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As filed with the Securities and Exchange Commission on May 8, 2000
Registration No. __________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
JFAX.COM, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
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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________________________
6922 Hollywood Boulevard
Suite 900
Hollywood, California 90028
(Address of principal executive offices)
(323) 860-9200
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Steven J. Hamerslag
Chief Executive Officer
6922 Hollywood Boulevard
Suite 900
Hollywood, California 90028
(Address of principal executive offices)
(323) 860-9200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Frank H. Golay, Jr., Esq.
Sullivan & Cromwell
1888 Century Park East
Los Angeles, California 90067
Telephone: (310) 712-6600
Fax: (310) 712-8800
________________________
Approximate date of commencement of proposed sale to the public: From time
to time after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
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 for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
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. [_]
If this Form is a post-effective amendment filed pursuant to Rule 464(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. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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Proposed maximum Proposed maximum
Title of each class of Amount to be offering price per aggregate offering Amount of
securities to be registered registered unit(1) price(1) registration fee
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Common Stock, $.01 par value..... 1,515,545 shares $2.48 $3,765,220 $995
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c), based on the average of the high and low prices of
the Common Stock of JFAX.COM, Inc. (the "Company") as reported on the
NASDAQ National Market on May 4, 2000, multiplied by the amount of shares
to be registered.
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Prospectus
RED HERRING TEXT
- ----------------
THE INFORMATION IN THIS 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 PROSPECTUS
IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER
TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
Subject to Completion, dated May 8, 2000.
1,515,545 Shares
JFAX.COM, Inc Common Stock
This is an offering of shares of common stock of JFAX.COM,Inc. from time to
time by the selling stockholders.
Our common stock is listed on the Nasdaq National Market under the symbol
"JFAX."
The last reported sales price of the common stock on May 5, 2000 was $2.50
per share.
YOU SHOULD READ THE RISK FACTORS BEGINNING ON PAGE 5 IN THIS PROSPECTUS
BEFORE PURCHASING SHARES OF OUR COMMON STOCK.
The selling stockholders may from time to time offer and sell the shares
held by them directly or through agents or dealers at market prices or on other
sale terms determined by them. To the extent required, we will disclose in a
prospectus supplement the names of any agent or dealer, applicable commissions
or discounts and any other required information with respect to any particular
offer. See "Plan of Distribution."
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Our principal executive offices are located at 6922 Hollywood Blvd., Suite
900, Los Angeles, CA and our telephone number is (323) 860-9200. The date of
this prospectus is __________, 2000.
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Other than in the United States, neither we nor the selling stockholders
have taken any action in any jurisdiction that would permit a public offering of
our common stock. No offer or sale of shares of our common stock may be made in
any jurisdiction outside the United States, except under circumstances that will
result in compliance with the applicable laws of that jurisdiction. We and the
selling stockholders require persons to whom this prospectus comes to inform
themselves about, and to observe, any restrictions as to the offering of shares
of our common stock and the distribution of this prospectus in jurisdictions
outside the United States.
The shares of common stock offered by this prospectus may not be offered or
sold in or into the United Kingdom, except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments, as
principal or agent, for the purposes of their businesses or otherwise in
circumstances that do not constitute an offer to the public in the United
Kingdom for the purposes of the Public Offers of Securities Regulations 1995.
This prospectus may only be issued or passed on in or into the United Kingdom to
any person to whom this prospectus may lawfully be issued or passed on by reason
of, or of any regulation made under, Section 58 of the Financial Services Act
1986.
You should rely only on the information or representations provided in this
prospectus or incorporated by reference into this prospectus. We have not
authorized anyone to provide you with any different information or to make any
different representations in connection with any offering made by this
prospectus. This prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy, in any state where the offer or sale is
prohibited. Neither the delivery of this prospectus, nor any sale made under
this prospectus shall, under any circumstances, imply that the information in
this prospectus is correct as of any date after the date of this prospectus.
INFORMATION AVAILABLE TO YOU
Our annual, quarterly and special reports, proxy statements and other
information are filed with the SEC as required by the Securities Exchange Act of
1934. You may inspect and copy these reports, proxy statements and other
information at the public reference facilities maintained by the SEC at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the SEC's regional offices located at Seven World Trade Center, Suite 1300, New
York, New York 10048, and at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. You may also obtain copies of these
materials by mail from the Public Reference Section of the SEC at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
SEC also maintains an Internet web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC at the Internet web site address:
http://www.sec.gov.
Our common stock is listed on the Nasdaq National Market, and you may also
inspect and copies these reports, proxy statements and other information at the
offices of The Nasdaq Stock Market, 1735 K Street, N.W., Washington DC 20006.
This prospectus provides you with a general description of the common stock
being registered. This prospectus is part of a registration statement that we
have filed with the SEC. To see more detail, you should read the exhibits and
schedules filed with our registration statement. You may obtain copies of the
registration statement and the exhibits and schedules to the registration
statement as described above.
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TABLE OF CONTENTS
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Page
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Prospectus Summary 4
Risk Factors 5
Use of Proceeds 20
Market Information 20
Dividend Policy 20
Selected Consolidated Financial Data 21
Management's Discussion and Analysis of Financial Condition and
Results of Operations 22
Business 28
Management 44
Principal Stockholders 51
Certain Transactions 54
Description of Capital Stock 59
Shares Eligible for Future Sale 63
Selling Stockholders 63
Plan of Distribution 65
Validity of Securities 66
Experts 66
Index to Financial Statements F-1
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus, including "Risk Factors" beginning on
page 5, carefully.
JFAX.COM, Inc.
We are an Internet-based messaging and communications services provider to
individuals and businesses throughout the world. Our 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 our services through our web site and can promptly
receive a JFAX.COM phone number.
We provide Internet-based unified messaging services with over 56,000 paid
subscriptions as of December 31, 1999. Since we started offering our services on
a commercial basis in June 1996, we have expanded our network to offer our
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. We have over 15 area codes outside the United States, including area
codes in London, Paris, Frankfurt, Zurich, Milan, Sydney and Tokyo. We intend to
continue to increase the number of area codes and target new international
locations.
THE OFFERING
Common stock offered:
By selling stockholders............ 1,515,545 shares
Common stock to be outstanding
after the offering................... 36,107,378 shares
Use of proceeds......................... We will not be receiving any the
proceeds from the offering. All of
the common stock to be offered will
be offered by selling stockholders.
Dividend policy......................... We intend to retain all future
earnings to fund the development and
growth of our business. Therefore, at
this time we do not anticipate paying
cash dividends.
Nasdaq National Market
Symbol............................... JFAX
The shares of common stock to be outstanding after the offering are stated
as of April 15, 2000 in this prospectus and exclude:
. 4,375,000 shares of common stock reserved for issuance under our stock
option plan of which 3,855,548 shares are subject to outstanding
options,
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. 850,000 shares of common stock subject to employee options which we have
committed to grant,
. 2,231,666 shares of common stock issuable upon exercise of outstanding
warrants, and
. 1,200,000 shares of common stock issuable upon conversion of outstanding
Series B Convertible Preferred Stock.
JFAX.COM is our service mark. This prospectus contains other product names,
trade names, trademarks and service marks of JFAX.COM and of other
organizations.
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should consider the following factors carefully before deciding to purchase
shares of our common stock.
Because We Have Limited Operating History, it is Difficult to Evaluate Our
Business
We have a limited operating history. We were formed in December 1995, and
our services became commercially available in 1996. Because of our limited
operating history, you have limited operating and financial data about us upon
which to base an evaluation of our performance and an investment in our common
stock or other securities. You should consider our prospects in light of the
risks, expenses and difficulties we may encounter, including those frequently
encountered by new companies competing in rapidly evolving markets.
These risks include our ability to:
Acquire businesses and technologies;
Integrate the operations of the companies that we have recently
acquired;
Manage growing domestic and international operations;
Create and maintain strategic relationships;
Expand sales and marketing activities;
Expand our customer base and retain key clients;
Introduce new services;
Compete in a highly competitive market;
Upgrade our systems and infrastructure to handle any increases in
messaging traffic;
Reduce service interruptions; and
Recruit and retain key personnel.
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If we are unable to execute our plans and grow our 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 our business, prospects,
financial condition and results of operations.
We Expect Our Losses and Negative Cash Flow to Continue, Which May Adversely
Impact Our Business and Our Stockholders
We have incurred substantial operating losses, net losses and negative cash
flow on both an annual and quarterly basis. For the year ended December 31,
1999, we 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. We expect to continue to incur net losses for the foreseeable
future and cannot assure you that we will ever achieve profitability or generate
positive cash flow.
We Expect Our Expenses to Increase, and Our Expenses May Exceed Our Revenues for
a Significant Period, Which Could Delay or Prevent Altogether Our Achieving
Profitability, and Harm Our Stockholders
We expect our 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 we develop and expand our business. As a result, we will need to increase our
revenue significantly to become profitable. In order to grow our revenue, we
need to add customers for our services and increase the usage of our services by
our customers, thereby increasing the fees and usage charges that we collect. If
our revenue does not increase as much as we expect or if increases in our
expenses are not in line with our plans, there could be a material adverse
effect on our business, prospects, financial condition and results of
operations.
We May Need and Be Unable to Obtain Additional Funding on Satisfactory Terms,
Which Could Dilute Our Stockholders or Impose Burdensome Financial Restrictions
on Our Business
If our capital requirements or revenue vary materially from our current
plans or if unforseen circumstances occur, we may require additional financing
sooner than we anticipate. This may not be available on a timely basis, in
sufficient amounts or on terms acceptable to us. This 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 our flexibility. At a minimum, we expect these covenants to
include restrictions on our ability to pay dividends on our common stock. Any
failure to comply with these covenants would have a material adverse effect on
our business, prospects, financial condition and results of operation.
Further Acquisitions Could Result In Dilution, Operating Difficulties And Other
Harmful Consequences.
We expect to acquire or invest in additional businesses, products, services
and technologies that complement or augment our service offerings and customer
base. Since January 2000, we have completed the acquisition of one company
(SureTalk.com, Inc.) and certain assets of another company, (TimeShift, Inc.).
We are currently engaged in discussions regarding further strategic acquisitions
or investments and, in this regard, have signed a letter of intent to merge
with eFAX.com. Although these discussions are ongoing, we have not signed any
definitive agreements, and cannot assure you that any of these discussions will
result in actual acquisitions. To be successful, we will need to identify
suitable acquisition candidates, integrate disparate technologies and corporate
cultures and manage a
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geographically dispersed company. We cannot assure you that we will be able to
do this successfully. Acquisitions could divert attention from other business
concerns and could expose us to unforeseen liabilities. In addition, we may lose
key employees while integrating any new companies. We expect to pay for some
acquisitions by issuing additional common stock, which would dilute current
shareholders. We may also use cash to make acquisitions. It may be necessary for
us to raise additional funds through public or private financings. We cannot
assure you that we will be able to raise additional funds at any particular
point in the future or on favorable terms. In addition, we may be required to
amortize significant amounts of goodwill and other intangible assets in
connection with future acquisitions, which would materially increase operating
expenses.
We Will Face Technical, Operational and Strategic Challenges That May Prevent Us
from Successfully Integrating SureTalk.com, Inc. and TimeShift, Inc.
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 our business has been and will be a complex, time
consuming and expensive process and may disrupt our business if not completed in
a timely and efficient manner. We must operate as a combined organization
utilizing common information and communication systems, operating procedures,
financial controls and human resources practices. We may encounter substantial
difficulties, costs and delays involved in integrating the operations of our
subsidiaries and businesses, including:
potential incompatibility of business cultures;
perceived adverse changes in business focus;
potential conflicts in sponsor, advertising or strategic relationships;
and
the loss of key employees and diversion of the attention of management
from other ongoing business concerns.
Consequently, we may not be successful in integrating acquired businesses or
technologies and may not achieve anticipated revenue and cost benefits. We also
cannot guarantee that these acquisitions will result in sufficient revenues or
earnings to justify our investment in, or expenses related to, these
acquisitions or that any synergies will develop. If we fail to execute our
acquisition strategy successfully for any reason, our business will suffer
significantly.
We Have Experienced Rapid Growth Which Has Placed a Strain on Resources And Our
Failure To Manage Growth Could Cause Our Business To Suffer
We have expanded our operations rapidly and intend to continue this expansion.
The number of our employees increased from 68 on December 31, 1998 to over 130
on March 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, we will need to improve or replace our existing
operational, customer service and financial systems, procedures and controls.
Any failure to properly manage these systems and procedural transitions could
impair our ability to attract and service customers, and could cause us to incur
higher operating costs and delays in the execution of our business plan. We will
also need to continue the expansion of our operations and employee base. Our
management may not be able to hire, train, retain, motivate and manage required
personnel. In addition, our management may not be able to successfully identify,
manage and exploit existing and potential market opportunities. If we cannot
manage growth effectively, our business and operating results could suffer.
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We 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 our existing services, proprietary technology and systems obsolete.
We must continually improve the performance, features and reliability of our
services, particularly in response to competitive offerings. Our success
depends, in part, on our ability to enhance our 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 we do not properly identify the feature preferences
of prospective subscribers, or if we fail to deliver features which meet the
standards of these subscribers, our ability to market our 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. We may not be
able to keep pace with the latest technological developments. We may also be
unable to use new technologies effectively or adapt services to customer
requirements or emerging industry standards.
If We Do Not Successfully Address Service Design Risks, Our Reputation Could Be
Damaged And Our Business And Operating Results Could Suffer
We must accurately forecast the features and functionality required by
target subscribers. In addition, we must design and implement service
enhancements that meet customer requirements in a timely and efficient manner.
We may not successfully determine customer requirements and may be unable to
satisfy subscriber demands. Furthermore, we 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 we launch is not favorably received by
customers and end-users, our reputation could be damaged. If we fail to
accurately determine customer feature requirements or service enhancements or to
market services containing such features or enhancements in a timely and
efficient manner, our business and operating results could suffer materially.
We May Need Additional Capital And Raising Additional Capital May Dilute
Existing Shareholders
We believe that existing capital resources will enable us to maintain
current and planned operations for at least the next 12 months. However, we may
be required to raise additional funds due to unforeseen circumstances. If
capital requirements vary materially from those current planned, we may require
additional financing sooner than anticipated. Such financing may not be
available in sufficient amounts or on terms acceptable to us and may be dilutive
to existing shareholders.
We Cannot Predict Whether We Will be Successful Because Our Business Model is
Unproven and Our Market is Developing
Our business strategy is unproven, and it is too early to reliably gauge
market penetration rates for our services. To date, we have not established a
definite demand or a reliable cost to add a subscriber for these services. In
addition, there can be no assurance that we will be successful in the offering
of any additional services that we are currently planning. If the demand is
lower than anticipated, or the cost to
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add a subscriber is higher, our 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 Our Services
Many services provided over the Internet are provided free of charge to
attract traffic to the service provider's website. These free services include
free voice mail, free e-mail and free facsimile-to-email services, which are
being offered by other companies in competition to our 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. We expect that as these free services become popular
with consumers, they will require our subscription services to provide clear
incremental benefits over free services to justify paying for our services. In
addition, to the extent free services of another provider are used by a
potential JFAX.COM customer, it may be harder for us to persuade that potential
customer to try our services.
Our Failure to Achieve or Sustain Market Acceptance at Desired Pricing
Levels Could Impair Our Ability to Achieve Profitability or Positive Cash Flow
The widespread availability of free services, including our own, may result
in consumers being unwilling to pay for messaging services. Even in cases where
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, we expect prices in our industry will continue to fall.
Therefore we may need to reduce prices for our existing and future services. We
cannot predict whether our pricing schedule will prove to be viable, whether
demand for our services will materialize at the prices we would like to charge
or whether we will be able to sustain adequate future pricing levels as
competitors introduce competing services, including free services.
Customers may be unwilling to pay our 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 our services are in some
cases higher than those charged by our competitors. Our failure to achieve or
sustain desired pricing levels would have a material adverse effect on our
business, prospects, financial condition and results of operations.
The Recent Introduction of Free Fax Services May Harm Our Business
In 1999 we introduced free services. We expect to generate revenues from
our free service customers by selling them additional services for which charges
are usage-based. We will also encourage free service customers to convert to
paid subscriptions. We have a limited track record from which to predict levels
of revenue to be achieved from customers who are attracted by our free services.
The availability of free services may cause some of our paying customers to
switch to our free services and discontinue their payments to us.
We introduced our free services principally as a promotional tool, and
partially in response to the introductions by competing companies. We expect the
trend for free services will continue in our industry. There can be no assurance
that the recent introduction of these competing services will not have a
material adverse effect on our business, prospects, financial condition and
results of operations.
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Our Operating Results In One or More Future Periods Are Likely to Fluctuate
Significantly and May Negatively Impact Our Stock Price
Our annual and quarterly operating results may fluctuate significantly in
the future as a result of numerous factors, including:
the rate at which we are able to add subscriptions and sell additional
usage-based services to both free and paid customers of our subscription
services,
the amount and timing of expenditures to form strategic relationships,
to enhance sales and marketing and to expand our 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 our industry.
As a result, it is likely that in some future periods our operating results will
be below the expectations of securities analysts and investors. If this happens,
the trading price of our common stock would likely be materially adversely
affected.
If We Fail to Expand and Adapt Our Network Infrastructure, Our Business May be
Harmed
We must continue to expand and adapt our 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 our
network infrastructure will require substantial financial, operational and
management resources, even if the expansion is primarily for our free service
offerings. There can be no assurance that we will be able to expand or adapt our
network infrastructure to meet any additional demand on a timely basis, at a
commercially reasonable cost or at all.
In addition, future growth in our subscriber base for both free and paid
services, together with growth in the subscriber bases of other companies who
have recently introduced free facsimile-to-email 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 our part to accommodate our future
growth. Insufficient network capacity could lead to a reduction in our services'
reliability. 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 our business, prospects, financial condition
and results of operations.
Our Business Could Suffer if We Cannot Obtain Telephone Numbers
Our future success will depend upon our ability to procure large quantities
of telephone numbers in the United States and foreign countries. Our 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 us from entering some foreign markets or
hamper our growth in domestic markets,
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and may have a material adverse effect on our business, prospects, financial
condition and results of operations.
Our ability to procure large quantities of phone numbers will be
particularly limited in area codes of large metropolitan areas, and we may at
some point be unable to provide our 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. We do not
allow customers of our free services to choose the area code for the phone
number we provide, and to some extent this makes our free services less
attractive, particularly in comparison to our subscription services, or
subscription services provided by others where the customer may select an area
code.
In addition, future growth in our 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 our part
to acquire the necessary phone numbers to accommodate our future growth.
Any Failure of the Internet as a Message Transmission Medium Could Harm Our
Business
Our future success will depend upon our ability to route our customers'
traffic through the Internet and through other data transmission media. For our
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 our use. Our success is largely dependent upon the
viability of the Internet as a medium for the transmission of documents. We also
depend on the continued operation of a user's e-mail system. To date, we have
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.
We access the Internet and other data transmission media through dedicated
or shared connections to third party service providers. In many cases, we pay
fixed monthly fees for Internet and other access, regardless of our usage or the
volume of our customers' traffic. There can be no assurance that the current
pricing structure for access to and use of these media will not change
unfavorably and, if the pricing structure changes unfavorably, our business,
prospects, financial condition and results of operations could be materially and
adversely affected.
If the Internet Stops Growing, Our Business Will Suffer
Our future success is substantially dependent upon continued growth in the
use of the Internet in order to support the sale of our 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 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 Our Services Due to Concerns About the Reliability
of Internet Communications, Which May Significantly Impair Our Business and
Prevent the Execution of Our Business Plan
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Our ability to route existing customers' traffic through the Internet and
to sell our 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 our
service being regarded as less timely than a traditional fax delivery. If our
existing and potential customers do not accept delivery through the Internet as
a means of sending and receiving documents via fax, our business, prospects,
financial condition and results of operations would be materially and adversely
affected.
In addition, we face 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, our business, prospects, financial condition and
results of operations may be materially and adversely affected.
Our Business May be Constrained Because We Support a Limited Number of Operating
System Platforms
Our 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, we cannot provide our
services to all potential customers for our services. To the extent other
operating systems proliferate in the future, our ability to attract new
customers and keep existing customers could be significantly impaired.
The Market In Which We Operate is Highly Competitive, and We 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. We face competition for our services from, among
others, voice mail providers, fax providers, paging companies, Internet service
providers, e-mail providers and telephone companies.
The recent trend of our competitors providing free services has increased
these competitive pressures. We have responded to this trend by introducing our
own free services. Competitive pressures may impair our ability to achieve
profitability. The increased competition may also make it more difficult for us
to successfully enter into strategic relationships with major companies,
particularly if our goal is to have an exclusive relationship with a particular
company.
We compete against other companies that provide one or more of the services
that we do. In addition, these competitors may add services to their offerings
to provide unified messaging services comparable to ours. Future competition
could come from a variety of companies both in the Internet industry and the
telecommunications industry, which could include some of our strategic
alliances. These industries include major companies which have much greater
resources than we do, have been in operation for many years and have large
subscriber bases. These 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 we can.
There can be no assurance that additional competitors will not enter markets
that we plan to serve or that we will be able to compete effectively.
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We May Have Difficulty in Retaining Our Customers, Which May Prevent Our Long-
Term Success
Our sales and marketing and other costs of acquiring new subscriptions are
substantial relative to the monthly fees derived from subscriptions.
Accordingly, we believe that our long-term success depends largely on our
ability to retain our existing customers, while continuing to attract new ones.
We continue to invest significant resources in our network infrastructure and
customer and technical support capabilities to provide high levels of customer
service. We cannot be certain that these investments will maintain or improve
customer retention. We believe that intense competition from our competitors,
some of which offer free service or other enticements for new subscriptions, has
caused, and may continue to cause, some of our customers to switch to our
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 our customer retention rates. Any decline in customer retention
rates could have a material adverse effect on our 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 We Use
The messaging and communications industry is subject to rapid and
significant technological change. We cannot predict the effect of technological
changes on our business. Additionally, widely accepted standards have not yet
developed for the technologies we use.
We expect that new services and technologies will emerge in the market in
which we compete. These new services and technologies may be superior to the
services and technologies that we use or these new services may render our
services and technologies obsolete. In addition, these services and technologies
may not be compatible or operate in a manner sufficient for us to execute our
business plan, which could have a material adverse effect on our business,
prospects, financial condition and results of operations.
A System Failure or Breach of Network Security Could Delay or Interrupt Service
to Our Customers
Our operations are dependent on our ability to protect our network from
interruption by damage from fire, earthquake, power loss, telecommunications
failure, unauthorized entry, computer viruses or other events beyond our
control. There can be no assurance that our 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, our infrastructure may
also be vulnerable to computer viruses, hackers or similar disruptive problems
caused by our 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 our
services, which may result in significant liability to us and also may deter
current and potential customers from using our services. Any damage, failure or
security breach that causes interruptions or data loss in our operations or in
the computer systems of our customers could have a material adverse effect on
our business, prospects, financial condition and results of operations.
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Our Software May Have Defects and We May Encounter Development Delays
Software-based services and equipment, such as our services, may contain
undetected errors or failures when introduced or when new versions are released.
There can be no assurance that, despite testing by us and by current and
potential customers, errors will not be found in our software after commercial
release, or that we will not experience development delays, resulting in delays
in market acceptance, any of which could have a material adverse effect on our
business, prospects, financial condition and results of operations.
We Depend on Third Parties to Market Our Services, and the Failure by These
Third Parties to Market Our Services May Hinder Our Marketing Efforts
Currently, we rely on third parties, including e-mail providers, Internet
service providers, online service providers and telecommunications companies as
a means of marketing our services. We are also in the early stages of marketing
our services through systems integrators. Systems integrators are businesses
that bundle our 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, our marketing capabilities would be
significantly hindered, which could have a detrimental effect on our business,
prospects, financial condition or results of operations. For example, our
failure to achieve technical integration with America Online's e-mail system
resulted in a renegotiation of our agreement with America Online, and a
suspension of our advertising on America Online in late 1998 through December
1999. This resulted in a reduction in our 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 our 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 our
strategic allies view unified messaging as important to their future, they may
elect to directly compete with us in the provision of unified messaging
services.
In addition, our success in developing an international customer base
depends on the formation of alliances with foreign companies and their ability
to successfully market our services. In any relationship with a third party,
particularly internationally, there may be difficulties in integrating or
coordinating our 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 our services could have a
material adverse effect on our business, prospects, financial condition and
results of operations.
Our Success Depends on Our Retention of Our Executive Officers and Our Ability
to Hire and Retain Additional Key Personnel
Our 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, our President and Chief Executive Officer and
Chief Technology Officer have joined us since the beginning of 2000.
The loss of the services of one or more of our executive officers or other
key employees could have a material adverse effect on our business, prospects,
financial condition and results of operations. Our
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future success also depends on our continuing ability to attract and retain
highly qualified technical, sales and managerial personnel. Competition for such
personnel is intense, and there can be no assurance that we can retain our key
employees or that we can attract, assimilate or retain other highly qualified
technical, sales and managerial personnel in the future.
Our International Operations are Exposed to Regulatory, Management, Credit Card,
Currency and Other Risks That May Prevent Us From Being Successful in
International Markets
At the end of 1999, foreign telephone numbers represented a significant
portion of our total telephone numbers. These foreign numbers were sold through
our U.S. web site. We intend 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, our business, financial condition and
operating results will suffer. At present, we have international operations in
Australia, Canada, Finland, France, Germany, Ireland, Italy, Japan, New Zealand,
the Netherlands, Switzerland and the United Kingdom. We have 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 our 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 we sell 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 our results of operations. Additionally,
fluctuations in exchange rates could adversely affect demand for our services
and have a material adverse effect on our business, prospects, financial
condition and results of operations.
The Price of Our Common Stock May Decline Due to Shares Eligible for Future Sale
As of April 15, 2000, we 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 our
common stock to decline. In the near future, including the shares offered
hereunder, approximately 1.8 million shares will become eligible for sale under
registration statements that we will file to meet our registration rights
obligations in connection with recent acquisitions. Certain of our other
shareholders
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<PAGE>
and warrantholders have registration rights with respect to the common stock and
common stock issuable under the warrants.
Anti-Takeover Provisions Could Negatively Impact Our Stockholders
Provisions of Delaware law and of our certificate of incorporation and
bylaws could make it more difficult for a third party to acquire control of us.
For example, we are subject to Section 203 of the Delaware General Corporation
Law which would make it more difficult for another party to acquire our company
without the approval of our board of directors. Additionally, our certificate of
incorporation authorizes our board of directors to issue preferred stock without
requiring any shareholder 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 our company even if an
acquisition might be in the best interest of our stockholders.
Our Stock Price May Be Volatile or May Decline
Our stock price and trading volumes have been highly volatile since our
initial public offering on July 23, 1999. We expect that this volatility will
continue in the future due to factors such as:
assessments of our progress in adding paid subscriptions or free
customers, and comparisons of our results in these areas versus our
competitors;
variations between our actual results and analyst and investor
expectations;
new service or technology announcements by us or others, and regulatory
or competitive developments affecting our markets;
investor perceptions of our company 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 us or our competitors;
developments with respect to intellectual property rights;
conditions and trends in the Internet and other technology industries;
and
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 our 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. We 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 our business and operating results.
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We May Have Liability for Internet Content and We May Not Have Adequate
Liability Insurance
As a provider of messaging and communications services, we face potential
liability for defamation, negligence, copyright, patent or trademark
infringement and other claims based on the nature and content of the materials
transmitted via our services. We do not and cannot screen all of the content
generated by our users, and we 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 we carry general liability and umbrella liability insurance, our
insurance may not cover claims of these types or may not be adequate to
indemnify us for all liability that may be imposed. There is a risk that a
single claim or multiple claims, if successfully asserted against us, could
exceed the total of our coverage limits. There is also a risk that single claim
or multiple claims asserted against us may not qualify for coverage under our
insurance policies as a result of coverage exclusions that are contained within
these policies. Should either of these risks occur, capital contributed by our
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 our reputation and
business and operating results, or could result in the imposition of criminal
penalties.
Inadequate Intellectual Property Protections Could Prevent Us From Enforcing or
Defending Our Proprietary Technology
Our success depends to a significant degree upon our proprietary
technology. We rely on a combination of trademark, trade secret and copyright
law and contractual restrictions to protect our proprietary technology. However,
these measures provide only limited protection, and we may not be able to detect
unauthorized use or take appropriate steps to enforce our intellectual property
rights, particularly in foreign countries where the laws may not protect our
proprietary rights as fully as in the United States. In addition, we may face
challenges to the validity and enforceability of our 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 our intellectual property rights would be
expensive and time-consuming, would divert management resources and may not be
adequate to protect our business.
We May Be Found to Have Infringed the Intellectual Property Rights of Others
Which Could Expose Us to Substantial Damages or Restrict Our Operations
We could be subject to claims that we have infringed the intellectual
property rights of others. In addition, we may be required to indemnify our
resellers and users for similar claims made against them. Any claims against us
could require us to spend significant time and money in litigation, pay damages,
develop new intellectual property or acquire licenses to intellectual property
that is the subject 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 us could have a material adverse effect on our business,
prospects, financial conditions and results of operations. For example, on
October 28, 1999, AudioFAX IP LLC filed a lawsuit against the company asserting
infringement upon the ownership of certain United States and Canadian patents.
See "Business--Legal Proceedings" for additional discussion.
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Our Services May Become Subject to Burdensome Telecommunications Regulation
Which Could Increase Our Costs or Restrict Our Service Offerings
We provide our 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 we pay for transmission
services, the competition we face from telecommunications services and other
aspects of our market.
As an Internet messaging services provider, we are not subject to direct
regulation by the FCC. However, as Internet services and telecommunications
services converge or as the services we offer expand, there may be increased
regulation of our business. Therefore, in the future, we may become subject to
FCC or other regulatory agency regulation. Changes in the regulatory environment
could decrease our revenues, increase our costs and restrict our service
offerings.
If Regulation of the Internet Increases, Our 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 ours 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 our services relate principally to the Internet, but convert voice
and fax transmissions into e-mails, we are necessarily exposed to legal or
regulatory developments affecting either Internet services or telecommunications
services. Regulatory developments could cause our business, prospects, financial
condition and results of operations to be materially adversely affected.
We Could Be Required to Register as an Investment Company and Become Subject to
Substantial Regulation That Would Interfere With Our Ability to Conduct Our
Business
As of December 31, 1999 we have significant cash on hand representing
proceeds from our July 23, 1999 initial public offering. We invest such cash in
short-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 our
being treated as an "investment company" under the Investment Company Act of
1940. In addition, the Investment Company Act requires 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 we are required to register as an investment company pursuant to the
Investment Company Act, we would become subject to substantial regulation with
respect to our capital structure, management,
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<PAGE>
operations, transactions with affiliated persons and other matters. Application
of the provisions of the Investment Company Act to us would materially and
adversely affect our business, prospects, financial condition and results of
operations.
Our Principal Stockholders and Management Own a Significant Percentage of Our
Stock and Will Be Able to Exercise Significant Influence
As of April 15, 2000, our executive officers and directors and principal
stockholders together beneficially owned approximately 60% of our common stock,
including shares subject to options and warrants that confer beneficial
ownership of the underlying shares. Accordingly, these stockholders will be able
to determine the composition of our board of directors, will retain the voting
power to approve all matters requiring stockholder approval and will continue to
have significant influence over our affairs. This concentration of ownership
could have the effect of delaying or preventing a change in our control or
otherwise discouraging a potential acquirer from attempting to obtain control of
us, which in turn could have a material and adverse effect on the market price
of the common stock or prevent our stockholders from realizing a premium over
the market prices for their shares of common stock.
Our Management has Broad Discretion in the Application of Proceeds, Which May
Increase the Risk that the Proceeds Will Not Be Applied Effectively
Our management has broad discretion in determining how to spend the
proceeds of our July 23, 1999 initial public offering. Accordingly, we can spend
the proceeds from that offering in ways which turn out to be ineffective or with
which the stockholders may not agree.
We 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 our July 23, 1999
initial public offering, we 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 JFAX.COM subscribers as of June 30, 1999. On or about
July 6, 1999 we sent e-mails to approximately 150,000 of our subscribers
informing them of this program and briefly explaining the procedures to be
followed. On or about July 9, 1999 we 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 our
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. We 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, we intend to contest the matter vigorously. We do not
believe that any such liability would be material to our financial condition.
Information Regarding Forward-Looking Statements
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to our future plans, objectives,
expectations and intentions, and the assumptions underlying or relating to any
of these statements. These statements may be identified by the use of words
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such as "expect", "anticipate", "estimate", "believe", "intend" and "plan". Our
actual results may differ materially from those discussed in these statements.
Factors that could contribute to such differences include those discussed in
"Risk Factors" and elsewhere in this prospectus.
Although we believe that the expectations reflected in our forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity or performance of achievements. Neither we nor any other person assumes
responsibility for the accuracy and completeness of these statements. We assume
no duty to update any of the forward-looking statement after the date of this
report or to conform these statements to actual results
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares offered
by the selling stockholders.
MARKET INFORMATION
The common stock is traded on the Nasdaq National Market under the symbol
"JFAX." The following table sets forth the high and low closing sale prices for
the common stock for the periods indicated, as reported by the Nasdaq National
Market.
High Low
---- ---
Year December 31, 1999
Third Quarter (from July 23).................... 9.50 4.75
Fourth Quarter.................................. 7.68 4.06
High Low
---- ---
Year December 31, 2000
First Quarter .................................. 7.13 4.50
Second Quarter (through May 5).................. 4.81 2.00
On May 5, 2000, the closing sale price for the common stock as reported
by the Nasdaq National Market was $2.50.
As of April 15, 2000 there were 105 stockholders of record of the common
stock, although there are a larger number of beneficial owners.
DIVIDEND POLICY
We have never paid any dividends on our common stock and do not anticipate
declaring or paying cash dividends in the foreseeable future. We intend to
retain future earnings, if any, to reinvest in our business. We expect that
covenants in our future financing agreements will prohibit or limit our ability
to declare or pay cash dividends.
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SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and the notes thereto and
the information contained herein in "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Historical results are not
necessarily indicative of future results. The pro forma financial data shown
below assumes the acquisition of SureTalk.com was completed as of January 1,
1999 for Statement of Operations data and as of December 31, 1999 for Balance
Sheet data (see pro forma financial statements).
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ----------- ---------- ----------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue ................................ $ 7,643 $ 3,520 $ 685 $ 105 $ --
Cost of revenue ........................ 4,641 3,398 858 150 1
----------- ----------- ----------- ----------- -----------
Gross profit (loss) .......... 3,002 122 (173) (45) (1)
----------- ----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing ............... 6,355 4,990 1,069 150 --
Research and development .......... 1,829 1,226 793 61 --
General and administrative ........ 7,976 4,948 2,962 512 20
----------- ----------- ----------- ----------- -----------
Total operating expenses ..... 16,160 11,164 4,824 723 20
----------- ----------- ----------- ----------- -----------
Operating loss ............... (13,158) (11,042) (4,997) (768) (21)
Other income (expense) net ............. 230 (933) 215 -- --
Loss from Joint Venture ................ (82) -- -- -- --
Increase in market value of put warrants -- 5,256 -- -- --
Income tax expense ..................... 2 2 2 1 --
----------- ----------- ----------- ----------- -----------
Net loss before extraordinary
Item ........................... $ (13,012) $ (17,233) $ (4,784) $ (769) $ (21)
=========== =========== =========== =========== ===========
Extraordinary Item ..................... 4,428 -- -- -- --
Net Loss................................ $ (17,440) $ (17,233) $ (4,784) $ (769) $ (21)
=========== =========== =========== =========== ===========
Net loss attributable to common
shares ......................... $ (19,012) $ (17,728) $ (4,784) $ (769) $ (21)
=========== =========== =========== =========== ===========
Basic and diluted net loss per common
share ............................... $ (0.68) $ (0.80) $ (0.30) $ (0.12) $ (0.00)
=========== =========== =========== =========== ===========
Weighted average common shares used
in determining net loss per share ... 28,098,994 22,181,960 15,738,334 6,406,666 5,575,000
Dividends per share .................... -- -- -- -- --
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
Pro forma
1999
----------
<S> <C>
Statement of Operations Data:
Revenue ................................ $ 7,802
Cost of revenue ........................ 4,855
-----------
Gross profit (loss) .......... 2,947
-----------
Operating expenses:
Sales and marketing ............... --
Research and development .......... --
General and administrative ........ --
-----------
Total operating expenses ..... 23,376
-----------
Operating loss ............... (20,429)
Other income (expense) net ............. 230
Loss from Joint Venture ................ (82)
Increase in market value of put warrants --
Income tax expense ..................... 2
-----------
Net loss before extraordinary
Item ........................... $ (20,283)
===========
Extraordinary Item ..................... 4,428
Net Loss................................ $ (24,711)
===========
Net loss attributable to common
shares ......................... $ (26,289)
===========
Basic and diluted net loss per common
share ............................... $ (0.89)
===========
Weighted average common shares used
in determining net loss per share ... 29,614,539
Dividends per share .................... --
===========
</TABLE>
<TABLE>
<CAPTION>
December 31
-------------------------------------------------------------------------------
Pro forma
1999 1998 1997 1996 1995 1999
--------- ---------- --------- ---------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ..... $ 12,256 $ 7,279 $ 23 $ 656 $ -- $ 12,288
Short term investments ........ 23,511 -- -- -- -- 23,511
Working capital (deficiency) .. 36,555 6,735 58 479 (11) 35,568
Total assets .................. 58,625 10,513 2,613 896 -- 71,747
Long-term debt and put warrants 1,537 12,455 -- -- -- 1,537
Redeemable common and preferred
stock(1) ................... 7,065 9,317 -- -- -- 7,065
Total stockholders' equity
(deficiency) ............... 45,147 (13,317) 1,618 677 (11) 57,130
</TABLE>
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______________
(1) See Note 4 of the notes to our consolidated financial statements for the
conditions applicable to the redeemable securities.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Consolidated Financial Data" and our financial statements and related notes
included elsewhere in this prospectus.
Overview
We were founded in 1995 to provide Internet-based messaging and
communications services. We were initially conceived as a solution to facilitate
the receipt of faxes and voice messages via the Internet. As of December 31,
1999, our unified messaging service had over 56,000 paid subscriptions.
We currently derive substantially all revenues from subscription fees,
activation fees and charges for usage-based services. Activation fees account
for approximately 10% of total revenue. We recognize 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, we expect to
derive a growing proportion of our revenues from selling our subscription and
usage-based services to our free subscribers. Our customers are primarily
pre-billed on a month-to-month basis. Revenues are recognized as the service is
performed.
Payments made to our strategic alliance resellers are typically made on a
commission basis. In our domestic alliances, we generally pay to the reseller a
portion of our 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. We also pay a percentage of
customer usage fees. We record the commission expenses as the related revenues
are recognized.
For the years ended December 31, 1999, 1998, and 1997, our strategic
alliances contributed 22.2%, 41.2%, 11.2% and of our net subscriber additions,
respectively. 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 us, and in fact produced a net reduction of approximately 1400
subscribers. Excluding America Online, net subscriber additions through
strategic alliances would have been 27.1% and 21.1% for 1999 and 1998
respectively.
Under our renegotiated agreement with America Online, America Online is
committed to deliver certain technological assistance so as to make our services
more compatible with America Online's e-mail service and to deliver $920,000 in
advertising owed to us as a result of payments made under our previous
agreement. Following the necessary technical integrations, we expect to resume
advertising with America Online and we anticipate that America Online will again
contribute to our net subscriber additions.
Revenues from subscriptions provided by our strategic alliances represented
approximately 28.1% and 29% of our total revenues in 1999 and 1998,
respectively. We believe that the generally increasing trend in strategic
alliance contributions to net subscriber additions, and to our revenues, will
continue in the future.
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<PAGE>
We expect to increase our sales and marketing expenses. In the past, we
have allocated limited resources to marketing our services, relying on our web
site to generate subscriptions and our strategic alliances to market and sell
our services to their customer base. We intend to increase our direct and
indirect marketing efforts in order to grow our subscriber base and to generate
sales from our free and paying subscribers and businesses looking to outsource
their messaging requirements. These marketing efforts will require a
considerable investment on our part.
We also intend to continue to invest in the development of new services,
complete the development of our services currently under development and extend
and upgrade our network. In particular, we intend to invest in additional
infrastructure to increase our capacity and enable us to provide additional
Internet-based messaging and communications services.
We have incurred significant losses since our inception. As of December 31,
1999, we had an accumulated deficit of approximately $40.2 million. We expect to
incur substantial operating losses for the foreseeable future.
Although we cannot guarantee the success of our business plan, we expect
the increases in sales and marketing expenses and in our investments in new
services and services under development, together with our free services, will
improve our ability to add new subscriptions including paid subscriptions. We
also expect 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 our business plans and the expectations noted above.
An increasing number of companies are offering services that compete with
our services, and some competitors have recently introduced free services that
are similar to our 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. We also offer some of our services on a free basis. We
expect 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 our unified messaging
services. However, we cannot guarantee that we will be able to sell any
usage-based services or to convert free subscriptions. In addition, there is a
risk that some of our paid subscriptions will convert to free subscriptions or
that they will choose to switch to the free services provided by one of our
competitors. We believe that the introduction of free services, both by us and
by our competitors, has occurred too recently for us to accurately gauge whether
and to what degree they will negatively impact our revenues, our cost structure
or our ability to add new subscriptions including paid subscriptions.
Results of Operations
Years Ended December 31, 1999, 1998 and 1997
The following table sets forth, for the years ended December 31, 1999, 1998
and 1997, information derived from our 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
prospectus.
December 31,
--------------
1999 1998 1997
---- ---- ----
Revenue ............................................. 100% 100% 100%
Cost of revenue ..................................... 61 97 125
--- --- ---
Gross profit (loss) ....................... 39 3 (25)
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<PAGE>
Operating expenses:
Sales and marketing ............................ 83 142 156
Research and development ....................... 24 35 116
General and administrative ..................... 104 141 432
---- ---- ----
Total operating expenses .................. 211 318 704
---- ---- ----
Operating loss ............................ (172) (315) (729)
Interest expense (income), net ...................... (3) 27 (31)
Loss in joint venture ............................... (1) -- --
Increase in market value of put warrants ............ -- (149) --
---- ---- ----
Loss before income taxes and extraordinary item ..... (170) (491) (698)
Extraordinary Item-early extinguishment of debt ..... (58) -- --
---- ---- ----
Income tax expense .................................. -- -- --
---- ---- ----
Net loss .................................. (228)% (491)% (698)%
==== ==== ====
Revenue Items
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
our direct marketing and our strategic alliances. Our 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 our server and networking
infrastructure and customer services to accommodate the growth of our 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.
Operating Expenses
Sales and Marketing. Our 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.
In October 1997, we entered into an interactive marketing relationship with
America Online. As of December 31, 1999, we had $920,000 in prepaid advertising
costs and such amount is expected to be consumed in fiscal 2000. During 1999 and
1998, we incurred $80,000 and $1,250,000 respectively in advertising expense for
advertising activity through America Online. See Note 6(a) of the notes to our
consolidated financial statements.
At December 31, 1999, we were 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
us to make certain fixed and revenue share payments based
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<PAGE>
on advertising amounts placed on the respective sites and customers acquired.
See Note 6(b) of the notes to our 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. Our 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. Our 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 our 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 the company 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 us to purchase the warrants at their fair market value if we
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, we had federal and state net
operating 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.
Liquidity and Capital Resources
In July 1999, we completed our initial public offering. 8,500,000 shares
were sold by us to the public at $9.50 per share for an aggregate amount of
$80,750,000 before deduction of underwriting discounts, commissions and other
expenses. No overallotment shares were sold in the offering. Net proceeds to us
from the IPO were approximately $73.9 million.
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<PAGE>
In July 1998 we received net proceeds of $13.9 million through the private
placement of $10,000,000 in Senior Subordinated Notes and $5,000,000 in
Preferred Stock.
Prior to the IPO and Senior Subordinated Note and Preferred Stock
Offerings, we financed our operations primarily through private placements of
Common Stock.
At December 31, 1999, our primary source of liquidity consisted of
$12,256,000 in cash and cash equivalents and $23,511,000 in short term
investments. Additionally, as of December 31, 1999 we had $13,559,000 in long
term investments. Short and long term investments consist primarily of corporate
debt securities with maturities ranging from 91 days to 18 months.
We finance the acquisition of substantial portions of our operating
technology equipment and office equipment through leasing and loan arrangements.
Amounts due under these arrangements were $3,129,000 and $1,686,000 at December
31, 1999 and 1998 respectively.
Net cash used in operating activities was $12,091,000, $10,000,000, and
$4,546,000 for the years ended December 31, 1999, 1998, and 1997 respectively.
The principal uses of cash for all periods were to fund our net losses from
operations, partially offset by increases in accounts payable, decreases in
payments to strategic alliances, and increases due to non-cash put warrant
charges.
Net cash used in investing activities was $39,446,000, $543,000, and
$1,579,000 for the years ended 1999, 1998, and 1997 respectively. The principal
uses in 1999 were for the purchases of current and non current investments and
the purchases of property and equipment. In 1998 and 1997 the principal use was
for property and equipment.
Net cash provided by financing activities was $56,514,000, $17,800,000, and
$5,500,000 for the years ended 1999, 1998 and 1997 respectively. The net
increase in 1999 was primarily due to the $73.9 million raised in our initial
public offering, reduced by repayments of senior subordinated debt and preferred
stock of $10.6 million and $6.8 million respectively.
The net increase in 1998 was primarily due to proceeds from senior
subordinated debt, preferred stock, and the private placement of common stock.
Net proceeds for 1997 were primarily due to proceeds from private placement of
common stock of $8.1 million reduced by the issuance of notes receivable to
shareholders of $2.4 million.
Our capital requirements depend on numerous factors, including market
acceptance of our services, the amount of resources we devote to investments in
our network and services development, the resources we devote to the sales and
marketing of our services and our brand promotions and other factors. We have
experienced a substantial increase in our capital expenditures and operating
lease arrangements since our inception consistent with the growth in our
operations and staffing, and anticipate that this will continue for the
foreseeable future. Additionally, we expect to make additional investments in
technologies and our network, and plan to expand our sales and marketing
programs and conduct more aggressive brand promotions. We currently anticipate
that our existing cash balances and short and long term investments will be
sufficient to meet our 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 we experience growth in the
future, we anticipate that our operating and investing activities will use cash.
Consequently, any such future growth may require us to obtain additional equity
or debt financing, which may not be available on attractive terms, or at all, or
may be dilutive.
Impact of Year 2000 Issue
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<PAGE>
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any computer programs
or hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
system failures or miscalculations causing disruptions of operations for any
company using computer programs or hardware, including, among other things, a
temporary inability to process transactions, send invoices or engage in normal
business activities.
We are a comparatively new company, and, accordingly, the software and
hardware we use to operate our business have all been purchased or developed in
the last five years. While this does not protect us against Year 2000 exposure,
we believe we gain some mitigation from the fact that the information technology
we use to operate our business is of recent origin. All of the software code we
have internally developed to operate our business is written with four digits to
define the applicable year.
Prior to January 1, 2000, we conducted ongoing tests of our internal
information technology and non-information technology systems. As of December
31, 1999 we completed testing internally developed systems, and the subsequent
process of evaluating and compiling test results did not reveal any information
that would indicate any year 2000 exposure All of the testing we have completed
has been performed by our own personnel. To date, we have not retained any
outside service or consultants to test or review our systems for Year 2000
compliance. Based on the testing we have performed, we believe that such
software is Year 2000 compliant.
In addition to our internally developed software, we utilize software and
hardware developed by third parties both for our network as well as our internal
information systems. As of December 31, 1999 we tested this third-party software
and hardware to determine Year 2000 compliance. In addition, we obtained
certifications from our key suppliers of hardware and networking equipment for
our data centers, as well as from the providers of our Internet access and of
our dedicated data transmission media, that our hardware and networking
equipment are Year 2000 compliant. Additionally, we have received assurances
from the providers of key software applications for our internal operations that
their software is Year 2000 compliant. Based upon an evaluation of our broader
list of software and hardware providers, we are aware that all of these
providers reviewed and implementing their own Year 2000 compliance programs, and
we continue to work with these providers to address the Year 2000 issue and
continue to seek assurances from them that their products are Year 2000
compliant.
We have not incurred any significant expenses to date, and we do not
anticipate that any future costs associated with our Year 2000 remediation
efforts will be material. Our estimate of costs incurred to date associated with
implementing our year 2000 compliance plan is approximately $100,000 which is
consistent with our original estimates. The costs incurred to date represent in
the aggregate less than 5% of the amounts that we have budgeted for research and
development and network operations. However, if we, our customers, our providers
of hardware and software or other third parties with whom we do business fail to
remedy any Year 2000 issues, our services could be interrupted and we could
experience a material loss of revenues that could have a material adverse effect
on our business, prospects, results of operations and financial condition. We
consider such an interruption to be the most reasonably likely unfavorable
result of any failure by us, or failure by the third parties upon whom we rely,
to achieve Year 2000 compliance. Presently, we are unable to reasonably estimate
the duration and extent of any interruption, or quantify the effect it may have
on our future revenues.
As part of our overall assessment, we shut down all non-essential systems
just prior to January 1, 2000 and restored those systems on January 1, 2000.
Once restored, these systems were tested and monitored throughout the first week
of January 2000. All systems performed properly in the first week of January
2000 and continue to perform properly up to and after February 29, 2000.
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<PAGE>
Quantitative and Qualitative Disclosures About Market Risk
The following discussion about our market risk disclosures contains
forward-looking statements. Forward-looking statements are subject to risks and
uncertainties. Actual results could differ materially from those discussed in
the forward-looking statements. We are exposed to market risk related to changes
in interest rates and foreign currency exchange rates. We do not have derivative
financial instruments for hedging, speculative, or trading purposes.
During 1999, we had indebtedness outstanding that accrued interest at fixed
rates over the term of that indebtedness, and therefore we did not have interest
rate risk on that debt. As of July 30, 1999 we redeemed all of our 10% senior
subordinated notes due 2004 which represented a substantial portion of our long-
term debt obligations.
At December 31, 1999, investment in short and long term debt securities
owned by us primarily consisted of 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 5.38% to 6.63% and are classified as held to maturity as we
have the ability and intent to do so. At December 31, 1999, cost approximated
fair market value, and we believe we have immaterial market rate risk.
We believe that our exposure on currency exchange fluctuation risk is
insignificant because our transactions with international vendors and customers
are generally denominated in US dollars.
BUSINESS
Company Overview
We are an Internet-based messaging and communications services provider to
individuals and businesses throughout the world. Our 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 our services through our web site and can promptly
receive a JFAX.COM phone number.
We provide Internet-based unified messaging services with over 56,000 paid
subscriptions as of December 31, 1999. Since we started offering our services on
a commercial basis in June 1996, we have expanded our network to offer our
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. We have over 15 area codes outside the United States, including area
codes in London, Paris, Frankfurt, Zurich, Milan, Sydney and Tokyo. We intend to
continue to increase the number of area codes and target new international
locations.
Recent Developments
On April 5, 2000, we entered into a letter of intent and a loan commitment
letter with eFAX.com ("eFAX.com") in which:
We established with eFAx.com the principal terms for a potential
merger of us and eFAX.com,
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<PAGE>
We agreed to lend eFAX.com $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,
eFAX.com granted to us a warrant to acquire 250,000 shares of
eFAX.com's common stock. The warrant will have a term of two years and
will be exercisable at the market price of eFAX.com's common stock on
the date of grant, but the exercise price will reset to $1.00 per
share if the proposed merger of eFAX.com and JFAX.COM does not occur.
eFAX.com agreed to grant to us an additional warrant with a term of
two years and an exercise price of $1.00 per share of eFAX.com's
common stock. The warrant will be granted if the merger between
eFAX.com and JFAX.COM does not occur. The warrant will be for 750,000
shares of eFAX.com's common stock if JFAX.COM terminates the merger
discussions, other than following a material breach of the letter of
intent by eFAX.com, prior to the execution of a definitive merger
agreement or if the definitive merger agreement is terminated because
our shareholders fail to approve the merger or we materially breach
the definitive merger agreement. The warrant will be for 1,750,000
shares of eFAX.com'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 eFAX.com nor
we are required to complete the merger. In the merger, approximately 18.5
million shares of our common stock will be issued to the current holders of
eFAX.com's common and preferred stock. We would be the surviving corporation in
the merger.
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 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
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<PAGE>
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, we believe 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.
Our Solution
We provide individual consumers, end-users and businesses with convenient,
cost-effective and reliable Internet-based messaging and communications
services.
Individual Consumers and End-Users
Our services are designed to provide the following key benefits to
individual consumers and end-users:
Unified Messaging. We believe we were the first company to provide a
commercially available Internet-based messaging service that enables
the end-user's e-mail box to 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.
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Anytime, Anywhere Accessibility. We have designed our services to
allow easy access by customers seven days a week, 24 hours a day from
any location. Our 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, our customers can listen to
their voice mail and view their faxes anytime they read their e-mail.
Access to International Network. We have built a network allowing our
customers to establish a local phone number in over 90 area codes in
the United States and abroad. Additionally, our proprietary
Internet-based solution enables a customer to activate service from
our web site or over the phone within minutes.
Cost Effective Service. We believe that by using our service,
customers can achieve cost savings and efficiency when compared to
traditional telephone and fax communication.
Customization. Our services allow customers to create their own
messaging solutions. They may elect to use our free services or our
paid subscription services, or they may add any of our usage-based
features, such as telephone access to e-mail, outbound voice,
outbound faxing, broadcast voice and broadcast faxing.
Customer Support. We offer our customers various levels of support
seven days a week, 24 hours a day.
We believe a large percentage of our subscribers are professionals or are
employed in upper management positions and that another large percentage of our
subscribers are self-employed or small business owners.
Businesses
In addition to the benefits listed above, our service provides the
following key benefits to businesses:
Cost Effective Service. With our service, businesses have a reduced
need for personnel, traditional fax machines, phone lines or other
costly hardware. In addition, we offer a simple solution priced to
reflect our economies of scale.
Award-Winning Technology. We provide our 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, our technology has earned the 1998 CommerceNet
award for Electronic Commerce Excellence in the United States
Business-to-Consumer category.
Scaleability and Reliability. Our network of services is designed to
be highly scaleable, meaning that it allows us to easily add
additional locations to our network and additional users at each
location. Our 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 our customers.
Security. Our 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 our message transmission services are
merely a conduit for electronic messaging and do not store copies of
transmissions in any format, electronic or otherwise.
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Our Services
We provide a comprehensive range of Internet-based services to address the
messaging and communication needs of individuals and businesses. All of our
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.
We collect approximately 95% of our 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 60 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. We write-off 100% of all
amounts declined by credit cards on a monthly basis.
Our subscription services are summarized in the following table:
SUBSCRIPTION SERVICES
<TABLE>
<CAPTION>
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 Outbound faxing--User Cannot select area code for phone Setup Fee of $5.00
Send can send faxes number $2.95 per month plus
additional usage-
Broadcast fax--User can Unlimited incoming based charges
send the same fax to faxes
numerous recipients
Annotation capability
Business Fax Outbound faxing--User Can select area code for Setup Fee of $15.00
can send faxes phone number and $12.50 per phone
number per month plus
Broadcast fax--User can Unlimited incoming additional
send the same fax to faxes usage-based charges
numerous recipients
Annotation capability
E-mail by Phone Phone access--User can Access, manage and/or reply to e- Setup Fee of $15.00
call a toll- free number mail, voice mail and faxes by phone plus $9.50 month plus
and access e-mail and
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
voice mail and fax headers additional usage-
through a touch tone based charges
telephone
Personal Telecom Combined suite of services All benefits of Business Fax and Setup fee of $15.00
E-mail by Phone plus $12.50 per month
plus additional
usage-based
charges
</TABLE>
__________________
* These are United States dollar prices for phone numbers in most countries.
In addition to our subscription services, we provide a number of
value-added services which are available to free and paid customers of our
subscription services for an incremental usage-based fee. The primary usage-
based services that we offer and we expect to offer in the near future are
described in the following table:
USAGE-BASED SERVICES
<TABLE>
<CAPTION>
Services Description Attributes
- -------- ----------- ----------
<S> <C> <C>
Current Usage-Based
Services
Outbound Fax User can fax document through his/her Per minute fax rates
e-mail outbox via the Internet by using the
intended recipient's destination fax number Paperless forwarding of
followed by faxes "@jfaxsend.com"as received fax
the e-mail destination address
Outbound Voice User can send a voice message through his/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
recipients via the Outbound Fax service capabilities
Broadcast Voice User can send the same voice message to multiple Powerful broadcast voice
recipients via the Outbound Voice service messaging capabilities
Telephone Access to E-mail User can call a toll-free number and access Access, manage and/or reply to
e-mail through a touch tone telephone e-mail by phone
Planned Services
Conference Calling User will be able to set up conference User will be able to set up
calls and speak to more than one party at a conference calls though web
time interface with personalized
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
calendar/contacts information
Follow Me Services Will locate user by routing incoming calls User will be able to assign
to any phone number or series of phone telephone/cell phone numbers
numbers. Callers will have option to leave a pager numbers at which
a voice mail or to search for the user user can be located
Service will try all numbers and
track down user
Notification Will keep user updated regarding incoming User will be able to choose to
messages check messages immediately or do
it later
User will be able to apply rules to filter
which messages are received and which
media is used for notification
Cardless Calling User will be able to make outgoing calls User will be able to make calls
through JFAX.COM number by entering a pin number. without having to hang up and reenter
calling card number
</TABLE>
Each of the above services listed under "Current Usage-Based Services" is
currently offered to our Unified Personal Telecom on per minute rates which vary
depending on the location of the destination fax/phone number. Pricing for
telephone access to e-mail is $0.25 per minute for access to e-mail via a toll-
free telephone number.
There can be no assurance that we 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 second or third quarter of 2000. The
introduction of the planned services has required a significant upgrade to our
international network, which is in progress. The expansion of our network
includes enhancements to our operations centers in Los Angeles, New York and
London. These centers will allow enhanced data transmission over our network,
including live phone conversations, which will be necessary to support the
launch of our future services.
Sales and Marketing
We intend to enhance our market position through development of, and
integration with, online partners and the introduction of new communications
solutions into our suite of products. In April 2000, we launched a new lifecycle
communication strategy focused on usage and delivering targeted upsell messages
to our rapidly expanding base of free subscribers.
Indirect Marketing
We have recently implemented our new affiliate program, to further enable
companies and individuals to sign up as JFAX.COM resellers online.
In order to introduce our services to end-users, we have 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 us with access to likely consumers
for our services.
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<PAGE>
On July 1, 1999, we entered into a new advertising and promotion agreement
with Yahoo. The new agreement calls for fixed, guaranteed quarterly payments, in
exchange for which we receive integration into, and exclusivity on, Yahoo's
e-mail service. We also receive guaranteed user page views in Yahoo's e-mail
service and certain other areas of Yahoo's network. The agreement does not
require any commission payments based on customer sign-ups. The agreement
expires on December 31, 2000.
Integrated Services
With some of our strategic relationships, we co-brand our service, allowing
them to integrate their service with ours and sell a "powered by JFAX.COM"
service.
Telecommunications Companies
We have contracted with Ameritech, 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
We are in the early stages of our relationship with systems integrators, by
which we mean businesses that take our services and bundle them with services of
other companies to be sold as a convenient package of services to the customer.
We intend to build a network of systems integrators that will offer our services
as part of an overall information technology solution for their corporate and
government customers.
International Marketing
We believe that we benefit from local representatives in our international
markets, since they have the cultural understanding and relationships necessary
to sell our services. Our international department in Los Angeles focuses on
recruiting and supporting our international marketing effort.
Marketing Our Services to Existing Subscribers
Our unified messaging resources allow us to execute this sales and
marketing strategy efficiently. As a unified messaging company, we have access
to our subscribers' e-mail and are able to customize our marketing efforts to
specific customers. As a result, we have a direct, low cost channel in which to
advertise our services by sending the customer a promotional fax, e-mail or
voice mail message.
International Network and Operations
We offer our 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. We obtain phone numbers on an as-needed
basis from various local carriers throughout the United States and
internationally with whom we have relationships. As of March 31, 2000, we have
over 725,000 phone numbers in use by our subscribers and we have an additional
200,000 phone numbers which we have already acquired from local carriers and
which are in our inventory. Our ability to continue to acquire additional
quantities of
35
<PAGE>
phone numbers in the future will depend on our relationships with our local
carriers and our ability to pay market prices for such phone numbers. We have
pursued two basic types of commercial relationships in rolling out our network:
International Strategic Alliances. To expand our international
network rapidly, we are pursuing strategic alliances with companies
in a number of foreign markets. These alliances provide us with local
marketing, billing, and customer support and, in some cases,
co-location and phone numbers. Our agreements with our international
strategic alliance resellers may provide that the reseller is granted
a license as our 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 renewal terms, provided that certain threshold
requirements for JFAX.COM 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 JFAX.COM revenues associated with
the reseller.
Co-location. Our 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 JFAX.COM or connected to the
Internet. We refer to this service provided by third parties as
"co-location." We generally arrange independently for the connection
of local phone numbers for our 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 our hubs, or central servers, through
which messages can be routed to the Internet. Either the local
telephone company or an alternate provides us the ability to access
our servers through the telephone lines for the purposes of
maintenance and repair. Given the simple nature of the services
provided by the co-locators, our co-location agreements are much
simpler arrangements than the agreements with our strategic alliances
and provide for a fixed monthly fee.
We have entered into co-location agreements primarily with three
carriers. For locations in the United States, we generally co-locate
with WorldCom/MFS, which is now MCI WorldCom, or AT&T Corp. For
international locations, our co-location agreements are for the most
part with a U.S. subsidiary of Telecom Italia. We have certain other
co-location agreements, in which we own both the lines and equipment.
Our co-location agreements generally provide for fixed monthly
payments and a fixed term of at least one year. Some are cancellable
by us on either 60 or 90 days' notice.
We intend to enter additional markets and to expand our operations
outside the United States. International sales and our entry into additional
foreign markets are subject to a number of inherent risks. For example, we face
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, we may not
acquire telephone numbers directly, but must use a local company to procure
telephone numbers. This increases the importance of our international strategic
alliances, but also makes it more difficult to structure foreign strategic
alliances given the preferences the local companies enjoy. In addition, we must
depend to a greater extent on our foreign strategic alliances for day-to-day
management, including relying on those foreign strategic alliances to provide
help-desk support and other services.
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<PAGE>
Internationally, we may encounter different technology standards that
require us to expend time and resources on adapting our 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 our network. This
adaptation increases the cost of expanding abroad. Finally, in international
markets, we are subject to changes in regulatory requirements and tariffs.
Because we are not familiar with those international environments, and because
the systems of government and regulation that exist abroad are frequently
different from what we experience in the United States, it may be more difficult
for us to anticipate changes and how they will affect the provision of our
services. As a result, it may be more difficult for us to accommodate those
changes.
Services and Information Systems
Inbound Services
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 we are 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.
Outbound Services
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 in a timely and cost-effective manner to the destination.
Telephone Access Services
Our 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. Our 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 voicemails by phone.
Internet Access and Provisioning Services
Our Internet-based provisioning systems, by which customers can initiate
our services from our web site, permit us to provision 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
37
<PAGE>
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 we intend to add new subscribers and expand our service offerings,
future growth in our 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 our business, and in that of our existing or future competitors, could lead
to shortages in the capacity required to operate our business, or could cause
capacity to become more expensive. In either case, we 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 our 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 our part to acquire the
necessary phone numbers, particularly in desirable metropolitan areas, to
accommodate our future growth. If potential customers encounter difficulty
obtaining phone numbers from us, or obtaining those phone numbers on a timely
basis, they may turn to competitors' services. In addition, if the growth in our
subscriber base or our service offerings leads to a reduction in our reliability
or our perceived reliability, or results in problems for the Internet in general
that are beyond our control, customers or potential customers may turn to our
competitors' services including traditional faxing services. Thus, while our
growth is crucial to our future success, that very same growth, when combined
with that of our competitors, could lead to slow delivery times or unreliable
service levels, network failures, security breaches, lack of capacity in our
network, insufficient telephone numbers or a slower Internet. Any of the above
could have a material adverse effect on our business, prospects, financial
condition and results of operations.
Customer Support Services
Our 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 our subscribers, ranging from initial
sales and sign-up to technical support and account administration. To provide
this "one-stop shop," we have installed a technology infrastructure for our
customer service representatives to leverage available data from our main
enterprise database and our customer database. These databases give our customer
service representatives the ability to track purchase history, payment history,
caller history, contact history, and report, analyze and solve technical issues
in an efficient and organized manner. We maintain 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 our customer
service representatives abreast of new issues.
Further, we offer Internet-based online self-help. This allows customers to
resolve simple issues on their own. We have found that most customer questions
come from new users, and with an online self-help guide we believe we are able
to address the majority of new users' questions efficiently.
Competition
We principally compete 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
38
<PAGE>
other methods of messaging (e.g., voice mail, fax and e-mail) into a single
repository, we compete 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 we currently have direct competitors for some of our services, we
are not aware of any service provider currently offering an international
unified messaging suite of services directly competitive to our own. We believe
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 our services face competition, that competition is based on price,
quality, brand recognition, geography and customer support.
Services similar to ours 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 website. 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 ours include free voice mail products that require users to listen to
taped ads before they can access their messages, and facsimile-to-email services
free to users which require that users view advertisements when they retrieve
their faxes. We expect that as these free services become popular, consumers
will require our subscription services to provide clear incremental benefits
over free services to justify paying for our services. In addition, to the
extent free services of another provider are used by a potential JFAX.COM
customer, it may be harder for us to persuade that potential customer to try our
services. Providers of free services in addition to those listed above may enter
the market and thereby reduce the perceived value of our services to our
potential customers.
Further, although to date we have not experienced competition from any of
our strategic alliance resellers, there is a risk that, in the future, these
companies could develop their own competitive services and begin to compete with
us directly. This represents a particular risk for us as we rely to a great
extent on our strategic alliances to market, and provide a potential customer
base for, our services. As a result, competition from these entities would have
the doubly adverse effect of both subjecting our services to competitive
pressures and limiting our 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 we have, 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 we can. There can be no assurance that additional
competitors will not enter markets that we plan to serve or that we will be able
to compete successfully.
We believe that our 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.
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<PAGE>
However, our solution competes unfavorably at least on price with those
companies who provide for free, i.e. on an advertising supported basis, one or
more of the services that we provide. In addition, we compete negatively with
many companies whose services compete with one or more of our services, and
which have greater efficiencies of scale or easier access to capital due to
their financial strength or size or their more well-established reputation.
Finally, one or more of the companies offering component portions of our service
may enhance their service offerings, and those service offerings might be
superior to ours. If this were to occur, and the company offering those services
were well-established, it would negatively impact our competitive position.
We believe we 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, we have a head start on our current and potential competitors
with respect to these factors. However, we face strong competition in each of
the component portions of our service (e.g., voice mail, fax and e-mail) from
larger, financially stronger and better established competitors.
Patents and Proprietary Rights
We rely on a combination of trademark, trade secret and copyright law and
contractual agreements to protect our proprietary technology and intellectual
property rights.
We have developed substantially all of our software internally. We have
entered into agreements with our software programmers that provide for our
ownership of all software and intellectual property.
We have licensed from third parties some components of our end-user
software for unlimited use for one-time, up-front payments pursuant to written
license agreements. Some of our license agreements provide for a modest
additional payment in the event of a subsequent major upgrade.
We have multiple pending U.S. patent applications and one Patent and
Trademark Office application for proprietary aspects of the major components of
our technology, but we have no issued patents. Unless and until patents are
issued, no patent rights can be enforced. We have obtained U.S. copyright
registrations for certain proprietary software.
We own registrations in the United States for the service marks JFAX,
JFAX.COM and our logo, as well as a European Community registration and a
European Community application for registration of JFAX(R). We also own
registrations and applications for registration in the United States of other
service marks and slogans that we use.
We hold the Internet domain name "jfax.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 we
conduct business, and we could be unable to prevent third-parties from acquiring
domain names that infringe or otherwise decrease the value of our domain names
or trademarks.
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Like other technology-based businesses, we face the risk that we will be
unable to protect our intellectual property and other proprietary rights, and
the risk that we 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 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 stronger
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
stronger criminal penalties for using the Internet to solicit minors
for sexual purposes and criminalizes sending obscene material to
persons under the age of 16.
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
our business, prospects, financial condition and results of operations.
We provide our 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, we are 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 or the services we offer
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<PAGE>
expand, there may be increased regulation of our business including regulation
by agencies having jurisdiction over telecommunications services. Additionally,
existing telecommunications regulations affect our business through regulation
of the prices we pay 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 increase in costs could slow the growth of Internet use and thereby
decrease the demand for our 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 our business, prospects, financial condition and
results of operations.
Seasonality and Backlog
Our business is not seasonal to any significant extent. Due to sales almost
exclusively by credit card, we experience no material backlog.
Research and Development
The market for our 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. Our future success will depend, in part, upon our ability to
enhance our current services, to respond effectively to technological changes,
to sell additional services to our existing customer base and to introduce new
services and technologies that address the increasingly sophisticated needs of
our customers. We are devoting significant resources to the development of
enhancements to our existing services and the migration of existing services to
new software platforms. There can be no assurance that we 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 our competitive position or render our services or technologies
noncompetitive or obsolete
Our research and development expenditures were $1,829,000, $1,226,000 and
$793,000 for the fiscal years ended December 31, 1999, 1998, and 1997,
respectively.
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Facilities
We currently lease approximately 28,000 square feet of office space for our
headquarters in Hollywood, California under a lease that expires in January
2010. We lease such space from CIM/Hollywood, LLC, a limited liability company
indirectly controlled by our co-chairman. Additionally we sublease approximately
26% of the space back to CIM Group, LLC, another limited liability company
indirectly controlled by our co-chairman. This sublease is cancelable by either
party on six months' notice. Our share of the monthly rent is approximately
$36,000.
We lease an additional 8,000 square feet of office space in Carlsbad,
California under a lease which expires in August 2000, 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 our network equipment is housed either at our Los Angeles or New
York leased space or at one of our 52 co-location facilities around the world.
Employees
As of March 31, 2000, we employed or contracted a total of 130 employees,
including 4 consultants on a full or part-time basis. We have 106 full-time and
24 hourly workers. 32 of our employees are technical staff, reflecting our
emphasis on the development of new technologies.
Our future success will depend, in part, on our ability to continue to
attract, retain and motivate highly qualified technical, marketing and
management personnel. Our employees are not represented by any collective
bargaining unit. We have never experienced a work stoppage. We believe our
relationship with our 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 "Risk Factors--Information Regarding
Forward-Looking Statements".
On October 28, 1999, AudioFAX IP LLC filed a lawsuit against us 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. We filed an
answer to the complaint on December 2, 1999. We have reviewed the AudioFAX
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 are 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.
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MANAGEMENT
Directors
The names of our directors, their ages at April 15, 2000, 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 41 President, Orchard Capital Corporation 1997
- ----------------------------------------------------------------------------------------------------------------------
Zohar Loshitzer 42 Chief Information Officer, JFAX.COM, Inc. 1997
- ----------------------------------------------------------------------------------------------------------------------
John F. Rieley 55 Co-Founder and Vice-Chairman, JFAX.COM, Inc. 1995
- ----------------------------------------------------------------------------------------------------------------------
Michael P. Schulhof 57 Private Investor 1997
- ----------------------------------------------------------------------------------------------------------------------
R. Scott Turicchi 36 Executive Vice President, Corporate Development, 1998
JFAX.COM, Inc.
- ----------------------------------------------------------------------------------------------------------------------
Robert J. Cresci 56 Managing Director of Pecks Management Partners Ltd. 1998
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
There is no family relationship between any director and any of our
executive officers.
Richard S. Ressler has been our Chairman of the Board and a director since
1997. He is the managing member of Orchard/JFAX Investors, LLC, one of our
principal stockholders. He was our chief executive officer 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 of Orchard Capital
Corporation, a firm which provides investment capital and advice to companies in
which Orchard or its affiliates have made investments. Mr. Ressler has been a
principal of Orchard since 1994.
Zohar Loshitzer has been our chief information officer and a director 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.
John F. Rieley is a co-founder and has been a director since 1995. From
December 1995 when our business was founded until March 1997, he held various
offices with JFAX.COM. After March 1997 he has provided consulting services to
us under an agreement between us and Boardrush Media LLC, one of our principal
stockholders. He has managed, marketed and consulted on other projects in the
media field, the airline industry and in public affairs.
Michael P. Schulhof has been a director 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.
44
<PAGE>
R. Scott Turicchi has been a director since 1998, and recently assumed the
newly-created position of Executive Vice President, Corporate Development. From
1990 to 2000, Mr. Turicchi was a Managing Director in Donaldson, Lufkin &
Jenrette Securities Corporation's Investment Banking department. There, 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.
Robert J. Cresci has been a director 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.
Executive Officers
The name, age and title of each of our executive officers (other than
executive officers who are directors set forth above), business experience for
at least the past five years and certain other information concerning each such
executive officer has been furnished by the executive officer and is set forth
below. Executive officers are elected by the Board of Directors following the
annual meeting of our stockholders.
Steven J. Hamerslag, 43, has been our 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 we 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., an
international provider of data storage management products and services.
Nehemia Zucker, 43, has been our Chief Financial Officer since 1996. Prior
to joining JFAX.COM 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 our Vice President, Engineering, since October
1999. He joined JFAX.COM in August 1997 as a senior systems analyst and served
as our Director, Research and Development, from May 1998 until October 1999.
Prior to joining JFAX.COM, beginning in 1995, Mr. Kumar served as a software
engineer for IBM.
Timothy Johnson, 36, has been our 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 we 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 our 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 which we acquired 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.
45
<PAGE>
Bita Klein, 40, has been our Vice President, Customer Service, since March
2000. From March 1999, until she joined JFAX.COM, 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.
Lester Morales, 38, has been our Senior Vice President, Sales, since,
January 2000. Previously, since May 1998, he had been Vice President, Sales, of
SureTalk.com, Inc., a closely held Internet-based messaging and communications
company which we acquired on January 26, 2000. Since 1989, Mr. Morales has
served as president of Capitol Communications, Inc., a telemarketing company
based in Michigan. Since 1991, he has served as president of Superior
Communications & Consulting Inc., a communications consulting firm.
Summary Compensation Table
The following table shows, as to our Chairman and former Chief Executive
Officer, and each of our 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 us in all capacities during the
last three fiscal years.
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Awards
------------------- -------------------
Other All
Annual Other
Compen- Securities Compen-
sation Underlying sation
Name and Principal Position Year Salary($) Bonus($) ($) Options(#) ($)
- --------------------------- ---- --------- -------- --- ---------- ---
<S> <C> <C> <C> <C> <C> <C>
Richard S. Ressler/(1)/ 1999 237,500 0 0 500,000 0
Chairman and Former 1998 200,000 0 0 0 0
Chief Executive Officer 1997 175,000 0 0 0 0
Gary H. Hickox/(2)/ 1999 220,000 71,291 0 500 0
Former President and 1998 60,874/(3)/ 0 0 375,000 40,542/(4)/
Chief Operating Officer 1997 0 0 0 0 0
Nehemia Zucker 1999 150,000 43,125 0 20,500 0
Chief Financial Officer 1998 150,000 31,250 0 12,500 0
1997 150,000 34,361 0 250,000 20,000/(5)/
Zohar Loshitzer 1999 175,000 65,625 0 20,500 0
Chief Information Officer 1998 140,000 34,936 0 50,000 0
1997 74,407 30,000 0 225,000 0
Anand Narasimhan/(6)/ 1999 165,000 45,662 0 10,500 0
Former Chief Technology 1998 137,453 28,673 0 112,500 0
Officer 1997 94,423 20,219 0 75,000 10,000/(7)/
</TABLE>
46
<PAGE>
(1) Mr. Ressler is an employee of Orchard Capital Corporation, which provides
his services to us through a consulting agreement. Mr. Ressler served as
our Chief Executive Officer from March 1997 until January 2000.
(2) Mr. Hickox was our 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 our Chief Technology Officer from 1996 until March 2000.
(7) Consists of re-location expenses reimbursed to Mr. Narasimhan.
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 our
executive officers named in the Summary Compensation Table:
<TABLE>
<CAPTION>
Individual Grants
- ------------------
Potential Realizable
Number of % of Total Value at Assumed
Securities Options Annual Rates
Underlying Granted of Stock Price
Options To Employees Exercise Appreciation For
Granted In Fiscal Price Expiration Option Term/(1)/
Name #(2) Year(3) ($/SH)(4)(5) Date 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
</TABLE>
(1) Potential realizable value is based on the assumption that the 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 Securities and Exchange
Commission and do not represent an estimate of future stock price growth.
(2) All stock options granted have ten 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" for provisions regarding acceleration of the
vesting of options under certain circumstances.
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<PAGE>
(3) There were a total of 1,492,500 stock options and warrants granted to our
employees in 1999 (including all options granted to Mr. Ressler, but
excluding options granted to our outside directors).
(4) Options were granted at an exercise price equal to the market value of the
Common Stock as listed on the NASDAQ.
(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 our 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 Value of Unexercised
Underlying Unexercised In-The-Money Options at
Options at Fiscal Year-End(#) Fiscal Year-End($) (1)
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------------------- -------------------------
<S> <C> <C>
Richard S. Ressler 0 / 500,000 0.00 / 0.00
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.
Director Compensation
Our directors who are also officers or consultants receive no separate
compensation for serving as directors. Our outside directors, Messrs. Schulhof
and Cresci, are themselves, or are representatives of, significant stockholders.
They receive no compensation for serving as directors. They are, however,
reimbursed for their expenses in attending directors' meetings and committee
meetings.
Our directors are eligible to participate in our 1997 Stock Option Plan
and, in July 1999, Messrs. Cresci, Rieley, Schulhof and Turicchi were each
granted 40,000 options, and Mr. Ressler was granted 500,000 options, to purchase
shares of our Common Stock at an exercise price of $8.00 per share. See "--1997
Stock Option Plan" for a description of the terms of our 1997 Stock Option Plan.
The services of Mr. Ressler, formerly as Chief Executive Officer and
currently as Chairman, are provided pursuant to a consulting agreement. See
"Certain Transactions".
48
<PAGE>
No options or warrants were exercised by any of our directors in 1999.
Employment Contracts, Termination of Employment, and Change of Control
Arrangements
We currently have employment contracts with Steven J. Hamerslag, R. Scott
Turicchi, Nehemia Zucker, and Lester Morales. We also have a consulting
agreement with Orchard Capital Corporation which supplies the services of
Richard S. Ressler, our Chairman, and a consulting agreement with Boardrush
Media LLC which supplies the services of John F. Rieley, our Vice Chairman. See
"--Certain Transactions with Management."
Mr. Hamerslag's Contract. This agreement has a four year term, and is
automatically renewed for successive one year terms unless either we or Mr.
Hamerslag give prior notice of termination. The agreement contains no severance
obligations.
In connection with the agreement, we issued 120 shares of our Series B
Convertible Preferred Stock ("Series B Preferred Stock") to Mr. Hamerslag. Each
share of our Series B Preferred Stock is convertible into 10,000 shares (for a
total of 1.2 million shares) of our Common Stock, at the election of Mr.
Hamerslag, but only following the expiration of our repurchase rights
(hereinafter described) with respect to such share of Series B Preferred Stock
and repayment by Mr. Hamerslag of the applicable portion of the promissory note
(hereinafter described) delivered by Mr. Hamerslag to us in connection with the
issuance to him of the Series B Preferred Stock. In exchange for his shares of
Series B Preferred Stock, Mr. Hamerslag issued to us a promissory note in an
amount equal to $7,125,000 ($5.9375, the market price per share for our 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
Series B Preferred shares, accrues interest at the one-year Treasury-note rate,
with interest payable annually in arrears, and matures 5 years following
issuance. Mr. Hamerslag has granted us the right to repurchase all 120 shares of
his Series B Preferred Stock (at a price per share equal to $5.9375 multiplied
by 10,000) in the event that Mr. Hamerslag's employment terminates for any
reason; provided, that this repurchase right (1) only applies to 90 shares
following the first anniversary of Mr. Hamerslag's employment (or in the event
of a termination by us without cause or by Mr. Hamerslag with good reason (as
defined) 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); (2) 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
(3) expires completely upon a change of control (as defined). "Good reason" is
defined as a change in the reporting relationship between Mr. Hamerslag and our
Board, the committees of our Board or our Chairman, or a relocation of Mr.
Hamerslag. "Change of control" is defined as a single party or affiliated group
not currently affiliated with us (excluding any of our employee benefit plans
and excluding our Chairman, Richard S. Ressler, or any of his affiliates),
acquiring a majority of the outstanding shares of our Common Stock or
substantially all of our assets.
Under the agreement, we reimburse Mr. Hamerslag for up to $50,000 of
discretionary business expenses incurred by Mr. Hamerslag per year, and Mr.
Hamerslag participates in all of our benefits programs including our semi-annual
incentive compensation bonus plan.
Mr. Turicchi's Contract. This agreement has no specified term. In the event
of termination by us without cause or by Mr. Turicchi following a constructive
without cause termination (as defined), we
49
<PAGE>
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,
6-months' severance, in the event of a termination occurring during the second
year of Mr. Turicchi's employment, and 3-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
occurrence of a change-in-control (as defined in our 1997 Stock Option Plan).
In connection with the agreement, we committed to grant to Mr. Turicchi
(subject to stockholder approval of an increase in the number of shares reserved
for issuance under our 1997 Stock Option Plan) 850,000 options to purchase our
Common Stock at an exercise price of $5.00 per share (the market price per share
for our Common Stock on the date Mr. Turicchi was offered employment) in
accordance with our 1997 Stock Option Plan. These options will have a term of 10
years. One-quarter (or 212,500) of the options will vest on each anniversary of
the date Mr. Turicchi commenced employment with us; provided, that (i) in the
event of a termination by us 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; (ii)
in the event of a termination by us 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 (iii) all options will vest upon a change of
control (as defined). "Change of control" is defined as a single party or
affiliated group, not currently affiliated with us, acquiring a majority of our
outstanding shares of Common Stock.
Under the agreement, Mr. Turicchi participates in all of our benefits
programs including our semi-annual incentive compensation bonus plan.
Mr. Morales' Contract. This agreement has no specified term. In the event
of termination by us without cause or by Mr. Morales following a constructive
without cause termination (as defined), we will be required to pay Mr. Morales
severance for a period equal to one month for each full year of service (but in
no event less than three months nor more than six months), in the case of a
termination by us without cause, and for a period of six months, in the event of
a constructive without cause termination. Further in the event any such
termination occurs during the first year of Mr. Morales' employment, Mr. Morales
will vest in unvested stock options otherwise scheduled to vest on his first
anniversary. A "constructive without cause termination" is defined as a
relocation of Mr. Morales or a material change in Mr. Morales' duties or
responsibilities.
Under the agreement, Mr. Morales participates in all of our benefits
programs including our 1997 Stock Option Plan and our 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 us 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 JFAX.COM.
1997 Stock Option Plan
Our 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
Common Stock has been reserved for issuance under the plan. As of April 15,
2000, options to purchase 3,855,548 shares of Common Stock
50
<PAGE>
were outstanding under the plan, and 118,770 shares had been issued upon
exercise of previously granted options.
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
(including non-employee directors).
The plan is administered by the Compensation Committee of the 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.
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 the 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 our stock, the option exercise
price for each share covered stock by such option may not be less than 110% of
the fair market value of share of Common Stock on the date of grant of such
option.
In the event of a sale of all or substantially all of our assets, or our
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.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee currently consists of Messrs. Cresci, Schulhof,
and Ressler. We have no interlocking relationships or other transactions
involving any of our Compensation Committee members that are required to be
reported pursuant to applicable Securities and Exchange Commission rules. One of
our former officers, Richard S. Ressler, but no current officer, serves on the
Compensation Committee.
PRINCIPAL STOCKHOLDERS
The following tables set forth information as of April 15, 2000 with
respect to the beneficial ownership of our common stock both before and
immediately following the offering by:
. each person known by us to own beneficially more than five percent, in
the aggregate, of the outstanding shares of our common stock,
51
<PAGE>
. our directors and our Named Executive Officers, and
. all executive officers and directors as group.
The following calculations of the percentages of outstanding shares are
based on 36,107,378 shares of our common stock outstanding as of April 15, 2000.
We determined beneficial ownership in accordance with the rules of the
Securities and Exchange Commission, which generally require inclusion of shares
over which a person has voting or investment power. Share ownership in each case
includes shares issuable upon exercise of outstanding options and warrants that
are exercisable within 60 days of April 15, 2000 as described in the footnotes
below. Percentage of ownership is calculated pursuant to SEC Rule 13d-3(d)(1).
Security Ownership of Certain Beneficial Owners
We were aware of the following beneficial owners of more than 5% of
our common stock as of April 15, 2000:
<TABLE>
<CAPTION>
Number of Percentage
Name and Address Shares of Class
- ---------------- ------ --------
<S> <C> <C>
Richard S. Ressler 13,273,073/(1)/ 36.45%
c/o Orchard Capital Corporation
6922 Hollywood Boulevard, 9th Floor
Los Angeles, CA 90028
Boardrush Media LLC 4,370,250 12.10%
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) Consist of 12,574,515 shares of stock owned by Orchard/JFAX Investors, LLC
("Orchard Investors"), 390,244 shares of common stock owned by The Ressler
Family Foundation (the "Foundation"), and 308,314 shares of common stock
which Orchard Investors may purchase pursuant to warrants which are
exercisable in full at this time. Mr. Ressler is the manager of Orchard
Investors and a trustee of the Foundation, but has disclaimed beneficial
ownership of any shares of common stock in which he has no pecuniary
interest.
(2) Consist of:
. 1,391,084 shares of common stock and 295,625 vested warrants held by
Delaware State Employees Retirement Fund,
. 382,979 shares of common stock and 81,250 vested warrants held by ICI
American Holdings, Inc. Defined Benefit Plan,
. 257,070 shares of common stock and 54,375 vested warrants held by
Zeneca Holdings Inc. Defined Benefit Plan, and
52
<PAGE>
. 176,565 shares of common stock and 37,500 vested warrants held by the
JW McConnell Family Foundation.
Security Ownership of Management
The following table sets forth the beneficial ownership of our common
Stock as of April 15, 2000, by each director, by each of the executive officers
named in the Summary Compensation Table, by our other current executive
officers, and by all such directors and executive officers as a group.
<TABLE>
<CAPTION>
Number of
Shares
Beneficially Approximate
Name/(1)/ Owned Percentage
- ------- ----- ----------
<S> <C> <C>
Richard S. Ressler 13,273,073/(2)/ 36.45%
Zohar Loshitzer 241,667/(3)/ *
John F. Rieley 175,000 *
Michael P. Schulhof 1,103,104/(4) 2.99%
R. Scott Turicchi 143,750/(5)/ *
Robert J. Cresci 0 *
Steven J. Hamerslag 231,411 *
Timothy Johnson 9,538 *
Lester Morales 68,634 *
Leo D'Angelo 30,000 *
Bita Klein 0 *
Amit Kumar 20,750/(6)/ *
Gary H. Hickox 87,083/(7)/ *
Nehemia Zucker 515,906/(8)/ 1.42%
Anand Narasimhan 289,084/(9)/ *
All directors and named executive
officers as a group (15 persons) 16,289,000 42.70%
</TABLE>
_______________________
* Less than 1%
(1) The address for all executive officers and directors is c/o JFAX.COM, Inc.,
6922 Hollywood Blvd., Suite 900, Los Angeles, CA 90028.
(2) Consist of 12,574,515 shares of stock owned by Orchard/JFAX Investors, LLC
("Orchard Investors"), 390,244 shares of common stock owned by The Ressler
Family Foundation (the "Foundation"), and 308,314 shares of common stock
which Orchard Investors may purchase pursuant to warrants which are
exercisable in full at this time. Mr. Ressler is the manager of Orchard
Investors and a trustee of the Foundation, but has disclaimed beneficial
ownership of any shares of common stock in which he has no pecuniary
interest.
(3) Consist of 241,667 employee options that are exercisable within 60 days of
April 15, 2000.
(4) Consist of 263,104 shares of common stock and 840,000 vested warrants.
53
<PAGE>
(5) Consist of 143,750 vested warrants.
(6) Consist of 10,333 shares of common stock and 10,417 employee options that
are exercisable within 60 days of April 15, 2000.
(7) Consist of 41,250 shares of common stock and 145,833 employee options that
are exercisable within 60 days of April 15, 2000.
(8) Consist of 261,739 shares of common stock and 254,167 employee options that
are exercisable within 60 days of April 15, 2000.
(9) Consist of 160,959 shares of common stock and 128,125 employee options that
are exercisable within 60 days of April 15, 2000.
CERTAIN TRANSACTIONS
Indebtedness of Officers, Directors and Principal Stockholders
The following directors, officers and beneficial owners of more than
5% of our common stock are indebted to us. Nehemia Zucker is indebted to us 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 our common stock owned by Mr. Zucker.
Anand Narasimhan, our former Chief Technology Officer, is indebted to us in the
amount of $50,000. This loan was advanced to Mr. Narasimhan on September 17,
1997, matured on September 17, 1999 and bears interest at the rate of 8.0% per
annum. Interest was previously deducted from Mr. Narasimhan's salary. This note
is secured by a pledge of 150,000 shares of our common stock owned by Mr.
Narasimhan. Boardrush Media LLC is indebted to us in the amount of approximately
$2,030,618. The loan to Boardrush was advanced to Boardrush on March 17, 1997.
The loan to Boardrush matures on March 17, 2004. However, Boardrush shall be
required to repay this loan to us upon the sale by Boardrush or its affiliates
of at least $6 million of our common stock. 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, our
former President and Chief Operating Officer, is indebted to us in the
approximate amount of $105,288. 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 us together with accrued interest through
March 31, 2000. Mr. Hickox used the proceeds of this loan to purchase 41,250
shares of our 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 us 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 "Management--Employment
Contracts, Termination of Employment, and Change of Control Arrangements."
Consulting Agreements
We are a party to a consulting agreement with Boardrush Media LLC, a
limited liability company that owns approximately 12% of our common stock and of
which Jens Muller, a former
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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 our directors and our Vice Chairman, to us for a maximum of two days each per
month. We consider Mr. Muller and Mr. Rieley to be the co-founders of our
company. 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 March
17, 2004. 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 us. Until March 17, 1999, we 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. Pursuant to the
consulting agreement, we also reimburse Boardrush for expenses it incurs on our
behalf. Pursuant to the consulting agreement, for a period of three years which
expired in March 2000, Boardrush, and each of Mr. Muller and Mr. Rieley, agreed
not to engage in a business in direct competition with our products and services
in those areas where we conduct our business.
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 ("Orchard"), a company controlled by Mr. Ressler, who is
also a member and the manager of Orchard/JFAX Investors, LLC, one of our
principal stockholders. Under this consulting arrangement, we paid Orchard
$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's 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), and
Orchard's consulting arrangement was reflected in a written agreement between us
and Orchard which expires October 1, 2000.
As a director, Mr. Ressler is eligible to participate in our 1997 Stock
Option Plan and, in July 1999, he was granted 500,000 options to purchase shares
of our common stock at an exercise price of $8.00 per share. See "Management--
1997 Stock Option Plan" for a description of the terms of our 1997 Stock Option
Plan.
Other than reimbursement for reasonable expenses incurred in connection
with the services it renders to us, neither Orchard nor Mr. Ressler receive any
other compensation from us.
In January 1997, we entered into a consulting agreement with Michael P.
Schulhof, now a member of our board of directors. Pursuant to this agreement,
Mr. Schulhof agreed to provide financial, investment and operational advice to
our management team. In consideration for these services, Mr. Schulhof was
granted a warrant to purchase 420,000 shares of our common stock at an exercise
price of $0.70 per share and a second warrant to purchase 420,000 shares of our
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
We currently lease approximately 28,000 square feet of office space for our
headquarters in Hollywood, California under a lease that expires in January
2010. We lease such space from CIM/Hollywood, LLC, a limited liability company
indirectly controlled by our Chairman, Richard S. Ressler. Additionally we
sublease approximately 26% of this space to CIM Group, LLC, another limited
liability company indirectly controlled by Mr. Ressler. This sublease is
cancelable by either
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<PAGE>
party on six months' notice. Our share of the monthly rent is approximately
$36,000 and CIM Group's share of the monthly rent is approximately $12,500.
We also share and pro-rate the cost of certain administrative costs with
other entities that are controlled by our Chairman. The other administrative
costs include the costs of a shared receptionist and routine office and
telephone expenses. We also make available the services of our general counsel
to these other entities and charge them for the proportionate cost of the
services of our 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 us are currently approximately $20,000.
This amount reflects our business activity, vis a vis the other affiliated
entities, as of April 30, 2000, and could increase or decrease as we and/or
these affiliated entities grow.
Investments in JFAX.COM by Officers, Directors and Principal Stockholders
Between December 1995, when we were founded, and March 1997, when
Orchard/JFAX Investors, LLC invested in us, we issued a total of 6,910,000
shares of our common stock to our founders, Messrs. Muller and Rieley, in
exchange for cash investments. In March 1997, we issued 5,375,000 shares of
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, we
issued 10,060,000 shares of common stock to Orchard/JFAX Investors, LLC in
exchange for a cash investment of $7,750,000. In March and May 1997, we issued
220,000 shares and 150,000 shares, respectively, to Nehemia Zucker and Anand
Narasimhan, upon the exercise by Messrs. Zucker and Narasimhan of employee
options granted to them when they joined us in 1996 and payment by each of them
of the option price of 0.02(cent) per share. In connection with the investments
by Boardrush, Orchard/JFAX Investors, LLC, and Messrs. Zucker and Narasimhan, we
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 JFAX.COM,
but they have no right to demand that we effect a registration. These
registration rights will expire on March 17, 2007.
In March 1998, we issued a total of 3,750,000 shares of common stock at
$0.80 per share pursuant to a rights offering that was made available to all of
our then shareholders 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 us from Orchard/JFAX Investors, LLC. 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, we issued $10 million of our 10% senior subordinated notes
due 2004 together with 2,101,971 shares of our 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 our directors, is a managing director of Pecks Management Partners, Ltd.
Pursuant to the terms of the notes, which permitted us to make some payments of
interest by issuing additional notes and shares of common stock, we subsequently
issued an additional $512,500 principal amount of notes and 105,727 shares of
common stock to that investor group. The total purchase price was $10 million.
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<PAGE>
In July 1998, we also issued $5 million in liquidation preference of
our Series A Usable Redeemable Preferred Stock and related warrants to acquire
3,125,000 shares of our 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 our
common stock and a cash payment of $870,000, as compensation for its services.
Mr. Turicchi, one of our directors, 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 2,187,500 warrants;
. Orchard/JFAX Investors, LLC purchased 500 shares and received 312,500
warrants; and
. The investor group managed by Pecks Management Partners, Ltd.
purchased 750 shares and received 468,750 warrants.
A portion of the proceeds of the notes and preferred stock offerings was used to
repay a loan to us from Orchard/JFAX Investors, LLC. 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 the 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 us 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
common stock issued in connection with the notes offering or of the common stock
issued upon exercise of the warrants. In addition, the holders are entitled to
participate in registrations initiated by us. Finally, under the registration
rights agreement, we have also agreed to file a registration statement on Form
S-3 permitting resales of the shares of common stock held by such investors when
we are eligible to use that form.
In addition, the holders of the common stock and warrants issued in
connection with the notes and preferred stock offerings are entitled to have us
repurchase such shares of common stock issued upon exercise of the warrants in
the event of a change of control of JFAX.COM. In such event, the shares of
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
warrant and the shares issued upon exercise of warrants to be repurchased at
$4.00 per share.
We are 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, LLC. Under that
agreement, we have agreed to take all action within our power to cause the
election of, and the stockholders have agreed to vote their shares of 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 common stock issued in connection with the
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<PAGE>
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 our common
stock and warrants to acquire our common stock.
In October 1998, we issued 41,250 shares of our common stock to Mr.
Hickox, our 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, we 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 JFAX.COM 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 us.
In January, 2000, we 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, Inc.
included Steven J. Hamerslag, Timothy Johnson, and Lester Morales, who joined us
executive officers following the closing. At closing, Mr. Hamerslag received
231,411 shares of our common stock, Mr. Johnson received 9,538 shares of our
common stock and Mr. Morales received 68,634 shares of our common stock, in each
case in satisfaction of our 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 our common stock they received
in connection with the sale pursuant to an agreement between us and those
stockholders entered into at the time of the closing. Under that agreement, we
agreed to file a registration statement on Form S-1, of which this prospectus is
a part, permitting resales of the shares of common stock held by such
stockholders and to have such registration statement declared effective no later
than June 30, 2000.
At the time of our acquisition of SureTalk.com, Inc., 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 currently our Senior Vice President, Sales, is the
president and sole stockholder of Capitol Communications. This administrative
services agreement has continued in place and we currently pay approximately
$12,000 per month under the agreement. We expect to make a total of
approximately $70,000 in payments under this agreement through July 2000,
following which the agreement will be terminated.
In March, 2000, we 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, Inc.,
Leo D'Angelo, joined us as an executive officer following the closing. At
closing, Mr. D'Angelo received 30,000 shares of our common stock as a stock-out
of any claims he had to the assets of TimeShift,Inc. that were being transferred
to us.
We believe 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
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Orchard/JFAX Investors, LLC investment in our company, the June 1998 issuance of
notes and common stock, the July 1998 issuance of preferred stock and warrants,
and the January - March 2000 SureTalk.Com, Inc. and TimeShift, Inc.
acquisitions--those transactions were negotiated at arms' length with previously
unaffiliated parties. We intend to have all future transactions between us and
our 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 our directors.
DESCRIPTION OF CAPITAL STOCK
The following summary information is qualified in its entirety by the
provisions of our certificate of incorporation and by-laws, copies of which have
been filed as exhibits to the registration statement of which this prospectus is
a part. See "Information Available to You" for more information.
Our 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 April 15, 2000, 36,107,378 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
April 15, 2000, 120 shares of Series B Convertible Preferred Stock were issued
and outstanding, and there was one holder of record of preferred stock. We also
have 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. See "Dividend Policy."
Voting Rights
Each outstanding share of common stock entitles the holder to one vote on
all matters submitted to a vote of stockholders, including the election of our
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 by-laws 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 by-laws. The certificate of
incorporation may be amended by an affirmative vote of the holders of a majority
of our 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 of our securities. Upon our liquidation,
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dissolution or winding up, the holders of common stock are entitled to receive
pro rata any of our 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 our 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 us to purchase these shares at the put price.
Preferred Stock
As of April 15, 2000, we have 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 us as President and Chief Executive Officer. See
"Management--Employment Contracts, Termination of Employment, and Change of
Control Arrangements."
The 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 our
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.
We believe that the 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 JFAX.COM without any further action by the holders of
common stock. We have no current plans to issue preferred stock for any purpose.
Warrants and Options
In connection with our preferred stock offering in July 1998 (see "Certain
Transactions") we issued 3,393,750 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. 1,112,500 of these warrants remain outstanding.
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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 us:
. to redeem the warrants at $1.60 each, 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.
We have also issued warrants to purchase 420,000 shares of 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 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.
We also issued 250,000 warrants to America Online on October 15, 1997 to
purchase 250,000 shares of our common stock at $2.40 per share. These warrants
expire on October 15, 2004.
All of the above warrants are immediately exercisable.
We also have options outstanding and available for grant under our stock
option plan, including outstanding and currently exercisable options to acquire
916,005 shares of our common stock as of April 15, 2000. See "Management--1997
Stock Option Plan" and "Certain Transactions." We have filed a registration
statement on Form S-8 covering the shares of common stock issuable under our
stock option plan, including shares subject to outstanding options, thus
permitting the resale of such 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 certain of our officers, directors and significant stockholders,
the holders of 22,177,754 shares of our common stock may make requests that we
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 our 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 our officers, directors and principal
stockholders, see "Certain Transactions."
Securityholders' Agreement
We have a securityholders' agreement dated as of June 30, 1998 with certain
of our warrant investors in the June and July 1998 private placements. For a
description of the terms of that securityholders' agreement, see "Certain
Transactions."
Anti-Takeover Effects of Delaware Law
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We are a Delaware corporation and are 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 our stock or the removal of the incumbent board of
directors. Such provisions could also have the effect of discouraging an
outsider from making a tender offer or otherwise attempting to obtain control of
JFAX.COM, even though such an attempt might be beneficial to us and our
stockholders.
Our certificate of incorporation and by-laws 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.
We believe that these provisions are necessary to attract and retain
qualified directors and officers.
Our by-laws require that any stockholder proposals to be considered at an
annual meeting of stockholders must be delivered to us 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
such 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.
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Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American
Securities Transfer & Trust, Inc.
SHARES ELIGIBLE FOR FUTURE SALE
At April 15, 2000, we had 36,107,378 shares of common stock
outstanding and 8,137,214 shares issuable upon the exercise of outstanding
warrants, options, and convertible preferred stock. We have also committed to
grant an additional 850,000 stock options to one of our employees. We estimate
that approximately one-quarter of our outstanding shares were previously sold in
registered offerings or in transactions under Rule 144, and therefore are
tradable without restriction, other than any shares purchased by our
"affiliates".
The remaining shares owned by existing shareholders are restricted
securities under the Securities Act of 1933, and may be sold only pursuant to a
registration, including this one, or an applicable exemption, including Rule
144. However, most of these restricted shares are currently eligible for sale
pursuant to Rule 144, subject to the limitations of that rule. Market sales of
shares by existing shareholders or the availability of shares for future sale
may depress the market price of our common stock.
SELLING STOCKHOLDERS
The following stockholders are the selling shareholders in this
offering. Pursuant to a Registration Rights Agreement, dated as of January 26,
2000, these stockholders have certain registration rights and this prospectus
has been prepared and filed in accordance with that agreement.
This table provides information about the selling shareholders and the
shares that may be offered by them as of April 15, 2000.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Before Offering After Offering
- -----------------------------------------------------------------------------------------------------------------------
Number of Number of
Shares Shares
Name Beneficially Approximate Beneficially Approximate
----
Owned Percentage Owned(1) Percentage
----- ---------- ----- ----------
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mark Schwartz 656,253 1.82% 0 *
- -----------------------------------------------------------------------------------------------------------------------
Barry Shore 225,838 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Chris Brunn 3,784 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Lester Morales/(2)/ 68,634 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Jack B. Root 50,887 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Robert Lipman 10,093 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Steven Archer 5,046 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Moshe Lazar 5,046 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Henry Edelman 2,523 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Christopher Outwater 3,028 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Philip Sussholz 2,422 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Daniel Rasmussen 2,523 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Philip Kamornick 2,018 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
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<TABLE>
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David Gollub 1,614 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Value Added Ventures LLC 5,046 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Brobeck Phleger & Harrison LLP 1,328 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Greg Williams 12,749 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Richard Fink 9,827 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Kevin DeBre 2,124 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
John Jones 531 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Eileen M. Beale/(2)/ 757 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Robert Zink 567 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Michael Sawyer 567 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Denise Woods 63 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Shannon Van Haaren 63 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Steven J. Hamerslag/(2)/ 231,411 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Sanjiv Ahuja 5,046 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Arthur J. Cormier 10,513 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Georges J. Daou, Trustee of the Georges J. 0
Daou Trust dated 5/2/96 10,513 * *
- -----------------------------------------------------------------------------------------------------------------------
Joseph B. Fenley 10,513 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Laurence Fish 5,256 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Marvin Nelson Greenwood and Loriann *
Greenwood, TTES U/D/T dtd 5/16/96 10,598 0 *
- -----------------------------------------------------------------------------------------------------------------------
Ian A. Lerner 6,834 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Alan Lipman, Trustee of the Lipman Family
Trust 2,624 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Manhattan Group Funding 10,513 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
QB Sports Money Purchase Plan 5,256 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Roswell R. Roberts, III 2,628 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Roston Enterprises 30,784 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Tom Taulli 5,256 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Lowell Teschmacher 5,256 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Larry W. Wangberg and Michelle D.
Wangberg, Trustees for the benefit of the
Wangberg Living Trust UAD 9/17/90 7,317 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Michael Albert/(2)/ 9,882 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Warren H. Weiner 43,800 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Wade Snell 2,018 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
KSSM Investments LLP 764 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
The Terpin Group 1,261 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
- -Airwaves Advertising dba PPG Advertising 710 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
The Rabuck Agency 2,271 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Navid Ashroff/(2)/ 1,009 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Troy Bass/(2)/ 504 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Tony Busko/(2)/ 504 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Precious Albright/(2)/ 50 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
V. Gordon Clemons 504 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
John Davis/(2)/ 5,046 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Nila Dawson/(2)/ 504 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
64
<PAGE>
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Patrick Farley/(2)/ 2,523 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Anita Isanto/(2)/ 504 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Timothy Johnson/(2)/ 9,538 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
Aaron Lieu 504 * 0 *
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Assumes that all of the shares that are registered are sold.
(2) Each of Lester Morales, Eileen M. Beale, Steven J. Hamerslag, Michael
Albert, Navid Ashroff, Troy Bass, Tony Busko, Precious Albright, John
Davis, Nila Dawson, Patrick Farley, Anita Isanto, and Timothy Johnson is a
former employee of SureTalk.com, Inc. and a current employee of ours.
Messrs. Hamerslag, Morales, and Johnson are three of our Named Executive
Officers.
PLAN OF DISTRIBUTION
This prospectus relates to the offer and sale from time to time by the
selling shareholders named above of up to 1,515,545 shares of common stock.
The selling shareholders may sell shares of common stock from time to time
directly to purchasers. Alternatively, they may from time to time offer the
shares of common stock to or through dealers or agents, and they may receive
compensation in the form of commissions or discounts from the selling
shareholders or commissions from the purchasers for whom they may act as an
agent. The selling shareholders and any dealers or agents that participate in
the distribution may be deemed to be "underwriters" within the meaning of the
Securities Act of 1933, and any profits and commissions or discounts received by
them may be considered to be underwriting compensation under the Securities Act.
The selling shareholders may also dispose of the shares by writing options on
the shares or by settling short sales of the shares.
The selling shareholders may distribute the shares from time to time in
one or more underwritten transactions at a fixed price, at market prices
prevailing at the time of sale or at negotiated prices. An underwritten offering
may be on a "best efforts" or a "firm commitment" basis. In connection with an
underwritten offering, underwriters or agents may receive compensation in the
form of discounts, concessions or commissions from the selling shareholders or
commissions from the purchasers. Underwriters may sell shares of common stock to
or through dealers, and dealers may receive compensation in the form of
discounts, concessions or commissions from the underwriters or commissions from
the purchasers.
At the time a particular offer of shares of common stock is made, a
prospectus supplement, if required, will be distributed that will set forth the
names of any underwriters, dealers or agents, any commissions or discounts, and
any other required information. The shares of common stock may be sold from time
to time at varying prices determined at the time of sale.
The selling shareholders may also sell the shares of common stock
pursuant to Rule 144 under the Securities Act.
In some states, the shares of common stock may be sold only through
registered or licensed brokers or dealers.
We will pay the expenses incident to the registration, offering and
sale of the shares, which are estimated at approximately $41,000. We have agreed
to indemnify the selling shareholders and any underwriters and their controlling
persons against liabilities under the Securities Act.
65
<PAGE>
VALIDITY OF SECURITIES
The validity of the shares of common stock offered hereby will be passed
upon for us by our general counsel, Nicholas V. Morosoff. Mr. Morosoff is the
beneficial owner of 33,250 shares of our common stock.
EXPERTS
Our consolidated financial statements as of December 31, 1998 and 1999, and
for each of the years in the three-year period ended December 31, 1999 included
in this prospectus and in the registration statement have been so included in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere in this prospectus and in the registration statement, and
upon the authority of that firm as experts in accounting and auditing.
The financial statements of Suretalk.com as of December 31, 1999 and for
the year then ended included in this prospectus and in the registration
statement have been so included in reliance upon the report of KPMG LLP,
independent certified public accountants, appearing elsewhere in this prospectus
and in the registration statement, and upon the authority of that firm as
experts in accounting and auditing.
66
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
JFAX.COM, Inc. and Subsidiary
Independent Auditors' Report..................................... F-2
Consolidated Balance Sheets...................................... F-3
Consolidated Statements of Operations............................ F-4
Consolidated Statements of Stockholders' Equity (Deficiency) and
Comprehensive Loss.............................................. F-5
Consolidated Statements of Cash Flows............................ F-6
Notes to Consolidated Financial Statements....................... F-7
SureTalk.com, Inc.
Independent Auditors' Report..................................... F-23
Balance Sheet.................................................... F-24
Statement of Operations.......................................... F-25
Statement of Stockholders' Equity (Deficiency)................... F-26
Statement of Cash Flows.......................................... F-27
Notes to Financial Statements.................................... F-28
JFAX.COM, Inc.
Unaudited Proforma Condensed Combining Balance Sheet............. F-34
Unaudited Proforma Condensed Combining Statement of Operations... F-35
</TABLE>
F-1
<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
F-2
<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.
F-3
<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.
F-4
<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 7 --
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.
F-5
<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.
F-6
<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.
F-7
<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.
F-8
<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.
F-9
<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.
F-10
<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.
F-11
<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>
F-12
<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.
F-13
<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.
F-14
<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.
F-15
<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>
F-16
<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>
F-17
<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.
F-18
<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.
F-19
<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.
F-20
<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.
F-21
<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.
F-22
<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
F-23
<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
F-24
<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
F-25
<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.
F-26
<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.
F-27
<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.
F-28
<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
==========
F-29
<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:
F-30
<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 $640,566 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:
F-31
<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.
F-32
<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.
F-33
<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>
F-34
<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>
F-35
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following is a statement of the estimated expenses to be incurred by
JFAX.COM in connection with the distribution of the securities registered under
this registration statement.
Amount to
---------
be paid
-------
SEC registration fee....................... $ 1,000
Legal fees and expenses.................... $10,000
Nasdaq National Market listing fees........ $17,500
Accounting fees and expenses............... $10,000
Printing and engraving fees................ $ 1,000
Registrar and transfer agent's fees........ $ 1,000
Miscellaneous.............................. $ 500
-------
Total............................ $41,000
=======
Item 14. Indemnification of Directors and Officers
As permitted by Delaware law, our certificate of incorporation includes a
provision that eliminates the personal liability of our directors to us or our
stockholders for monetary damages for breach of fiduciary duty as a director.
Article VI of our 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
II-1
<PAGE>
in the interest of the participants and beneficiaries of such plan shall be
deemed to be action not opposed to the best interests of the Corporation."
In addition, the underwriting agreement for the offering will include
customary provisions indemnifying the officers, directors and our control
persons against liabilities in respect of information provided by the
underwriters for use in this registration statement.
We have also obtained a policy of directors' and officers' liability
insurance for our directors and officers to insure directors and officers
against the cost of defense, settlement or payment of a judgment under certain
circumstances.
Item 15. Recent Sales of Unregistered Securities
Between December 1995, when we were founded, and March 1997, when Mr.
Ressler invested in the Company through Orchard/JFAX Investors LLC and obtained
a controlling interest, we issued a total of 6,910,000 shares of our common
stock to our founders, Jaye Muller and John F. Rieley, as well as to various
individuals who made cash investments totaling $212,830 and who provided
investment, software and development consulting services to us in our early
stages of growth. During this time, we also issued 155,000 shares to The Regent
Trust Company Limited in September 1996 in exchange for a cash investment of
$412,500 and we issued 300,000 shares to Toxford Corporation in October 1996 in
exchange for a cash investment of $750,000.
In January 1997, we granted Michael P. Schulhof two warrants to purchase a
total of 840,000 shares of our common stock pursuant to a consulting agreement.
The first warrant provides Mr. Schulhof with the right to purchase 420,000
shares of our common stock at an exercise price of $0.70 per share. The second
warrant provides Mr. Schulhof with the right to purchase another 420,000 shares
of our common stock at an exercise price of $1.80 per share. Both warrants are
currently exercisable and expire in January 2007.
In March 1997, we issued 5,375,000 shares of common stock to Boardrush
Media LLC in exchange for an equivalent number of Mr. Muller's then-current
stock holdings, which holdings were canceled. At the same time, we issued
10,060,000 shares of common stock to Orchard/JFAX Investors LLC in exchange for
a cash investment of $7,750,000 and 240,000 shares to Globetrans Ltd. in
satisfaction of a consultant's fee due to Globetrans as a result of helping to
procure Orchard's investment.
In March and May 1997, we issued 220,000 shares and 150,000 shares to
Nehemia Zucker and Anand Narasimhan, upon the exercise by Messrs. Zucker and
Narasimhan of employee options granted to them when they joined us in 1996 and
payment by each of them of the option price of .02(cent) per share. The total
purchase price was $44 and $30, respectively.
In October 1997, we entered into an interactive marketing relationship with
AOL and granted them a warrant to purchase 250,000 shares of our common stock at
an exercise price of $2.40 per share. These warrants are currently exercisable
and expire on October 15, 2004.
In November 1997, we issued 150,000 shares to Toxford Corporation upon the
exercise by Toxford Corporation of a previously issued warrant and the payment
by Toxford Corporation of the warrant exercise price of $2.50 per share, or a
total of $375,000.
II-2
<PAGE>
In March 1998, we issued a total of 3,750,000 shares of common stock at
$0.80 per share pursuant to a rights offering that was made available to all of
our then shareholders and warrant holders on the same terms. The total purchase
price was $3 million. The shareholders who participated and the number of shares
purchased were as follows: Orchard/JFAX Investors LLC (3,080,776), Michael P.
Schulhof (263,104), Globetrans Ltd. (147,481), Toxford Corporation (140,949),
Nehemia Zucker (41,739), Anand Narasihman (28,459), Geoff Goodfellow (23,491),
Neil Seeman (15,000) and Marc Seeman (9,000).
In April 1998, we granted Transamerica Business Credit Corporation a
warrant to purchase 29,166 shares of common stock for $2.40 per share,
exercisable until April 21, 2005, as partial consideration for a secured
equipment loan in the amount of approximately $1 million. On October 15, 1997,
we also issued 250,000 warrants to America Online to purchase 250,000 shares of
our common stock at $2.40 per share, as part of our contract with America
Online.
In June 1998, we issued $10 million of our 10% Senior Subordinated Notes
due 2004 together with 2,101,971 shares of our 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. The total purchase
price was $10 million. At the same time, we also issued $5 million in
liquidation preference of our Series A Usable Redeemable Preferred Stock and
related warrants to acquire 3,125,000 shares of our common stock at $2.40 per
share, $3.5 million of which was purchased by DLJ Capital Corp. and its
affiliates and $750,000 of which was purchased by the group advised by Pecks
Management Partners Ltd. discussed above. In addition, Donaldson Lufkin &
Jenrette Securities Corporation, the affiliate of DLJ Capital Corp. that acted
as placement agent for the offerings, received warrants to acquire 247,250
shares of our common stock on the same terms as purchasers, as compensation for
its services. The total purchase price was approximately $5 million.
Orchard/JFAX Investors LLC, a company in which Richard S. Ressler is the
managing member, participated to the extent of $500,000 and GMT Partners, LLC
participated to the extent of $250,000 in the latter investment.
In October 1998 and January 1999, we issued $512,250 of our 10% Senior
Subordinated Notes due 2004 together with 105,727 shares of our common stock to
the investor group advised by Pecks Management Partners Ltd. above in
satisfaction of certain pay-in-kind obligations owing under the terms of the
original issued $10 million in 10% Senior Subordinated Notes due 2004 issued in
June 1998.
In October 1998, we issued 41,250 shares of our common stock to Gary H.
Hickox at a purchase price of $99,000. We loaned such amount to Mr. Hickox
pursuant to a $99,000 promissory note given to us by Mr. Hickox. The sale and
related note issuance were part of the terms of Mr. Hickox's employment
agreement with us. Also in October 1998, we issued 75,000 shares to an
individual upon the exercise of an option granted in January 1996 and payment by
such individual of the total option price of $15.00.
Between August 1998 and June 1999, we issued a total of 57,913 shares of
our common stock to various employees who exercised employee options to purchase
such stock at a price between $0.80 and $2.40 per share for a total purchase
price of $50,529.
As of May 21, 1999, we effected a 1.25 for one stock split of our common
stock by means of a stock dividend, with a result that share numbers and numbers
of shares issuable upon exercise of warrants and options were proportionately
increased, and the purchase price per share of warrants and options was
proportionately reduced.
II-3
<PAGE>
Between June 30, 1999 and September 30, 1999 we (1) issued a total of
33,044 shares of our common stock to various employees who exercised employee
options to purchase such stock at prices between $.80 and $1.65 per share for a
total purchase price of $ 29,135 and (2) issued 5,470 shares of our common stock
to a consultant in consideration for services to be performed under a consulting
agreement.
Between January 1, 2000 and March 31, 2000 we issued a total of 27,873
shares of our common stock to various employees who exercised employee options
to purchase such stock at prices between $.80 and $2.40 per share for a total
purchase price of $51,348.
In January, 2000, we 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 received a total of 1,515,545
shares of our common stock in the transaction.
In March, 2000, we acquired substantially all of the assets of
TimeShift, Inc., a developer of technology for accessing and managing
communications services via the Internet. As consideration for the transaction,
various creditors and former employees received a total of 308,458 shares of our
common stock as a stock-out of any claims to the assets of TimeShift,Inc. that
were being transferred to us.
In February and March 2000, we issued a total of 1,389,768 shares of
our common stock to investors who had received warrants to purchase our common
stock at $2.40 per share in our June 1998 preferred stock financing discussed
above. These investors exercised their rights to exercise the warrants on a
cashless basis, exchanging a total of 2,259,750 warrants for the total of
1,398,768 shares of our common stock
All of the above issuances were effected in private transactions either
pursuant to the exemption provided by Section 4(2) under the Securities Act or
upon exercise of employee stock options pursuant to Rule 701 under the
Securities Act.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
The following exhibits are filed herewith or are incorporated by reference
to exhibits previously filed with the Commission. The Company shall furnish
copies of exhibits for a reasonable fee (covering the expense of furnishing
copies) upon request.
Exhibit
-------
No. Exhibit Title
-- -------------
2.1 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. 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.****
II-4
<PAGE>
3.1 Certificate of Incorporation, as amended and restated.*
3.1.1 Certificate Of Designation Of Series B Convertible Preferred Stock of
JFAX.COM, Inc.*****
3.2 By-laws, as amended and restated.*
4.1 Specimen of common stock certificate.***
5.1 Opinion of Nicholas V. Morosoff, general counsel to the Company.
9.1 Securityholders' Agreement, dated as of June 30, 1998, with the
investors in the June and July 1998 private placements.*
10.1 JFAX.COM Incentive Compensation Bonus Plan.*
10.2 JFAX Communications, Inc. (JFAX.COM) 1997 Stock Option Plan.*****
10.3 Employment Agreement for Gary H. Hickox, dated September 2, 1998.*
10.3.1 Promissory Note issued by Gary H. Hickox to JFAX Communications,
Inc. on October 7, 1998, due October 7, 2001.**
10.4 Employment Agreement for Dr. Anand Narasimhan, dated March 17, 1997.*
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.**
10.5 Employment Agreement for Nehemia Zucker, dated March 21, 1997.*
10.5.1 Promissory Note issued by Nehemia Zucker to JFAX Communications,
Inc. on April 11, 1997, due March 31, 2001.**
10.6 Consulting Agreement for Boardrush Media LLC, dated as of March 17,
1997.*
10.7 Put Rights, for the benefit of the investors in the June and July
1998 private placements.*
10.8 Registration Rights Agreement, dated as of June 30, 1998, with the
investors in the June and July 1998 private placements.*
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.*
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.**
10.10 Stock Option Agreement, dated as of January 24, 1997, by and among
JFAX Communications, Inc. and Michael P. Schulhof.**
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.**
10.12 Purchase Agreement, dated as of July 2, 1998, relating to $5 million
of preferred stock and warrants.**
10.13 Consent to Amendment of Purchase Agreement, dated as of April 16,
1999.**
10.14 Form of warrant pursuant to such Purchase Agreement.**
10.15 Master Loan and Security Agreement, dated as of March 10, 1998, by
JFAX Communications, Inc. in favor of Transamerica Business Credit
Corporation.**
II-5
<PAGE>
10.16 Promissory Note issued by JFAX Communications, Inc. to Transamerica
Business Credit Corporation on April 21, 1998 due May 1, 2001.**
10.17 Promissory Note issued by JFAX Communications, Inc. to Transamerica
Business Credit Corporation on December 22, 1998 due January 1,
2002.**
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.**
10.19 Promissory Note issued by Boardrush LLC to JFAX Communications, Inc.
dated March 17, 1997 due March 17, 2004.**
10.20 Employment Agreement, dated as of January 26, 2000, between JFAX.COM,
Inc. and Steven J. Hamerslag*****
10.21 Employment Agreement, dated February 17, 2000, between JFAX.COM,
Inc. and R. Scott Turicchi*****
10.22 Escrow Agreement, dated as of January 26, 2000, among City National
Bank, JFAX.COM, Inc. and Steven J. Hamerslag*****
10.23 Promissory Note, dated January 26, 2000, from Steven J. Hamerslag in
favor of JFAX.COM, Inc.*****
21.1 List of subsidiaries of the Company.*****
23.1 Consent of KPMG LLP.
23.2 Consent of Nicholas V. Morosoff (included in 5.1).
27.1 Financial Data Schedule.
________________
* 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.
** 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.
*** 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.
**** Incorporated by reference to the Company's Report on Form 8-K filed
with the Commission on February 10, 2000.
***** Incorporated by reference to the Company's Report on Form 10-K filed
with the Commission on March 30, 2000.
(b) Financial Statement Schedules
All other schedules are omitted because they are not required or the
required information is shown in the financial statements or notes thereto.
Item 17. Undertakings
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
II-6
<PAGE>
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.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus 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.
(3) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10 (a) (3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424 (b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;"
(4) That, for the purpose 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.
(5) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-7
<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 8th day of May, 2000.
JFAX.COM, Inc.
By: /s/ Steven J. Hamerslag
-------------------------
Name: Steven J. Hamerslag
Title: President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that such person whose signature appears
below constitutes and appoints Steven J. Hamerslag and Nicholas V. Morosoff and
each of them severally, his true and lawful attorneys- in-fact with power of
substitution and resubstitution to sign in his name, place and stead, in any and
all capacities, to do any and all things and execute any and all instruments
that such attorney may deem necessary or advisable under the Securities Act of
1933, as amended (the "Securities Act"), and any rules, regulations and
requirements of the U.S. Securities and Exchange Commission, in connection with
the registration under the Securities Act of the Common Stock of the Registrant,
including specifically, but without limiting the generality of the foregoing,
the power and authority to sign his name in his respective capacity as a member
of the Board of Directors or officer of the Registrant, to this Registration
Statement and/or such other form or forms as may be appropriate to be filed with
the Commission as any of them may deem appropriate in respect of the Common
Stock of the Registrant, to any and all amendments thereto (including
post-effective amendments) to this Registration Statement, to any related Rule
462(b) Registration Statement and to any documents filed as part of or in
connection with this Registration Statement and any and all amendments thereto,
including post-effective amendments.
II-8
<PAGE>
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 May 8, 2000:
<TABLE>
<CAPTION>
Signature Title
<S> <C>
/s/ Steven J. Hamerslag President and Chief Executive Officer (Principal
- ------------------------------------------------------ Executive Officer)
Steven J. Hamerslag
/s/ Richard S. Ressler Chairman of the Board
- ------------------------------------------------------
Richard S. Ressler
/s/ Nehemia Zucker Chief Financial and Accounting Officer (Principal
- ------------------------------------------------------ Financial and Accounting Officer)
Nehemia Zucker
/s/ Zohar Loshitzer Director
- ------------------------------------------------------
Zohar Loshitzer
/s/ John F. Rieley Director
- ------------------------------------------------------
John F. Rieley
/s/ Michael P. Schulhof Director
- ------------------------------------------------------
Michael P. Schulhof
/s/ R. Scott Turicchi Director
- ------------------------------------------------------
R. Scott Turicchi
/s/ Robert J. Cresci Director
- ------------------------------------------------------
Robert J. Cresci
</TABLE>
II-9
<PAGE>
Exhibit 5.1
Opinion of Nicholas V. Morosoff
May 8, 2000
JFAX.COM, INC.
6922 Hollywood Boulevard
Hollywood, California 90028
Ladies and Gentlemen:
I have acted as General Counsel to the Company in connection with the
registration of 1,515,545 shares of the Company's par value US $0.01 per share
(the "Shares") under the Securities Act of 1933, as amended ("Securities Act"),
as described in the registration statement on Form S-1 (the "Registration
Statement") filed with the United States Securities and Exchange Commission (the
"Securities and Exchange Commission") on or about the date hereof.
For the purposes of giving this opinion, I have examined the following
documents:
(1) a copy of the final form of the Registration Statement as
provided to me by the Company on May 8, 2000; and
(2) a copy of a unanimous written consent of directors of the Company
dated January 21, 2000 setting forth resolutions approving, inter
alia, the acquisition by the Company of the outstanding stock of
the SureTalk.com, Inc.
I have also examined and relied as to factual matters upon the originals, or
copies, certified or otherwise identified to my satisfaction, of the Certificate
of Incorporation and By-laws of the Company, certificates of public officials,
certificates of officers of the Company, certain agreements to which the Company
is a party and such other records, documents, certificates and instruments, and
have made such other investigations, as in my judgment are necessary or
appropriate to enable me to render the opinions expressed below.
I have assumed that (i) the resolutions in writing referred to herein
are full and accurate records of resolutions passed in accordance with the
by-laws of the Company and that such resolutions have not been amended or
rescinded and are in full force and effect, (ii) there is no provision of the
law of any jurisdiction, other than Delaware, which would have any implication
in relation to the opinion expressed herein, (iii) the Shares fall within the
existing authorized share capital of the Company, and (iv) no resolution has
been passed by the shareholders of the Company to limit or otherwise fetter the
powers granted to the directors of the Company by the by-laws of the Company to
issue any unissued shares of the Company on such terms and conditions as they
may determine.
I am licensed to practice law only in the States of New York and
California. However, I have not in connection with this opinion made an
investigation of the laws of any jurisdiction except the General Corporation Law
of the State of Delaware, and nothing in this opinion should be or shall be
construed otherwise. This opinion is limited solely to the laws of the General
Corporation Law of the
1
<PAGE>
State of Delaware. Subject as mentioned below, this opinion is issued solely for
your benefit and is not to be relied upon by any other person, firm or entity or
in respect of any other matter.
On the basis of and subject to the foregoing, I am of the opinion that
the Shares have been duly authorized, issued, fully paid and are non-assessable.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving such consent I do not thereby admit that I
come within the category of persons whose consent is required under Section 7 of
the Securities Act, or the Rules and Regulations of the Securities and Exchange
Commission thereunder.
Very truly yours,
/s/ Nicholas V. Morosoff
- ------------------------------
Nicholas V. Morosoff
General Counsel
JFAX.COM, Inc.
2
<PAGE>
Exhibit 23.1.
Consent of Independent Accountants
Board of Directors
JFAX.COM, Inc.
We consent to the use of our reports included herein, with respect to
JFAX.COM, Inc. and SureTalk.com, Inc., and to the reference to our firm under
the headings "Experts" in the prospectus.
By: /s/ KPMG LLP
-------------------------
KPMG LLP
Los Angeles, California
May 8, 2000
3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JFAX.COM
INC. FORM 10K FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 12,256
<SECURITIES> 23,511
<RECEIVABLES> 370
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 40,248
<PP&E> 5,194
<DEPRECIATION> 1,850
<TOTAL-ASSETS> 58,625
<CURRENT-LIABILITIES> 3,693
<BONDS> 0
0
0
<COMMON> 305
<OTHER-SE> 44,842
<TOTAL-LIABILITY-AND-EQUITY> 58,625
<SALES> 7,643
<TOTAL-REVENUES> 7,643
<CGS> 4,641
<TOTAL-COSTS> 4,641
<OTHER-EXPENSES> 16,160
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,349
<INCOME-PRETAX> (13,009)
<INCOME-TAX> 2
<INCOME-CONTINUING> (13,011)
<DISCONTINUED> 0
<EXTRAORDINARY> 4,428
<CHANGES> 0
<NET-INCOME> (17,439)
<EPS-BASIC> (0.68)
<EPS-DILUTED> (0.68)
</TABLE>
