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______________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington. D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-25965
JFAX.COM, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0371142
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
6922 Hollywood Boulevard
Suite 900
Hollywood, California 90028
(Address of principal executive offices)
(323) 860-9200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of October 31, 2000, there were 35,887,670 shares of the Registrant's
common stock, $0.01 per share, outstanding.
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JFAX.COM, INC.
For the Quarter Ended September 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations................. 3
Condensed Consolidated Balance Sheets........................... 4
Condensed Consolidated Statements of Cash Flows................. 5
Notes to Condensed Consolidated Financial Statements............ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .............................................. 14
Item 2. Changes in Securities and Use of Proceeds ...................... 14
Item 3. Defaults Upon Senior Securities ................................ 15
Item 4. Submission of Matters to a Vote of Security Holders ........... 15
Item 5. Other Information .............................................. 15
Item 6. Exhibits and Reports on Form 8-K ............................... 15
</TABLE>
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PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
JFAX. COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 3,266 $ 1,952 $ 9,139 $ 5,010
Cost of revenue 1,709 1,167 4,747 3,400
------------- ------------ ------------- ------------
Gross profit 1,557 785 4,392 1,610
Operating expenses:
Sales and marketing 2,549 1,880 7,167 3,245
Research and development 767 401 2,120 1,298
General and administrative 3,711 1,670 11,483 5,199
Amortization of goodwill and other
intangibles 1,141 -- 2,942 --
------------- ------------ ------------- ------------
Total operating expenses 8,168 3,951 23,712 9,742
Operating Loss (6,611) (3,166) (19,320) (8,132)
Other income (expense), net 703 418 2,178 (465)
------------- ------------ ------------- ------------
Net Loss before extraordinary item (5,908) (2,748) (17,142) (8,597)
Extraordinary item-Loss on
extinguishment of debt -- 4,428 -- 4,428
------------- ------------ ------------- ------------
Net Loss (5,908) (7,176) (17,142) (13,025)
------------- ------------ ------------- ------------
Premiums on preferred stock -- (878) -- (878)
Dividends and accretion on preferred
stock -- (169) -- (694)
------------- ------------ ------------- ------------
Net loss attributable to common
stockholders $ (5,908) $ (8,223) $ (17,142) $ (14,597)
============= ============ ============= ============
Basic and diluted net loss per
common share $ (0.16) (0.26) (0.48) (0.55)
============= ============ ============= ============
Weighted average shares outstanding 36,023 30,796 35,591 26,496
============= ============ ============= ============
</TABLE>
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JFAX.COM, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
ASSETS September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Cash and cash equivalents $ 15,057 $ 12,256
Short-term investments 1,780 23,511
Accounts receivable 1,369 370
Note receivable 4,000 --
Prepaid expenses and other current assets 2,739 4,111
------------------ -----------------
Total current assets 24,945 40,248
Furniture, fixtures and equipment, net 6,090 3,344
Goodwill, net 7,498 --
Other purchased intangibles, net 1,800 --
Long-term investments 13,650 13,559
Other assets 1,372 1,475
------------------ ------------------
Total assets $ 55,355 $ 58,626
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 2,745 $ 1,781
Deferred revenue 347 439
Current portion of capital lease payable 311 176
Current portion of long-term debt 1,316 1,240
Other 283 57
------------------ ------------------
Total current liabilities 5,002 3,693
Capital lease obligations 229 186
Long-term debt 719 1,537
------------------ ------------------
Total liabilities 5,950 5,416
Redeemable common stock 7,065 7,065
Common stock subject to put option 998 998
Total stockholders' equity 41,342 45,147
------------------ ------------------
Total liabilities and stockholders' equity $ 55,355 $ 58,626
================== ==================
</TABLE>
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JFAX.COM, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30
--------------------------------
2000 1999
---------- ---------
<S> <C> <C>
Net cash used in operating activities (9,887) (8,919)
-------- --------
Cash flows from investing activities:
Advances under Note receivable (4,000) 0
Purchases of Investments 0 (28,695)
Redemption of investments 20,926 0
Purchases of furniture, fixtures and equipment (3,688) (1,515)
-------- --------
Net cash provided by (used in) investing activities 13,238 (30,210)
-------- --------
Cash flows from financing activities
Common stock issued, net of capitalized offering costs 0 73,823
Exercise of stock options 90 77
Repayments of preferred stock 0 (6,818)
Repayments of long term debt 0 (10,506)
Proceeds (repayments) of long term debt and capital lease obligations (640) 293
-------- --------
Net cash provided by (used in) financing activities (550) 56,869
-------- --------
Net increase in cash 2,801 17,740
======== ========
Cash and cash equivalents, beginning of year 12,256 7,279
======== ========
Cash and cash equivalents, end of period $ 15,057 $ 25,019
-------- --------
</TABLE>
<TABLE>
Non cash investing activities:
During the nine month period ended September 30, 2000, net assets as follows were acquired through the issuance of common stock:
<S> <C>
Current assets $ 180
Furniture, fixtures, and equipment 585
Goodwill and intangibles 12,943
Investment in operating lease 705
Less: Liabilities assumed (149)
-------
Fair value of common stock issued $14,264
=======
</TABLE>
5
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JFAX. COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial information is unaudited but reflects all adjustments
(consisting only of normal recurring adjustments) that are, in the opinion of
management, necessary for a fair presentation of the consolidated financial
position and results of operations for the interim periods. The condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, together with management's
discussion and analysis of financial condition and results of operations, for
the fiscal year ended December 31, 1999 as presented in the Company's Form 10-K,
as amended on May 1, 2000. The results of operations for the three and nine
months ended September 30, 2000 are not necessarily indicative of the results to
be expected for the entire fiscal year.
NOTE 2 - USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
NOTE 3 - COMPREHENSIVE LOSS
Comprehensive loss is comprised of net loss and unrealized gains and losses on
short-term investments classified as available for sale. Comprehensive loss was
$6.1 and $7.2 million for the quarters ended September 30, 2000 and 1999,
respectively, and $17.5 and $13.0 for the nine months ended September 30, 2000
as 1999, respectively.
NOTE 4 - BUSINESS COMBINATIONS
On January 26, 2000, the Company completed the acquisition of SureTalk.com, Inc.
("SureTalk"). The acquisition was recorded using the purchase method of
accounting under APB Opinion No. 16. The Company issued an aggregate of
1,515,545 shares of common stock to effect the transaction. The aggregate
purchase price of SureTalk, plus related charges, was approximately $9.28
million, and was comprised solely of common stock. Results of operations for
SureTalk have been included in the financial results of the Company from the
closing date forward.
In accordance with APB Opinion No. 16, all identifiable assets of SureTalk were
assigned a portion of the cost of SureTalk (the purchase price) on the basis of
their respective fair values. Identifiable intangible assets and goodwill are
included in "Other purchased intangibles, net" and "Goodwill, net" in the
accompanying condensed consolidated balance sheets and are amortized over their
average useful lives of 2-3 years. Intangible assets were identified and valued
by considering the Company's intended use of acquired assets, and analysis of
data concerning products, technologies, markets, historical financial
performance, and underlying assumptions of
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future performance. The economic and competitive environment in which the
Company and SureTalk operate was also considered in the valuation analysis.
The pro forma consolidated financial information for the three months ended
September 30, 2000 and 1999, determined as if the SureTalk acquisition had
occurred on January 1 of each year, would have resulted in net sales of $3.3 and
$2.0 million, net loss of $5.9 and $9.8 million, and basic and diluted loss per
share of $0.16 and $0.30, respectively. This unaudited pro forma information is
presented for illustrative purposes only and is not necessarily indicative of
the results of operations in future periods or results that would have been
achieved had the Company and SureTalk been combined during the specified
periods.
The pro forma consolidated financial information for the nine months ended
September 30, 2000 and 1999, determined as if the SureTalk acquisition had
occurred on January 1 of each year, would have resulted in net sales of $9.2 and
$5.3 million, net loss of $17.6 and $18.0 million, and basic and diluted loss
per share of $0.50 and $0.64, respectively. This unaudited pro forma information
is presented for illustrative purposes only and is not necessarily indicative of
the results of operations in future periods or results that would have been
achieved had the Company and SureTalk been combined during the specified
periods.
NOTE 5 - LOSS PER SHARE
The Company has adopted SFAS No. 128, "Earnings Per Share." Basic net loss per
share is computed using the weighted average number of common shares outstanding
during the period.
Premiums and dividends and accretion on preferred stock increased 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.
NOTE 6 - LITIGATION
On October 28, 1999, AudioFAX IP LLC filed a lawsuit against the Company in the
United States District Court for the Northern District of Georgia asserting the
ownership of certain United States and Canadian patents and claiming that the
Company is infringing these patents as a result of the Company's sale of
enhanced facsimile services. The suit requests unspecified damages, treble
damages due to willful infringement, and preliminary and permanent injunctive
relief. The Company filed an answer to the complaint on December 2, 1999. The
Company has reviewed the AudioFAX patents with its business and technical
personnel and outside patent counsel and has concluded that it has not infringed
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 financial condition and results of operations.
In September 2000 the case was stayed by consent of the parties pending the
reexamination by the U.S. Patent and Trademark Office of one of the patents that
is the subject of the litigation.
NOTE 7 - PENDING ACQUISITION OF EFAX.COM
On July 13, 2000, the Company entered into a merger agreement (the "Merger
Agreement") with eFax.com, Inc. ("EFAX"), and JFAX.COM Merger Sub, Inc., a newly
formed subsidiary of the Company (the "Merger Sub"). Under the terms of the
Merger Agreement, EFAX has agreed to
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merge with and into the Merger Sub (the "Merger") and become a wholly owned
subsidiary of the Company. As consideration for the Merger, EFAX's stockholders
would receive the following:
For each share of EFAX's common stock, par value $.01 per share ("EFAX
Common Stock"), its holder would receive a fraction of a share of the
Company's common stock, par value $0.01 per share ("JFAX Common Stock"),
determined by a conversion number calculated in accordance with the Merger
Agreement (the "Conversion Number"), which Conversion Number will result in
the issuance to EFAX common stockholders of a total of approximately 4
million shares of JFAX Common Stock.
For each share of EFAX's Series D Convertible Preferred Stock, par value
$.01 per share ("Series D Stock"), outstanding at the time of the Merger,
its holder would receive 4,922.75 shares of JFAX Common Stock
(collectively, if all 1,421 shares of Series D Stock are outstanding at the
time of the Merger, approximately 7.1 million shares), which amount will
increase between July 12, 2000 and the time of the Merger at an annualized
rate of 3.5%.
Because the consideration to be received by the EFAX preferred stockholders is a
fixed amount, subject to the 3.5% annualized rate of increase, any increase or
decrease in the total consideration received in the Merger will only affect the
holders of EFAX Common Stock. The Conversion Number will vary depending on:
The amount outstanding under the term loan agreement between EFAX and the
Company (the "Term Loan Agreement") on the closing date for the Merger.
Under the Term Loan Agreement entered into between the Company and EFAX on
May 5, 2000, EFAX, subject to satisfying the conditions contained in the
Term Loan Agreement, may borrow up to $5 million from the Company ($4.0
million was borrowed as of September 30, 2000);
On the closing date of the Merger, the amount of cash that EFAX has (other
than cash from the sale of certain assets of EFAX), the amount of certain
of EFAX's prepaid expenses and the amount of EFAX's overdue payables; and
The number, if any, of the shares of EFAX Common Stock into which the
shares of Series D Stock are converted prior to the time of the Merger.
The Timing of the Merger. The consummation of the Merger will depend upon, in
addition to other conditions, the approval of the Merger by both the holders of
a majority of the outstanding shares of EFAX Common Stock and the holders of a
majority of the outstanding shares of JFAX Common Stock. The Boards of Directors
of the Company and EFAX have each called shareholders meetings to be held on
November 22, 2000, at which time each entity's shareholders will consider and
vote upon the Merger. If all required conditions are met, the Merger is expected
to be completed in the fourth quarter of 2000.
On June 30, 2000, EFAX and the Company entered into an Agreement of
Understanding (the "Agreement of Understanding") with Integrated Global
Concepts, Inc. ("IGC"). IGC has been providing EFAX with development and co-
location services necessary for EFAX's operations. The Agreement of
Understanding provides that, at the time of the closing of the Merger, IGC will
grant EFAX a license to certain software developed by IGC that EFAX uses in its
operations, IGC will relinquish all claims that it may have against EFAX in
connection with development services it has previously provided to EFAX, and the
Company will issue 2,000,000 shares of JFAX Common Stock to IGC. The Agreement
of Understanding was entered into as a result of EFAX's desire to acquire a
license to the software developed by IGC, to pay IGC for development work
performed by IGC for which IGC claimed it had not received adequate
compensation, and to ensure the provision of certain transition services.
8
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations for the Three Months Ended September 30, 2000 and
September 30, 1999
Revenue. Revenue was $3.3 million and $2.0 million for the three months
ended September 30, 2000 and 1999 respectively. The increase in revenue was
primarily due to increased core subscribers and outbound services. Our paid
subscribers numbered 70,308 and 45,968 as of September 30, 2000 and 1999,
respectively.
Cost of Revenue. Cost of revenue is comprised primarily of data and voice
network costs, customer service expenses, equipment depreciation, and online
processing fees. Cost of revenue was $1.7 million or 52% of revenue and $1.2
million or 60% of revenue for the three months ended September 30, 2000 and
1999, respectively. The increase in cost of revenue reflects the cost of
building and expanding our server and networking infrastructure and customer
service capabilities to accommodate growth of our subscriber base. Cost of
revenue as a percentage of revenue decreased as a result of increases in revenue
over the same period last year.
Operating Expenses
Sales and Marketing. Our sales and marketing costs consist primarily of
payments with respect to strategic alliances, personnel related expenses,
advertising costs, consulting fees, public relations expenses, and costs for
promotions. Sales and marketing expenses were $2.5 million or 78% of revenue and
$1.9 million or 96% of revenue for the three months ended September 30, 2000 and
1999, respectively. The increase in sales and marketing expenses from period to
period primarily reflects an increase in online costs associated with payments
to strategic alliance partners and an increase in personnel related expenses,
offset by a decrease in advertising through traditional media channels. Sales
and marketing as a percentage of revenue decreased over the same period last
year, primarily as a result of increases in revenue over the same period last
year.
On July 1, 1999, we entered into an advertising and promotion agreement
with Yahoo! Inc. During the first two quarters of 2000, we refined our marketing
and customer acquisition strategies. As part of this review, in July 2000 we
concluded negotiations with Yahoo! to substitute the existing advertising and
promotion agreement with a new, more limited, arrangement for non-exclusive
placement on the Yahoo! web site, including Yahoo! Mail. This agreement
expires during the fourth quarter of fiscal 2000. Although we are currently
evaluating our relationship with Yahoo!, there is no certainty we will have such
a relationship in the future and any such relationship would be dependent upon
reaching a mutually satisfactory arrangement with Yahoo! on issues such as cost,
placement, and type of purchase.
Research and Development Research and development costs were $767,000 or
23% of revenue and $401,000 or 21% of revenue for the three months ended
September 30, 2000 and 1999, respectively. Research and development costs for
the three months ended September 30, 2000 primarily consisted of personnel
related expenses and $250,000 of integration costs associated with our marketing
relationship with Intuit Corp. We expect to incur comparable integration costs
in the fourth quarter of fiscal 2000, after which we expect such costs to cease.
Research and development costs for the three months ended September 30,
1999 consisted primarily of personnel related costs.
General and Administrative. Our general and administrative costs consist
primarily of personnel related expenses, professional fees, and occupancy costs.
General and administrative costs were $3.7 million or 114% of revenue and $1.7
million or 86% or revenue for the quarters
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ended June 30, 2000 and 1999, respectively. The cost increase as a percentage of
revenue in general and administrative from period to period was due primarily to
increases in personnel, as well as the increased cost of legal fees.
Amortization of Goodwill and Other Intangibles. For the three months ended
September 30, 2000, we recognized amortization of goodwill and other intangibles
of $1.1 million related to the acquisition of SureTalk.com, Inc. in January
2000. There was no comparable amortization for the three months ended September
30, 1999.
Other Income (Expense), Net. Other income (expense), net was $703,000 and
$418,000 for the three months ended September 30, 2000 and 1999, respectively.
Other income (expense), net resulted primarily from interest income earned on
our cash and cash equivalents and short and long-term investments generated from
our July 1999 initial public offering, offset by interest expense on capital
lease obligations and long-term debt.
Results of Operations for the Nine Months Ended September 30, 2000 and September
30, 1999
Revenue. Revenue was $9.1 million and $5.0 million for the nine months
ended September 30, 2000 and 1999, respectively. The increase in revenue was due
primarily to increased core subscribers and outbound services. Our paid
subscribers numbered 70,308 and 45,968 as of September 30, 2000 and 1999,
respectively.
Cost of Revenue. Cost of revenue is primarily comprised of data and voice
network costs, customer service expense, online processing fees and equipment
depreciation. Cost of revenue was $4.8 million or 52% of revenue and $3.4
million or 68% of revenue for the nine months ended September 30, 2000 and 1999,
respectively. The increase in cost of revenue reflects the cost of building and
expanding our server and networking infrastructure and customer service
capabilities to accommodate growth of our subscriber base. Cost of revenue as a
percentage of revenue decreased as a result of increases in revenue over the
same period last year.
Operating Expenses
Sales and Marketing. Our sales and marketing costs consist primarily of
payments with respect to strategic alliances, advertising costs, personnel
related expenses, consulting fees, public relations expenses, and costs for
promotions. Sales and marketing expenses were $7.2 million or 78% of revenue
and $3.3 million or 65% of revenue for the nine months ended September 30, 2000
and 1999, respectively. The increase in sales and marketing expenses from period
to period primarily reflects an increase in payments to strategic alliance
partners and an increase in personnel related expenses. Sales and marketing as a
percentage of revenue increased over the same period last year, primarily as a
result of strategic alliance payments.
On July 1, 1999, we entered into an advertising and promotion agreement
with Yahoo! Inc. During the first two quarters of 2000, we refined our marketing
and customer acquisition strategies. As part of this review, in July 2000 we
concluded negotiations with Yahoo! to substitute the existing advertising and
promotion agreement with a new, more limited, arrangement for non-exclusive
placement on the Yahoo! web site, including Yahoo! Mail. This agreement expires
during the fourth quarter of fiscal 2000. Although we are currently evaluating
our relationship with Yahoo!, there is no certainty we will have such a
relationship in the future, and any such relationship would be dependent upon
reaching a mutually satisfactory arrangement with Yahoo! on issues such as cost,
placement, and type of purchase.
Research and Development. Our research and development costs consist
primarily of personnel related expenses. Research and development costs were
$2.1 million or 23% of revenue
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and $1.3 million or 26% of revenue for the nine months ended September 30, 2000
and 1999, respectively. The increase in research and development costs from
period to period primarily reflects increases in personnel related expenses.
Research and development as a percentage of revenue decreased as a result of
increases in revenue over the same period last year.
General and Administrative. Our general and administrative costs consist
primarily of personnel related expenses, professional fees, and occupancy costs.
General and administrative costs were $11.5 million or 126% of revenue and $5.2
million or 104% or revenue for the quarters ended September 30, 2000 and 1999,
respectively. The cost increase as a percentage of revenue in general and
administrative from period to period was primarily due to increases in
personnel, as well as the increased cost of legal fees.
Amortization of Goodwill and Other Intangibles. For the nine months ended
September 30, 2000, we recognized amortization of goodwill and other intangibles
of $2.9 million related to the acquisition of SureTalk.com, Inc. in January
2000. There was no comparable amortization for the three months ended September
30, 1999.
Other Income (Expense), Net. Other income (expense), net was $2.2 million
and ($465,000) for the nine months ended September 30, 2000 and 1999,
respectively. For the nine months ended September 30, 2000, Other income
(expense), net resulted primarily from interest income earned on our cash and
cash equivalents and short and long-term investments generated from our July
1999 initial public offering, offset by interest expense on capital lease
obligations and long-term debt.
For the nine months ended September 30, 1999, interest income (expense),
net is primarily related to interest expense on capital lease obligations and
long-term debt.
Liquidity and Capital Resources
As of September 30, 2000, we had cash and investments on hand for use in
the business of $30.5 million. Such amount was comprised of $15.0 million in
cash and cash equivalents and $1.8 and $13.7 million in short-term and long-term
investments, respectively. Short and long-term investments primarily consisted
of government and corporate debt securities. Short-term maturities range from
three months to one year and long-term maturities range from greater than one
year up to 18 months.
Net cash used in operating activities increased to $9.9 million for the
nine months ended September 30, 2000 from $8.9 million for the same period in
1999. The increase in net cash used in operating activities was due primarily to
an increase in net losses.
Net cash provided by investing activities was $13.2 million for the nine
months ended September 30, 2000. Net cash used in investing activities was $30.2
million for the nine months ended September 30, 1999. The increase in net cash
provided by investing activities from fiscal 1999 to 2000 was primarily due to
the redemption of short and long-term investments, reduced by purchases of
leasehold improvements and office equipment for our new headquarters in
Hollywood, California, the continuing build-out of our network, and advances
under a note receivable to eFax.com.
Net cash used in financing activities of $550,000 for the nine months ended
September 30, 2000 primarily consisted of net repayments of loans payable and
capital lease obligations. Net cash provided by financing activities of $56.9
million for the nine months ended September 30,
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1999 consisted primarily of proceeds from our July 1999 initial public offering
of $73.9 million reduced by repayments of preferred stock and long-term debt
aggregating $19.8 million.
The eFax.com Merger Agreement. On July 13, 2000, the Company entered
into a merger agreement (the "Merger Agreement") with eFax.com, Inc. ("EFAX"),
and JFAX.COM Merger Sub, Inc., a newly formed subsidiary of the Company (the
"Merger Sub"). Under the terms of the Merger Agreement, EFAX has agreed to merge
with the Merger Sub (the "Merger") and become a wholly-owned subsidiary of the
Company. As consideration for the Merger, EFAX's stockholders would receive the
following:
For each share of EFAX's common stock, par value $.01 per share ("EFAX
Common Stock"), its holder would receive a fraction of a share of the
Company's common stock, par value $0.01 per share ("JFAX Common Stock"),
determined by a conversion number calculated in accordance with the
Merger Agreement (the "Conversion Number"), which Conversion Number will
result in the issuance to EFAX common stockholders of a total of
approximately 4 million shares of JFAX Common Stock.
For each share of EFAX's Series D Convertible Preferred Stock, par value
$.01 per share ("Series D Stock"), outstanding at the time of the Merger,
its holder would receive 4,922.75 shares of JFAX Common Stock
(collectively, if all 1,421 shares of Series D Stock are outstanding at
the time of the Merger, approximately 7.1 million shares), which amount
will increase between July 12, 2000 and the time of the Merger at an
annualized rate of 3.5%.
Because the consideration to be received by the EFAX preferred stockholders
is a fixed amount, subject to the 3.5% annualized rate of increase, any increase
or decrease in the total consideration received in the Merger will only affect
the holders of EFAX Common Stock. The Conversion Number will vary depending on:
The amount outstanding under the term loan agreement between EFAX and the
Company (the "Term Loan Agreement") on the closing date for the Merger.
Under the Term Loan Agreement entered into between the Company and EFAX on
May 5, 2000, EFAX, subject to satisfying the conditions contained in the
Term Loan Agreement, may borrow up to $5 million from the Company ($4.0
million was borrowed as of September 30, 2000);
On the closing date of the Merger, the amount of cash that EFAX has (other
than cash from the sale of certain assets of EFAX), the amount of certain
of EFAX's prepaid expenses and the amount of EFAX's overdue payables; and
The number, if any, of the shares of EFAX Common Stock into which the
shares of Series D Stock are converted prior to the time of the Merger.
The Timing of the Merger. The consummation of the Merger will depend upon
the approval of the Merger by both the holders of a majority of the outstanding
shares of EFAX Common Stock and the holders of a majority of the outstanding
shares of JFAX Common Stock being voted at the meeting to approve the Merger.
The Boards of Directors of the Company and EFAX have each called shareholders
meetings to be held on November 22, 2000, at which time each entity's
shareholders will consider and vote upon the Merger. In addition to obtaining
approval from their respective shareholders, EFAX and the Company must fulfill
the other conditions required by the Merger Agreement in order to complete the
Merger. If all of the required conditions are met, the Merger is expected to be
completed in the fourth quarter of 2000.
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On June 30, 2000, EFAX and the Company entered into an Agreement of
Understanding (the "Agreement of Understanding") with Integrated Global
Concepts, Inc. ("IGC"). IGC has been providing EFAX with development and co-
location services necessary for EFAX's operations. The Agreement of
Understanding provides that at the time of the closing of the Merger, IGC will
grant EFAX a license to certain software developed by IGC that EFAX uses in its
operations, IGC will relinquish all claims which it may have against EFAX in
connection with development services it has previously provided to EFAX, and the
Company will issue 2,000,000 shares of JFAX Common Stock to IGC. The Agreement
of Understanding was entered into as a result of EFAX's desire to acquire a
license to the software developed by IGC, to pay IGC for development work
performed by IGC for which IGC claimed it had not received adequate
compensation, and to ensure the provision of certain transition services.
For additional information regarding this pending merger, please refer to
our Form S-4/A filed with the Securities and Exchange Commission on October 19,
2000, which filing is incorporated herein by reference.
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 cash and cash equivalents 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 may 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.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
At September 30, 2000, short and long-term investments consisted primarily of
government and corporate debt securities. Short-term maturities range from three
months to one year and long-term maturities range from beyond one year up to 18
months. Such securities bear interest at fixed rates ranging from 5.8% to 6.9%
per annum and are classified as held to maturity because the Company has the
ability and intent to do so. At September 30, 2000, cost approximates fair
market value and the Company believes it has 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.
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PART II.
OTHER INFORMATION
ITEM 1. Legal Proceedings
On October 28, 1999, AudioFAX IP LLC filed a lawsuit against the Company in
the United States District Court for the Northern District of Georgia asserting
the ownership of certain United States and Canadian patents and claiming that we
are infringing these patents as a result of our sale of enhanced facsimile
services. The suit requests unspecified damages, treble damages due to willful
infringement, and preliminary and permanent injunctive relief. The Company filed
an answer to the complaint on December 2, 1999. The Company has reviewed the
AudioFAX patents with its business and technical personnel and outside patent
counsel and has concluded that it has not infringed these patents. As a result,
the Company is confident of its position in this matter and is vigorously
defending the suit. However, the outcome of complex litigation is uncertain and
cannot be predicted with certainty at this time. Any unanticipated adverse
result could have a material adverse effect on our financial condition and
results of operations.
In September 2000 the case was stayed by consent of the parties pending the
reexamination by the U.S. Patent and Trademark Office of one of the patents that
is the subject of the litigation.
ITEM 2. Changes in Securities and Use of Proceeds
A. Not applicable
B. Not applicable
C. Sales of Unregistered Securities
In September, 2000 we issued 15,000 shares of common stock to an employee
in consideration for services to be performed by that employee for the Company.
We issued these shares in reliance upon the registration exemption contained in
Section 4(2) of the Securities Act of 1933 as a transaction by an issuer not
involving any public offering.
D. Sales of Registered Securities and Use of Proceeds
During July 1999, the Company completed its initial public offering (the
"Offering") of 8,500,000 shares of its common stock. The offering date was July
23, 1999. The Company's common stock is publicly traded on the NASDAQ National
Market under the symbol "JCOM."
The lead underwriters in the offering were Donaldson, Lukfin & Jenrette;
BancBoston Robertson Stephens; CIBC World Markets; and DLJdirect Inc. The
shares of common stock sold in the Offering were registered under the Securities
Act of 1933, as amended, on a Registration Statement on Form S-1 (the
"Registration Statement") (File No. 333-76477), which the Securities and
Exchange Commission declared effective on July 22, 1999.
The Company registered a total of 8,500,000 shares of common stock for sale
under the Registration Statement for an aggregate amount of $80,750,000 (based
upon the offering price of $9.50 per share). The Company sold all 8,500,000
shares for an aggregate amount of
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$80,750,000 (before deduction of underwriting discounts, commissions and other
expenses). Additionally, the underwriters had an option to purchase an
additional 473,000 shares from the Company and 802,000 shares from certain
selling stockholders to cover overallotments. None of those shares were sold in
the Offering. If they had been sold, the aggregate amount received for the
optional shares on the same basis as above would have been $4.5 million for the
Company and $7.6 million for the selling stockholders.
After deducting underwriting discounts and commissions of $5,652,500 and
expenses of $1,274,000 in connection with the Offering, the Company received net
proceeds from the Offering of $73.8 million.
Through June 30, 2000, we have used $38.4 million of proceeds from the
Offering for the following purposes: (i) $17.3 million for repayment of long-
term debt in the amount of $10.5 million and redemption of preferred stock in
the amount of $6.8 million, (ii) $6.9 million for expansion of our worldwide
network, (iii) $10.6 million for funding advertising and marketing activities,
(iv) $8.2 million for funding general corporate expenses, and $4.0 million for
note receivable advances to eFax.com.
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable
ITEM 5. Other Information
Not applicable
ITEM 6. Exhibits and Reports on Form 8-K
The following exhibits are filed herewith or are incorporated herein by
reference to exhibits previously filed with the Securities and Exchange
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.****
2.2 Agreement and Plan of Merger among JFAX.COM, Inc., JFAX.COM Merger
Sub, Inc. and eFax.com, dated July 13, 2000.******
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.*****
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Exhibit
-------
No. Exhibit Title
--- -------------
3.2 By-laws, as amended and restated.*
4.1 Specimen of common stock certificate.***
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.**
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,
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Exhibit
-------
No. Exhibit Title
--- -------------
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.*****
10.24 Side Agreement among eFax.com, JFAX.COM, Inc., Wingate Capital Ltd.
and Fisher Capital Ltd., dated July 13, 2000.******
10.25 Agreement of Understanding among eFax.com, JFAX.COM, Inc. and
Integrated Global Concepts, Inc., dated June 30, 2000.******
10.26 Exchange Agreement, between eFax.com and the current holders of
eFax.com's Series B Convertible Preferred Stock, dated as of July
13, 2000.******
10.27 Term Loan Agreement, between eFax.com and JFAX.COM, Inc., dated May
5, 2000. Such agreement contains a listing of schedules or similar
attachments. Pursuant to the applicable instruction, such schedules
or attachments are not filed herewith. However, the Registrant
agrees to furnish supplementally to the Commission upon request a
copy of any omitted schedule or attachment.*******
10.28 First Amendment to Term Loan Agreement, between eFax.com and
JFAX.COM, Inc., dated July 13, 2000.******
10.29 Allonge to Promissory Note made by eFax.com in favor of JFAX.COM,
Inc., dated July 13, 2000.******
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.
****** Incorporated by reference to the Company's Report on Form 8-K filed
with the Commission on July 20, 2000.
******* Incorporated by reference to the Company's Report on Form 10-Q filed
with the Commission on August 14, 2000.
B. Reports on Form 8-K
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Form Item Description Filing Date
---- ---- ----------- -----------
8-K 5, 7 Incorporation by reference of September 13, 2000
certain Information from
Form S-4
8-K 9 Regulation FD Disclosure October 31, 2000
18
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
JFAX.COM, INC.
(Registrant)
By: /s/ Nehemia Zucker
----------------------
Its: Chief Financial Officer and Duly
Authorized Officer of the Registrant
November 14, 2000
19
