<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 3, 1999.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File Number 0-22561
EFAX.COM, INC.
(Exact name of Registrant as specified in its charter)
Delaware 77-0182451
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1378 Willow Road, Menlo Park, California 94025
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 324-0600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of August 16, 1999 there were 12,851,947 shares of common stock, $.01 par
value, outstanding.
This Report on Form 10-Q includes 35 pages with the Index to Exhibits located
on page 25.
<PAGE> 2
<TABLE>
<CAPTION>
EFAX.COM, INC. AND SUBSIDIARIES
INDEX TO
REPORT ON FORM 10-Q
FOR QUARTER ENDED JULY 3, 1999
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - June 30,
1999 and December 31, 1998........................ 3
Condensed Consolidated Statements of Operations -
Three Months and Six Months Ended June 30, 1999
and 1998.......................................... 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1999 and 1998........... 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......................................... 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................... 23
Item 2. Changes in Securities................................. 23
Item 4. Submission of Matters to a Vote of Security Holders... 24
Item 5. Other Information..................................... 25
Item 6. Exhibits and Reports on Form 8-K...................... 25
Signature............................................. 26
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
EFAX.COM, INC. (FORMERLY JETFAX, INC.) AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
June 30, December 31,
1999 1998 (1)
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 12,696 $ 1,305
Short-term investments 2,996 2,808
Accounts receivable, net 3,646 4,402
Inventories 2,738 4,519
Prepaid expenses 421 247
---------- ----------
Total current assets 22,497 13,281
Property, net 2,039 1,339
Other assets 4,311 1,595
---------- ----------
Total assets $ 28,847 $ 16,215
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,831 $ 777
Accrued liabilities 1,429 1,576
---------- ----------
Total current liabilities 3,260 2,353
Deferred revenue 75 25
Stockholders' equity:
Series A convertible preferred stock, $0.01
par value; 5,000,000 shares authorized, - -
shares outstanding: 1,500 in 1999 and none
in 1998
Common stock, $0.01 par value; 35,000,000
shares authorized, shares outstanding: 128 119
12,769,903 in 1999 and 11,873,711 in 1998
Additional paid-in capital 62,287 42,946
Accumulated deficit (36,903) (29,228)
---------- ----------
Total stockholders' equity 25,512 13,837
---------- ----------
Total liabilities and stockholders' equity $ 28,847 $ 16,215
========== ==========
</TABLE>
(1) Derived from the December 31, 1998 audited consolidated balance sheet
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
See notes to condensed consolidated financial statements.
3
<PAGE> 4
<TABLE>
<CAPTION>
EFAX.COM, INC. (FORMERLY JETFAX, INC.) AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Product $ 4,962 $ 6,082 $ 11,159 $ 12,106
Licenses and services 1,068 1,072 2,214 2,415
Development fees 253 568 679 900
--------- --------- --------- ---------
Total revenues 6,283 7,722 14,052 15,421
--------- --------- --------- ---------
Costs and expenses:
Cost of product revenues 3,421 3,843 7,725 8,130
Cost of licenses and services 344 148 583 449
Research and development 1,579 1,339 3,234 2,789
Selling and marketing 4,763 1,680 6,859 3,909
General and administrative 2,405 648 3,195 1,404
--------- --------- --------- ---------
Total costs and expenses 12,512 7,658 21,596 16,681
--------- --------- --------- ---------
Income (loss) from operations (6,229) 64 (7,544) (1,260)
--------- --------- --------- ---------
Other income (expense):
Interest income 88 83 142 162
Interest expense - - (1) (2)
Other income (expense) (47) (1) (62) (24)
--------- --------- --------- ---------
Total other income 41 82 79 136
--------- --------- --------- ---------
Income (loss) before income taxes (6,188) 146 (7,465) (1,124)
Provision for income taxes 24 32 39 49
--------- --------- --------- ---------
Net income (loss) (6,212) 114 (7,504) (1,173)
Series A Convertible Preferred
stock dividends (171) - (171) -
--------- --------- --------- ---------
Net income (loss) applicable to
common stockholders $ (6,383) $ 114 $ (7,675) $ (1,173)
========= ========= ========= =========
Net income (loss) per share:
Basic $ (0.51) $ 0.01 $ (0.63) $ (0.10)
========= ========= ========= =========
Diluted $ (0.51) $ 0.01 $ (0.63) $ (0.10)
========= ========= ========= =========
Shares used in computing net
income (loss) per share:
Basic 12,538 11,755 12,273 11,748
========= ========= ========= =========
Diluted 12,538 13,136 12,273 11,748
========= ========= ========= =========
</TABLE>
For presentation purposes, the periods ended July 3, 1999 and July 4, 1998 are
referred to above as ending on June 30, 1999 and 1998, respectively.
4
<PAGE> 5
<TABLE>
<CAPTION>
EFAX.COM, INC. (FORMERLY JETFAX, INC.) AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
June 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (7,504) $ (1,173)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 474 204
Loss on disposal of asset (39) -
Issuance of Common Stock for service 208 -
Common Stock options - severance 1,367 -
Common Stock options - services 284 -
Changes in assets and liabilities:
Trade receivables 756 532
Inventories 1,781 135
Prepaid expenses (174) (66)
Accounts payable 1,054 234
Deferred revenue 50 (24)
Accrued liabilities (273) (84)
------------ ------------
Net cash used for operating activities (2,016) (242)
------------ ------------
Cash flows from investing activities:
Purchase of short-term investments (2,996) -
Sale of short-term investments 2,808 -
Purchase of property (921) (220)
Increase in other assets (733) (317)
------------ ------------
Net cash used for investing activities (1,842) (537)
------------ ------------
Cash flows from financing activities:
Proceeds from sale of Common Stock 1,034 (3)
Proceeds from sale of Series A Convertible
Preferred Stock, net 14,215 -
------------ ------------
Net cash provided by (used for) financing
activities 15,249 (3)
------------ ------------
Increase (decrease) in cash and cash equivalents 11,391 (782)
Cash and cash equivalents, beginning of period 1,305 7,224
------------ ------------
Cash and cash equivalents, end of period $ 12,696 $ 6,442
============ ============
Supplemental cash flow information:
Interest paid $ - $ 2
============ ============
Taxes paid - foreign withholding $ 18 $ -
============ ============
Supplemental noncash investing and financial
information:
Warrant expense - service $ 197 $ -
============ ============
Conversion of accrued ESPP for purchase
of Common Stock $ 45 $ 76
============ ============
Trademark settlement $ 2,000 $ -
============ ============
Cumulative dividends on Series A Convertible
Preferred Stock $ 171 $ -
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
EFAX.COM, INC. (FORMERLY JETFAX, INC.) AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Interim Financial Information
The accompanying condensed consolidated financial statements of eFax.com,
Inc. and its wholly-owned subsidiaries ("eFax.com" or "eFax" or the "Company")
as of June 30, 1999 and for the three and six months ended June 30, 1999 and
1998 are unaudited. In the opinion of management, the condensed consolidated
financial statements include all adjustments (consisting of normal recurring
accruals) that management considers necessary for a fair presentation of its
financial position, operating results and cash flows for the interim periods
presented. Operating results and cash flows for interim periods are not
necessarily indicative of results for the entire year.
This financial data should be read in conjunction with the audited
financial statements and notes thereto included in eFax.com's Annual Report on
Form 10-K for the year ended December 31, 1998.
Fiscal Period End
The Company uses a 52-53 week fiscal year ending on the first Saturday on
or after December 31. For presentation purposes, the Company refers herein to
the 13-week and 26-week periods ended July 3, 1999 and July 4, 1998 as the
three and six months ended June 30, 1999 and 1998, respectively.
Per Share Information
Basic earnings (loss) per share is computed by dividing net income (loss)
by the weighted average common shares outstanding for the period while diluted
earnings (loss) per share also includes the dilutive impact of stock options
and warrants. Common stock equivalents from options and warrants have been
excluded from the computation for all periods presented with net losses as
their effect is antidilutive. Such options and warrants will be included,
using the treasury stock method, in periods where eFax.com reports net income
and the average fair market value of its common stock exceeds the exercise
price. The net income (loss) and the shares used for the computation of both
basic and diluted income (loss) per share are shown in the table below.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) applicable to
shareholders $ (6,383) $ 114 $ (7,675) $ (1,173)
======== ======== ======== ========
SHARES USED IN COMPUTATION:
Weighted average common shares
outstanding used in computation
of basic earnings(loss) per share 12,538 11,755 12,273 11,748
Dilutive effect of stock options
and warrants - 1,381 - -
-------- -------- -------- --------
Shares used in computation of
diluted net income (loss)
per share 12,538 13,136 12,273 11,748
======== ======== ======== ========
BASIC EARNINGS (LOSS) PER SHARE $ (0.51) $ 0.01 $ (0.63) $ (0.10)
======== ======== ======== ========
DILUTED EARNINGS (LOSS) PER SHARE $ (0.51) $ 0.01 $ (0.63) $ (0.10)
======== ======== ======== ========
</TABLE>
6
<PAGE> 7
EFAX.COM, INC. (FORMERLY JETFAX, INC.) AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
2. Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Materials and supplies $ 1,092 $ 1,982
Work-in-process 37 93
Finished goods 1,609 2,444
------------ ------------
Total $ 2,738 $ 4,519
============ ============
</TABLE>
3. Accrued Liabilities
Accrued liabilities consist of (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Compensation and related benefits $ 721 $ 632
Product warranty 46 78
Royalties 46 62
Other 616 804
------------ ------------
Total $ 1,429 $ 1,576
============ ============
</TABLE>
4. Comprehensive Income
Effective January 1, 1998, eFax.com adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS
No. 130 requires an enterprise to report, by major components and as a single
total, the change in net assets during the period from non-owner sources. For
the three and six months ended June 30, 1999 and 1998, there were no
differences between eFax.com's comprehensive loss and net loss.
5. Disclosures about Segments of an Enterprise and Related Information
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which establishes annual and interim reporting standards for an enterprise's
business segments and related disclosures about its products, services,
geographic areas and major customers. Adoption of this statement does not
impact eFax.com's consolidated financial position, results of operations or
cash flows. It is eFax.com's opinion that its business is a single reportable
segment, which addresses the communication and handling of electronic and paper
documents. Organizational structure and internal management reporting are not
segmented, nor are there specific segment profitability responsibilities within
management.
7
<PAGE> 8
EFAX.COM, INC. (FORMERLY JETFAX, INC.) AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
6. Effect Of Changes In Accounting Principles
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
defines derivatives, requires that all derivatives be carried at fair value,
and provides for hedging accounting when certain conditions are met. The
Company is required to adopt this statement in the first quarter of fiscal year
2001, with early adoption permitted. On a forward-looking basis, although
eFax.com has not fully assessed the implications of this new statement,
eFax.com does not believe adoption of this statement will have a material
impact on eFax.com's financial position or results of operations.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The statements contained in this Report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 (the ''Securities Act'') and Section 21E of the
Securities Exchange Act of 1934 (the "Exchange Act"), including statements
regarding eFax.com's expectations, hopes, intentions or strategies regarding
the future. When used herein, the words ''may,'' ''will,'' ''expect,''
''anticipate,'' ''continue,'' ''estimate,'' ''project,'' ''intend'' and similar
expressions are intended to identify forward-looking statements within the
meaning of the Securities Act and the Exchange Act. Forward-looking statements
include: statements regarding events, conditions and financial trends that may
affect eFax.com's future plans of operations, business strategy, results of
operations and financial position. All forward-looking statements included in
this document are based on information available to eFax.com on the date
hereof, and eFax.com assumes no obligation to update any such forward-looking
statements. Investors are cautioned that any forward-looking statements are not
guarantees of future performance and are subject to risks and uncertainties and
that actual results may differ materially from those included within the
forward-looking statements as a result of various factors. These forward-
looking statements are made in reliance upon the safe harbor provision of The
Private Securities Litigation Reform Act of 1995. Factors that could cause or
contribute to such differences include, but are not limited to, those described
below, under the heading "Factors That May Affect Operating Results" and
elsewhere in this Report on Form 10-Q.
Pursuant to a Certificate of Ownership and Merger, which provided for the
merger of JetFax, Inc. with eFax.com, Inc., a Delaware corporation and wholly
owned subsidiary of JetFax, Inc., filed with the Delaware Department of
Corporations and declared effective on February 8, 1999, the corporate name of
JetFax, Inc., a Delaware Corporation has been changed to "eFax.com, Inc." All
filings and reports made after February 8, 1999 bear the name "eFax.com, Inc."
eFax.com, Inc. is a leading developer and provider of integrated embedded
system technology, branded products and desktop software solutions for the
multifunction product ("MFP") market, which consists of electronic office
devices that combine print, fax, copy and scan capabilities in a single unit.
eFax.com was incorporated in August 1988 and since that time has engaged in the
development, manufacture and sale of its branded MFPs. eFax.com has also
entered into agreements with a number of manufacturers for the customization
and integration of eFax.com's embedded system technology and desktop software
in OEMs' MFPs. The desktop software includes JetSuite, which resulted from
eFax.com's July 1996 purchase of substantially all of the assets of the
Crandell Group, Inc., and PaperMaster, which was acquired in a December 1997
pooling of interests transaction with DocuMagix, Inc. Building from this strong
technology base, eFax.com is now emphasizing Internet applications for its
document transmission and software expertise.
Effective December 31, 1996, the Company changed its fiscal year end from
March 31 to a 52-53 week reporting year ending on the first Saturday on or
following December 31. The 13-week periods from April 4, 1999 to July 3, 1999
and from April 5, 1998 to July 4, 1998 are referred to herein as the quarters
ended June 30, 1999 and June 30, 1999, respectively. The 26-week periods from
January 3, 1999 to July 3, 1999 and from January 4, 1998 to July 4, 1998 are
referred to herein as the six months ended June 30, 1999 and June 30, 1998,
respectively.
eFax.com's revenues are derived from three sources: (i) product revenues
consisting of sales of JetFax branded MFPs, consumables and upgrades; (ii)
software and technology license fees related to both its embedded system
technology for MFPs and its desktop software; and (iii) development fees for
the customization and integration of eFax.com's embedded system technology and
desktop software in OEM products. In addition, during the quarter ended June
30, 1999, the Company introduced certain of its premium eFax services. Revenue
from such services was not material to the quarter and has been included with
licenses and services revenues in the financial statements. Historically,
product revenues have accounted for the majority of eFax.com's total revenues.
For the three months ended June 30, 1999, product revenues, licenses and
services revenues, and development fees as a percentage of total revenues, were
79%, 17%, and 4%, respectively, as compared to 79%, 14%, and 7% for the
comparable period in the prior year. For the six months ended June 30, 1999,
product revenues, software and technology fees, and development fees as a
percentage of total revenues, were 79%, 16%, and 5%, respectively, as compared
to 79%, 16%, and 6% for the comparable period in the prior year.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
eFax.com in the past has experienced, and in the future may experience,
significant fluctuations in quarterly operating results that have been or may
be caused by many factors including: the timing of introductions of new
products or product enhancements; initiation, expansion, reduction or
termination of arrangements between eFax.com and significant OEM customers or
dealers and distributors; the size and timing of and fluctuations in end user
demand; currency fluctuations; and general economic conditions. eFax.com
expects that its operating results will continue to fluctuate significantly as
a result of these and other factors discussed under the heading "Factors That
May Affect Operating Results".
Results of Operations
The following table sets forth, as a percentage of total revenues, certain
items in eFax.com's statements of operations for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <S> <S> <S> <S>
Revenues:
Product 79.0% 78.8% 79.4% 78.5%
Licenses and services 17.0 13.9 15.8 15.7
Development fees 4.0 7.3 4.8 5.8
------ ------ ------ ------
Total revenues 100.0 100.0 100.0 100.0
------ ------ ------ ------
Costs and expenses:
Cost of product revenues 54.4 49.8 55.0 52.7
Cost of software and licensing
revenue, services 5.5 1.9 4.2 2.9
Research and development 25.1 17.3 23.0 18.1
Selling and marketing 75.8 21.8 48.8 25.4
General and administrative 38.3 8.4 22.7 9.1
------ ------ ------ ------
Total costs and expenses 199.1 99.2 153.7 108.2
------ ------ ------ ------
Income (loss) from operations (99.1) 0.8 (53.7) (8.2)
Other income, net 0.6 1.1 0.6 0.9
------ ------ ------ ------
Income (loss) before income taxes (98.5) 1.9 (53.1) (7.3)
Provision for income taxes 0.4 0.4 0.3 0.3
------ ------ ------ ------
Net income (loss) (98.9) 1.5 (53.4) (7.6)
Series A Convertible Preferred
stock dividends (2.7) - (1.2) -
------ ------ ------ ------
Net income (loss) applicable to
common stockholders (101.6)% 1.5% (54.6)% (7.6)%
====== ====== ====== ======
</TABLE>
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Three and Six Months Ended June 30, 1999 Compared to Three and Six Months Ended
June 30, 1998
Revenues. Total revenues decreased 19% to $6.3 million from $7.7 million
for the three months ended June 30, 1999 and June 30, 1998, respectively. For
the six-month periods ended June 30, 1999 and June 30, 1998, respectively,
revenues declined 9% to $14.1 million from $15.4 million.
Overall product revenues decreased 18% to $5.0 million from $6.1 million
for the three months ended June 30, 1999 and June 30, 1998, respectively, and
dropped 20% from the preceding three months ended March 31, 1999. Revenue from
shipments of MFPs declined 30% from the preceding three months, as the Series
M900 product approached end of model life. Next generation platforms are
expected in the third quarter. While OEM sales generated a modest increase over
the preceding quarter, both the level of OEM business and general market
pressures contributed to continuing erosion in average selling prices. JetFax
branded products will be discontinued after the third quarter of 1999 in order
to focus the hardware business exclusively on OEM channels. As a result,
hardware product revenues are expected to decline for the remainder of the year
as this move to a new business model is implemented. Consumable revenue
increased 41% in the second quarter versus the year ago period, but rose only
slightly from the preceding quarter. For the six months ended June 30, 1999
and June 30, 1998, overall product revenues declined 8% to $11.2 million from
$12.1 million, a reflection of the factors related to the Series M900.
Licensing and services revenues were flat for the three months ended June
30, 1999 as compared to the year ago three months ended June 30, 1998. An
anticipated decline in per unit royalties for the Hewlett-Packard SureStore CD-
Writer was offset by revenues for PaperMaster in the current period, as
software revenues for the second quarter of 1998 included a reserve established
for the withdrawal of PaperMaster products from the retail distribution
channel. Revenue recognized from the eFax(c) Service was nominal in the
quarter as premium services were launched late in June. Revenue from such
services was not material to the quarter and has been included with licenses
and services revenues in the financial statements. For the six-month period,
licensing fees and other services declined 8% to $2.2 million from $2.4 million
for the comparable year ago period, the result of the aforementioned
anticipated decline.
Development fees dropped 55% to $253,000 from $568,000 for the three
months ended June 30, 1999 and June 30, 1998, respectively, as current projects
neared completion. For the six-month period, development revenues declined 25%
to $679,000 from $900,000 for the prior year period, reflecting the completion
of current projects and conversion of development fees to per unit royalties.
Cost of Product Revenues. Cost of product revenues decreased 11% to
$3.4 million from $3.8 million for the three months ended June 30, 1999 and
June 30, 1998, respectively, and decreased 5% to $7.7 million from $8.1 million
for the six months ended June 30, 1999 and June 30, 1998, respectively.
Product gross margin was 31%, down from 37% for the year ago period. This
decrease was attributable to volume and average selling price declines and the
absence of favorable foreign exchange rates experienced on inventory purchases
in the second quarter of 1998. For the six-month periods ended June 30, 1999
and June 30, 1998, margins were 31% and 33%, respectively.
Print engines are purchased for the Series M900 product line in Yen from
OkiData Corporation. For the six months ended June 30, 1999 the average
exchange rate for purchases weakened to 114 from 132 Yen to the dollar for the
same year ago period. As a result of this rate change, cost of goods sold was
increased by $215,000, a major component of the margin decline.
Cost of Licensing and Services. Cost of software, licensing and other
services rose 132% to $344,000 from $148,000 for the three months ended June
30, 1999 and June 30, 1998, respectively, and increased 30% to $583,000 from
$449,000 for the six months ended June 30, 1999 and June 30, 1998,
respectively. Direct costs for the eFax( Service represented the major portion
of the increase.
Research and Development. Research and development expenses rose 18% to
$1.6 million from $1.3 million for the three months ended June 30, 1999 and
June 30, 1998, respectively, driven by higher personnel costs related to
headcount growth and escalation in engineering salaries, as well as an increase
in external engineering costs. Average headcount for the current quarter rose
7% over the year ago period. Research and development expenses grew 16% to
$3.2 million from $2.8 million for the six months ended June 30, 1999 and June
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
30, 1998, respectively. Increased costs for the six month period included
software development charges in support of the new eFax( Service as well as the
impact of headcount growth.
Selling and Marketing. Selling and marketing expenses climbed 184% to
$4.8 million from $1.7 million for the three months ended June 30, 1999 and
June 30, 1998, respectively. Increased promotional activity in support of the
new eFax( Service accounted for effectively all of the increase, as reductions
in external marketing efforts related to the hardware business were offset by
charges incurred for options granted to external consultants. Selling and
marketing expenses rose 75% to $6.9 million from $3.9 million for the three
months ended June 30, 1999 and June 30, 1998, respectively, the result of these
same activities.
General and Administrative. General and administrative expenses rose
271% to $2.4 million from $648,000 for the three months ended June 30, 1999 and
June 30, 1998, respectively. Of the increase, $1.4 million was associated with
stock-based severance charges related to changes in management undertaken in
the quarter. Amortization of trademarks and, to a lesser degree, compensation
expenses, and expenses related to external reporting for public companies
accounted for the bulk of the remainder. Excluding all severance charges,
general and administrative costs totaled $923,000, up 42% from the comparable
year ago period. General and administrative expenses rose 128% to $3.2 million
from $1.4 million for the three months ended June 30, 1999 and June 30, 1998,
respectively, driven primarily by expenses for the addition to and subsequent
change in executive management.
Interest and Other Income (Expense). Interest and other income, net,
decreased to $41,000 from $82,000 for the three months ended June 30, 1999 and
June 30, 1998, respectively. Other expense related to disposal of fixed assets
and foreign currency fluctuations accounted for the drop. For the six month
period, interest and other income, net, decreased to $79,000 from $136,000, the
result of the same factors.
Provision for Income Tax. Due to eFax.com's net losses, there were no
provisions for federal or state income taxes for three months ended June 30,
1999 and June 30, 1998, respectively. Income tax provisions of $24,000 and
$32,000, respectively, relate primarily to foreign withholding taxes on certain
royalty fees, but also include minimum state and franchise taxes.
Net Income (Loss). The net loss applicable to common shareholders for
the three months ended June 30, 1999 was $6.4 million or $0.51 per share
compared to net income for the three months ended June 30, 1998 of $114,000 or
$0.01 per share. The net loss for the six months ended June 30, 1999 was $7.7
million or $0.63 per share compared to $1.1 million or $0.10 per share for the
six months ended June 30, 1998. Significant drivers to the current year loss
include: 1) heavy spending on external promotions for the new eFax( Service, 2)
a shift in the hardware business model from branded products to OEM channels,
and 3) costs associated with changes in management. Without the one time, non-
cash charge of $1.5 million associated with changes in management, net loss for
the current quarter would have been $4.9 million or $0.39 per share.
Liquidity and Capital Resources
eFax.com has financed its operations to date principally through private
placements of debt and equity securities, proceeds from borrowings under a bank
line of credit, debt associated with the Crandell Acquisition, and sales of
common stock. The total amount of equity raised through June 30, 1999 was $62
million through a series of private financing rounds at both eFax.com and
DocuMagix, and sales of common and preferred stock.
At June 30,1999, eFax.com had $1.5 million available under its bank credit
facility under which there were no borrowings at that date. This lending
facility is collateralized by substantially all of eFax.com's assets. The
maximum amount available under the line of credit is the lesser of $1.5 million
or 80% of eFax.com's eligible outstanding domestic accounts receivable. The
revolving line of credit was renegotiated on September 18, 1998, and terminates
on August 23, 1999. Negotiations are currently underway to renew the line of
credit and are expected to be concluded in September 1999. The line of credit
contains certain covenants which include the requirements that eFax.com
maintain tangible net worth (as defined) of $5.0 million, quarterly net income,
a quick ratio of at least 1.0 to 1.0, a maximum debt to net worth ratio (as
defined) of 1.5 to 1.0, and certain minimum liquidity and debt service
coverage. In addition, the agreement prohibits the payment of cash dividends.
eFax.com was in compliance with all such covenants at June 30, 1999, except the
quarterly net income covenant for which eFax.com received a waiver dated August
16, 1999.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
On May 10, 1999, eFax.com entered into a purchase agreement with an
investor for the private placement of $15.0 million of Series A Convertible
Preferred Stock, convertible into Common Stock at $21.1375 per share. The
conversion price is subject to an adjustment after one year to the greater of
the then current market price of the Common Stock or 60% of the initial
conversion price if the current market price is less than the initial
conversion price. The agreement also includes 300,000 warrants exercisable at a
10% premium to the Series A Convertible Preferred Stock conversion price. The
Series A Convertible Preferred Stock includes an 8% dividend payable in cash or
common stock at the option of eFax.com. The closing occurred on May 13, 1999.
eFax.com has agreed to file a registration statement for the resale of the
shares of Common Stock acquired on conversion of the Convertible Preferred
Stock and upon exercise of the warrants.
Cash, cash equivalents and short-term investments rose to $15.7 million at
June 30, 1999 from $4.1 million at December 31, 1998, a result of proceeds from
the private placement. Inventories of $2.7 million at June 30, 1999 decreased
from $4.5 million at December 31, 1998 due to improved inventory management and
end-of-product life cycle for the Series M900. Accounts receivable also
declined to $3.6 million at June 30, 1999 from $4.4 million, the result of the
lowered sales volume and continuing improved collection on aged accounts.
Accounts payable rose to $1.8 million at June 30, 1999 from $777,000 at
December 31, 1998, driven primarily by commitments for external promotions in
support of the eFax( Service.
Investing activities for the six months ended June 30, 1999 consumed $1.8
million of cash: $921,000 for property purchases, $733,000 for investment in
other assets and $188,000 for net purchases of short-term investments.
Financing activities for the six months ended June 30, 1999 provided $15.2
million of cash: $14.2 million in proceeds from the sale of Series A
Convertible Preferred Stock, and $1.0 million in proceeds from the sale of
Common Stock.
eFax.com currently believes that its cash and equivalents, together with
proceeds from the recent private placement of convertible preferred stock,
available borrowings under its line of credit and the expected renewal, and
funds from current and anticipated operations, will be sufficient to meet
eFax.com's working capital and capital expenditure requirements for the next
twelve months. If eFax.com acquires one or more businesses or products,
eFax.com's capital requirements could increase substantially.
Factors That May Affect Operating Results
eFax.com operates in a dynamic and rapidly changing environment that
involves numerous risks and uncertainties. The following section lists some,
but not all, of those risks and uncertainties which may have a material adverse
effect on eFax.com's business, financial condition or results of operations.
This section should be read in conjunction with the unaudited Condensed
Consolidated Financial Statements and Notes thereto included in Part I - Item 1
of this Quarterly Report on Form 10-Q and the audited Consolidated Financial
Statements and Notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations for the year ended December 31,
1998, contained in eFax.com's Annual Report on Form 10-K for the year ended
December 31, 1998.
This Quarterly Report on Form 10-Q and the documents incorporated by
reference into this Quarterly Report on Form 10-Q may contain projections of
results of operations and financial condition or other "forward-looking
statements" which involve risks and uncertainties. The words "anticipate,"
"believe," "estimate," and "expect" and similar expressions when used in this
prospectus in relation to eFax.com or its management are intended to identify
such forward-looking statements. eFax.com's actual results, performance, or
achievements could differ materially from these projections or forward-looking
statements as a result of many factors, including those discussed in this
"Factors That May Affect Operating Results" section of the Quarterly Report on
Form 10-Q.
WE HAVE EXPERIENCED FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
eFax.com in the past has experienced, and in the future may experience,
significant fluctuations in its quarterly operating results. These fluctuations
have been or may be caused by many factors, including:
o acceptance and timing of new products combining fax technology with
the Internet;
o the size and timing of development or software licensing agreements;
o the timing of new introductions or phase-out of eFax.com's brand
products;
o fluctuations in consumer demand for eFax.com's brand products and for
products which are made by eFax.com's manufacturing customers
incorporating eFax.com's products; and
o seasonal trends, competition and pricing.
eFax.com expects that its operating results will continue to fluctuate as
a result of these and other factors.
eFax.com has often received a substantial portion of its quarterly
revenues during the last month of a quarter. These revenues frequently
concentrate in the last weeks or days of a quarter. One reason for this is
that eFax.com's brand products are primarily sold through dealers, and these
dealers often place orders for products at or near the end of a quarter. The
booking and shipping of one or more key orders at the end of a quarter may be
delayed until the beginning of the next quarter or it may be cancelled. As a
result, we are not able to predict future revenues with any significant degree
of accuracy. For these and other reasons, we believe that period-to-period
comparisons of eFax.com's results of operations are not necessarily meaningful.
We believe that you should not rely upon these comparisons as indicators of
future performance. It is likely that in future quarters, eFax.com's operating
results will sometimes be below the expectations of public market analysts and
investors. This could have a material adverse effect on the price of eFax.com's
common stock.
We believe that the accuracy of eFax.com's report of its quarterly license
revenues received from its manufacturing customers has been, and will continue
to be, dependent on the timing and accuracy of product sales reports which we
receive from these manufacturing customers. Our manufacturing customers only
provide these reports on a quarterly basis and this quarterly basis may not
coincide with eFax.com's quarter. Our manufacturing customers may also delay or
revise these reports. Therefore, we are required to estimate all of the
recurring license revenues from manufacturing customers for each quarter. As a
result, we will record an estimate of such revenues prior to public
announcement of eFax.com's quarterly results. In the event the product sales
reports we receive from our manufacturing customers are delayed or subsequently
revised, we may be required to restate eFax.com's recognized revenues or adjust
revenues for subsequent periods. This restatement or adjustment of revenues
could have a material adverse effect on eFax.com's business, financial
condition and results of operations and, as a result, the price of eFax.com's
common stock.
THE PRICE OF EFAX.COM STOCK MAY BE VOLATILE DUE TO MANY FACTORS, INCLUDING OUR
STATUS AS AN INTERNET-RELATED COMPANY, FLUCTUATIONS IN OUR QUARTERLY OPERATING
RESULTS, THE RAPID PACE OF TECHNOLOGICAL CHANGE, THE UNCERTAINTY OF OUR
BUSINESS TRANSACTIONS AND THE CONTENTS OF NEWS AND SECURITY ANALYST REPORTS.
The trading price of eFax.com's common stock is likely to be highly
volatile. The price could be subject to wide fluctuations in response to
factors such as:
o actual or anticipated variations in eFax.com's quarterly operating
results;
o announcements of technological innovations or new services by eFax.com
or its competitors;
o announcements of significant acquisitions or strategic partnerships by
eFax.com or its competitors;
o changes in financial estimates and recommendations by securities
analysts; and
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
o news reports relating to trends in eFax.com's markets.
In addition, the stock market in general, and the market prices for
Internet- related companies in particular, have experienced extreme volatility
that is often unrelated to the operating performance of these companies. These
broad market and industry fluctuations may adversely affect the price of
eFax.com's common stock, regardless of eFax.com's actual operating performance.
ALTHOUGH WE TAKE STEPS TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, WE MAY
BECOME SUBJECT TO TIME-CONSUMING AND COSTLY LITIGATION WHERE WE ARE ACCUSED OF
INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHER PARTIES. IN FACT, WE WERE
RECENTLY SUED FOR INFRINGING A TRADEMARK OF E-FAX COMMUNICATIONS.
eFax.com's success is heavily dependent upon its intellectual property. To
protect its proprietary rights, eFax.com relies on a combination of copyright,
trade secret and trademark laws, patents, nondisclosure agreements and other
contractual restrictions. As part of its confidentiality procedures, eFax.com
generally enters into nondisclosure agreements with its employees, consultants,
manufacturing customers and strategic partners. eFax.com also limits access to
and distribution of its designs, software and other proprietary information.
Despite these efforts, eFax.com may be unable to effectively protect its
proprietary rights. In addition, enforcement of eFax.com's proprietary rights
may be expensive. We cannot assure you that eFax.com's means of protecting its
proprietary rights will be adequate. Nor can we assure you that eFax.com's
competitors will not independently develop similar technology.
As the number of patents, copyrights, trademarks and other intellectual
property rights in eFax.com's industry increases, eFax.com's intellectual
property may increasingly become the subject of infringement claims. In the
past, eFax.com has received communications from other parties claiming that
eFax.com's trademarks or products infringe the proprietary rights of these
parties. eFax.com has also received communications asking for
"indemnification" against such infringement. "Indemnification" means that
eFax.com would promise to repay or reimburse the other party for loss or
damages suffered by that other party as a result of infringement. eFax.com's
manufacturing customers generally require eFax.com to reimburse or "indemnify"
the manufacturing customers for claims of infringement from third parties. We
can give you no assurance that third parties will not make infringement claims
against eFax.com or its manufacturing customers in the future. Any of these
claims, even if they have no legal merit, could be time consuming (especially
for key management and technical personnel), result in costly litigation or
cause delays in revenues. In addition, these claims could require eFax.com to
enter into royalty or licensing agreements on terms unacceptable to eFax.com.
If eFax.com fails to develop a substitute technology, or to license a
substitute technology on acceptable terms, this could have a material adverse
effect on eFax.com's business, financial condition and results of operations.
As an example, eFax.com was recently sued by E-Fax Communications which claimed
that the use of the name "eFax.com" infringed this party's trademark rights. In
settlement of the matter, eFax.com has agreed to pay E-Fax Communications a
combination of cash and Common Stock in an amount not exceeding $2.5 million
based on the average share price of the Common Stock just prior to the stock
registration becoming effective.
OUR REVENUES MAY NOT GROW AS ANTICIPATED BECAUSE THE MARKET FOR OUR INTERNET-
RELATED SERVICES IS NEW, RAPIDLY CHANGING AND UNCERTAIN.
The market for Internet-related document communication and handling
services is very new and is evolving rapidly. eFax.com expects to rely
significantly in the future on revenues generated through its "eFax" service, a
free fax-to-e-mail service, and products which support this service. We cannot
assure you, however, that the base of customers subscribing to our eFax(c)
service will continue to expand rapidly. Nor can we assure you that users will
be willing to pay fees for premium services or that the subscriber base will
grow large enough to be capable of generating advertising revenue. As a result,
our revenues may not grow as anticipated, which would have a negative effect on
our business.
WE HAVE CHANGED THE FOCUS OF OUR BUSINESS TO INTERNET-RELATED SERVICES,
PRODUCTS AND TECHNOLOGIES AND GROWTH OF BUSINESS IN THIS NEW FOCUS AREA IS
UNCERTAIN.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Historically, eFax.com has focused primarily on the development,
manufacture and sale of its brand multifunction products. eFax.com currently
derives a substantial portion of its revenues from the sale of these brand
multifunction products. However, eFax.com expects that its future revenue
growth will be dependent, in part, on expansion of its recently introduced
Internet-based document services, such as its fax-to-e-mail service, and on
further licensing of eFax.com's hardware and software technologies and software
products. However, we cannot assure you that eFax.com will realize growth in
revenues from such sales. If such growth in revenues does not occur and if
revenues from the sale of eFax.com's brand multifunction products does not to
continue at past growth rates, it could have a material adverse effect on
eFax.com's business, financial condition and results of operations.
WE DEPEND ON THE CONTINUED GROWTH OF INTERNET COMMERCE. WE FACE THE RISKS THAT
INTERNET COMMERCE MAY NOT GROW AS RAPIDLY AS ANTICIPATED AND THAT THE INTERNET
MAY EXPERIENCE TECHNICAL PROBLEMS DUE TO INSUFFICIENT INFRASTRUCTURE AND
INADEQUATE TECHNOLOGICAL IMPROVEMENTS.
eFax.com intends to derive a significant portion of its revenues from its
fax-to-e-mail service, called "eFax", and related products. Rapid growth in the
use of and interest in the Internet and online Internet services is a recent
phenomenon. As a result, a sufficiently broad base of consumers may not adopt
and continue to use the Internet and other online services as a way of
purchasing and conducting business. Internet web-based advertising and the
sales of premium Internet services are relatively new. It is difficult to
predict the extent that these will grow, or if they will grow at all. In
addition, the Internet may not prove to be a viable commercial marketplace for
reasons such as potentially inadequate development of:
o Internet network infrastructure;
o technologies which enable use of the Internet; and
o performance improvements to support increased levels of Internet
activity.
If any of the following take place, it could have a material adverse
effect on eFax.com's business, financial condition and results of operation:
o if the use of the Internet and other online services does not continue
to increase or increases more slowly than expected;
o if the infrastructure for the Internet and online services proves to
be inadequate to effectively support expansion; or
o if the Internet does not become a viable commercial marketplace.
OUR MANUFACTURING CUSTOMERS, WHICH PROVIDE A SIGNIFICANT PORTION OF OUR
REVENUES, MAY NOT CONTINUE TO DEVELOP, MARKET OR SELL PRODUCTS INCORPORATING
EFAX.COM'S TECHNOLOGY.
eFax.com has derived a significant portion of its revenues from licensing
of its software and hardware and software technologies to other parties and
from providing development services to manufacturing customers. eFax.com
currently has manufacturing relationships with Hewlett-Packard Company, Oki
Data Corporation, and Konica Business Systems. eFax.com anticipates that it
will derive a significant portion of its revenues in the future from its
manufacturing customers and that eFax.com's revenues will be dependent upon,
among other things, the ability and willingness of its manufacturing customers
to develop and promote multifunction products that incorporate eFax.com's
technology. The ability and willingness of these manufacturing customers to do
this is based upon a number of factors, including eFax.com's ability to
complete timely development of designs for them. We cannot give you any
assurances regarding the ability or willingness of eFax.com's manufacturing
customers to continue developing, marketing and selling products incorporating
eFax.com's technology. The loss of any of eFax.com's significant manufacturing
customers could have a material adverse effect on eFax.com's business,
financial condition and results of operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
OUR DEALERS AND DISTRIBUTORS MAY REDUCE OR DELAY SALES OR STOP MARKETING
EFAX.COM'S PRODUCTS WITH A RESULTING LOSS OF REVENUES.
eFax.com has derived a substantial portion of its revenues from sales of
its JetFax brand multifunction products through dealers and distributors.
eFax.com expects that sales of these products through its dealers and
distributors will continue to account for a substantial portion of eFax.com's
revenues for the foreseeable future. eFax.com currently maintains distribution
relationships with dealers associated with IKON Office Solutions, a national
group of office equipment dealers, and A. Messerli AG, one of eFax.com's office
equipment dealers located in Switzerland. Each of eFax.com's dealers and
distributors can stop marketing eFax.com's products with only limited notice to
eFax.com and with little or no penalty. The loss of one or more of eFax.com's
major dealers or distributors could have a material adverse effect on
eFax.com's business, financial condition and results of operations. eFax.com's
dealers and distributors also offer competing products manufactured by third
parties. We can give no assurance that eFax.com's dealers and distributors will
give priority to the marketing of eFax.com's products as compared to the
marketing of our competitors' products. Any reduction or delay in sales of
eFax.com's products by our dealers and distributors could have a material
adverse effect on eFax.com's business, financial condition and results of
operations.
WE HAVE A HISTORY OF OPERATING LOSSES AND AN ACCUMULATED DEFICIT.
eFax.com has had annual net losses since the company was formed.
eFax.com's historical losses and certain preferred stock dividends have
resulted in an accumulated deficit of approximately $36.9 million as of June
30, 1999. We can give you no assurance that eFax.com will achieve profitability
on a quarterly or annual basis in the future.
WE MAY FAIL TO ADAPT TO OUR MARKET'S RAPIDLY CHANGING TECHNOLOGY AND EVOLVING
INDUSTRY STANDARDS AND WE MAY LOSE COMPETITIVENESS AND REVENUES AS A RESULT.
The market for eFax.com's products and services is characterized by
rapidly changing technology, evolving industry standards and needs, and
frequent new product introductions. As the market for Internet-based document
communication and handling services grows, this market will begin to exert more
pressure on companies to develop advanced features at more economical pricing.
The multifunction product market already expects the continued development and
release of new products with better performance and improved features at
competitive prices. As product development increases in complexity and the
expected time to bring a product to market continues to decrease, the risk and
difficulty in meeting these development schedules increases and the costs to
eFax.com and its manufacturing customers also increases. In addition, eFax.com,
its manufacturing customers and their competitors may, from time to time,
announce new products, capabilities or technologies that may replace or shorten
the life cycles of eFax.com's brand products and software and the life cycles
of manufacturing customers' products incorporating eFax.com's technology.
eFax.com's success will depend on, among other things:
o market acceptance of eFax.com's product offerings; and
o the ability of eFax.com and its manufacturing customers to respond to
industry changes and market demands.
Any failure of eFax.com to anticipate or respond adequately to the rapidly
changing technology and evolving industry standards and needs could result in a
loss of our competitiveness or revenues. Any significant delay in our
development or introduction of new and enhanced products and services could
also result in a loss of competitiveness or revenues. Such a loss of
competitiveness or revenues could have a material adverse effect on eFax.com's
business, financial condition and results of operations.
WE FACE A HIGH LEVEL OF COMPETITION IN OUR INTERNET-RELATED INDUSTRY.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The market for Internet-related document communication and handling
services, such as eFax.com's fax-to-e-mail service, is a newly emerging market
and competitors are just beginning to appear. eFax.com anticipates that it
will need to:
o provide good service and grow its business rapidly to meet demand;
o create name recognition for eFax.com in advance of competitors;
o build its subscriber base prior to any significant entry by the
competition; and
o continue to expand and improve on its eFax fax-to-e-mail service
offerings.
eFax.com's technology, development services and software primarily compete
with solutions developed internally by manufacturing customers. Virtually all
of eFax.com's manufacturing customers have significant investments in their
existing solutions. These manufacturing customers have the substantial
resources necessary to develop competing multifunction technologies and
software that may be implemented into their own products.
eFax.com also competes with technologies, software and development
services provided in the multifunction product market by other systems and
software suppliers to manufacturing customers.
With respect to hardware and software technologies for multifunction
products, eFax.com competes with Peerless Systems Corporation, Personal
Computer Products, Inc. and Xionics Document Technologies, Inc., among others.
With respect to desktop software, eFax.com competes with Caere Corporation,
Simplify Development Corporation, Smith Micro Software, Inc., Visioneer Inc.,
Wordcraft International and Xerox, among others. In the newly evolving market
for fax- to-e-mail services, competitors include JFAX.com, Inc., an established
business, and CallWave, a start-up that is just introducing its product.
The market for multifunction products and related technology and software
is highly competitive. This market is characterized by continuous pressure to
improve performance, to introduce new features and to accelerate the release of
new products. eFax.com's brand products compete primarily with the dominant
vendors in the fax market, all of whom have substantially greater resources
than eFax.com. These dominant vendors include Canon Inc., Panasonic, a
division of Matsushita Electrical Industrial Co., Ltd., Pitney Bowes Inc.,
Ricoh Co. Ltd., Sharp Electronics Corporation and Xerox, among others. eFax.com
also competes on the basis of vendor name and recognition, technology and
software expertise, product functionality, development time and price.
eFax.com anticipates increasing competition for its multifunction
products, technologies, software under development and Internet services. Most
of eFax.com's existing competitors, many of its potential competitors and all
of eFax.com's manufacturing customers have substantially greater financial,
technical, marketing and sales resources than eFax.com. In the event that
price competition increases, competitive pressures could cause eFax.com to:
o reduce the cost of its eFax Service offerings;
o reduce the price of its brand products;
o reduce the amount of royalties received on new licenses; and
o reduce the fees for its development services in order to maintain
existing business and generate additional product sales and license
and development revenues.
In turn, these reductions could reduce eFax.com's profit margins and
result in losses and a decrease in market share, which would have a material
adverse effect on eFax.com's business, financial condition and results of
operations.
WE ARE DEPENDENT ON KEY PERSONNEL AND COULD BE AFFECTED BY THE LOSS OF THEIR
SERVICES.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
eFax.com is largely dependent upon the skills and efforts of its senior
management, particularly Edward R. Prince, III, known as ''Rudy", its Chief
Executive Officer, and Lon Radin, its Vice President of Engineering, as well as
other officers and key employees, some of whom only recently have joined
eFax.com. eFax.com maintains key person life insurance policies on Rudy Prince
and Lon Radin. None of eFax.com's officers or key employees have an employment
agreement with eFax.com. eFax.com believes that its future success will depend
in large part upon its ability to attract and retain highly skilled
engineering, managerial, sales, marketing and operations personnel, many of
whom are in great demand. Competition for such personnel, especially
engineering personnel, has recently increased significantly. The loss of key
personnel or the inability to hire or retain qualified personnel could have a
material adverse effect on eFax.com's business, financial condition and results
of operations.
OUR RAPID GROWTH PLACES A STRAIN ON OUR OPERATIONS AND FINANCIAL RESOURCES AND
WE MAY FAIL TO MANAGE OUR GROWTH EFFECTIVELY. IN ADDITION, WE MAY FACE RISKS
ASSOCIATED WITH ANY POTENTIAL ACQUISITION OF OTHER COMPANIES WHICH WE MAY
CHOOSE TO UNDERTAKE.
eFax.com has grown rapidly in recent years. A continuing period of rapid
growth could place a significant strain on eFax.com's management, operations
and other resources. eFax.com's ability to manage its growth will require
eFax.com to continue to invest in its operational, financial and management
information systems, procedures and controls, and to attract, retain, motivate
and effectively manage its employees. We can give no assurance that eFax.com
will be able to manage its growth effectively. Failure to manage growth
effectively would have a material adverse effect on eFax.com's business,
financial condition and results of operations. eFax.com may, from time to time,
pursue the acquisition of other companies, assets or product lines that
complement or expand its existing business. Acquisitions involve a number of
risks that could adversely affect eFax.com's operating results. These risks
include:
o the diversion of management's attention from day-to-day business;
o the difficulty of combining and assimilating the operations and
personnel of the acquired companies;
o charges to the company's earnings as a result of the purchase of
intangible assets; and
o the potential loss of key employees as a result of an acquisition.
eFax.com has no present commitments nor is it engaged in any discussions
or negotiations regarding possible acquisitions. However, should any
acquisition by eFax.com take place, we can give no assurance that this
acquisition will not materially and adversely affect eFax.com or that any such
acquisition will enhance eFax.com's business.
WE ARE DEPENDENT ON A LIMITED NUMBER OF SUPPLIERS AND MAY BE AFFECTED BY
CHANGES, DELAYS OR INTERRUPTIONS IN SUPPLY OF COMPONENTS OF OUR PRODUCTS FROM
THESE SUPPLIERS.
eFax.com relies on various suppliers of components for its products.
eFax.com generally buys components under purchase orders and does not have
long-term agreements with its suppliers. Alternate suppliers may be readily
available for some of these components. However, for other components, we do
not know how long it would take to find a replacement supplier and to receive
replacement components. If we need to find another supplier of those components
which we now purchase from a single source, we may not have sufficient
inventory to fill customer orders without interruption. Although we believe we
could develop other sources for these single source components, no alternative
source currently exists and the process of finding an alternate source could
take several months or longer. Therefore, any interruption in the supply of
these components could have a material adverse effect on eFax.com's business,
financial condition and results of operations.
eFax.com purchases many of the components used in its products from
suppliers located outside the United States. Foreign manufacturing facilities
are subject to the risk of changes in governmental policies, imposition of
tariffs and import restrictions and other factors beyond eFax.com's control. We
can give you no assurance that United States or foreign trading policies will
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<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
not restrict the availability of components or increase their cost. Any
significant increase in component prices or decrease in component availability
could have a material adverse effect on eFax.com's business, financial
condition and results of operations.
Certain components used in eFax.com's products are available only from one
source. eFax.com is dependent on Oki America, Inc., as the supplier of major
components, contained in eFax.com's Series M900, one of eFax.com's most
important products. Oki America is also a competitor of eFax.com. eFax.com is
also dependent on:
o American Microsystems, Inc. to provide customized integrated circuits
incorporating eFax.com's imaging and logic circuitry;
o Motorola, Inc. to provide microprocessors;
o Pixel Magic, Inc., a subsidiary of Oak Technology, Inc., to provide a
specialized imaging processor;
o Conexant Systems, Inc., to provide modem chips.
Given our dependence on single source suppliers, any of the following
events could have a material adverse effect on eFax.com's business, financial
condition and results of operations:
o if any of these companies were to limit or reduce the sale of such
components to eFax.com;
o if these suppliers were to experience financial difficulties or other
problems which prevented them from supplying eFax.com with necessary
components;
o any shortage or interruption in the supply of any of the components
used in eFax.com's products; or
o the inability of eFax.com to obtain these components from alternate
sources on acceptable terms.
WE GENERATE A SIGNIFICANT PORTION OF OUR REVENUES FROM OUR INTERNATIONAL
ACTIVITIES AND WE ARE SUBJECT TO MANY RISKS AS A RESULT OF THESE ACTIVITIES.
A significant portion of eFax.com's total revenues come from sales to
eFax.com's customers outside the United States. The international market for
eFax.com's brand products and products incorporating eFax.com's technology and
software is highly competitive. Risks inherent in eFax.com's international
business activities also include:
o currency fluctuations and restrictions;
o the burdens of complying with a wide variety of foreign laws and
regulations;
o longer accounts receivable cycles;
o the imposition of government controls;
o risks of localizing and internationalizing products to local
requirements in foreign countries;
o trade restrictions;
o tariffs and other trade barriers;
o restrictions on bringing earnings back into the United States; and
o potentially adverse tax consequences.
Any of these risks could have a material adverse effect on eFax.com's
business, financial condition and results of operations. Substantially all of
eFax.com's international sales are currently made in U.S. dollars. Therefore,
20
<PAGE> 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
increases in the value of the U.S. dollar relative to foreign currencies could
make eFax.com's products less competitive in foreign markets. Because of
eFax.com's international activities, it faces currency exposure and currency
exchange risks. For example, eFax.com purchases some of its key components
pursuant to purchase contracts which require payment in foreign currency which
results in currency exchange risks.
OUR ONLY MANUFACTURING FACILITY AND SEVERAL OF OUR SUPPLIERS ARE LOCATED IN ONE
GEOGRAPHIC AREA. A DISRUPTION OF OUR MANUFACTURING FACILITY AND OUR SUPPLIERS
IN THE SAME GEOGRAPHIC AREA WOULD HAVE A NEGATIVE EFFECT ON OUR BUSINESS.
eFax.com's manufacturing operations are located in its facility in
Northern California. In addition, eFax.com relies on several suppliers of
components for eFax.com's products and a number of companies which assemble
eFax.com products which are located in Northern California. eFax.com does not
currently operate multiple facilities in different geographic areas and does
not have alternative sources for many of its components or assembly processes.
As a result, a disruption of eFax.com's manufacturing operations, or the
operations of its suppliers, could cause eFax.com to cease or limit its
manufacturing operations. Consequently, this would have a material adverse
effect on eFax.com's business, financial condition and results of operations.
WE MAY BE ADVERSELY AFFECTED IF OUR COMPUTER SYSTEMS OR THOSE OF OUR
DISTRIBUTORS, SUPPLIERS AND CUSTOMERS FAIL BECAUSE OF YEAR 2000 PROBLEMS.
Readiness for the year 2000 refers to the issue surrounding computer
programs that use two digits rather than four to define a given year. These
programs might read a date using "00" as the year 1900 rather than the year
2000, which could cause a system failure or a miscalculation.
We do not believe eFax.com's manufacturing facilities are vulnerable in
any significant way to year 2000 system failures involving non-information
technology. In August 1998, eFax.com renovated its existing telephone system at
a cost of approximately $40,000, which made the phone system ready for the year
2000. eFax.com has invested approximately $367,000 and will continue to make
certain investments, estimated not to exceed $50,000, in its software systems
and applications to ensure eFax.com's information systems are ready for the
year 2000. The necessary funds to support these renovations have come from
eFax.com's operating budget and eFax.com does not anticipate that it will need
to allocate special future funding outside of historical levels for this item.
The financial impact of eFax.com's year 2000 readiness effort has not been and
is not anticipated to be material to eFax.com's financial position or results
of operations in any given year. For example, during 1997 and 1998, eFax.com
purchased and implemented new manufacturing and accounting information systems
with a total capitalized cost of $338,000. eFax.com has obtained written
assurances from the vendor, QAD Inc., that the systems are ready for the year
2000. However, eFax.com has not conducted internal testing of the systems'
readiness.
eFax.com believes that its current products are ready for the year 2000.
Certain of eFax.com's older products, which may not be year 2000 ready, are no
longer under warranty. eFax.com believes it has no obligation related to these
products. If eFax.com is mistaken in this assessment, eFax.com could incur
expenses in defending legal actions for breach of contract or other causes of
action. We can give you no assurance that these expenses will not be material
to eFax.com's financial position or results of operations.
As discussed above, eFax.com has recently implemented new information
systems and accordingly does not anticipate any internal year 2000 problems
from those information systems, databases or programs. However, year 2000
problems faced by major distributors, suppliers, customers and financial
service organizations with which we interact could adversely impact eFax.com.
We expect to complete our assessment of the potential impact of these
additional issues by August 31, 1999. We can give you no assurance that we will
be able to detect all potential failures of eFax.com's computer systems or the
computer systems of third parties. A significant failure of eFax.com's or a
third party's computer system could have a material adverse effect on
eFax.com's business, financial condition and results of operations. However, we
are unable at this time to assess what might be the extent of such effect.
eFax.com intends to complete a contingency plan by August 31, 1999, detailing
actions that would be taken in the event that such a failure occurs.
21
<PAGE> 22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No change has occurred since the filing by the Registrant on Form 10-K for
the year ended December 31, 1998. Reference is made to Part II, Item 7A,
Quantitative and Qualitative Disclosures About Market Risk, in the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1998.
22
<PAGE> 23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In April 1999, the Company and E-Fax Communications, Inc. signed a
settlement agreement in which E-Fax Communications, Inc. agreed to dismiss all
charges against eFax.com, transfer all rights to the mark "E-FAX" to eFax.com,
Inc., stop all use of the "E-FAX" trademark, and change its corporate name.
The agreement called for eFax.com, Inc. to pay E-Fax Communications, Inc. a
combination of cash and common stock in an amount not to exceed $2.5million.
ITEM 2. CHANGES IN SECURITIES
(a) Not applicable.
(b) On May 10, 1999, eFax.com entered into a purchase agreement with
an investor for the private placement of $15 million of Series A
Convertible Preferred Stock, convertible into Common Stock based
upon the five-day average stock price prior to closing which was
$21.1375. The conversion price is subject to an adjustment after
one year to the greater of the then current market price of the
Common Stock or 60% of the initial conversion price. The agreement
also includes 300,000 warrants exercisable at a 10% premium to the
Series A Convertible Preferred Stock conversion price or $23.25.
The Series A Convertible Preferred Stock includes an 8% dividend
payable in cash or common stock at the option of eFax.com. The
closing occurred on May 13, 1999. eFax.com has filed a
registration statement for the resale of the shares of Common
Stock acquired on conversion of the Convertible Preferred Stock
and upon exercise of the warrants. Holders of the preferred
shares shall have no voting rights, except as required by law,
including but not limited to the General Corporation Laws of the
State of Delaware. The Company cannot declare or pay any cash
dividend or distribution on the common stock without the prior
express written consent of the holders of not less than two-thirds
of the then outstanding preferred shares. In the event of a
liquidation of the Company, the holders of the Series A
Convertible Preferred Stock would be entitled to receive
distributions in preference to the holders of the Common Stock.
(c) During the second quarter ended June 30, 1999, eFax.com sold the
following unregistered securities:
In April 1999, the Company issued 45,506 shares of common stock to
E-Fax Communications, Inc. as part of a settlement agreement for
trademark rights entered into on April 9, 1999 between E- Fax
Communications, Inc. and eFax.com, Inc. In July 1999, the amount
of shares issued was increased to 127,592 per the terms of
the agreement that specifies that the number of shares be based on
the average share price just prior to a registration of the shares
for resale becoming effective. The average value of the shares
used in the computation was $15.675.
In May 1999, the Company issued 975 shares of convertible
preferred stock to Fisher Capital Ltd. and 525 shares of
convertible preferred stock to Wingate Capital Ltd. for $15
million in connection with a securities purchase agreement dated
May 7, 1999 among eFax.com, Fisher Capital and Wingate Capital.
The preferred shares are convertible into 461,266 and 248,374
shares of common stock for Fisher Capital and Wingate Capital,
respectively, based on a conversion price of $21.1375 per share.
In May 1999, the Company issued warrants to purchase 195,000
shares of common stock to Fisher Capital Ltd. and warrants to
purchase 105,000 shares of common stock to Wingate Capital Ltd. in
connection with a securities purchase agreement dated May 7, 1999
among eFax.com, Fisher Capital and Wingate Capital. The warrant
exercise price is $23.25. These warrants may be exercised
immediately.
In May 1999, the Company issued warrants to purchase 124,995
shares of common stock to Reedland Capital Partners for their
services in connection with the sale of Series A preferred stock
and warrants to Fisher Capital and Wingate Capital. The warrant
exercise price is $26.33. These warrants may be exercised
immediately.
In May 1999, the Company issued warrants to purchase 5,000 shares
of common stock to Global NAPS, Inc., in connection with the
completion and acceptance of project milestones. The warrant
exercise price is $19.06. These warrants may be exercised
immediately.
23
<PAGE> 24
The issuance and sale of all such securities was intended to be
exempt from registration and prospectus delivery requirements
under the Securities Act of 1933, as amended (the "Securities
Act"), by virtue of Section 4(2) thereof due to, among other
things, (i) the limited number and nature of persons to whom the
securities were issued, (ii) the distribution of disclosure
documents to the investors, (iii) the fact that such persons
represented and warranted to the Company, among other things, that
such persons were acquiring the securities for investment only and
not with a view to the resale or distribution thereof, and (iv)
the fact that a certificate representing the securities was issued
with a legend to the effect that such securities had not been
registered under the Securities Act or any state securities laws
and could not be sold or transferred in the absence of such
registration or an exemption therefrom.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders (the "Annual Meeting") was
held on May 13, 1998 at 2:00 p.m., local time, at the Stanford Park Hotel, 100
El Camino Real, Menlo Park, California. The Annual Meeting was held for the
purpose of (a) electing seven members of the Board of Directors to serve for
the ensuing year and until their successors are elected, (b) approving an
amendment to the Company's Certificate of Incorporation to change the name of
the Company to "eFax.com," (c) approving an increase in the aggregate number of
shares of Common Stock authorized for issuance under the Company's 1995 Stock
Plan, as amended, by 1,000,000 shares, (d) ratifying and approving the
appointment of Deloitte & Touche LLP as the Company's independent auditors for
the fiscal year ending December 31, 1999 and (e) transacting such other
business as may properly come before the Annual Meeting. The two matters below
were voted upon and approved:
Proposal No. 1 - Election of Directors:
The following persons were duly elected to the Board by the stockholders
for a one year term and until their successors are elected and qualified:
<TABLE>
<CAPTION>
NOMINATION VOTES FOR VOTES ABSTAINED
---------- --------- ---------------
<S> <S> <S>
Rudy Prince 10,774,850 39,822
Thomas B. Akin 10,774,750 39,922
Douglas Y. Bech 10,774,850 39,822
Steven J. Carnevale 10,774,850 39,822
Edward R. Prince, Jr. 10,774,850 39,822
Lon B. Radin 10,774,850 39,822
Albert E. Sisto 10,774,850 39,822
</TABLE>
Proposal No. 2 - Approval of an Amendment to the Company's Certificate of
Incorporation to Change the Name of the Company:
<TABLE>
<CAPTION>
VOTES VOTES
VOTES FOR AGAINST ABSTAINED
----------- --------- -----------
<S> <C> <C>
10,798,398 10,670 5,604
</TABLE>
24
<PAGE> 25
Proposal No. 3 - Approval of an Increase in the Shares Authorized for Issuance
Under the 1995 Stock Plan, as Amended:
<TABLE>
<CAPTION>
VOTES VOTES
VOTES FOR AGAINST ABSTAINED UNVOTED
----------- --------- ----------- ---------
<S> <C> <C> <C>
2,133,866 116,517 40,335 8,523,954
</TABLE>
Proposal No. 4 - Ratification of Appointment of Independent Auditors:
<TABLE>
<CAPTION>
VOTES VOTES
NOMINATION VOTES FOR AGAINST ABSTAINED
------------ ----------- --------- -----------
<S> <C> <C> <C>
Deloitte & Touche LLP 10,783,371 15,730 15,571
</TABLE>
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
------ ---------------------------------------------------------------
<S> <C>
4.6 Form of Warrant to Purchase Common Stock by and between eFax and
Reedland Capital Partners.
27.1 Financial Data Schedule.
-------------------
</TABLE>
(b) Reports on Form 8-K. The Company did not file any Reports on Form
8-K during the quarter ended June 30, 1999.
25
<PAGE> 26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EFAX.COM, INC.
--------------------------
(Registrant)
Date: August 17, 1999 By: /s/ TODD J. KENCK
-------------------------
Todd J. Kenck
Vice President, Finance
and Chief Financial Officer
(Authorized Officer and
Principal Financial and
Accounting Officer)
26
<PAGE> 27
EXHIBIT 4.6
THIS WARRANT AND THE UNDERLYING SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THEY MAY NOT BE SOLD, OFFERED
FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO SUCH SECURITIES UNDER THE ACT OR AN OPINION OF COUNSEL
SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.
EFAX.COM, INC.
WARRANT TO PURCHASE COMMON STOCK
No. W-3 May 13, 1999
Void After May 13, 2002
THIS CERTIFIES THAT, for value received, REEDLAND CAPITAL PARTNERS, with its
principal office at 21 Tamal Vista Blvd., Suite 201, Corte Madera, CA 94925, or
assigns (the "Holder"), is entitled to subscribe for and purchase at the
Exercise Price (defined below) from EFAX.COM, INC., a Delaware corporation,
with its principal office at 1378 Willow Road, Menlo Park, Ca 94025 (the
"Corporation") up to one hundred twenty four thousand nine hundred ninety five
(124,995) shares of the Common Stock of the Corporation (the "Common Stock").
1. DEFINITIONS. As used herein, the following terms shall have the
following respective meanings:
(a) "Exercise Period" shall mean the period commencing with the date
hereof and ending three (3) years from the date hereof, unless sooner
terminated as provided below.
(b) "Exercise Price" shall mean $26.325 per share, subject to
adjustment pursuant to Section 5 below.
(c) "Exercise Shares" shall mean the shares of the Corporation's
Preferred Stock issuable upon exercise of this Warrant.
2. EXERCISE OF WARRANT. The rights represented by this Warrant may be
exercised in whole or in part at any time during the Exercise Period, by
delivery of the following to the Corporation at its address set forth above (or
at such other address as it may designate by notice in writing to the Holder):
(a) An executed Notice of Exercise in the form attached hereto;
(b) Payment of the Exercise Price either (i) in cash or by check, or
(ii) by cancellation of indebtedness; and
(c) This Warrant.
<PAGE> 28
Upon the exercise of the rights represented by this Warrant, a certificate
or certificates for the Exercise Shares so purchased, registered in the name of
the Holder or persons affiliated with the Holder, if the Holder so designates,
shall be issued and delivered to the Holder within a reasonable time after the
rights represented by this Warrant shall have been so exercised.
The person in whose name any certificate or certificates for Exercise
Shares are to be issued upon exercise of this Warrant shall be deemed to have
become the holder of record of such shares on the date on which this Warrant
was surrendered and payment of the Exercise Price was made, irrespective of the
date of delivery of such certificate or certificates, except that, if the date
of such surrender and payment is a date when the stock transfer books of the
Corporation are closed, such person shall be deemed to have become the holder
of such shares at the close of business on the next succeeding date on which
the stock transfer books are open.
2.1 Net Exercise. Notwithstanding any provisions herein to the
contrary, if the fair market value of one share of the Corporation's Common
Stock is greater than the Exercise Price (at the date of calculation as set
forth below), in lieu of exercising this Warrant by payment of cash, the Holder
may elect to receive shares equal to the value (as determined below) of this
Warrant (or the portion thereof being canceled) by surrender of this Warrant at
the principal office of the Company together with the properly endorsed Notice
of Exercise in which event the Company shall issue to the Holder a number of
shares of Common Stock computed using the following formula:
X = Y (A-B)
-------
A
Where X = the number of shares of Common Stock to be issued to the
Holder
Y = the number of shares of Common Stock purchasable under the
Warrant or, if only a portion of the Warrant is being
exercised, the portion of the Warrant being canceled (at the
date of such calculation)
A = the fair market value of one share of the Corporation's
Common Stock (at the date of such calculation)
B = Exercise Price (as adjusted to the date of such calculation)
For purposes of the above calculation, the fair market value of one share
of Common Stock shall be the closing bid price of the Common Stock on the
Nasdaq National Market ("Nasdaq") on the last business day immediately
preceding the date of exercise of this warrant, or if Nasdaq is not the
principal trading market for such security, the last closing bid price of such
security on the principal securities exchange or trading market where such
security is listed or traded.
<PAGE> 29
3. COVENANTS OF THE CORPORATION.
3.1 Covenants as to Exercise Shares. The Corporation covenants and
agrees that all Exercise Shares that may be issued upon the exercise of the
rights represented by this Warrant will, upon issuance, be validly issued and
outstanding, fully paid and nonassessable, and free from all taxes, liens and
charges with respect to the issuance thereof. The Corporation further
covenants and agrees that the Corporation will at all times during the Exercise
Period, have authorized and reserved, free from preemptive rights, a sufficient
number of shares of its Common Stock to provide for the exercise of the rights
represented by this Warrant. If at any time during the Exercise Period the
number of authorized but unissued shares of Common Stock shall not be
sufficient to permit exercise of this Warrant, the Corporation will take such
corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purposes.
3.2 No Impairment. Except and to the extent as waived or consented
to by the Holder, the Corporation will not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Corporation, but will at all times in
good faith assist in the carrying out of all the provisions of this Warrant and
in the taking of all such action as may be necessary or appropriate in order to
protect the exercise rights of the Holder against impairment.
3.3 Notices of Record Date. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend which is the same as cash dividends paid
in previous quarters) or other distribution, the Corporation shall mail to the
Holder, at least ten (10) days prior to the date specified herein, a notice
specifying the date on which any such record is to be taken for the purpose of
such dividend or distribution.
4. REPRESENTATIONS OF HOLDER.
4.1 Acquisition of Warrant for Personal Account. The Holder
represents and warrants that it is acquiring the Warrant solely for its account
for investment and not with a view to or for sale or distribution of said
Warrant or any part thereof. The Holder also represents that the entire legal
and beneficial interests of the Warrant and Exercise Shares the Holder is
acquiring is being acquired for, and will be held for, its account only.
4.2 Securities Are Not Registered.
(a) The Holder understands that the Warrant and the Exercise
Shares have not been registered under the Securities Act of 1933, as amended
(the "Act") on the basis that no distribution or public offering of the stock
of the Corporation is to be effected. The Holder realizes that the basis for
the exemption may not be present if, notwithstanding its
<PAGE> 30
representations, the Holder has a present intention of acquiring the securities
for a fixed or determinable period in the future, selling (in connection with a
distribution or otherwise), granting any participation in, or otherwise
distributing the securities. The Holder has no such present intention.
(b) The Holder recognizes that the Warrant and the Exercise
Shares must be held indefinitely unless they are subsequently registered under
the Act or an exemption from such registration is available. The Holder
recognizes that, except as set forth in that certain engagement letter, dated
March 1, 1999, by and between Holder and the Corporation, the Corporation has
no obligation to register the Warrant or the Exercise Shares of the
Corporation, or to comply with any exemption from such registration.
(c) The Holder is aware that neither the Warrant nor the
Exercise Shares may be sold pursuant to Rule 144 adopted under the Act unless
certain conditions are met, including, among other things, the existence of a
public market for the shares, the availability of certain current public
information about the Company, the resale following the required holding period
under Rule 144 and the number of shares being sold during any three month
period not exceeding specified limitations. Holder is aware that the
conditions for resale set forth in Rule 144 have not been satisfied and that
the Corporation presently has no plans to satisfy these conditions in the
foreseeable future.
4.3 Disposition of Warrant and Exercise Shares.
(a) Subject to Section 9, the Holder further agrees not to
make any disposition of all or any part of the Warrant or Exercise Shares in
any event unless and until:
(i) The Corporation shall have received a letter
secured by the Holder from the Securities and Exchange Commission stating that
no action will be recommended to the Commission with respect to the proposed
disposition; or
(ii) There is then in effect a registration
statement under the Act covering such proposed disposition and such disposition
is made in accordance with said registration statement; or
(iii) The Holder shall have notified the Corporation
of the proposed disposition and shall have furnished the Corporation with a
detailed statement of the circumstances surrounding the proposed disposition,
and if reasonably requested by the Company, the Holder shall have furnished the
Corporation with an opinion of counsel, reasonably satisfactory to the Company,
for the Holder to the effect that such disposition will not require
registration of such Warrant or Exercise Shares under the Act or any applicable
state securities laws.
(b) The Holder understands and agrees that all certificates
evidencing the shares to be issued to the Holder may bear the following legend:
<PAGE> 31
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"). THEY MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THE SECURITIES UNDER THE ACT OR AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
(c) The Holder hereby agrees not to sell or otherwise
transfer or dispose of all or any part of this Warrant or the Exercise Shares
during a period specified by the representative of the underwriters of Common
Stock (not to exceed one hundred eighty (180) days) following the effective
date of the registration statement of the Corporation filed under the Act.
Holder further agrees that the Corporation may impose stop-transfer
instructions with respect to securities subject to the foregoing restrictions
until the end of such period.
5. ADJUSTMENT OF EXERCISE PRICE. In the event of changes in the
outstanding Common Stock of the Corporation by reason of stock dividends,
split-ups, recapitalizations, reclassifications, combinations or exchanges of
shares, separations, reorganizations, liquidations, or the like, the number and
class of shares available under the Warrant in the aggregate and the Exercise
Price shall be correspondingly adjusted to give the Holder of the Warrant, on
exercise for the same aggregate Exercise Price, the total number, class, and
kind of shares as the Holder would have owned had the Warrant been exercised
prior to the event and had the Holder continued to hold such shares until after
the event requiring adjustment; provided, however, that such adjustment shall
not be made with respect to, and this Warrant shall terminate if not exercised
prior to, the events set forth in Section 7 below. The form of this Warrant
need not be changed because of any adjustment in the number of Exercise Shares
subject to this Warrant.
6. FRACTIONAL SHARES. No fractional shares shall be issued upon the
exercise of this Warrant as a consequence of any adjustment pursuant hereto.
All Exercise Shares (including fractions) issuable upon exercise of this
Warrant may be aggregated for purposes of determining whether the exercise
would result in the issuance of any fractional share. If, after aggregation,
the exercise would result in the issuance of a fractional share, the
Corporation shall, in lieu of issuance of any fractional share, pay the Holder
otherwise entitled to such fraction a sum in cash equal to the product
resulting from multiplying the then current fair market value of an Exercise
Share by such fraction.
7. EARLY TERMINATION. In the event of, at any time during the Exercise
Period, a capital reorganization, or any reclassification of the capital stock
of the Corporation (other than a change in par value or from par value to no
par value or no par value to par value or as a result of a stock dividend or
subdivision, split-up or combination of shares), or the consolidation or merger
of the Corporation with or into another corporation (other than a merger solely
to effect a reincorporation of the Corporation into another state), or the sale
or other disposition of all or substantially all the properties and assets of
the Corporation in its entirety to any other person, the Corporation shall
provide to the Holder twenty (20) days advance written notice of such,
reorganization, reclassification, consolidation, merger or sale or other
disposition of the
<PAGE> 32
Corporation's assets, and this Warrant shall terminate unless exercised prior
to the occurrence of such reorganization, reclassification, consolidation,
merger or sale or other disposition of the Corporation's assets.
8. NO STOCKHOLDER RIGHTS. This Warrant in and of itself shall not entitle
the Holder to any voting rights or other rights as a stockholder of the
Corporation.
9. TRANSFER OF WARRANT. Neither this Warrant nor any of the rights
hereunder shall be transferable.
10. LOST, STOLEN, MUTILATED OR DESTROYED WARRANT. If this Warrant is lost,
stolen, mutilated or destroyed, the Corporation may, on such terms as to
indemnity or otherwise as it may reasonably impose (which shall, in the case of
a mutilated Warrant, include the surrender thereof), issue a new Warrant of
like denomination and tenor as the Warrant so lost, stolen, mutilated or
destroyed. Any such new Warrant shall constitute an original contractual
obligation of the Corporation, whether or not the allegedly lost, stolen,
mutilated or destroyed Warrant shall be at any time enforceable by anyone.
11. NOTICES, ETC. All notices and other communications required or
permitted hereunder shall be in writing and shall be sent by telex, telegram,
express mail or other form of rapid communications, if possible, and if not
then such notice or communication shall be mailed by first-class mail, postage
prepaid, addressed in each case to the party entitled thereto at the following
addresses: (a) if to the Corporation, to eFax.com, Inc., 1378 Willow Road,
Menlo Park, CA 94025, Attention: President and Chief Executive Officer, and
(b) if to the Holder, to Reedland Capital Partners, 21 Tamal Vista Blvd., Suite
201, Corte Madera, CA 94925, Attention: Thomas J. Griesel, Managing Director,
or at such other address as one party may furnish to the other in writing.
Notice shall be deemed effective on the date dispatched if by personal
delivery, telecopy, telex or telegram, two days after mailing if by express
mail, or three days after mailing if by first-class mail.
12. ACCEPTANCE. Receipt of this Warrant by the Holder shall constitute
acceptance of and agreement to all of the terms and conditions contained
herein.
13. GOVERNING LAW. This Warrant and all rights, obligations and
liabilities hereunder shall be governed by the laws of the State of California.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 33
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be executed
by its duly authorized officer as of May 13, 1999.
EFAX.COM, INC.
By _______________________________
Todd J. Kenck
Chief Financial Officer
<PAGE> 34
NOTICE OF EXERCISE
TO: EFAX.COM, INC.
(1) [ ] The undersigned hereby elects to purchase 124,995 shares
of the Common Stock of eFax.com, Inc. (the "Company") pursuant to the terms of
the attached Warrant, and tenders herewith payment of the exercise price in
full, together with all applicable transfer taxes, if any.
[ ] The undersigned hereby elects to purchase ________ shares
of the Common Stock of eFax.com, Inc. (the "Company") pursuant to the terms of
the net exercise provisions set forth in Section 2.1 of the attached Warrant,
and shall tender payment of all applicable transfer taxes, if any.
(2) Please issue a certificate or certificates representing said
shares of Common Stock in the name of the undersigned or in such other name as
is specified below:
________________________
(Name)
________________________
________________________
(Address)
(3) The undersigned represents that (i) the aforesaid shares of Common
Stock are being acquired for the account of the undersigned for investment and
not with a view to, or for resale in connection with, the distribution thereof
and that the undersigned has no present intention of distributing or reselling
such shares; (ii) the undersigned is aware of the Company's business affairs
and financial condition and has acquired sufficient information about the
Company to reach an informed and knowledgeable decision regarding its
investment in the Company; (iii) the undersigned is experienced in making
investments of this type and has such knowledge and background in financial and
business matters that the undersigned is capable of evaluating the merits and
risks of this investment and protecting the undersigned's own interests; (iv)
the undersigned understands that the shares of Common Stock issuable upon
exercise of this Warrant have not been registered under the Securities Act of
1933, as amended (the "Securities Act"), by reason of a specific exemption from
the registration provisions of the Securities Act, which exemption depends
upon, among other things, the bona fide nature of the investment intent as
expressed herein, and, because such securities have not been registered under
the Securities Act, they must be held indefinitely unless subsequently
registered under the Securities Act or an exemption from such registration is
available; (v) the undersigned is aware that the aforesaid shares of Common
Stock may not be sold pursuant to Rule 144 adopted under the Securities Act
unless certain conditions are met and until the undersigned has held the shares
for the number of years prescribed by Rule 144, that among the conditions for
use of the Rule is the availability of current information to the public about
the Company and the Company has not made such information available and has no
present plans to do so; and (vi) the undersigned agrees not to make any
disposition of all or any part of the aforesaid shares of Common Stock unless
and until there is then in effect a registration statement under the Securities
Act covering such proposed disposition and such disposition is made in
accordance with said registration statement, or the undersigned has provided
the Company with an opinion of counsel satisfactory to the Company, stating
that such registration is not required.
_______________________ ____________________________
(Date) (Signature)
____________________________
(Print name)
<PAGE> 35
<TABLE> <S> <C>
<S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS <F1>
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 12,696
<SECURITIES> 2,996
<RECEIVABLES> 3,646 <F2>
<ALLOWANCES> 0
<INVENTORY> 2,738
<CURRENT-ASSETS> 22,497
<PP&E> 2,039 <F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 28,847
<CURRENT-LIABILITIES> 3,260
<BONDS> 0
0
0
<COMMON> 128
<OTHER-SE> 25,384
<TOTAL-LIABILITY-AND-EQUITY> 28,847
<SALES> 11,159
<TOTAL-REVENUES> 14,052
<CGS> 7,725
<TOTAL-COSTS> 8,308
<OTHER-EXPENSES> 3,234 <F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,544)
<INCOME-TAX> 39
<INCOME-CONTINUING> (7,504)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,504)
<EPS-BASIC> (0.63) <F4>
<EPS-DILUTED> (0.63)
<FN>
<F1> The 13-week period from April 4, 1999 to July 3, 1999 is referred to
herein as the three months ended July 3, 1999. The 26-week period from
January 3, 1999 to July 3, 1999 is referred to herein as the six months
ended June 30, 1999. Year-to-date data is for quarters presented.
<F2> Item shown net of allowance, consistent with the balance sheet
presentation.
<F3> Item consists of research and development.
<F4> Item consists of basic earnings per share.
</FN>
</TABLE>
