E of Title IV of ERISA at any time since
September 26, 1980. No notice of a "reportable event", within the meaning of
Section 4043 of ERISA for which the 30-day reporting requirement has not been
waived, has been required to be filed for any Parent Pension Plan or by any
ERISA Affiliate within the 12-month period ending on the date hereof or will be
required to be filed in connection with the transactions contemplated by this
Agreement.
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<PAGE>
(iv) All contributions required to be made under the terms of
any Parent Compensation and Benefit Plan as of the date hereof have been timely
made or have been reflected on the most recent consolidated balance sheet filed
or incorporated by reference in the Parent Reports prior to the date hereof.
Neither any Parent Pension Plan nor any single-employer plan of an ERISA
Affiliate has an "accumulated funding deficiency" (whether or not waived) within
the meaning of Section 412 of the Code or Section 302 of ERISA. Neither Parent
nor its Subsidiaries has provided, or is required to provide, security to any
Parent Pension Plan or to any single-employer plan of an ERISA Affiliate
pursuant to Section 401(a)(29) of the Code.
(v) Under each Parent Pension Plan which is a single-employer
plan, as of the last day of the most recent plan year ended prior to the date
hereof, the actuarially determined present value of all "benefit liabilities",
within the meaning of Section 4001(a)(16) of ERISA (as determined on the basis
of the actuarial assumptions contained in the Parent Pension Plan's most recent
actuarial valuation), did not exceed the then current value of the assets of
such Parent Pension Plan, and there has been no material change in the financial
condition of such Parent Pension Plan since the last day of the most recent plan
year.
(vi) Neither Parent nor its Subsidiaries have any obligations
for retiree health and life benefits under any Parent Compensation and Benefit
Plan, except as set forth in the Parent Disclosure Letter. Parent or its
Subsidiaries may amend or terminate any such plan under the terms of such plan
at any time without incurring any material liability thereunder.
(j) Compliance with Laws; Permits. The businesses of each of
-----------------------------
Parent and its Subsidiaries have not been, and are not being, conducted in
violation of any Laws, except for violations or possible violations that,
individually or in the aggregate, are not reasonably likely to have a Parent
Material Adverse Effect or prevent or materially burden or materially impair the
ability of Parent or Merger Sub to consummate the transactions contemplated by
this Agreement. No investigation or review by any Governmental Entity with
respect to Parent or any of its Subsidiaries is pending or, to the knowledge of
the officers of Parent, threatened, nor has any Governmental Entity indicated an
intention to conduct the same, except for those the outcome of which are not,
individually or in the aggregate, reasonably likely to have a Parent Material
Adverse Effect or prevent or materially burden or materially impair the ability
of Parent or Merger Sub to consummate the transactions contemplated by this
Agreement. To the knowledge of the officers of Parent, no material change is
required in Parent's or any of its Subsidiaries' processes, properties or
procedures in connection with any such Laws, and Parent has not received any
notice or communication of any material noncompliance with any such Laws that
has not been cured as of the date hereof. Parent and its Subsidiaries each has
all permits, licenses, franchises, variances, exemptions, orders and other
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<PAGE>
governmental authorizations, consents and approvals necessary to conduct its
business as presently conducted except those the absence of which are not,
individually or in the aggregate, reasonably likely to have a Parent Material
Adverse Effect or prevent or materially burden or materially impair the ability
of Parent or Merger Sub to consummate the Merger and the other transactions
contemplated by this Agreement.
(k) [Reserved.]
---------
(l) Taxes. Parent and each of its Subsidiaries (i) have prepared
-----
in good faith and duly and timely filed (taking into account any extension of
time within which to file) all Tax Returns required to be filed by any of them
and all such filed Tax Returns are complete and accurate in all material
respects; (ii) have paid all Taxes that are shown as due on such filed Tax
Returns or that Parent or any of its Subsidiaries are obligated to withhold from
amounts owing to any employee, creditor or third party, except with respect to
matters contested in good faith; and (iii) have not waived any statute of
limitations with respect to Taxes or agreed to any extension of time with
respect to a Tax assessment or deficiency. As of the date hereof, there are not
pending or, to the knowledge of the officers of Parent threatened in writing,
any audits, examinations, investigations or other proceedings in respect of
Taxes or Tax matters. There are not, to the knowledge of the officers of Parent,
any unresolved questions or claims concerning Parent's or any of its
Subsidiaries' Tax liability that are reasonably likely to have a Parent Material
Adverse Effect. Neither Parent nor any of its Subsidiaries has any liability
with respect to income, franchise or similar Taxes that accrued on or before the
end of the latest completed fiscal quarter of Parent in excess of the amounts
accrued with respect thereto that are reflected in the financial statements
included in the Parent Reports filed on or prior to the date hereof.
(m) Labor Matters. Neither Parent nor any of its Subsidiaries
-------------
is a party to or otherwise bound by any collective bargaining agreement,
contract or other agreement or understanding with a labor union or labor
organization, nor, as of the date hereof, is Parent or any of its Subsidiaries
the subject of any material proceeding asserting that Parent or any of its
Subsidiaries has committed an unfair labor practice or is seeking to compel it
to bargain with any labor union or labor organization nor is there pending or,
to the knowledge of the officers of Parent, threatened, nor has there been for
the past five years, any labor strike, dispute, walk-out, work stoppage, slow-
down or lockout involving Parent or any of its Subsidiaries.
(n) Insurance. All material fire and casualty, general
----------
liability, business interruption, product liability, and sprinkler and water
damage insurance policies maintained by Parent or any of its Subsidiaries are
with reputable insurance carriers, provide full and adequate coverage for all
normal risks incident to the business of Parent and its Subsidiaries and their
respective properties and assets, and are in character and
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<PAGE>
amount at least equivalent to that carried by persons engaged in similar
businesses and subject to the same or similar perils or hazards, except for any
such failures to maintain insurance policies that, individually or in the
aggregate, are not reasonably likely to have a Parent Material Adverse Effect.
(o) Intellectual Property.
---------------------
(i) Parent and/or each of its Subsidiaries owns, or is licensed
or otherwise possesses legally enforceable rights to use all patents,
trademarks, trade names, service marks, copyrights, and any applications
therefor, technology, know-how, computer software programs or applications, and
tangible or intangible proprietary information or materials that are used in the
business of Parent and its Subsidiaries as currently conducted, except for any
such failures to own, be licensed or possess that, individually or in the
aggregate, are not reasonably likely to have a Parent Material Adverse Effect,
and to the knowledge of the officers of Parent all patents, trademarks, trade
names, service marks and copyrights held by Parent and/or its Subsidiaries are
valid and subsisting.
(ii) Except as disclosed in Parent Reports filed prior to the
date hereof or as is not reasonably likely to have a Parent Material Adverse
Effect:
(A) Parent is not, nor will it be as a result of the execution
and delivery of this Agreement or the performance of its obligations
hereunder, in violation of any licenses, sublicenses and other
agreements as to which Parent is a party and pursuant to which Parent
is authorized to use any third-party patents, trademarks, service
marks, copyrights, trade secrets or computer software (collectively,
"Parent Third-Party Intellectual Property Rights");
-----------------------------------------------
(B) no claims with respect to (I) the patents, registered and
material unregistered trademarks and service marks, registered
copyrights, trade names, and any applications therefor, trade secrets
or computer software owned by Parent or any of its Subsidiaries
(collectively, the "Parent Intellectual Property Rights"); or (II)
-----------------------------------
Parent Third-Party Intellectual Property Rights are currently pending
or, to the knowledge of the officers of Parent, are threatened by any
Person;
(C) there are no valid grounds for any bona fide claims (I) to
the effect that the manufacture, sale, licensing or use of any product
as now used, sold or licensed or proposed for use, sale or license by
Parent or any of its Subsidiaries, infringes on any copyright, patent,
trademark, service mark or trade secret; (II) against the use by
Parent or any of its Subsidiaries, of any Parent Intellectual Property
Rights or Parent Third-Party Intellectual Property Rights used in the
business of Parent or any of its Subsidiaries as currently conducted
or as proposed
A-27
<PAGE>
to be conducted; (III) challenging the ownership, validity or
enforceability of any of the Parent Intellectual Property Rights; or
(IV) challenging the license or legally enforceable right to use of
the Parent Third-Party Intellectual Rights by Parent or any of its
Subsidiaries; and
(D) there is no unauthorized use, infringement or
misappropriation of any of the Parent Intellectual Property Rights by
any third party, including any employee or former employee of Parent
or any of its Subsidiaries.
(p) Brokers and Finders. Neither Parent nor any of its
-------------------
officers, directors, employees, representatives or agents has employed any
broker or finder or incurred any liability for any brokerage fees, commissions
or finder's fees in connection with the Merger or the other transactions
contemplated by this Agreement, except that Parent has employed Tucker Anthony
Incorporated as its financial advisor, the arrangements with which have been
disclosed in writing to the Company prior to the date hereof.
(q) Related Agreements. Each of the representations and
------------------
warranties of the Parent set forth in the Agreement of Understanding and the
Side Agreement, including the other related agreements referred to in any of the
foregoing or exhibited or annexed to any of the foregoing, is true and correct.
ARTICLE VI
Covenants
6.1. Interim Operations of the Company. The Company covenants
---------------------------------
and agrees as to itself and its Subsidiaries that, after the date hereof and
prior to the Effective Time (unless Parent shall otherwise approve and except as
otherwise expressly contemplated by this Agreement and except as required
pursuant to the terms of the Term Loan Agreement and the related loan documents,
including the repayment of any principal or interest, the Side Agreement, the
Series D Exchange Agreement (as defined in the Side Agreement), the Series D
Certificate of Designations (as defined in the Series D Exchange Agreement) or
the Agreement of Understanding):
(a) the business of it and its Subsidiaries shall be conducted
in the ordinary and usual course and, to the extent consistent therewith, it and
its Subsidiaries shall use all reasonable efforts to maintain its existing
relations and goodwill with customers, suppliers, distributors, creditors,
lessors and business associates; provided, however, that the Company may sell
-------- -------
those assets which it is permitted to dispose of pursuant to and in accordance
with the terms of the Term Loan Agreement and may continue to de-emphasize its
sales and licensing of its multifunction products business.
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<PAGE>
(b) it shall not (i) issue, sell, pledge, dispose of or encumber any
capital stock owned by it in any of its Subsidiaries; (ii) amend its certificate
of incorporation or by-laws; (iii) split, combine or reclassify its outstanding
shares of capital stock; (iv) declare, set aside or pay any dividend payable in
cash, stock or property in respect of any capital stock other than dividends
from its direct or indirect wholly-owned Subsidiaries; or (v) repurchase, redeem
or otherwise acquire, except in connection with the Stock Option Plans, or
permit any of its Subsidiaries to purchase or otherwise acquire, any shares of
its capital stock or any securities convertible into or exchangeable or
exercisable for any shares of its capital stock;
(c) neither it nor any of its Subsidiaries shall (i) issue, sell,
pledge, dispose of or encumber any shares of, or securities convertible into or
exchangeable or exercisable for, or options, warrants, calls, commitments or
rights of any kind to acquire, any shares of its capital stock of any class or
any other property or assets (other than Shares issuable pursuant to options
outstanding on the date hereof under the Stock Option Plans, options for Shares
and Shares issuable pursuant to the Stock Purchase Plan, options issuable
pursuant to the terms of the Directors' Plan (as defined in Section 6.11(a)),
Shares issuable upon the conversion of Series B Shares, the exchange of the
Series B Shares for the Series D Shares or Shares issuable upon the exercise of
the Exchange Warrants or the Other Warrants); (ii) other than in the ordinary
and usual course of business and except for sales permitted by and made in
accordance with Section 9(c) of the Term Loan Agreement, transfer, lease,
license, guarantee, sell, mort gage, pledge, dispose of or encumber any other
property or assets (including capital stock of any of its Subsidiaries) or incur
or modify any material indebtedness or other liability; or (iii) make or
authorize or commit for any capital expenditures other than in the ordinary and
usual course of business or, by any means, make any acquisition of, or
investment in, assets or stock of or other interest in, any other Person or
entity;
(d) except as required by the terms of this Agreement, or permitted
pursuant to Section 6.11(d) of this Agreement, and except for option grants
pursuant to the Directors' Plan, neither it nor any of its Subsidiaries shall
terminate, establish, adopt, enter into, make any new grants or awards under,
reprice or substitute any options previously granted under, amend or otherwise
modify, any Compensation and Benefit Plans or increase the salary, wage, bonus
or other compensation of any employees;
(e) neither it nor any of its Subsidiaries shall settle or compromise
any material claims or litigation or, except in the ordinary and usual course of
business, modify, amend or terminate any of its material Contracts or waive,
release or assign any material rights or claims;
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<PAGE>
(f) neither it nor any of its Subsidiaries shall make any Tax election
or permit any insurance policy naming it as a beneficiary or loss-payable payee
to be cancelled or terminated except in the ordinary and usual course of
business;
(g) neither it nor any of its Subsidiaries shall take any action or
omit (other than omissions in good faith) to take any action that would cause
any of its representations and warranties herein to become untrue in any
material respect; and
(h) neither it nor any of its Subsidiaries will authorize or enter
into an agreement to do any of the foregoing.
6.1.1 Interim Operations of Parent. Parent covenants and agrees
----------------------------
as to itself and its Subsidiaries that, after the date hereof and prior to the
Effective Time (unless the Company shall otherwise approve and except as
otherwise expressly contemplated by this Agreement, the Side Agreement or the
Agreement of Understanding):
(a) it shall not (i) amend its certificate of incorporation or by-laws
(other than to change its name); (ii) split, combine or reclassify its
outstanding shares of capital stock; or (iii) declare, set aside or pay any
dividend payable in cash, stock or property in respect of any capital stock
other than dividends from its direct or wholly-owned Subsidiaries;
(b) neither it nor any of its Subsidiaries shall take any action or
omit (other than omissions in good faith) to take any action that would cause
any of its representations and warranties herein to become untrue in any
material respect; and
(c) neither it nor any of its Subsidiaries will authorize or enter
into an agreement to do any of the foregoing.
6.2. Acquisition Proposals. The Company agrees that neither it nor
---------------------
any of its Subsidiaries nor any of the officers and directors of it or its
Subsidiaries shall, and that it shall direct and cause its and its Subsidiaries'
employees, agents and representatives (including any investment banker, attorney
or accountant retained by it or any of its Subsidiaries) not to, directly or
indirectly, initiate, solicit, encourage or otherwise facilitate any inquiries
or the making of any proposal or offer with respect to a merger, reorganization,
share exchange, consolidation or similar transaction involving, or any purchase
of any assets or any equity securities of, it or any of its Subsidiaries (any
such proposal or offer being hereinafter referred to as an "Acquisition
-----------
Proposal"). The Company further agrees that neither it nor any of its
--------
Subsidiaries nor any of the officers and directors of it or its Subsidiaries
shall, and that it shall direct and cause its and its Subsidiaries' employees,
agents and representatives (including any investment banker, attorney or
accountant retained by it or any of its Subsidiaries) not to, directly or
A-30
<PAGE>
indirectly, engage in any negotiations concerning, or provide any confidential
information or data to, or have any discussions with, any Person relating to an
Acquisition Proposal, or otherwise facilitate any effort or attempt to make or
implement an Acquisition Proposal; provided, however, that nothing contained in
this Agreement shall prevent the Company or its Board of Directors from (A)
complying with Rule 14e-2 promulgated under the Exchange Act with regard to an
Acquisition Proposal; (B) providing information in response to a request
therefor by a Person who has made an unsolicited bona fide written proposal
relating to (1) the acquisition, purchase or lease of a business or assets that
constitute 80% or more of the consolidated net revenues, consolidated net income
or consolidated assets of the Company and its Subsidiaries taken as a whole,
(2) the acquisition or purchase of 80% or more of the common stock of the
Company, or (3) a tender offer or exchange offer that if consummated would
result in any Person beneficially owning 80% or more of any class of common
stock or voting securities of the Company (any such unsolicited bona fide
written proposal described in the foregoing clauses (1) - (3), a "Competing
---------
Proposal"), but only if the Board of Directors receives from the Person so
--------
requesting such information an executed confidentiality agreement on terms
substantially similar to those contained in the Confidentiality Agreement (as
defined in Section 9.1) between the Company and Parent; (C) engaging in any
negotiations or discussions with any Person who has made a Competing Proposal;
or (D) recommending such a Competing Proposal to the stockholders of the
Company, if and only to the extent that, (i) in each such case referred to in
clause (B), (C) or (D) above, the Board of Directors of the Company determines
in good faith after consultation with outside legal counsel that such action is
necessary in order for its directors to comply with their respective fiduciary
duties under applicable law and (ii) in each case referred to in clause (C) or
(D) above, the Board of Directors of the Company determines in good faith (after
consultation with its financial advisor) that such Competing Proposal, if
accepted, is reasonably likely to be consummated, taking into account all legal,
financial and regulatory aspects of the proposal and the Person making the
proposal and would, if consummated, result in a transaction more favorable to
the Company's stockholders from a financial point of view than the transaction
contemplated by this Agreement (any such more favorable Competing Proposal being
referred to in this Agreement as a "Superior Proposal"). The Company agrees
-----------------
that it will immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties conducted heretofore
with respect to any Acquisition Proposal. The Company agrees that it will take
the necessary steps to promptly inform the individuals or entities referred to
in the first sentence hereof of the obligations undertaken in this Section 6.2
and in the Confidentiality Agreement . The Company agrees that it will notify
Parent immediately if any such inquiries, proposals or offers are received by,
any such information is requested from, or any such discussions or negotiations
are sought to be initiated or continued with, any of its representatives
indicating, in connection with such notice, the name of such Person and the
material terms and conditions of any proposals or offers and thereafter shall
keep Parent informed, on a current basis, on the status and terms of any
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<PAGE>
such proposals or offers and the status of any such discussions or negotiations.
The Company also agrees that it will promptly request each Person that has
heretofore executed a confidentiality agreement in connection with its
consideration of acquiring it or any of its Subsidiaries to return all
confidential information heretofore furnished to such Person by or on behalf of
it or any of its Subsidiaries.
6.3. Information Supplied. The Company and Parent each agrees, as to
--------------------
itself and its Subsidiaries, that none of the information supplied or to be
supplied by it or its Subsidiaries for inclusion or incorporation by reference
in (i) the Registration Statement on Form S-4 to be filed with the SEC by Parent
in connection with the issuance of shares of Parent Common Stock in the Merger
(including the joint proxy statement and prospectus (the "Prospectus/ Proxy
-----------------
Statement") constituting a part thereof) (the "S-4 Registration Statement")
---------- --------------------------
will, at the time the S-4 Registration Statement becomes effective under the
Securities Act, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, and (ii) the Prospectus/Proxy Statement and any amendment or
supplement thereto will, at the date of mailing to stockholders and at the times
of the meetings of stockholders of the Company and Parent to be held in
connection with the Merger, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The Company and Parent will cause the Form S-4
to comply as to form in all material respects with the applicable provisions of
the Securities Act and the rules and regulations thereunder.
6.4 Stockholders Meetings. The Company will take, in accordance with
---------------------
its certificate of incorporation and by-laws, all action necessary to convene a
meeting of holders of Shares (the "Stockholders Meeting") as promptly as
--------------------
practicable after the S-4 Registration Statement is declared effective to
consider and vote upon the approval of this Agreement and the Merger. Parent
will take, in accordance with its certificate of incorporation and by-laws, all
action necessary to convene a meeting of holders of Parent Common Stock as
promptly as practicable after the S-4 Registration Statement is declared
effective to consider and vote upon the approval of the issuance of Parent
Common Stock in the Merger. Subject to the provisions of Section 6.2, each of
the Company's and Parent's board of directors shall recommend such approval and
shall take all lawful action to solicit such approval.
6.5 Filings; Other Actions; Notification. (a) Parent and the
------------------------------------
Company shall promptly prepare and file with the SEC the Prospectus/Proxy
Statement, and Parent shall prepare and file with the SEC the S-4 Registration
Statement as promptly as practicable. Parent and the Company each shall use its
best efforts to have the S-4 Registration Statement declared effective under the
Securities Act as promptly as
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<PAGE>
practicable after such filing, and promptly thereafter mail the Prospectus/Proxy
Statement to the respective stockholders of each of the Company and Parent.
Parent shall also use its efforts to obtain prior to the effective date of the
S-4 Registration Statement all necessary state securities law or "blue sky"
permits and approvals required in connection with the Merger and to consummate
the other transactions contemplated by this Agreement and will pay all expenses
incident thereto. The Prospectus/Proxy Statement shall contain the
recommendation of the Company's Board of Directors in favor of approval of this
Agreement and the transactions contemplated hereby.
(b) The Company and Parent each shall use its best efforts to cause to
be delivered to the other party and its directors a letter of its independent
auditors, dated (i) the date on which the S-4 Registration Statement shall
become effective and (ii) the Closing Date, and addressed to the other party and
its directors, in form and substance customary for "comfort" letters delivered
by independent public accountants in connection with registration statements
similar to the S-4 Registration Statement.
(c) The Company and Parent shall cooperate with each other and use
(and shall cause their respective Subsidiaries to use) their respective best
efforts to take or cause to be taken all actions, and do or cause to be done all
things, necessary, proper or advisable on its part under this Agreement and
applicable Laws to consummate and make effective the Merger and the other
transactions contemplated by this Agreement as soon as practicable, including
preparing and filing as promptly as practicable all documentation to effect all
necessary notices, reports and other filings and to obtain as promptly as
practicable all consents, registrations, approvals, permits and authorizations
necessary or advisable to be obtained from any third party and/or any
Governmental Entity in order to consummate the Merger or any of the other
transactions contemplated by this Agreement; provided, however, that nothing in
-------- -------
this Section 6.5 shall require, or be construed to require, Parent or the
Company or any of their Affiliates to proffer to, or agree to, sell or hold
separate and agree to sell, before or, in the case of Parent and its
Subsidiaries, after the Effective Time, any assets, businesses, or interest in
any assets or businesses of Parent, the Company or any of their respective
Affiliates (or to consent to any sale, or agreement to sell, by the Company of
any of its assets or businesses) or to agree to any material changes or
restriction in the operations of any such assets or businesses. Subject to
applicable laws relating to the exchange of information, Parent and the Company
shall have the right to review in advance, and to the extent practicable each
will consult the other on, all the information relating to Parent or the
Company, as the case may be, and any of their respective Subsidiaries, that
appear in any filing made with, or written materials submitted to, any third
party and/or any Governmental Entity in connection with the Merger and the other
transactions contemplated by this Agreement. In exercising the foregoing right,
each of the Company and Parent shall act reasonably and as promptly as
practicable.
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<PAGE>
(d) The Company and Parent each shall, upon request by the other,
furnish the other with all information concerning itself, its Subsidiaries,
directors, officers and stockholders and such other matters as may be reasonably
necessary or advisable in connection with the Prospectus/Proxy Statement, the S-
4 Registration Statement or any other statement, filing, notice or application
made by or on behalf of Parent, the Company or any of their respective
Subsidiaries to any third party and/or any Governmental Entity in connection
with the Merger and the transactions contemplated by this Agreement.
(e) The Company and Parent and each of their Affiliates shall keep the
other apprised of the status of matters relating to completion of the
transactions contemplated hereby, including promptly furnishing the other with
copies of notice or other communications received by Parent or the Company, as
the case may be, or any of its Subsidiaries, from any third party and/or any
Governmental Entity with respect to the Merger and the other transactions
contemplated by this Agreement.
6.6. [Reserved.]
-----------
6.7. Access. Upon reasonable notice, and except as may otherwise be
------
required by applicable law, the Company and Parent each shall (and shall cause
its Subsidiaries to) afford the other's officers, employees, counsel,
accountants and other authorized representatives ("Representatives") reasonable
---------------
access, during normal business hours throughout the period prior to the
Effective Time, to its properties, books, contracts and records and, during such
period, each shall (and shall cause its Subsidiaries to) furnish promptly to the
other all information concerning its business, properties and personnel as may
reasonably be requested, provided that no investigation pursuant to this Section
--------
shall affect or be deemed to modify any representation or warranty made by the
Company, Parent or Merger Sub, and provided, further, that the foregoing shall
-------- -------
not require the Company or Parent to permit any inspection, or to disclose any
information, that in the reasonable judgment of the Company or Parent, as the
case may be, would result in the disclosure of any trade secrets of third
parties or violate any of its obligations with respect to confidentiality if the
Company or Parent, as the case may be, shall have used best efforts to obtain
the consent of such third party to such inspection or disclosure. All requests
for information made pursuant to this Section shall be directed to an executive
officer of the Company or Parent, as the case may be, or such Person as may be
designated by either of its officers, as the case may be. All such information
shall be governed by the terms of the Confidentiality Agreement.
6.8. Affiliates. Prior to the date of the Stockholders Meeting, the
----------
Company shall deliver to Parent a list of names and addresses of those Persons
who are, in the opinion of the Company, as of the time of the Stockholders
Meeting referred to in Section 6.4, "affiliates" of the Company within the
meaning of Rule 145 under the Securities Act. The Company shall provide to
Parent such information and documents as
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<PAGE>
Parent shall reasonably request for purposes of reviewing such list. There shall
be added to such list the names and addresses of any other Person subsequently
identified by either Parent or the Company as a Person who may be deemed to be
such an affiliate of the Company; provided, however, that no such Person
-------- -------
identified by Parent shall be added to the list of affiliates of the Company if
Parent shall receive from the Company, on or before the date of the Stockholders
Meeting, an opinion of counsel reasonably satisfactory to Parent to the effect
that such Person is not such an affiliate. The Company shall exercise its best
efforts to deliver or cause to be delivered to Parent, prior to the date of the
Stockholders Meeting, from each affiliate of the Company identified in the
foregoing list (as the same may be supplemented as aforesaid), a letter dated as
of the Closing Date substantially in the form attached as Exhibit D (the
"Affiliates Letter"). Except for the registration statement required pursuant to
-----------------
Section 6.11(b), Parent shall not be required to maintain the effectiveness of
the S-4 Registration Statement or any other registration statement under the
Securities Act for the purposes of resale of Parent Common Stock received by
such affiliates in the Merger and the certificates representing Parent Common
Stock received by such affiliates shall bear a customary legend regarding
applicable Securities Act restrictions and the provisions of this Section.
6.9. Stock Exchange Listing and De-listing, etc. Parent shall use
------------------------------------------
its best efforts to cause the shares of Parent Common Stock to be issued in the
Merger to be approved for quotation on the NASDAQ subject to official notice of
issuance, prior to the Closing Date. The Surviving Corporation shall use its
best efforts to cause the Shares to be no longer quoted on the NASDAQ and to be
de-registered under the Exchange Act as soon as practicable following the
Effective Time. Parent shall use its best efforts to have the shares of Parent
Common Stock into which the New Exchange Warrants, the Consideration Warrants,
and the Other Warrants are exercisable be listed or approved for listing upon
issuance on NASDAQ in the manner required by the rules and regulations of
NASDAQ. At all times, Parent shall ensure that the number of authorized, but
unissued shares of Parent Common Stock are sufficient to permit the exercise of
the New Exchange Warrants, the Consideration Warrants, the Other Warrants and
the Company Options (as defined in Section 6.11(a)). Parent shall cause the
Parent Common Stock issuable pursuant to the New Exchange Warrants, the
Consideration Warrants, the Other Warrants and the Company Options, at the time
of such issuance to be duly authorized, validly issued, fully paid and non-
assessable and free and clear of any lien, pledge, security interest, claim or
other encumbrance.
6.10. Publicity. Each of Company and Parent agrees that it will not,
---------
without the prior approval of the other party, issue any press release or
written statement for general circulation relating to the transactions
contemplated hereby, except as otherwise required by applicable law or
regulation or NASDAQ rules (provided that the issuing party shall nevertheless
provide the other party with notice of, and the opportunity to review, any such
press release or written statement).
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<PAGE>
6.11. Benefits.
--------
(a) Stock Options.
-------------
(i) At the Effective Time, each outstanding option to purchase
Shares (a "Company Option") under the Stock Option Plans, whether vested or
--------------
unvested, shall be deemed to constitute an option to acquire, on the same terms
and conditions as were applicable under such Company Option, a number of shares
of Parent Common Stock equal to the number of Shares underlying such Company
Option multiplied by the Conversion Number (rounded to the nearest whole number
with .5 being rounded up), at a price per share (rounded to the nearest whole
cent with .5 being rounded up) equal to (y) the exercise price for the Shares
otherwise purchasable pursuant to such Company Option divided by (z) the
Conversion Number; provided, however, that in the case of any Company Option to
-------- -------
which Section 422 of the Code applies, the option price, the number of shares
purchasable pursuant to such option and the terms and conditions of exercise of
such option shall be determined in accordance with the foregoing, subject to
such adjustments as are necessary in order to satisfy the requirements of
Section 424(a) of the Code. At or prior to the Effective Time, the Company shall
make all necessary arrangements with respect to the Stock Option Plans to permit
the assumption of the unexercised Company Options by Parent pursuant to this
Section.
(ii) Effective at the Effective Time, Parent shall assume each
Company Option in accordance with the terms of the Stock Option Plan under which
it was issued and the stock option agreement by which it is evidenced. At or
prior to the Effective Time, Parent shall take all corporate action necessary to
reserve for issuance a sufficient number of shares of Parent Common Stock for
delivery upon exercise of Company Options assumed by it in accordance with this
Section. In addition, the Board of Directors of the Company and Parent shall,
prior to the Effective Time, take all such actions as may be necessary or
appropriate pursuant to Rule 16b-3(e) to exempt (i) the conversion of Shares and
Company Options into Parent Common Stock or options to purchase Parent Common
Stock, as the case may be, and (ii) the acquisition of Parent Common Stock or
options to purchase Parent Common Stock, as the case may be, pursuant to the
terms of this Agreement by officers and directors of the Company subject to the
reporting requirements of Section 16(a) of the Exchange Act. Parent and the
Company shall provide to counsel to the other party copies of the resolutions to
be adopted by the respective Boards of Directors to implement the foregoing.
(iii) Immediately prior to the Effective Time, the Company shall
terminate its 1997 Employee Stock Purchase Plan (the "Stock Purchase Plan"), the
-------------------
1997 Directors' Stock Option Plan (the "Directors' Plan") and the other Stock
---------------
Option Plans (as defined below). The Company prior to the Effective Date shall
amend the then current offering period for the Stock Purchase Plan so that the
exercise date is on the date of the
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<PAGE>
Company's payday immediately preceding, but not on, the Effective Date. As used
in this Agreement, the term "Stock Option Plans" shall mean the Directors' Plan,
------------------
the Company's 1989 Stock Option Plan and the Company's 1995 Stock Plan.
(b) Registration on Form S-8. No later than the Effective Time, the
------------------------
Parent shall prepare and file with the SEC registration statements on Form S-8
(or any successor or other appropriate form) registering a number of shares of
Parent Common Stock into which any outstanding options issued under the Stock
Option Plans are convertible or exercisable and shall use its commercially
reasonable efforts to maintain the effectiveness of such registration statements
(and maintain the current status of the prospectuses contained therein) for so
long as any such options remain outstanding.
(c) Benefit Plans. Commencing at the Effective Time, Parent shall
-------------
use its reasonable efforts to cause those employees of the Surviving Corporation
or any of its Subsidiaries, who were employed by the Company or any of its
Subsidiaries as of the Effective Time (the "Company Employees") and who are
-----------------
retained as employees following the Effective Time, to be eligible to
participate in Parent Compensation and Benefit Plans in which similarly situated
employees of Parent are eligible to participate. To the extent any Company
Employee participates in any Parent Compensation and Benefit Plan providing for
medical, dental or life insurance or 401K benefits after the Effective Time,
such Company Employee shall be credited under such Parent Compensation and
Benefit Plan with his or her service for the Company or its Subsidiaries prior
to the Effective Time to the same extent such Company Employee would have been
credited if such service had been for Parent, but only to the extent a waiver of
any required waiting period is available from the applicable benefits provider.
With respect to the plan year in which the Effective Time occurs under any
Parent Compensation and Benefit Plan providing for medical or dental benefits,
Parent shall use its reasonable efforts to obtain the agreement of the plan
provider to cause the dollar amount of all expenses incurred by the Company
Employees and their eligible dependents during such year to be credited for
purposes of satisfying such Parent Compensation and Benefit Plan's deductible
and co-payment limitations for such plan year, to the extent such expenses would
have been credited under any corresponding plan prior to the Effective Time.
The Company Employees shall be subject to other personnel policies and practices
of Parent in all respects.
(d) Option Issuance. Notwithstanding any other provision of this
---------------
Agreement, prior to the Effective Time, the Company may issue stock options
pursuant to its 1995 Stock Plan to the employees and exercisable for the number
of Shares set forth on Schedule 6.11(d). No option shall be exercisable for
Shares at a price that is less than the fair market value of the Shares (as
defined in the 1995 Stock Plan) at the time of the authorization of the option.
Notwithstanding any other provision of this Agreement, the Company may, prior to
the Closing, amend the terms of any non-qualified stock option
A-37
<PAGE>
previously granted by the Company pursuant to the 1995 Stock Plan or the 1989
Stock Option Plan to Michael C. Tonnenson, Todd J. Kenck, Ronald P. Brown or
Michael M. Crandell to provide that such option will not terminate until the
earlier of (a) the expiration date of the term of such option or (b) 18 months
after the termination of the optionee's consulting relationship or continuous
status as an employee with the Company. Notwithstanding any other provisions of
this Agreement, the Company may refund to all employees the amounts collected
under the Stock Purchase Plan for the first offering period of 2000.
(e) Obligations. Parent shall cause the Surviving Corporation to
-----------
honor all written contractual obligations (including the Current Severance
Agreements (as defined below) and indemnification agreements) of the Company and
its Subsidiaries to their respective current and former employees, directors and
independent contractors, but only to the extent such obligations are set forth
on Schedule 6.11(e). The provisions of this Section 6.11(e) are not meant to
prevent Parent or any of its Subsidiaries, including the Surviving Corporation,
from terminating, amending or modifying any such obligation pursuant to the
terms of such obligation. The provisions of this Section are intended to be for
the benefit of and shall be enforceable by the current and former employees,
directors and independent contractors to whom the Company has obligations as set
forth on Schedule 6.11(e), their heirs and their representatives.
(f) Severance Agreements. Notwithstanding any other provision of
--------------------
this Agreement, prior to the Effective Time, the Company may offer the severance
agreements (the "Current Severance Agreements") to the employees, and providing
----------------------------
for severance payments in the respective amounts, set forth on Schedule 6.11(f).
The Current Severance Agreements shall be in the form set forth as Exhibit E.
After the Closing, Parent agrees to cause the Current Severance Agreements to be
executed by the Surviving Corporation as required by any employee accepting such
an offer. The provisions of this Section are intended to be for the benefit of
and shall be enforceable by the employees to whom the Current Severance
Agreements are offered. During the period from the date hereof until the
Closing, the Company agrees to deliver the 30-day written notice required by the
Current Severance Agreements to any employee or employees for which the Parent
gives the Company a written direction to send such 30-day written notice;
provided that the Company will have the right to approve the contents of any
such notice (such approval not to be unreasonably withheld), no such notice
shall provide for a termination date prior to the Effective Time, and any
wrongful termination action or claim resulting from any such notice shall be
deemed not to have a Company Material Adverse Effect. The Company will deliver
such notices to employees within two (2) business days after receipt of such
written direction from Parent.
(g) Effect of Section 6.11. Except as otherwise provided in this
----------------------
Agreement, nothing in this Section 6.11 shall be interpreted as preventing
Parent or the
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<PAGE>
Surviving Corporation after the Effective Time from amending, modifying or
terminating any Parent Compensation and Benefit Plan, Company Compensation and
Benefit Plan, or other employee benefit plans, contracts, arrangements,
commitments or understandings, or terminating any Company Employee, in each case
in accordance with the terms of the respective plans and applicable law.
(h) Election to Parent's Board of Directors. At the Effective Time of
---------------------------------------
the Merger, Parent shall promptly increase the size of its Board of Directors or
exercise its best efforts to secure the resignation of present directors in
order to cause one person designated by the Company, to be appointed to Parent's
Board of Directors and, subject to fiduciary obligations under applicable law,
shall nominate one person designated by such person designated by the Company
(or, in the event such Person no longer wishes to be a director, the Person
designated by such director) as a director of Parent at the first and second
annual meetings of stockholders of Parent with a proxy mailing date after the
Effective Time.
6.12. Expenses. Each party hereto will bear all expenses incurred
--------
by it in connection with this Agreement and the transactions contemplated
hereby, except that the Company and Parent shall split equally the HSR Act
filing fees, if any.
6.13. Indemnification; Directors' and Officers' Insurance.
---------------------------------------------------
(a) Parent shall indemnify and hold harmless for six years, to the
fullest extent permitted under applicable law (and Parent shall also advance
expenses as incurred to the fullest extent permitted under applicable law
provided the Person to whom expenses are advanced provides an undertaking to
--------
repay such advances if it is ultimately determined that such Person is not
entitled to indemnification), each present and former director, officer and
employee of the Company and its Subsidiaries (collectively, the "Indemnified
-----------
Parties") against any costs or expenses (including reasonable attorneys' and
-------
experts' fees), judgments, fines, losses, claims, damages or liabilities
(collectively, "Costs") incurred in connection with any claim, action, suit,
-----
proceeding or investigation, whether civil, criminal, administrative or
investigative, relating to any acts or omissions by such Persons in their
capacities as directors, officers, or employees of the Company and its
Subsidiaries and arising out of matters existing or occurring at or prior to the
Effective Time, including the transactions contemplated by this Agreement;
provided, however, that Parent shall not be required to indemnify any
-------- -------
Indemnified Party pursuant hereto if it shall be determined that the Indemnified
Party acted in bad faith and not in a manner such Party believed to be in or not
opposed to the best interests of the Company.
(b) Any Indemnified Party wishing to claim indemnification under
paragraph (a) of this Section 6.13, upon learning of any such claim, action,
suit, proceeding or investigation, shall promptly notify Parent thereof. In the
event of any
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<PAGE>
such claim, action, suit, proceeding or investigation (whether arising before or
after the Effective Time), (i) Parent or the Surviving Corporation shall have
the right to assume the defense thereof and Parent shall not be liable to such
Indemnified Parties for any legal expenses of other counsel or any other
expenses subsequently incurred by such Indemni fied Parties in connection with
the defense thereof, except that if Parent or the Surviving Corporation elects
not to assume such defense or counsel for the Indemnified Parties advises that
there are issues which raise conflicts of interest between Parent or the
Surviving Corporation and the Indemnified Parties, the Indemnified Parties may
retain counsel satisfactory to them, and Parent or the Surviving Corporation
shall pay all reasonable fees and expenses of such counsel for the Indemnified
Parties promptly as statements therefor are received; provided, however, that
-------- -------
Parent shall be obligated pursuant to this paragraph (b) to pay for only one
firm of counsel for all Indemnified Parties in any jurisdiction, (ii) the
Indemnified Parties will cooperate in the defense of any such matter and (iii)
Parent shall not be liable for any settlement effected without its prior written
consent; and provided, further, that Parent shall not have any obligation
-------- -------
hereunder to any Indemnified Party if and when a court of competent jurisdiction
shall ultimately determine, and such determination shall have become final, that
the indemnification of such Indemnified Party in the manner contemplated hereby
is pro hibited by applicable law. If such indemnity is not available with
respect to any Indemnified Party, then the Surviving Corporation and the
Indemnified Party shall contribute to the amount payable in such proportion as
is appropriate to reflect relative faults and benefits.
(c) The Surviving Corporation shall maintain officers' and directors'
liability insurance in respect of acts or omissions occurring prior to the
Effective Time covering each person currently covered by the Company's officers'
and directors' liability insurance policy on terms with respect to coverage no
less favorable than those of such policy in effect on the date hereof and with a
policy amount of at least $20 million ("D&O Insurance") for a period of six
-------------
years after the Effective Time so long as the annual premium therefor does not
exceed 150% of the last annual premium paid prior to the date hereof (the
"Current Premium"); provided, however, that if the D&O Insurance expires, is
---------------- -------- -------
terminated or cancelled during such six-year period, the Surviving Corporation
will use its best efforts to obtain D&O Insurance in a policy amount of at least
$20 million or, if lower, as much D&O Insurance as can be obtained for the
remainder of such period for a premium not in excess (on an annualized basis) of
1.5 times the Current Premium.
(d) The certificate of incorporation or by-laws of the Company, with
respect to indemnification of all officers, directors, employees and agents,
shall not be amended, repealed or otherwise modified after the Effective Time in
any manner that would adversely affect the rights thereunder of the Persons who
at any time prior to the Effective Time were identified as prospective
indemnities under the certificate of
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<PAGE>
incorporation or by-laws of the Company in respect to actions or omissions
occurring at or prior to the Effective Time (including the transactions
contemplated hereby), unless such modification is required by law.
(e) In the event that after the Effective Time, Parent or any of its
successors or assigns or the Surviving Corporation or any its successors or
assigns (i) consolidates with or merges into any other Person and shall not be
the continuing or surviving corporation or entity of such consolidation or
merger or (ii) transfers or conveys all or substantially all of its properties
and assets to any Person then, and in its such case, to the extent necessary,
proper provision shall be made so that the successors and assigns of Parent or
the Surviving Corporation, as applicable, assume the respective obligations of
Parent or the Surviving Corporation, as the case may be, as set forth in this
Section 6.13.
(f) The provisions of this Section are intended to be for the benefit
of, and shall be enforceable by, each of the Indemnified Parties, their heirs
and their representatives.
6.14. Worker Adjustment and Retraining Notification Act ("WARN Act").
--------------------------------------------------------------
The parties agree to consult with each other on the need for and timing of
notices pursuant to the WARN Act which applies generally to businesses with the
equivalent of 100 or more full-time employees and requires employers to give at
least 60 days' advance notice of defined types of employment loss. The parties
agree that the WARN Act does not apply to the Company prior to consummation of
the Merger but may or may not apply to the Surviving Corporation following
consummation of the Merger. However, pending the Closing, the Company agrees,
as agent for the Parent, upon the prior written request of Parent, to give
notices to its employees when requested by the Parent in order to comply with
the applicable provisions of the WARN Act. The Parent will be responsible for
the form of such notices and for ensuring that such notices comply with the WARN
Act. No such notice will provide for a termination date prior to the Effective
Time.
6.15. Parent Vote. Parent shall vote (or consent with respect to) or
-----------
cause to be voted (or a consent to be given with respect to) any Shares and any
shares of common stock of Merger Sub beneficially owned by it or any of its
Affiliates or with respect to which it or any of its Affiliates has the power
(by agreement, proxy or otherwise) to cause to be voted (or to provide a
consent), in favor of the adoption and approval of this Agreement at any meeting
of stockholders of the Company or Merger Sub, respectively, at which this
Agreement shall be submitted for adoption and approval and at all adjournments
or postponements thereof (or, if applicable, by any action of stockholders of
either the Company or Merger Sub by consent in lieu of a meeting).
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<PAGE>
6.16. Parent Vote. The Company shall vote (or consent with respect to)
-----------
or cause to be voted (or a consent to be given with respect to) any Shares of
Parent Common Stock beneficially owned by the Company or any of its Affiliates
or with respect to which it or any of its Affiliates has the power (by
agreement, proxy or otherwise) to cause to be voted (or to provide a consent),
in favor of the approval of the issuance of Parent Common Stock in the Merger at
any meeting of stockholders of Parent at which such issuance or this Agreement
shall be submitted for adoption and approval and at all adjournments or
postponement thereof (or, if applicable, by any action of stockholders of Parent
by consent in lieu of a meeting).
6.17. Related Agreements. Each of the parties agrees to perform all of
------------------
its obligations under the Agreement of Understanding and the Side Agreement,
including the other related agreements referred to in any of the foregoing or
exhibited or annexed to any of the foregoing.
ARTICLE VII
Conditions
7.1 Conditions to Each Party's Obligation to Effect the Merger. The
----------------------------------------------------------
respective obligation of each party to effect the Merger is subject to the
satisfaction or waiver at or prior to the Effective Time of each of the
following conditions:
(a) Stockholder Approval. This Agreement shall have been duly
--------------------
approved by holders of Shares constituting the Company Requisite Vote and shall
have been duly approved by the sole stockholder of Merger Sub in accordance with
applicable law and the certificate of incorporation and by-laws of each such
corporation, and the issuance of Parent Common Stock pursuant to the Merger
shall have been duly approved by the holders of Parent Common Stock constituting
the Parent Requisite Vote.
(b) NASDAQ Listing. The shares of Parent Common Stock issuable to the
--------------
Company stockholders pursuant to this Agreement shall have been authorized for
listing on NASDAQ upon official notice of issuance. To the extent required by
the rules and regulations of NASDAQ, the shares of Parent Common Stock issuable
pursuant to (a) the exercise of any options issued prior to the Effective Time
pursuant to the Stock Option Plans, and (b) the exercise of the New Exchange
Warrants, the Consideration Warrants and the Other Warrants, shall have been
authorized for listing on the NASDAQ upon official notice of issuance. The
Parent Common Stock shall continue to be listed on the Nasdaq National Market
and not subject to any suspension from trading.
(c) Regulatory Consents. If the HSR Act applies to the Merger, the
-------------------
waiting period applicable to the consummation of the Merger under the HSR Act
shall
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<PAGE>
have expired or been terminated. Other than the filing provided for in Section
1.3, all notices, reports and other filings required to be made prior to the
Effective Time by the Company or Parent or any of their respective Subsidiaries
with, and all consents, registrations, approvals, permits and authorizations
required to be obtained prior to the Effective Time by the Company or Parent or
any of their respective Subsidiaries from, any Governmental Entity
(collectively, "Governmental Consents") in connection with the execution and
---------------------
delivery of this Agreement and the consummation of the Merger and the other
transactions contemplated hereby by the Company, Parent and Merger Sub shall
have been made or obtained (as the case may be), except those that the failure
to make or to obtain are not, individually or in the aggregate, reasonably
likely to have a Company Material Adverse Effect or a Parent Material Adverse
Effect or to provide a reasonable basis to conclude that the parties hereto or
any of their affiliates or respective directors, officers, agents, advisors or
other representatives would be subject to the risk of criminal or material
financial liability.
(d) Litigation. No court or Governmental Entity of competent
----------
jurisdiction shall have enacted, issued, promulgated, enforced or entered any
statute, law, ordinance, rule, regulation, judgment, decree, injunction or other
order (whether temporary, preliminary or permanent) that is in effect and
restrains, enjoins or otherwise prohibits consummation of the Merger or the
other transactions contemplated by this Agreement (collectively, an "Order"),
-----
and no Governmental Entity shall have instituted any proceeding or threatened in
writing to institute any proceeding seeking any such Order.
(e) S-4. The S-4 Registration Statement shall have become effective
---
under the Securities Act. No stop order suspending the effectiveness of the S-4
Registration Statement shall have been issued, and no proceedings for that
purpose shall have been initiated or be threatened, by the SEC.
(f) Blue Sky Approvals. Parent shall have received all state
------------------
securities and "blue sky" permits and approvals necessary to consummate the
transactions contemplated hereby.
(g) Notification Filing Required Under HSR Act. If required, the
------------------------------------------
parties shall make good faith efforts to complete and file without delay, and in
any event within thirty (30) days after the date of this Agreement, any
notification filing required under the HSR Act with respect to the transactions
contemplated by this Agreement. Parent and Company shall in good faith take (or
fully cooperate in the taking of) all actions, and provide any additional
information that may be, required or reasonably requested in order to comply
with the requirements of the HSR Act. If a notification filing is required
under the HSR Act, Company and Parent shall each pay equal amounts of all filing
fees in connection therewith.
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<PAGE>
(h) Validity of Agreement of Understanding and Side Agreement. The
---------------------------------------------------------
Agreement of Understanding and the Side Agreement, including the other related
agreements exhibited or annexed to any of the foregoing, shall remain in full
force and effect and there shall be no material breach under any such agreement
(provided that a breaching party shall not be entitled to utilize its own breach
as constituting a failure of a closing condition).
(i) No Cash Redemption of Preferred Shares. No holder of Series B
--------------------------------------
Shares or Series D shares shall have elected to receive a cash redemption of
such shares.
7.2. Conditions to Obligations of Parent and Merger Sub. The
--------------------------------------------------
obligations of Parent and Merger Sub to effect the Merger are also subject to
the satisfaction or waiver by Parent at or prior to the Effective Time of the
following conditions:
(a) Representations and Warranties. The representations and
------------------------------
warranties of the Company set forth in this Agreement shall be true and correct
as of the date of this Agreement and as of the Closing Date as though made on
and as of the Closing Date (except to the extent any such representation or
warranty expressly speaks as of an earlier date), and Parent shall have received
a certificate signed on behalf of the Company by the Chief Executive Officer of
the Company to such effect; provided, however, that notwithstanding anything
-------- -------
herein to the contrary, this Section 7.2(a) shall be deemed to have been
satisfied even if such representations or warranties are not so true and correct
unless the failure of such representations or warranties to be so true and
correct, individually or in the aggregate, has had, or is reasonably likely to
have, a Company Material Adverse Effect or is reasonably likely to prevent or to
materially burden or materially impair the ability of the Company to consummate
the transactions contemplated by this Agreement.
(b) Performance of Obligations of the Company. The Company shall have
-----------------------------------------
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Closing Date, and Parent shall have
received a certificate signed on behalf of the Company by the Chief Executive
Officer of the Company to such effect.
(c) Consents Under Agreements. The Company shall have obtained the
-------------------------
consent or approval of each Person whose consent or approval shall be required
under any material Contract to which the Company or any of its Subsidiaries is a
party, except for those consents or approvals which the failure to obtain is not
reasonably likely to have a Company Material Adverse Effect or materially delay
or materially impair the ability of the Company to consummate the transactions
contemplated by this Agreement.
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<PAGE>
(d) Dissenting Shares. The aggregate amount of Dissenting Shares at
-----------------
the Effective Time shall be less than five percent (5%) of the total outstanding
Shares as of the date hereof. However, the parties recognize that so long as
the conditions set forth in the first paragraph of Section 4.3 are met, there
should be no Dissenting Shares. In addition, Parent acknowledges that the
Shares ceasing to be designated as a national market system security will not,
as such, be deemed to be a Company Material Adverse Effect. This acknowledgment
shall not exclude, however, the possibility of a Company Material Adverse Effect
resulting or following or deriving from the Shares ceasing to be so designated.
(e) Legal Opinion. Parent shall have received an opinion of Howard,
-------------
Rice, Nemerovski, Canady, Falk & Rabkin, A Professional Corporation, counsel to
the Company, dated the Closing Date, substantially in the form attached as
Exhibit F.
(f) Resignations. To the extent requested by Parent, Parent shall
------------
have received the resignations of each director and officer of the Company and
each of its Subsidiaries. No such resignation shall require any officer to lose
any rights which such officer may have under his change in control agreement
with the Company provided such change in control agreements are listed on
Schedule 7.2(f).
(g) Accountant Letters. Parent shall have received, in form and
------------------
substance reasonably satisfactory to Parent, from the accountants for the
Company, the "comfort" letter described in Section 6.5(b).
(h) Fairness Opinion. Prior to the Closing Date, Parent shall have
----------------
received an opinion of Tucker Anthony Incorporated dated on or about the Closing
Date, to the effect that, as of such date, the consideration to be received by
Parent in the Merger is fair to the holders of Parent Common Stock from a
financial point of view.
(i) Affiliates Letters. Parent shall have received an Affiliates
------------------
Letter from each Person identified as an affiliate of the Company pursuant to
Section 6.8.
(j) Conversion of Company Preferred Stock. Parent shall have
-------------------------------------
received appropriate information as to the status of the Series B Shares (and
written confirmation by the Company of the exchange of the Series B Shares into
Series D Shares, it being understood that references to the Series B Shares
include the Series D Shares) as either (x) having been converted into Shares
prior to the Effective Time or (y) remaining outstanding immediately prior to
the Effective Time, in order to facilitate the application of Article IV. The
Company shall have provided the appropriate notice to the holders of the Series
B Shares in compliance with Section 6 of the Series D Certificate of
Designations at least five days prior to the Effective Time and shall not have
rescinded such notice in any manner.
A-45
<PAGE>
(k) Employment Agreements. Parent shall have entered into an
---------------------
employment agreement with Michael Crandell on terms that are satisfactory to
Parent and to such employee.
(l) Plan Terminations. The Company shall have terminated the Stock
-----------------
Option Plans and the Stock Purchase Plan.
(m) Accrued Vacation. No employee of the Company shall have more
----------------
than six and one-half weeks of accrued personal time off as of the Closing Date.
7.3 Conditions to Obligation of the Company. The obligation of the
---------------------------------------
Company to effect the Merger is also subject to the satisfaction or waiver by
the Company at or prior to the Effective Time of the following conditions:
(a) Representations and Warranties. The representations and
------------------------------
warranties of Parent and Merger Sub set forth in this Agreement shall be true
and correct as of the date of this Agreement and as of the Closing Date as
though made on and as of the Closing Date, (except to the extent any such
representation and warranty expressly speaks as of an earlier date) and the
Company shall have received a certificate signed on behalf of Parent by the
Chief Executive Officer of Parent to such effect; provided, however, that
-------- -------
notwithstanding anything herein to the contrary, this Section 7.3(a) shall be
deemed to have been satisfied even if such representations or warranties are not
so true and correct unless the failure of such representations or warranties to
be so true and correct, individually or in the aggregate, has had, or is
reasonably likely to have, a Parent Material Adverse Effect or is reasonably
likely to prevent or to materially burden or materially impair the ability of
Parent to consummate the transactions contemplated by this Agreement.
(b) Performance of Obligations of Parent and Merger Sub. Each of
---------------------------------------------------
Parent and Merger Sub shall have performed in all material respects all
obligations required to be performed by it under this Agreement at or prior to
the Closing Date, and the Company shall have received a certificate signed on
behalf of Parent by the Chief Executive Officer of Parent to such effect.
(c) Consents Under Agreements. Parent shall have obtained the
-------------------------
consent or approval of each Person whose consent or approval shall be required
in order to consummate the transactions contemplated by this Agreement under any
material Contract to which Parent or any of its Subsidiaries is a party, except
for those consents or approvals which the failure to obtain is not reasonably
likely to have a Parent Material Adverse Effect or materially delay or
materially impair the ability of Parent to consummate the transactions
contemplated by this Agreement.
A-46
<PAGE>
(d) [Reserved.]
-----------
(e) Accountant Letters. The Company shall have received, in form and
------------------
substance reasonably satisfactory to the Company, from the accountants for
Parent the "comfort" letter described in Section 6.5(b).
(f) Registration Statement. The registration statements of Parent
----------------------
required pursuant to Section 6.11(b) shall have become effective and shall not
be subject to any stop order suspending the effectiveness of such registration
statements and no proceeding for that purpose shall have been initiated or
threatened by the SEC.
(g) Fairness Opinion. Prior to the Closing Date, the Company shall
----------------
have received an opinion of Pacific Growth Equities, Inc., dated on or about the
Closing Date, to the effect that, as of such date, the consideration to be
received in the Merger is fair to the holders of the Company's equity securities
from a financial point of view.
(h) Legal Opinion. The Company shall have received an opinion of
-------------
Sullivan & Cromwell, counsel to Parent and Merger Sub, dated the Closing Date,
substantially in the form attached as Exhibit G.
(i) Term Loan Agreement. Each installment requested by the Company
-------------------
to be funded by Parent pursuant to the Term Loan Agreement shall have been
funded in accordance with the terms of the Term Loan Agreement except where such
installment was not funded because the conditions to funding were not met under
the terms of the Term Loan Agreement.
ARTICLE VII
Termination
8.1 Termination by Mutual Consent. This Agreement may be terminated
-----------------------------
and the Merger may be abandoned at any time prior to the Effective Time, whether
before or after the approval by stockholders of the Company and Parent referred
to in Section 7.1(a), by mutual written consent of the Company and Parent by
action of their respective Boards of Directors.
8.2 Termination by Either Parent or the Company. This Agreement may
-------------------------------------------
be terminated and the Merger may be abandoned at any time prior to the Effective
Time by action of the Board of Directors of either Parent or the Company if (i)
the Merger shall not have been consummated by December 31, 2000, whether such
date is before or after the date of approval by the stockholders of the Company
or Parent (the
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<PAGE>
"Termination Date"), (ii) the approval of the Company's or Parent's stockholders
----------------
required by Section 7.1(a) shall not have been obtained at a meeting duly
convened therefor or at any adjournment or postponement thereof, or (iii) any
Order permanently restraining, enjoining or otherwise prohibiting consummation
of the Merger shall become final and non-appealable (whether before or after the
approval by the stockholders of the Company or Parent); provided, that the right
--------
to terminate this Agreement pursuant to clause (i) above shall not be available
to any party that has breached in any material respect its obligations under
this Agreement in any manner that shall have proximately contributed to the
occurrence of the failure of the Merger to be consummated.
8.3 Termination by the Company. This Agreement may be terminated and
--------------------------
the Merger may be abandoned at any time prior to the Effective Time, whether
before or after the approval by stockholders of the Company referred to in
Section 7.1(a), by action of the Board of Directors of the Company:
(a) if (i) the Board of Directors of Parent shall have withdrawn or
adversely modified its approval or recommendation of this Agreement or failed to
reconfirm its recommendation of this Agreement within five business days after a
written request by the Company to do so, or (ii) there has been a breach of any
representation, warranty, covenant or agreement made by Parent or Merger Sub in
this Agreement, or any such representation and warranty shall have become untrue
after the date of this Agreement, such that Section 7.3(a) or 7.3(b) would not
be satisfied and such breach or condition is not curable or, if curable, is not
cured within 30 days after written notice thereof is given by the Company to
Parent; or
(b) if (i) the Company's Board of Directors has received a Superior
Proposal, (ii) the Company has notified Parent in writing of the determination
of the Company's Board of Directors to accept the Superior Proposal, with such
notice to include a summary of all material terms and conditions of the Superior
Proposal, (iii) at least ten business days following receipt by Parent of the
notice referred to in clause (ii) above, and taking into account any revised
proposal made by Parent since receipt of the notice referred to in clause (ii)
above, such Superior Proposal remains a Superior Proposal, (iv) the Company is
in compliance with Section 6.2, (v) the Company is not in material breach of any
of the other provisions of this Agreement or of the Term Loan Agreement, (vi)
the Company's Board of Directors concurrently approves, and the Company
concurrently enters into, a definitive agreement providing for the
implementation of such Superior Proposal and (vii) the Company concurrently
delivers to Parent an agreement by the acquiring Person(s) that are party to
such agreement providing for implementation of such Superior Proposal, in which
such Person(s) agree, subject only to completion of such Superior Proposal, to
pay or to cause the Company to pay to Parent any amount that may become payable
pursuant to Section 8.5(b)(i), and the
A-48
<PAGE>
Company concurrently pays the charges and expenses of Parent and Merger Sub as
provided in Section 8.5(b)(ii).
8.4 Termination by Parent. This Agreement may be terminated and the
---------------------
Merger may be abandoned at any time prior to the Effective Time, whether before
or after the approval by the stockholders of Parent referred to in Section
7.1(a), by action of the Board of Directors of Parent:
(a) if (i) the Board of Directors of the Company shall have withdrawn
or adversely modified its approval or recommendation of this Agreement or failed
to reconfirm its recommendation of this Agreement (including rejecting any then
applicable Competing Proposal) within five business days after a written request
by Parent to do so, (ii) there has been a breach of any representation,
warranty, covenant or agreement made by the Company in this Agreement, or any
such representation and warranty shall have become untrue after the date of this
Agreement, such that Section 7.2(a) or 7.2(b) would not be satisfied and such
breach or condition is not curable or, if curable, is not cured within 30 days
after written notice thereof is given by Parent to the Company or (iii) if the
Company or any of the other Persons described in Section 6.2 as affiliates,
representatives or agents of the Company shall take any of the actions
proscribed by Section 6.2.
8.5 Effect of Termination and Abandonment.
-------------------------------------
(a) In the event of termination of this Agreement and the abandonment
of the Merger pursuant to this Article VIII, this Agreement (other than as set
forth in Section 9.1) shall become void and of no effect with no liability on
the part of any party hereto (or of any of its directors, officers, employees,
agents, legal and financial advisors or other representatives); provided,
--------
however, except as otherwise provided herein, no such termination shall relieve
-------
any party hereto of any liability or damages resulting from any willful breach
of this Agreement.
(b) (i) In the event that this Agreement is terminated for any
reason prior to the Effective Time, then the Company shall promptly, upon the
conditions set forth in the following sentence being met, pay to Parent a cash
payment according to the formula set forth in Exhibit H. The conditions to the
payment referred to in the preceding sentence are that, within two years after
the date of any such termination, the Company (x) shall consummate (on a
solicited or unsolicited basis) an Acquisition Proposal (or shall enter into a
binding agreement to consummate an Acquisition Proposal that is subsequently
consummated) which in either case would meet the standard set forth in
subsection (B)(1), (2) or (3) of Section 6.2 hereof, or (y) shall issue any
securities (other than pursuant to the Stock Option Plans or other employee
benefit plans) and receive cash proceeds (on a cumulative basis for all such
issuances within two years after
A-49
<PAGE>
the termination date) aggregating at least $5 million. Promptly upon such
consummation or promptly upon such receipt of proceeds, the Company (or the
successor to the Company, if applicable) shall make the cash payment to Parent
according to the formula set forth in Exhibit H; provided that in the case of an
event described in clause (y) of the preceding sentence, the cash payment will
not be due until 270 days following the receipt of such proceeds.
(ii) In addition, in any case where termination of this Agreement
arises as a result of failure to obtain approval by the Company's stockholders
as contemplated in Section 6.4, or any action on the part of the Company's Board
of Directors (including, without limitation, action pursuant to Section 8.3(b)
or Section 8.4(a)(i)), or as a result of any material breach by the Company
hereunder, then the Company shall promptly, but in no event later than two
business days after being notified of such by Parent, pay all of the out-of-
pocket charges and expenses, including those of the Exchange Agent, incurred by
Parent or Merger Sub in connection with this Agreement and the Term Loan
Agreement and the transactions contemplated by this Agreement and the Term Loan
Agreement payable by wire transfer of same day funds.
(iii) The Company acknowledges that the agreements contained in this
Section 8.5(b) are an integral part of the transactions contemplated by this
Agreement, and that, without these agreements, Parent and Merger Sub would not
enter into this Agreement; accordingly, if the Company fails to promptly pay the
amounts due pursuant to this Section 8.5(b), and, in order to obtain such
payment, Parent or Merger Sub commences a suit which results in a judgment
against the Company for any payment set forth in this Section 8.5(b), the
Company shall pay to Parent or Merger Sub its costs and expenses (including
attorneys' fees) in connection with such suit, together with interest on the
amount owing, until paid in full, at the same rate as is applicable to the loan
made by Parent to the Company pursuant to the Term Loan Agreement.
ARTICLE IX
Miscellaneous and General
9.1 Survival. This Article IX and the agreements of the Company,
--------
Parent and Merger Sub contained in Sections 6.9 (Stock Exchange Listing and De-
listing, etc.), 6.11 (Benefits), 6.12 (Expenses) and 6.13 (Indemnification;
Directors' and Officers' Insurance) shall survive the consummation of the
Merger. This Article IX, the agreements of the Company, Parent and Merger Sub
contained in Section 6.12 (Expenses), Section 8.5 (Effect of Termination and
Abandonment) and the Confidentiality Agreement, dated March 26, 2000, between
the Company and Parent (the "Confidentiality Agreement") shall survive the
-------------------------
termination of this Agreement. All other
A-50
<PAGE>
representations, warranties, covenants and agreements in this Agreement shall
not survive the consummation of the Merger or the termination of this Agreement,
but the other separate agreements of the parties, e.g., the Term Loan Agreement
(including the security agreement, the security documents, and the other
agreements entered into in connection therewith or related thereto), shall
survive or terminate pursuant to their own terms.
9.2 Modification or Amendment. Subject to the provisions of the
-------------------------
applicable law, at any time prior to the Effective Time, the parties hereto may
modify or amend this Agreement, by written agreement executed and delivered by
duly authorized officers of the respective parties.
9.3 Waiver of Conditions. The conditions to each of the parties'
--------------------
obligations to consummate the Merger are for the sole benefit of such party and
may be waived by such party in whole or in part to the extent permitted by
applicable law.
9.4 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each such counterpart being deemed to be an original instrument,
and all such counterparts shall together constitute the same agreement.
9.5 GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL. (a) THIS
---------------------------------------------
AGREEMENT SHALL BE DEEMED TO BE MADE IN AND IN ALL RESPECTS SHALL BE
INTERPRETED, CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH THE LAW OF THE
STATE OF DELAWARE WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF. The
parties hereby irrevocably submit to the jurisdiction of the courts of the State
of Delaware and the Federal courts of the United States of America located in
the State of Delaware solely in respect of the interpretation and enforcement of
the provisions of this Agreement and of the documents referred to in this
Agreement, and in respect of the transactions contemplated hereby, and hereby
waive, and agree not to assert, as a defense in any action, suit or proceeding
for the interpretation or enforcement hereof or of any such document, that it is
not subject thereto or that such action, suit or proceeding may not be brought
or is not maintainable in said courts or that the venue thereof may not be
appropriate or that this Agreement or any such document may not be enforced in
or by such courts, and the parties hereto irrevocably agree that all claims with
respect to such action or proceeding shall be heard and determined in such a
Delaware State or Federal court. The parties hereby consent to and grant any
such court jurisdiction over the person of such parties and over the subject
matter of such dispute and agree that mailing of process or other papers in
connection with any such action or proceeding in the manner provided in Section
9.6 or in such other manner as may be permitted by law shall be valid and
sufficient service thereof.
A-51
<PAGE>
(b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY
ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT
ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY
WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT,
OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND
ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE
EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH PARTY
UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH PARTY
MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH PARTY HAS BEEN INDUCED TO ENTER
INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION 9.5.
9.6 Notices. Any notice, request, instruction or other document to
-------
be given hereunder by any party to the others shall be in writing and delivered
personally or sent by registered or certified mail, postage prepaid, or by
facsimile:
if to Parent or Merger Sub
--------------------------
6922 Hollywood Boulevard, Suite 900
Hollywood, California 90028
Attention: Steven J. Hamerslag, President and CEO, and
Nicholas V. Morosoff, Secretary and General Counsel
fax: (323) 860-9201
with a copy to Frank H. Golay, Jr.
Sullivan & Cromwell
1888 Century Park East
Los Angeles, California 90067
fax: (310) 712-8800.
if to the Company
-----------------
1378 Willow Road,
Menlo Park, California 94025
Attention: Todd J. Kenck
Vice President and Chief Financial Officer
fax: (650) 470-6969
A-52
<PAGE>
with a copy to Joseph B. Hershenson, Esq.
Howard, Rice, Nemerovski, Canady, Falk & Rabkin
A Professional Corporation
Three Embarcadero Center, 7th Floor
San Francisco, California 94111
fax: (415) 217-5910
or to such other persons or addresses as may be designated in writing by the
party to receive such notice as provided above.
9.7 Entire Agreement; NO OTHER REPRESENTATIONS. This Agreement
------------------------------------------
(including any exhibits hereto), the other agreements between the parties
referred to in the recitals hereof, the Company Disclosure Letter, the Parent
Disclosure Letter and the Confidentiality Agreement constitute the entire
agreement, and supersede all other prior agreements, understandings,
representations and warranties both written and oral, among the parties, with
respect to the subject matter hereof. In particular, all of the terms of the
Letter of Intent, dated April 5, 2000, between the Company and Parent, including
Section 3 thereof, are hereby terminated. EACH PARTY HERETO AGREES THAT, EXCEPT
FOR THE REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS AGREEMENT, OR IN SUCH
OTHER AGREEMENTS REFERRED TO ABOVE, NEITHER PARENT AND MERGER SUB NOR THE
COMPANY MAKES ANY OTHER REPRESENTATIONS OR WARRANTIES, AND EACH HEREBY DISCLAIMS
ANY OTHER REPRESENTATIONS OR WARRANTIES MADE BY IT OR ANY OF ITS OFFICERS,
DIRECTORS, EMPLOYEES, AGENTS, FINANCIAL AND LEGAL ADVISORS OR OTHER
REPRESENTATIVES, WITH RESPECT TO THE EXECUTION AND DELIVERY OF THIS AGREEMENT OR
THE TRANSACTIONS CONTEMPLATED HEREBY, NOT WITHSTANDING THE DELIVERY OR
DISCLOSURE TO THE OTHER OR THE OTHER'S REPRESENTATIVES OF ANY DOCUMENTATION OR
OTHER INFORMATION WITH RESPECT TO ANY ONE OR MORE OF THE FOREGOING.
9.8 No Third-Party Beneficiaries. Except as provided in Section
----------------------------
6.11(e) (Obligations), Section 6.11(f) (Severance Agreements) and Section 6.13
(Indemnification; Directors' and Officers' Insurance), this Agreement is not
intended to confer upon any Person other than the parties hereto any rights or
remedies hereunder.
9.9 Obligations of Parent and of the Company. Whenever this
----------------------------------------
Agreement requires a Subsidiary of Parent to take any action, such requirement
shall be deemed to include an undertaking on the part of Parent to cause such
Subsidiary to take such action. Whenever this Agreement requires a Subsidiary
of the Company to take any action, such requirement shall be deemed to include
an undertaking on the part of the
A-53
<PAGE>
Company to cause such Subsidiary to take such action and, after the Effective
Time, on the part of the Surviving Corporation to cause such Subsidiary to take
such action.
9.10 Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability or the other provisions hereof. If any
provision of this Agreement, or the application thereof to any Person or any
circumstance, is invalid or unenforceable, (a) a suitable and equitable
provision shall be substituted therefor in order to carry out, so far as may be
valid and enforceable, the intent and purpose of such invalid or unenforceable
provision and (b) the remainder of this Agreement and the application of such
provision to other Persons or circumstances shall not be affected by such
invalidity or unenforceability, nor shall such invalidity or unenforceability
affect the validity or enforceability of such provision, or the application
thereof, in any other jurisdiction.
9.11 Interpretation. The table of contents and headings herein are
--------------
for convenience of reference only, do not constitute part of this Agreement and
shall not be deemed to limit or otherwise affect any of the provisions hereof.
Where a reference in this Agreement is made to a Section or Exhibit, such
reference shall be to a Section of or Exhibit to this Agreement unless otherwise
indicated. Whenever the words "include," "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation."
9.12 Assignment. This Agreement shall not be assignable by operation
----------
of law or otherwise; provided, however, that Parent may designate, by written
-------- -------
notice to the Company, another wholly-owned direct or indirect subsidiary to be
a Constituent Corporation in lieu of Merger Sub, in which event all references
herein to Merger Sub shall be deemed references to such other subsidiary, except
that all representations and warranties made herein with respect to Merger Sub
as of the date of this Agreement shall be deemed representations and warranties
made with respect to such other subsidiary as of the date of such designation.
9.13 Term Loan Agreement. Neither the entering into of this
-------------------
Agreement nor the consummation of the Merger shall be deemed to be a breach of
the terms of the Term Loan Agreement and Parent hereby waives any claim of
breach of any provision of the Term Loan Agreement insofar as such provision
might be deemed to be breached by the entering into of this Agreement or the
consummation of the Merger or any actions required by the provisions of this
Agreement.
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered by the duly authorized officers of the parties hereto as of the date
first written above.
eFax.com
By: /s/ Michael Crandell
------------------------------------
Name: Michael Crandell
Title: Senior Vice President
JFAX.COM, Inc.
By: /s/ Steven J. Hamerslag
------------------------------------
Name: Steven J. Hamerslag
Title: President and CEO
JFAX.COM Merger Sub, Inc.
By: /s/ Steven J. Hamerslag
------------------------------------
Name: Steven J. Hamerslag
Title: President and CEO
A-55
<PAGE>
[Explanatory note: Exhibits B and H are included with this copy, but the other
Exhibits are omitted.]
A-56
<PAGE>
EXHIBIT B
The exchange ratio, or the number of shares of JFAX Common Stock into which each
share of the Company's Common Stock shall be convertible, and for which each
share of the Company's Common Stock shall be exchanged, shall be determined by
the following formula:
CN = 11,000,000 + $5,000,000 - LA + M - O$
-------------- --------------------------
N FMV/J/ x N
Where:
CN = the Conversion Number (the second of the fractions comprising
CN may be a negative number).
LA = the sum of (x) the amount of loan proceeds disbursed under the
Term Loan Agreement as of the Closing Date which have not been
repaid and (y) the amount of payables of the Company that are 45
days or more past due as of the Closing Date.
FMV/J/ = the average closing price of the Parent Common Stock for
the five trading days beginning on and including the seventh trading
day prior to the Closing Date.
M = the sum of (x) cash on hand at the Company as of the Closing
Date (but not including any cash deposited or required under the
terms of the Term Loan Agreement to be deposited into the Asset
Sales Account (as defined in the Term Loan Agreement) plus (y) any
of the Company's pre-paid rents and insurance premiums (but only to
the extent a pro-rata refund of any such premium is available as to
insurance policies (other than the Company's D&O Insurance policy)
which will be cancelled, at the election of Parent or otherwise,
following the Closing) as of Closing (in no event will M exceed LA).
O$ = the amount of any cash received by the Company upon (a)
exercise of employee stock options under the Stock Option Plans, (b)
purchases pursuant to the Stock Purchase Plan, or (c) exercise of
Exchange Warrants or Other Warrants, in each case during the period
between the date hereof and the time immediately prior to the
Effective Time.
N = an amount equal to the sum of (w) 13,520,895 (the number of
outstanding Shares as of the date hereof), plus (x) Shares, if any,
issued upon conversion of the Series B Shares during the period
between the date hereof and the time immediately prior to the
Effective Time, plus (y) any other Shares issued during the period
between the date hereof and the time immediately prior to the
Effective Time, except any shares issued (a) upon exercise of
employee stock options under the Stock Option Plans, (b) upon
purchase pursuant to the Stock Purchase Plan, or (c) upon exercise
of Exchange Warrants or Other Warrants, plus (z) the total number of
Shares that would be issuable upon the conversion of the Series B
Shares that remain outstanding immediately prior to the Effective
Time, assuming that all such Series B Shares were then converted.
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<PAGE>
EXHIBIT H
The cash payment from the Company to Parent required by Section
8.5(b)(i), if and when the conditions of such Section are met, shall be
determined by the following formula:
CP =N x (FMV /E/ - EP)
Where:
CP =the cash payment required, but not less than zero.
N = 1,750,000, provided that N shall be reduced to 750,000 if the
termination of this Agreement arises as a result of a failure to obtain approval
by Parent's stockholders as referred to in Section 6.4 or as a result of a
material breach by Parent under this Agreement (in either case N is subject to
adjustment as provided below).
FMV /E/ = The fair market value of one share of the Company Common
Stock as of the date the conditions of Section 8.5(b)(i) are met, which shall
mean the average of the daily prices for the Company Common Stock on the
applicable market specified below, over the latest 10 trading days prior to the
date such conditions are met, based upon:
(a) the closing prices per share of the Company Common Stock on the
principal national securities exchange on which such stock is listed or admitted
to trading, or
(b) if not listed or traded on such exchange, the last reported sales
prices per share on the Nasdaq National Market or the Nasdaq Stock Market
(collectively, "Nasdaq"), or
------
(c) if not listed or traded on any such exchange or Nasdaq, the daily
average of the high and low bid prices per share as reported in the NASD OTC
Bulletin Board, or
(d) if not so listed or traded, and not so reported, then as
determined by negotiations in good faith between the Company and Parent.
EP = $0.10 (subject to adjustment as provided below)
In the event that the Company changes the number or kind of shares of Company
Common Stock, or securities convertible or exchangeable into or exercisable for
shares of
A-58
<PAGE>
Company Common Stock, at or prior to the date when the conditions of Section
8.5(b)(i) are met, as a result of any reclassification, stock split (including a
reverse split), stock dividend or distribution, recapitalization, merger,
consolidation, sale of all or substantially all assets, subdivision, tender or
exchange offer, for other similar transaction, then for purposes of the
foregoing formula, at any time or times when such a change occurs, N and EP
shall be proportionately adjusted so as to preserve the relative amount of any
payment resulting from such formula in relation to the capitalization of the
Company after giving effect to any such change or changes.
A-59
<PAGE>
Appendix B
July 11, 2000
Board of Directors
eFax.com
1378 Willow Rd.
Menlo Park, CA 94025
Members of the Board of Directors:
You asked for our opinion as to the fairness, from a financial point of view, to
the holders of common stock, par value $0.001 per share ("eFax Common Stock") of
eFax, a Delaware corporation ("eFax" or the "Company") of certain transactions
in which eFax is considering participating.
Background of Transactions
eFax entered into an Agreement and Plan of Merger (the "Agreement and Plan of
Merger") with Jfax.com, a Delaware corporation ("Jfax"), pursuant to which Jfax
would acquire eFax. Pursuant to the Agreement and Plan of Merger, the
outstanding shares of eFax common stock will be converted into a number of
shares (the "Conversion Shares") of Jfax Common Stock, at a conversion ratio
specified in the Agreement and Plan of Merger. The number of shares of Jfax
Common Stock to be received by eFax shareholders will be 11,000,000 common
shares of Jfax stock resulting in a transaction value of approximately $18.6
million. The Merger is to be accounted for as a purchase transaction and is to
be a tax-free reorganization under Section 368 of the Internal Revenue Code of
1986, as amended.
Investigation and Analysis
In conducting our investigation and analysis and in arriving at the opinion set
forth below, we reviewed such information and took into account such financial
and economic factors as we deemed relevant under the circumstances. In that
connection, we, among other things: (i) reviewed publicly available information
about eFax (ii) reviewed publicly available information about Jfax, including
but not limited to Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
proxy and other information filed with the Securities and Exchange Commission,
(iii) analyzed information regarding the market prices of eFax and similar
publicly traded companies over various periods; (iv) analyzed information on
publicly-traded comparable companies; and (v) analyzed information about prices
paid in acquisitions of online communication service providers during the period
April, 1997 through May, 2000.
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Board of Directors
eFax.com
July 11, 2000
Page 2
We reviewed with senior management of eFax the state of eFax's business and
operations prepared and furnished to us by the Company. We held discussions with
certain members of Jfax's senior management concerning Jfax's historical and
current business condition and operating results. We considered such other
information, financial studies, analyses and investigations and financial,
economic and market criteria that we deemed relevant for the preparation of this
opinion. We did not consider any benefits that may inure to any stockholder of
the Company as a result of the Merger or any related transactions other than in
such party's capacity as a stockholder of the Company.
In arriving at our opinion, we assumed and relied upon the accuracy and
completeness of all of the financial and other information provided to us by or
on behalf of eFax and Jfax, and all of the publicly available financial and
other information referred to above, and did not attempt independently to verify
any such information. We also assumed, with your consent, that the Merger would
be consummated in accordance with the terms of the Agreement and Plan of Merger,
without any amendment thereto and without waiver by eFax or Jfax of any of the
conditions to their respective obligations thereunder. We relied upon assurances
of senior management of eFax and Jfax, Inc. that such management was unaware of
any fact that would make their respective information provided to us incomplete
or misleading.
Our opinion necessarily was based upon economic, monetary and market conditions
as they existed and could be evaluated on the date hereof, and did not predict
or take into account any changes that could have occurred, or information that
could have become available, after the date of our opinion, including without
limitation changes in the terms of the Agreement and Plan of Merger. It should
be understood that subsequent developments may have affected this opinion and we
do not have any obligation to update, revise or reaffirm this opinion. Except as
noted above, this opinion did not address the relative merits of the Merger and
any other potential transactions or business strategies considered by the Board
of Directors of eFax. We did not participate in the negotiation of the terms of
the Merger, provide any legal advice or provide any advice with respect to the
Merger or any possible alternatives to the Merger.
PGE received a fee for rendering this written opinion pursuant to the terms of
an engagement letter. PGE and/or its employees may from time to time trade the
securities of eFax and/or Jfax for its or their own account/s or the accounts of
PGE's customers and, accordingly, may at any time hold long or short positions
in such securities.
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Board of Directors
eFax.com
July 11, 2000
Page 3
Opinion
Based upon and subject to the foregoing, we are of the opinion that, as of the
date hereof, the Merger is fair, from a financial point of view, to the holders
of eFax's common stock.
Our opinion was prepared solely for the information of the board of directors,
and may not be used for any other purpose or disclosed to or relied upon by any
other party without the prior written consent of PGE; provided, however, that if
eFax proposes to state in any proxy statement filed under the Securities
Exchange Act of 1934 that PGE rendered this written opinion and/or describe the
conclusions reached herein, PGE's consent shall not be unreasonably withheld.
Very truly yours,
Pacific Growth Equities, Inc.
B-3
<PAGE>
Appendix C
July 12, 2000
Board of Directors
JFAX.COM, Inc.
6922 Hollywood Boulevard, Suite 900
Hollywood, CA 90028
Ladies and Gentlemen:
We understand that JFAX.COM, Inc. ("JFAX") and eFax.com ("EFAX") propose to
enter into an Agreement and Plan of Merger dated as of July ___, 2000 (the
"Merger Agreement"), which provides for, among other matters, the merger of
JFAX.COM Merger Sub, Inc., a subsidiary of JFAX, with and into EFAX (the
"Merger"). Pursuant to the Merger, each share of common stock, par value $.01
per share, of EFAX ("EFAX Common Stock") issued and outstanding immediately
prior to the effectiveness of the Merger (the "Effective Time") will be
converted into, and become exchangeable for, that number of shares (the "Merger
Consideration," as more fully defined in the Merger Agreement, and including the
shares of JFAX Common Stock issuable in respect of the EFAX preferred stock) of
common stock, par value $.01 per share, of JFAX ("JFAX Common Stock") equal to
the amount (the "Conversion Number") determined pursuant to the formula set
forth in Exhibit B to the Merger Agreement. The terms and conditions of the
Merger are set forth in more detail in the Merger Agreement and related
documents, and terms used herein but not defined shall have the meaning ascribed
to them in the Merger Agreement. The terms and conditions of the Merger were
determined without our involvement and our opinion does not address whether
better terms could have been achieved.
You have requested our opinion as to the fairness to JFAX's stockholders, from a
financial point of view, of the Merger Consideration to be paid by JFAX in
connection with the Merger. In arriving at our opinion, we have reviewed, among
other things, the draft of the Merger Agreement dated July 10, 2000 (the "draft
Merger Agreement"); the draft Stock Purchase Agreement by and between EFAX and
JFAX dated July 12, 2000; the draft Declaration of Registration Rights Agreement
by and between EFAX and JFAX dated July 12, 2000; the draft Exchange Agreement
by and between EFAX and the Investors listed on the Schedule of Investors
attached thereto dated July 10, 2000; the draft Side Agreement between EFAX,
Fisher Capital Ltd. and Wingate Capital Ltd. and JFAX dated July 10, 2000;
various legal documentation; the draft Agreement of Understanding by and between
EFAX, JFAX and Integrated Global Concepts, Inc. dated June 30, 2000; the Term
Loan Agreement by and between EFAX and JFAX dated May 5, 2000; certain publicly
available financial statements, research reports and earnings estimates by
research analysts covering JFAX and EFAX, and other business and financial
information regarding JFAX and EFAX; and certain internal financial statements,
forecasts and other financial and operating data provided to us by and
concerning JFAX and EFAX. We also have reviewed and discussed the business,
financial condition, assets, earnings and prospects of JFAX and EFAX with
representatives of JFAX's and EFAX's management. In arriving at our opinion, we
have considered (a) the trading history of the two companies' common shares and
the average ratio of EFAX's share price to JFAX's share price over several
periods of time; (b) merger premiums/discounts for certain comparable
transactions;
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Board of Directors
JFAX.COM, Inc.
July 12, 2000
Page 2
(c) the relative contributions of JFAX and EFAX with respect to certain
financial and operational statistics; (d) certain financial and stock market
data of publicly held companies in businesses considered to be generally
comparable to JFAX and EFAX; (e) certain publicly available information
concerning the nature and terms of certain transactions that we believed to be
relevant on a comparative basis; (f) the impact of the Merger on JFAX's
projected earnings per share; and (g) such other information, financial studies,
analyses and financial, economic and market criteria as we deemed relevant and
appropriate. Given the nature of our analytical techniques, this opinion is not
readily susceptible to partial analysis or summary description.
In connection with our review, we have not independently verified any of the
foregoing information and have relied upon it being complete and accurate in all
material respects. We have not made an independent evaluation or appraisal of
any assets or liabilities (contingent or otherwise) of JFAX or EFAX, nor have we
been furnished with any such evaluation or appraisal information. We did not
interview customers, evaluate technologies, nor have we conducted a complete
inspection of the properties or facilities of either JFAX or EFAX. With respect
to the financial plans, estimates and analyses provided to us by JFAX and EFAX,
we have assumed, at your direction, that all such information was complete and
accurate in all material respects, reasonably prepared on bases reflecting the
best currently available knowledge, estimates and judgments of JFAX's and EFAX's
management as to future financial performance and was based upon the historical
performance of JFAX and EFAX and certain estimates and assumptions which were
reasonable at the time made, without independent verification. Finally, we have
assumed that the executed Merger Agreement will be in the same form as the draft
Merger Agreement reviewed by us, and that the Merger will be consummated on the
terms described in the draft Merger Agreement, without any waiver of any
material term or condition, and that obtaining any necessary regulatory or third
party approval for the Merger will not have a material adverse effect on either
JFAX or EFAX. Our opinion is based on economic, monetary and market conditions
as in effect on, and the information provided to us as of, the date hereof.
We have not been requested to evaluate the reasonableness, adequacy, or
feasibility of JFAX's estimates regarding future financing requirements or its
ability to access any such financing. This opinion assumes that JFAX has, or at
closing will have, financing adequate to complete the Merger in accordance with
the Merger Agreement.
Based upon and subject to the foregoing, it is our opinion that, as of the date
hereof, the Merger Consideration to be paid by JFAX in connection with the
Merger is fair, from a financial point of view, to JFAX's stockholders.
We are acting as financial advisor to the Board of Directors of JFAX in this
transaction pursuant to an engagement letter dated April 28, 2000. Under the
terms of that engagement letter, we are entitled to a fee for our services,
payable upon delivery of this opinion to JFAX's Board of Directors. Our fee is
not contingent upon the contents of this opinion or the approval or consummation
of the Merger or any other transaction. In addition, JFAX has agreed to
indemnify us for certain liabilities that may arise out of the rendering of this
opinion. JFAX also has agreed to reimburse us for our reasonable and properly
documented expenses, not to exceed $25,000, incurred in connection with the
performance of our services under the engagement letter.
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Board of Directors
JFAX.COM, Inc.
July 12, 2000
Page 3
Prior to the date hereof, Tucker Anthony Cleary Gull has not provided any
investment banking services to either JFAX or EFAX.
This opinion is for the use and benefit of the Board of Directors of JFAX and is
rendered to the Board of Directors in connection with its consideration of the
Merger. We have not been requested to opine as to, and our opinion does not in
any manner address, JFAX's underlying business decision to proceed with or
consummate the Merger, whether the terms contained in the Merger Agreement were
the best available terms to JFAX, whether stockholders should vote in favor of
the proposed Merger or whether the allocation of the consideration among EFAX's
common and preferred stockholders is appropriate.
Very truly yours,
TUCKER ANTHONY CLEARY GULL
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Appendix D
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended January 1, 2000.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ________to_______.
Commission File Number 0-22561
eFax.com
(Exact name of Registrant as specified in its charter)
Delaware 77-0182451
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or Organization)
1378 Willow Road, Menlo Park, California 94025
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 324-0600
Securities registered pursuant to Section 12(b) of the Act: None
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. Yes [X] 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. [ ]
As of April 3, 2000, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $63,493,325 based upon the
closing sales price of the Common Stock as reported on the Nasdaq National
Market on such date. Shares of Common Stock held by officers, directors and
holders of more than ten percent of the outstanding Common Stock have been
excluded from this calculation because such persons may be deemed to be
affiliates. The determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of April 3, 2000, the Registrant had outstanding 13,184,072 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the following documents are incorporated by reference in this
report: Registrant's Proxy Statement for its 2000 Annual Meeting of Stockholders
which will be filed with the Securities and Exchange Commission no later than
120 days after January 1, 2000. (Part III).
================================================================================
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EFAX.COM
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED JANUARY 1, 2000
<TABLE>
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Page
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PART I
Item 1 Business 3
Item 2 Properties 9
Item 3 Legal Proceedings 9
Item 4 Submission of Matters to a Vote of Security Holders 9
PART II
Item 5 Market for the Registrant's Common Equity and Related
Stockholder Matters 10
Item 6 Selected Financial Data 12
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 7A Quantitative and Qualitative Disclosures About Market Risk 31
Item 8 Financial Statements and Supplementary Data 31
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 31
PART III
Item 10 Directors and Executive Officers of the Registrant 32
Item 11 Executive Compensation 34
Item 12 Security Ownership of Certain Beneficial Owners
and Management 36
Item 13 Certain Relationships and Related Transactions 37
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 39
Signatures 61
</TABLE>
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PART I
ITEM 1. BUSINESS
Overview
eFax.com is a leading provider of Internet communications services. eFax.com
currently provides its free and fee-based Internet communications services to
more than 1.6 million users. In February 1999, eFax.com launched its Internet
communications services, which incorporate fax-to-email, voicemail and voice-to-
email capabilities. Prior to developing this market, eFax.com had developed and
marketed branded and licensed products and software solutions for the
"multifunction product ("MFP) market," which consisted of electronic office
devices that combine print, fax, copy and scan capabilities in a single unit.
In addition, eFax.com has licensed its embedded systems technology and software
to a number of manufacturers of multi-function products. On January 10, 2000,
we announced that we will focus exclusively on expanding our position as a
leading provider of enhanced Internet communications services and solutions and
that we will discontinue manufacturing and sales of multifunction products.
To date, the majority of eFax.com's revenues have been generated from sales
and licensing of multifunction products. Traditionally, we license our hardware
and software technologies for a range of multifunction products sold under the
brand names of our manufacturing and software license customers. eFax.com also
offers software which can be sold on a stand-alone basis, or bundled with
hardware and software technologies to provide the customer with a complete,
integrated hardware and software product solution. Our software products include
eFax Messenger Plus, JetSuite, Filing Central, HotSend and Paper Master.
On February 8, 1999, we changed our name from JetFax, Inc. to eFax.com, Inc.
and announced our "eFax(R)" service, a free fax-to-e-mail Internet service. On
December 16, 1999, eFax.com's corporate name changed from eFax.com, Inc. to
eFax.com. It is eFax.com's intention to expand its service and product
offerings to include a variety of Internet-based communication services and
products.
eFax.com Internet Services
In February 1999, we launched the eFax.com web site and service. This service
provides users with the capability to receive facsimile transmissions as email
attachments by way of the Internet. To enable the eFax service, a user simply
signs up at the eFax.com website by providing limited personal information. Once
a user is registered, eFax.com issues a unique telephone number to be used as a
personal eFax number. eFax users can then receive faxes by distributing their
eFax number instead of a traditional fax number to contacts. To view the fax
images, our users must install a client application, eFax Messenger.
The eFax service has expanded to provide a comprehensive set of unified
communications services to our users on both a free and fee basis. Our eFax
Plus service is a fee based service incorporating fax-to-email, email-to-fax,
voice-to-email and voicemail. Pricing for eFax Plus is based upon monthly
subscription fees and usage based charges for outbound faxing. eFax Free users
can utilize our fax-to-email, voice-to-email and voicemail services for free.
Our cost of supporting free users is offset by revenue from advertising, which
is served to the client viewer on the user's desktop, upgrade campaigns aimed at
converting free users to paid customers, and e-commerce opportunities in our
eFax Mall.
eFax Free. eFax Free is an advertising based free service which has been the
driving force for user acquisitions for the eFax services. eFax Free allows
users to receive faxes and voicemails on their eFax number at no cost to the
user. The eFax Messenger software allows users to view faxes and listen to
voicemails. In addition, this software incorporates ad serving technology to
present advertisements on the applications tool bar while faxes and voicemails
are viewed or played.
The eFax Free service provides us with a cost effective vehicle for attracting
users to the eFax services - both free and paid. Once a user subscribes to eFax
Free, eFax.com will work to monetize the advertising and promotional
opportunities associated with that subscriber's use of the service.
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eFax Plus. eFax Plus is our premium fax and voicemail service aimed at
customers desiring local or toll-free telephone numbers, fax sending and
advanced management of their communications from the Internet. Features of this
service include sending faxes via email, sending faxes directly from the Web,
optical character recognition of received documents, and automatic email
distribution of received messages to several email recipients.
eFax.com Products
eFax.com offers the following products and solutions to its Internet, OEM and
other customers:
eFax Messenger and Messenger Plus. eFax.com has developed the eFax Messenger
software for eFax users to view faxes and play voice messages. eFax Messenger is
based on core technology developments we have made in document portability and
image compression. eFax Messenger is a very small computer application which is
easily downloaded by the user. It incorporates live advertising and the
capability to view, rotate, enlarge and print images. The eFax Messenger Plus
software incorporates all the features of eFax Messenger while including several
advanced capabilities for the eFax service as well as for communicating
documents by email. Key features of eFax Messenger Plus include text and audio
annotations of fax or other documents, fax sending software which, when used
with the eFax service, allows users to send documents from their computers to
any fax machine in the world and the capability to take nearly any document and
create a portable document which can be emailed to anyone without requiring the
person viewing the document to have the underlying application or fonts.
Software. eFax.com offers JetSuite and PaperMaster software for convenient
communication and handling of electronic and paper documents, as well as Printer
Control Language ("PCL") printer drivers. JetSuite software combines low-level
device drivers for printing, faxing, copying and scanning with a visual
"desktop" application that allows a user to organize, convert and manage
documents created or received using a MFP. Users can create a self-viewing,
portable version of any document, whether "printed" electronically, captured
from an Internet Web page, scanned or faxed. Such a portable document can then
be e-mailed and viewed without requiring the recipient to have a specific
viewer, while maintaining all of the document's original formatting, layout,
colors and look. We offer JetSuite to OEMs for use with the OEMs' embedded
system or bundled with eFax.com's embedded system technology. PaperMaster began
shipping in 1994 as user-friendly personal document management software.
PaperMaster uses a file cabinet metaphor as its user interface, allowing one to
unlock and open various file drawers and folders and insert a variety of
document types. The software indexes documents, allowing users to search and
retrieve documents based on text strings. Also included are search and
retrieval capabilities and web links to allow users to easily save web-based
HTML documents. PaperMaster is marketed through OEM bundles, upgrades, and
direct sales on the Internet. In 1998 Hewlett-Packard began bundling
PaperMaster with its successful CD-Writer Plus storage system, broadening the
market for PaperMaster to the storage arena.
Embedded System Technology. eFax.com develops and licenses its embedded
system technology for manufacture and integration by its OEM customers into
their MFPs. This technology includes a complete embedded system design, modified
to meet the OEMs' specifications and requirements. Such hardware and software
modifications are performed by eFax.com and typically include changes to the
printer and scanner interfaces and to the control panel and user interface. We
generally receive development fees in return for such modifications, in addition
to prepaid and per unit royalties for the license. Our embedded system
technology has been customized and licensed for use in Hewlett-Packard LaserJet
3100 and 3150, as well as the previously sold Minoltafax 1000, the Xerox 3006,
and Xerox WorkCenter 250 and the Samsung dex 855.
Hardware Multifunction Products and Related Consumables. eFax.com develops,
manufactures and markets high quality multifunction products, integrating its
embedded system technology with a printing and scanning engine. During fiscal
1999, we discontinued distribution of our JetFax branded multifunction
peripherals through our own channels. eFax.com's current MFP is the Series M7,
which we began shipping commercially to OEM customers in October 1999. The
Series M7 offers the functionality of a high-volume, full-featured laser printer
fax machine in addition to its multifunction print, copy and scan capabilities.
The Series M7 includes features such as a high-speed 33.6 Kbps modem, which
reduces the transmission time;
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and fax-to-email capability independent of a network or special software. We
also sell consumables for our hardware products, including toner cartridges,
imaging drums and inkjet cartridges, which represented 29%, 19% and 17% of the
our total revenues in the years ended December 31, 1999, 1998 and 1997,
respectively. We will continue to sell consumables to dealers and OEM customers
for the foreseeable future.
Technology
Portable Document Technology. Portable document technology replicates
documents for storage, transmission and viewing. Messenger Plus portable
documents use a highly compressed print-imaging format containing a combination
of text, fonts, color, graphic elements (such as lines and circles) and bitmaps.
This portable document technology allows a single document database to handle
both hard copy images from scanned or faxed documents and electronically created
documents. Messenger Plus portable documents can easily be shared with others by
using a freely distributable compact version of the Messenger viewer that
combines with the portable document to create a self-viewing document. Messenger
Plus also provides a range of imaging functionality for fast viewing, zooming
and panning, as well as document markup and cleanup functionality.
Third Generation Embedded System Technology. eFax.com's third generation
embedded system technology is based on the eFax.com's application specific
integrated circuit ("ASIC") semiconductor designs integrated with a Motorola
microprocessor. The specialized ASICs perform most of the heavy computational
tasks, allowing the single microprocessor to drive the embedded system and
service all of the functions -- printing, faxing, copying and scanning --
required by a MFP. The ASICs perform a variety of imaging functions and provide
high-speed data paths for large image data files that are quickly moving through
the various processes in the system. The ASIC imaging functions include error
diffusion scanning, edge enhancement, background compensation, scaling and print
smoothing. A high-speed image bus and numerous direct memory access ("DMA")
channels are also provided by the ASICs to optimize system performance and
provide easy access to a specialized compression/decompression imaging
processor. The firmware in the embedded system is centered on our task-swapping,
real-time operating system. The operating system rotates among the various MFP
functions such as printing, faxing, copying or scanning, allocating enough
processing time for each task to prevent any significant performance
deterioration when swapping among other tasks.
Marketing and Business Development
We market our eFax services directly to users through advertising and business
development activities. During 1999, we invested approximately $15.0 million in
consumer branding for the eFax services. Our branding efforts included radio,
Internet banner, sponsorship and location-based advertising. In addition to
traditional media advertising we market to our installed base extensively
through email and the eFax.com website. eFax.com also has an active press
relations campaign which targets press coverage and informing industry
participants of the eFax service.
We have partnered with several Internet community sites and technology
providers to capture user registrations. As an example, we launched a cobranded
service for Microsoft's WebTV in early 2000. This cobranded service combined
eFax.com's expertise in fax and voice messaging with a customized site suited to
the technical capabilities of the WebTV set top audience. Additional cobrand
sites launched in 1999 include NBCi, FindLaw, AllBusiness.com and FortuneCity
UK. We have also partnered with manufacturers of PCs, scanners and printers to
bundle our eFax Messenger Plus software with our partners' products. In certain
cases, an icon for the eFax Service resides on the desktop of our partners' PC
products, thereby encouraging partner customers to sign up for eFax services. We
have partnered with HP to distribute our software with the HP Pavillion desktop
and laptop computers; HP bundles our software with their scanners and Epson
bundles our software with their printers.
Hardware Products. eFax.com markets and sells its products worldwide to OEMs,
dealers and distributors. Before 1999, we maintained a separate sales force for
our hardware products and OEM/licensing
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businesses. Marketing resources have been refocused to emphasize Internet
activity through reassignment of personnel and other resources.
OEM Relationships. eFax.com licenses its embedded system technology and
software to OEMs. eFax.com works closely with OEM accounts to define product
requirements, create development plans and manage development programs. The
marketing group promotes eFax.com as a leading provider to OEMs of MFP solutions
through a combination of public relations and press coverage, exhibits and
presentations at tradeshows, product brochures and other marketing promotions.
Software. eFax.com's software marketing strategy is to license software for
bundling with multiple OEM products. In addition, we promote software upgrades
and add-on software products in a number of ways, including software
installation and reminder screens, mailings to registered users, website
advertisements and co-promotions with OEMs.
eFax.com's international sales efforts are focused principally on Western
Europe. In November 1999, eFax.com launched services in the U.K. We have
marketing, service or support personnel located in Germany, Ireland and the U.K.
International marketing efforts are focused on promoting eFax services in Europe
and pursuing business development opportunities. We have recently closed our
German office, which principally supported the hardware product sales and
support in Europe.
Network Operations
The eFax.com network is currently based on 15 points of presence in the United
States and in the United Kingdom. Each of eFax.com's points of presence is co-
located with a telecommunications partner. Currently eFax.com works with ten
different partners in the U.S. and three telecom partners in the U.K. Each co-
location center requires a large number of Direct Inward Dial lines ("DIDs"),
that act as individual phone numbers, Internet connectivity, and telephony
services at each site. Our co-locations are typically located in manned data
centers of our telecom partners, with limited onsite support. We manage and
monitor our network operations and performance from a central site in Chicago.
Our telecommunications partners include Focal Communications, Electric
Lightwave, Global Naps, AT&T and Colt Telecom.
Certain network management and development operations are outsourced to
Integrated Global Concepts. Integrated Global Concepts provides 24 hour support
and monitoring for our network and licenses to eFax.com certain elements of our
network architecture. We entered into a two-year agreement with Integrated
Global Concepts in February 1999.
The decentralization of the eFax.com network provides for greater reliability
and reduces our dependence on any one supplier. In addition, by being
geographically dispersed our network is less susceptible to network outages
caused by either power interruptions or problems with telecommunications
failures. Certain functions such as customer data, billing and outbound fax
sending are all centralized. All inbound message processing is handled in the
distributed eFax.com network. Each point of presence is capable of operating
independently of the other locations and supporting customers with telephone
numbers based out of the site.
Customers
The eFax service currently supports over 1.6 million users, including over
45,000 fee-based customers.
In 1999, our customers also included office equipment dealers and distributors
who resell branded MFPs, options and consumables, as well as OEMs that license
our embedded system technology and software in conjunction with the manufacture
and distribution of MFPs.
Hardware Products. In the United States and Canada, eFax.com distributed
JetFax branded products, options and consumables through office equipment
dealers, primarily through IKON and dealers associated
D-6
<PAGE>
with Business Technology Associates ("BTA"). In the years ended December 31,
1999, 1998 and 1997, revenues recorded by eFax.com from dealers associated with
IKON represented 11%, 16%, and 19%, respectively, of eFax.com's total revenues.
The Company also distributes its products through regional distributors. As of
December 31, 1999, eFax.com had discontinued sales of branded product through
our dealer channel.
OEM Relationships and JetSuite and PaperMaster Software. eFax.com receives
license fees and development fees for our embedded system technology and desktop
software from a number of manufacturers of MFPs. We currently license embedded
system technology or desktop software to 25 companies and have OEM relationships
with Hewlett-Packard, Oki Data, and Konica. In the years ended December 31, 1999
and 1998, Hewlett-Packard represented 13% and 18% of the eFax.com's total
revenues, respectively. In the years ended December 31, 1999, 1998 and December
31, 1997, revenues from Konica represented 13%, 2%, and 0%, respectively, of our
total revenues.
Hewlett-Packard Company. In 1997, eFax.com entered into a development and
license agreement with Hewlett-Packard for the inclusion of the our embedded
system technology and JetSuite software in Hewlett-Packard product. The
development was completed in early 1998 and the HP LaserJet 3100 was launched in
March 1998. Effective May 1998, a follow-on development effort was undertaken
and was completed at December 31, 1998. In January 2000, the resulting HP
LaserJet 3150 was launched.
Oki Data Corporation. In September 1996, eFax.com entered into a license
agreement with Oki Data for the inclusion of JetSuite software with a number of
Oki Data MFPs which are currently in the market.
Research and Development
eFax.com's principal research and development activities are located at
eFax.com's headquarters in Menlo Park, California and at its software
applications division located in Santa Barbara, California. Primary activities
at those locations include new product development, enhancement of existing
products, product testing and technical documentation.
Our research and development efforts focus on ongoing development of the eFax
services and supporting software applications. Software and communications
capabilities developed for our multifunction products have provided a solid
technological base for creating Internet-based product offerings.
Intellectual Property and Proprietary Rights
Our success is heavily dependent upon our proprietary technology. To protect
our proprietary rights, eFax.com relies on a combination of copyright, trade
secret and trademark laws, patents and nondisclosure and other contractual
restrictions. As part of our confidentiality procedures, we generally enter into
nondisclosure agreements with our employees, consultants, OEMs and strategic
partners and limits access to and distribution of our designs, software and
other proprietary information.
Manufacturing
We manufacture our JetFax branded and OEM products for distribution to the
corporate segment of the MFP market. eFax.com generally outsources materials
from suppliers and performs final assembly and testing at our main facility in
Menlo Park, California. All manufacturing operations should cease at the end of
the first quarter 2000.
The Series M7 is our current product line of MFPs. The major components of the
Series M7 products are the print engine, the scanner, the user interface and the
multifunction embedded system technology and modem electronics, all of which are
outsourced. The JetFax embedded system and modem assemblies are built to
specification by an external printed circuit board assembler. Final product
assembly at the eFax.com's headquarters consists of integrating the components
and OEM configuration on a progressive assembly line.
D-7
<PAGE>
Competition
The market for Internet-related communication services, such as our fax-to-e-
mail, voice-to-e-mail, voicemail and e-mail-to-fax services, are a newly
emerging market and competitors are just beginning to appear. eFax.com
anticipates that it will need to:
. provide good service and grow its business rapidly to meet demand;
. create name recognition for eFax.com in advance of competitors;
. build its subscriber base prior to any significant entry by the competition;
and
. continue to expand and improve on its Internet communication service
offerings.
eFax.com's technology, development services and software primarily compete
with solutions developed internally by manufacturing and software license
customers. Virtually all of eFax.com's manufacturing and software license
customers have significant investments in their existing solutions. These
manufacturing and software license customers have the substantial resources
necessary to develop competing multifunction technologies and software that may
be implemented into their own products. eFax.com also competes with
technologies, software and development services provided in the multifunction
product market by other systems and software suppliers to manufacturing and
software license customers.
The market for Internet-related communication services, related technology and
software is highly competitive. This market is characterized by continuous
pressure to improve performance, to introduce new features and to accelerate the
release of new products. eFax.com also competes on the basis of vendor name and
recognition, technology and software expertise, product functionality,
development time and price. eFax.com anticipates increasing competition for its
multifunction products, technologies, software under development and Internet
services. Most of eFax.com's existing competitors, many of its potential
competitors and all of eFax.com's manufacturing and software license customers
have substantially greater financial, technical, marketing and sales resources
than eFax.com. In the event that price competition increases, competitive
pressures could cause eFax.com to:
. reduce the cost of its fee-based eFax Service offerings;
. expand services to match those offered by competitors; or
. reduce the amount of royalties received on new licenses.
In turn, these reductions could reduce eFax.com's profit margins and result in
additional losses and a decrease in market share, which would have a material
adverse effect on eFax.com's business, financial condition and results of
operations.
Backlog
The Company had essentially no backlog at December 31, 1999 and 1998,
respectively, which is in line with the normal practice in the markets in which
the Company operates. The office equipment dealer channel for MFPs typically
requires shipment at time of order placement, and the Company has managed
operations to fully satisfy customer demand within each fiscal quarter. The
software business conventionally does not have a backlog, and revenues from the
Company's development programs are recognized on a percentage of completion
basis.
D-8
<PAGE>
Employees
As of December 31, 1999, the Company had 110 employees. There is no labor
union representation for any of the Company's employees. The Company has never
experienced a work stoppage, and relations with employees are considered good.
The Company hires contract employees on an as-needed basis to meet temporary or
specific needs.
ITEM 2. PROPERTIES
The Company's headquarters and principal operations are in leased facilities
totaling approximately 42,000 square feet in Menlo Park, California, and the
lease for this facility expires in January 2003. Additionally, the Company
leases approximately 5,200 square feet in Santa Barbara, California for its
software application organization and the one-year extension on the lease is set
to expire July 31, 2001. The Company leases approximately 2,600 square feet in
Beaverton, Oregon for additional software application personnel, and this lease
expires April 2001.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1999, no matters were submitted to a vote of
security holders.
D-9
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information and Recent Sales of Unregistered Securities
The Company's Common Stock is traded on the Nasdaq National Market tier of
the Nasdaq Stock Market under the trading symbol "EFAX". Prior to February 8,
1999, the symbol for the Company's Common Stock as reported on the Nasdaq
National Market was "JTFX". Effective with the close of business on February 8,
1999, the Company name was officially changed from "JetFax, Inc." to "eFax.com,
Inc." Subsequently, on December 16, 1999, the Company changed its name from
eFax.com, Inc. to eFax.com.
The range of daily closing prices per share for the Company's common stock
from January 1, 1999 to December 31, 1999 was:
Year Ended December 31, 1999: High Low
Fourth quarter $12.438 $ 6.906
Third quarter $18.375 $ 7.125
Second quarter $30.125 $11.250
First quarter $25.375 $ 2.750
Year Ended December 31, 1998: High Low
Fourth quarter $ 2.750 $ 1.531
Third quarter $ 4.500 $ 2.500
Second quarter $ 7.188 $ 4.438
First quarter $ 7.125 $ 3.625
The reported last sale price of the Company's Common Stock on the Nasdaq
National Market on April 3, 2000 was $5.00. The approximate number of holders of
record of the shares of the Company's Common Stock was 254 as of April 3, 1999.
This number does not include stockholders whose shares are held in trust by
other entities. The actual number of stockholders is greater than this number of
holders of record. Based on the number of annual reports requested by brokers,
the Company estimates that it has approximately 19,339 beneficial owners of its
Common Stock.
The Company has authorized Common Stock of $0.01 par value and Preferred
Stock. In connection with the initial public offering, all of the convertible
preferred stock, except the Series P Redeemable Preferred Stock, and related
accrued dividends outstanding at the time of the initial public offering
automatically converted into 6,456,681 shares of Common Stock. Approximately
$2.8 million of the net proceeds were used for the mandatory redemption of the
Series P Redeemable Preferred Stock following the closing of the Company's
initial public offering in June 1997.
On May 10, 1999, eFax.com entered into a purchase agreement with an investor
for the private placement of $15 million of Series A Convertible Preferred Stock
which was not registered under the Securities Act of 1933, as amended, and is
convertible into Common Stock based upon the five-day average stock price prior
to closing which was $21.1375. The conversion price is subject to an adjustment
after one year to the greater of the then current market price of the Common
Stock or 60% of the initial conversion price. The agreement also includes
300,000 warrants exercisable at $23.25, which represents a 10% premium to the
Series A Convertible Preferred Stock conversion price. The Series A Convertible
Preferred Stock
D-10
<PAGE>
includes an 8% dividend payable in cash or common stock at the option of
eFax.com. The closing occurred on May 13, 1999. eFax.com has filed a
registration statement for the resale of the shares of Common Stock acquired on
conversion of the Convertible Preferred Stock and upon exercise of the warrants.
Holders of the preferred shares shall have no voting rights, except as required
by law, including but not limited to the General Corporation Laws of the State
of Delaware. The Company cannot declare or pay any cash dividend or distribution
on the common stock without the prior express written consent of the holders of
not less than two-thirds of the then outstanding preferred shares. In the event
of a liquidation of the Company, the holders of the Series A Convertible
Preferred Stock would be entitled to receive distributions in preference to the
holders of the Common Stock.
The Company has not paid any cash dividends on its Common Stock but has
accrued 8% dividends for the Series A Convertible Preferred Stock which are due
in either cash or stock on May 13, 2000. The Company currently intends to retain
the remaining portion of its earnings to fund the development and growth of its
business. See Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" and Note
6 of Notes to Consolidated Financial Statements contained in Item 14.
(b) Report of offering securities and use of proceeds therefrom:
Not applicable.
D-11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The consolidated statement of operations data set forth below for the years
ended December 31, 1999, 1998 and 1997, and the consolidated balance sheet data
at December 31, 1999 and 1998 are derived from the consolidated financial
statements of the Company included elsewhere in this Annual Report on Form 10-K.
The consolidated statement of operations data set forth below for the nine
months ended December 31, 1996 and the year ended March 31, 1996, and the
consolidated balance sheet data at December 31, 1997 and 1996 and March 31, 1996
are derived from audited consolidated financial statements not included in this
Annual Report on Form 10-K. The following financial data 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 notes thereto included elsewhere in this
Annual Report on Form 10-K.
<TABLE>
<CAPTION>
Nine Months Fiscal Year
Ended Ended
Years Ended December 31, December 31, March 31,
-----------------------------------------
1999 1998 1997(1) 1996(1) 1996
-------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues:
Product.............................................. $ 18,817 $ 23,385 $ 16,281 $ 10,205 $ 11,143
Software and technology license fees................. 3,629 5,069 4,493 3,200 3,413
Development fees .................................... 1,059 1,779 2,246 1,468 720
eFax services........................................ 1,200 -- -- -- --
-------- -------- -------- -------- --------
Total revenues ................................... 24,705 30,233 23,020 14,873 15,276
-------- -------- -------- -------- --------
Costs and expenses:
Cost of product revenues ............................ 13,540 16,005 11,886 8,441 11,102
Inventory write-down - hardware products............. 1,060 -- -- -- --
Cost of software and technology license fees
revenues........................................... 584 710 770 517 587
Cost of eFax services................................ 2,400 -- -- -- --
Research and development ............................ 6,188 5,445 5,355 2,554 2,318
Selling and marketing ............................... 19,972 7,267 6,046 5,212 5,216
General and administrative .......................... 5,320 2,592 3,031 1,726 1,652
Restructuring costs.................................. 872 -- -- -- --
Acquisition and related expenses..................... -- -- 2,106 -- --
-------- -------- -------- -------- --------
Total costs and expenses ......................... 49,936 32,019 29,194 18,450 20,875
-------- -------- -------- -------- --------
Loss from operations .................................. (25,231) (1,786) (6,174) (3,577) (5,599)
-------- -------- -------- -------- --------
Interest and other income (expense), net............... 335 365 111 -- (259)
-------- -------- -------- -------- --------
Loss before income taxes .............................. (24,896) (1,421) (6,063) (3,577) (5,858)
Provision for income taxes ............................ 67 80 96 107 35
-------- -------- -------- -------- --------
Net loss............................................... (24,963) (1,501) (6,159) (3,684) (5,893)
Series A Convertible Preferred Stock dividends......... (769) -- -- -- --
Series P Redeemable Preferred Stock dividends.......... -- -- (68) (116) --
-------- -------- -------- -------- --------
Net loss applicable to common stockholders............. $(25,732) $ (1,501) $ (6,227) $ (3,800) $ (5,893)
======== ======== ======== ======== ========
Net loss per share:
Basic................................................ $ (2.04) $ (0.13) $ (0.84) $ (2.13) $ (3.86)
======== ======== ======== ======== ========
Diluted ............................................. $ (2.04) $ (0.13) $ (0.84) $ (2.13) $ (3.86)
======== ======== ======== ======== ========
Shares used in computing per share amounts:
Basic................................................ 12,585 11,784 7,389 1,784 1,526
======== ======== ======== ======== ========
Diluted ............................................. 12,585 11,784 7,389 1,784 1,526
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, March 31,
----------------------------------------------------- -----------
1999 1998 1997(1) 1996 1996
------- ------- ------- ------ -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital................................. $ 1,946 $10,928 $12,814 $ 542 $ 4,978
Total assets.................................... 15,508 16,215 18,856 7,092 12,031
Long-term note payable, less current portion....... -- -- -- 198 --
Redeemable preferred stock...................... -- -- -- 2,726 2,610
Convertible preferred stock..................... 7,467 -- -- -- --
Total stockholders' equity (deficit)............ 8,070 13,837 15,271 (861) 2,708
</TABLE>
(1) Effective December 31, 1996, the Company changed its fiscal year end from
March 31 to a 52-53 week reporting year ending on the first Saturday on or
after December 31.
D-12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The statements contained in this Annual Report on Form 10-K that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934 (the "Exchange Act"), including statements
regarding the Company's expectations, hopes, intentions or strategies regarding
the future. When used herein, the words "may," "will," "expect," "anticipate,"
"continue," "estimate," "project," "intend" and similar expressions are intended
to identify forward-looking statements within the meaning of the Securities Act
and the Exchange Act. Forward-looking statements include: statements regarding
events, conditions and financial trends that may affect the Company's future
plans of operations, business strategy, results of operations and financial
position. All forward-looking statements included in this document are based on
information available to the Company on the date hereof, and the Company assumes
no obligation to update any such forward-looking statements. Investors are
cautioned that any forward-looking statements are not guarantees of future
performance and are subject to risks and uncertainties and that actual results
may differ materially from those included within the forward-looking statements
as a result of various factors. Factors that could cause or contribute to such
differences include, but are not limited to, those described below, under the
heading "Factors That May Affect Operating Results" and elsewhere in this Annual
Report on Form 10-K.
eFax.com is a leading provider of Internet communications services.
eFax.com currently provides its free and fee-based Internet communications
services to more than 1.6 million users. In February 1999, eFax.com launched its
Internet communications services, which incorporate fax-to-email, voicemail and
voice-to-email capabilities. Prior to developing this market, eFax.com had
developed and marketed branded and licensed products and software solutions for
the MFP market, which consisted of electronic office devices that combine print,
fax, copy and scan capabilities in a single unit. In addition, eFax.com has
licensed its embedded systems technology and software to a number of
manufacturers of multi-function products. On January 10, 2000, we announced that
we will focus exclusively on expanding our position as a leading provider of
enhanced Internet communications services and solutions and that we will
discontinue manufacturing and sales of multifunction products.
eFax.com's revenues are derived from four sources: (i) product revenues
consisting of sales of JetFax branded MFPs, OEM branded MFPs, consumables and
upgrades; (ii) software and technology license fees related to both the
Company's embedded system technology for MFPs and desktop software; (iii)
development fees for the customization and integration of eFax.com's embedded
system technology and desktop software in OEM products; and (iv) eFax(R) Service
revenues derived from the Company's internet-based services introduced during
the quarter ended June 30, 1999. Historically, product revenues have accounted
for the majority of eFax.com's total revenues. For the year ended December 31,
1999, product revenues, software and technology licenses fees, development fees
and eFax services revenues as a percentage of total revenues were 76%, 15%, 4%,
and 5%, respectively, as compared to 77%, 17%, 6%, and 0 % for the prior year.
Overall product revenues for the year ended December 31, 1999 declined from
the prior year as a result of the Company's transition to an OEM and internet-
based business model. Shipments of the new OEM platform MFP began in the fourth
quarter of 1999. In January 2000, the Company announced its decision to
discontinue manufacturing its MFP products. We intend to complete the final OEM
contract during the first quarter of 2000.
The new emphasis on Internet services has resulted in increased
expenditures for both external promotions and other marketing expenses. The
majority of these costs are related to media and Internet advertising promoting
both the basic service and new products and features as introduced. Similarly
infrastructure costs to support the planned expansion of services have
increased. These infrastructure costs include the cost of delivery of the
service such as telephony charges and depreciation on capital equipment, as well
as technical and operational support personnel.
D-13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Recent Developments
On April 5, 2000, the Company entered into a letter of intent and a loan
commitment letter with JFAX.COM, Inc., a unified Internet communications
company, in which:
. The Company and JFAX.COM established the principal terms for a potential
merger of the Company and JFAX.COM.
. JFAX.COM agreed to lend the Company $5 million. The loan will have an
interest rate of 13% and a maturity date of August 31, 2000, subject to
adjustment which could increase the maturity date by up to 60 days.
. The Company agreed to grant to JFAX.COM a warrant to acquire 250,000 shares
of the Company's common stock. The warrant will have a term of two years
and will be exercisable at the market price of the Company's common stock
on the date of grant, but the exercise price will reset to $1.00 per share
if the proposed merger of the Company and JFAX.COM does not occur. The
warrant is expected to be granted prior to April 15, 2000.
. The Company agreed to grant to JFAX.COM a warrant with a term of two years
and an exercise price of $1.00 per share of the Company's common stock. The
warrant will be granted if the merger between the Company and JFAX.COM does
not occur. The warrant will be for 750,000 shares of the Company's common
stock if JFAX.COM terminates the merger discussions, other than following a
material breach of the letter of intent by the Company, prior to the
execution of a definitive merger agreement, or if the definitive merger
agreement is terminated because JFAX.COM's shareholders fail to approve the
merger or JFAX.COM materially breaches the definitive merger agreement. The
warrant will be for 1,750,000 shares of the Company's common stock if the
merger does not occur for any reason not discussed in the preceding
sentence.
Prior to the execution of a definitive purchase agreement, neither the
Company nor JFAX.COM is required to complete the merger. In the merger,
approximately 18.5 million shares of JFAX.COM common stock will be issued to the
current holders of the Company's common and preferred stock. The number of
shares of JFAX.COM common stock to be received will be subject to downward
adjustment based on potential fluctuations in the price of JFAX.COM common
stock. The formula for determining the consideration to be received by the
Company's common and preferred stockholders is included in Exhibit 2.1 to this
report. JFAX.COM would be the surviving corporation in the merger. On April 5,
2000, the Company and the current holders of all of its shares of Series A
Convertible Preferred Stock entered into an exchange agreement under which the
holders agreed to exchange all of their outstanding shares of Series A
Convertible Preferred Stock for a new Series B Convertible Preferred Stock. The
Series B shares have a stated value which reflects the 25% premium that the
holders would have had the right, under the Series A Convertible Preferred
Stock, to receive in cash at the time of the Company's merger with JFAX.COM. The
Company has the right to require the Series B stockholders to accept JFAX.COM
common stock at the closing of the merger in return for any shares of Series B
Convertible Preferred Stock which they then own. The Series B Convertible
Preferred Stock will be convertible into shares of the Company's common stock
based on the average closing bid price of the Company's common stock for the 20
trading days beginning on April 7, 2000. See Note 16 to the Consolidated
Financial Statements.
Results of Operations
The following table sets forth, as a percentage of total revenues, certain
items in the Company's statements of operations for the periods indicated.
D-14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Product 76% 77% 71%
Software and technology license fees 15 17 19
Development fees 4 6 10
eFax services 5 -- --
--------- --------- ---------
Total revenues 100 100 100
--------- --------- ---------
Costs and expenses:
Cost of product revenues 55 53 52
Inventory write-down - hardware products 4 -- --
Cost of software and license revenues 2 2 3
Cost of eFax services 10 -- --
Research and development 25 18 24
Selling and marketing 81 24 27
General and administrative 21 9 13
Restructuring costs 4 -- --
Acquisition and related expenses -- -- 9
--------- --------- ---------
Total costs and expenses 202 106 127
--------- --------- ---------
Loss from operations (102) (6) (27)
Other income, net 1 1 --
--------- --------- ---------
Loss before income taxes (101) (5) (27)
Provision for income taxes -- -- --
--------- --------- ---------
Net loss (101)% (5)% (27)%
========= ========= =========
</TABLE>
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues. Total revenues decreased 18% to $24.7 million for the year ended
December 31, 1999 from $30.2 million for the year ended December 31, 1998. The
decline resulted primarily from a decline in product revenues as the Company
transitioned to an internet-based business model.
Product revenues decreased 20% to $18.8 million from $23.4 million for the
years ended December 31, 1999 and 1998, respectively, a reflection of the
factors related to the discontinuation of the Company's JetFax branded products.
Revenue from shipments of MFPs for the year ended December 31, 1999 declined 36%
from the preceding year, as final domestic and international units of the JetFax
branded Series M900 product were sold. Product revenues also reflected the
continued erosion in average selling prices, driven by the level of OEM
business, product discontinuation and general market pressures. Average selling
prices for the year ended December 31, 1999 declined 13% from the prior year.
Unit sales for the year ended December 31, 1999 also decreased, down 39% from
the prior year. As a result, hardware product revenues declined for 1999 as the
move to a new business model was implemented. We anticipate that product
D-15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
revenues from the shipment of MFPs will end at the end of the first quarter of
2000. Consumable revenue increased 28% for the year ended December 31, 1999
versus the prior year. We anticipate that we will continue to sell consumables
to our installed base of hardware customers. However, as this base will not
continue to grow, we expect revenues will begin to decline over the next several
quarters.
Software and technology licensing fees declined 28% to $3.6 million for the
year ended December 31, 1999 from $5.1 million for the year ended December 31,
1998. The decline resulted from anticipated declines in per unit royalties for
the Hewlett-Packard SureStore CD-Writer, and due to a product transition and
reductions in software revenues due to the withdrawal of PaperMaster products
from the retail distribution channel. Royalty fees from sales of the Hewlett-
Packard 3100 decreased by 17% from the prior year. In January 2000, Hewlett-
Packard released the follow-on product to the 3100, the 3150. We anticipate that
we will continue to receive royalties over the life of this product.
Development fees declined 40% to $1.1 million from $1.8 million for the
years ended December 31, 1999 and 1998, respectively, reflecting the completion
of current projects and conversion of development fees to per unit royalties.
Currently, we have no plans for new development projects and as a result do not
anticipate future development fees.
eFax Service revenue totaled $1.2 million as compared to none in the prior
year and reflects the Company's transition to an internet-based business model.
eFax Service revenue consisted primarily of recurring monthly subscription fees,
signup fees, usage-based charges and revenues from advertising activities. eFax
premium service revenues began in June 1999.
International revenues accounted for 13%, 18% and 29% of total revenues for
the years ended December 31, 1999, 1998, and 1997, respectively. All of the
development fees and software and technology license revenues, and most of the
product revenues, have been denominated and collected in United States dollars.
Historically, international revenues were derived primarily from product sales
and consumables. International revenues are likely to decline in the near term
due to the discontinuation of hardware production. The Company has not hedged
the foreign currency exposure related to product sales denominated in foreign
currencies as the impact has not been significant. See " Factors That May Affect
Operating Results -- International Activities."
Software and technology license fees result from licensing the Company's
proprietary embedded system technology and desktop software to OEMs for
integration into their products. The recurring license revenues reported by the
Company are dependent on the timing and accuracy of product manufacturing or
quarterly sales reports received from the Company's OEM customers. The quarterly
reports, as well as any verbal estimates, are subject to delay and potential
revision by the OEM. In such an event, the Company may subsequently be required
to adjust revenues for subsequent periods due to the change in estimate, which
could have a material adverse effect on the Company's business, financial
condition, and results of operations and on the price of the Company's Common
Stock.
Cost of Product Revenues Cost of product revenues consists primarily of
purchased materials; direct production labor and supervision for assembly and
testing; subcontracted manufacturing, mainly for printed circuit boards;
indirect labor for inventory management, shipping and receiving, purchasing,
manufacturing engineering, document control and operations management; and
related facility and support costs. Cost of product revenues may vary as a
percentage of total revenues in the future as a result of a number of factors
including: relative production volumes; the mix of product shipped and the
varying proportion of MFPs versus consumables and upgrades; changes in
production yields, especially those associated with the introduction of new
products; risk of inventory obsolescence and excess inventory; pricing pressures
in the market; and vendor quality or supply problems.
The gross margins for the Company's branded MFP products were constrained
by the competitive nature of the marketplace, pricing pressures and the greater
name recognition of the larger companies with which eFax.com competes. The
margins on consumables, such as toner cartridges and drums, and on upgrades,
D-16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
such as the two-line upgrade, were typically higher than on the base unit. In
addition, the Company's consumables generate recurring revenues which tend to
increase as the cumulative number of units sold increases.
Cost of product revenues decreased 15% to $13.5 million from $16.0 million
for the years ended December 31, 1999 and 1998, respectively. Product gross
margin was 28%, down from 32% for the prior year. The decrease was attributable
to volume and average selling price declines and the absence of favorable
foreign exchange rates experienced on inventory purchases in 1998.
Inventory Write-Down - Hardware Products. In connection with the Company's
announced decision to exit from the manufacturing of MFP products, the Company
recognized in 1999 a one-time $1.1 million write-down of inventory to reflect
anticipated realizable values of the inventory on hand.
Cost of Software and License Revenues. Cost of software and license
revenues consists primarily of royalties paid for licensed technology included
in the Company's products, amortization of purchased technology, and the
duplication and packaging expense associated with software sold in the retail
market. Cost of software and license revenues decreased 18% to $584,000 from
$710,000. The decrease in royalty revenues generated a corresponding decrease in
royalties payable for certain technology licensed from others for the year ended
December 31, 1999.
Cost of eFax Services. Direct costs of providing the eFax Services totaled
$2.4 million for the year ended December 31, 1999, as compared to none in the
prior year. Planned expansion in support of the business growth included service
delivery costs such as telephony charges, depreciation on capital equipment,
operations personnel as well as all technical and customer support related
expenses.
Research and Development. Research and development expenses rose 14% to
$6.2 million from $5.4 million for the years ended December 31, 1999 and 1998,
respectively, driven by higher personnel costs related to headcount growth,
software development charges in support of the new eFax Service, and an increase
in prototype and tooling charges in support of the next generation OEM MFP
platform. Average headcount for the current year rose 2% over the prior year.
Selling and Marketing. Selling and marketing expenses increased 175% to
$20.0 million from $7.3 million for the years ended December 31, 1999 and 1998,
respectively. Increased promotional activity in support of the new eFax Service
accounted for effectively all of the increase, more than offsetting the
elimination of external marketing efforts related to the branded hardware
business. Selling and marketing expenses included approximately $15.0 million in
expenses associated with advertising in 1999. Selling and marketing expenses are
expected to decline from the current level on a dollar basis in the first half
of 2000 but remain important to the Company's continued development.
General and Administrative. General and administrative expenses rose 105%
to $5.3 million from $2.6 million for the years ended December 31, 1999 and
1998, respectively. The increase primarily resulted from $1.4 million of stock-
based severance charges related to changes in executive management in the second
quarter. The increase in general and administrative expenses in 1999 also
resulted from the amortization of trademarks, legal expenses, consultant
expenses, expenses related to external reporting for public companies, and, to a
lesser degree, hiring and compensation expenses were responsible for this
increase. The Company anticipates a $500,000 charge in the first quarter of 2000
from a severance charge relating to another executive management change.
Restructuring costs. In connection with the Company's announced decision to
exit from manufacturing MFP products, the Company recognized an $872,000
restructuring charge for the write-down of capital equipment, intellectual
property and leasehold improvements, excess facilities accruals and severance
costs.
D-17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
It is anticipated that the discontinuation and restructuring was substantially
completed during the first quarter of 2000.
Interest and Other Income, Net. Interest and other income, net, decreased
to $335,000 from $365,000 for the years ended December 31, 1999 and 1998,
respectively, as a $143,000 increase in other expense and the absence of $46,000
in other income was partially offset by a $113,000 increase in interest income
from interest-bearing investments.
Provision for Income Tax. Due to eFax.com's net losses, there were no
provisions for federal or state income taxes for the years ended December 31,
1999 and 1998, respectively. Income tax provisions of $67,000 and $80,000, for
the years ended December 31, 1999 and 1998, respectively, relate primarily to
foreign withholding taxes on certain royalty fees, and also include minimum
state and franchise taxes.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues. Total revenues increased 31% to $30.2 million for the year ended
December 31, 1998 from $23.0 million for the year ended December 31, 1997.
Product revenue from the sale of the Company's MFPs and related consumables and
accessories was $23.4 million in 1998, a 44% increase from $16.3 million during
the year ended December 31, 1997. All product categories rose significantly year
over year, as MFP's, consumables and accessories advanced 45%, 42% and 37%,
respectively, for the year ended December 31, 1998 from the same period ended
December 31, 1997. MFP unit sales increased 61% for the year ended December 31,
1998 from the same period ended December 31, 1997. This increase in demand was
partially offset by average selling price declines driven by competitive pricing
in the market. The number of units sold each quarter was relatively flat during
the first nine months of 1998, dropping by 18% in the final three month period
ended December 31, 1998. The decline in unit shipments in the last quarter was
due primarily to inventory level adjustments at one of the Company's marketing
channel partners, IKON, that began in September 1998 and continued through year-
end.
Development revenue decreased 21% to $1.8 million for the year ended
December 31, 1998 from $2.2 million for the year ended December 31, 1997. Major
development milestones on the original Hewlett-Packard contract were completed
in 1997 and the revenue stream from development fees was converted to per unit
royalties in the first part of 1998. The follow-on development efforts did not
commence until May 1998, which resulted in the decrease.
Software and technology licensing fees rose 13% to $5.1 million for the
year ended December 31, 1998 from $4.5 million for the year ended December 31,
1997. The year ended December 31, 1998 included per unit royalties for 1) the H-
P SureStore CD-Writer, which began shipping in February 1998 and 2) H-P LaserJet
3100, which began shipping in March 1998. Partially offsetting these increases
in per unit royalties, revenue from acquired DocuMagix software products for the
year ended December 31, 1998 fell 79% to $.5 million from $2.1 million for the
same period ended December 31, 1997, the result of withdrawal of products from
the retail distribution channel.
International revenues declined to 18% of total revenues from 29% for the
year ended December 31, 1998 and 1997, respectively. Product revenue increases
in 1998 were more heavily concentrated in the US as opposed to Europe, resulting
in the proportionate decline. The Company did not sell its products in any Asian
countries, though products are sold in New Zealand and Australia. Two customers,
Hewlett-Packard and IKON Office Solutions, accounted for $5.3 million (18%) and
$4.8 million (16%), respectively, of total revenues for the year ended December
31, 1998. The same two customers accounted for $3.1 million (13%) and $4.4
million (19%), respectively, of total revenues for the year ended December 31,
1997.
Cost of Product Revenues Cost of product revenues consisted primarily of
purchased materials; direct production labor and supervision for assembly and
test; subcontracted manufacturing, mainly for printed
D-18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
circuit boards; indirect labor for inventory management, shipping and receiving,
purchasing, manufacturing engineering, document control and operations
management; and related facility and support costs.
Cost of product revenues increased 35% to $16.0 million from $11.9 million
for the years ended December 31, 1998 and 1997, respectively. In 1998 the year
end review of inventory resulted in an increase in reserves of $350,000.
Approximately half of this charge related to reduced MFP demand and half to
previously inventoried marketing materials. Despite this adjustment, product
gross margins expanded to 31.6% from 27.0% for the years ended December 31, 1998
and 1997, respectively. The improvements in gross margin for JetFax branded
products and consumables were due to manufacturing efficiencies, higher volumes,
and a shift in mix to the newer Series M900 product lines, the aggregate of
which more than offset a decline in average selling price of MFPs and the
inventory reserve adjustment.
The Company purchased print engines for its Series M900 product line in Yen
from Oki Data Corporation and included exchange gains and losses related to Yen-
based purchases and hedging activity in cost of goods sold. In order to reduce
the potential volatility related to the ongoing Yen liability, the Company
entered into a Yen hedge in August 1997. As the Yen weakened during the year
ended December 31, 1998, the average exchange rate for purchases improved to 133
from 122 Yen to the dollar for the year ended December 31, 1997. As a result of
this rate improvement, cost of goods sold was lowered by over $300,000. Hedging
activity generated a loss of $12,000 for the year ended December 31, 1998. Given
the considerable expense associated with maintaining the Yen hedge, coupled with
the recent strengthening of the Yen in relation to the dollar, the Company
decided to terminate its Yen hedge in September 1998.
Cost of Software and License Revenues. Cost of software and license
revenues consisted primarily of royalties paid for licensed technology included
in the Company's products, amortization of purchased technology, and the
duplication and packaging expense associated with software sold in the retail
market. Cost of software and license revenues decreased 8% to $710,000 from
$770,000. The increase in per unit royalty revenues generated a corresponding
increase in per unit royalties payable for certain technology licensed from
others for the year ended December 31, 1998. This was in turn offset by reduced
expenses related to retail software sales as the Company withdrew from the
retail channel distribution market.
Research and Development. Research and development expenses were
essentially flat at $5.4 million for the years ended December 31, 1998 and 1997,
respectively. Average engineering headcount increased to 45 from 39 for the
years ended December 31, 1998 and 1997, respectively. The related increase in
engineering compensation expense was effectively offset by (1) reduced
prototype, materials and external consultant charges and (2) the non-recurrence
of acquisition-related DocuMagix retention bonuses of $150,000 from December
1997. As a percent of revenue, research and development expense declined to 18%,
a result of the increase in revenue.
Selling and Marketing. Selling and marketing expenses consist primarily of
personnel related costs and commissions, travel and entertainment expenses,
advertising and promotional expenses, marketing communications, customer
support, and service and facilities expenses. Selling and marketing expenses
increased 20% to $7.3 million from $6.0 million for the year ended December 31,
1998 and 1997, respectively. An additional $1.3 million in promotional efforts
including dealer incentives, advertising, and public relations in support of the
Series M900 product accounted for the period increase. This was offset to a
minor degree by the non-recurrence of acquisition-related DocuMagix retention
bonuses of $77,000 from December 1997. As a percentage of revenues, selling and
marketing expenses declined slightly to 24% from 27% for the year ended December
31, 1998 from the year ended December 31, 1997, as the rise in revenue outpaced
the increase in marketing charges.
General and Administrative. General and administrative expenses include
personnel related costs for administrative, finance, and executive personnel,
outside professional fees, and facilities expenses. General and administrative
expenses decreased 15% to $2.6 million from $3.0 million for the years ending
December 31, 1998 and 1997, respectively. Elimination of redundant costs related
to facilities, business insurance, and legal and accounting services, effective
with the acquisition of DocuMagix accounted for the drop in expense. Expenses
related to public company disclosures, e.g., reporting to shareholders and SEC
filings,
D-19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
more than offset the non-recurrence of DocuMagix retention bonuses of $169,000.
As a percentage of revenues, general and administrative expenses declined to 9%
from 13% for the year ended December 31, 1998 from the year ended December 31,
1997.
Acquisition Charges and Related Expense. Acquisition charges related to the
purchase of substantially all the assets of the Crandell Group, Inc. in July
1996 and the purchase of DocuMagix, Inc. through a pooling of interests
transaction which closed in December 1997. There were no acquisition related
charges for the year ended December 31, 1998; there were a total of $2.1 million
in acquisition charges for the year ended December 31, 1997. The Crandell
Group's $1.7 million portion of the 1997 acquisition charges was comprised of: a
$1.0 million compensation payment in July 1997, acquisition charges of $0.6
million for a variable equity award classified as compensation; and compensation
expenses of $56,000 associated with royalties related to the continuing
employment of the founders of the Crandell Group. The $425,000 DocuMagix portion
of the 1997 acquisition charges was primarily comprised of legal and accounting
costs related to the pooling of interests transaction and the estimated lease
obligation for the previous DocuMagix facility.
Interest and Other Income (Expense). Interest and other income, net
increased to $365,000 from $111,000 for the year ended December 31, 1998 and
1997, respectively. Interest income from investments was essentially flat at
$300,000, while interest expense declined to zero from $119,000. Foreign
exchange gains (losses) increased to $19,000 from ($58,000) for the years ended
December 31, 1998 and 1997, respectively.
Provision for Income Taxes. Due to the Company's net losses, there were no
provisions for federal or state income taxes for the year ended December 31,
1998 or the year ended December 31, 1997. Income tax provisions of $80,000 and
$96,000 for the year ended December 31, 1998 and 1997, respectively, related
primarily to foreign withholding taxes on certain royalty fees, but also include
minimum state and franchise taxes.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") released
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements. This bulletin summarizes certain interpretations and practices
followed by the Division of Corporation Finance and the Office of the Chief
Accountant of the SEC in administering the disclosure requirements of the
Federal securities laws in applying generally accepted accounting principles to
revenue recognition in financial statements. Application of the accounting and
disclosures desired in the bulletin is required by the second quarter of 2000.
Although the Company has not fully assessed the implications of SAB No. 101,
management does not believe adoption of this bulletin will have a material
impact on the Company's consolidated financial position, results of operations
or cash flows.
Liquidity and Capital Resources
In 1999, the Company's revenues were not sufficient to support its
operations, and revenues will not be sufficient enough to support operations
until such time, if any, that the Company's revenues from technology licensing
agreements and fee generating Internet-based services gain substantial market
acceptance. Historically, the Company has financed its operations to date
principally through private placements of debt and equity securities, proceeds
from borrowings under a bank line of credit that expired in August 1999, debt
associated with the Crandell Acquisition, and the Company's 1997 initial public
offering of common stock. The total amount of equity raised through a series of
private financing rounds and the Company's June 1997 initial public offering
through December 31, 1999 was $69 million. The Company has completed discussions
with JFAX.COM to finance the Company through an interim loan agreement of $5.0
million while the two parties continue merger discussion pursuant to a letter of
intent to merge the Company with JFAX.COM; however, no assurance can be given
that these discussions and negotiations will culminate in the
D-20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
contemplated merger. In the event that the Merger is not consummated, the
Company will need to obtain additional financing to repay the loan from JFAX.COM
and to finance continuing operating losses. In such event, there can be no
assurance that the Company will be successful in obtaining additional financing
and that would result in a material adverse effect on the Company's ability to
meet its business objectives and continue as a going concern. See Notes 1 and 16
to the Consolidated Financial Statements.
On May 10, 1999, eFax.com entered into a purchase agreement with an
investor for the private placement of $15.0 million of Series A Convertible
Preferred Stock, convertible into Common Stock at $21.1375 per share. The
conversion price is subject to an adjustment after one year to the greater of
the then current market price of the Common Stock or 60% of the initial
conversion price if the current market price is less than the initial conversion
price. The agreement also includes 300,000 warrants exercisable at a 10% premium
to the Series A Convertible Preferred Stock conversion price. The Series A
Convertible Preferred Stock includes an 8% dividend payable in cash or common
stock at the option of eFax.com. The closing occurred on May 13, 1999. eFax.com
filed a registration statement for the resale of the shares of Common Stock
acquired on conversion of the Convertible Preferred Stock and upon exercise of
the warrants.
Cash and short term investments increased to $4.7 million at December 31,
1999 from $4.1 million at December 31, 1998. Net cash used for operating
activities was $5.7 million in 1999, resulting primarily from the Company's net
loss of $25.0 million partially offset by noncash charges of $11.4 million. In
addition, inventories decreased to $1.7 million from $4.5 million at December
31, 1999 and 1998, respectively, a result of reduced stocking levels related to
the discontinuance of the Company's MFP product line and an associated write-
down of $1.0 million. Accounts receivable decreased to $2.4 million from $4.4
million at December 31, 1999 and 1998, respectively, which was principally the
result of the withdrawal from the MFP market. Accounts payable increased $2.7
million to $4.4 million at December 31, 1999 from $1.7 million at December 31,
1998. The increase in payables resulted from additional expenses related to the
ramp-up of the Company's internet-based services and related selling and
marketing expenses. Other changes in working capital items also partially offset
the net loss by approximately $0.5 million.
Investing activities for the year ended December 31, 1999 consumed $2.3
million of cash: $1.9 million for property purchases, $184,000 for investment in
other assets and $187,000 for net purchases of short-term investments.
Financing activities for the year ended December 31, 1999, provided $15.6
million of cash: $14.2 million in proceeds from the sale of Series A Convertible
Preferred Stock, and $1.4 million in proceeds from the sale of Common Stock.
Factors That May Affect Operating Results
eFax.com operates in a dynamic and rapidly changing environment that
involves numerous risks and uncertainties. This Annual Report on Form 10-K may
contain projections of results of operations and financial condition or other
"forward-looking statements" which involve risks and uncertainties. The words
"anticipate," "believe," "estimate," and "expect" and similar expressions when
used in this Annual Report on Form 10-K in relation to eFax.com or its
management are intended to identify such forward-looking statements. eFax.com's
actual results, performance, or achievements could differ materially from these
projections or forward-looking statements as a result of many factors, including
those discussed in this "Factors That May Affect Operating Results " section of
the Annual Report on Form 10-K. This section should be read in conjunction with
the audited Consolidated Financial Statements and Notes thereto included in Part
IV -- Item 14 of this Annual Report on Form 10-K.
WE HAVE EXPERIENCED FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS.
eFax.com in the past has experienced, and in the future may experience,
significant fluctuations in its quarterly operating results. These fluctuations
have been or may be caused by many factors, including:
D-21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
. acceptance and timing of new products combining communications
technology with the Internet;
. the size and timing of development or software licensing agreements;
. the timing of the phase-out of eFax.com's hardware products;
. fluctuations in consumer demand for eFax.com's brand products and for
products which are made by eFax.com's manufacturing and software
license customers incorporating eFax.com's technology; and
. seasonal trends, competition and pricing.
EFAX.COM EXPECTS THAT ITS OPERATING RESULTS WILL CONTINUE TO FLUCTUATE AS A
RESULT OF THESE AND OTHER FACTORS.
For these and other reasons, we believe that period-to-period comparisons
of eFax.com's results of operations are not necessarily meaningful. We believe
that you should not rely upon these comparisons as indicators of future
performance. It is likely that in future quarters, eFax.com's operating results
will sometimes be below the expectations of public market analysts and
investors. This could have a material adverse effect on the price of eFax.com's
common stock.
We believe that the accuracy of eFax.com's report of its quarterly license
revenues received from its manufacturing and software license customers has
been, and will continue to be, dependent on the timing and accuracy of product
sales reports which we receive from these manufacturing and software license
customers. Our manufacturing and software license customers only provide these
reports on a quarterly basis and this quarterly basis may not coincide with
eFax.com's quarter. Our manufacturing and software license customers may also
delay or revise these reports. Therefore, we are required to estimate all of the
recurring license revenues from manufacturing and software license customers for
each quarter. As a result, we will record an estimate of such revenues prior to
public announcement of eFax.com's quarterly results. In the event the product
sales reports we receive from our manufacturing and software license customers
are delayed or subsequently revised, we may be required to adjust revenues for
subsequent periods. This adjustment of revenues could have a material adverse
effect on eFax.com's business, financial condition and results of operations
and, as a result, the price of eFax.com's common stock.
THE PRICE OF EFAX.COM STOCK MAY BE VOLATILE DUE TO MANY FACTORS, INCLUDING OUR
STATUS AS AN INTERNET-RELATED COMPANY, FLUCTUATIONS IN OUR QUARTERLY OPERATING
RESULTS, THE RAPID PACE OF TECHNOLOGICAL CHANGE, THE UNCERTAINTY OF OUR BUSINESS
TRANSACTIONS AND THE CONTENTS OF NEWS AND SECURITY ANALYST REPORTS.
The trading price of eFax.com's common stock is likely to be highly
volatile. The price could be subject to wide fluctuations in response to factors
such as:
. actual or anticipated variations in eFax.com's quarterly operating
results;
. announcements of technological innovations or new services by eFax.com
or its competitors;
. announcements of significant acquisitions or strategic partnerships by
eFax.com or its competitors;
D-22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
. changes in financial estimates and recommendations by securities
analysts; and
. news reports relating to trends in eFax.com's markets.
In addition, the stock market in general, and the market prices for
Internet-related companies in particular, have experienced extreme volatility
that is often unrelated to the operating performance of these companies. These
broad market and industry fluctuations may adversely affect the price of
eFax.com's common stock, regardless of eFax.com's actual operating performance.
ALTHOUGH WE TAKE STEPS TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, WE MAY
BECOME SUBJECT TO TIME-CONSUMING AND COSTLY LITIGATION WHERE WE ARE ACCUSED OF
INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHER PARTIES. IN FACT, WE WERE
RECENTLY SUED FOR INFRINGING A TRADEMARK OF E-FAX COMMUNICATIONS.
eFax.com's success is heavily dependent upon its intellectual property. To
protect its proprietary rights, eFax.com relies on a combination of copyright,
trade secret and trademark laws, patents, nondisclosure agreements and other
contractual restrictions. As part of its confidentiality procedures, eFax.com
generally enters into nondisclosure agreements with its employees, consultants,
manufacturing and software license customers and strategic partners. eFax.com
also limits access to and distribution of its designs, software and other
proprietary information. Despite these efforts, eFax.com may be unable to
effectively protect its proprietary rights. In addition, enforcement of
eFax.com's proprietary rights may be expensive. We cannot assure you that
eFax.com's means of protecting its proprietary rights will be adequate. Nor can
we assure you that eFax.com's competitors will not independently develop similar
technology.
As the number of patents, copyrights, trademarks and other intellectual
property rights in eFax.com's industry increases, eFax.com's intellectual
property may increasingly become the subject of infringement claims. In the
past, eFax.com has received communications from other parties claiming that
eFax.com's trademarks or products infringe the proprietary rights of these
parties. eFax.com has also received communications asking for "indemnification"
against such infringement. "Indemnification" means that eFax.com would promise
to repay or reimburse the other party for loss or damages suffered by that other
party as a result of infringement. eFax.com's manufacturing and software license
customers generally require eFax.com to reimburse or "indemnify" the
manufacturing and software license customers for claims of infringement from
third parties. We can give you no assurance that third parties will not make
infringement claims against eFax.com or its manufacturing and software license
customers in the future. Any of these claims, even if they have no legal merit,
could be time consuming (especially for key management and technical personnel),
result in costly litigation or cause delays in revenues. In addition, these
claims could require eFax.com to enter into royalty or licensing agreements on
terms unacceptable to eFax.com. If eFax.com fails to develop a substitute
technology, or to license a substitute technology on acceptable terms, this
could have a material adverse effect on eFax.com's business, financial condition
and results of operations. As an example, eFax.com was sued in February 1999 by
E-Fax Communications which claimed that the use of the name "eFax.com" infringed
this party's trademark rights. In settlement of the matter, eFax.com paid E-Fax
Communications a combination of cash and common stock in an amount not exceeding
$2.5 million.
OUR REVENUES MAY NOT GROW AS ANTICIPATED BECAUSE THE MARKET FOR OUR INTERNET-
RELATED SERVICES IS NEW, RAPIDLY CHANGING AND UNCERTAIN.
The market for Internet-related communication services is very new and is
evolving rapidly. eFax.com expects to rely significantly in the future on
revenues generated through its "eFax" service, a free fax-to-
D-23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
email, email-to-fax and voice-to-email service, and products which support this
service. We cannot assure you, however, that the base of customers subscribing
to our eFax(c) service will continue to expand rapidly. Nor can we assure you
that users will be willing to pay fees for premium services or that the
subscriber base will grow large enough to be capable of generating advertising
revenue. As a result, our revenues may not grow as anticipated, which would have
a negative effect on our business.
WE HAVE CHANGED THE FOCUS OF OUR BUSINESS TO INTERNET-RELATED SERVICES, PRODUCTS
AND TECHNOLOGIES AND GROWTH OF BUSINESS IN THIS NEW FOCUS AREA IS UNCERTAIN.
Historically, eFax.com has focused primarily on the development,
manufacture and sale of its branded multifunction products. eFax.com derived a
substantial portion of its revenues from the sale of these brand multifunction
products. However, on January 10, 2000, we announced the discontinuation of our
manufacturing operations and that we now expect that our future revenue growth
will be dependent, largely, on expansion of our Internet-based communications
services, such as its fax-to-e-mail service, and on further licensing of
eFax.com's hardware and software technologies and software products. However, we
cannot assure you that eFax.com will realize growth in revenues from such sales.
If such growth in revenues does not occur, it could have a material adverse
effect on eFax.com's business, financial condition and results of operations.
WE DEPEND ON THE CONTINUED GROWTH OF INTERNET COMMERCE. WE FACE THE RISKS THAT
INTERNET COMMERCE MAY NOT GROW AS RAPIDLY AS ANTICIPATED AND THAT THE INTERNET
MAY EXPERIENCE TECHNICAL PROBLEMS DUE TO INSUFFICIENT INFRASTRUCTURE AND
INADEQUATE TECHNOLOGICAL IMPROVEMENTS.
eFax.com intends to derive a significant portion of its revenues from its
Internet communications services, called "eFax", and related products. Rapid
growth in the use of and interest in the Internet and online Internet services
is a recent phenomenon. As a result, a sufficiently broad base of consumers may
not adopt and continue to use the Internet and other online services as a way of
purchasing and conducting business. Internet web-based advertising and the sales
of premium Internet services are relatively new. It is difficult to predict the
extent that these will grow, or if they will grow at all. In addition, the
Internet may not prove to be a viable commercial marketplace for reasons such as
potentially inadequate development of:
. Internet network infrastructure; and
. technologies which enable use of the Internet.
If any of the following take place, it could have a material adverse effect
on eFax.com's business, financial condition and results of operation:
. if the use of the Internet and other online services does not continue
to increase or increases more slowly than expected;
. if performance improvements to support increased levels of Internet
activity prove to be inadequate,
. if the infrastructure for the Internet and online services proves to
be inadequate to effectively support expansion; or
D-24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
. if the Internet does not become a viable commercial marketplace.
CERTAIN OF OUR PRODUCTS ARE BEING DISCONTINUED AND OUR MANUFACTURING AND
SOFTWARE LICENSE CUSTOMERS, WHICH PROVIDE A SIGNIFICANT PORTION OF OUR REVENUES,
MAY NOT CONTINUE TO DEVELOP, MARKET OR SELL PRODUCTS INCORPORATING EFAX.COM'S
TECHNOLOGY.
eFax.com has derived a significant portion of its revenues from licensing
of its software and hardware and software technologies to other parties and from
providing development services to manufacturing and software license customers.
eFax.com currently has manufacturing relationships with Hewlett-Packard Company,
Oki Data Corporation, and Konica Business Systems. As a result of discontinuing
our hardware products, we do not anticipate future product revenues Oki Data
Corporation or Konica Business Systems after the first quarter of 2000. eFax.com
anticipates that it will derive a significant portion of its revenues in the
future from Hewlett-Packard Company and its software license customers and that
eFax.com's revenues will be dependent upon, among other things, the ability and
willingness of its manufacturing and software license customers to develop and
promote products that incorporate eFax.com's technology. The ability and
willingness of these manufacturing and software license customers to do this is
based upon a number of factors, including eFax.com's ability to complete timely
development of designs for them. We cannot give you any assurances regarding the
ability or willingness of eFax.com's manufacturing and software license
customers to continue developing, marketing and selling products incorporating
eFax.com's technology. The loss of any of eFax.com's significant manufacturing
and software license customers could have a material adverse effect on
eFax.com's business, financial condition and results of operations.
WE HAVE A HISTORY OF OPERATING LOSSES AND AN ACCUMULATED DEFICIT
eFax.com has had annual net losses since the company was formed. eFax.com's
historical losses and certain preferred stock dividends have resulted in an
accumulated deficit of approximately $55.0 million as of December 31, 1999. We
can give you no assurance that eFax.com will achieve profitability on a
quarterly or annual basis in the future. As a result of our history of operating
losses and substantial expenditures associated with the transition to an
Internet-based business model, we are currently experiencing a liquidity
shortfall which we are addressing by seeking additional capital investments.
WE MAY NOT BE ABLE TO OBTAIN SUFFICIENT FUNDS TO GROW OUR BUSINESS.
We intend to continue to grow our business. Due to our limited operating
history in Internet communication services and the nature of our industry, our
future capital needs are difficult to predict. Therefore, we will require
additional capital to fund any of the following:
. continuing operating losses
. unanticipated opportunities;
. strategic alliances;
. potential acquisitions;
. changing business conditions; and
D-25
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
. unanticipated competitive pressures.
Obtaining additional financing will be subject to a number of factors,
including market conditions, our operating performance and investor sentiment.
These factors may make the timing, amount, terms and conditions of additional
financings unattractive to us. If we are unable to raise additional capital, our
current operations and our growth could be impeded.
WE MAY FAIL TO ADAPT TO OUR MARKET'S RAPIDLY CHANGING TECHNOLOGY AND EVOLVING
INDUSTRY STANDARDS AND WE MAY LOSE COMPETITIVENESS AND REVENUES AS A RESULT.
The market for eFax.com's products and services is characterized by rapidly
changing technology, evolving industry standards and needs, and frequent new
product introductions. As the market for Internet-based communication services
grows, this market will begin to exert more pressure on companies to develop
advanced features at more economical pricing. As product development increases
in complexity and the expected time to bring a product to market continues to
decrease, the risk and difficulty in meeting these development schedules
increases and the costs to eFax.com and its manufacturing and software license
customers also increases. In addition, eFax.com, its manufacturing and software
license customers and their competitors may, from time to time, announce new
products, capabilities or technologies that may replace or shorten the life
cycles of eFax.com's services and software and the life cycles of manufacturing
and software license customers' products incorporating eFax.com's technology.
eFax.com's success will depend on, among other things:
. market acceptance of eFax.com's service offerings; and
. the ability of eFax.com and its manufacturing and software license
customers to respond to industry changes and market demands.
Any failure of eFax.com to anticipate or respond adequately to the rapidly
changing technology and evolving industry standards and needs could result in a
loss of our competitiveness or revenues. Any significant delay in our
development or introduction of new and enhanced products and services could also
result in a loss of competitiveness or revenues. Such a loss of competitiveness
or revenues could have a material adverse effect on eFax.com's business,
financial condition and results of operations.
WE FACE A HIGH LEVEL OF COMPETITION IN OUR INTERNET-RELATED INDUSTRY.
The market for Internet-related communication services, such as eFax.com's
fax-to-e-mail service, is a newly emerging market and competitors are just
beginning to appear. eFax.com anticipates that it will need to:
. provide good service and grow its business rapidly to meet demand;
. create name recognition for eFax.com in advance of competitors;
. build its subscriber base prior to any significant entry by the
competition; and
. continue to expand and improve on its Internet communication service
offerings.
D-26
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
eFax.com's technology, development services and software primarily compete
with solutions developed internally by manufacturing and software license
customers. Virtually all of eFax.com's manufacturing and software license
customers have significant investments in their existing solutions. These
manufacturing and software license customers have the substantial resources
necessary to develop competing multifunction technologies and software that may
be implemented into their own products. eFax.com also competes with
technologies, software and development services provided in the multifunction
product market by other systems and software suppliers to manufacturing and
software license customers.
The market for Internet-related communication services, related technology
and software is highly competitive. This market is characterized by continuous
pressure to improve performance, to introduce new features and to accelerate the
release of new products. eFax.com also competes on the basis of vendor name and
recognition, technology and software expertise, product functionality,
development time and price. eFax.com anticipates increasing competition for its
multifunction products, technologies, software under development and Internet
services. Most of eFax.com's existing competitors, many of its potential
competitors and all of eFax.com's manufacturing and software license customers
have substantially greater financial, technical, marketing and sales resources
than eFax.com. In the event that price competition increases, competitive
pressures could cause eFax.com to:
. reduce the cost of its fee-based eFax Service offerings;
. expand services to match those offered by competitors; or
. reduce the amount of royalties received on new licenses.
In turn, these reductions could reduce eFax.com's profit margins and result
in losses and a decrease in market share, which would have a material adverse
effect on eFax.com's business, financial condition and results of operations.
WE ARE DEPENDENT ON KEY PERSONNEL AND COULD BE AFFECTED BY THE LOSS OF THEIR
SERVICES.
eFax.com is largely dependent upon the skills and efforts of its senior
management, as well as other officers and key employees, some of whom only
recently have joined eFax.com. None of eFax.com's officers or key employees have
an employment agreement with eFax.com. eFax.com believes that its future success
will depend in large part upon its ability to attract and retain highly skilled
engineering, managerial, sales, marketing and operations personnel, many of whom
are in great demand. Competition for such personnel, especially engineering
personnel, has recently increased significantly. The loss of key personnel or
the inability to hire or retain qualified personnel could have a material
adverse effect on eFax.com's business, financial condition and results of
operations. Edward R. Prince, III, our Chief Executive Officer, and Lon Radin,
our Vice President of Engineering recently resigned.
OUR RAPID GROWTH PLACES A STRAIN ON OUR OPERATIONS AND FINANCIAL RESOURCES AND
WE MAY FAIL TO MANAGE OUR GROWTH EFFECTIVELY. IN ADDITION, WE MAY FACE RISKS
ASSOCIATED WITH ANY POTENTIAL ACQUISITION OF OTHER COMPANIES WHICH WE MAY CHOOSE
TO UNDERTAKE.
eFax.com has grown rapidly in recent years. A continuing period of rapid
growth could place a significant strain on eFax.com's management, operations and
other resources. eFax.com's ability to manage its growth will require eFax.com
to continue to invest in its operational, financial and management information
systems, procedures and controls, and to attract, retain, motivate and
effectively manage its
D-27
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
employees. We can give no assurance that eFax.com will be able to manage its
growth effectively. Failure to manage growth effectively would have a material
adverse effect on eFax.com's business, financial condition and results of
operations. eFax.com may, from time to time, pursue the acquisition of other
companies, assets or product lines that complement or expand its existing
business. Acquisitions involve a number of risks that could adversely affect
eFax.com's operating results. These risks include:
. the diversion of management's attention from day-to-day business;
. the difficulty of combining and assimilating the operations and
personnel of the acquired companies;
. charges to the company's earnings as a result of the purchase of
intangible assets; and
. the potential loss of key employees as a result of an acquisition.
eFax.com has no present commitments nor is it engaged in any discussions or
negotiations regarding possible acquisitions. However, should any acquisition by
eFax.com take place, we can give no assurance that this acquisition will not
materially and adversely affect eFax.com or that any such acquisition will
enhance eFax.com's business.
WE ARE DEPENDENT ON A LIMITED NUMBER OF SERVICE PROVIDERS AND MAY BE AFFECTED BY
CHANGES, DELAYS OR INTERRUPTIONS IN OF SERVICES FROM THESE SUPPLIERS.
eFax.com relies on various providers or network communication
infrastructure, telecommunications infrastructure and other partners providing
network management services. We depend on relationships with providers and
partners for, among other things:
. management of our network operations;
. providing and managing our telephone numbers;
. telephony infrastructure; and
. network connectivity.
eFax.com generally purchases network and telecommunications services under
multi-year agreements. Alternate providers or partners may be readily available
for some of these services, but there may be unavoidable interruptions in
service if we change service providers. However, for other network management
services, we do not know how long it would take to find a replacement provider
or partner and to establish a replacement network operations center. If we need
to find another provider or partner of those network management services which
we now purchase from a single source, we may experience delays, operational
difficulties and increased expenses, and our ability to provide services to our
users or expand our operations may be impaired. Although we believe we could
develop other providers or partners for these single source services, no
alternative providers or partners currently exist and the process of finding an
alternate provider or partner could take several months or longer. Therefore,
any interruption in the performance of these network management services could
have a material adverse effect on eFax.com's business, financial condition and
results of operations.
Given our dependence on network communication infrastructure,
telecommunications infrastructure and network management partners, any of the
following events could have a material adverse effect on eFax.com's business,
financial condition and results of operations:
D-28
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
. if any of these companies were to experience extended interruptions in
network services;
. if these providers were to experience financial difficulties or other
problems which prevented them from meeting contractual service
obligations;
. any shortage or interruption in the supply of telephone numbers used
in eFax.com's services; or
. the inability of eFax.com to obtain any of these services from
alternate providers or partner on acceptable terms.
WE GENERATE A SIGNIFICANT PORTION OF OUR REVENUES FROM OUR INTERNATIONAL
ACTIVITIES AND WE ARE SUBJECT TO MANY RISKS AS A RESULT OF THESE ACTIVITIES.
A significant portion of eFax.com's total revenues come from sales to
eFax.com's customers outside the United States. The international market for
eFax.com's brand products and products incorporating eFax.com's technology and
software is highly competitive. Risks inherent in eFax.com's international
business activities also include:
. currency fluctuations and restrictions;
. the burdens of complying with a wide variety of foreign laws and
regulations;
. longer accounts receivable cycles;
. the imposition of government controls;
. risks of localizing and internationalizing products to local
requirements in foreign countries;
. trade restrictions;
. tariffs and other trade barriers;
. restrictions on bringing earnings back into the United States; and
. potentially adverse tax consequences.
Any of these risks could have a material adverse effect on eFax.com's
business, financial condition and results of operations. Substantially all of
eFax.com's international sales are currently made in U.S. dollars. Therefore,
increases in the value of the U.S. dollar relative to foreign currencies could
make eFax.com's products less competitive in foreign markets. Because of
eFax.com's international activities, it faces currency exposure and currency
exchange risks. For example, eFax.com purchases some of its key components
pursuant to purchase contracts which require payment in foreign currency which
results in currency exchange risks.
OUR BUSINESS DEPENDS UPON THE DELIVERY OF ACCURATE ELECTRONIC INFORMATION VIA
THE INTERNET, AND IF YEAR 2000 ISSUES CAUSE LONG-TERM
D-29
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
INOPERABILITY OF THE INTERNET OR OUR SERVICES, WE COULD LOSE USERS OF OUR
SERVICES OR BE UNABLE TO CONTINUE OUR BUSINESS.
Year 2000 issues refers to the issue surrounding computer programs that use
two digits rather than four to define a given year. These programs might read a
date using "00" as the year 1900 rather than the year 2000, which could cause a
system failure or a miscalculation.
Significant uncertainty exists concerning the potential costs and effects
associated with any year 2000 compliance problems. Any year 2000 compliance
problems faced by us, users of our online marketplace and strategic partners
could seriously harm our business. In addition, our ability to operate our
business depends upon delivery of accurate, electronic information via the
Internet. To the extent year 2000 issues result in the long-term inoperability
of the Internet or our online marketplace, our business would be seriously
harmed.
eFax.com has recently implemented new information systems and accordingly
does not anticipate any internal year 2000 problems from those information
systems, databases or programs. However, year 2000 problems faced by major
distributors, suppliers, customers and financial service organizations with
which we interact could adversely impact eFax.com. Our assessment of the
potential impact of these additional issues was completed in October 1999. We
can give you no assurance that we were able to detect all potential failures of
eFax.com's computer systems or the computer systems of third parties. A
significant failure of eFax.com's or a third party's computer system could have
a material adverse effect on eFax.com's business, financial condition and
results of operations. eFax.com has completed its contingency plan, detailing
actions that would be taken in the event that such failure occurs. To date, we
have not experienced any significant disruptions related to the Year 2000 issue.
WE MAY BE ADVERSELY AFFECTED IF OUR COMPUTER SYSTEMS OR THOSE OF OUR
DISTRIBUTORS, SUPPLIERS AND CUSTOMERS FAIL BECAUSE OF ANY RESIDUAL YEAR 2000
PROBLEMS.
The Year 2000 issue refers to whether computer systems will properly
recognize two digit year values as the year 2000 versus the year 1900. Systems
that do not properly recognize such information could generate erroneous data or
cause a system to fail. We recognize the need to insure that our operations and
relationships with our customers, suppliers and other third parties will not be
adversely impacted by the Year 2000 software issue. During the past year, we
have implemented and completed a Year 2000 project designed to identify and
assess the risks associated with its information systems, products, operations
and infrastructure, suppliers and customers that are not Year 2000 compliant,
and to develop, implement and test remediation and contingency plans to mitigate
these risks. To date, we have not experienced any significant disruptions
related to the Year 2000 issue and has not been informed of any failures of the
Company's products related to the year 2000 issue. We are not aware of any
significant Year 2000 disruptions affecting our critical suppliers and vendors.
We cannot guarantee that our efforts will prevent a material adverse impact on
our results of operations, financial condition or cash flow that might result
from the failure of any key third party systems to accommodate the Year 2000
problem. If our systems or those of key third parties are not fully Year 2000
functional, we estimate that disruptions in operations could occur. Such
disruptions could result in delays in providing services and in issuing billings
to customers. These consequences could have a material adverse impact on our
consolidated results of operations, financial condition and cash flows if we are
unable to substantially conduct our business in the ordinary course.
D-30
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following disclosures about the Company's market risk involve forward-
looking statements. Actual results could differ materially from those projected
in the forward-looking statements. The Company faces exposure to market risk
from adverse movements in interest rates and foreign currency exchange rates,
which could impact its results of operations and financial condition. The
Company does not use derivative financial instruments for speculative purposes.
Short-term Investments. At December 31, 1999, the Company held $3.0 million
in short-term investments consisting of high quality financial instruments with
an original maturity of from three to fifteen months. These available-for-sale
securities are subject to interest rate risk and will fall in value if market
interest rates increase. If market interest rates were to increase immediately
and uniformly by 10 percent from levels at December 31, 1999, the fair market
value of the short-term investments would decline by an immaterial amount. The
Company generally expects to have the ability to hold its fixed income
investments until maturity and therefore would not expect operating results or
cash flows to be affected to any significant degree by the effect of a sudden
change in market interest rates on short-term investments.
Foreign Currency Exchange Rate. Historically, the Company's primary
exposure has related to significant purchases of materials for manufacture of
its Series M900 product line which were denominated in Yen. In order to reduce
the potential volatility related to its ongoing Yen liability, the Company has
occasionally purchased foreign currencies and held them during the contract
term. At December 31, 1999 the Company did not hold a hedge position against a
foreign currency exposure.
At December 31, 1999 the Company had no purchase commitments denominated in
Yen.
The Company does maintain cash balances denominated in British Pound
Sterling, Irish Punt, French Francs, and German Deutschemarks. If foreign
exchanges rates were to weaken against the dollar immediately and uniformly by
10 percent from the exchange rate at December 31, 1999, the fair value of these
foreign currency amounts would decline by an immaterial amount.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements are set forth in Item 14 below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
D-31
<PAGE>
PART III
Item 10. Directors and Executive Officers of the registrant
The Company's current executive officers and directors are set forth below,
with their ages as of December 31, 1999. The terms of all incumbent directors
expire at the Annual Meeting of the Company's stockholders in July 2000 (the
"Annual Meeting") or at such later time as their successors have been duly
elected and qualified.
<TABLE>
<CAPTION>
Name Age Position(s) with the Company
----- --- ----------------------------
<S> <C> <C>
Thomas B. Akin......................................... 46 Director
Douglas Y. Bech........................................ 53 Director
Steven J. Carnevale.................................... 43 Director
Albert E. Sisto........................................ 49 Director
Lon Radin.............................................. 49 Director
Ronald P. Brown........................................ 46 President
Michael Crandell....................................... 44 Executive Vice President and Chief Technology Officer
Todd J. Kenck.......................................... 32 Vice President of Finance, Chief Financial Officer and Secretary
Michael C. Tonneson.................................... 36 Vice President of Business Development
Josh A. Mailman........................................ 38 Vice President of Operations
</TABLE>
Thomas B. Akin has served as a director of the Company since July 1996.
Since October 1995, Mr. Akin has served as a Managing General Partner of Talkot
Capital, LLC, an investment firm. From November 1981 to February 1994, Mr. Akin
served in various capacities, most recently as the Managing Director of Western
Regional Sales for Merrill Lynch & Co. Mr. Akin was on a leave of absence from
Merrill Lynch & Co. from February 1994 until his retirement in April 1997. Mr.
Akin holds a B.A. in Biology from the University of California at Santa Cruz and
an M.B.A. from the University of California at Los Angeles. Mr. Akin is a
director of Acacia Research, Inc.
Douglas Y. Bech has served as a director of the Company since August 1988.
Since August 1997, Mr. Bech has served as Chairman and Chief Executive Officer
of Raintree Resorts International, Inc., a company that owns and operates luxury
vacation ownership resorts. Mr. Bech was a founding partner of and, since August
1994, has served as a Managing Director of Raintree Capital Company, LLC, a
merchant banking firm. In addition, from October 1994 to October 1997, Mr. Bech
was a partner of Akin, Gump, Strauss, Hauer & Feld, L.L.P., a law firm. From May
1993 through July 1994, Mr. Bech was a partner of Gardere & Wynne, L.L.P., a law
firm. From September 1970 to May 1993. Mr. Bech was associated with and a senior
partner of the law firm Andrews & Kurth L.L.P. Mr. Bech holds a B.A. in
Political Science from Baylor University and a J.D. from The University of Texas
Law School. Mr. Bech is a director of Frontier Oil Corporation, Pride Companies,
L.P. and several private companies.
Steven J. Carnevale has served as a director of the Company since July
1996. In July 1996, Mr. Carnevale became a General Partner in Talkot Capital,
LLC, an investment firm. From August 1992 to July 1996, Mr. Carnevale was a
General Partner of Endeavor Capital Management, an investment firm. From
November 1990 to August 1992, Mr. Carnevale was the owner and Chief Executive
Officer of Orca Industries, a specialty computer manufacturer. Mr. Carnevale
holds a B.S. in Engineering from the University of Michigan.
D-32
<PAGE>
Albert E. Sisto has served as a director of the Company since February
1998. Since June 1999, Mr. Sisto has served as President and Chief Executive
Officer of Phoenix Technologies Ltd. From November 1997 to June 1999, Mr. Sisto
has served as the Chief Operating Officer of RSA Data Security, a wholly owned
subsidiary of Security Dynamics Technologies, Inc., a supplier of software
components that secure electronic data. From October 1994 to November 1997, Mr.
Sisto was Chairman of the Board and President of DocuMagix, Inc., a supplier of
electronic file cabinet software which was acquired by the Company in December
1997. Prior to that Mr. Sisto was President and Chief Executive Officer of Pixel
Craft (formerly BarneyScan) from 1989 to September 1994. Mr. Sisto holds a B.E.
in Materials from the Stevens Institute of Technology. Mr. Sisto is a director
of Insignia Solutions PLC, Tekgraf, Inc., Phoenix Technologies Ltd. and hi/fn,
Inc.
Lon Radin co-founded the Company and has served as a director of the
Company since August 1988. From August 1988 to December 1999, Dr. Radin served
as the Vice President of Engineering. Dr. Radin also served as the Chairman of
the Board of Directors from August 1988 to October 1996. From 1986 to 1988, Dr.
Radin was the sole proprietor of L-Tel Laboratories, a developer of digital fax
telephone devices. From 1981 to 1986, Dr. Radin served in various positions,
most recently as the Director of Software and Manager of Research with Time &
Space Processing, Inc., a software developer of telecommunications products for
the defense industry. Prior to that Dr. Radin served as a software services
consultant for The Systems Group, an engineering consulting firm from 1976 to
1981. Dr. Radin holds a B.S. in Physics and Mathematics from the University of
Michigan and a Ph.D. and an M.A. in Mathematics from the University of
California at Berkeley.
Ron Brown joined the Company in August 1998 as the Vice President of
Marketing and was named President of the Company in January 2000. Mr. Brown was
a founding partner in the Internet start-up, Musicvine from February 1997 to
August 1998, concentrating on Web-casting sponsorships for large companies. From
February 1994 to February 1997, Mr. Brown was vice president of worldwide
corporate marketing for SyQuest Technology, a manufacturer of removable storage
devices for personal computers. From April 1993, until it was acquired by
Artisoft, Inc. in February 1994, Mr. Brown was vice president of marketing for
Eagle Technology, a manufacturer of networking products. Mr. Brown holds a B.A.
degree in Advertising and an M.B.A. from San Jose State University.
Michael Crandell joined the Company in July 1996 as the Vice President of
Software and was named Executive Vice President and Chief Technology Officer in
January 2000. From January 1993 to July 1996, Mr. Crandell served as the
President of the Crandell Group, the assets of which were purchased by the
Company in July 1996. Prior to that, Mr. Crandell served as the President of
Crandell Development Corporation, a software development company from November
1984 to December 1992. From 1981 to November 1984, Mr. Crandell worked as a
Software Engineer with Compucorp, Inc. Mr. Crandell holds a B.A. in Religious
Studies from Stanford University.
Todd J. Kenck joined the Company in April 1999 as the Vice President of
Finance, Chief Financial Officer and Secretary. From January 1998 to April 1999,
Mr. Kenck was a Vice President of investment banking with Pacific Growth
Equities, Inc. From October 1989 to January 1998 served in various positions
with Volpe Brown Whelan & Company, LLC, an investment banking company, most
recently as an Associate in the technology investment banking group. Mr. Kenck
holds an M.B.A. from the Harvard Business School and a B.S. in Business
Administration from the University of Montana.
Michael C. Tonneson joined the Company in November 1999 as the Vice
President of Business Development. From June 1999 to November 1999, Mr. Tonneson
was Senior Director of Business Development with Tavolo.com, an online retailer.
From September 1999 to June 1999, Mr. Tonneson was the Founder of Natural
Beverage Company, a beverage manufacturer. From 1991 to 1998, Mr. Tonneson was
Director of the consumer practice of Dove Associates, a strategy consulting
firm. Mr. Tonneson holds an M.B.A. from the Amos Tuck School at Dartmouth
College and a B.A. in Economics and Computer Science from Dartmouth College.
Josh A. Mailman rejoined the Company in January 1997 and most recently held
the position of Director of Business Development. Mr. Mailman was appointed Vice
President of Operations in August 1999. From July 1993 to January 1997, Mr.
Mailman was with Xerox Corporation in a variety of positions, lastly as the
D-33
<PAGE>
Director of Worldwide Marketing Operations for their workgroup fax product line.
From May 1992 to June 1993, Mr. Mailman was Product Manager for the Company.
Mailman holds a B.A. in Economics from the University of California at Los
Angeles and an M.B.A. from The Anderson School of Management at the University
of California at Los Angeles.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act and regulations of the Securities and
Exchange Commission (the "SEC") thereunder require the Company's executive
officers and directors, and persons who own more than 10% of a registered class
of the Company's equity securities, to file reports of initial ownership and
changes in ownership with the SEC. Based solely on its review of copies of such
forms received by the Company, and on written representations from certain
reporting persons that no other reports were required for such persons, the
Company believes that, during or with respect to the fiscal year ended December
31, 1999, all of the Section 16(a) filing requirements applicable to its
executive officers, directors and 10% stockholders were complied with except
that three Form 4s, covering an aggregate of three transactions, were filed late
by Michael Crandell, Edward R. Prince III and former director Chung Chui.
Item 11. Executive Compensation
The following table sets forth the compensation earned in each of the three
years in the period ended December 31, 1999 by the Chief Executive Officer, the
former Chief Executive Officer and each of the other four most highly
compensated executive officers of the Company (collectively the "Named Executive
Officers"), during the year ended December 31, 1999:
<TABLE>
<CAPTION>
Annual
Compensation
----------------------------------
Securities Underlying
Name and Principal Position Year Salary ($) Bonus ($) Options(#)
--------------------------- ---- ---------- --------- ----------
<S> <C> <C> <C> <C>
Edward R. Prince, III.........................
Former Chief Executive Officer, 1999 $223,269 $40,000 275,000
Chairman of the Board 1998 180,000 -- --
And President 1997 140,000 -- 175,000
Ron Brown..................................... 1999 160,000 90,000 165,000
President(1) 1998 57,230 -- 85,000
Michael M. Crandell........................... 1999 159,230 25,000 150,000
Executive Vice President 1998 140,000 -- --
and Chief Technology Officer 1997 110,000 -- --
Gary P. Kapner................................ 1999 158,654 -- 60,000
Vice President of U.S. 1998 125,000 15,000 --
Sales 1997 89,840 20,000 100,000
Lon B. Radin.................................. 1999 159,423 -- 100,000
former Vice President of 1998 145,000 -- --
Engineering 1997 125,000 -- 75,000
</TABLE>
___________________
(1) Mr. Brown was elected President of the Company on January 11, 2000.
Option Grants in Last Fiscal Year
The following options were granted to the Named Executive Officers during the
year ended December 31, 1999.
D-34
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable Value At
Assumed Annual Rates of
Stock
Price Appreciation For Option
Individual Grants Term
----------------- ----
Percent Of
Number Of Total
Securities Options/
Underlying SARs Granted Exercise Of
Option/SARs To Employees Base Price Expiration
Name Granted (#) In Fiscal Year ($/Sh) Date 5% ($) 10% ($)
---- ----------- -------------- ------ ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Edward R. Prince, III..... 125,000 5.9% 11.8125 08/17/09 928,602 2,353,260
150,000 7.1% 2.9375 01/08/09 277,107 702,243
Ron Brown................. 125,000 5.9% 11.8125 08/17/09 928,602 2,353,260
40,000 1.9% 18.7500 04/19/09 471,670 1,195,306
Michael Crandell.......... 50,000 2.4% 11.8125 08/07/09 371,441 941,304
100,000 4.7% 2.9375 01/08/09 184,734 468,162
Gary P. Kapner............ 60,000 2.8% 2.9375 01/08/09 110,843 280,897
Lon B. Radin.............. 100,000 4.7% 2.9375 01/08/09 184,738 468,162
</TABLE>
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values.
(1) The following table provides certain information concerning the exercise of
options, the number of options held and their fiscal year-end value.
AGGREGATED OPTION GRANTS IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Shares Value Number of Securities Value of Unexercised
Acquired On Realized Underlying Unexercised In-the-Money
Exercise (#) ($) Options at FY-End(#) Options at FY-End($)(1)
------------- -------- ---------------------------- ---------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Edward R. Prince, III....... 79,166 885,670 94,415 376,419 $198,845 $583,329
Ron Brown................... -- -- 28,333 221,667 126,614 253,233
Michael Crandell............ 152,813 3,034,857 26,343 157,344 182,262 531,692
Gary P. Kapner.............. 3,000 35,025 66,290 75,710 233,694 227,885
Lon B. Radin................ -- -- 150,727 124,273 701,512 398,498
</TABLE>
----------------------------
(1) Calculated by determining the difference between the closing price of the
Company's Common Stock on the Nasdaq National Market at year-end ($7.2188)
and the exercise price of the in-the-money options. Such numbers do not
reflect amounts actually realized upon sale of the shares by such officers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Please see "Certain Transactions With Management" below for information
regarding reportable transactions between the Company and members of the
Compensation Committee. During the year ended December 31, 1999, Messrs. Akin,
Bech, Sisto, and former director Edward R. Prince, Jr. served as the
Compensation Committee of the Company's Board of Directors. During the year
ended December 31, 1999, no interlocking relationship existed between any member
of the Company's Compensation Committee and any other member of the Company's
Board of Directors. Mr. Edward R. Prince, Jr. is the father of Edward R. Prince,
III, the Company's former Chairman of the Board and Chief Executive Officer.
D-35
<PAGE>
BOARD COMPENSATION
Each non-employee director of the Company receives an annual retainer of
$4,000 plus a per meeting fee of $1,000 (plus $500 for each special meeting or
committee meeting attended). In the fiscal year ended December 31, 1999, such
fees totaled $60,000. The directors are also reimbursed for their expenses in
attending out-of-town meetings. Officers are appointed by and serve at the
discretion of the Board of Directors. There were no family relationships between
directors and executive officers of the Company except that former director Mr.
Edward R. Prince, Jr., is the father of former director Edward R. Prince, III.
Each non-employee director is automatically granted an initial option on the
date on which such person first becomes a director to purchase 20,000 shares of
the Company's Common Stock (an "Initial Grant") and thereafter an annual grant
to purchase 5,000 shares of the Company's Common Stock on the date of the annual
meeting of the stockholders each year thereafter (an "Annual Grant") pursuant to
the terms of the Company's 1997 Directors' Stock Option Plan (the "Directors'
Plan"). Pursuant to the Directors' Plan, all non-employee directors were granted
an option to purchase 5,000 shares on May 13, 1999 at an exercise price of
$20.125. The Annual Grants will vest in full on the four year anniversary of the
date of grant. Each option will expire ten years from the date of grant unless
terminated sooner pursuant to the provisions of the Directors' Plan.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
On March 1, 2000, the Company entered into a termination agreement with
Edward R. Prince, III, the former President, Chief Executive Officer and
Chairman of the Board, as the Company redirected its focus to the e-commerce
portion of its business. The Agreement provides for severance payments of
$18,750 per month for a period of one year beginning on January 10, 2000 and
ending on January 10, 2001 and continued health insurance during that period.
The Agreement also accelerated Mr. Prince's outstanding options by one year, or
a total of 82,084. In return, Mr. Prince and the Company agreed to mutually
indemnify the other party for any claims of action.
On January 25, 2000, the Company entered into change of control agreements
with certain of its executive officers. The agreement provides for the
acceleration of any unvested options in the event that the executive is
terminated without cause or voluntarily terminates his employment with the
Company for good reason within twelve months after a change of control event. In
return each of the executives agrees to refrain from soliciting any employee,
consultant or independent contractor of the Company to terminate their
relationship with the Company for one year following the executive's separation
date. The agreement also provides for certain releases by the executives and
arbitration of disputes.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of April 28, 2000 (except as noted in the
footnotes) certain information with respect to the beneficial ownership of the
Company's Common Stock by (i) each person known by the Company to own
beneficially more than 5% of the outstanding shares of Common Stock, (ii) each
director of the Company, (iii) each of the executive officers and (iv) all
directors and executive officers as a group. Except as indicated in the
footnotes to this table the persons and entities named in the table have sole
voting and investment power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws where applicable.
D-36
<PAGE>
<TABLE>
<CAPTION>
Shares of Common Stock
Beneficially Owned(1)
----------------------
Percentage
Name of Beneficial Owner Number Ownership
----------------------- ------ ----------
<S> <C> <C>
Thomas B. Akin (2)................................................. 194,208 1.47%
Steven J. Carnevale (3)............................................ 164,125 1.24%
Albert E. Sisto (4)................................................ 10,000 *
Douglas Y. Bech (5)................................................ 105,492 *
Lon B. Radin....................................................... 200,166 1.52%
Ron Brown (6)...................................................... 50,624 *
Michael Crandel l (7).............................................. 219,707 1.58%
Gary P. Kapner (8)................................................. 77,749 *
Citadel Investment Group, L.L.C. (9).............................. 1,009,640 Note (9)
All directors and executive officers as a group,
(12 persons) (11).................................................. 1,113,934 8.45%
</TABLE>
---------------------------------
* Less than 1%.
(1) Except as otherwise indicated in the footnotes to this table and pursuant
to applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock.
(2) Includes 23,649 shares jointly with his wife, Karen Akin; and 83,720 shares
of Common Stock held by his minor children. Includes options and warrants
to purchase an aggregate of 58,472 shares of Common Stock exercisable
within sixty days of April 28, 2000.
(3) Includes options and warrants to purchase an aggregate of 164,125 shares of
Common Stock exercisable within sixty days of April 28, 2000
(4) Includes options to purchase 10,000 shares of Common Stock exercisable
within sixty days of April 28, 2000.
(5) Includes options to purchase 25,000 shares of Common Stock exercisable
within sixty days of April 28, 2000.
(6) Includes options to purchase 50,624 shares of Common Stock exercisable
within sixty days of April 28, 2000.
(7) Includes options to purchase 74,206 shares of Common Stock exercisable
within sixty days of April 28, 2000.
(8) Includes options to purchase 77,749 shares of Common Stock exercisable
within sixty days of April 28, 2000.
(9) Citidel Investment Group, L.L.C. is part of a group having shared voting
and dispositive power of 1,500 shares of the Company's Series B Preferred
Stock (the "Series B Preferred"). The shares of Series B Preferred are
owned by two members of the group: Fisher Capital Ltd. which owns 975
shares and Wingate Capital Ltd. which owns 525 shares of the Series B
Preferred. The conversion rate of the Series B Preferred into shares of
Common Stock will be determined based on the average closing bid price for
the Common Stock on the twenty consecutive days on which the Common Stock
trades, beginning on April 7, 2000, provided that, the maximum average
price for the Common Stock in determining the conversation rate may not
exceed $8.50 per share (the "Market Price"). As of the date of this filing,
the Market Price has not been determined. Each share of Series B Preferred
Stock is convertible into the number of shares of Common Stock equal to:
(a) $13,223 plus ($10,723 x 8% x (the number of days since April 7,
2000/365)), divided by the Market Price. Notwithstanding the preceding,
neither Wingate Capital Ltd. nor Fisher Capital Ltd. is permitted to
convert the Series B Preferred into shares of Common Stock if after giving
effect to the conversion it (together with its affiliates) (i) would
beneficially own 10.00% or more of the outstanding Common Stock following
the conversion or (ii) would have acquired, through conversion of the
Series B Preferred or otherwise, in excess of 10.00% of the outstanding
shares of Common Stock following the conversion during the 60-day period
ending on and including the conversion date. At present, it is probable
that the Series B Preferred will be convertible into substantially in
excess of 10% of the Common Stock. For example only, assuming that the
Market Price is equal to the closing bid price of the Company's Common
Stock on April 28, 2000, each share of the Preferred Stock would be
convertible into 6,246 shares of Common Stock or a total 9,368,721 shares
(a beneficial ownership of 41.5% of all of the Common Stock).
Item 13. CERTAIN TRANSACTIONS WITH MANAGEMENT
In connection with the Crandell Acquisition in July 1996, the Company
acquired substantially all of the assets of the Crandell Group in exchange for a
cash payment of $250,000, a non-interest bearing secured promissory note of the
Company in the amount of $250,000 which was repaid in July 1997 and an agreement
to make certain ongoing royalty payments to the Crandell Group. In addition, the
Company entered into
D-37
<PAGE>
employment agreements with Michael Crandell and Larry Crandell, the principals
of the Crandell Group. The Company also issued options to purchase an aggregate
of 280,000 shares of the Company's Common Stock to certain former employees of
the Crandell Group who were hired by the Company, including 187,500 shares to
Michael Crandell and 62,500 shares to Larry Crandell, at an exercise price of
$0.30 per share (the estimated fair market value of the Company's Common Stock
at the grant date), subject to vesting over 4 year periods (except for a 2 year
vesting period as to Larry Crandell). Pursuant to an amendment agreement dated
December 1996, (the "Amendment Agreement") the Company's obligation to make
certain ongoing royalty payments terminated upon the Company's initial public
offering, in exchange for a single lump sum payment. Pursuant to the Amendment
Agreement, the Company also issued warrants, exercisable at $1.75 per share (the
estimated fair market value of the Company's Common Stock at the grant date), to
Michael Crandell and to Larry Crandell to purchase 75,000 shares and 25,000
shares of the Company's Common Stock, respectively. Such warrants were
exercisable upon the effectiveness of the Company's initial public offering.
Michael Crandell is the Company's Vice President of Software.
The Company has entered into indemnification agreements with each of its
directors and executive officers. Such agreements require the Company to
indemnify such individuals to the fullest extent permitted by Delaware law.
The Company acquired DocuMagix, Inc. through a merger which was accounted
for as a pooling of interests in December 1997. As part of the transaction, the
principal DocuMagix stockholders requested representation on the eFax.com Board
of Directors until the 900,000 shares of eFax.com Common Stock issued to the
DocuMagix stockholders in the merger were registered with the Securities and
Exchange Commission, which occurred in the third quarter of 1998. Albert E.
Sisto, previously the Chairman and Chief Executive Officer of DocuMagix, Inc.,
was appointed to the Company's Board of Directors in February 1998, pursuant to
this Agreement. This arrangement no longer applies subsequent to the 1998
registration, however Mr. Sisto has been nominated for the Board for the
forthcoming election at the May 11, 2000 Annual Meeting of Stockholders.
D-38
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements.
--------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................................. 40
Consolidated Balance Sheets as of December 31, 1999 and 1998............................. 41
Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998,
and 1997............................................................................... 42
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December
31, 1999, 1998, and 1997............................................................... 43
Consolidated Statements of Cash flows for the Years Ended December 31, 1999 1998,
and 1997............................................................................... 44
Notes to Consolidated Financial Statements............................................... 45
</TABLE>
2. Financial Statement Schedules.
Schedule II-- Valuation and Qualifying Accounts (see page 60)
Schedules not listed above have been omitted because the
information required to be set forth therein is not applicable or
is shown in the financial statements or notes thereto.
3. Exhibits.
---------
Set forth below is a list of management contracts and
compensatory plans and arrangements required to be filed as
Exhibits by Item 14(a)(3).
10.2** 1989 Stock Option Plan, as amended and restated, and forms
of Stock Option Agreements thereunder.
10.3** 1995 Stock Plan, as amended and restated, and form of Stock
Option Agreement thereunder.
10.4** 1997 Director Stock Option Plan and form of Stock Option
Agreement thereunder.
10.5** 1997 Employee Stock Purchase Plan and forms of agreements
thereunder.
10.28** Common Stock Purchase Option dated as of March 29, 1996 by
and between Registrant and Steven J. Carnevale.
10.29** Common Stock Purchase Option dated as of March 29, 1996 by
and between Registrant and Thomas B. Akin.
** Incorporated by reference to the identically numbered exhibits filed in
response to Item 16(a), "Exhibits", of the Company's Registration Statement
on Form S-1, as amended, (File No. 333-23763), which was declared effective
on June 10, 1997.
(b) Reports on Form 8-K. No Reports on Form 8-K were filed by the Registrant
-------------------
during the fourth quarter of 1999.
(c) Exhibits Pursuant to Item 601 of Regulation S-K. The exhibits required
-----------------------------------------------
by this Item are listed in the Exhibit Index attached hereto, which is
incorporated by reference.
(d) Financial Statement Schedules. The financial statement schedule required
-----------------------------
by this Item is listed under Item 14(a)(2) above.
D-39
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of eFax.com:
We have audited the accompanying consolidated balance sheets of eFax.com and
subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity and comprehensive loss and cash
flows for the years ended December 31, 1999, 1998, and 1997. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of eFax.com and subsidiaries at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for the years ended December 31, 1999, 1998, and 1997 in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1, the
Company's recurring losses from operations, among other factors, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans concerning these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
San Jose, California
January 24, 2000
(April 5, 2000 as to Note 16)
D-40
<PAGE>
EFAX.COM AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 1,752 $ 1,305
Short-term investments........................................................... 2,988 2,808
Trade receivables, net of allowances of: $262 in 1999 and
$277 in 1998................................................................... 2,414 4,402
Inventories...................................................................... 1,698 4,519
Prepaid expenses................................................................. 507 247
-------- --------
Total current assets...................................................... 9,359 13,281
Property, net....................................................................... 2,253 1,339
Other assets........................................................................ 3,896 1,595
-------- --------
Total assets........................................................................ $ 15,508 $ 16,215
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 4,404 $ 777
Accrued liabilities.............................................................. 2,044 1,576
Restructuring reserve............................................................ 605 --
Current deferred revenue......................................................... 360 --
-------- --------
Total current liabilities................................................. 7,413 2,353
-------- --------
Deferred revenue.................................................................... 25 25
Commitments and contingencies (Notes 7 and 16)
Stockholders' equity:
Convertible preferred stock, $0.01 par value; 5,000,000 shares
authorized, shares outstanding: 1,500 in 1999 and none in 1998................ 7,467 --
Common stock, $0.01 par value; 35,000,000 shares authorized, shares
outstanding: 13,012,130 in 1999 and 11,873,711 in 1998........................ 130 119
Additional paid-in capital....................................................... 48,342 42,946
Warrants......................................................................... 7,098 --
Accumulated other comprehensive income........................................... (7) --
Accumulated deficit.............................................................. (54,960) (29,228)
-------- --------
Total stockholders' equity................................................ 8,070 13,837
-------- --------
Total liabilities and stockholders' equity.......................................... $ 15,508 $ 16,215
======== ========
</TABLE>
See notes to consolidated financial statements.
D-41
<PAGE>
EFAX.COM AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Product....................................................... $ 18,817 $ 23,385 $ 16,281
Software and technology license fees.......................... 3,629 5,069 4,493
Development fees.............................................. 1,059 1,779 2,246
eFax services................................................. 1,200 -- --
-------- -------- --------
Total revenues......................................... 24,705 30,233 23,020
-------- -------- --------
Costs and expenses:
Cost of product revenues...................................... 13,540 16,005 11,886
Inventory write-down - hardware products...................... 1,060 -- --
Cost of software and license fees............................. 584 710 770
Cost of eFax services......................................... 2,400 -- --
Research and development...................................... 6,188 5,445 5,355
Selling and marketing......................................... 19,972 7,267 6,046
General and administrative.................................... 5,320 2,592 3,031
Restructuring costs........................................... 872 -- --
Acquisition and related expenses.............................. -- -- 2,106
-------- -------- --------
Total costs and expenses............................... 49,936 32,019 29,194
-------- -------- --------
Loss from operations............................................. (25,231) (1,786) (6,174)
-------- -------- --------
Other income (expense), net:
Interest income............................................... 433 320 310
Interest expense.............................................. -- (1) (120)
Other income (expense)........................................ (98) 46 (79)
-------- -------- --------
Total other income, net..................................... 335 365 111
-------- -------- --------
Loss before income taxes......................................... (24,896) (1,421) (6,063)
Provision for income taxes....................................... 67 80 96
-------- -------- --------
Net loss......................................................... (24,963) (1,501) (6,159)
Series A Convertible Preferred Stock dividends................... (769) -- --
Series P Redeemable Preferred Stock dividends.................... -- -- (68)
-------- -------- --------
Net loss applicable to common stockholders....................... $ (25,732) $ (1,501) $ (6,227)
========= ======== ========
Net loss per share:
Basic......................................................... $ (2.04) $ (0.13) $ (0.84)
========= ========= =========
Diluted....................................................... $ (2.04) $ (0.13) $ (0.84)
========== ========= ========
Shares used in computation:
Basic......................................................... 12,585 11,784 7,389
========== ========= ========
Diluted....................................................... 12,585 11,784 7,389
========== ========= ========
</TABLE>
See notes to consolidated financial statements.
D-42
<PAGE>
EFAX.COM AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Convertible
Preferred Stock CommonStock Additional
------------------------- -------------------- Paid-in
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1997.................. 6,293,978 $ 63 1,789,086 $ 18 $ 21,317
Net loss and comprehensive loss............ -- -- -- -- --
Employee Stock Purchase Plan............... -- -- 16,948 -- 77
Exercise of Common Stock Options........... -- -- 105,374 1 27
Exercise of Common Stock Warrants.......... -- -- 516,782 5 269
Cumulative dividends on Series F
Convertible ($240) and Series P
Redeemable ($68) Preferred Stock........ -- -- -- -- 240
Warrant compensation expense (Note 2)...... -- -- -- -- 625
Issuance of Common Stock in Connection
with Initial Public Offering............ -- -- 2,750,000 27 19,329
Conversion of Convertible Preferred
Stock to Common Stock at IPO............ (6,293,978) (63) 6,293,978 63 --
Conversion of Series F Cumulative
Dividends............................... -- -- 162,703 2 (2)
Issuance of Common Stock for
DocuMagix warrants...................... -- -- 2,190 -- --
Issuance of Common Stock in exchange....... -- -- 103,853 1 999
for DocuMagix convertible note......
Adjustment to conform fiscal year of
DocuMagix............................... -- -- 469 -- --
---------- ----------- ------------ ----------- ----------
Balances, December 31, 1997................ -- -- 11,741,383 117 42,881
Net loss and comprehensive loss............ -- -- -- -- --
Employee Stock Purchase Plan............... -- -- 51,492 -- 157
Exercise of Common Stock Options........... -- -- 53,245 1 21
Exercise of Common Stock Warrants.......... -- -- 67,591 1 (1)
Repurchase of Common Stock................. -- -- (40,000) -- (112)
---------- ----------- ------------ ----------- ----------
Balances, December 31, 1998................ -- -- 11,873,711 119 42,946
Comprehensive income -
Net loss................................ -- -- -- -- --
Other comprehensive income, net of
tax - change in net unrealized loss
from short-term investments............. -- -- -- -- --
Comprehensive loss.........................
Sale of Convertible Preferred Stock........ 1,500 7,467 -- -- --
Employee Stock Purchase Plan............... -- -- 32,108 -- 124
Exercise of Common Stock Options........... -- -- 666,864 7 1,280
Exercise of Common Stock Warrants.......... -- -- 281,855 3 117
Issuance of IGC SW development shares...... -- -- 30,000 -- 208
Issuance of Common Stock for trademark
settlement.............................. -- -- 127,592 1 1,999
Issuance of Warrants....................... -- -- -- -- --
Issuance of options to consultants......... -- -- -- -- 301
Accelerated vesting of options............. -- -- -- -- 1,367
Dividends on Preferred Convertible Stock... -- -- -- -- --
---------- ----------- ------------ ----------- ----------
Balances, December 31, 1999................ 1,500 $ 7,467 13,012,130 $ 130 $ 48,342
=========== =========== ============ =========== ==========
<CAPTION>
Accumulated
Other
Comprehensive Accumulated Comprehensive
Warrants Income (Loss) Deficit Total Loss
----------- ------------- ------- ----- ----
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1997.................. $ -- $ -- $ (22,259) $ (861)
Net loss and comprehensive loss............ -- -- (6,159) (6,159) $ (6,159)
==========
Employee Stock Purchase Plan............... -- -- -- 77
Exercise of Common Stock Options........... -- -- -- 28
Exercise of Common Stock Warrants.......... -- -- -- 274
Cumulative dividends on Series F
Convertible ($240) and Series P
Redeemable ($68) Preferred Stock........ -- -- (308) (68)
Warrant compensation expense (Note 2)...... -- -- -- 625
Issuance of Common Stock in Connection
with Initial Public Offering............ -- -- -- 19,356
Conversion of Convertible Preferred
Stock to Common Stock at IPO............ -- -- -- --
Conversion of Series F Cumulative
Dividends............................... -- -- -- --
Issuance of Common Stock for
DocuMagix warrants...................... -- -- -- --
Issuance of Common Stock in exchange....... -- -- -- 1,000
for DocuMagix convertible note......
Adjustment to conform fiscal year of
DocuMagix............................... -- -- 999 999
---------- ----------- ------------ -----------
Balances, December 31, 1997................ -- -- (27,727) 15,271
Net loss and comprehensive loss............ -- -- (1,501) $ (1,501) $ (1,501)
==========
Employee Stock Purchase Plan............... -- -- -- 157
Exercise of Common Stock Options........... -- -- -- 22
Exercise of Common Stock Warrants.......... -- -- -- --
Repurchase of Common Stock................. -- -- -- (112)
---------- ----------- ------------ -----------
Balances, December 31, 1998................ -- -- (29,228) 13,837
Comprehensive income -
Net loss................................ -- -- (24,963) (24,963) $ (24,963)
Other comprehensive income, net of
tax - change in net unrealized loss
from short-term investments............. -- (7) -- (7) (7)
---------
Comprehensive loss......................... $ (24,970)
=========
Sale of Convertible Preferred Stock........ 6,697 -- -- 14,164
Employee Stock Purchase Plan............... -- -- -- 124
Exercise of Common Stock Options........... -- -- -- 1,287
Exercise of Common Stock Warrants.......... -- -- -- 120
Issuance of IGC SW development shares...... -- -- -- 208
Issuance of Common Stock for trademark
settlement.............................. -- -- -- 2,000
Issuance of Warrants....................... 401 -- -- 401
Issuance of options to consultants......... -- -- -- 301
Accelerated vesting of options............. -- -- -- 1,367
Dividends on Preferred Convertible Stock... -- -- (769) (769)
---------- ----------- ------------ -----------
Balances, December 31, 1999................ $ 7,098 $ (7) $ (54,960) $ 8,070
=========== =========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
D-43
<PAGE>
EFAX.COM AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................................................. $(24,963) $ (1,501) $ (6,159)
Adjustments to reconcile net loss to net cash used for operating activities:
DocuMagix net loss for the quarter ended March 31, 1997............................ -- -- 999
Depreciation and amortization...................................................... 1,345 705 539
Gain (loss) on disposal of assets.................................................. (61) 3 --
Warrant compensation expense....................................................... -- -- 625
Provision for inventory reserves and loss on purchase commitment................... 1,060 350 292
Issuance of Common Stock for service............................................... 208 -- --
Common Stock options - severance................................................... 1,367 -- --
Common Stock options - services.................................................... 301 -- --
Changes in assets and liabilities:
Trade receivables................................................................ 1,988 418 (2,375)
Inventories...................................................................... 1,761 (840) (1,769)
Prepaid expenses................................................................. (260) 30 (115)
Accounts payable................................................................. 3,627 (895) (819)
Deferred revenue................................................................. 360 (24) 49
Accrued liabilities.............................................................. (177) (288) 578
Provision for restructuring reserve.............................................. 605 -- --
-------- -------- --------
Net cash used for operating activities....................................... (12,839) (2,042) (8,155)
-------- -------- --------
Cash flows from investing activities:
Purchase of property................................................................. (1,916) (604) (742)
Purchase of short-term investments................................................... (3,004) (10,044) (3,024)
Proceeds from sale of short-term investments......................................... 2,817 10,260 --
Increase in other assets............................................................. (182) (532) (783)
Net cash used for investing activities....................................... (2,285) (920) (4,549)
Cash flows from financing activities:
Proceeds from sale of Common Stock................................................... 1,407 179 19,735
Repurchase of Common Stock........................................................... -- (112) --
Proceeds from issuance of notes payable.............................................. -- -- 500
Repayment of notes payable........................................................... -- -- (950)
Proceeds from Series A Convertible Preferred Stock, net.............................. 14,164 -- --
Redemption of Preferred Stock-- Series P, net........................................ -- -- (2,794)
-------- -------- --------
Net cash provided by financing activities.................................... 15,571 67 16,491
-------- -------- --------
Increase (decrease) in cash and cash equivalents....................................... 447 (2,895) 3,787
Cash and cash equivalents, beginning of year........................................... 1,305 4,200 413
-------- -------- --------
Cash and cash equivalents, end of year................................................. $ 1,752 $ 1,305 $ 4,200
======== ======== ========
Supplemental cash flow information:
Interest paid........................................................................ $ -- $ -- $ 120
======== ======== ========
Taxes paid--foreign withholding...................................................... $ 33 $ 52 $ 96
======== ======== ========
Supplemental noncash investing and financial information:
Warrant expense - service............................................................ $ 399 $ -- $ --
Conversion of Convertible Preferred Stock to Common Stock at Initial Public Offering. -- -- $ 63
======== ======== ========
Conversion of accrued ESPP for purchase of Common Stock.............................. $ 124 -- --
======== ======== ========
Cumulative dividends on Series A Convertible Preferred Stock......................... $ 769 -- --
======== ======== ========
Cumulative dividends on Series F Convertible and Series P Redeemable Preferred Stock. -- -- $ 308
======== ======== ========
Issuance of Common Stock in trademark settlement agreement........................... $ 2,000 -- --
======== ======== ========
Issuance of Common Stock in exchange for DocuMagix convertible note.................. -- -- $ 1,000
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
D-44
<PAGE>
EFAX.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998, and 1997
1. Nature of Business and Significant Accounting Policies
Nature of Business
On February 8, 1999 JetFax, Inc. changed its name to eFax.com, Inc. On
December 16, 1999 eFax.com, Inc. changed its name to eFax.com. ("the Company").
The Company was incorporated in Delaware in August 1988 and since that time has
engaged in the development, manufacture and sale of its branded multifunction
products (MFPs) and entered into agreements with a number of manufacturers
(OEMs) of MFPs for the customization and integration of the Company's embedded
system technology and desktop software in several OEM products. In February
1999, eFax.com changed the focus of the Company's business to Internet-related
services, products and technologies. Concurrent with the change in focus, the
Company discontinued its previous engagement in the development, manufacture and
sale of its MFPs and embedded system technology.
The consolidated financial statements have been prepared on a going concern
basis, which contemplates, among other things, the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company's net
loss of $25.7 million for the year ended December 31, 1999 and its working
capital position of $1.9 million at December 31, 1999 raise substantial doubt
regarding the Company's ability to continue as a going concern. In 1999, the
Company's revenues were not sufficient to support its operations, and revenues
will not be sufficient enough to support operations until such time, if any,
that the Company's revenues from fee generating Internet-based services gain
substantial market acceptance. The Company is currently in discussions with
existing and potential investors to obtain additional financing and is
considering other strategic alternatives (see Note 16). Management believes that
these actions will allow the Company to continue as a going concern.
Accordingly, the consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amount and classification of liabilities or any other adjustments
that might be necessary should the Company be unable to continue as a going
concern.
Fiscal Period End
The Company operates on a 52-53 week reporting year ending on the first
Saturday on or after December 31. Fiscal years 1999, 1998 and 1997 include 52
weeks. For presentation purposes, the Company refers to its reporting years
ended January 1, 2000, January 2, 1999, and January 3, 1998, as ending on
December 31, 1999, 1998, and 1997, respectively.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Certain Significant Risks and Uncertainties
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. Estimates
include the level of the allowance for potentially uncollectible accounts
receivable, reserves for inventories, accrued OEM licensing revenues, product
development revenues recognized on the percentage-of-completion basis, accrued
warranty costs, and a valuation allowance for net deferred tax assets.
The Company sells and licenses its products and technology primarily to end
users (through independent distributors and dealers) and OEMs in the United
States, Canada, Asia and Europe. In addition, the Company
D-45
<PAGE>
EFAX.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998, and 1997
performs development services for certain of its OEMs. The Company performs
ongoing credit evaluations of its customers' financial condition and limits its
exposure to losses from bad debts by limiting the amount of credit extended
whenever deemed necessary and generally does not require collateral.
Certain components used in the Company's products are available only from
one source. In particular, the Company currently purchases its printer engine
and certain semiconductor devices from separate single sources of supply. Any
shortage or interruption in the supply of any of the components used in the
Company's products, or the inability of the Company to procure these components
from alternate sources on acceptable terms, could have a material adverse effect
on the Company's business, financial condition and results of operations. The
eFax.com network is currently based on 15 points of presence in the United
States and in the United Kingdom. Each of eFax.com's points of presence is co-
located with a telecommunications partner. The decentralization of the eFax.com
network provides for greater reliability and reduces our dependence on any one
supplier. In addition, by being geographically dispersed our network is less
susceptible to network outages caused by either power interruptions or problems
with telecommunications failures.
The Company operates in a very dynamic industry. The Company believes that
changes in any of the following areas could have a negative impact on the
Company's future financial position and results of operations: the fact that the
Company's markets are characterized by rapidly changing technology, evolving
industry standards and frequent introductions of new products and enhancements,
and the Company's ability to respond to such changes; the re-focus of its
business model to Internet-based electronic document communications; the highly
competitive nature of the markets for the Company's Internet-based services; the
phase-out or early termination of the Company's branded products or OEM products
incorporating the Company's technology; the Company's ability to attract and
retain skilled personnel; and the quarterly variability in the Company's
revenues.
Foreign Currency Translation
The Company's foreign subsidiary in Germany uses the U.S. dollar as the
functional currency. Accordingly, assets and liabilities are translated using
period-end exchange rates, except for inventories and property, plant and
equipment, which are translated using historical rates. Revenues and costs are
translated using historical rates. The resulting translation gains and losses
are included in income as they are incurred. Foreign currency transaction gains
and losses resulting from transactions denominated in other than the U.S. dollar
are included in income as incurred. The Company's foreign loss for the year
ended December 31, 1999 totaled $55,000 as compared to a gain of $19,000 for the
year ended December 31, 1998 and a loss of $58,000 for the year ended December
31, 1997.
On occasion, the Company enters into firm purchase contracts with suppliers
that are denominated in a foreign currency. At December 31, 1997, the Company
had Yen deposits of 115,000,000 which were designated as a hedge against Yen
denominated firm purchase commitments; in September 1998 the Company closed its
Yen account. The foreign currency gains and losses from the foreign currency
deposit were recognized as an offset to the foreign currency gains and losses
from the firm purchase commitment. At December 31, 1999 and 1998, respectively,
the Company did not hold a hedge position against a foreign currency.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist of cash equivalents, short-term
investments and accounts receivable. Credit risk with respect to trade
receivables is spread over a number of geographically diverse customers, who
make up the Company's customer base. At December 31, 1999, two customers each
accounted for 13% of total accounts receivable. At December 31, 1998 and 1997,
one customer accounted for 30% and 35% of total accounts receivable,
respectively.
D-46
<PAGE>
EFAX.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998, and 1997
Cash Equivalents and Short-Term Investments
Cash equivalents are highly liquid debt instruments acquired with an
original maturity of three months or less. The recorded carrying amounts of the
Company's cash and cash equivalents approximate their fair market value. Short-
term investments are high quality financial instruments with an original
maturity of three to fifteen months. The short-term investments are carried at
cost, which approximates fair value.
Accounts Receivable
Accounts receivable include unbilled amounts of $400,000, $526,000, and
$1,469,723 relating to development revenues at December 31, 1999, 1998, and
1997, respectively (see "Revenue Recognition" below).
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. The Company's products typically experience short life cycles, and the
Company estimates the market value of its inventory based on the anticipated
selling prices adjusted for completion and selling costs. Should the Company
experience a substantial unanticipated decline in the selling price of its
products and/or demand thereof, a valuation adjustment and corresponding charge
to operations could result. In addition, the Company uses subcontractors for the
manufacture of certain of its products and/or components and occasionally enters
into purchase commitments for such purchases. Consequently, the Company
evaluates its exposure relative to such contracts and the estimated selling
prices of the related products, adjusted for completion and selling costs, and
accrues for losses, if anticipated.
Property
Property is stated at cost or, for items under capital lease, at the
present value of future minimum lease payments at the lease inception.
Depreciation and amortization are computed using the straight-line method over
estimated useful lives of one to five years or the lease term, whichever is
appropriate.
Other Assets
Other assets as of December 31, 1999, 1998 and 1997 include a minority
investment in Oasis Semiconductor of $725,000, $725,000 and $325,000,
respectively, (accounted for using the cost method) and intangible assets
(acquired software, eFax license, licensing contracts and covenants not to
compete) of $3,171,000, $870,000 and $1,021,000, net of accumulated amortization
of $770,000, $488,000 and $205,000, respectively. Amortization of intangible
assets is computed using the straight line method over the estimated useful life
of five years.
Long-Lived Assets
In accordance with Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," the Company evaluates long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Income Taxes
The Company accounts for income taxes under an asset and liability
approach. Deferred tax liabilities are recognized for future taxable amounts and
deferred tax assets are recognized for future deductions net of a valuation
allowance to reduce deferred tax assets to amounts that are more likely than not
to be realized.
D-47
<PAGE>
EFAX.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998, and 1997
Revenue Recognition
Revenues from product sales to resellers, international distributors, OEMs
and end users are recognized upon shipment. OEMs, end users, and international
distributors have no rights of return while resellers have limited return
rights. Allowances for potential returns and exchanges from resellers are
provided at the time of sale based on historical returns and exchange
experience. The Company defers revenue on sales to domestic distributors and
recognizes the revenue when the distributor sells the product to resellers. The
Company provides a ninety day warranty for parts and service on its hardware
products as well as ongoing technical support to the dealer network. The Company
provides a limited amount of telephone technical support to its software
customers. Estimated cost of warranty work is accrued when the revenue is
recognized.
The Company enters into development agreements with OEM customers for which
it receives development fees with certain payments contingent upon attaining
contract milestones. Development fee revenues are derived from customizing the
Company's embedded system technology and software for inclusion in specific
applications for its OEMs' products. The Company's development contracts with
certain OEM customers have enabled the Company to accelerate its product
development efforts. The Company classifies all development costs related to
such contracts as research and development expenses because such development
fees have only partially funded the Company's product development activities,
and the Company generally retains ownership of the technology developed under
these agreements. The agreements typically provide for license and royalty
payments to the Company based on the OEM customers' subsequent use of the
technology in their products. Revenues from product development agreements are
recognized using the percentage of completion method. Estimates are reviewed and
revised periodically throughout the lives of the contracts. Any revisions are
recorded in the accounting period in which the revisions are made. Royalties are
recognized as earned, and include OEM product licensing revenues which are
primarily determined based on the number of OEM units sold. Such revenues are
initially recorded based on an estimate of such number of units and are adjusted
upon the receipt of actual unit sales data from OEMs in the accounting period in
which the information is received.
Revenues from the eFax service include sign-up fees, monthly recurring
subscription fees and usage-based charges and are recognized as the services are
provided. The Company pre-bills its customers for monthly recurring subscription
fees and usage fees. In the event of customer cancellation of services, the
Company refunds unearned amounts from subscription fees and usage fees to the
customer. The Company provides a limited amount of customer support by email.
Research and Development
Research and development costs include costs and expenses associated with
the design and development of new products. To the extent that such costs
include the development of computer software, the Company follows the working
model approach to determine technological feasibility of the software product.
Costs incurred subsequent to establishing technological feasibility have been
immaterial and, accordingly, all software development costs have been included
in research and development expenses for the periods presented herein.
Stock-Based Compensation
The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with APB No. 25, "Accounting for Stock
Issued to Employees."
Basic and Diluted Net Loss Per Share
Basic and diluted net loss per share has been computed using the weighted
average of common shares outstanding. Potential common shares issuable upon
exercise of options, warrants, convertible preferred stock and redeemable
preferred stock have been excluded from the computation during all periods
presented
D-48
<PAGE>
EFAX.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998, and 1997
as their effect is antidilutive due to the Company's net losses. Accordingly at
December 31, 1999, options and warrants to purchase approximately 3,425,224
common shares at a weighted average exercise price of $8.95 per share and
709,640 shares issuable upon conversion of preferred stock have been excluded
from the computation. At December 31, 1998, options and warrants to purchase
approximately 2,530,000 common shares at a weighted average exercise price of
$3.03 per share have been excluded from the computation. Such options and
warrants will be included, using the treasury stock method, in periods where the
Company reports net income and the average fair market value of the Company's
common stock exceeds the exercise price. The net loss applicable to common
stockholders and the shares used for the computation of basic and diluted loss
per share are the same.
The pro forma computation set forth below includes in the weighted average
number of shares outstanding the 6,293,978 shares of common stock issued in
connection with the IPO upon the automatic conversion of the outstanding
convertible preferred shares. Because of the significant increase in outstanding
common shares that occurred as a result of the conversion of convertible
preferred stock, management believes that the pro forma computation of net loss
per share provides a useful and more meaningful comparison of year to year per
share data.
<TABLE>
<CAPTION>
Year Ended
December 31,
1997
----
<S> <C>
Net loss applicable to common stockholders......................................... $ (6,227)
========
Pro Forma net loss per share:
Basic........................................................................... $ (0.61)
=======
Diluted $ (0.61)
=======
Shares used in pro forma computation:
Basic........................................................................... 10,170
=======
Diluted......................................................................... 10,170
=======
</TABLE>
Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS
No. 130 requires an enterprise to report, by major components and as a single
total, the change in net assets during the period from non-owner sources. For
the year ended December 31, 1999, the Company's comprehensive loss and net loss
were $24,970,000 and $24,963,000, respectively. For the years ended December 31,
1998 and 1997, there were no differences between the Company's comprehensive
loss and net loss. Consolidated statements of comprehensive loss for the year
ended December 31, 1999, has been included within the consolidated statements of
shareholders' equity and comprehensive loss.
Disclosures about Segments of an Enterprise and Related Information
The Company reports segment data pursuant to SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which establishes
annual and interim reporting standards for an enterprise's business segments and
related disclosures about its products, services, geographic areas and major
customers. The Company operates in one reportable segment, within which are
multiple product lines including internet-related services and legacy MFP and
OEM products. Revenues and related costs of goods and services are recorded for
internal management purposes as reflected in the accompanying Consolidated
Statement of Operations. For internal management purposes, expenses below that
level and related assets are not separately recorded and monitored.
D-49
<PAGE>
EFAX.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998, and 1997
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which defines
derivatives, requires that all derivatives be carried at fair value, and
provides for hedging accounting when certain conditions are met. The Company is
required to adopt this statement in the first quarter of fiscal year 2001, with
early adoption permitted. On a forward-looking basis, although eFax.com has not
fully assessed the implications of this new statement, eFax.com does not believe
adoption of this statement will have a material impact on eFax.com's financial
position or results of operations.
At December 31, 1999 and 1998 the Company held no derivatives or hedge
positions.
On occasion, the Company enters into firm purchase contracts with suppliers
that are denominated in a foreign currency. The Company has occasionally
purchased foreign currencies and held them during the contract term as a
designated hedge of the purchase commitment. The foreign currency gains and
losses from the foreign currency deposit are recognized as an offset to the
foreign currency gains and losses from the firm purchase commitment.
The Company purchases print engines for its Series M900 product line in Yen
from Oki Data Corporation and includes exchange gains and losses related to Yen-
based purchases and hedging activity in cost of goods sold. In order to reduce
the potential volatility related to the ongoing Yen liability, the Company
entered into a Yen hedge in August 1997. At December 31, 1997 the Company had
Yen deposits of 115,000,000 which were designated as a hedge against Yen
denominated firm purchase commitments. Given the considerable expense associated
with maintaining the Yen hedge, coupled with the recent strengthening of the Yen
in relation to the dollar, the Company decided to sell its Yen hedge in
September 1998. Hedging activity generated a loss of $12,000 for the year ended
December 31, 1998.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission (SEC) released
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements. This bulletin summarizes certain interpretations and practices
followed by the Division of Corporation Finance and the Office of the Chief
Accountant of the SEC in administering the disclosure requirements of the
Federal securities laws in applying generally accepted accounting principles to
revenue recognition in financial statements. Application of the accounting and
disclosures desired in the bulletin is required by the second quarter of 2000.
Although the Company has not fully assessed the implications of SAB No. 101,
management does not believe adoption of this bulletin will have a material
impact on the Company's consolidated financial position, results of operations
or cash flows.
2. Business Combinations
On December 5, 1997, the Company acquired DocuMagix, Inc. ("DocuMagix") in
a merger transaction pursuant to an Agreement and Plan of Reorganization
(Agreement) entered into with DocuMagix on November 11, 1997. Under the
Agreement, the Company issued 793,957 shares of its common stock in exchange for
all outstanding common and preferred shares of DocuMagix, and all rights with
respect to DocuMagix common stock under outstanding employee options were
converted into rights with respect to the Company's common stock using the
common stock exchange ratio of 0.004572. In addition, the Company issued 2,190
shares of its common stock to certain holders of DocuMagix warrants in exchange
for such warrants and 103,853 shares of the Company's common stock were
exchanged for $1.0 million of outstanding convertible notes payable by
DocuMagix. The merger has been accounted for as a pooling of
D-50
<PAGE>
EFAX.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998, and 1997
interests and, accordingly, the consolidated financial statements for all
periods have been restated to reflect the combined operations of the two
companies.
3. Inventories
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Materials and supplies.............................................. $ 305 $ 1,982
Work-in-process..................................................... 624 93
Finished goods...................................................... 769 2,444
------- -------
Total............................................................... $ 1,698 $ 4,519
======= =======
</TABLE>
4. Property
Property consists of (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Furniture and fixtures........................................... $3,697 $ 1,816
Software......................................................... 563 501
Leasehold improvements........................................... 441 440
------- -------
Total............................................................ $4,701 $ 2,757
Accumulated depreciation and amortization........................ (2,448) (1,418)
------ -------
Property, net.................................................... $2,253 $ 1,339
====== =======
</TABLE>
5. Accrued Liabilities
Accrued liabilities consist of (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Compensation and related benefits........................................... $ 684 $ 632
Acquisition related accruals................................................ -- 22
Royalties................................................................... 42 62
Product warranty............................................................ 59 78
Accrued Series A Convertible Preferred Stock dividends...................... 769 --
Other....................................................................... 490 782
------- ------
Total....................................................................... $ 2,044 $1,576
======= ======
</TABLE>
6. Line of Credit
The Company's line of credit expired in August 1999 and was not renewed by
the Company.
7. Lease Commitments
The Company leases its primary facility under an operating lease expiring
January 2003. Rent expense is recognized on a straight-line basis over the term
of the lease. The lease agreement requires the Company to
D-51
<PAGE>
EFAX.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998, and 1997
pay property taxes and maintenance costs. Additionally, the Company leases
approximately 5,200 square feet in Santa Barbara, California for its software
application organization and the one-year extension on the lease is set to
expire July 31, 2001. The Company leases approximately 2,600 square feet in
Beaverton, Oregon for additional software application personnel, and this lease
expires April 2000. For the years ended December 31, 1999, 1998, and 1997, rent
expense was $872,363, $572,000, and $523,000, respectively. Future minimum
annual rental payments for facilities leases are: 2000, $563,000; 2001,
$551,000; 2002, $551,000; 2003, $46,000; and none thereafter.
8. Stockholders' Equity
In June 1997, the Company completed an initial public offering of 2,750,000
shares of its common stock (selling shareholders sold an additional 750,000
shares in the offering) at a price of $8.00 per share. Concurrent with the
offering, each of the 6,293,978 shares of convertible preferred stock then
outstanding were converted into the same number of common shares and the 344,350
shares of Series P Redeemable Preferred Stock were redeemed for $2.8 million
from the proceeds of the offering. In addition, 389,512 shares of common stock
were issued upon the net exercise of warrants, 127,270 shares of common stock
were issued upon the exercise of other warrants and 162,703 shares of common
stock were issued upon conversion of cumulative unpaid dividends on Series F
Preferred Stock. In 1998, 67,591 shares of common stock were issued upon the net
exercise of warrants. In 1999, the Company issued 1,500 shares of Convertible
Preferred Stock.
Preferred Stock
The number of shares of preferred stock authorized to be issued is
5,000,000. The Board of Directors is authorized to issue the preferred stock
from time to time in one or more series and to fix the rights, privileges and
restrictions of the shares of such series. On May 10, 1999, eFax.com entered
into a purchase agreement with an investor for the private placement of $15
million of Series A Convertible Preferred Stock which were not registered under
the Securities Act of 1933, as amended, convertible into Common Stock based upon
the five-day average stock price prior to closing which was $21.1375. The
conversion price is subject to an adjustment after one year to the greater of
the then current market price of the Common Stock or 60% of the initial
conversion price. The agreement also includes 300,000 warrants exercisable at
$23.25, a 10% premium to the Series A Convertible Preferred Stock conversion
price. The Series A Convertible Preferred Stock includes an 8% dividend payable
in cash or common stock at the option of eFax.com. The closing occurred on May
13, 1999. eFax.com has filed a registration statement for the resale of the
shares of Common Stock acquired on conversion of the Convertible Preferred Stock
and upon exercise of the warrants. Holders of the preferred shares shall have no
voting rights, except as required by law, including but not limited to the
General Corporation Laws of the State of Delaware. The Company cannot declare or
pay any cash dividend or distribution on the common stock without the prior
express written consent of the holders of not less than two-thirds of the then
outstanding preferred shares. In the event of a liquidation of the Company, the
holders of the Series A Convertible Preferred Stock would be entitled to receive
distributions in preference to the holders of the Common Stock. As of December
31, 1999, 1,500 shares of preferred stock were outstanding.
Stock Option and Purchase Plans
The Company has an employee stock option plan and a nonemployee director
option plan under which the Company may grant options to purchase up to
4,400,000 and 270,000 shares of common stock, respectively. At December 31,
1999, 1,002,159 and 130,000 shares, respectively, remain available for future
grant under these plans. The terms for exercising options are determined by the
Board of Directors and options expire at the earlier of ten years and one month
or such shorter terms as may be provided in each stock option agreement. In
connection with the merger of DocuMagix (see Note 2), the Company assumed
outstanding DocuMagix options using the common stock exchange ratio. At December
31, 1999, options to
D-52
<PAGE>
EFAX.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998, and 1997
purchase 958 shares of the Company's common stock at a weighted average exercise
price of $34.42 were outstanding pursuant to the DocuMagix options.
Stock option activity and balances, excluding DocuMagix option activity,
which is immaterial, are summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number Exercise Price
of Shares Per Share
--------- ---------
<S> <C> <C>
Balance, January 1, 1997................................................................. 1,034,785 $ 0.54
Granted (weighted average fair market value $3.04)....................................... 1,107,100 7.42
Canceled................................................................................. (73,509) 4.35
Exercised................................................................................ (105,374) 0.27
----------- ---------
Balance, December 31, 1997............................................................... 1,963,002 $ 4.29
Granted (weighted average fair market value $2.04)....................................... 847,800 3.19
Canceled................................................................................. (720,408) 5.96
Exercised................................................................................ (53,245) 0.40
----------- ---------
Balance, December 31, 1998............................................................... 2,037,149 $ 3.34
Granted (weighted average fair market value $5.40)....................................... 2,189,527 8.87
Canceled................................................................................. (779,680) 1.93
Exercised................................................................................ (666,864) 6.92
----------- ---------
Balance, December 31, 1999............................................................... 2,780,132 $ 7.03
===========
</TABLE>
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
------------------------------------------------------------------------------ -----------------------------------------
Number Weighted Weighted Number Weighted
Range of Outstanding at Average Average Exercisable at Average
Exercise December 31, Remaining Exercise December 31, Exercise
Prices 1999 Life (Years) Price 1999 Price
------- ---- ------------ ----- ---- -----
<S> <C> <C> <C> <C> <C>
$0.20 - $ 0.30 93,254 6.25 $0.29 61,387 $ 0.29
0.50 - 1.75 299,766 7.49 1.07 177,672 0.85
2.75 - 5.88 864,295 8.56 2.92 252,789 2.89
6.00 - 9.44 838,817 8.61 7.82 203,411 7.78
11.81 - 11.81 410,000 9.62 11.81 -- 0.00
12.31 - 20.13 274,000 8.09 19.20 42,000 19.69
---------------- --------- ----- ------ ------- --------
$ 0.20 - $ 20.13 2,780,132 8.49 $7.03 737,259 $ 4.49
================ ========= ===== ====== ======= ========
</TABLE>
The Company has reserved 500,000 shares of common stock for issuance
pursuant to the 1997 Employee Stock Purchase Plan. The plan permits employees to
purchase shares at 85% of the lower of the fair market value of the common stock
at the beginning or end of each six-month offering period. During 1997, 1998 and
1999, 16,948, 51,492, and 32,108 shares, respectively, have been issued under
the plan. At December 31, 1999, 399,436 shares are reserved for issuance under
the plan.
As discussed in Note 1, the Company uses the intrinsic value method
specified by Accounting Principles Board Opinion No. 25 to measure compensation
expense associated with issuing stock options and, accordingly, has recorded no
such expense in the consolidated financial statements, as such issuances have
been at the fair value of the Company's common stock at the date of grant.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation", (SFAS 123) requires the disclosure of pro forma net income
and earnings per share had the Company adopted the fair value method as of the
beginning of the year ended March 31, 1996. Under SFAS 123, the
D-53
<PAGE>
EFAX.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998, and 1997
fair value of stock-based awards to employees is calculated through the use of
the minimum value method for all periods prior to the initial public offering,
and subsequently through the use of option pricing models, even though such
models were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The Company's stock option
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions:
<TABLE>
<CAPTION>
Employee Stock Options
--------------------------------------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1999 1998 1997
----- ----- ----
<S> <C> <C> <C>
Risk-Free Interest Rate............................ 5.00% 5.36% 5.76%
Stock Volatility (*)............................... 100% 100% 65%
Expected Life (in years)........................... 0.5 1 1
Dividends.......................................... -- -- --
</TABLE>
(*) 1997: 65% subsequent to public filing; 0% prior to public filing
The Company's calculations are based on a multiple option valuation
approach and forfeitures are recognized as they occur. If the computed fair
values of the stock-based awards (including awards under the Purchase Plan) had
been amortized to expense over the vesting period of the awards, pro forma net
loss available to common stockholders would have been $29,118,000 ($2.31 per
share) for the year ended December 31, 1999, $3,262,000 ($0.28 per share) for
the year ended December 31, 1998, and $6,706,000 ($0.91 per share) for the year
ended December 31, 1997. However, because options vest over several years and
grants prior to April 1, 1995 have been excluded from these calculations, the
pro forma adjustments for the years ended December 31, 1999, 1998, and 1997 are
not indicative of future period pro forma adjustments, assuming grants are made
in those years, when the calculation will apply to all applicable stock options.
As of December 31, 1999, the Company has reserved or otherwise committed to
issue 645,092 shares of Common Stock upon exercise of warrants.
9. Income Taxes
No federal and state income taxes were provided for the years ended
December 31, 1998, December 31, 1997, and the nine months ended December 31,
1996 due to the Company's net losses. Foreign withholding taxes of approximately
$52,000, $96,000 and $105,000 were paid during the years ended December 31,
1998, December 31, 1997, and the nine months ended December 31, 1996,
respectively. The Company's effective tax rate differs from the federal
statutory rate as follows (in thousands):
D-54
<PAGE>
EFAX.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
Year Year Year
Ended Ended Ended
December 31, December 31, December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Taxes computed at federal statutory rate of 35%....................... $ (8,760) $ (554) $ (2,156)
Change in valuation allowance......................................... 9,681 554 2,156
Foreign withholding taxes............................................. 33 52 96
Other................................................................. (887) 28 --
-------- -------- --------
Total provision....................................................... $ 67 $ 80 $ 96
======== ======== ========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as operating loss
and tax credit carryforwards. Significant components of the Company's net
deferred income tax asset are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Deferred tax asset:
Net operating loss carryforwards............................ $ 15,844 $ 7,283
Tax credit carryforwards.................................... 643 277
Accounts receivable allowances.............................. 120 110
Depreciation................................................ 30 99
Inventory valuation......................................... 339 173
Nondeducted expense accrual................................. 527 201
Warranty reserve............................................ 23 31
Capitalized research and development........................ 440 68
Vacation accrual............................................ 190 140
Other....................................................... 46 139
Total deferred tax assets...................................... 18,202 8,521
Valuation allowance............................................ (18,202) (8,521)
-------- -------
$ -- $ --
======== =======
</TABLE>
As a result of the Company's history of operating losses, management
believes that the recognition of the deferred tax asset is considered less
likely than not. Accordingly, the Company has fully reserved its net deferred
tax assets as of December 31, 1999 and 1998. At December 31, 1999, consolidated
net operating loss carryforwards of approximately $44.0 million and $14.0
million were available to offset future Federal and state taxable income,
respectively, and research and development tax credits of $355,000 and $288,000
were available to offset future Federal and state income taxes, respectively.
Current Federal and California tax law includes certain provisions limiting the
annual use of net operating loss carryforwards in the event of certain defined
changes in stock ownership. The Company's ability to utilize its net operating
loss and tax credit carryforwards could be limited according to these
provisions. Management believes such limitation could result in the loss of
carryforward benefits which expire from 2004 through 2019. The use of the above
loss carryforwards is dependent upon the Company's ability to achieve
profitability. The Company's net operating loss carryforwards attributable to
its DocuMagix subsidiary before its acquisition are limited according to these
provisions to approximately $380,000 per year or approximately $5.7 million and
$1.9 million in total through the applicable federal and California carryforward
periods, respectively.
D-55
<PAGE>
EFAX.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998, and 1997
10. Employee Benefit Plan
The Company has a 401(k) tax deferred savings plan for all eligible
employees. Participants may contribute a percentage of their compensation, which
may be limited by the plan administrator or applicable tax laws. The Company may
make discretionary matching contributions. Such matching contributions were
immaterial for the year ended December 31, 1999, 1998, and 1997.
11. Customer Information
Three customers accounted for 11%, 13% and 13%, respectively, of total
revenues for the year ended December 31, 1999. Two customers accounted for 18%
and 16%, respectively, of total revenues for the year ended December 31, 1998.
The same two customers accounted for 19% and 13%, respectively, of total
revenues for the year ended December 31, 1997.
12. Related Party Transactions
Related party transactions and balances not otherwise disclosed herein were
as follows (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Sales to related party......................... $ -- $ 31
Purchases from related party................... -- --
</TABLE>
The Company has also granted a stockholder a nonexclusive royalty-free
license to utilize certain of its intellectual property.
13. Geographic Reporting
The following is a summary of revenues by geographic region (in thousands):
<TABLE>
<CAPTION>
Year Year Year
Ended Ended Ended
December 31, December 31, December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
United States................................... $ 21,258 $ 24,747 $ 16,386
Europe.......................................... 3,228 4,665 4,545
Asia............................................ 219 568 1,098
Other........................................... -- 253 991
-------- -------- --------
Total........................................... $ 24,705 $ 30,233 $ 23,020
======== ======== ========
</TABLE>
* Total revenues are attributed to countries based on "ship to" location of
customer.
14. Discontinued Product Lines and Related Restructuring Charges
During January 2000, the Company restructured its operations to focus on
the Internet communications services which it introduced in February 1999 by
discontinuing efforts on the development and marketing of branded and licensed
products and software solutions for the "multifunction product ("MFP) market".
In connection with the Company's announced decision to exit from the
manufacturing of MFP products, the Company recognized in 1999 a $1.1 million
write-down of inventory to reflect anticipated net realizable
D-56
<PAGE>
EFAX.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998, and 1997
values of the inventory on hand. Also in connection with the Company's decision
to exit from manufacturing MFP products, the Company recognized an $872,000
restructuring charge for the write-down of capital equipment, intellectual
property and leasehold improvements, excess facilities accruals and severance
costs. As a result, the Company substantially reduced its manufacturing work
force and downsized its hardware manufacturing operations. The discontinuation
and restructuring was substantially completed in the first quarter of 2000,
during which an additional charge of $500,000 will be recognized. The Company
recorded total charges of $ 1.9 million as follows:
<TABLE>
<CAPTION>
Total
Restructuring Balance at
(in thousands) Charge Utilized December 31, 1999
------ -------- -----------------
<S> <C> <C> <C>
Write-down of inventory............................... $ 826 $ 826 $ --
Reserve for estimated cost of purchase commitments.... 234 -- 234
------ ------- -------
Subtotal........................................... 1,060 826 234
------ ------- -------
Write-down of machinery and equipment................. 312 312 --
Reserve for estimated lease costs..................... 171 -- 171
Reserve for estimated severance costs................. 169 22 147
Write-down of acquired technology..................... 167 167 --
Reserve for estimated post-warranty technical
support costs...................................... 53 -- 53
------ ------- -------
Subtotal........................................... 872 501 371
------ ------- -------
$1,932 $ 1,327 $ 605
====== ======= =======
</TABLE>
Included in the fourth quarter 1999 write-downs is a $312,000 charge
related to the net loss on disposal of machinery and equipment and leasehold
improvements which was written down to fair market value in accordance with SFAS
No. 121, "Accounting for Impairment of Long-Live Assets and for Long-Lived
Assets to be Disposed Of."
The Company anticipates substantially all accrued severance and benefits
will be paid within one year.
15. Quarterly Results -- Unaudited
<TABLE>
<CAPTION>
(in thousands, except per share amounts) Three Months Ended
-----------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31,
1999 1999 1999 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total revenues..................................... $ 7,770 $ 6,283 $ 6,149 $ 4,503
Loss from operations............................... $(1,314) $(6,229) $(7,476) $(10,212)
Net loss applicable to common stockholders......... $(1,292) $(6,383) $(7,618) $(10,439)
Net loss per share:
Basic............................................. $ (0.11) $ (0.51) $ (0.59) $ (0.83)
Diluted........................................... $ (0.11) $ (0.51) $ (0.59) $ (0.83)
Shares used in computing per share amounts:
Basic............................................ 12,009 12,538 12,854 12,939
Diluted........................................... 12,009 12,538 12,854 12,939
</TABLE>
D-57
<PAGE>
EFAX.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
(in thousands, except per share amounts) Three Months Ended
-----------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total revenues..................................... $ 7,698 $ 7,722 $ 7,748 $ 7,064
Income (loss) from operations...................... $ (1,325) $ 64 $ (85) $ (441)
Net income (loss) applicable to common
stockholders...................................... $ (1,289) $ 114 $ 37 $ (365)
Net income (loss) per share:
Basic............................................. $ (0.11) $ 0.01 $ 0.00 $ (0.03)
Diluted........................................... $ (0.11) $ 0.01 $ 0.00 $ (0.03)
Shares used in computing per share amounts:
Basic............................................. 11,741 11,755 11,806 11,834
Diluted........................................... 11,741 13,136 12,838 11,834
</TABLE>
* See "Basic and Diluted Net Loss Per Share" in Note 1 for the
determination of the number of shares used in computing net loss per
share in accordance with the adoption of SEC Staff Accounting Bulletin
No.98.
16. Subsequent Events
On April 5, 2000, the Company entered into a letter of intent and a loan
commitment letter with JFAX.COM, Inc., a unified Internet communications
company, in which:
. The Company and JFAX.COM established the principal terms for a potential
merger of the Company and JFAX.COM.
. JFAX.COM agreed to lend the Company $5 million. The loan will have an
interest rate of 13% and a maturity date of August 31, 2000, subject to
adjustment which could increase the maturity date by up to 60 days.
. The Company agreed to grant to JFAX.COM a warrant to acquire 250,000 shares
of the Company's common stock. The warrant will have a term of two years
and will be exercisable at the market price of the Company's common stock
on the date of grant, but the exercise price will reset to $1.00 per share
if the proposed merger of the Company and JFAX.COM does not occur. The
warrant is expected to be granted prior to April 15, 2000.
. The Company agreed to grant to JFAX.COM a warrant with a term of two years
and an exercise price of $1.00 per share of the Company's common stock. The
warrant will be granted if the merger between the Company and JFAX.COM does
not occur. The warrant will be for 750,000 shares of the Company's common
stock if JFAX.COM terminates the merger discussions, other than following a
material breach of the letter of intent by the Company, prior to the
execution of a definitive merger agreement, or if the definitive merger
agreement is terminated because JFAX.COM's shareholders fail to approve the
merger or JFAX.COM materially breaches the definitive merger agreement. The
warrant will be for 1,750,000 shares of the Company's common stock if the
merger does not occur for any reason not discussed in the preceding
sentence.
D-58
<PAGE>
EFAX.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998, and 1997
Prior to the execution of a definitive purchase agreement, neither the
Company nor JFAX.COM is required to complete the merger. In the merger,
approximately 18.5 million shares of JFAX.COM common stock will be issued to the
current holders of the Company's common and preferred stock. The number of
shares of JFAX.COM common stock to be received will be subject to downward
adjustment based on potential fluctuations in the price of JFAX.COM common
stock. The formula for determining the consideration to be received by the
Company's common and preferred stockholders is included in Exhibit 2.1 to this
report. JFAX.COM would be the surviving corporation in the merger. On April 5,
2000, the Company and the current holders of all of its shares of Series A
Convertible Preferred Stock entered into an exchange agreement under which the
holders agreed to exchange all of their outstanding shares of Series A
Convertible Preferred Stock for a new Series B Convertible Preferred Stock. The
Series B shares have a stated value which reflects the 25% premium that the
holders would have had the right, under the Series A Convertible Preferred
Stock, to receive in cash at the time of the Company's merger with JFAX.COM. The
Company has the right to require the Series B stockholders to accept JFAX.COM
common stock at the closing of the merger in return for any shares of Series B
Convertible Preferred Stock which they then own. The Series B Convertible
Preferred Stock will be convertible into shares of the Company's common stock
based on the average closing bid price of the Company's common stock for the 20
trading days beginning on April 7, 2000.
D-59
<PAGE>
Schedule II
EFAX.COM AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning of Cost and Deduction/ End of
Period Expenses Write-off Period
------ -------- --------- ------
<S> <C> <C> <C> <C>
Year Ended December 31, 1999:
Accounts receivable allowance............................. $ 277 $ -- $ (15) $ 262
===== ===== ====== =====
Year Ended December 31, 1998:
Accounts receivable allowance............................. $ 656 $ -- $ (379) $ 277
===== ===== ====== =====
Year Ended December 31, 1997:
Accounts receivable allowance............................. $ 559 $ 133 $ (36) $ 656
===== ===== ====== =====
</TABLE>
D-60
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the city of Menlo
Park, State of California on the 7th day of April, 2000.
EFAX.COM
By: /s/ RONALD P. BROWN
---------------------------
Ronald P. Brown,
President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Ronald P. Brown and Todd J. Kenck, and
each of them, his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendments to this Report on Form 10-
K and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ RONALD P. BROWN President April 7, 2000
------------------------------------- (Principal Executive Officer)
(Ronald P. Brown)
/s/ TODD J. KENCK Vice President of Finance, Chief April 7, 2000
------------------------------------- Financial Officer, and Secretary
(Todd Kenck) (Principal Financial and
Accounting Officer )
/s/ THOMAS B. AKIN Director April 7, 2000
-------------------------------------
(Thomas B. Akin)
/s/ DOUGLAS Y. BECH Director April 7, 2000
-------------------------------------
(Douglas Y. Bech)
/s/ STEVEN J. CARNEVALE Director April 7, 2000
-------------------------------------
(Steven J. Carnevale)
/s/ ALBERT E. SISTO Director April 7, 2000
-------------------------------------
(Albert E. Sisto)
/s/ LON RADIN Director April 7, 2000
-------------------------------------
(Lon Radin)
</TABLE>
D-61
<PAGE>
Exhibit Index
eFax.com
Exhibits Pursuant to Item 601 of Regulation S-K
(a) Exhibits
3.1** Certificate of Incorporation of Registrant filed on August 3, 1988, as
currently in effect.
3.2** Certificate of Amendment of Certificate of Incorporation, as filed on
October 31, 1990.
3.3** Certificate of Amendment of Certificate of Incorporation, as filed on
August 13, 1991.
3.4** Certificate of Amendment of Certificate of Incorporation, filed on
February 12, 1996.
3.5** Certificate of Amendment of Certificate of Incorporation filed on
February 12, 1996.
3.6** Certificate of Amendment of Certificate of Incorporation filed on
November 4, 1996.
3.7** Amended Certificate of Designation of Series A Preferred Stock, as
currently in effect.
3.8** Certificate of Designation of Series B Preferred Stock, as currently
in effect.
3.9** Certificate of Designation of Series C Preferred Stock, as currently
in effect.
3.10** Certificate of Designation of Series D Preferred Stock, as currently
in effect.
3.11** Certificate of Designation of Series E Preferred Stock, as currently
in effect.
3.12** Amended Certificate of Designation of Series E Preferred Stock, as
currently in effect.
3.13** Certificate of Designation of Series P Preferred Stock, as currently
in effect.
3.14** Certificate of Designation of Series F Preferred Stock, as currently
in effect.
3.16** Amended and Restated Bylaws of Registrant, as currently in effect.
3.18** Certificate of Ownership and Merger, merging eFax.com, Inc., a
Delaware corporation and wholly owned subsidiary of JetFax, Inc., with
and into JetFax, Inc. as filed on February 8, 1999.
3.19++ Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock of eFax.com, Inc. dated as of May 12,
1999.
3.20++ Certificate of Amendment of the Certificate of Designations,
Preferences and Rights of Series A Convertible Preferred Stock of
eFax.com, Inc. dated as of May 13, 1999.
3.21 Certificate of Amendment of Certificate of Incorporation, as filed on
December 16, 1999.
4.1** Specimen Common Stock Certificate.
4.2++ Form of Warrant to Purchase Common Stock by and between eFax and
Global NAPS, Inc.
4.3++ Form of Warrant to Purchase Common Stock by and between eFax and
Fisher Capital, Ltd.
4.4++ Form of Warrant to Purchase Common Stock by and between eFax and
Wingate Capital, Ltd.
4.5++ Registration Rights Agreement, dated as of May 7, 1999 by and between
eFax and Fisher Capital, Ltd., and Wingate Capital, Ltd.
4.6# Form of Warrant to Purchase Common Stock by and between eFax and
Reedland Capital Partners.
10.1** Form of Indemnification Agreement between Registrant and each of its
directors and officers.
10.2** 1989 Stock Option Plan, as amended and restated, and forms of Stock
Option Agreements thereunder.
10.3**+ 1995 Stock Plan, as amended and restated, and form of Stock Option
Agreement thereunder.
10.4** 1997 Director Stock Option Plan and form of Stock Option Agreement
thereunder.
10.5** 1997 Employee Stock Purchase Plan and forms of agreements thereunder.
10.6** Lease Agreement dated December 1, 1992 between Registrant and Lincoln
Menlo Phase I Associates Limited for Menlo Park, California office.
10.7** Lease dated December 18, 1991 between Crandell Development Corporation
and Robert S. Grant for Santa Barbara, California office.
10.8** Registration Rights Agreement dated March 5, 1997 by and among the
Registrant and Rudy Prince, Lon B. Radin and Virginia Snyder.
10.9** Stock and Warrant Purchase Agreement dated as of August 31, 1988 by
and among Registrant and Purchasers of 299,995 shares of Series A
Preferred, as amended February 1994.
10.10** Preferred Stock Purchase Agreement dated as of December 16, 1988 by
and among Registrant and purchasers of 336,000 shares of Series A
Preferred, as amended February 1994.
10.11** Preferred Stock Purchase Agreement dated as of June 22, 1989 by and
between Registrant and David A. Brewer.
10.12** Form of Subscription and Stock Purchase Agreement dated January 1991
by and between Registrant and certain purchasers of Series A Preferred
Stock.
D-62
<PAGE>
10.13** Form of Subscription and Stock Purchase Agreement dated July 1989 by
and between Registrant and certain purchasers of shares of Series B
Preferred Stock.
10.14** Form of Subscription and Stock Purchase Agreement dated December 1989
by and between Registrant and certain purchasers of shares of Series B
Preferred Stock.
10.15** Form of Subscription and Stock Purchase Agreement dated
August/September 1990 by and between Registrant and certain purchasers
of shares of Series C Preferred Stock.
10.16** Subscription and Stock Purchase Agreement for the purchase of shares
of Series C Preferred Stock dated September 6, 1990 by and between
Registrant and Draper Associates Polaris Fund.
10.17** Subscription and Stock Purchase Agreement dated September 7, 1990 by
and between Registrant and Adlar Turnkey Manufacturing Corporation.
10.18** Form of Subscription and Stock Purchase Agreement for shares of Series
D and Series E Preferred Stock and Warrants dated July 1991 by and
between Registrant and certain purchasers of shares of Series D and
Series E Preferred Stock.
10.19** Series E Preferred Stock Purchase Agreement dated August 18, 1991, as
amended as of January 30, 1996, by and between Registrant and Ailicec
California Corporation.
10.20** Series F Preferred Stock Purchase Agreement dated as of March 5, 1996
by and between Registrant and purchasers of Series F Preferred Stock.
10.26** Asset Purchase Agreement dated July 31, 1996, as amended December 16,
1996, by and between Registrant and the Crandell Group, Inc.
10.27!** Development Agreement dated September 25, 1991 and amended as of
February 12, 1997 by and between Registrant and Ailicec International
Enterprises Limited.
10.28** Common Stock Purchase Option dated as of March 29, 1996 by and between
Registrant and Steven J. Carnevale.
10.29** Common Stock Purchase Option dated as of March 29, 1996 by and between
Registrant and Thomas B. Akin.
10.30** Promissory Note to Lon B. Radin dated March 1, 1992 from Registrant.
10.31!** Development and Supply Agreement dated June 30, 1995 by and between
Registrant and Samsung Electronics Corporation.
10.32!** Software License Agreement dated September 30, 1996 by and between
Registrant and Oki Data Corporation.
10.33!** Supply and License Agreement dated November 1, 1996 by and between
Registrant and Pixel Magic, Inc.
10.34!** Facsimile Product Development Agreement dated June 9, 1994 by and
between Registrant and Xerox Corporation.
10.35!** Facsimile Product Development Agreement dated November 23, 1994 by and
between Registrant and Xerox Corporation.
10.36!** Master Development, Purchase and Distribution License Agreement dated
effective as of January 31, 1997 by and between Registrant and
Hewlett-Packard Company.
10.38** Security Agreement dated July 31, 1996 by and between Registrant and
the Crandell Group, Inc.
10.39!** OEM Purchase Agreement dated February 22, 1995, as amended February
21, 1997, by and Between Registrant and Oki America, Inc.
10.40** Loan and Security Agreement dated August 23, 1996 by and between
Registrant and Cupertino National Bank & Trust and the amendment
thereto dated March 11, 1997 and the amendment Thereto dated March 31,
1997.
10.41** Form of Dealer Agreement.
10.42!** Agreement dated November 30, 1994 by and between the Crandell Group,
Inc. and Intel Corporation as amended May 11, 1995, assigned and
delegated to Registrant as of July 30, 1996 and as further amended
December 23, 1996.
10.43*** First Amendment dated September 15, 1997 to Lease Agreement dated
April 4, 1997 between Registrant and Lincoln Menlo Phase I Associates
Limited for Menlo Park, California office.
10.44*** Second Amendment dated December 2, 1997 to Lease Agreement dated April
4, 1997 between Registrant and Lincoln Menlo Phase I Associates
Limited for Menlo Park, California office, as amended September 15,
1997.
10.45*** Sublease dated August 1, 1997 between Registrant and Systems &
Software Consortium, Inc. Santa Barbara, California office.
10.46*** Lease Agreement between Registrant and Landlord, K. Dalbey and M.
Tachouet dated March 28, 1997 for Beaverton, Oregon office.
D-63
<PAGE>
10.51! Revision D to Master Development, Purchase and
Distribution License Agreement dated as of December 22,
1998 by and between Registrant and Hewlett-Packard Company
which incorporates by reference Master Development,
Purchase and Distribution License Agreement dated
effective as of January 31, 1997 by and between Registrant
and Hewlett-Packard Company (Exhibit 10.36!**).
10.54++ Stock Purchase Agreement, dated as of February 23, 1999,
by and between eFax and Integrated Global Concepts, Inc.
10.55(degree)(degree) Securities Purchase Agreement, dated as of May 7, 1999, by
and between eFax and Fisher Capital, Ltd., and Wingate
Capital, Ltd.
21.1 Subsidiaries of Registrant.
23.1 Independent Auditors' Consent and Report on Schedule (see
page 67).
24.1 Power of Attorney (see Signature Page).
27.1 Financial Data Schedule.
** Incorporated by reference to the identically numbered exhibits filed in
response to Item 16(a), "Exhibits", of the Company's Registration
Statement on Form S-1, as amended, (File No. 333-23763), which was
declared effective on June 10, 1997.
! Confidential treatment has been granted with respect to certain portions
of the exhibit and the omitted portions have been separately filed with
the Commission.
*** Incorporated by reference to the identically numbered exhibits filed in
response pursuant to Item 601 of Regulation S-K of the Company's filing on
Annual Report on Form 10-K for the fiscal year ended January 3, 1998.
!! Incorporated by reference to Exhibit 10.1 filed November 17, 1998, on
Report on Form 10-Q for the quarter ended October 3, 1998.
**+ Incorporated by reference to Exhibit A, filed April 16, 1999, to the
Company's Definitive Proxy Statement.
++ Incorporated by reference to the identically numbered exhibits filed May
18, 1999 on Report on Form 10-Q for the quarter ended April 3, 1999.
# Incorporated by reference to the identically numbered exhibit filed August
17, 1999 on Report on Form 10-Q for the quarter ended July 3, 1999.
D-64
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended July 1, 2000.
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from________to________.
Commission File Number 0-22561
EFAX.COM
(Exact name of Registrant as specified in its charter)
Delaware 77-0182451
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1378 Willow Road, Menlo Park, California 94025
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 324-0600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
As of August 10, 2000 there were 13,520,895 shares of common stock, $.01 par
value, outstanding.
D-65
<PAGE>
EFAX.COM AND SUBSIDIARIES
INDEX TO
REPORT ON FORM 10-Q
FOR QUARTER ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -- June 30, 2000 and December 31, 1999...... 3
Condensed Consolidated Statements of Operations -- Three and Six Months Ended
June 30, 2000 and 1999........................................................... 4
Condensed Consolidated Statements of Cash Flows -- Six Months Ended June 30,
2000 and 1999.................................................................... 5
Notes to Condensed Consolidated Financial Statements.............................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................ 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................. 23
Item 2. Changes in Securities............................................................. 23
Item 6. Exhibits and Reports on Form 8-K.................................................. 24
Signature......................................................................... 25
</TABLE>
D-66
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EFAX.COM AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999 (1)
-------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 175 $ 1,752
Short-term investments -- 2,988
Accounts receivable, net 1,451 2,414
Inventories 368 1,698
Prepaid expenses 1,168 507
-------- --------
Total current assets 3,162 9,359
Property, net 2,156 2,253
Other assets 3,513 3,896
-------- --------
Total assets $ 8,831 $ 15,508
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,505 $ 4,404
Accrued liabilities 1,277 2,044
Note payable - JFAX.COM, INC. 1,500 --
Restructuring reserve 413 605
Current deferred revenue 1,028 360
-------- --------
Total current liabilities 6,723 7,413
Deferred revenue -- 25
Stockholders' equity:
Series A convertible preferred stock, $0.01 par value; 5,000,000 shares
authorized, shares outstanding: none in 2000 and 1500 in 1999 -- 7,467
Series B convertible preferred stock, $0.01 par value; 1,447 and none
shares authorized, shares outstanding in 2000 and 1999 respectively 11,886 --
Common stock, $0.01 par value; 35,000,000 shares authorized, shares
outstanding: 13,293,707 in 2000 and 13,012,130 in 1999 135 130
Additional paid-in capital 49,529 48,342
Warrants 7,816 7,098
Accumulated other comprehensive income -- (7)
Accumulated deficit (67,258) (54,960)
-------- --------
Total stockholders' equity 2,108 8,070
-------- --------
Total liabilities and stockholders' equity $ 8,831 $ 15,508
======== ========
</TABLE>
(1) Derived from the December 31, 1999 audited consolidated balance sheet
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
For presentation purposes, the periods ended July 1, 2000 and January 1, 2000
are referred to above as ending on June 30, 2000 and December 31, 1999,
respectively.
See notes to condensed consolidated financial statements.
D-67
<PAGE>
EFAX.COM AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- --------------------------
2000 1999 2000 1999
------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues:
Product $ 1,946 $ 4,962 $ 5,240 $11,159
eFax services 1,613 33 2,732 33
Software and technology license fees 1,083 1,035 2,182 2,181
Development fees -- 253 -- 679
------- ------- -------- -------
Total revenues 4,642 6,283 10,154 14,052
------- ------- -------- -------
Costs and expenses:
Cost of product revenues 1,296 3,421 3,753 7,725
Cost of eFax services 2,017 454 3,280 668
Cost of software and technology license fees 78 115 193 279
Research and development 1,156 1,579 2,524 3,234
Selling and marketing 989 4,538 4,793 6,495
General and administrative 1,361 2,405 3,238 3,195
------- ------- -------- -------
Total costs and expenses 6,897 12,512 17,781 21,596
------- ------- -------- -------
Loss from operations (2,255) (6,229) (7,627) (7,544)
------- ------- -------- -------
Other income (expense):
Interest income 3 88 34 142
Interest expense (234) -- (234) (1)
Other expense (70) (47) (99) (62)
------- ------- -------- -------
Total other income (expense), net (301) 41 (299) 79
------- ------- -------- -------
Loss before income taxes (2,556) (6,188) (7,926) (7,465)
Provision for income taxes 4 24 15 39
------- ------- -------- -------
Net loss (2,560) (6,212) (7,941) (7,504)
Preferred stock dividends and accretion (4,058) (171) (4,358) (171)
------- ------- -------- -------
Net loss applicable to common stockholders $(6,618) $(6,383) $(12,299) $(7,675)
======= ======= ======== =======
Net loss per share:
Basic $(0.50) $(0.51) $(0.93) $(0.63)
======= ======= ======== =======
Diluted $(0.50) $(0.51) $(0.93) $(0.63)
======= ======= ======== =======
Shares used in computing net loss per share:
Basic 13,294 12,538 13,198 12,273
======= ======= ======== =======
Diluted 13,294 12,538 13,198 12,273
======= ======= ======== =======
</TABLE>
For presentation purposes, the periods ended July 1, 2000 and July 3, 1999 are
referred to above as ending on June 30, 2000 and 1999, respectively.
See Notes to condensed consolidated financial statements.
D-68
<PAGE>
EFAX.COM AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------
2000 1999
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(7,941) $(7,504)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization 487 474
Loss (gain) on disposal of asset 26 (39)
Issuance of Common Stock for services -- 208
Non-cash interest expense 217 --
Additional value for change in exercise price of warrants 32 --
Common Stock options - severance 225 1,367
Common Stock options - services -- 284
Changes in assets and liabilities:
Trade receivables 963 756
Inventories 1,330 1,781
Prepaid expenses (192) (174)
Accounts payable (1,899) 1,054
Deferred revenue 643 50
Accrued liabilities 2 (273)
Restructuring reserve (192) --
------- -------
Net cash used for operating activities (6,299) (2,016)
------- -------
Cash flows from investing activities:
Purchases of short-term investments -- (2,996)
Sale of short-term investments 2,995 2,808
Purchase of property (433) (921)
Proceeds from sale of property 17 --
(Increase) decrease in other assets 383 (733)
------- -------
Net cash provided by (used for) investing activities 2,962 (1,842)
------- -------
Cash flows from financing activities:
Proceeds from issuance of note payable - JFAX.COM, INC. 1,500 --
Proceeds from sale of Common Stock 260 1,034
Proceeds from sale of Series A Convertible Preferred Stock, net -- 14,215
------- -------
Net cash provided by financing activities 1,760 15,249
------- -------
Increase (decrease) in cash and cash equivalents (1,577) 11,391
Cash and cash equivalents, beginning of period 1,752 1,305
------- -------
Cash and cash equivalents, end of period $ 175 $12,696
======= =======
Supplemental cash flow information:
Taxes paid - foreign withholding $ 4 $ 18
======= =======
Supplemental noncash investing and financial information:
Warrant expense - service $ -- $ 197
======= =======
Valuation of warrants issued to JFAX.COM, INC. $ 686 $ --
======= =======
Conversion of accrued ESPP for purchase of Common Stock $ -- $ 45
======= =======
Trademark settlement $ -- $ 2,000
======= =======
Cumulative dividends on Series A Convertible Preferred Stock $ 315 $ 171
======= =======
Conversion of Series A Convertible Preferred Stock to Series B Convertible
Preferred Stock
$ 7,467 $ --
======= =======
Conversion of accrued Series A Convertible Stock dividends to Series B Convertible
Preferred Stock
$ 1,084 $ --
======= =======
Redemption premium and accretion on Series B Convertible Preferred Stock $ 4,042 $ --
======= =======
Conversion of Series B Convertible Preferred Stock to Common Stock $ 707 $
======= =======
Issuance of Common Stock options - severance $ 225 $ --
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
D-69
<PAGE>
EFAX.COM AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Interim Financial Information
The accompanying condensed consolidated financial statements of
eFax.com(TM) and its wholly-owned subsidiaries ("eFax" or the "Company") as of
June 30, 2000 and December 31, 1999 and for the three and six months ended June
30, 2000 and 1999 are unaudited. In the opinion of management, the condensed
consolidated financial statements include all adjustments (consisting of normal
recurring accruals) that management considers necessary for a fair presentation
of its financial position, operating results and cash flows for the interim
periods presented. Operating results and cash flows for interim periods are not
necessarily indicative of results for the entire year. References to "we", "us"
or "our" in this Report also refer to eFax.com
The condensed consolidated financial statements have been prepared on a
going concern basis, which contemplates, among other things, the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company's net loss of $7.9 million for the six months ended June 30, 2000 and
its negative working capital position of $3.6 million at June 30, 2000 raise
substantial doubt regarding the Company's ability to continue as a going
concern. In the three and six months ended June 30, 2000, the Company's revenues
were not sufficient to support its operations, and revenues will not be
sufficient to support operations until such time, if any, that the Company's
revenues from fee generating Internet-based services gain substantial market
acceptance. On May 5, 2000, the Company entered into a loan agreement with
JFAX.COM, Inc. ("JFAX.COM") pursuant to which JFAX.COM is financing the Company
while the two parties seek their shareholders' consent to the merger of eFax.com
with a subsidiary of JFAX.COM. Under the loan agreement, the Company may borrow
up to $5.0 million, of which, as of August 14, 2000, the Company has borrowed
$3.25 million. No assurance can be given that approval of the merger will be
obtained, that the merger will ultimately be consummated or that the proceeds of
the loan agreement will be sufficient to sustain the Company until the merger
occurs, if ever. In the event that the merger is not consummated, is consummated
after the expiry of the term loan or is consummated after the Company has
exhausted all of the funds available under the term loan, the Company will need
to obtain additional financing to repay the loan from JFAX.COM and/or to finance
continuing operating losses. In such event, there can be no assurance that the
Company will be successful in obtaining additional financing and any such
failure to obtain financing would result in a material adverse effect on our
ability to meet our business objectives and continue as a going concern. In
light of the forgoing assumptions, the consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amount and classification of liabilities or any
other adjustments that might be necessary should the Company be unable to
continue as a going concern.
This financial data should be read in conjunction with the audited
financial statements and notes thereto included in eFax.com's Annual Report on
Form 10-K for the year ended December 31, 1999.
Certain prior quarter amounts have been reclassified to conform to the
current quarter presentation for cost of licenses and services as well as
selling and marketing expenses.
Fiscal Period End
The Company uses a 52-53 week fiscal year ending on the first Saturday on
or after December 31. For presentation purposes, the Company refers herein to
the 13-week periods ended July 1, 2000 and July 3, 1999 as the three months
ended June 30, 2000 and 1999, respectively, and the 26-week periods ended July
1, 2000 and July 3, 1999 as the six months ended June 30, 2000 and 1999,
respectively.
Per Share Information
Basic earnings (loss) per share is computed by dividing net income (loss)
by the weighted average common shares outstanding for the period while diluted
earnings (loss) per share also includes the dilutive impact of stock options and
warrants. Common stock equivalents from options and warrants have been excluded
from the computation during all periods presented as their effect is
antidilutive due to eFax.com's net losses. Such options
D-70
<PAGE>
EFAX.COM AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
and warrants will be included, using the treasury stock method, in periods where
eFax.com reports net income and the average fair market value of its common
stock exceeds the exercise price. The net loss and the shares used for the
computation of both basic and diluted loss per share are the same.
2. Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
<S> <C> <C>
2000 1999
----- ------
Materials and supplies $ 63 $ 305
Work-in-process -- 624
Finished goods 305 769
----- ------
Total $ 368 $1,698
===== ======
</TABLE>
3. Accrued Liabilities
Accrued liabilities consist of (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
<S> <C> <C>
2000 1999
------ ------
Compensation and related benefits $ 687 $ 684
Accrued Series A Convertible
Preferred Stock dividends -- 769
Product warranty 59 59
Royalties 31 42
Other 500 490
------ ------
Total $1,277 $2,044
====== ======
</TABLE>
4. Note payable - JFAX.COM, INC.
On May 5, 2000, the Company entered into a term loan agreement ("Term Loan
Agreement") with JFAX.COM under which JFAX.COM agreed to lend to the Company an
amount of up to $5.0 million. Borrowings under Term Loan Agreement are evidenced
by an executed note payable and bear an interest rate of 13% per annum. As
discuss above, unless the term of the Term Loan Agreement is extended by
JFAX.COM, the loan must be repaid on October 31, 2000; provided that, under
specified circumstances the Company may be required to repay the loan as early
as August 31, 2000. As of June 30, 2000, the outstanding principal under the
Term Loan Agreement was $1.5 million. As collateral for the loan, the Company
has given JFAX.COM a security interest in substantially all of its assets,
including all of its DID numbers. If the loan becomes due and the Company is
unable to timely repay any amounts outstanding, JFAX.COM may exercise its rights
in connection with the assets in which it has a security interest. As
consideration for entering into a loan commitment, the Company granted JFAX.COM
warrants to purchase 250,000 shares of Common Stock on April 5, 2000 at an
exercise price of $4.4375. The warrants have a two year life. The value of the
warrants is being amortized over the life of the loan.
D-71
<PAGE>
EFAX.COM AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
5. Comprehensive Income
Effective January 1, 1998, eFax.com adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130
requires an enterprise to report, by major components and as a single total, the
change in net assets during the period from non-owner sources. For the three
months ended June 30, 2000, there were no differences between eFax.com's
comprehensive loss and net loss. For the six months ended June 30, 2000, the
eFax.com's comprehensive loss was $7,934,000 as compared to a net loss of
$7,941,000. For the three and six months ended June 30, 1999, there were no
differences between eFax.com's comprehensive loss and net loss.
6. Disclosures about Segments of an Enterprise and Related Information
The Company reports segment data pursuant to SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes annual and
interim reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas and major customers.
The Company operates in one reportable segment, within which are multiple
product lines including Internet-related services and legacy multifunction
hardware products ("MFP"). Revenues and related costs of goods and services are
recorded for internal management purposes as reflected in the accompanying
Condensed Consolidated Statement of Operations. For internal management
purposes, expenses below that level and related assets are not separately
recorded and monitored.
7. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which defines
derivatives, requires that all derivatives be carried at fair value, and
provides for hedging accounting when certain conditions are met. The Company is
required to adopt this statement in the first quarter of fiscal year 2001, with
early adoption permitted. Although eFax.com has not fully assessed the
implications of this new statement, eFax.com does not believe adoption of this
statement will have a material impact on eFax.com's future financial position or
results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") released
Staff Accounting Bulletin (SAB) No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements". This bulletin summarizes certain interpretations and
practices followed by the Division of Corporation Finance and the Office of the
Chief Accountant of the SEC in administering the disclosure requirements of the
Federal securities laws in applying generally accepted accounting principles to
revenue recognition in financial statements. Application of the accounting and
disclosures desired in the bulletin is required by the second quarter of 2000.
The Company has elected early adoption of SAB 101 and is in compliance with SAB
101 revenue recognition requirements.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44 ("FIN 44") "Accounting for Certain Transactions involving Stock
Compensation" an interpretation of APB Opinion No. 25. FIN 44 clarifies the
application of Opinion 25 for (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a non-compensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998, or January 12, 2000.
The Company believes that FIN 44 will not have a material effect on its
financial position or results of operations.
D-72
<PAGE>
EFAX.COM AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
8. Discontinued Product Lines and Related Restructuring Charges
During January 2000, we restructured our operations to focus on the Internet
communications services, which we introduced in February 1999, by discontinuing
efforts on the development and marketing of branded and licensed products and
software solutions for the MFP market. In connection with the Company's
announced decision to exit from the manufacturing of MFP products, the Company
recognized in the fourth quarter of 1999 a $1.1 million write-down of inventory
to reflect anticipated net realizable values of the inventory on hand. Also in
connection with the Company's decision to exit from manufacturing MFP hardware
products, the Company recognized in the fourth quarter of 1999 an $872,000
restructuring charge for the write-down of capital equipment, intellectual
property and leasehold improvements, excess facilities accruals and severance
costs. As a result, the Company substantially reduced its manufacturing work
force and downsized its hardware manufacturing operations. The discontinuation
and restructuring was substantially completed in the first quarter of 2000,
during which period an additional charge of $450,000 was recognized for certain
executive severance costs incurred in January 2000. The Company recorded total
charges of $ approximately 1.9 million as follows:
<TABLE>
<CAPTION>
Total
Restructuring Balance at
(in thousands) Charge Utilized June 30, 2000
------ -------- -------------
<S> <C> <C> <C>
Write-down of inventory $ 826 $ 826 $ --
Reserve for estimated cost of purchase commitments 234 35 199
------ ------ ------
Subtotal 1,060 861 199
------ ------ ------
Write-down of machinery and equipment 312 312 --
Reserve for estimated lease costs 171 10 161
Reserve for estimated severance costs 169 169 --
Write-down of acquired technology 167 167 --
Reserve for estimated post-warranty technical
support costs 53 -- 53
------ ------ ------
Subtotal 872 658 214
------ ------ ------
$1,932 $1,519 $413
====== ====== ======
</TABLE>
The Company anticipates substantially all accrued severance and benefits will
be paid within one year.
Included in the fourth quarter 1999 write-downs are charges of $312,000
related to the net loss on disposal of machinery and equipment and leasehold
improvements which was written down to fair market value in accordance with SFAS
No. 121, "Accounting for Impairment of Long-Live Assets and for Long-Lived
Assets to be Disposed of."
Additionally, from time to time, the Company is or may become a party to
suits, actions and proceedings in the ordinary course of its business. The
Company does not believe that any of its current ordinary course of business
suits, actions or proceedings will result in a material adverse impact on the
Company.
9. Litigation
On June 20, 2000, Jerry Kirsch filed a lawsuit against the Company in the
United States District Court for the Eastern District of Michigan asserting the
ownership of certain United States patents and claiming that the Company is
infringing these patents as a result of the Company's sale of multifunction
hardware products. The suit requests unspecified damages, treble damages due to
willful infringement, and preliminary and permanent injunctive relief. We have
reviewed the Kirsch patents with our business and technical personnel and
outside patent counsel and have concluded that we do not infringe these patents.
As a result, we are confident of our position in this matter and
D-73
<PAGE>
EFAX.COM AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
intend to defend the suit vigorously; however if such suit is successful, it
could have a material adverse effect on the Company and even if unsuccessful
could require the substantial expenditure of time and costs in its resolution.
10. Subsequent Events
Merger Agreement
On July 13, 2000, the Company entered into a merger agreement (the "Merger
Agreement") with JFAX.COM, a unified Internet communications company, and
JFAX.COM Merger Sub, Inc., a newly formed subsidiary of JFAX.COM (the "Merger
Sub"). Under the terms of the Merger Agreement, the Company has agreed to merge
with the Merger Sub (the "Merger") and become a wholly-owned subsidiary of
JFAX.COM. As consideration for the Merger, the Company's stockholders would
receive the following:
. For each share of the Company's common stock, par value $.01 per share (the
"Common Stock"), its holder would receive a fraction of a share of
JFAX.COM.
. Common Stock, par value $0.01 per share ("JFAX.COM Common Stock"),
determined by a conversion number formula included in this report (the
"Conversion Number").
. Subject to certain limitations, for each share of the Company's Series D
Convertible Preferred Stock, par value $0.01 per share (the "Series D
Shares"), outstanding at the time of the Merger, its holder would receive
4,938.50 shares of JFAX.COM Common Stock (collectively if all 1,447 Series
D Shares are outstanding at the time of the Merger, 7,146,009 shares),
which amount will increase between August 14, 2000 and the time of the
Merger at an annualized rate of 3.5%.
. The holders of the Series D Shares (the "Investors") have agreed to receive
a warrant to acquire shares of JFAX.COM Common Stock under the
circumstances described below under "Agreement with Investors" instead of a
portion of the JFAX.COM Common Stock which they would otherwise have a
right to receive as consideration for the Merger.
. The holders of the Common Stock and the Series D Shares will receive cash
in lieu of fractional shares of JFAX.COM Common Stock.
Because the consideration to be received by the Investors is a fixed amount,
subject to the 3.5% annualized rate of increase, any increase or decrease in the
total consideration received in the Merger will only affect the holders of the
Common Stock. The Conversion Number will vary depending on, among other things:
. The amount outstanding under the term loan agreement between the Company
and JFAX.COM (the "Term Loan Agreement") on the closing date for the
Merger. Under the Term Loan Agreement, the Company, subject to satisfying
the conditions contained in the Term Loan Agreement, may borrow up to $5
million from JFAX.COM.
. The closing date of the Merger, the amount of cash which the Company has
(other than cash from the sale of certain assets of the Company), the
amount of certain of the Company's prepaid expenses and the amount of the
Company's overdue payables.
. The number, if any, of the shares of Common Stock into which the Series D
Shares are converted prior to the time of the Merger.
and
. The timing of the Merger.
D-74
<PAGE>
EFAX.COM AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
For example only, for each share of Common Stock, a stockholder of the Company
would receive 0.281 shares of JFAX.COM Common Stock (collectively, 3,801,645
shares) if:
. $5.0 million is outstanding under the Term Loan Agreement on the closing
date for the Merger.
. On the closing date of the Merger, the Company has no cash on hand and it
has no prepaid expenses or accounts payable which affect the Conversion
Number.
. No Series D shares are converted into shares of Common Stock and other
shares of Common Stock are issued prior to the Merger.
. the Merger occurs on October 31, 2000.
As of August 14, 2000, the Company has borrowed $3.25 million under the Term
Loan Agreement.
In the event that the Merger does not occur and the Company, within two years
of the termination of the Merger discussions with JFAX.COM, is acquired by
another entity or the Company receives at least $5.0 million from a securities
offering or offerings, the Company will be required to pay JFAX.COM an amount
equal to:
. 1,750,000, times
. The fair market value of one share of the Common Stock at the time of the
acquisition or the securities offering, less $0.10.
The 1,750,000 amount will be reduced to 750,000 if the termination of the
Merger Agreement occurs because JFAX.COM's stockholders do not approve the
Merger or if JFAX.COM materially breaches the Merger Agreement.
If the Company is acquired by another entity, it must pay the amount to
JFAX.COM promptly following the consummation of the acquisition. If the Company
does a securities offering, it is required to make the payment within 270 days
of the offering. In addition, the Company is required to pay JFAX.COM for any of
JFAX.COM's out-of pocket expenses related to the Merger Agreement or the Term
Loan Agreement between the two parties if the Merger Agreement is terminated
because of a failure of the Company's stockholders to approve the Merger
Agreement or as a result of any action by eFax.com's board of directors or
eFax.com's material breach of the merger agreement.
The consummation of the Merger will depend upon the approval of the Merger by
both the holders of a majority of the outstanding shares of Common Stock and the
holders of a majority of the JFAX.COM Common Stock being voted at the meeting to
approve the Merger. To complete the Merger, the Company and JFAX.COM must also
fulfill the other conditions required by the Merger Agreement. Prior to the
stockholders' meetings, a registration statement on Form S-4 must be filed with
the Securities and Exchange Commission and be declared effective. If all of the
required conditions are met, the Merger is expected to be completed in the
fourth quarter of 2000.
Agreements with Investors
On July 13, 2000, the Company entered into an exchange agreement (the
"Exchange Agreement") with the Investors and the Company and JFAX.COM entered
into a side agreement (the "Side Agreement") with the Investors. Under the terms
of the Exchange Agreement, the shares of Series B Convertible Preferred Stock
held by the Investors were converted into an equal number of Series D Shares on
July 17, 2000.
D-75
<PAGE>
EFAX.COM AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Under the terms of the Side Agreement, each Investor has agreed that as
consideration for the Merger it would receive:
. Shares of JFAX.COM Common Stock to the extent that such shares held by the
Investor and its affiliates do not exceed 10% (the "10% Limitation") of the
total outstanding shares of JFAX.COM Common Stock immediately following the
Merger.
. A warrant, exercisable for JFAX.COM Common Stock at $0.01 per share, to
acquire the number of shares of JFAX.COM Common Stock which could not be
acquired because of the 10% Limitation.
The Conversion Number will be unaffected by whether the Investors receive
shares of JFAX.COM Common Stock or a warrant to acquire shares of JFAX.COM
Common Stock.
In addition, the Side Agreement provides that JFAX.COM will file a resale
registration statement to permit the Investors to resell any shares of JFAX.COM
Common Stock which the Investors may acquire upon the exercise of the warrant.
The Investors also have agreed to waive any appraisal rights which they may have
in connection with the Merger.
Under the terms of the Certificate of Designations, Preferences and Rights of
the Series D Shares, the holders of the Series D Shares have the right to
require the Company to redeem the Series D Shares for cash in certain events,
including if the total Merger consideration to be received by the holders of the
Common Stock and Series D Shares exceeds 12 million shares of JFAX.COM Common
Stock.
Agreement with IGC
On June 30, 2000, the Company and JFAX.COM entered into an Agreement of
Understanding (the "Agreement of Understanding") with Integrated Global
Concepts, Inc. ("IGC"). IGC has been providing the Company with development and
co-location services necessary for the Company's operations. The Agreement of
Understanding provides that at the time of the closing of the Merger:
. IGC will grant the Company a license to certain software developed by IGC
which the Company uses in its operations.
. IGC will waive all claims which it may have against the Company in
connection with development services it has previously provided to the
Company.
. JFAX.COM will issue 2,000,000 shares of JFAX.COM Common Stock to IGC. In
addition, the Agreement of Understanding provides that JFAX.COM will file a
resale registration statement to permit IGC to resell the shares of
JFAX.COM Common Stock which it is acquiring.
For more information concerning the Merger Agreement, the Agreement with
Investors and the Agreement with IGC, see the Company's Current Report of Form
8-K dated July 14, 2000.
Intuit Relationship
On July 21, 2000, JFAX.COM entered into an agreement with Intuit Inc.
("Intuit") pursuant to which JFAX.COM will enable certain Intuit small business
products with fax sending and receiving capabilities. These fax capabilities
will be made available to Intuit's customers and JFAX.COM and Intuit will share
revenues from this arrangement. The launch date for these Intuit products will
be determined by Intuit at a later date.
In connection with the Intuit transaction, JFAX.COM and the Company entered
into a separate agreement whereby JFAX.COM and the Company will share
responsibilities for developing and servicing the customized faxing products for
Intuit's customers. JFAX.COM will compensate the Company for its development
efforts on a
D-76
<PAGE>
EFAX.COM AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
monthly basis, as well as share a portion of the revenues from the JFAX.COM-
Intuit agreement with the Company. JFAX.COM anticipates that the Merger will
close prior to the launch date of the Intuit products containing the fax sending
and receipt capabilities described above.
Nasdaq National Market Listing
On August 9, 2000, the Company's Common Stock was delisted from The Nasdaq
National Market. The delisting was as a result of the Company's failure to meet
Nasdaq's continued listing requirements.
The Current Stock is currently trading on the over-the-counter electronic
bulletin board sponsored by Nasdaq.
Because the Company is no longer listed on The Nasdaq National Market,
stockholders of the Company who comply with the required procedures, including
not voting in favor of the Merger, will have appraisal rights if the Merger is
completed. Under the terms of the Merger Agreement, if 5% or more of the
Company's stockholders seek appraisal rights JFAX.COM will have the right to not
complete the Merger.
If the Merger does not occur, the Company believes that it is likely that its
preferred stockholders will have the right to require the Company to redeem all
or part of their preferred stock for cash. The current redemption value of all
of the outstanding preferred shares is approximately $19.6 million on August 10,
2000.
D-77
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(Continued)
Overview
The statements contained in this Report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934 (the "Exchange Act"), including statements
regarding eFax.com's expectations, hopes, intentions or strategies regarding the
future. When used herein, the words "may," "will," "expect," "anticipate,"
"continue," "estimate," "project," "intend" and similar expressions are intended
to identify forward-looking statements within the meaning of the Securities Act
and the Exchange Act. Forward-looking statements include: statements regarding
events, conditions and financial trends that may affect eFax.com's future plans
of operations, business strategy, results of operations and financial position.
All forward-looking statements included in this document are based on
information available to eFax.com on the date hereof, and eFax.com assumes no
obligation to update any such forward-looking statements. Investors are
cautioned that any forward-looking statements are not guarantees of future
performance and are subject to risks and uncertainties and that actual results
may differ materially from those included within the forward-looking statements
as a result of various factors. These forward-looking statements are made in
reliance upon the safe harbor provision of The Private Securities Litigation
Reform Act of 1995. Factors that could cause or contribute to such differences
include, but are not limited to, those described below, under the heading
"Factors That May Affect Operating Results" and elsewhere in this Quarterly
Report on Form 10-Q.
eFax.com is a leading provider of Internet communications services.
eFax.com currently provides its free and fee-based Internet communications
services to more than 2.0 million users. In February 1999, eFax.com launched its
Internet communications services, which incorporate fax-to-email, voicemail and
voice-to-email capabilities. Prior to developing this market, eFax.com had
developed and marketed branded and licensed products and software solutions for
the multifunction product ("MFP") market, which consisted of electronic office
devices that combine print, fax, copy and scan capabilities in a single unit. In
addition, we have licensed our embedded systems technology and software to a
number of manufacturers of multifunction products. On January 10, 2000, we
announced that we will focus exclusively on expanding our position as a leading
provider of enhanced Internet communications services and solutions. In
connection with this refocus of our business, we discontinued manufacturing and
sales of MFP products in the three months ended March 31, 2000.
eFax.com's revenues have been historically derived from four sources: (i)
product revenues consisting of sales of JetFax branded MFPs, original equipment
manufacturer ("OEM") branded MFPs, consumables and upgrades; (ii) eFax services
revenues derived from the Company's Internet-based services introduced during
the quarter ended June 30, 1999; (iii) software and technology license fees
related to both the Company's embedded system technology for MFPs and desktop
software; and (iv) development fees for the customization and integration of
eFax.com's embedded system technology and desktop software in OEM products.
Historically, product revenues have accounted for the majority of eFax.com's
total revenues. For the three months ended June 30, 2000, product revenues,
eFax services revenues, software and technology licenses and development fees,
as a percentage of total revenues were 42.0%, 34.7%, 23.3%, and 0.0%,
respectively, as compared to 79.0%, 0.5%, 16.5%, and 4.0%, respectively, for the
similar period in the prior year. For the six months ended June 30, 2000,
product revenues, eFax services revenues, software and technology licenses and
development fees, as a percentage of total revenues were 51.6%, 26.9%, 21.5%,
and 0.0%, respectively, as compared to 79.5%, 0.2%, 15.5%, and 4.8%,
respectively, for the similar period in the prior year.
Shipments of the new OEM platform MFP began in the fourth quarter of 1999.
We made our final OEM shipments during the first quarter of 2000. Overall
product revenues for the three and six months ended June 30, 2000 declined from
the prior year as a result of the Company's transition to an Internet-based
business model.
The new emphasis on Internet services resulted in increased expenditures
for both external promotions and other marketing expenses. The majority of these
costs were related to media and Internet advertising promoting both the basic
service and new products and features as introduced. Similarly infrastructure
costs to support the expansion of services also increased. These infrastructure
costs included the cost of delivery of the service such as telephony charges and
depreciation on capital equipment, as well as technical and operational support
personnel.
D-78
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(Continued)
Recent Developments
On July 13, 2000, eFax.com entered into a merger agreement (the "Merger
Agreement") with JFAX.COM, a unified Internet communications company, and
JFAX.COM Merger Sub, Inc., a newly formed subsidiary of JFAX.COM. On July 21,
2000, the Company entered into an agreement with JFAX.COM pursuant to which it
will help to develop and service certain customized faxing products for Intuit
Inc. On August 9, 2000, the Company's Common Stock was delisted from the Nasdaq
National Market. The terms of the Merger Agreement and certain related
agreements, the terms of the agreement relating to Intuit and the delisting of
the Company's Common Stock are described in Note 9-Subsequent Events to the
Company's financial statements.
Results of Operations
The following table sets forth, as a percentage of total revenues, certain
items in eFax.com's statements of operations for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- ----------------------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Product 42.0% 79.0% 51.6% 79.5%
eFax services 34.7 0.5 26.9 0.2
Software and technology license fees 23.3 16.5 21.5 15.5
Development fees -- 4.0 -- 4.8
------ ------ ------ ------
Total revenues 100.0 100.0 100.0 100.0
------ ------ ------ ------
Costs and expenses:
Cost of product revenues 27.9 54.4 37.0 55.1
Cost of eFax services 43.5 7.2 32.3 4.8
Cost of software and technology license fees 1.7 1.8 1.9 2.0
Research and development 24.9 25.1 24.9 23.0
Selling and marketing 21.3 72.2 47.2 46.2
General and administrative 29.3 38.3 31.9 22.7
------ ------ ------ ------
Total costs and expenses (148.6) 199.1 175.1 153.7
------ ------ ------ ------
Loss from operations (48.6) (99.1) (75.1) (53.7)
Other income (expense), net (6.5) 0.7 (2.9) 0.6
------ ------ ------ ------
Loss before income taxes (55.1) (98.5) (78.1) (53.1)
Provision for income taxes -- 0.4 0.1 (0.3)
------ ------ ------ ------
Net loss (55.1)% (98.9)% (78.2)% (53.4)%
====== ====== ====== ======
</TABLE>
Three and Six Months Ended June 30, 2000 Compared to Three and Six Months Ended
June 30, 1999
Revenues. Total revenues decreased 26% to $4.6 million from $6.2 million for
the three months ended June 30, 2000 and 1999, respectively. Total revenues
decreased 28% to $10.2 million from $14.1 million for the six months ended June
30, 2000 and 1999, respectively. The declines resulted primarily from a decline
in product revenues as the Company transitioned to an Internet-based business
model.
Product revenues decreased 61% to $1.9 million from $5.0 million for the three
months ended June 30, 2000 and 1999, respectively. Product revenues decreased
53% to $5.2 million from $11.2 million for the six months ended June 30, 2000
and 1999, respectively. These declines reflected the factors related to the
discontinuation of the Company's MFP products. Revenue from shipments of MFP
products for the three and six months ended June 30,
D-79
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(Continued)
2000 declined 99% and 47%, respectively, from the similar periods in the
preceding year, as final domestic and international units of the Company's MFP
products were sold. Product revenues also reflected the continued erosion in
average selling prices, driven by the level of OEM business, product
discontinuation and general market pressures. Unit sales for the three and six
months ended June 30, 2000 also decreased, down 100% and 79%, respectively, from
the similar periods in the prior year. As a result, product revenues declined
for the three and six months ended June 30, 2000 as the move to a new business
model was implemented. During the second quarter of 2000, we no longer shipped
MFP product inventory to our OEM customer and do not intend to sell any MFP
products in the future. Revenues associated with the sale of consumables
decreased 15% for the three months ended June 30, 2000 versus the similar period
in the prior year. Consumable revenues decreased 7% for the six months ended
June 30, 2000 versus the similar period in the prior year. We anticipate that we
will continue to sell consumables to our installed base of hardware customers.
However, as this base will not continue to grow, we expect consumable revenues
will continue to decline over the next several quarters.
eFax Services revenue totaled $1.6 million for the three months ended June 30,
2000 as compared to $33,000 for the similar period in 1999. eFax Services
revenue totaled $2.7 million for the six months ended June 30, 2000 as compared
to $33,000 for the similar period in 1999. These increases reflected the
Company's transition to an Internet-based business model. eFax Services revenue
consisted primarily of recurring monthly subscription fees, signup fees, usage-
based charges and revenues from advertising activities. eFax Services revenue
began in June 1999.
Software and technology license fees result from licensing the Company's
proprietary embedded system technology and desktop software to OEMs for
integration into their products. The recurring license revenues reported by the
Company are dependent on the timing and accuracy of product manufacturing or
quarterly sales reports received from the Company's OEM customers. The quarterly
sales reports, as well as any verbal estimates, are subject to delay and
potential revision by the OEM. In such an event, the Company may subsequently be
required to adjust revenues for subsequent periods due to the change in
estimate, which could have a material adverse effect on the Company's business,
financial condition, and results of operations and on the price of the Company's
Common Stock.
Software and technology licensing fees increased 5% to $1.1 million for the
three months ended June 30, 2000 from $1.0 million for the similar period in the
prior year. Software and technology licensing fees remained unchanged at $2.2
million for the six months ended June 30, 2000 and 1999. Royalty fees from sales
of the Hewlett-Packard 3150 increased by 27% and 42% for the three and six
months ended June 30, 2000 from the similar periods in the prior year. We
anticipate that we will continue to receive royalties over the life of this
product.
Development fees declined 100% to zero from $253,000 for the three months
ended June 30, 2000 and 1999, respectively. Development fees declined 100% to
zero from $679,000 for the six months ended June 30, 2000 and 1999,
respectively. These declines reflected the completion of current projects and
conversion of development fees to per unit royalties. Currently, we have no
plans for new development projects and as a result do not anticipate future
development fees.
International revenues accounted for 7% and 14% of total revenues for the
three months ended June 30, 2000 and 1999, respectively. International revenues
accounted for 6% and 13% of total revenues for the six months ended June 30,
2000 and 1999, respectively. Historically, international revenues were derived
primarily from product sales and consumables. International revenues are likely
to further decline in the near term due to the discontinuation of hardware
production. All of the development fees and software and technology license
revenues, and most of the product revenues, have been denominated and collected
in United States dollars. The Company has not hedged the foreign currency
exposure related to product sales denominated in foreign currencies as the
impact has not been significant.
Two customers, Hewlett-Packard and Konica Business Technologies accounted for
$1.8 million (17%) and $1.5 million (15%) of total revenues for the six months
ended June 30, 2000, respectively. Three customers, Hewlett-Packard, Konica
Business Technologies and IKON Office Solutions, accounted for $2.2 million in
software and technology license fees (16%), $1.7 million in OEM product sales
(12%) and $1.7 million in product sales (12%), respectively, of total revenues
for the six months ended June 30, 1999.
D-80
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(Continued)
Cost of Product Revenues. Cost of product revenues consists primarily of
purchased materials; direct production labor and supervision for assembly and
testing; subcontracted manufacturing, mainly for printed circuit boards;
indirect labor for inventory management, shipping and receiving, purchasing,
manufacturing engineering, document control and operations management; and
related facility and support costs. Cost of product revenues may vary as a
percentage of total revenues in the future as a result primarily of the cost of
consumables.
Cost of product revenues decreased 62% to $1.3 million from $3.4 million for
the three months ended June 30, 2000 and 1999, respectively. Cost of product
revenues decreased 51% to $3.8 million from $7.7 million for the six months
ended June 30, 2000 and 1999, respectively. The gross margins for the Company's
branded MFP products were constrained by the competitive nature of the
marketplace, pricing pressures and the greater name recognition of the larger
companies with which eFax.com competes. The margins on consumables, such as
toner cartridges and drums, and on upgrades, such as the two-line upgrade, were
typically higher than on the base unit. Product gross margin was 33% for the
three months ended June 30, 2000, as compared to 31% for the similar period in
the prior year. Product gross margin was 28% for the six months ended June 30,
2000, down from 31% for the similar period in the prior year. The increase for
the three months ended June 30, 2000 was attributable to decreases in direct and
indirect labor due to the transition from a manufacturing to internet-based
business model. The decrease for the six months ended June 30, 2000 was
attributable to decreased sales volume and average selling price declines.
Cost of eFax Services. Direct costs of providing the eFax Services totaled
$2.0 million for the three months ended June 30, 2000 as compared to $454,000
for the similar period in the prior year. Direct costs of providing the eFax
Services totaled $3.3 million for the six months ended June 30, 2000 as compared
to $668,000 for the similar period in the prior year. The increase in cost of
eFax Services resulted from expansion in support of the Company's planned
business growth including service delivery costs such as telephony charges,
depreciation on capital equipment, hiring operations personnel as well as all
technical and customer support related expenses.
Cost of Software and Technology License Fees. Cost of software and technology
license fees consists primarily of royalties paid for licensed technology
included in the Company's products and amortization of purchased technology.
Cost of software and technology license fees revenues decreased 32% to $78,000
from $115,000 for the three months ended June 30, 2000. Cost of software and
technology license fees revenues decreased 31% to $193,000 from $279,000 for the
six months ended June 30, 2000.
Research and Development. Research and development expenses declined 27% to
$1.2 million from $1.6 million for the three months ended June 30, 2000 and
1999, respectively. Research and development expenses declined 22% to $2.5
million from $3.2 million for the six months ended June 30, 2000 and 1999,
respectively. These declines resulted from lower software development charges in
support of the new eFax Service, reduced outside development services and a
eliminated prototype and tooling charges in support of the OEM/MFP platform.
Selling and Marketing. Selling and marketing expenses decreased 78% to
$989,000 from $4.5 million for the three months ended June 30, 2000 and 1999,
respectively. Selling and marketing expenses decreased 26% to $4.8 million from
$6.5 million for the six months ended June 30, 2000 and 1999, respectively.
Decreased promotional activity in support of the eFax services accounted for
substantially all of the decrease combined with the elimination of external
marketing efforts related to the branded hardware business. Selling and
marketing expenses included approximately $0.5 million in expenses associated
with advertising for the three months ended June 30, 2000 as compared to $3.9
million for the similar period in 1999. Selling and marketing expenses included
approximately $3.8 million in expenses associated with advertising for the six
months ended June 30, 2000 as compared to $4.8 million for the similar period in
1999. In anticipation of the consummation of the merger with JFAX.COM, very
limited discretionary selling and marketing expenses are expected in the third
and fourth quarters of 2000.
General and Administrative. General and administrative expenses decreased 43%
to $1.4 million from $2.4 million for the three months ended June 30, 2000 and
1999, respectively. General and administrative expenses remained unchanged at
$3.2 million for the six months ended June 30, 2000 and 1999, respectively. The
decrease for the three months ended June 30, 2000 primarily resulted from cost
containment efforts combined with reductions in personnel.
D-81
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(Continued)
Interest and Other Income (Expense), Net. Interest and other income (expense),
net, decreased to net other expenses of $301,000 from net other income of
$41,000 for the three months ended June 30, 2000 and 1999, respectively.
Interest and other income (expense), net, decreased to net other expenses of
$299,000 from net other income of $79,000 for the six months ended June 30, 2000
and 1999, respectively. These declines reflect primarily a decrease in interest
income from interest-bearing investments and an increase in interest expense
payable under the loan agreement with JFAX.COM.
Provision for Income Tax. Due to eFax.com's net losses, there were no
provisions for federal or state income taxes for the three and six months ended
June 30, 2000 and 1999, respectively. Income tax provisions of $4,000 and
$15,000 for the three and six months ended June 30, 2000, respectively, relate
primarily to foreign withholding taxes on certain royalty fees, but also include
minimum state and franchise taxes.
Liquidity and Capital Resources
In the three and six months ended June 30, 2000, the Company's revenues were
not sufficient to support its operations, and revenues will not be sufficient to
support operations until such time, if any, that the Company's revenues from
technology licensing agreements and fee generating Internet-based services gain
substantial market acceptance. eFax.com has financed its operations to date
principally through private placements of debt and equity securities, proceeds
from borrowings under a bank line of credit, debt associated with the Crandell
Acquisition, and sales of Common Stock. The total amount of equity raised
through August 3, 2000 was approximately $70 million through a series of private
financing rounds at eFax.com, and sales of common and Preferred Stock. All of
such equity capital was raised prior to December 31, 1999. On May 5, 2000, the
Company entered into a loan agreement with JFAX.COM pursuant to which JFAX.COM
is financing the Company while the two parties seek their shareholders' consent
to the merger of eFax.com with a subsidiary of JFAX.COM. Under the loan
agreement, the Company may borrow up to $5.0 million, of which, as of August 14,
2000, the Company has borrowed $3.25 million. No assurance can be given that the
approval of the merger will be obtained, that the merger will ultimately be
consummated or that the proceeds of the loan agreement will be sufficient to
sustain the Company until the merger occurs, if ever. In the event that the
merger is not consummated, is consummated after the expiry of the term loan or
is consummated after the Company has exhausted all of the funds available under
the term loan, the Company will need to obtain additional financing to repay the
loan from JFAX.COM and/or to finance continuing operating losses. In such
event, there can be no assurance that the Company will be successful in
obtaining additional financing and that would result in a material adverse
effect on the Company's ability to meet its business objectives and continue as
a going concern. See Notes 1 and 10 to the Condensed Consolidated Financial
Statements.
Cash, cash equivalents and short-term investments decreased to $175,000 at
June 30, 2000 from $4.7 million at December 31, 1999. Net cash used for
operating activities was $6.3 million for the six months ended June 30, 2000,
resulting primarily from the Company's net loss of $7.9 million partially offset
by noncash charges of $987,000. In addition, inventories decreased to $368,000
from $1.7 million at June 30, 2000 and December 31, 1999, respectively, a result
of reduced stocking levels related to the discontinuance of the Company's MFP
product line and an associated write-down of $1.0 million. Accounts receivable
decreased to $1.5 million from $2.4 million at June 30, 2000 and December 31,
1999, respectively, which was principally the result of the withdrawal from the
MFP market. Accounts payable decreased $1.9 million to $2.5 million at June 30,
2000 from $4.4 million at December 31, 1999. Other changes in working capital
items also partially offset the net loss by approximately $261,000.
Investing activities for the six months ended June 30, 2000 provided $3.0
million of cash as $3.0 million in proceeds from the sale of short-term
investments and a $383,000 decrease in other assets were partially offset by
$433,000 in purchases of property.
Financing activities for the six months ended June 30, 2000 provided $1.8
million of cash primarily in $1.5 million in proceeds from the issuance of a
note payable to JFAX.COM and $260,000 in proceeds from the sale of Common Stock
resulting from the exercise of employee stock options.
D-82
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(Continued)
Factors That May Affect Operating Results
eFax.com operates in a dynamic and rapidly changing environment that involves
numerous risks and uncertainties. This section should be read in conjunction
with the unaudited Condensed Consolidated Financial Statements and Notes thereto
contained in the Report and the audited Consolidated Financial Statements and
Notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations for the year ended January 1, 2000 contained in
eFax.com's Annual Report on Form 10-K for the year ended January 1, 2000.
EFAX.COM MAY BE UNABLE TO OBTAIN SUFFICIENT FUNDS TO CONTINUE OPERATIONS
To the extent our revenues are not sufficient to fund our operations, our only
current source of financing is pursuant to the Term Loan Agreement with
JFAX.COM. Under the Term Loan Agreement, we may borrow up to $5.0 million of
which $3.25 million has already been borrowed. As of August 10, 2000, eFax.com
had cash and borrowings available under the Term Loan Agreement, which amount is
sufficient to continue our current operations for approximately 12 weeks.
In order to receive additional advances under the Term Loan Agreement, we must
comply with the conditions to funding required by the Term Loan Agreement or
JFAX.COM must waive those conditions. One of the conditions is a requirement
that we provide documents necessary to protect JFAX.COM's security interests in
some of our assets. To date, we have been unsuccessful in obtaining these
documents, but JFAX.COM has continued to make advances to us under the Term Loan
Agreement. There can be no assurance that JFAX.COM will continue to waive the
conditions to additional funding or that we will be able to meet these or any
other funding conditions in the future.
The Merger is currently anticipated to be completed in the fourth quarter of
2000. At present, we are uncertain whether we will have sufficient funds to
enable us to continue to operate until the Merger occurs even if JFAX.COM
continues to fund us under the present terms of the Term Loan Agreement.
Factors which could determine the sufficiency of our potential cash resources
include:
. The timing of the Merger. If the Merger is delayed for any significant
period of time, it is unlikely that revenues generated from operations, our
current cash and the remaining amounts which we may potentially borrow
under the Term Loan Agreement will be sufficient.
. Any substantial litigation costs prior to the Merger.
. Increased costs in completing the Merger. To date, we have incurred
substantial costs in completing the Merger, including legal costs,
financial advisor fees and costs related to transitioning our operations
system so that it will be compatible with JFAX.COM's.
. Unforeseen contingencies.
If our current financial resources are insufficient, JFAX.COM may be unwilling
to lend us any additional funds. If the Term Loan Agreement is amended to
increase the amount of principal which we may borrow and our borrowing from
JFAX.COM is in excess of $5 million, the Merger consideration to be received by
our common stockholders will be reduced. The fraction of a share of JFAX.COM
Common Stock which will be received for each share of our common stock is based
on a conversion number formula (the "Conversion Number"). Additional borrowings
under the Term Loan Agreement would cause a decrease in the Conversion Number
(and a corresponding decrease in the amount of Merger consideration to be paid
to our common stockholders) unless the borrowings are offset by our having
additional cash at the time of the Merger. Because the number of shares of
JFAX.COM common stock, which our preferred stockholders will received in the
Merger, is unaffected by our additional borrowings from JFAX.COM, any amounts,
which we borrow from JFAX.COM, will only affect the amount of Merger
consideration to be received by our common stockholders.
D-83
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(Continued)
Under the terms of the Merger Agreement, we are not permitted to sell any
equity securities to third parties or to incur any indebtedness except in the
ordinary course of business. We also have granted JFAX.COM a security interest
in almost all of our assets. As a result, without JFAX.COM's approval, it may
be difficult for us to obtain financing from any party other than JFAX.COM.
Potential lenders to, and investors in, eFax.com also may be unwilling to
finance us because the funds may primarily be used to make redemption payments
to our preferred stockholders or to repay the Term Loan Agreement instead of
funding our ongoing operations.
No assurances can be given that eFax.com will have sufficient funds to
complete the Merger and/or continue its operations in the event that the Merger
is not completed.
If the Merger does not occur, there can be no guarantee that additional
financing will be available or, if available, will be sufficient to fund our
continued operations. If eFax.com remains independent, we anticipate that we
will continue to have quarterly losses and negative cash flow for the
foreseeable future. We may require additional capital to fund any of the
following:
. Continuing operating losses.
. Unanticipated opportunities.
. Litigation costs.
. Strategic alliances.
. Changing business conditions.
. Unanticipated competitive pressures.
Obtaining additional financing will be subject to a number of factors,
including the fact our Common Stock is no longer traded on The Nasdaq National
Market; that restrictions placed on us by our creditors and our preferred
stockholders; market conditions; our operating performance; and investor
sentiment. These factors may make the timing, amount, terms and conditions of
additional financings unattractive to us and could have terms that could dilute
the interests of our common stockholders. If we are unable to raise additional
capital in the event that the Merger does not occur, we will have to consider
significantly curtailing our current operations and taking other actions,
including declaring bankruptcy and/or liquidating the Company.
THERE ARE SIGNIFICANT RISKS IN CONNECTION WITH THE MERGER
The Merger will not be effective, if ever, until a registration statement
filed by JFAX.COM with the Securities and Exchange Commission is declared
effective and unless the stockholders of eFax.com and JFAX.COM both approve
resolutions related to the Merger and other conditions, to the Merger are met.
There can be no assurance that either the eFax.com or the JFAX.COM stockholders
will vote for approval of the resolutions required to complete the Merger or
that the other conditions necessary to complete the Merger will be satisfied.
As a result of entering into the Merger Agreement and our preparations in
connection with the Merger:
. Prior to the Merger, the prices of eFax.com and JFAX.COM Common Stock may
be linked, subject to other factors affecting the Conversion Number. If the
prices are linked, events, the price of JFAX.COM Common Stock and over
which eFax.com has no control, could affect the price of eFax.com Common
Stock. In addition, some of the factors which effect the price of JFAX.COM
Common Stock, may be different from, or in addition to, factors which would
normally affect the price of our Common Stock.
D-84
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(Continued)
. The potential Merger may affect employee morale. Since the initial
announcement on April 6, 2000 that eFax.com and JFAX.COM were considering a
merger, eFax.com has had a significant number of employees leave. On April
6, 2000, eFax.com had 107 employee and on August 4, 2000 the number of
employees was 69. Josh Mailman, Vice President of Operations, and Michael C
Tonneson, Vice President of Business Development, two of our five executive
officers, have left eFax.com since the April 6th announcement and have not
been replaced.
. eFax.com must obtain JFAX.COM's permission to make significant changes to
our operations. Under the terms of the Merger Agreement, eFax.com is
required to conduct the Company's business in the ordinary course and use
all reasonable efforts to maintain existing relationships with third
parties. In addition, without JFAX.COM's permission, eFax.com is unable to
sell any of the Company's securities or pledge any of the Company's
property as collateral. As a result, without JFAX.COM's consent, eFax.com
is unlikely to be able to raise any additional capital. The Merger
Agreement prohibits us from increasing compensation for any of our
employees and this may make it difficult to take actions which would enable
eFax.com to retain key personnel. There can be no assurance that eFax.com
will be able to obtain JFAX.COM's approval to undertake any activity
prohibited by the Merger Agreement and in the absence of such approval we
may be unable to perform the activities necessary to maximize our business,
prospects, financial condition and results of operations.
. A significant amount of eFax.com's current efforts relate to completing the
Merger. eFax.com's efforts in connection with the Merger affect the amount
of time which our management and other employees have to devote to the
daily operations of the Company. In addition, a substantial amount of our
cash flow is being dedicated to completing the Merger and these
expenditures may limit the cash available to ongoing operations. We
currently estimate that our out-of-pocket expenses related to the Merger
will be approximately $800,000, excluding amounts expended to integrate our
operating systems with JFAX.COM's. The amount of these expenditures may
vary substantially depending on events occurring prior to the Merger. The
allocation of our resources to the Merger may have a material adverse
effect on our business, prospects, financial conditions and results of
operations.
. Terms of the Merger Agreement may preclude other offers. Under the terms of
the Merger Agreement, we may not solicit additional offers to acquire the
Company, but may accept a superior offer by another party to acquire us. If
the Merger does not occur, we will be required to make the termination
payment to JFAX.COM and pay JFAX.COM's out-of-pocket expenses incurred in
connection with the Merger Agreement and the Term Loan Agreement.
eFax.com's potential obligations to JFAX.COM may reduce the likelihood that
any third party would make an offer to acquire us and could have an effect
on the potential price of eFax.com's Common Stock.
. Any substantial change to the Merger Agreement or substantial increase in
the Merger consideration will require approval of our preferred
stockholders. Under the terms of the Exchange Agreement, we can only
require the preferred stockholders to receive equity securities of JFAX.COM
if the Merger occurs on substantially the same terms as currently set forth
in the Merger Agreement. The preferred stockholders will have a right to
require a cash redemption for the Series D Shares if the total Merger
consideration to be received by the eFax.com common stockholders and the
eFax.com preferred stockholders exceeds 12,000,000 shares of JFAX.COM
Common Stock. The cash redemption amount of the Series D Shares on August
10, 2000 was $19.6 million. In calculating the 12 million share figure,
each share of JFAX.COM Common Stock which can be acquired upon the exercise
of any warrant received by a preferred stockholder as Merger consideration
will be included. While our current estimation is that the total
consideration will be less than 12.0 million shares of JFAX.COM Common
Stock, no assurances can be given that the total Merger consideration will
not exceed 12.0 million shares of JFAX.COM Common Stock under the
Conversion Number. If events occur which would cause the Merger
consideration to exceed 12.0 million shares, there can be no assurance that
the preferred stockholders would not exercise their cash redemption rights
or would not require additional consideration in order to permit the
completion of the Merger.
D-85
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(Continued)
WE WILL HAVE SIGNIFICANT RISKS IF THE MERGER DOES NOT OCCUR
If the Merger Agreement is terminated and eFax.com's board of directors
determines that it is in our best interests to seek another merger or business
combination, it is not certain that we will be able to find a partner willing to
pay an equivalent or more attractive price than that which would be paid in the
Merger.
In addition, if the Merger Agreement is terminated:
. The holders of our Series D Shares are expected to have the right to
require us to redeem all of the outstanding preferred stock in cash
(approximately, $19.6 million on August 10, 2000). At present, eFax.com
would not have sufficient cash to redeem our outstanding preferred stock.
. We will be required to repay to JFAX.COM the amount outstanding under the
Term Loan Agreement, including interest. As discuss above, unless the term
of the Term Loan Agreement is extended by JFAX.COM, the loan must be repaid
on October 31, 2000; provided that, under specified circumstances we may be
required to repay the loan as early as August 31, 2000. As of the date of
this Report, the outstanding principal under the Term Loan Agreement is
$3.25 million. As collateral for the loan, we have given JFAX.COM a
security interest in substantially all of our assets, including all of our
DID numbers. If the loan becomes due and we are unable to timely repay any
amounts outstanding, JFAX.COM may exercise its rights in connection with
the assets in which it has a security interest.
. We will need substantial amounts of cash to enable us to continue our
operations as they are currently being conducted.
At present, we do not have sufficient cash to redeem our outstanding preferred
stock or to repay the outstanding principal and interest under the Term Loan
Agreement. We also do not currently have any prospects for obtaining significant
additional financing and no assurance can be given that we will be able to
obtain the necessary cash to pay any amounts we owe or to continue our business.
If sufficient cash cannot be obtained, we may be required to significantly
curtail our operation and to take other actions including declaring bankruptcy
and/or liquidating the company.
ADDITIONAL RISKS
For additional risks effecting the ongoing operations of the Company on a
stand alone basis, reference is made to the risk factors set forth in the
Company's Annual Report on Form 10-K for the year ended January 1, 2000 and
Quarterly Report on Form 10-Q for the period ended April 1, 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No change has occurred since the filing by the Company of its Annual Report on
Form 10-K for the year ended January 1, 2000. Reference is made to Part II, Item
7A, Quantitative and Qualitative Disclosures About Market Risk, in the
Registrant's Annual Report on Form 10-K for the year ended January 1, 2000.
D-86
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 20, 2000, Jerry Kirsch filed a lawsuit against the Company in the
United States District Court for the Eastern District of Michigan asserting the
ownership of certain United States patents and claiming that the Company is
infringing these patents as a result of the Company's sale of multifunction
hardware products. The suit requests unspecified damages, treble damages due to
willful infringement, and preliminary and permanent injunctive relief. We have
reviewed the Kirsch patents with our business and technical personnel and
outside patent counsel and have concluded that we do not infringe these patents.
As a result, we are confident of our position in this matter and intend to
defend the suit vigorously; however if such suit is successful, it could have a
material adverse effect on the Company and even if unsuccessful could require
the substantial expenditure of time and costs in its resolution. See Note 9 to
Notes to Condensed Consolidated Financial Statements.
ITEM 2. CHANGES IN SECURITIES
(a) On April 5, 2000, the Company entered into an exchange agreement with the
holders of the Company's Series A Convertible Preferred Stock under which
the holders agreed to exchange all of their outstanding shares of the
Series A Convertible Preferred Stock for a new Series B Convertible
Preferred Stock. The exchanged occurred on April 7, 2000 and the preferred
stockholders received one share of Series B Convertible Preferred Stock
for each of the 1,500 shares of Series A Convertible Preferred Shares. The
Series B Shares which on July 17, 2000 were converted into shares of a new
Series D Convertible Preferred Stock, had a stated value which reflected
the 25% premium that the holders would have had the right, under the
Series A Convertible Preferred Stock, to receive in cash at the time of
the Merger with JFAX.COM. The Series B Convertible Preferred Stock was
convertible into shares of the Company's Common Stock based on the average
closing bid price of the Company's Common Stock for the 20 trading days
beginning on April 7, 2000 and ending on May 5, 2000. The average closing
bid price of the Company's common stock for this period was $2.31. Holders
of the preferred shares had no voting rights, except as required by law,
including, but not limited to, the General Corporation Laws of the State
of Delaware. The Company could not declare or pay any cash dividend or
distribution on the Common Stock without the prior express written consent
of the holders of not less than two-thirds of the then outstanding
preferred shares. In the event of a liquidation of the Company, the
holders of the Series B Convertible Preferred Stock would have been
entitled to receive distributions in preference to the holders of the
Common Stock.
(b) In April 2000, the Company issued warrants to purchase 250,000 shares of
Common Stock to JFAX.COM in connection with the execution of term loan
commitment letter. The warrant exercise price is $4.4375 which reset to
$1.00 per share if the Merger does not occur. These warrants may be
exercised immediately.
The issuance and sale of all such securities was intended to be exempt
from registration and prospectus delivery requirements under the
Securities Act of 1933, as amended (the "Securities Act"), by virtue of
Section 4(2) thereof due to, among other things, (i) the limited number
and nature of persons to whom the securities were issued, (ii) the
distribution of disclosure documents to the investors, (iii) the fact that
such persons represented and warranted to the Company, among other things,
that such persons were acquiring the securities for investment only and
not with a view to the resale or distribution thereof, and (iv) the fact
that a certificate representing the securities was issued with a legend to
the effect that such securities had not been registered under the
Securities Act or any state securities laws and could not be sold or
transferred in the absence of such registration or an exemption therefrom.
In addition, the exchange of the Series A Convertible Preferred Stock into
the Series B Convertible Preferred Stock was exempt under Section 3(a)(9)
of the Securities Act.
D-87
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
---------
Exhibit
Number Description
------ -----------
10.56 Gross Rent Real Property Lease by and between Patterson
Associates, LLC and the Company for Santa Barbara facilities
dated February 3, 2000.
10.57 Security Agreement between JFAX.COM, Inc. and the Company
dated May 5, 2000.
10.58 Term Loan Agreement by and between JFAX.COM, Inc. and the
Company dated May 5, 2000.
10.59 Promissory Note between JFAX.COM, Inc. and the Company dated
May 5, 2000.
10.60 Collateral Assignment of Copyrights (Security Agreement)
between the Company as Pledgor and JFAX.COM, Inc. as Pledgee
dated May 5, 2000.
10.61 Collateral Assignment of Patents (Security Agreement)
between the Company as Pledgor and JFAX.COM, Inc. as Pledgee
dated May 5, 2000.
10.62 Collateral Assignment of Trademarks (Security Agreement)
between the Company as Pledgor and JFAX.COM, Inc. as Pledgee
dated May 5, 2000.
27.1 Financial Data Schedule.
____________________
(b) Reports on Form 8-K. On April 6, 2000, the Company filed a Current Report
-------------------
on Form 8-K, concerning the execution of a letter of intent by the
Company and JFAX.COM relating to the Merger and of the entry into an
exchange agreement pursuant to which the shares of Series B Convertible
Preferred Stock would be exchanged for shares of Series D Convertible
Preferred Stock. On July 14, 2000, the Company filed a Current Report on
Form 8-K, as amended, pertaining to the execution of a merger agreement
between the Company and JFAX.COM, Inc., pursuant to which the Company
will merge with a subsidiary of JFAX.COM and become a subsidiary of
JFAX.COM and certain related matters. On August 9, 2000, the Company
filed a Current Report on Form 8-K, related to the delisting of the
Company's Common Stock from The Nasdaq National Market.
D-88
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EFAX.COM, INC.
---------------------------
(Registrant)
Date: August 15, 2000 By: /s/ TODD J. KENCK
---------------------------
Todd J. Kenck
Vice President, Finance and
Chief Financial Officer
(Authorized Officer and
Principal Financial and
Accounting Officer)
D-89
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Appendix E
DELAWARE GENERAL CORPORATION LAW, 8 DEL. C. (S)262 APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of stock on
the date of the making of a demand pursuant to subsection (d) of this section
with respect to such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise complied with
subsection (d) of this section and who has neither voted in favor of the merger
or consolidation nor consented thereto in writing pursuant to (S)228 of this
title shall be entitled to an appraisal by the Court of Chancery of the fair
value of the stockholder's shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or series of
stock of a constituent corporation in a merger or consolidation to be effected
pursuant to (S)251 (other than a merger effected pursuant to (S)251(g) of this
title), (S)252, (S)254, (S)257, (S)258, (S)263 or (S)264 of this title.
(1) Provided, however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock, which stock, or
depositary receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of (S)251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights under
this section shall be available for the shares of any class or series of stock
of a constituent corporation if the holders thereof are required by the terms of
an agreement of merger or consolidation pursuant to (S)(S)251, 252, 254, 257,
258, 263 and 264 of this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from such merger or
consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in respect
thereof, which shares of stock (or depository receipts in respect thereof) or
depository receipts at the effective date of the merger or consolidation will be
either listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more than 2,000
holders;
c. Cash in lieu of fractional shares or fractional depository receipts described
in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash in lieu
of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
E-1
<PAGE>
(3) In the event all of the stock of a subsidiary Delaware corporation party to
a merger effected under sec.253 of this title is not owned by the parent
corporation immediately prior to the merger, appraisal rights shall be available
for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsection (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of
such stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of such
stockholder's shares. A proxy or vote against the merger or consolidation shall
not constitute such a demand. A stockholder electing to take such action must do
so by a separate written demand, as herein provided. Within 10 days after the
effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to (S)228 or (S)253 of
this title, each constituent corporation, either before the effective date of
the merger or consolidation or within ten days thereafter, shall notify each of
the holders of any class or series of stock of such constituent corporation who
are entitled to appraisal rights of the approval of the merger or consolidation
and that appraisal rights are available for any or all shares of such class or
series of stock of such constituent corporation, and shall include in such
notice a copy of this section; provided that, if the notice is given on or after
the effective date of the merger or consolidation, such notice shall be given by
the surviving or resulting corporation to all such holders of any class or
series of stock of a constituent corporation that are entitled to appraisal
rights. Such notice may, and, if given on or after the effective date of the
merger or consolidation, shall, also notify such stockholders of the effective
date of the merger or consolidation. Any stockholder entitled to appraisal
rights may, within 20 days after the date of mailing of such notice, demand in
writing from the surviving or resulting corporation the appraisal of such
holder's shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of such holder's shares. If such notice did not
notify stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders of
any class or series of stock of such constituent corporation that are entitled
to appraisal rights of the effective date of the merger or consolidation or (ii)
the surviving or resulting corporation shall send such a second notice to all
such holders on or within 10 days after such effective date; provided, however,
that if such second notice is sent more than 20 days following the sending of
the first notice, such second notice need only be sent to each stockholder who
is entitled to appraisal rights and who has demanded appraisal of such holder's
shares in accordance with this subsection. An affidavit of the secretary or
assistant secretary or of the transfer agent of the corporation that is required
to give either notice that such notice has been given shall, in the absence of
fraud, be prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each constituent
corporation may fix, in advance, a record date that shall be not more than 10
days prior to the date the notice is given, provided, that if the notice is
given on or after the effective date of the merger or consolidation, the record
E-2
<PAGE>
date shall be such effective date. If no record date is fixed and the notice is
given prior to the effective date, the record date shall be the close of
business on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation, the
surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw such
stockholder's demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the stockholders
who have complied with this section and who have become entitled to appraisal
rights. The Court may require the stockholders who have demanded an appraisal
for their shares and who hold stock represented by certificates to submit their
certificates of stock to the Register in Chancery for notation thereon of the
pendency of the appraisal proceedings; and if any stockholder fails to comply
with such direction, the Court may dismiss the proceedings as to such
stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court shall
appraise the shares, determining their fair value exclusive of any element of
value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
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(i) The Court shall direct the payment of the fair value of the shares, together
with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed upon
the parties as the Court deems equitable in the circumstances. Upon application
of a stockholder, the Court may order all or a portion of the expenses incurred
by any stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorney's fees and the fees and expenses of
experts, to be charged pro rata against the value of all the shares entitled to
an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to received
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the shares of
such objecting stockholders would have been converted had they assented to the
merger or consolidation shall have the status of authorized and unissued shares
of the surviving or resulting corporation.
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<PAGE>
Appendix F
JFAX.COM, INC.
AMENDED AND RESTATED
1997 STOCK OPTION PLAN
----------------------
ARTICLE I
PURPOSES
--------
1.1. Purpose of Plan. The purpose of the JFAX Communications, Inc.
----------------
(JFAX.COM) 1997 Stock Option Plan (the "Plan") are to advance the interests of
JFAX.COM, Inc.(the "Company") and its shareholders by providing significant
incentives to selected officers, employees, and consultants of the Company who
contribute and are expected to contribute to the success of the Company, and to
enhance the interest of such officers and employees in the Company's success and
progress by providing them with an opportunity to become shareholders of the
Company. Further, the Plan is designed to enhance the Company's ability to
attract and retain qualified employees necessary for the success and progress of
the Company.
ARTICLE
DEFINITIONS
-----------
2.1. Definitions. Certain terms used herein shall have the meaning below
------------
stated, subject to the provisions of Section 7.1 hereof.
(a) "Board" or "Board of Directors" means the Board of Directors of
the Company.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
(c) "Committee" means either (i) the Board of Directors or (ii) the
Compensation Committee of the Board of Directors or such other committee of
the Board as shall be appointed by the Board to administer the Plan
pursuant to Article VII hereof.
(d) "Common Stock" means, subject to the provisions of Section 9.3,
the authorized common stock of the Company, par value $.01 per share.
(e) "Company" means JFAX.COM, Inc.
(f) "Effective Date" means the date on which the Company's 1997 Stock
Option Plan is adopted by the Board or the date the Plan is approved by the
stockholders of the
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Company, whichever is earlier.
(g) "Employee" means (i) any individual who is a common-law employee
of the Company or of a Subsidiary, (ii) a member of the Board of Directors,
or (iii) any consultant or other persons to the extent permitted by the
instructions to Form S-8 under the Securities Act of 1933, as amended, who
performs services for the Company or a Subsidiary. Service as a member of
the Board of Directors or as a consultant shall be considered employment
for all purposes under the Plan except the third sentence of Section 4.1.
(h) "Fair Market Value" means, in respect of a share of Common Stock
on any date, the last reported sales price regular way on such date or, in
case no such reported sale takes place on such date, the last reported
sales price regular way on the day preceding such date on which a reported
sale occurred, in either case on the New York Stock Exchange or, if at the
time the Common Stock is not listed or admitted to trading on such
Exchange, on the principal national securities exchange on which the Common
Stock is listed or admitted to trading or, if at the time the Common Stock
is not listed or admitted to trading on any national securities exchange,
in the National Association of Securities Dealers Automated Quotations
National Market System or, if at the time the Common Stock is not listed or
admitted to trading on any national securities exchange or quoted on such
National Market System, the average of the closing bid and asked prices in
the over-the-counter market as furnished by any New York Stock Exchange
member firm selected from time to time by the Company for that purpose or,
if the Common Stock is not traded over-the-counter, as determined by the
Committee using any reasonable valuation method.
(i) "Incentive Stock Option" means an Option to purchase Common
Stock, granted by the Company to an Employee pursuant to Section 5.1
hereof, which meets the requirements of Section 422 of the Code.
(j) "Nonstatutory Stock Option" means an Option to purchase Common
Stock, granted by the Company to an Employee pursuant to Section 5.1
hereof, which does not meet the requirements of Section 422 of the Code or
which provides, as of the time the Option is granted, that it will not be
treated as an Incentive Stock Option.
(k) "Option" means an Incentive Stock Option or a Nonstatutory Stock
Option.
(l) "Option Agreement" means an agreement between the Company and an
Optionee evidencing the terms of an Option Granted under the Plan.
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(m) "Optionee" means an Employee to whom an Option has been granted
under the Plan.
(n) "Plan" means the JFAX.COM, Inc. 1997 Stock Option Plan, as set
forth herein and as from time to time amended.
(o) "Subsidiary" means a subsidiary of the Company within the meaning
of Section 424(f) of the Code.
ARTICLE III
EFFECTIVE DATE OF THE PLAN; RESERVATION OF SHARES
-------------------------------------------------
3.1. Effective Date. The Plan shall become effective as of the Effective
---------------
Date.
3.2. Shares Reserved Under Plan. The aggregate number of shares of Common
---------------------------
Stock which may be issued upon the exercise of Options granted under the Plan
shall not exceed 8,000,000 of the authorized shares of Common Stock, all or any
part of which may be issued pursuant to Incentive Stock Options or Nonstatutory
Stock Options or any combination thereof. Shares of Common Stock issued upon the
exercise of Options granted under the Plan may consist of either authorized but
unissued shares or shares which have been issued and which shall have been
reacquired by the Company. The total number of shares authorized under the Plan
shall be subject to increase or decrease in order to give effect to the
provisions of Section 9.3 and to give effect to any amendment adopted pursuant
to Article VIII. If any Option granted under the Plan shall expire, terminate or
be cancelled for any reason without having been exercised in full, the number of
shares as to which such Option was not exercised shall again be available for
purposes of the Plan. The Company shall at all times while the Plan is in effect
reserve such number of shares of Common Stock as will be sufficient to satisfy
the requirements of the Plan.
ARTICLE IV
PARTICIPATION IN PLAN
---------------------
4.1. Eligibility. Options under the Plan may be granted to any key Employee
------------
of the Company or a Subsidiary who performs services for the Company or a
Subsidiary that the Committee deems to be of special importance to the growth
and success of the Company. The Committee shall determine those Employees to
whom Options shall be granted, the type of Option to be granted to each such
person, and, subject to Sections 3.2 hereof, the number of shares of Common
Stock subject to each such Option. Only individuals who are employed as common-
law employees by the Company or a Subsidiary shall be eligible for the grant of
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Incentive Stock Options.
4.2. Participation Not Guarantee of Employment or Retention. Nothing in
-------------------------------------------------------
this Plan or in any Option Agreement shall in any manner be construed to limit
in any way the right of the Company or any Subsidiary to terminate an Employee's
employment at any time, without regard to the effect of such termination on any
rights such Employee would otherwise have under this Plan, or give any right to
an Employee to remain employed by the Company or a Subsidiary thereof in any
particular position or at any particular rate of compensation.
ARTICLE V
GRANT AND EXERCISE OF OPTIONS
-----------------------------
5.1. Grant of Options. The Committee may from time to time in its
-----------------
discretion grant Incentive Stock Options and/or Nonstatutory Stock Options to
Employees at any time after the Effective Date. All Options under the Plan shall
be granted within ten (10) years from the date the Plan is adopted by the Board
or the date the Plan is approved by the stockholders of the Company, whichever
is earlier.
5.2. Option Terms. Options granted under the Plan shall be subject to the
-------------
following requirements:
(a) Option Price. The exercise price of each Incentive Stock Option
shall not be less than the higher of the par value or 100% of the Fair
Market Value of the shares of Common Stock subject to the Option on the
date the Option is granted. The exercise price of each Nonstatutory Stock
Option shall be the amount determined by the Committee as set forth in the
applicable Option Agreement, provided that such amount shall not be less
than the higher of the par value or 85% of the Fair Market Value of the
shares of Common Stock subject to the Option on the date the Option is
granted, provided further that options may only be granted at less than
100% of the Fair Market Value of the shares of Common Stock subject to the
Option on the date of grant if the discount is expressly in lieu of a
reasonable amount of salary or cash bonus, as determined by the Board of
Directors or the Committee in its sole discretion. The exercise price of an
Option may be subject to adjustment pursuant to Section 9.3 hereof.
(b) Term of Option. The term during which an Option is exercisable
shall be that period determined by the Committee as set forth in the
applicable Option Agreement, provided that no Option shall have a term that
exceeds a period of 10 years from the date of its grant.
(c) Nontransferability of Option. No Option granted
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<PAGE>
under the Plan shall be transferable by the Optionee otherwise than by will
or the laws of descent and distribution, and each such Option shall be
exercisable during the Optionee's lifetime only by him. No transfer of an
Option by an Optionee by will or by the laws of descent and distribution
shall be effective to bind the Company unless the Company shall have been
furnished with written notice thereof and a copy of the will and/or such
other evidence as the Committee may determine necessary to establish the
validity of the transfer.
(d) Exercise of Option. Unless the Option Agreement pursuant to which
an Option is granted provides otherwise, each Option shall become
exercisable, on a cumulative basis, with respect to 25% of the aggregate
number of the shares of Common Stock covered thereby on the first
anniversary of the date of grant and with respect to an additional 25% of
the shares of Common Stock covered thereby on each of the next three (3)
succeeding anniversaries of the date of grant; provided, however, the
--------
Committee may establish a different vesting schedule for any optionee or
group of optionees. Any portion of an Option which has become exercisable
shall remain exercisable until it is exercised in full or terminates
pursuant to the terms of the Plan or the Option Agreement pursuant to which
it is granted.
(e) Acceleration of Exercise on Change of Control. Notwithstanding
the provisions of paragraph (d) of this Section or any other restrictions
limiting the number of shares of Common Stock as to which an Option may be
exercised, each Option shall become immediately exercisable in full upon
and simultaneously with any "Change of Control" of the Company unless the
Board determines that the optionee has been offered substantially identical
replacement options and a comparable position at any acquiring company. For
purposes of this Plan, a "Change of Control" shall be deemed to have
occurred if:
(i) any "person," as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (other than the Company, any employee benefit plan
sponsored by the Company, any trustee or other fiduciary holding
securities under an employee benefit plan of the Company, or any
corporation owned, directly or indirectly, by the stockholders of the
Company in substantially the same proportions as their ownership of
stock of the Company), is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly,
of securities of the Company representing 50% or more of the combined
voting power of the Company's then outstanding securities;
F-5
<PAGE>
(ii) during any period of two consecutive years individuals who
at the beginning of such period constitute the Board, and any new
director (other than a director designated by a person who has
entered into an agreement with the Company to effect a transaction
described in clause (i), (iii) or (iv) of this Section) whose
election by the Board or nomination for election by the Company's
stockholders was approved by a vote of at least a majority of the
directors then still in office who either were directors at the
beginning of the period or whose election or nomination for election
was previously so approved, cease for any reason to constitute at
least a majority thereof;
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a
merger or consolidation which would result in the voting securities
of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity) more than 50% of the
combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or
consolidation; or
(iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the
Company's assets. For the purposes of this subsection (iv),
"substantially all" of the Company's assets shall mean assets for
which the price or consideration upon sale or disposition equals or
exceeds seventy-five percent (75%) or more of the fair market value
of the Company.
(f) Incentive Stock Options Granted to Ten Percent Shareholders. No
Incentive Stock Options shall be granted to any Employee who owns, directly or
indirectly within the mean of Section 424(d) of the Code, stock possessing more
than 10% of the total combined voting power of all classes of stock of the
Company or any Subsidiary, unless at the time the Incentive Stock Option is
granted, the exercise price of the Incentive Stock Option is at least 110% of
the Fair Market Value of the Common Stock subject to such Incentive Stock Option
and such Incentive Stock Option, by its terms, is not exercisable after the
expiration of five years from the date such Incentive Stock Option is granted.
(g) Limitation on Incentive Stock Options. To the extent that the aggregate
Fair Market Value of the Common Stock with respect to which Incentive Stock
Options are exercisable for the first time by an Optionee during any calendar
year (under all plans of the Company and its parent and subsidiary corporations)
F-6
<PAGE>
exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options.
For this purpose, Options shall be taken into account in the order in which they
were granted and the Fair Market Value of the Common Stock shall be determined
as of the time the Option with respect to such Common Stock is granted.
5.3. Payment of Exercise Price and Delivery of Shares.
-------------------------------------------------
(a) Notice and Payment for Shares. Each Option shall be exercised by
delivery of a written notice to the Company in such form as the Committee shall
approve stating the number of the whole shares of Common Stock as to which the
Option is being exercised and accompanied by payment therefor. No Option shall
be deemed exercised in the event that payment therefor is not received and
shares of Common Stock shall not be issued upon the exercise of an Option unless
the exercise price is paid in full. Payment for shares of Common Stock purchased
upon the exercise of an Option shall be made by (i) cash, (ii) certified check
payable to the order of the Company, (iii) outstanding shares of Common Stock
duly endorsed to the Company (which shares of Common Stock shall be valued at
their Fair Market Value as of the day preceding the date of such exercise), (iv)
any combination of the foregoing, or (v) such other method of payment as may be
provided in the applicable Option Agreement.
(b) Rights of Optionee in Stock. Neither any Optionee nor the legal
representatives, heirs, legatees or distributees of any Optionee, shall be
deemed to be the holder of, or to have any of the rights of a holder with
respect to, any shares of Common Stock issuable upon exercise of an Option
granted hereunder unless and until such shares are issued to him or them and
such person or persons have received a certificate or certificates therefor.
Upon the issuance and receipt of such certificate or certificates, such Optionee
or the legal representatives, heirs, legatees or distributees of such Optionee
shall have absolute ownership of the shares of Common Stock evidenced thereby,
including the right to vote such shares, to the same extent as any other owner
of shares of Common Stock, and to receive dividends thereon, subject, however,
to the terms, conditions and restrictions of this Plan.
ARTICLE VI
TERMINATION AND DEATH
---------------------
6.1. Termination Other Than by Death or for Cause. If an Optionee's
---------------------------------------------
position as an Employee of the Company or a Subsidiary terminates for any reason
other than death or for Cause (as defined in Section 6.2) he may, unless the
applicable Option Agreement provides otherwise, exercise an Option previously
granted and vested within three months after the date of such termination, but
in no event later than the date on which the Option would have expired in
accordance with its terms. To the
F-7
<PAGE>
extent the Option is not so exercised, it shall expire at the end of such three-
month period.
6.2. Termination for Cause. If an Optionee's position as an Employee of
----------------------
the Company or a Subsidiary is terminated for Cause, any Option theretofore
granted to him shall expire and cease to be exercisable on the date notice of
such termination is delivered to the Optionee. "Cause" shall mean (a) the
willful and continued failure by an Optionee to substantially perform his duties
with the Company (other than any such failure resulting from his incapacity due
to physical or mental illness), after a written demand for substantial
performance is delivered to the Optionee by the Board, which demand specifically
identifies the manner in which the Board believes that the Optionee has not
substantially performed his duties, or (b) the willful engaging by the Optionee
in conduct which is demonstrably and materially injurious to the Company,
monetarily or otherwise. For purposes of this Section 6.2, no act, or failure to
act, shall be deemed "willful" unless done, or omitted to be done, not in good
faith and without reasonable belief that such action or omission was in the best
interest of the Company.
6.3. Death. If an Optionee dies (i) while he is an Employee of the Company
------
or a Subsidiary or (ii) during the three-month period after the termination of
his position as an Employee of the Company or a Subsidiary, and at the time of
his death the Optionee was entitled to exercise an Option theretofore granted to
him, such Option shall, unless the applicable Option Agreement provides
otherwise, expire one year after the date of his death, but in no event later
than the date on which the Option would have expired if the Optionee had lived.
During such one-year period the Option may be exercised by the Optionee's
executor or administrator or by any person or persons who shall have acquired
the Option directly from the Optionee by bequest or inheritance, but only to the
extent that the Optionee was entitled to exercise the Option at the date of his
death and, to the extent the Option is not so exercised, it shall expire at the
end of such one-year period.
ARTICLE VII
ADMINISTRATION OF PLAN
----------------------
7.1. Administration. The Plan shall be administered by the Compensation
---------------
Committee of the Board of Directors or such other committee as may be appointed
by the Board of Directors of the Company, which Committee shall consist of not
less than two members, all of whom are members of the Board of Directors. A
majority of the Committee shall constitute a quorum thereof and the actions of a
majority of the Committee at a meeting at which a quorum is present, or actions
unanimously approved in writing by all members of the Committee, shall be the
actions of the Committee. Vacancies occurring on the Committee shall be filled
by the Board. The Committee shall have full and final authority (i)
F-8
<PAGE>
to interpret the Plan and each of the Option Agreements, (ii) to prescribe,
amend and rescind rules and regulations, if any, relating to the Plan, (iii) to
make all determinations necessary or advisable for the administration of the
Plan and (iv) to correct any defect, supply any omission and reconcile any
inconsistency in the Plan and any Option Agreement. The Committee's
determination in all matters referred to herein shall be conclusive and binding
for all purposes and upon all persons including, but without limitation, the
Company, the shareholders of the Company, the Committee, and each of the members
thereof, Employees and their respective successors in interest.
7.2. Liability. No member of the Committee shall be liable for anything
----------
done or omitted to be done by him or by any other member of the Committee in
connection with the Plan, except for his own willful misconduct or gross
negligence. The Committee shall have power to engage outside consultants,
auditors or other professional help to assist in the fulfillment of the
Committee's duties under the Plan at the Company's expense.
7.3. Determinations. In making its determinations concerning the key
---------------
Employees who shall receive Options as well as the number of shares to be
covered thereby and the time or times at which they shall be granted, the
Committee shall take into account the nature of the services rendered by such
key Employees, their past, present and potential contribution to the Company's
success and such other factors as the Committee may deem relevant. The Committee
shall determine the form of Option Agreements under the Plan and the terms and
conditions to be included therein, provided such terms and conditions are not
inconsistent with the terms of the Plan. The Committee may waive any provisions
of any Option Agreement, provided such waiver is not inconsistent with the terms
of the Plan as then in effect. The Committee's determinations under the Plan
need not be uniform and may be made by it selectively among persons who receive,
or are eligible to receive, Options under the Plan, whether or not such persons
are similarly situated.
ARTICLE VIII
AMENDMENT AND TERMINATION OF PLAN
---------------------------------
8.1. Amendment of Plan. (a) Generally. The Board of Directors may amend
------------------
the Plan at any time and from time to time. Rights and obligations under any
Option granted before amendment of the Plan shall not be materially altered, or
impaired adversely, by such amendment, except with consent of the Optionee. An
amendment of the Plan shall be subject to the approval of the Company's
stockholders only to the extent required by applicable laws, regulations or
rules.
(b) Amendments Relating to Incentive Stock Options. To the extent
applicable, the Plan is intended to permit the issuance of
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<PAGE>
Incentive Stock Options to Employees in accordance with the provisions of
Section 422 of the Code. Subject to paragraph 8.1(a) above, the Plan and Option
Agreements may be modified or amended at any time, both prospectively and
retroactively, and in a manner that may affect Incentive Stock Options
previously granted, if such amendment or modification is necessary for the Plan
and Incentive Stock Options granted hereunder to qualify under said provisions
of the Code.
8.2. Termination. The Board may at any time terminate the Plan as of any
------------
date specified in a resolution adopted by the Board. If not earlier terminated,
the Plan shall terminate on November 11, 2007. No Options may be granted after
the Plan has terminated, but the Committee shall continue to supervise the
administration of Options previously granted.
ARTICLE IX
MISCELLANEOUS PROVISIONS
------------------------
9.1. Restrictions upon Grant of Options. If the listing upon any stock
-----------------------------------
exchange or the registration or qualification under any federal or state law of
any shares of Common Stock to be issued on the exercise of Options granted under
this Plan (whether to permit the grant of Options or the resale or other
disposition of any such shares of Common Stock by or on behalf of Optionees
receiving such shares) should be or become necessary or desirable, the Board in
its sole discretion may determine that delivery of the certificates for such
shares of Common Stock shall not be made until such listing, registration or
qualification shall have been completed. The Company agrees that it will use
its best efforts to effect any such listing, registration or qualification,
provided, however, that the Company shall not be required to use its best
efforts to effect such registration under the Securities Act of 1933 other than
on Form S-8 or such other forms as may be in effect from time to time calling
for information comparable to that presently required to be furnished under Form
S-8.
9.2. Restrictions upon Resale of Unregistered Stock. Each Optionee shall,
-----------------------------------------------
if the Company deems it advisable, represent and agree in writing (i) that any
shares of Common Stock acquired by such Optionee pursuant to this Plan will not
be sold except pursuant to an effective registration statement under the
Securities Act of 1933 or pursuant to an exemption from registration under said
Act, (ii) that such Optionee is acquiring such shares of Common Stock for his
own account and not with a view to the distribution thereof, and (iii) to such
other customary matters as the Company may request. In such case, no shares of
Common Stock shall be issued to such Optionee unless such Optionee provides such
representations and agreements and the Company is reasonably satisfied that such
representations and agreements are correct.
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<PAGE>
9.3. Adjustments.
------------
(a) General. In the event of a subdivision of the outstanding Common
Stock, a declaration of a dividend payable in shares of Common Stock, a
declaration of a dividend payable in a form other than shares in an amount that
has a material effect on the value of shares of Common Stock, a combination or
consolidation of the outstanding Common Stock into a lesser number of shares of
Common Stock, a recapitalization, a reclassification or a similar occurrence,
the Committee shall make appropriate adjustments in one or more of (i) the
number of shares of Common Stock available for future grants of Options under
Section 3.2, (ii) the number of shares of Common Stock covered by each
outstanding Option, or (iii) the exercise price of each outstanding Option.
(b) Reorganizations. In the event that the Company is a party to a merger
or reorganization, outstanding Options shall be subject to the agreement of
merger or reorganization.
(c) Reservation of Rights. Except as provided in this Section 9.3, an
Optionee shall have no rights by reason of (i) any subdivision or consolidation
of shares of stock of any class, (ii) the payment of any dividend, or (iii) any
other increase or decrease in the number of shares of stock of any class. Any
issue by the Company of shares of stock of any class, or securities convertible
into shares of stock of any class, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number or exercise price of shares of
Common Stock subject to an Option. The grant of Option Shares pursuant to the
Plan shall not affect in any way the right or power of the Company to make
adjustments, reclassifications, reorganizations or changes of its capital or
business structure, to merge or consolidate or to dissolve, liquidate, sell or
transfer all or any part of its business or assets.
9.4. Withholding of Taxes. (a) Each Optionee who exercises a Nonstatutory
---------------------
Stock Option shall agree that no later than the date of such exercise or receipt
of shares of Common Stock pursuant thereto he will pay to the Company, or make
arrangements satisfactory to the Committee regarding payment of, any Federal,
state or local taxes of any kind required by law to be withheld with respect to
the transfer to him of such shares of Common Stock.
(b) The applicable Option Agreement may provide that an Optionee may
satisfy, in whole or in part, the requirements of paragraph (a):
(i) by delivery of shares of Common Stock owned by the Optionee for
at least six months (or such shorter or longer period as the Committee may
approve) having a Fair Market
F-11
<PAGE>
Value (determined as of the date of such delivery) equal to all or part of
the amount to be so withheld, or
(ii) by electing to have the Company withhold the requisite number of
shares from shares otherwise deliverable pursuant to the exercise of the
Option giving rise to the tax withholding obligation provided, however,
that
(A) the Optionee's election and the withholding pursuant thereto
take effect during the period beginning on the third business day
following the date of release for publication of the quarterly and
annual summary statements of the Company's sales and earnings and
ending on the twelfth business day following such date, and six months
have elapsed since the date the Option was granted, or
(B) such election was irrevocably made by the Optionee and filed
with the Committee in writing at least six months in advance of the
date on which such withholding occurs.
The Committee may require, as a condition of accepting any such delivery of
Common Stock or any such election by the Optionee, that the Optionee furnish to
the Company an opinion of counsel to the effect that such delivery or election
will not result in the Optionee incurring any liability under Section 16(b) of
the Securities Exchange Act of 1934, as amended.
9.5. Use of Proceeds. The proceeds from the sale of Common Stock pursuant
----------------
to Options granted under the Plan shall constitute general funds of the Company
and may be used for such corporate purposes as the Company may determine.
9.6. Substitution of Options. (a) The Committee may, with the consent of
------------------------
the holder of any Option granted under the Plan, cancel such Option and grant a
new Option in substitution therefor, provided that the Option as so substituted
shall satisfy all of the requirements of the Plan as of the date such new Option
is granted.
(b) Options may be granted under this Plan in substitution for options
held by individuals who are employees of another corporation and who become
Employees of the Company or any Subsidiary of the Company eligible to receive
Options pursuant to the Plan as a result of a merger, consolidation,
reorganization or similar event. The terms and conditions of any Options so
granted may vary from those set forth in the Plan to the extent deemed
appropriate by the Committee in order to conform the provisions of Options
granted pursuant to the Plan to the provisions of the options in substitution
for which they are granted.
9.7. Notices. Any notice required or permitted hereunder
--------
F-12
<PAGE>
shall be sufficiently given only if sent by registered or certified mail, return
receipt requested, postage prepaid, addressed to the Company at its principal
place of business, and to the Optionee at the address on file with the Company
at the time of grant hereunder, or to such other address as either party may
hereafter designate in writing by notice similarly given by one party to the
other.
9.8. Governing Law. The Plan and all determinations made and actions taken
--------------
hereunder, to the extent not otherwise governed by the Code or the laws of the
Untied States of America, shall be governed by the laws of the State of
California and construed accordingly.
F-13
<PAGE>
Appendix G
JFAX.COM, INC.
AUDIT COMMITTEE CHARTER
I. Composition of the Audit Committee: The Audit Committee shall be comprised
----------------------------------
of at least three directors, each of whom shall not be an officer or
employee of the Company or its subsidiaries, shall not have any
relationship which, in the opinion of the Board of Directors, would
interfere with the exercise of independent judgment in carrying out the
responsibilities of a director and shall otherwise satisfy the applicable
membership requirements under the rules of the National Association of
Securities Dealers, Inc., as such requirements are interpreted by the Board
of Directors in its business judgment.
II. Purposes of the Audit Committee: The purposes of the Audit Committee are to
-------------------------------
assist the Board of Directors:
1. in its oversight of the Company's accounting and financial reporting
principles and policies and internal audit controls and procedures;
2. in its oversight of the Company's financial statements and the
independent
audit thereof;
3. in selecting (or nominating the outside auditors to be proposed for
shareholder approval in any proxy statement), evaluating and, where
deemed appropriate, replacing the outside auditors; and
4. in evaluating the independence of the outside auditors.
The function of the Audit Committee is oversight. The management of the
Company is responsible for the preparation, presentation and integrity of
the Company's financial statements. Management and the internal auditing
department are responsible for maintaining appropriate accounting and
financial reporting principles and policies and internal controls and
procedures designed to assure compliance with accounting standards and
applicable laws and regulations. The outside auditors are responsible for
planning and carrying out a proper audit and reviews, including reviews of
the Company's quarterly financial statements prior to the filing of each
quarterly report on Form 10-Q, and other procedures. In fulfilling their
responsibilities hereunder, it is recognized that members of the Audit
Committee are not full-time employees of the Company and are not, and do
not represent themselves to be, accountants or auditors by profession or
experts in the fields of accounting or auditing. As such, it is not the
duty or responsibility of the Audit Committee or its members to conduct
"field work" or other types of auditing or accounting reviews or
procedures, and each member of the Audit Committee shall be entitled to
rely on (i) the integrity of those persons and organizations within and
outside the Company that it receives information from and (ii) the accuracy
of the financial and other information provided to the Audit
G-1
<PAGE>
Committee by such persons or organizations absent actual knowledge to the
contrary (which shall be promptly reported to the Board of Directors).
The outside auditors for the Company are ultimately accountable to the
Board of Directors (as assisted by the Audit Committee). The Board of
Directors, with the assistance of the Audit Committee, has the ultimate
authority and responsibility to select, evaluate and, where appropriate,
replace the outside auditors (or to nominate the outside auditors to be
proposed for shareholder approval in the proxy statement).
The outside auditors shall submit to the Company annually a formal written
statement delineating all relationships between the outside auditors and
the Company ("Statement as to Independence"), addressing at least the
matters set forth in Independence Standards Board No. 1.
III. Meetings of the Audit Committee: In addition to such meetings of the
-------------------------------
Audit Committee as may be required to discuss the matters set forth in
Article IV, the Audit Committee should meet separately at least annually
with management, the director of the internal auditing department and the
outside auditors to discuss any matters that the Audit Committee or any of
these persons or firms believe should be discussed privately. The Audit
Committee may request any officer or employee of the Company or the
Company's outside counsel or outside auditors to attend a meeting of the
Audit Committee or to meet with any members of, or consultants to, the
Audit Committee. Members of the Audit Committee may participate in a
meeting of the Audit Committee by means of conference call or similar
communications equipment by means of which all persons participating in the
meeting can hear each other.
IV. Duties and Powers of the Audit Committee: To carry out its purposes, the
----------------------------------------
Audit Committee shall have the following duties and powers:
1. with respect to the outside auditors,
(i) to provide advice to the Board of Directors in selecting,
evaluating or replacing outside auditors;
(ii) to review the fees charged by the outside auditors for audit and
non-audit services;
(iii) to ensure that the outside auditors prepare and deliver annually
a Statement as to Independence (it being understood that the
outside auditors are responsible for the accuracy and
completeness of this Statement), to discuss with the outside
auditors any relationships or services disclosed in this
Statement that may impact the objectivity and independence of
the Company's outside auditors and to recommend that the Board
of Directors take appropriate action in
G-2
<PAGE>
response to this Statement to satisfy itself of the outside
auditors' independence; and
(iv) to instruct the outside auditors that the outside auditors are
ultimately accountable to the Board of Directors and Audit
Committee;
2. with respect to the internal auditing department,
(i) to review the appointment and replacement of the director of the
internal auditing department; and
(ii) to advise the director of the internal auditing department that
he or she is expected to provide to the Audit Committee
summaries of and, as appropriate, the significant reports to
management prepared by the internal auditing department and
management's responses thereto;
3. with respect to financial reporting principles and policies and
internal audit controls and procedures,
(i) to advise management, the internal auditing department and the
outside auditors that they are expected to provide to the Audit
Committee a timely analysis of significant financial reporting
issues and practices;
(ii) to consider any reports or communications (and management's
and/or the internal audit department's responses thereto)
submitted to the Audit Committee by the outside auditors
required by or referred to in SAS 61 (as codified by AU Section
380), as may be modified or supplemented, including reports and
communications related to:
. deficiencies noted in the audit in the design or operation
of internal controls;
. consideration of fraud in a financial statement audit;
. detection of illegal acts;
. the outside auditors' responsibility under generally
accepted auditing standards;
. significant accounting policies;
. management judgments and accounting estimates;
G-3
<PAGE>
. adjustments arising from the audit;
. the responsibility of the outside auditors for other
information in documents containing audited financial
statements;
. disagreements with management;
. consultation by management with other accountants;
. major issues discussed with management prior to retention of
the outside auditor;
. difficulties encountered with management in performing the
audit;
. the outside auditor's judgments about the quality of the
entity's accounting principles; and
. reviews of interim financial information conducted by the
outside auditor;
(iii) to meet with management, the director of the internal auditing
department and/or the outside auditors:
. to discuss the scope of the annual audit;
. to discuss the audited financial statements;
. to discuss any significant matters arising from any audit or
report or communication referred to in items 2(ii) or 3(ii)
above, whether raised by management, the internal auditing
department or the outside auditors, relating to the
Company's financial statements;
. to review the form of opinion the outside auditors propose
to render to the Board of Directors and shareholders;
. to discuss significant changes to the Company's auditing and
accounting principles, policies, controls, procedures and
practices proposed or contemplated by the outside auditors,
the internal auditing department or management; and
. to inquire about significant risks and exposures, if any,
and
G-4
<PAGE>
the steps taken to monitor and minimize such risks;
(iv) to obtain from the outside auditors assurance that the audit was
conducted in a manner consistent with Section 10A of the
Securities Exchange Act of 1934, as amended, which sets forth
certain procedures to be followed in any audit of financial
statements required under the Securities Exchange Act of 1934;
and
(v) to discuss with the Company's General Counsel any significant
legal matters that may have a material effect on the financial
statements, the Company's compliance policies, including
material notices to or inquiries received from governmental
agencies; and
4. with respect to reporting and recommendations,
(i) to prepare any report, including any recommendation of the Audit
Committee, required by the rules of the Securities and Exchange
Commission to be included in the Company's annual proxy
statement;
(ii) to review this Charter at least annually and recommend any
changes to the full Board of Directors; and
(iii) to report its activities to the full Board of Directors on a
regular basis and to make such recommendations with respect to
the above and other matters as the Audit Committee may deem
necessary or appropriate.
V. Resources and Authority of the Audit Committee: The Audit Committee shall
----------------------------------------------
have the resources and authority appropriate to discharge its
responsibilities, including the authority to engage outside auditors for
special audits, reviews and other procedures and to retain special counsel
and other experts or consultants.
G-5
<PAGE>
PART II
Information Not Required in Prospectus
Item 20. Indemnification of Officers and Directors.
As permitted by Delaware law, the JFAX.COM certificate of
incorporation includes a provision that eliminates the personal liability of
JFAX.COM directors to JFAX.COM or JFAX.COM stockholders for monetary damages for
breach of fiduciary duty as a director.
Article VI of JFAX.COM's by-laws provides: "The Corporation shall
indemnify to the full extent permitted by law any person made or threatened to
be made a party to any action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that such person or such
person's testator or intestate is or was a director, officer or employee of the
Corporation or serves or served at the request of the Corporation any other
enterprise as a director, officer or employee. Expenses, including attorneys'
fees, incurred by any such person in defending any such action, suit or
proceeding shall be paid or reimbursed by the Corporation promptly upon receipt
by it of an undertaking of such person to repay such expenses if it shall
ultimately be determined that such person is not entitled to be indemnified by
the Corporation. The rights provided to any person by this by-law shall be
enforceable against the Corporation by such person who shall be presumed to have
relied upon it in serving or continuing to serve as a director, officer or
employee as provided above. No amendment of this by-law shall impair the rights
of any person arising at any time with respect to events occurring prior to such
amendment. For purposes of this by-law, the term `Corporation' shall include any
predecessor of the Corporation and any constituent corporation (including any
constituent of a constituent) absorbed by the Corporation in a consolidation or
merger; the term `other enterprise' shall include any corporation, partnership,
joint venture, trust or employee benefit plan; service `at the request of the
Corporation' shall include service as a director, officer or employee of the
Corporation which imposes duties on, or involves services by, such director,
officer or employee with respect to an employee benefit plan, its participants
or beneficiaries; any excise taxes assessed on a person with respect to an
employee benefit plan shall be deemed to be indemnifiable expenses; and action
by a person with respect to an employee benefit plan which such person
reasonably believes to be in the interest of the participants and beneficiaries
of such plan shall be deemed to be an action not opposed to the best interests
of the Corporation."
JFAX.COM has also obtained a policy of directors' and officers'
liability insurance for its directors and officers to insure directors and
officers against the cost of defense, settlement or payment of a judgment under
certain circumstances.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits:
A list of the exhibits included as part of this registration statement
is set forth on the list of exhibits immediately preceding such exhibits and is
incorporated herein by reference.
(b) Financial Statement Schedules:
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted because
they are not required, amounts which would otherwise be required to be shown
with respect to any item are not material, are inapplicable or the required
information has already been provided elsewhere or incorporated by reference in
the registration statement.
II-1
<PAGE>
Item 22: Undertakings.
The undersigned Registrant hereby undertakes as follows:
(1) That for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual
report pursuant to section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d)
of the Securities Exchange Act of 1934) that is incorporated by
reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(2) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this
registration statement, by any person or party who is deemed to
be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters,
in addition to the information called for by the other items of
the applicable form.
(3) That every prospectus (i) that is filed pursuant to paragraph (2)
immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act of 1933
and is used in connection with an offering of securities subject
to Rule 415, will be filed as a part of an amendment to the
registration statement and will not be used until such amendment
is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(4) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted for directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid
by a director, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication
of such issue.
(5) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11 or 13
of this Form, within one business day of receipt of such request,
and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained
in documents filed subsequent to the effective date of the
Registration Statement through the date of responding to the
request.
(6) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired or
involved therein, that was not the subject of and included in the
registration statement when it became effective.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Los
Angeles, State of California, on the 25th day of August, 2000.
JFAX.COM, Inc.
By: /s/ Steven J. Hamerslag
---------------------------------------------
Name: Steven J. Hamerslag
Title: President and Chief Executive Officer
POWER OF ATTORNEY
The undersigned directors and officers of JFAX.COM, Inc. do hereby
constitute and appoint R. Scott Turicchi, Nehemia Zucker and Nicholas V.
Morosoff, and each of them, our true and lawful attorneys-in-fact and agents to
do any and all acts and things in our name and behalf in our capacities as
directors and offices, and to execute any and all instruments for us and in our
names in the capacities indicated below which such person or persons may deem
necessary or advisable to enable JFAX.COM to comply with the Securities Act of
1933, as amended, and any rules, regulations and requirements of the Securities
and Exchange Commission, in connection with this Registration Statement,
including specifically, but not limited to, power and authority to sign for us,
or any of us, in the capacities indicated below and all amendments (including
post-effective amendments) hereto and we do hereby ratify and confirm all that
such person or persons shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on August 25, 2000:
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
Principal Executive Officer:
/s/ Steven J. Hamerslag President and Chief Executive Officer August 25, 2000
-------------------------------------------
Steven J. Hamerslag
Principal Financial and Accounting Officer:
/s/ Nehemia Zucker Chief Financial and Accounting Officer August 25, 2000
-------------------------------------------
Nehemia Zucker
Directors:
/s/ Richard S. Ressler Chairman of the Board August 25, 2000
-------------------------------------------
Richard S. Ressler
Director , 2000
-------------------------------------------
Zohar Loshitzer
/s/ John F. Rieley Director August 25, 2000
-------------------------------------------
John F. Rieley
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Michael P. Schulhof Director August 25, 2000
-------------------------------------------
Michael P. Schulhof
/s/ R. Scott Turicchi Director August 25, 2000
-------------------------------------------
R. Scott Turicchi
/s/ Robert J. Cresci Director August 25, 2000
-------------------------------------------
Robert J. Cresci
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
2.1 Agreement and Plan of Merger, dated as of July 13, 2000, among
eFax.com, JFAX.COM, Inc. and JFAX.COM Merger Sub, Inc. (included as
Appendix A to the proxy statement/prospectus).
2.2 Stock Purchase Agreement, dated as of January 15, 2000, among
JFAX.COM, Inc., the stockholders of SureTalk.Com, Inc. listed
therein, and SureTalk.Com, Inc.(4)
With respect to exhibits 2.1 and 2.2, such agreements contain a
listing of schedules or similar attachments. Pursuant to the
applicable instruction, such schedules or attachments are not filed
herewith. However, the Registrant agrees to furnish supplementally to
the Commission upon request a copy of any omitted schedule or
attachment.
3.1 Certificate of Incorporation of JFAX.COM, as amended and restated.(1)
3.1.1 Certificate of Designation of Series B Convertible Preferred Stock of
JFAX.COM.(5)
3.2 By-laws of JFAX.COM, as amended and restated.(1)
4.1 Specimen of JFAX.COM common stock certificate.(3)
5.1 Opinion of Sullivan & Cromwell (to be filed by amendment).
9.1 Securityholders' Agreement, dated as of June 30, 1998, between
JFAX.COM, Inc. and the investors in the June and July 1998 private
placements by JFAX.COM.(1)
10.1 JFAX.COM Incentive Compensation Bonus Plan.(1)
10.2 JFAX Communications, Inc. (JFAX.COM) 1997 Stock Option Plan.(5)
10.2.1 Amended and Restated 19997 Stock Option Plan (included as Appendix F
to the proxy statement/prospectus).
10.3 Employment Agreement for Gary H. Hickox, dated September 2, 1998.(1)
<PAGE>
10.3.1 Promissory Note issued by Gary H. Hickox to JFAX Communications, Inc.
on October 7, 1998, due October 7, 2001.(2)
10.4 Employment Agreement for Dr. Anand Narasimhan, dated March 17,
1997.(1)
10.4.1 Amended and Restated Interest Only Note issued by Anand Narasimhan to
JFAX Communications, Inc. on September 17, 1997, due September 17,
1998.(2)
10.5 Employment Agreement for Nehemia Zucker, dated March 21, 1997.(1)
10.5.1 Promissory Note issued by Nehemia Zucker to JFAX Communications, Inc.
on April 11, 1997, due March 31, 2001.(2)
10.6 Consulting Agreement for Boardrush Media LLC, dated as of March 17,
1997.(1)
10.6.1* Modification Agreement, dated as of January 1, 2000, to the Boardrush
Consulting Agreement.
10.7 Put Rights, for the benefit of the investors in the June and July
1998 private placements.(1)
10.8 Registration Rights Agreement, dated as of June 30, 1998, with the
investors in the June and July 1998 private placements.(1)
10.9 Registration Rights Agreement, dated as of March 17, 1997, with
Orchard/JFAX Investors, LLC, Boardrush LLC (Boardrush Media LLC),
Jaye Muller, John F. Rieley, Nehemia Zucker and Anand Narasimhan.(1)
10.9.1 Letter, dated as of June 30, 1998, to Boardrush LLC, Jens Muller John
F. Rieley, Anand Narasimhan, and Nehemia Zucker from Richard S.
Ressler regarding the Registration Rights Agreement, dated as of
March 17, 1997, among JFAX Communications, Inc., Boardrush LLC, Jens
Muller, John F. Rieley, Anand Narasimhan, and Nehemia Zucker.(2)
10.10 Stock Option Agreement, dated as of January 24, 1997, by and among
JFAX Communications, Inc. and Michael P. Schulhof.(2)
10.11 Letter, dated as of June 30, 1998, to Michael P. Schulhof from
Richard S. Ressler regarding the Stock Option Agreement, dated as of
January 24, 1997, between JFAX Communications, Inc. and Michael P.
Schulhof.(2)
2
<PAGE>
10.12 Purchase Agreement, dated as of July 2, 1998, relating to $5 million
of preferred stock and warrants.(2)
10.13 Consent to Amendment of Purchase Agreement, dated as of April 16,
1999.(2)
10.14 Form of warrant pursuant to such Purchase Agreement.(2)
10.15 Master Loan and Security Agreement, dated as of March 10, 1998, by
JFAX Communications, Inc. in favor of Transamerica Business Credit
Corporation.(2)
10.16 Promissory Note issued by JFAX Communications, Inc. to Transamerica
Business Credit Corporation on April 21, 1998 due May 1, 2001.(2)
10.17 Promissory Note issued by JFAX Communications, Inc. to Transamerica
Business Credit Corporation on December 22, 1998 due January 1,
2002.(2)
10.18 Investment Agreement among JFAX Communications, Inc., Jens Muller,
John F. Rieley and Boardrush LLC and Orchard/JFAX Investors, LLC and
Richard S. Ressler, dated as of March 14, 1997 and effective as of
March 17, 1997.(2)
10.19 Promissory Note issued by Boardrush LLC to JFAX Communications, Inc.
dated March 17, 1997 due March 17, 2004.(2)
10.20 Employment Agreement, dated as of January 26, 2000, between JFAX.COM,
Inc. and Steven J. Hamerslag.(5)
10.21 Employment Agreement, dated February 17, 2000, between JFAX.COM, Inc.
and R. Scott Turicchi.(5)
10.22 Escrow Agreement, dated as of January 26, 2000, among City National
Bank, JFAX.COM, Inc. and Steven J. Hamerslag.(5)
10.23 Promissory Note, dated January 26, 2000, from Steven J. Hamerslag in
favor of JFAX.COM, Inc.(5)
10.24 Side Agreement among eFax.com, JFAX.COM, Inc., Wingate Capital Ltd.
and Fisher Capital Ltd., dated July 13, 2000.(6)
10.25 Agreement of Understanding among eFax.com, JFAX.COM, Inc. and
Integrated Global Concepts, Inc., dated June 30, 2000. (6)
3
<PAGE>
10.26 Exchange Agreement, between eFax.com, and the current holders of
eFax.com's Series B Convertible Preferred Stock, dated as of July 13,
2000.(6)
10.27 Term Loan Agreement, between eFax.com and JFAX.COM, Inc., dated May
5, 2000. Such agreement contains a listing of schedules or similar
attachments. Pursuant to the applicable instruction, such schedules
or attachments are not filed herewith. However, the Registrant agrees
to furnish supplementally to the Commission upon request a copy of
any omitted schedule or attachment.(7)
10.28 First Amendment to Term Loan Agreement, between eFax.com and
JFAX.COM, Inc., dated July 13, 2000.(6)
10.29 Allonge to Promissory Note made by eFax.com in favor of JFAX.COM,
Inc. dated July 13, 2000.(6)
13.1 eFax.com Annual Report on Form 10-K for the fiscal year ended January
1, 2000, as amended on May 1, 2000 (included in Appendix D to the
proxy statement/prospectus).
13.2 eFax.com Quarterly Report on Form 10-Q for the quarterly period ended
July 1, 2000 (included in Appendix D to the proxy
statement/prospectus).
21.1 List of subsidiaries of JFAX.COM.(5)
23.1* Consent of KPMG LLP.
23.2* Consent of Deloitte & Touche LLP.
23.3 Consent of Sullivan & Cromwell (included in 5.1).
24.1 Power of Attorney (included on the signature page of the registration
statement).
[Note: The Financial Data Schedule is not applicable because the
fiscal year and interim year to date financial statements of the
Registrant included in this filing have been previously filed with
the Commission as part of the Registrant's reports on Form 10-K and
Form 10-Q.]
99.1* Form of Proxy of JFAX.COM.
99.2* Form of Proxy of eFax.com.
4
<PAGE>
________________________
* Filed herewith. All other exhibits will be filed by amendment or are
incorporated by reference as indicated by the numeric footnote references
or are included among the appendices to the proxy statement/prospectus.
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 filed with the Commission on April 16, 1999, Registration No. 333-
76477.
(2) Incorporated by reference to the Company's Amendment No. 1 to
Registration Statement on Form S-1 filed with the Commission on May 26,
1999, Registration No. 333-76477.
(3) Incorporated by reference to the Company's Amendment No. 2 to
Registration Statement on Form S-1 filed with the Commission on June 14,
1999, Registration No. 333-76477.
(4) Incorporated by reference to the Company's Report on Form 8-K filed with
the Commission on February 10, 2000.
(5) Incorporated by reference to the Company's Report on Form 10-K filed with
the Commission on March 30, 2000.
(6) Incorporated by reference to the Company's Report on Form 8-K filed with
the Commission on July 20, 2000.
(7) Incorporated by reference to the Company's Report on Form 10-Q filed with
the Commission on August 14, 2000.
5
