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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 June 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 [ ]
The number of shares, $0.01 par value each, of the registrant's common
stock outstanding as of July 31, 2000: 36,122,600 shares.
______________________________________________________________________________
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JFAX.COM, INC.
For the Quarter Ended March 31, 2000
<TABLE>
<CAPTION>
INDEX
Page
----
PART I. FINANCIAL INFORMATION
<S> <C> <C>
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 ................................ 14
</TABLE>
<TABLE>
<CAPTION>
PART II. OTHER INFORMATION
<S> <C> <C>
Item 1. Legal Proceedings ......................................................................... 14
Item 2. Changes in Securities and Use of Proceeds ................................................. 15
Item 3. Defaults Upon Senior Securities ........................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders ....................................... 16
Item 5. Other Information ......................................................................... 16
Item 6. Exhibits and Reports on Form 8-K .......................................................... 16
</TABLE>
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JFAX.COM, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------- -----------------------
2000 1999 2000 1999
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues $ 3,008 $ 1,647 $ 5,873 $ 3,058
Cost of revenue 1,676 1,179 3,037 2,233
----------- ----------- ----------- ----------
Gross profit 1,332 468 2,836 825
Operating expenses:
Sales and marketing 2,429 657 4,618 1,365
Research and development 564 380 1,353 897
General and administrative 3,809 2,039 7,772 3,529
Amortization of goodwill and other intangibles 1,141 --- 1,801 ---
---------- ---------- ---------- ----------
Total operating expenses 7,943 3,076 15,544 5,791
---------- ---------- ---------- ----------
Operating Loss (6,611) (2,608) (12,708) (4,966)
Other income (expense), net 676 (457) 1,474 (883)
---------- ---------- ---------- ----------
Net Loss (5,935) (3,065) (11,234) (5,849)
Dividends and accretion on preferred stock --- (266) --- (525)
---------- ---------- ---------- ----------
Net loss attributable to
common stockholders $ (5,935) $ (3,331) $ (11,234) $ (6,374)
========== ========== ========== ==========
Basic and diluted net loss
per common share: $ (0.16) $ (0.14) $ (0.31) $ (0.26)
========== ========== ========== ==========
Weighted average shares
outstanding 36,016,213 24,312,415 35,373,365 24,310,263
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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JFAX.COM, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
----------------- ----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 15,048 $ 12,256
Short-term investments 7,519 23,511
Accounts receivable 972 370
Note receivable 1,500 ---
Prepaid expenses and other current assets 3,160 4,111
----------------- ----------------
Total current assets 28,199 40,248
Furniture, fixtures and equipment, net 5,791 3,344
Goodwill, net 8,301 ---
Other purchased intangibles, net 2,138 ---
Long-term investments 15,169 13,559
Other assets 1,653 1,475
------------------ -----------------
Total assets $ 61,251 $ 58,626
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 2,503 $ 1,781
Deferred revenue 316 439
Current portion of capital lease payable 236 176
Current portion of long-term debt 1,359 1,240
Other 417 57
------------------ ------------------
Total current liabilities 4,831 3,693
Capital lease obligations 179 186
Long-term debt 1,001 1,537
------------------ ------------------
Total liabilities 6,011 5,416
Redeemable common stock 7,065 7,065
Common stock subject to put option 998 998
Total stockholders' equity 47,177 45,147
------------------- ------------------
Total liabilities and stockholders' equity $ 61,251 $ 58,626
=================== ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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JFAX.COM, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six months ended
June 30
------------------------------------
2000 1999
------------------------------------
<S> <C> <C>
Net cash used in operating activities $ (6,163) $ (3,711)
------------ ------------
Cash flows from investing activities:
Redemption of investments 14,217 0
Investment in joint venture (45) 0
Issuance of Notes receivable (2,200) 0
Purchases of furniture, fixtures and equipment (2,743) (428)
------------ ------------
Net cash provided by (used in) investing activities 9,229 (428)
------------ ------------
Cash flows from financing activities:
Exercise of stock options 89 11
Proceeds from issuance of notes payable 203 91
Repayments of loan payable and capital lease obligations (567) (225)
------------ ------------
Net cash used in financing activities (274) (123)
------------ ------------
Net increase (decrease) in cash and cash equivalents 2,792 (4,262)
Cash and cash equivalents, beginning of period 12,256 7,279
------------ ------------
Cash and cash equivalents, end of period $ 15,048 $ 3,017
============ ============
</TABLE>
Non cash investing activities:
During the six month period ended June 30, 2000 net assets as follows were
acquired though the issuance of common stock:
<TABLE>
<CAPTION>
<S> <C>
Current assets $ 180
Furniture, fixtures, and equipment 585
Goodwill and intangibles 705
Investment in operating lease 12,943
Less: liabilities assumed (149)
-----------
Fair value of common stock issued 14,264
===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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JFAX. COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial information is unaudited but reflects all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the consolidated financial
position and results of operations for the interim periods. The condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, together with management's
discussion and analysis of financial condition and results of operations, for
the fiscal year ended December 31, 1999 as presented in the Company's Form 10-K,
as amended on May 1, 2000. The results of operations for the three and six
months ended June 30, 2000 are not necessarily indicative of the results to be
expected for the entire fiscal year.
NOTE 2 - USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
NOTE 3 - COMPREHENSIVE LOSS
Comprehensive loss is comprised of net loss and unrealized gains and losses on a
short term investment classified as available for sale. Comprehensive loss was
$6.2 and $3.3 million for the quarters ended June 30, 2000 and 1999,
respectively.
NOTE 4 -- BUSINESS COMBINATIONS
On January 26, 2000, the Company completed the acquisition of Suretalk.com, Inc.
(SureTalk) The acquisition was recorded using the purchase method of accounting
under APB Opinion No. 16. The Company issued an aggregate of approximately
1,515,545 shares of common stock to effect the transaction. The
aggregate purchase price of Suretalk, plus related charges, was approximately
$9.28 million, and was comprised of common stock. Results of operations for
SureTalk have been included in the financial results of the Company from the
closing date of the transaction forward.
In accordance with APB Opinion No. 16, all identifiable assets were assigned a
portion of the cost of the acquired company (purchase price) on the basis of
their respective fair values. Identifiable intangible assets and goodwill are
included in "Goodwill, net" and "Other purchased intangibles, net" in the
accompanying condensed consolidated balance sheets and are amortized over their
average useful lives of 2-3 years. Intangible assets were identified and valued
by
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considering the Company's intended use of acquired assets, and analysis of
data concerning products, technologies, markets, historical financial
performance, and underlying assumptions of future performance. The economic and
competitive environment in which the Company and the acquired company operate
was also considered in the valuation analysis.
The pro forma consolidated financial information for the three months ended June
30, 2000 and 1999, determined as if the acquisition had occurred on January 1
of each year, would have resulted in net sales of $3.0 and $1.8 million , net
loss of $5.9 and $3.9 million, and basic and diluted loss per share of $0.16 and
$0.15, respectively. This unaudited pro forma information is presented for
illustrative purposes only and is not necessarily indicative of the results of
operations in future periods or results that would have been achieved had
JFAX.COM and the acquired company been combined during the specified periods.
The pro forma consolidated financial information for the six months ended June
30, 2000 and 1999, determined as if the acquisition had occurred on January 1
of each year, would have resulted in net sales of $5.9 and $3.3 million , net
loss of $11.7 and $7.2 million, and basic and diluted loss per share of $0.32
and $0.28, respectively. This unaudited pro forma information is presented for
illustrative purposes only and is not necessarily indicative of the results of
operations in future periods or results that would have been achieved had
JFAX.COM and the acquired company been combined during the specified periods.
NOTE 5 - LOSS PER SHARE
The Company has adopted SFAS No. 128, "Earnings Per Share." Basic net loss per
share is computed using the weighted average number of common shares outstanding
during the period.
Dividends and accretion on Preferred Stock increased the net loss for
determining basic and diluted net loss per share attributable to Common Stock in
the applicable periods. Diluted net loss per share excludes the effect of common
stock equivalents, because their effect would be anti-dilutive.
NOTE 6 - LITIGATION
On October 28, 1999, AudioFAX IP LLC filed a lawsuit against the Company in the
United States District Court for the Northern District of Georgia asserting the
ownership of certain United States and Canadian patents and claiming that we are
infringing these patents as a result of our sale of enhanced facsimile services.
The suit requests unspecified damages, treble damages due to willful
infringement, and preliminary and permanent injunctive relief. The Company filed
an answer to the complaint on December 2, 1999. The Company has reviewed the
AudioFAX patents with its business and technical personnel and outside patent
counsel and have concluded that it does not infringe these patents. As a result,
the company is confident of its position in this matter and is vigorously
defending the suit. However, the outcome of complex litigation is uncertain and
cannot be predicted with certainty at this time. Any unanticipated adverse
result could have a material adverse effect on our financial condition and
results of operations.
On May 11, 2000, Inso Chicago Corporation ("Inso") filed a lawsuit against the
Company in the United States District Court of for the District of Massachusetts
asserting breach of contract, breach of implied covenant of good faith and fair
dealing, and unfair and deceptive trade practices. The suit requests
unspecified damages, treble damages due to willful unfair or deceptive acts, and
injunctive relief. The lawsuit arises out of a dispute with Inso regarding
amounts which Inso alleges are payable by the Company under a software license
pursuant to
7
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which Inso provided certain software that, until July 16, 2000 (when the Company
ceased used of the software) enabled the Company's subscribers to send faxes
from the Company's web site. The total license fee due under the license
agreement is $150,000 for a two-year license period commencing on or about
January 1, 2000. The Company maintains that the software did not perform to
warranted specifications, that Inso misrepresented the level of performance that
could be expected from the software, and that the defects were not addressed by
Inso. The Company withheld payment accordingly. The Company answered Inso's
complaint and filed a counter-claim seeking to recover damages that resulted
from Inso's misrepresentations and delivery of defective products. On June 6,
2000, the Court denied Inso's request for a preliminary injunction. The parties
are currently engaged in discovery. The Company is confident of its position
in this matter and is vigorously defending the suit. However, the outcome of
complex litigation is uncertain and cannot be predicted with certainty at this
time. Any unanticipated adverse result could have a material adverse effct on
our financial condition and results of operations.
NOTE 7- PENDING ACQUISITION OF E-FAX
On July 13, 2000, the Company entered into a merger agreement (the "Merger
Agreement") with eFax.com, Inc. ("EFAX"), and JFAX.COM Merger Sub, Inc., a newly
formed subsidiary of the Company ("Merger Sub"). Under the terms of the
Merger Agreement, EFAX has agreed to merge with the Merger Sub ("Merger")
and become a wholly owned subsidiary of the Company, in exchange for which the
Company will issue a total of approximately 13.0 million shares of its common
stock. As consideration for the Merger, EFAX's stockholders would receive the
following:
For each share of EFAX's common stock, par value $.01 per share ("EFAX
Common Stock"), its holder would receive a fraction of a share of the
Company's 2 common stock, par value $0.01 per share ("JFAX Common Stock"),
determined by a conversion number calculated in accordance with the Merger
Agreement (the "Conversion Number"), which Conversion Number will result in
the issuance to EFAX common stockholders of a total of approximately 3.8
million shares of JFAX Common Stock.
For each share of EFAX's Series D Convertible Preferred Stock, par value
$.01 per share ("Series D Stock"), outstanding at the time of the Merger,
its holder would receive 4,922.75 shares of JFAX Common Stock
(collectively, if all 1,447 shares of Series D Stock are outstanding at the
time of the Merger, approximately 7.1 million shares), which amount will
increase between July 12, 2000 and the time of the Merger at an annualized
rate of 3.5%.
Because the consideration to be received by the EFAX preferred stockholders
is a fixed amount, subject to the 3.5% annualized rate of increase, any increase
or decrease in the total consideration received in the Merger will only affect
the holders of EFAX Common Stock. The Conversion Number will vary depending on
certain events, as described in the Merger Agreement.
The consummation of the Merger will depend upon, in addition to other
conditions, the approval of the Merger by both the holders of a majority of the
outstanding shares of EFAX Common Stock and the holders of a majority of the
outstanding shares of JFAX Common Stock being voted at the meeting to approve
the issuance of JFAX shares in the Merger. If all of the required conditions are
met, the Merger is expected to be completed in the fourth quarter of 2000.
On June 30, 2000, EFAX and the Company entered into an Agreement of
Understanding (the "Agreement of Understanding") with Integrated Global
Concepts, Inc. ("IGC"). IGC has been providing EFAX with development and co-
location services necessary for EFAX's operations. The Agreement of
Understanding provides that at the time of the closing of the Merger, IGC will
grant EFAX a license to certain software developed by IGC which EFAX uses in its
operations, IGC will relinquish all claims which it may have against EFAX in
connection with
8
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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.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations for the Three Months Ended June 30, 2000 and June 30, 1999
Revenue. Revenue was $3.0 million and $1.6 million for the three months
ended June 30, 2000 and 1999 respectively. The increase in revenue was primarily
due to an increased number of subscriptions. Our paid subscribers numbered
64,200 and 36,400 as of June 30, 2000 and 1999.
Cost of Revenue. Cost of revenue is primarily comprised of data and voice
network costs, customer service, online processing fees and equipment
depreciation. Cost of revenue was $1.7 million or 56% of revenue and $1.2
million or 72% of revenue for the three months ended June 30, 2000 and 1999. The
increase in cost of revenue reflects the cost of building and expanding our
server and networking infrastructure and customer service to accommodate growth
of our subscriber base. Cost of revenue as a percentage of revenue decreased as
a result of the increases in revenue over the same period last year.
Operating Expenses
Sales and Marketing. Our sales and marketing costs consist primarily of
payments with respect to strategic alliances, personnel related expenses,
advertising, consulting, and public relations. Sales and marketing expenses were
$2.4 million or 81% of revenue and $657,000 or 40% of revenue for the three
months ended June 30, 2000 and 1999, respectively. The increases in sales and
marketing expenses from period to period primarily reflect an increase in
advertising costs associated with payments to strategic alliances and an
increase in personnel related expenses. Sales and marketing as a percentage of
revenue increased over the same period last year, primarily as a result of
strategic alliance payments.
On July 1, 1999, 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, Yahoo!
and we concluded negotiations to replace the existing advertising and promotion
agreement with a new, more limited, arrangement for non-exclusive placement on
the Yahoo! web site, including in Yahoo! Mail. This agreement runs through at
least October 15, 2000, and contains more favorable financial terms for us than
the July 1, 1999 advertising and promotion agreement.
9
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Research and Development. Our research and development costs consist
primarily of personnel related expenses. Research and development costs were
$564,000 or 19% of revenue and $380,000 or 23% of revenue for the three months
ended June 30, 2000 and 1999. The increase in research and development costs
from period to period primarily reflects increases in personnel related
expenses. Research and development as a percentage of revenue decreased as a
result of increases in revenue over the same period last year.
General and Administrative. Our general and administrative costs consist
primarily of personnel related expenses, professional fees, and occupancy costs.
General and administrative costs were $3.8 million or 127% of revenue and $2.0
million or 124% or revenue for the quarters ended June 30, 2000 and 1999. The
cost increases as a percentage of revenue in general and administrative from
period to period were primarily due to increases in the additional
infrastructure required to support our overall growth and our conversion to a
public company in July 1999. Included in general and amdinstrative costs is
$499,000 and $138,000 in depreciation and amortization for the quarters ended
June 30, 2000 and 1999.
Amortization of goodwill and other intangibles . For the three months ended
June 30, 2000, amortization of goodwill and other intangibles of $1.1 million
occurred due to the acquisition of SureTalk.com, Inc. in January 2000. There was
no comparable amortization for the three months ended June 30, 1999
Interest Income (Expense), Net. Interest income (expense), net was $676,000
and ($457,000) for the three months ended June 30, 2000 and 1999, respectively.
For the three months ended June 30, 2000 interest income (expense), net
primarily resulted from interest income earned on our cash and cash equivalents
and short and long term investments generated from our July 1999 IPO. For the
three months ended June 30, 1999, interest income (expense), net is primarily
related to interest expense on capital lease obligations and long-term debt.
Results of Operations for the Six Months Ended June 30, 2000 and June 30, 1999
Revenue. Revenue was $5.9 million and $3.1 million for the six months ended
June 30, 2000 and 1999 respectively. The increase in revenue was primarily due
to an increased number of subscriptions. Our paid subscribers numbered 64,200
and 36,400 as of June 30, 2000 and 1999.
Cost of Revenue. Cost of revenue is primarily comprised of data and voice
network costs, customer service, online processing fees and equipment
depreciation. Cost of revenue was $3.0 million or 52% of revenue and $2.2
million or 73% of revenue for the six months ended June 30, 2000 and 1999. The
increase in cost of revenue reflects the cost of building and expanding our
server and networking infrastructure and customer service to accommodate growth
of our subscriber base. Cost of revenue as a percentage of revenue decreased as
a result of the increases in revenue over the same period last year.
Operating Expenses
Sales and Marketing. Our sales and marketing costs consist primarily of
payments with respect to strategic alliances, personnel related expenses,
consulting, advertising, and public relations. Sales and marketing expenses were
$4.6 million or 79% of revenue and $1.4 million or 45% of revenue for the six
months ended June 30, 2000 and 1999, respectively. The increases
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in sales and marketing expenses from period to period primarily reflect an
increase in advertising costs associated with payments to strategic alliances
and an increase in personnel related expenses. Sales and marketing as a
percentage of revenue increased over the same period last year, primarily as a
result of strategic alliance payments.
On July 1, 1999, 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, Yahoo!
and we concluded negotiations to replace the existing advertising and promotion
agreement with a new, more limited, arrangement for non-exclusive placement on
the Yahoo! web site, including in Yahoo! Mail. This agreement runs through at
least October 15, 2000, and contains more favorable financial terms for us than
the July 1, 1999 advertising and promotion agreement.
Research and Development. Our research and development costs consist
primarily of personnel related expenses. Research and development costs were
$1.4 million or 23% of revenue and $897,000 or 29% of revenue for the six months
ended June 30, 2000 and 1999. The increase in research and development costs
from period to period primarily reflects increases in personnel related
expenses. Research and development as a percentage of revenue decreased as a
result of increases in revenue over the same period last year.
General and Administrative. Our general and administrative costs consist
primarily of personnel related expenses, professional fees, and occupancy costs.
General and administrative costs were $7.8 million or 132% of revenue and $3.5
million or 115% or revenue for the six months ended June 30, 2000 and 1999. The
cost increases as a percentage of revenue in general and administrative from
period to period were primarily due to increases in the additional
infrastructure to support our overall growth and our conversion to a public
company in July 1999. Included in general and administrative costs is $811,000
and $269,000 in depreciation and amortization for the six months ended June 30,
2000 and 1999.
Amortization of goodwill and other intangibles . For the six months ended June
30, 2000, amortization of goodwill and other intangibles of $1.8 million
occurred due to the acquisition of SureTalk.com, Inc. in January 2000. There was
no comparable amortization for the six months ended June 30, 1999
Interest Income (Expense), Net. Interest income (expense), net was $1.5
million and ($883,000) for the six months ended June 30, 2000 and 1999,
respectively. For the six months ended June 30, 2000 interest income (expense),
net primarily resulted from interest income earned on our cash and cash
equivalents and short and long term investments generated from our July 1999
IPO. For the six months ended June 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 June 30, 2000, we had funds on hand for use in our business of
approximately $37.7 million. Such funds consisted of $15.0 million in cash and
cash equivalents and $7.5 and $15.2 million in short term and long term
investments, respectively. Short and long term investments consisted of
government and corporate debt securities. Short term maturities range
11
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from three months to one year and long term maturities range from beyond one
year up to 18 months.
Net cash used in operating activities increased to $6.2 million for the six
months ended June 30, 2000 from $3.7 million for the same period in 1999. The
increase in net cash used in operating activities was primarily due to an
increase in net losses, offset by an increase in depreciation relating to our
additional infrastructure and amortization of goodwill and other intangibles
from the acquisition of SureTalk.com, Inc.
Net cash provided by investing activities was $9.2 million for the six months
ended June 30, 2000. Net cash used in investing activities was $428,000 for the
six months ended June 30, 1999. The increase in net cash provided by investing
activities from fiscal 1999 to 2000 was primarily due to the redemption of short
and long term investments reduced by purchases of leasehold improvements and
office equipment for our new headquarters in Hollywood, California, the
continuing build-out of our network, and advances under notes receivable to
EFAX.com, Inc.
Net cash used in financing activities of $274,000 for the six months ended
June 30, 2000 was comparable to $123,000 for the same period in 1999 and
primarily consisted of net repayments of loans payable and capital lease
obligations.
EFAX Merger Agreement. On July 13, 2000, we entered into a merger agreement
(the "Merger Agreement") with eFax.com, Inc. ("EFAX"), and JFAX.COM Merger Sub,
Inc., a newly formed subsidiary ("Merger Sub"). Under the terms of the Merger
Agreement, EFAX has agreed to merge with Merger Sub (the "Merger") and become
our wholly owned subsidiary, in exchange for which we will issue a total of
approximately 13.0 million shares of our common stock. As consideration for the
Merger, EFAX's stockholders would receive the following:
For each share of EFAX's common stock, par value $.01 per share ("EFAX
Common Stock"), its holder would receive a fraction of a share of
our common stock, par value $0.01 per share ("JFAX Common Stock"),
determined by a conversion number calculated in accordance with the Merger
Agreement (the "Conversion Number"), which Conversion Number will result in
the issuance to EFAX common stockholders of a total of approximately 3.8
million shares of JFAX Common Stock.
For each share of EFAX's Series D Convertible Preferred Stock, par value
$.01 per share ("Series D Stock"), outstanding at the time of the Merger,
its holder would receive 4,922.75 shares of JFAX Common Stock
(collectively, if all 1,447 shares of Series D Stock are outstanding at the
time of the Merger, approximately 7.1 million shares), which amount will
increase between July 12, 2000 and the time of the Merger at an annualized
rate of 3.5%.
Because the consideration to be received by the EFAX preferred stockholders
is a fixed amount, subject to the 3.5% annualized rate of increase, any
increase or decrease in the total consideration received in the Merger will
only affect the holders of EFAX Common Stock. The Conversion Number will
vary depending on:
The amount outstanding under the term loan agreement between EFAX and us
(the "Term Loan Agreement") on the closing date for the Merger. Under the
Term Loan Agreement, EFAX, subject to satisfying the conditions contained
in the Term Loan Agreement, may borrow up to $5 million from us;
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On the closing date of the Merger, the amount of cash which 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;
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; and
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 issuance of shares in the Merger. To
complete the Merger, EFAX and we must also fulfill the other conditions required
by the Merger Agreement. Prior to the stockholders' meetings, a registration
statement on Form S-4 must be filed with the Securities and Exchange Commission
and be declared effective. If all of the required conditions are met, the Merger
is expected to be completed in the fourth quarter of 2000.
On June 30, 2000, EFAX and we entered into an Agreement of
Understanding (the "Agreement of Understanding") with Integrated Global
Concepts, Inc. ("IGC"). IGC has been providing EFAX with development and co-
location services necessary for EFAX's operations. The Agreement of
Understanding provides that at the time of the closing of the Merger, IGC will
grant EFAX a license to certain software developed by IGC which EFAX uses in its
operations, IGC will relinquish claims which it may have against EFAX in
connection with development services it has previously provided to EFAX and we
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.
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.
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<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
At June 30, 2000 short and long term investments primarily consisted of
government and corporate debt securities. Short term maturities range from three
months to one year and long term maturities range from beyond one year up to 18
months. Such securities bear interest at fixed rates ranging from 5.6% to 6.9%
and are classified as held to maturity as we have the ability and intent
to do so. At June 30, 2000 cost approximates 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.
PART II.
OTHER INFORMATION
ITEM 1. Legal Proceedings
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.
On May 11, 2000, Inso Chicago Corporation ("Inso") filed a lawsuit against us in
the United States District Court of for the District of Massachusetts asserting
breach of contract, breach of implied covenant of good faith and fair dealing,
and unfair and deceptive trade practices. The suit requests unspecified damages,
treble damages due to willful unfair or deceptive acts, and injunctive relief.
The lawsuit arises out of a dispute with Inso regarding amounts which Inso
alleges are payable by us under a software license pursuant to which Inso
provided certain software that, until July 16, 2000 (when we ceased used of the
software) enabled our subscribers to send faxes from our web site. The total
license fee due under the license agreement is $150,000 for a two-year license
period commencing on or about January 1, 2000. We maintain that the software did
not perform to warranted specifications, that Inso misrepresented the level of
performance that could be expected from the software, and that the defects were
not addressed by Inso. The Company withheld payment accordingly. We answered
Inso's complaint and filed a counter-claim seeking to recover damages that
resulted from Inso's misrepresentations and delivery of defective products. On
June 6, 2000, the Court denied Inso's request for a preliminary injunction. The
parties are currently engaged in discovery. 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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<PAGE>
ITEM 2. Changes in Securities and use of Proceeds
A. Not applicable
B. Not applicable
C. Not applicable
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. JFAX.COM's stock is publicly traded on the NASDAQ National Market
under the symbol "JFAX."
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 was declared effective by
the SEC on July 22, 1999.
A total of 8,500,000 shares of common stock were registered for sale by the
Company under the Registration Statement for an aggregate amount of $80,750,000
(based upon the offering price of $9.50 per share). 8,500,000 shares were sold
by the Company for an aggregate amount of $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 these shares were sold in the Offering. If these
shares 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) $6.0 million for expansion of our worldwide
network; (iii) $8.2 million for funding advertising and marketing activities;
and (iv) $6.9 million for funding general corporate expenses.
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<PAGE>
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 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.
<TABLE>
<CAPTION>
Exhibit
-------
No. Exhibit Title
--- -------------
<S> <C>
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.*****
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.*
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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,
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.
</TABLE>
__________
* 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.
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<PAGE>
***** 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.
B. Reports on Form 8-K
Form Item Description Filing date
---- ---- ----------- -----------
8-K 5, 7 Merger agreement with eFAX.com, July 20, 2000
Inc.
8-K 5 Agreement with Intuit, Inc. July 27, 2000
18
<PAGE>
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
Chief Financial Officer and Duly
Authorized Officer of the Registrant
August 11, 2000
19
