<PAGE> 1
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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 September 30, 2000.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to .
---------- -----------
Commission File Number 0-22561
EFAX.COM
(Exact name of Registrant as specified in its charter)
Delaware 77-0182451
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1378 Willow Road, Menlo Park, California 94025
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 324-0600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of November 17, 2000 there were 13,970,565 shares of common stock, $.01 par
value, outstanding.
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<PAGE>
<TABLE>
<CAPTION>
EFAX.COM AND SUBSIDIARIES
INDEX TO
REPORT ON FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 2000
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - September 30,
2000 and December 31, 1999................................ 3
Condensed Consolidated Statements of Operations - Three and
Nine Months Ended September 30, 2000 and 1999............. 4
Condensed Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 2000 and 1999.................. 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 23
Item 2. Changes in Securities......................................... 23
Item 6. Exhibits and Reports on Form 8-K.............................. 23
Signature..................................................... 24
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
EFAX.COM AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
September 30, December 31,
2000 1999 (1)
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 877 $ 1,752
Short-term investments -- 2,988
Accounts receivable, net 1,546 2,414
Inventories 504 1,698
Prepaid expenses 539 507
-------- --------
Total current assets 3,466 9,359
Property, net 1,939 2,253
Other assets 3,270 3,896
-------- --------
Total assets $ 8,675 $ 15,508
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,906 $ 4,404
Accrued liabilities 1,210 2,044
Note payable - JFAX.COM, INC. 4,000 --
Restructuring reserve 413 605
Current deferred revenue 1,107 360
-------- --------
Total current liabilities 8,636 7,413
-------- --------
Deferred revenue -- 25
Stockholders' equity:
Series A convertible preferred stock, $0.01 par
value; 5,000,000 shares authorized, shares
outstanding: none in 2000 and 1500 in 1999 -- 7,467
Series D convertible preferred stock, $0.01 par
value; 1,421 and none shares authorized, shares
outstanding in 2000 and 1999 respectively 12,196 --
Common stock, $0.01 par value; 35,000,000 shares
authorized, shares outstanding: 13,970,565 in
2000 and 13,012,130 in 1999 140 130
Additional paid-in capital 49,525 48,342
Warrants 7,816 7,098
Accumulated other comprehensive income -- (7)
Accumulated deficit (69,638) (54,960)
-------- --------
Total stockholders' equity 40 8,070
-------- --------
Total liabilities and stockholders' equity $ 8,675 $ 15,508
======== ========
<FN>
(1) Derived from the December 31, 1999 audited consolidated balance sheet
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
</FN>
</TABLE>
For presentation purposes, the period ended January 1, 2000 is referred to
above as ending on December 31, 1999.
See notes to condensed consolidated financial statements.
3
<PAGE> 4
<TABLE>
<CAPTION>
EFAX.COM AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Product $ 1,763 $ 4,649 $ 7,003 $ 15,808
eFax services 1,909 442 4,640 475
Software and technology license fees 795 816 2,977 2,997
Development fees -- 242 -- 921
------- ------- -------- --------
Total revenues 4,467 6,149 14,620 20,201
------- ------- -------- --------
Costs and expenses:
Cost of product revenues 1,314 3,444 5,067 11,169
Cost of eFax services 1,629 750 4,909 1,418
Cost of software and technology
license fees 72 168 265 446
Research and development 870 1,545 3,394 4,779
Selling and marketing 605 6,841 5,399 13,337
General and administrative 1,619 877 4,856 4,072
------- ------- -------- --------
Total costs and expenses 6,108 13,625 23,890 35,221
------- ------- -------- --------
Loss from operations (1,642) (7,476) (9,270) (15,020)
------- ------- -------- --------
Other income (expense):
Interest income -- 184 34 325
Interest expense (454) -- (687) --
Other income (expense) 27 (6) (72) (68)
------- ------- -------- --------
Total other income (expense), net (427) 178 (725) 257
------- ------- -------- --------
Loss before income taxes (2,069) (7,298) (9,995) (14,763)
Provision for income taxes -- 21 15 61
------- ------- -------- --------
Net loss (2,069) (7,319) (10,010) (14,824)
Preferred stock dividends and accretion (310) (299) (4,668) (470)
Net loss applicable to common
Stockholders $(2,379) $(7,618) $(14,678)$(15,294)
======= ======= ======== ========
Net loss per share:
Basic $ (0.17) $ (0.59) $ (1.10)$ (1.23)
======= ======= ======== ========
Diluted $ (0.17) $ (0.59) $ (1.10)$ (1.23)
======= ======= ======== ========
Shares used in computing net loss
per share:
Basic 13,719 12,854 13,371 12,467
======= ======= ======== ========
Diluted 13,719 12,854 13,371 12,467
======= ======= ======== ========
</TABLE>
For presentation purposes, the period ended October 2, 1999 is referred to
above as ending on September 30, 1999.
See notes to condensed consolidated financial statements.
4
<PAGE> 5
<TABLE>
<CAPTION>
EFAX.COM AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
---------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (10,010) $ (14,824)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 745 872
Loss (gain) on disposal of asset 31 (39)
Issuance of Common Stock for services -- 208
Additional value for change in exercise price
of warrants 32 --
Common Stock options - severance 225 1,367
Common Stock options - services -- 302
Changes in assets and liabilities:
Trade receivables 868 1,115
Inventories 1,194 2,133
Prepaid expenses 654 (342)
Accounts payable (2,498) 2,828
Deferred revenue 722 124
Accrued liabilities (65) (330)
Restructuring reserve (192) --
-------- --------
Net cash used for operating activities (8,294) (6,586)
-------- --------
Cash flows from investing activities:
Purchases of short-term investments -- (2,996)
Sale of short-term investments 2,995 2,808
Purchase of property (479) (1,301)
Proceeds from sale of property 17 --
(Increase) decrease in other assets 626 (594)
-------- --------
Net cash provided by (used for) investing
Activities 3,159 (2,083)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of note payable - JFAX.COM, INC. 4,000 --
Proceeds from sale of Common Stock 260 1,158
Proceeds from sale of Series A Convertible Preferred
Stock, net -- 14,215
-------- --------
Net cash provided by financing activities 4,260 15,373
-------- --------
Increase (decrease) in cash and cash equivalents (875) 6,704
Cash and cash equivalents, beginning of period 1,752 1,305
-------- --------
Cash and cash equivalents, end of period $ 877 $ 8,009
======== ========
Supplemental cash flow information:
Interest paid $ -- $ --
======== ========
Taxes paid - foreign withholding $ 15 $ 29
======== ========
Supplemental noncash investing and financial information:
Warrant expense - service $ -- $ 337
======== ========
Valuation of warrants issued to JFAX.COM, INC. $ 686 $ --
======== ========
Conversion of accrued ESPP for purchase of
Common Stock $ -- $ 45
======== ========
Trademark settlement $ -- $ 2,000
======== ========
Cumulative dividends on Series A Convertible
Preferred Stock $ 315 $ 470
======== ========
Conversion of Series A Convertible Preferred Stock
to Series B Convertible Preferred Stock $ 7,467 $ --
======== ========
Redemption premium and accretion on Series B and
Series D Convertible Preferred Stock $ 4,353 $ --
======== ========
Redemption premium and accretion on Series B
Convertible Preferred Stock $ 1,084 $ --
======== ========
Conversion of Series B Convertible Preferred Stock
to Common Stock $ 1,060 $ --
======== ========
Issuance of Common Stock options - severance $ 225 $ --
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
EFAX.COM AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Interim Financial Information
-----------------------------
The accompanying condensed consolidated financial statements of
eFax.com(tm) and its wholly-owned subsidiaries ("eFax" or the "Company") as of
September 30, 2000 and December 31, 1999 and for the three and nine months
ended September 30, 2000 and 1999 are unaudited. In the opinion of management,
the condensed consolidated financial statements include all adjustments
(consisting of normal recurring accruals) that management considers necessary
for a fair presentation of its financial position, operating results and cash
flows for the interim periods presented. Operating results and cash flows for
interim periods are not necessarily indicative of results for the entire year.
References to "we", "us" or "our" in this Report also refer to eFax.com
The condensed consolidated financial statements have been prepared on a
going concern basis, which contemplates, among other things, the realization of
assets and the satisfaction of liabilities in the normal course of business.
The Company's net loss of $14.7 million for the nine months ended September 30,
2000 and its negative working capital position of $5.2 million at September 30,
2000 raise substantial doubt regarding the Company's ability to continue as a
going concern. In the three and nine months ended September 30, 2000, the
Company's revenues were not sufficient to support its operations, and revenues
will not be sufficient to support operations until such time, if any, that the
Company's revenues from fee generating Internet-based services gain substantial
market acceptance.
On May 5, 2000, the Company entered into a loan agreement with JFAX.COM,
Inc. (currently doing business as j2 Global Communications, Inc.) ("JFAX.COM")
pursuant to which JFAX.COM is financing the Company while the two parties seek
their shareholders' consent to the merger of eFax.com with a subsidiary of
JFAX.COM. Meetings of the shareholders of eFax.com and JFAX.COM are scheduled
for November 22, 2000 to approve the merger. If the shareholders of both
companies approve the merger, the merger is anticipated to be consummated
promptly following the meeting. Under the loan agreement, the Company may
borrow up to $5.0 million, of which, as of November 20, 2000, the Company has
borrowed $4.0 million. No assurance can be given that approval of the merger
will be obtained, that the merger will ultimately be consummated or that the
proceeds of the loan agreement will be sufficient to sustain the Company until
the merger occurs, if ever. In the event that the merger is not consummated, is
consummated after the expiry of the term loan or is consummated after the
Company has exhausted all of the funds available under the term loan, the
Company will need to obtain additional financing to repay the loan from
JFAX.COM and/or to finance continuing operating losses. In such event, there
can be no assurance that the Company will be successful in obtaining additional
financing and any such failure to obtain financing would result in a material
adverse effect on our ability to meet our business objectives and continue as a
going concern. The Company does not currently consider it likely that it will
be able to find any additional sources of financing if the merger does not
occur. In light of the forgoing assumptions, the consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amount and classification of
liabilities or any other adjustments that might be necessary should the Company
be unable to continue as a going concern.
On August 8, 2000, Ronald Brown resigned as President of the Company.
This financial data should be read in conjunction with the audited
financial statements and notes thereto included in eFax.com's Annual Report on
Form 10-K for the year ended December 31, 1999.
Certain prior quarter amounts have been reclassified to conform to the
current quarter presentation for cost of licenses and services as well as
selling and marketing expenses.
Fiscal Period End
-----------------
The Company uses a 52-53 week fiscal year ending on the first Saturday on
or after December 31. For presentation purposes, the Company refers herein to
the 13-week period ended October 2, 1999 as the three months ended
6
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EFAX.COM AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
September 30, 1999, and the 39-week period ended October 2, 1999 as the nine
months ended September 30, 1999.
Per Share Information
Basic earnings (loss) per share is computed by dividing net income (loss)
by the weighted average common shares outstanding for the period while diluted
earnings (loss) per share also includes the dilutive impact of stock options
and warrants. Common stock equivalents from options and warrants have been
excluded from the computation during all periods presented as their effect is
antidilutive due to eFax.com's net losses. Such options and warrants will be
included, using the treasury stock method, in periods where eFax.com reports
net income and the average fair market value of its common stock exceeds the
exercise price. The net loss and the shares used for the computation of both
basic and diluted loss per share are the same.
2. Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Materials and supplies $ 323 $ 305
Work-in-process -- 624
Finished goods 181 769
------- -------
Total $ 504 $ 1,698
======= =======
</TABLE>
3. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Compensation and related benefits $ 480 $ 684
Accrued Series A Convertible Preferred Stock
Dividends -- 769
Product warranty 59 59
Royalties 25 42
Other 646 490
------- -------
Total $ 1,210 $ 2,044
======= =======
</TABLE>
4. Note payable - JFAX.COM, INC.
On May 5, 2000, the Company entered into a term loan agreement ("Term Loan
Agreement") with JFAX.COM under which JFAX.COM agreed to lend to the Company an
amount of up to $5.0 million. Borrowings under Term Loan Agreement are
evidenced by an executed note payable and bear an interest rate of 13% per
annum. As discuss above, unless the term of the Term Loan Agreement is
extended by JFAX.COM, the loan must be repaid on the later of October 31, 2000
or 60 days after the termination of the merger agreement related to the merger
between eFax.com and JFAX.com if the termination is a result of a failure of
JFAX.COM's stockholders to approve the merger or as a result of a material
breach of the merger agreement by JFAX.COM. If eFax.com's stockholders fail to
approve the merger, eFax.com's board of directors withdraws its support for the
merger, eFax.com materially breaches the merger agreement or eFax.com accepts
an offer superior to JFAX.COM's offer, then the repayment
7
<PAGE> 8
EFAX.COM AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
date will accelerate to the date that the event occurs. As of September 30,
2000, the outstanding principal under the Term Loan Agreement was $4.0 million.
As collateral for the loan, the Company has given JFAX.COM a security interest
in substantially all of its assets, including all of its DID numbers. If the
loan becomes due and the Company is unable to timely repay any amounts
outstanding, JFAX.COM may exercise its rights in connection with the assets in
which it has a security interest. As consideration for entering into a loan
commitment, the Company granted JFAX.COM warrants to purchase 250,000 shares of
Common Stock on April 5, 2000 at an exercise price of $4.4375. The warrants
have a two year life. The value of the warrants is being amortized over the
life of the loan.
5. Comprehensive Income
Effective January 1, 1998, eFax.com adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS
No. 130 requires an enterprise to report, by major components and as a single
total, the change in net assets during the period from non-owner sources. For
the three months ended September 30, 2000, there were no differences between
eFax.com's comprehensive loss and net loss. For the nine months ended September
30, 2000, eFax.com's comprehensive loss was $14,671,000 as compared to a net
loss of $14,678,000. For the three and nine months ended September 30, 1999,
there were no differences between eFax.com's comprehensive loss and net loss.
6. Disclosures about Segments of an Enterprise and Related Information
The Company reports segment data pursuant to SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which establishes
annual and interim reporting standards for an enterprise's business segments
and related disclosures about its products, services, geographic areas and
major customers. The Company operates in one reportable segment, within which
are multiple product lines including Internet-related services and legacy
multifunction hardware products ("MFP"). Revenues and related costs of goods
and services are recorded for internal management purposes as reflected in the
accompanying Condensed Consolidated Statement of Operations. For internal
management purposes, expenses below that level and related assets are not
separately recorded and monitored.
7. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
defines derivatives, requires that all derivatives be carried at fair value,
and provides for hedging accounting when certain conditions are met. The
Company is required to adopt this statement in the first quarter of fiscal year
2001, with early adoption permitted. Although eFax.com has not fully assessed
the implications of this new statement, eFax.com does not believe adoption of
this statement will have a material impact on eFax.com's future financial
position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") released
Staff Accounting Bulletin (SAB) No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements" as amended by SAB 101A and 101B. This bulletin
summarizes certain interpretations and practices followed by the Division of
Corporation Finance and the Office of the Chief Accountant of the SEC in
administering the disclosure requirements of the Federal securities laws in
applying generally accepted accounting principles to revenue recognition in
financial statements. Application of the accounting and disclosures desired in
the bulletin is required by the second quarter of 2000. The Company has
elected early adoption of SAB 101 and is in compliance with SAB 101 revenue
recognition requirements.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44") "Accounting for Certain Transactions involving
Stock Compensation" an interpretation of APB Opinion No. 25. FIN 44 clarifies
the application of Opinion 25 for (a) the definition of employee for purposes
of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a non-compensatory plan, (c) the accounting consequence of various
8
<PAGE> 9
EFAX.COM AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998, or January 12, 2000.
The Company believes that FIN 44 will not have a material effect on its
financial position or results of operations.
8. Discontinued Product Lines and Related Restructuring Charges
During January 2000, we restructured our operations to focus on the
Internet communications services, which we introduced in February 1999, by
discontinuing efforts on the development and marketing of branded and licensed
products and software solutions for the MFP market. In connection with the
Company's announced decision to exit from the manufacturing of MFP products,
the Company recognized in the fourth quarter of 1999 a $1.1 million write-down
of inventory to reflect anticipated net realizable values of the inventory on
hand. Also in connection with the Company's decision to exit from manufacturing
MFP hardware products, the Company recognized in the fourth quarter of 1999 an
$872,000 restructuring charge for the write-down of capital equipment,
intellectual property and leasehold improvements, excess facilities accruals
and severance costs. As a result, the Company substantially reduced its
manufacturing work force and downsized its hardware manufacturing operations.
The discontinuation and restructuring was substantially completed in the first
quarter of 2000, during which period an additional charge of $450,000 was
recognized for certain executive severance costs incurred in January 2000. The
Company recorded total charges of approximately $1.9 million as follows:
<TABLE>
<CAPTION>
Total
Restructuring Balance at
(in thousands) Charge Utilized September 30, 2000
------ -------- ------------------
<S> <C> <C> <C>
Write-down of inventory $ 826 $ 826 $ --
Reserve for estimated cost of
purchase commitments 234 35 199
-------- -------- --------
Subtotal 1,060 861 199
-------- -------- --------
Write-down of machinery and
Equipment 312 312 --
Reserve for estimated lease costs 171 10 161
Reserve for estimated severance costs 169 169 --
Write-down of acquired technology 167 167 --
Reserve for estimated post-warranty
technical support costs 53 -- 53
-------- -------- --------
Subtotal 872 658 214
-------- -------- --------
$ 1,932 $ 1,509 $ 413
======== ======== ========
</TABLE>
The Company anticipates substantially all accrued severance and benefits
will be paid within one year.
Included in the fourth quarter 1999 write-downs are charges of $312,000
related to the net loss on disposal of machinery and equipment and leasehold
improvements which was written down to fair market value in accordance with
SFAS No. 121, "Accounting for Impairment of Long-Live Assets and for Long-Lived
Assets to be Disposed of."
Additionally, from time to time, the Company is or may become a party to
suits, actions and proceedings in the ordinary course of its business. The
Company does not believe that any of its current ordinary course of business
suits, actions or proceedings will result in a material adverse impact on the
Company.
9
<PAGE> 10
EFAX.COM AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
9. Litigation
On June 20, 2000, Jerry Kirsch filed a lawsuit against the Company in the
United States District Court for the Eastern District of Michigan asserting the
ownership of certain United States patents and claiming that the Company is
infringing these patents as a result of the Company's sale of multifunction
hardware products. The suit requests unspecified damages, treble damages due to
willful infringement, and preliminary and permanent injunctive relief. We have
reviewed the Kirsch patents with our business and technical personnel and
outside patent counsel and have concluded that we do not infringe these
patents. As a result, we are confident of our position in this matter and
intend to defend the suit vigorously; however if such suit is successful, it
could have a material adverse effect on the Company and even if unsuccessful
could require the substantial expenditure of time and costs in its resolution.
10. The Merger and Other Events
Merger Agreement
----------------
On July 13, 2000, the Company entered into a merger agreement (the "Merger
Agreement") with JFAX.COM, a unified Internet communications company, and
JFAX.COM Merger Sub, Inc., a newly formed subsidiary of JFAX.COM (the "Merger
Sub"). Under the terms of the Merger Agreement, the Company has agreed to merge
with the Merger Sub (the "Merger") and become a wholly-owned subsidiary of
JFAX.COM. Meetings of the shareholders of eFax.com and JFAX.COM are scheduled
for November 22, 2000 to approve the proposed Merger. If the shareholders of
both companies approve the Merger, the Merger is anticipated to be consummated
promptly following the meeting, however, no assurance can be given that the
Merger will occur at such time, if ever. As consideration for the Merger, the
Company's stockholders would receive the following:
o For each share of the Company's common stock, par value $.01 per share
(the "Common Stock"), its holder would receive a fraction of a share of
JFAX.COM Common Stock, par value $0.01 per share ("JFAX.COM Common
Stock"), determined by a conversion number formula included in this
report (the "Conversion Number").
o Subject to certain limitations, for each share of the Company's Series D
Convertible Preferred Stock, par value $0.01 per share (the "Series D
Shares"), outstanding at the time of the Merger, its holder would
receive 4,985 shares of JFAX.COM Common Stock (collectively if all 1,421
Series D Shares are outstanding at the time of the Merger, 7,083,685
shares), which amount will increase between November 20, 2000 and the
time of the Merger at an annualized rate of 3.5%.
o The holders of the Series D Shares (the "Investors") have agreed to
receive a warrant to acquire shares of JFAX.COM Common Stock under the
circumstances described below under "Agreements with Investors" instead
of a portion of the JFAX.COM Common Stock which they would otherwise
have a right to receive as consideration for the Merger.
o The holders of the Common Stock and the Series D Shares will receive
cash in lieu of fractional shares of JFAX.COM Common Stock.
Because the consideration to be received by the Investors is a fixed
amount, subject to the 3.5% annualized rate of increase, any increase or
decrease in the total consideration received in the Merger will only affect the
holders of the Common Stock. The Conversion Number will vary depending on,
among other things:
o The amount outstanding under the term loan agreement between the Company
and JFAX.COM (the "Term Loan Agreement") on the closing date for the
Merger. Under the Term Loan Agreement, the Company, subject to
satisfying the conditions contained in the Term Loan Agreement, may
borrow up to $5 million from JFAX.COM.
10
<PAGE> 11
EFAX.COM AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
o The closing date of the Merger, the amount of cash which the Company has
(other than cash from the sale of certain assets of the Company), the
amount of certain of the Company's prepaid expenses and the amount of
the Company's overdue payables.
o The number, if any, of the shares of Common Stock into which the Series
D Shares are converted prior to the time of the Merger.
O The timing of the Merger.
As of November 20, 2000, the Company has borrowed $4.0 million under the
Term Loan Agreement.
In the event that the Merger does not occur and the Company, within two
years of the termination of the Merger discussions with JFAX.COM, is acquired
by another entity or the Company receives at least $5.0 million from a
securities offering or offerings, the Company will be required to pay JFAX.COM
an amount equal to:
o 1,750,000, times
o The fair market value of one share of the Common Stock at the time of
the acquisition or the securities offering, less $0.10.
The 1,750,000 amount will be reduced to 750,000 if the termination of the
Merger Agreement occurs because JFAX.COM's stockholders do not approve the
Merger or if JFAX.COM materially breaches the Merger Agreement.
If the Company is acquired by another entity, it must pay the amount to
JFAX.COM promptly following the consummation of the acquisition. If the Company
does a securities offering, it is required to make the payment within 270 days
of the offering. In addition, the Company is required to pay JFAX.COM for any
of JFAX.COM's out-of-pocket expenses related to the Merger Agreement or the
Term Loan Agreement between the two parties if the Merger Agreement is
terminated because of a failure of the Company's stockholders to approve the
Merger Agreement or as a result of any action by eFax.com's board of directors
or eFax.com's material breach of the merger agreement.
The consummation of the Merger will depend upon the approval of the Merger
by both the holders of a majority of the outstanding shares of Common Stock and
the holders of a majority of the JFAX.COM Common Stock being voted at the
meeting to approve the Merger. To complete the Merger, the Company and JFAX.COM
must also fulfill the other conditions required by the Merger Agreement. A
Proxy Statement/Prospectus, dated October 20, 2000 (the "Proxy
Statement/Prospectus"), which was part of a registration statement on Form S-4
filed with the Securities and Exchange Commission by JFAX.COM has been mailed
to the shareholders of eFax.com and JFAX.COM in connection with the
shareholders meetings of eFax.com and JFAX.COM scheduled for November 22, 2000.
Agreements with Investors
On July 13, 2000, the Company entered into an exchange agreement (the
"Exchange Agreement") with the Investors and the Company and JFAX.COM entered
into a side agreement (the "Side Agreement") with the Investors. Under the
terms of the Exchange Agreement, the shares of Series B Convertible Preferred
Stock held by the Investors were converted into an equal number of Series D
Shares on July 17, 2000.
Under the terms of the Side Agreement, each Investor has agreed that as
consideration for the Merger it would receive:
o Shares of JFAX.COM Common Stock to the extent that such shares held by
the Investor and its affiliates do not exceed 10% (the "10% Limitation")
of the total outstanding shares of JFAX.COM Common Stock
11
<PAGE> 11
EFAX.COM AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
immediately following the Merger.
o A warrant, exercisable for JFAX.COM Common Stock at $0.01 per share, to
acquire the number of shares of JFAX.COM Common Stock which could not be
acquired because of the 10% Limitation.
The Conversion Number will be unaffected by whether the Investors receive
shares of JFAX.COM Common Stock or a warrant to acquire shares of JFAX.COM
Common Stock.
In addition, the Side Agreement provides that JFAX.COM will file a resale
registration statement to permit the Investors to resell any shares of JFAX.COM
Common Stock which the Investors may acquire upon the exercise of the warrant.
The Investors also have agreed to waive any appraisal rights which they may
have in connection with the Merger.
Under the terms of the Certificate of Designations, Preferences and Rights
of the Series D Shares, the holders of the Series D Shares have the right to
require the Company to redeem the Series D Shares for cash in certain events,
including if the total Merger consideration to be received by the holders of
the Common Stock and Series D Shares exceeds 12 million shares of JFAX.COM
Common Stock.
Agreement with IGC
------------------
On June 30, 2000, the Company and JFAX.COM entered into an Agreement of
Understanding (the "Agreement of Understanding") with Integrated Global
Concepts, Inc. ("IGC"). IGC has been providing the Company with development and
co-location services necessary for the Company's operations. The Agreement of
Understanding provides that at the time of the closing of the Merger:
o IGC will grant the Company a license to certain software developed by
IGC which the Company uses in its operations.
o IGC will waive all claims which it may have against the Company in
connection with development services it has previously provided to the
Company.
o JFAX.COM will issue 2,000,000 shares of JFAX.COM Common Stock to IGC. In
addition, the Agreement of Understanding provides that JFAX.COM will
file a resale registration statement to permit IGC to resell the shares
of JFAX.COM Common Stock which it is acquiring.
For more information concerning the Merger Agreement, the Agreement with
Investors and the Agreement with IGC, see the Company's Current Report of Form
8-K dated July 14, 2000 and the Proxy Statement/Prospectus.
Intuit Relationship
-------------------
On July 21, 2000, JFAX.COM entered into an agreement with Intuit Inc.
("Intuit") pursuant to which JFAX.COM will enable certain Intuit small business
products with fax sending and receiving capabilities. These fax capabilities
will be made available to Intuit's customers and JFAX.COM and Intuit will share
revenues from this arrangement. The launch date for these Intuit products will
be determined by Intuit at a later date.
In connection with the Intuit transaction, JFAX.COM and the Company
entered into a separate agreement whereby JFAX.COM and the Company will share
responsibilities for developing and servicing the customized faxing products
for Intuit's customers. JFAX.COM anticipates that the Merger will close prior
to the launch date of the Intuit products containing the fax sending and
receipt capabilities described above.
12
<PAGE> 13
EFAX.COM AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Nasdaq National Market Listing
------------------------------
On August 9, 2000, the Company's common stock was delisted from The Nasdaq
National Market. The delisting was as a result of the Company's failure to meet
Nasdaq's continued listing requirements.
The common stock is currently trading on the over-the-counter electronic
bulletin board sponsored by Nasdaq.
Because the Company is no longer listed on The Nasdaq National Market,
stockholders of the Company who comply with the required procedures, including
not voting in favor of the Merger, will have appraisal rights if the Merger is
completed. Under the terms of the Merger Agreement, if 5% or more of the
Company's stockholders seek appraisal rights JFAX.COM will have the right to
not complete the Merger.
If the Merger does not occur, the Company believes that it is likely that
its preferred stockholders will have the right to require the Company to redeem
all or part of their preferred stock for cash. The current redemption value of
all of the outstanding preferred shares is approximately $19.6 million on
November 15, 2000.
13
<PAGE> 14
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 Quarterly Report on Form 10-Q.
eFax.com is a leading provider of Internet communications services.
eFax.com currently provides its free and fee-based Internet communications
services to more than 2.0 million users. In February 1999, eFax.com launched
its Internet communications services, which incorporate fax-to-email, voicemail
and voice-to-email capabilities. Prior to developing this market, eFax.com had
developed and marketed branded and licensed products and software solutions for
the multifunction product ("MFP") market, which consisted of electronic office
devices that combine print, fax, copy and scan capabilities in a single unit.
In addition, we have licensed our embedded systems technology and software to a
number of manufacturers of multifunction products. On January 10, 2000, we
announced that we will focus exclusively on expanding our position as a leading
provider of enhanced Internet communications services and solutions. In
connection with this refocus of our business, we discontinued manufacturing and
sales of MFP products in the three months ended March 31, 2000.
eFax.com's revenues have been historically derived from four sources: (i)
product revenues consisting of sales of JetFax branded MFPs, original equipment
manufacturer ("OEM") branded MFPs, consumables and upgrades; (ii) eFax(R)
services revenues derived from the Company's Internet-based services introduced
during the quarter ended June 30, 1999; (iii) software and technology license
fees related to both the Company's embedded system technology for MFPs and
desktop software; and (iv) development fees for the customization and
integration of eFax.com's embedded system technology and desktop software in
OEM products. Historically, product revenues have accounted for the majority of
eFax.com's total revenues. For the three months ended September 30, 2000,
product revenues, eFax services revenues, software and technology licenses and
development fees, as a percentage of total revenues were 39%, 43%, 18%, and
0.0%, respectively, as compared to 76%, 7%, 13%, and 4%, respectively, for the
similar period in the prior year. For the nine months ended September 30, 2000,
product revenues, eFax services revenues, software and technology licenses and
development fees, as a percentage of total revenues were 48%, 32%, 20%, and
0.0%, respectively, as compared to 78%, 2%, 15%, and 5%, respectively, for the
similar period in the prior year.
Shipments of the new OEM platform MFP began in the fourth quarter of 1999.
We made our final OEM shipments during the first quarter of 2000. Overall
product revenues for the three and nine months ended September 30, 2000
declined from the prior year as a result of the Company's transition to an
Internet-based business model.
The new emphasis on Internet services resulted in increased expenditures
for both external promotions and other marketing expenses. The majority of
these costs were related to media and Internet advertising promoting both the
basic service and new products and features as introduced. Similarly
infrastructure costs to support the expansion of services also increased.
These infrastructure costs included the cost of delivery of the service such as
telephony charges and depreciation on capital equipment, as well as technical
and operational support personnel.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (CONTINUED)
Recent Developments
-------------------
A meeting of the shareholders of each of eFax.com and JFAX.COM has been
scheduled for November 22, 2000 to vote on the proposed merger of eFax.com with
a subsidiary of JFAX.COM. If the shareholders of both companies approve the
merger, the merger is anticipated to be consummated promptly following the
meeting, however, no assurance can be given that the merger will occur at such
time, if ever.
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 Nine Months Ended
September 30, September 30,
------------------ -------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Product 39.5% 75.6% 47.9% 78.3%
eFax services 42.7 7.2 31.7 2.3
Software and technology license fees 17.8 13.3 20.4 14.8
Development fees -- 3.9 -- 4.6
------ ------ ------ ------
Total revenues 100.0 100.0 100.0 100.0
------ ------ ------ ------
Costs and expenses: Cost of product revenues 29.4 56.0
34.7 55.3
Cost of eFax services 36.5 12.2 33.6 7.0
Cost of software and technology
license fees 1.6 2.7 1.8 2.2
Research and development 19.5 25.1 23.2 23.7
Selling and marketing 13.6 111.3 36.9 66.0
General and administrative 36.2 14.3 33.2 20.2
------ ------ ------ ------
Total costs and expenses (136.8) 221.6 163.4 174.4
------ ------ ------ ------
Loss from operations (36.8) (121.6) (63.4) (74.4)
Other income (expense), net (9.5) 2.9 (5.0) 1.3
------ ------ ------ ------
Loss before income taxes (46.3) (118.7) (68.4) (73.1)
Provision for income taxes -- 0.3 0.1 0.3
------ ------ ------ ------
Net loss (46.3)% (119.0)% (68.5)% (73.4)%
====== ====== ====== ======
</TABLE>
Three and Nine Months Ended September 30, 2000 Compared to Three and Nine
Months Ended September 30, 1999
Revenues. Total revenues decreased 27% to $4.5 million from $6.1 million
--------
for the three months ended September 30, 2000 and 1999, respectively. Total
revenues decreased 28% to $14.6 million from $20.2 million for the nine months
ended September 30, 2000 and 1999, respectively. The declines resulted
primarily from a decline in product revenues as the Company transitioned to an
Internet-based business model.
Product revenues decreased 62% to $1.8 million from $4.6 million for the
three months ended September 30, 2000 and 1999, respectively. Product revenues
decreased 56% to $7.0 million from $15.8 million for the nine months ended
September 30, 2000 and 1999, respectively. These declines reflected the factors
related to the discontinuation of the Company's MFP products. Revenue from
shipments of MFP products for the three and nine months ended September 30,
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (CONTINUED)
2000 declined 62% and 56%, respectively, from the similar periods in the
preceding year, as final domestic and international units of the Company's MFP
products were sold. Product revenues also reflected the continued erosion in
average selling prices, driven by the level of OEM business, product
discontinuation and general market pressures. Unit sales for the three and
nine months ended September 30, 2000 also decreased, down 99% and 85%,
respectively, from the similar periods in the prior year. As a result, product
revenues declined for the three and nine months ended September 30, 2000 as the
move to a new business model was implemented. During the second and third
quarters of 2000, we no longer shipped MFP product inventory to our OEM
customer and do not intend to sell any MFP products in the future. Revenues
associated with the sale of consumables decreased 13% for the three months
ended September 30, 2000 versus the similar period in the prior year.
Consumable revenues decreased 10% for the nine months ended September 30, 2000
versus the similar period in the prior year. We anticipate that we will
continue to sell consumables to our installed base of hardware customers.
However, as this base will not continue to grow, we expect consumable revenues
will continue to decline over the next several quarters.
eFax Services revenue increased to $1.9 million for the three months ended
September 30, 2000 as compared to $442,000 for the similar period in 1999. eFax
Services revenue increased to $4.6 million for the nine months ended September
30, 2000 as compared to $475,000 for the similar period in 1999. These
increases reflected the Company's transition to an Internet-based business
model. eFax Services revenue consisted primarily of recurring monthly
subscription fees, signup fees, usage-based charges and revenues from
advertising activities. eFax Services revenue began in June 1999.
Software and technology license fees result from licensing the Company's
proprietary embedded system technology and desktop software to OEMs for
integration into their products. The recurring license revenues reported by the
Company are dependent on the timing and accuracy of product manufacturing or
quarterly sales reports received from the Company's OEM customers. The
quarterly sales reports, as well as any verbal estimates, are subject to delay
and potential revision by the OEM. In such an event, the Company may
subsequently be required to adjust revenues for subsequent periods due to the
change in estimate, which could have a material adverse effect on the Company's
business, financial condition, and results of operations and on the price of
the Company's Common Stock.
Software and technology licensing fees decreased 3% to $795,000 for the
three months ended September 30, 2000 from $816,000 for the similar period in
the prior year. Software and technology licensing fees remained unchanged at
$3.0 million for the nine months ended September 30, 2000 and 1999. Royalty
fees from sales of the Hewlett-Packard 3150 increased by 8% and 32% for the
three and nine months ended September 30, 2000 from the similar periods in the
prior year. We anticipate that future royalties will decrease to minimal
amounts over the next two quarters as this product is nearing the end of
production and marketing.
Development fees declined 100% to zero from $242,000 for the three months
ended September 30, 2000 and 1999, respectively. Development fees declined 100%
to zero from $921,000 for the nine months ended September 30, 2000 and 1999,
respectively. These declines reflected the completion of current projects and
conversion of development fees to per unit royalties. Currently, we have no
plans for new development projects and as a result do not anticipate future
development fees.
International revenues accounted for 4% and 19% of total revenues for the
three months ended September 30, 2000 and 1999, respectively. International
revenues accounted for 6% and 13% of total revenues for the nine months ended
September 30, 2000 and 1999, respectively. Historically, international
revenues were derived primarily from product sales and consumables.
International revenues are likely to further decline in the near term due to
the discontinuation of hardware production. All of the development fees and
software and technology license revenues, and most of the product revenues,
have been denominated and collected in United States dollars. The Company has
not hedged the foreign currency exposure related to product sales denominated
in foreign currencies as the impact has not been significant.
Three customers, Hewlett-Packard, Konica Business Technologies and IKON
Office Solutions accounted for $2.5 million (17%), $1.7 million (10%), and $1.4
million (10%), of total revenues for the nine months ended September 30, 2000,
respectively. The same three customers, Hewlett-Packard, Konica Business
Technologies and IKON Office Solutions, accounted for $2.6 million in software
and technology license fees (15%), $2.3 million in OEM product sales (11%) and
$2.3 million in product sales (11%), respectively, of total revenues for the
nine months ended September 30, 1999.
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (CONTINUED)
Cost of Product Revenues. Cost of product revenues consists primarily of
------------------------
purchased materials; direct production labor and supervision for assembly and
testing; subcontracted manufacturing, mainly for printed circuit boards;
indirect labor for inventory management, shipping and receiving, purchasing,
manufacturing engineering, document control and operations management; and
related facility and support costs. Cost of product revenues may vary as a
percentage of total revenues in the future as a result primarily of the cost of
consumables.
Cost of product revenues decreased 62% to $1.3 million from $3.4 million
for the three months ended September 30, 2000 and 1999, respectively. Cost of
product revenues decreased 55% to $5.1 million from $11.2 million for the nine
months ended September 30, 2000 and 1999, respectively. The gross margins for
the Company's branded MFP products were constrained by the competitive nature
of the marketplace, pricing pressures and the greater name recognition of the
larger companies with which eFax.com competes. The margins on consumables, such
as toner cartridges and drums, and on upgrades, such as the two-line upgrade,
were typically higher than on the base unit. Product gross margin was 25% for
the three months ended September 30, 2000, as compared to 26% for the similar
period in the prior year. Product gross margin was 28% for the nine months
ended September 30, 2000, down from 29% for the similar period in the prior
year. The decreases for the three and nine months ended September 30, 2000 were
attributable to decreased sales volume and average selling price declines.
Cost of eFax Services. Direct costs of providing the eFax Services
---------------------
totaled $1.6 million for the three months ended September 30, 2000 as compared
to $750,000 for the similar period in the prior year. Direct costs of providing
the eFax Services totaled $4.9 million for the nine months ended September 30,
2000 as compared to $1.4 million for the similar period in the prior year. The
increase in cost of eFax Services resulted from expansion in support of the
Company's planned business growth including service delivery costs such as
telephony charges, depreciation on capital equipment, hiring operations
personnel as well as all technical and customer support related expenses.
Cost of Software and Technology License Fees. Cost of software and
--------------------------------------------
technology license fees consists primarily of royalties paid for licensed
technology included in the Company's products and amortization of purchased
technology. Cost of software and technology license fees revenues decreased 57%
to $72,000 from $168,000 for the three months ended September 30, 2000 and
1999, respectively. Cost of software and technology license fees revenues
decreased 41% to $265,000 from $447,000 for the nine months ended September 30,
2000 and 1999, respectively.
Research and Development. Research and development expenses declined 44%
------------------------
to $870,000 from $1.5 million for the three months ended September 30, 2000 and
1999, respectively. Research and development expenses declined 29% to $3.4
million from $4.8 million for the nine months ended September 30, 2000 and
1999, respectively. These declines resulted from lower software development
charges in support of the new eFax Service, reduced outside development
services and eliminated prototype and tooling charges in support of the OEM/MFP
platform.
Selling and Marketing. Selling and marketing expenses decreased 91% to
---------------------
$605,000 from $6.8 million for the three months ended September 30, 2000 and
1999, respectively. Selling and marketing expenses decreased 60% to $5.4
million from $13.3 million for the nine months ended September 30, 2000 and
1999, respectively. Decreased promotional activity in support of the eFax
services accounted for substantially all of the decrease combined with the
elimination of external marketing efforts related to the branded hardware
business. Selling and marketing expenses included approximately $590,000 in
expenses associated with advertising for the three months ended September 30,
2000 as compared to $6.5 million for the similar period in 1999. Selling and
marketing expenses included approximately $5.1 million in expenses associated
with advertising for the nine months ended September 30, 2000 as compared to
$12.1 million for the similar period in 1999. In anticipation of the
consummation of the merger with JFAX.COM, only limited discretionary selling
and marketing expenses are expected in the fourth quarter of 2000.
General and Administrative. General and administrative expenses
--------------------------
increased 85% to $1.6 million from $877,000 for the three months ended
September 30, 2000 and 1999, respectively. General and administrative expenses
increased 19% to $4.9 million from $4.1 million for the nine months ended
September 30, 2000 and 1999, respectively. The increases for the three and nine
months ended September 30, 2000 primarily resulted from legal
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (CONTINUED)
and accounting costs associated with the anticipated merger which were
partially offset by cost containment efforts combined with reductions in
personnel.
Interest and Other Income (Expense), Net. Interest and other income
----------------------------------------
(expense), net, decreased to net other expenses of $427,000 from net other
income of $178,000 for the three months ended September 30, 2000 and 1999,
respectively. Interest and other income (expense), net, decreased to net other
expenses of $725,000 from net other income of $270,000 for the nine months
ended September 30, 2000 and 1999, respectively. These declines reflect
primarily a decrease in interest income from interest-bearing investments and
an increase in interest expense payable under the loan agreement with JFAX.COM.
Provision for Income Tax. Due to eFax.com's net losses, there were no
------------------------
provisions for federal or state income taxes for the three months ended
September 30, 2000 and 1999, respectively. Income tax provisions of none and
$15,000 for the three and nine months ended September 30, 2000, respectively,
relate primarily to foreign withholding taxes on certain royalty fees, but also
include minimum state and franchise taxes. Income tax provisions of $21,000
and $61,000 for the three and nine months ended September 30, 1999,
respectively, relate primarily to foreign withholding taxes on certain royalty
fees, but also include minimum state and franchise taxes.
Liquidity and Capital Resources
-------------------------------
In the three and nine months ended September 30, 2000, the Company's
revenues were not sufficient to support its operations, and revenues will not
be sufficient to support operations until such time, if any, that the Company's
revenues from technology licensing agreements and fee generating Internet-based
services gain substantial market acceptance. eFax.com has financed its
operations to date principally through private placements of debt and equity
securities, proceeds from borrowings, including borrowings from JFAX.COM, Inc.,
and sales of common stock. The total amount of equity raised through November
20, 2000 was approximately $70 million through a series of private financing
rounds at eFax.com, and sales of common and preferred stock. All of such equity
capital was raised prior to December 31, 1999. On May 5, 2000, the Company
entered into a loan agreement with JFAX.COM pursuant to which JFAX.COM is
financing the Company while the two parties seek their shareholders' consent to
the Merger of eFax.com with a subsidiary of JFAX.COM. Under the loan agreement,
the Company may borrow up to $5.0 million, of which, as of November 20, 2000,
the Company has borrowed $4.0 million. Meetings of the shareholders of eFax.com
and JFAX.COM are scheduled for November 22, 2000 to approve the proposed
Merger. If the shareholders of both companies approve the Merger, the Merger is
anticipated to be consummated promptly following the meeting. No assurance can
be given that the approval of the Merger will be obtained, that the Merger will
ultimately be consummated or that the proceeds of the loan agreement will be
sufficient to sustain the Company until the Merger occurs, if ever. In the
event that the Merger is not consummated, is consummated after the expiry of
the term loan or is consummated after the Company has exhausted all of the
funds available under the term loan, the Company will need to obtain additional
financing to repay the loan from JFAX.COM and/or to finance continuing
operating losses. In such event, there can be no assurance that the Company
will be successful in obtaining additional financing and that would result in a
material adverse effect on the Company's ability to meet its business
objectives and continue as a going concern. The Company does not currently
consider it likely that it will be able to find any additional sources of
financing if the Merger does not occur. If we are unable to raise additional
capital in the event that the Merger does not occur, we will have to consider
significantly curtailing our current operations and taking other actions,
including declaring bankruptcy and/or liquidating the Company. See Notes 1 and
10 to the Condensed Consolidated Financial Statements.
Cash, cash equivalents and short-term investments decreased to $877,000 at
September 30, 2000 from $4.7 million at December 31, 1999. Net cash used for
operating activities was $8.3 million for the nine months ended September 30,
2000, resulting primarily from the Company's net loss of $10.0 million
partially offset by non-cash charges of $1.0 million. In addition, inventories
decreased to $1.2 million from $1.7 million at September 30, 2000 and December
31, 1999, respectively, a result of reduced stocking levels related to the
discontinuance of the Company's MFP product line and an associated write-down
of $1.0 million. Accounts receivable decreased to $868,000 from $2.4 million
at September 30, 2000 and December 31, 1999, respectively, which was
principally the result of the withdrawal from the MFP market. Accounts payable
decreased $2.5 million to $1.9 million at September 30, 2000 from $4.4 million
at December 31, 1999. Other changes in working capital items also partially
offset the net loss by approximately $2.0 million.
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (CONTINUED)
Investing activities for the nine months ended September 30, 2000 provided
$3.2 million of cash as $3.0 million in proceeds from the sale of short-term
investments and a $626,000 decrease in other assets were partially offset by
$479,000 in purchases of property.
Financing activities for the nine months ended September 30, 2000 provided
$4.2 million of cash primarily from $4.0 million in proceeds from the issuance
of a note payable to JFAX.COM and $260,000 in proceeds from the sale of common
stock resulting from the exercise of employee stock options.
Factors That May Affect Operating Results
-----------------------------------------
eFax.com operates in a dynamic and rapidly changing environment that
involves numerous risks and uncertainties. This section should be read in
conjunction with the unaudited Condensed Consolidated Financial Statements and
Notes thereto contained in the Report and the audited Consolidated Financial
Statements and Notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations for the year ended January 1,
2000 contained in eFax.com's Annual Report on Form 10-K for the year ended
January 1, 2000.
EFAX.COM MAY BE UNABLE TO OBTAIN SUFFICIENT FUNDS TO CONTINUE OPERATIONS
To the extent our revenues are not sufficient to fund our operations, our
only current source of financing is pursuant to the Term Loan Agreement with
JFAX.COM. Under the Term Loan Agreement, we may borrow up to $5.0 million of
which $4.0 million has already been borrowed.
In order to receive additional advances under the Term Loan Agreement, we
must comply with the conditions to funding required by the Term Loan Agreement
or JFAX.COM must waive those conditions. One of the conditions is a
requirement that we provide documents necessary to protect JFAX.COM's security
interests in some of our assets. To date, we have been unsuccessful in
obtaining these documents, but JFAX.COM has continued to make advances to us
under the Term Loan Agreement. There can be no assurance that JFAX.COM will
continue to waive the conditions to additional funding or that we will be able
to meet these or any other funding conditions in the future.
The Merger is currently anticipated to be completed promptly following our
shareholders meeting on November 22, 2000. If the Merger does not occur,
eFax.com does not anticipate that it will be able to make any additional
borrowings under the Term Loan Agreement and may be required to immediately
repay all of the outstanding principal and interest under the Term Loan
Agreement.
If the Term Loan Agreement is amended to increase the amount of principal
which we may borrow and our borrowing from JFAX.COM is in excess of $5.0
million, the Merger consideration to be received by our common stockholders
will be reduced. The fraction of a share of JFAX.COM Common Stock which will
be received for each share of our common stock is based on a conversion number
formula (the "Conversion Number"). Additional borrowings under the Term Loan
Agreement would cause a decrease in the Conversion Number (and a corresponding
decrease in the amount of Merger consideration to be paid to our common
stockholders) unless the borrowings are offset by our having additional cash at
the time of the Merger. Because the number of shares of JFAX.COM common stock,
which our preferred stockholders will received in the Merger, is unaffected by
our additional borrowings from JFAX.COM, any amounts, which we borrow from
JFAX.COM, will only affect the amount of Merger consideration to be received by
our common stockholders.
Under the terms of the Merger Agreement, we are not permitted to sell any
equity securities to third parties or to incur any indebtedness except in the
ordinary course of business. We also have granted JFAX.COM a security interest
in almost all of our assets. As a result, without JFAX.COM's approval, it may
be difficult for us to obtain financing from any party other than JFAX.COM.
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<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (CONTINUED)
Potential lenders to, and investors in, eFax.com also may be unwilling to
finance us because the funds may primarily be used to make redemption payments
to our preferred stockholders or to repay the Term Loan Agreement instead of
funding our ongoing operations.
No assurances can be given that eFax.com will have sufficient funds to
complete the Merger and/or continue its operations in the event that the Merger
is not completed.
If the Merger does not occur, there can be no guarantee that additional
financing will be available or, if available, will be sufficient to fund our
continued operations. If eFax.com remains independent, we anticipate that we
will continue to have quarterly losses and negative cash flow for the
foreseeable future. We may require additional capital to fund any of the
following:
o Continuing operating losses.
o Unanticipated opportunities.
o Litigation costs.
o Strategic alliances.
o Changing business conditions.
o Unanticipated competitive pressures.
Obtaining additional financing will be subject to a number of factors,
including the fact that our Common Stock is no longer traded on The Nasdaq
National Market; that restrictions placed on us by our creditors and our
preferred stockholders; market conditions; our operating performance; and
investor sentiment. These factors may make the timing, amount, terms and
conditions of additional financings unattractive to us and could have terms
that could dilute the interests of our common stockholders. If we are unable
to raise additional capital in the event that the Merger does not occur, we
will have to consider significantly curtailing our current operations and
taking other actions, including declaring bankruptcy and/or liquidating the
Company.
THERE ARE SIGNIFICANT RISKS IN CONNECTION WITH THE MERGER
The Merger will not be effective, if ever, unless the stockholders of
eFax.com and JFAX.COM both approve resolutions related to the Merger and other
conditions, to the Merger are met. Meetings of the stockholders of eFax.com and
JFAX.COM to approve the Merger are scheduled for November 22, 2000. There can
be no assurance that either the eFax.com or the JFAX.COM stockholders will vote
for approval of the resolutions required to complete the Merger or that the
other conditions necessary to complete the Merger will be satisfied.
As a result of entering into the Merger Agreement and our preparations in
connection with the Merger:
o Prior to the Merger, the prices of eFax.com and JFAX.COM Common Stock
may be linked, subject to other factors affecting the Conversion Number.
If the prices are linked, events, the price of JFAX.COM Common Stock and
over which eFax.com has no control, could affect the price of eFax.com
Common Stock. In addition, some of the factors which effect the price
of JFAX.COM Common Stock, may be different from, or in addition to,
factors which would normally affect the price of our Common Stock.
o eFax.com must obtain JFAX.COM's permission to make significant changes
to our operations. Under the terms of the Merger Agreement, eFax.com is
required to conduct the Company's business in the ordinary course and
use all reasonable efforts to maintain existing relationships with third
parties. In addition, without JFAX.COM's permission, eFax.com is unable
to sell any of the Company's securities or pledge any of the Company's
property as collateral. As a result, without JFAX.COM's consent,
eFax.com is
20
<PAGE> 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (CONTINUED)
unlikely to be able to raise any additional capital. The
Merger Agreement prohibits us from increasing compensation for any of
our employees and this may make it difficult to take actions which would
enable eFax.com to retain key personnel. There can be no assurance that
eFax.com will be able to obtain JFAX.COM's approval to undertake any
activity prohibited by the Merger Agreement and in the absence of such
approval we may be unable to perform the activities necessary to
maximize our business, prospects, financial condition and results of
operations.
o A significant amount of eFax.com's current efforts relate to completing
the Merger. eFax.com's efforts in connection with the Merger affect the
amount of time which our management and other employees have to devote
to the daily operations of the Company. In addition, a substantial
amount of our cash flow is being dedicated to completing the Merger and
these expenditures may limit the cash available to ongoing operations.
We currently estimate that our out-of-pocket expenses related to the
Merger will be approximately $800,000, excluding amounts expended to
integrate our operating systems with JFAX.COM's. The amount of these
expenditures may vary substantially depending on events occurring prior
to the Merger. The allocation of our resources to the Merger may have a
material adverse effect on our business, prospects, financial conditions
and results of operations.
o Terms of the Merger Agreement may preclude other offers. Under the
terms of the Merger Agreement, we may not solicit additional offers to
acquire the Company, but may accept a superior offer by another party to
acquire us. If the Merger does not occur, we will be required to make
the termination payment to JFAX.COM and pay JFAX.COM's out-of-pocket
expenses incurred in connection with the Merger Agreement and the Term
Loan Agreement. eFax.com's potential obligations to JFAX.COM may reduce
the likelihood that any third party would make an offer to acquire us
and could have an effect on the potential price of eFax.com's Common
Stock.
o Any substantial change to the Merger Agreement or substantial increase
in the Merger consideration will require approval of our preferred
stockholders. Under the terms of the Exchange Agreement, we can only
require the preferred stockholders to receive equity securities of
JFAX.COM if the Merger occurs on substantially the same terms as
currently set forth in the Merger Agreement. The preferred stockholders
will have a right to require a cash redemption for the Series D Shares
if the total Merger consideration to be received by the eFax.com common
stockholders and the eFax.com preferred stockholders exceeds 12,000,000
shares of JFAX.COM Common Stock. The cash redemption amount of the
Series D Shares on November 20, 2000 was $19.6 million. In calculating
the 12.0 million share figure, each share of JFAX.COM Common Stock which
can be acquired upon the exercise of any warrant received by a preferred
stockholder as Merger consideration will be included. While our current
estimation is that the total consideration will be less than 12.0
million shares of JFAX.COM Common Stock, no assurances can be given that
the total Merger consideration will not exceed 12.0 million shares of
JFAX.COM Common Stock under the Conversion Number. If events occur
which would cause the Merger consideration to exceed 12.0 million
shares, there can be no assurance that the preferred stockholders would
not exercise their cash redemption rights or would not require
additional consideration in order to permit the completion of the
Merger.
WE WILL HAVE SIGNIFICANT RISKS IF THE MERGER DOES NOT OCCUR
If the Merger Agreement is terminated and eFax.com's board of directors
determines that it is in our best interests to seek another merger or business
combination, it is not certain that we will be able to find a partner willing
to pay an equivalent or more attractive price than that which would be paid in
the Merger.
In addition, if the Merger Agreement is terminated:
o The holders of our Series D Shares are expected to have the right to
require us to redeem all of the outstanding preferred stock in cash
(approximately, $19.6 million on November 20, 2000). At present,
eFax.com would not have sufficient cash to redeem our outstanding
preferred stock.
o We will be required to repay to JFAX.COM the amount outstanding under
the Term Loan Agreement,
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<PAGE> 22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (CONTINUED)
including interest. As of the date of this Report, the outstanding
principal under the Term Loan Agreement is $4.0 million. As collateral
for the loan, we have given JFAX.COM a security interest in
substantially all of our assets, including all of our DID
numbers. If the loan becomes due and we are unable to timely repay any
amounts outstanding, JFAX.COM may exercise its rights in connection with
the assets in which it has a security interest.
o We will need substantial amounts of cash to enable us to continue our
operations as they are currently being conducted.
At present, we do not have sufficient cash to redeem our outstanding
preferred stock or to repay the outstanding principal and interest under the
Term Loan Agreement. We also do not currently have any prospects for obtaining
significant additional financing and no assurance can be given that we will be
able to obtain the necessary cash to pay any amounts we owe or to continue our
business. If sufficient cash cannot be obtained, we may be required to
significantly curtail our operation and to take other actions including
declaring bankruptcy and/or liquidating the company.
ADDITIONAL RISKS
For additional risks effecting the ongoing operations of the Company on a
stand alone basis, reference is made to the risk factors set forth in the
Company's Annual Report on Form 10-K for the year ended January 1, 2000 and
Quarterly Reports on Form 10-Q for the periods ended April 1, 2000 and July 1,
2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No change has occurred since the filing by the Company of its Annual
Report on Form 10-K for the year ended January 1, 2000. Reference is made to
Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk,
in the Registrant's Annual Report on Form 10-K for the year ended January 1,
2000.
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<PAGE> 23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 20, 2000, Jerry Kirsch filed a lawsuit against the Company in the
United States District Court for the Eastern District of Michigan asserting the
ownership of certain United States patents and claiming that the Company is
infringing these patents as a result of the Company's sale of multifunction
hardware products. The suit requests unspecified damages, treble damages due to
willful infringement, and preliminary and permanent injunctive relief. We have
reviewed the Kirsch patents with our business and technical personnel and
outside patent counsel and have concluded that we do not infringe these
patents. As a result, we are confident of our position in this matter and
intend to defend the suit vigorously; however if such suit is successful, it
could have a material adverse effect on the Company and even if unsuccessful
could require the substantial expenditure of time and costs in its resolution.
See Note 9 to Notes to Condensed Consolidated Financial Statements.
ITEM 2. CHANGES IN SECURITIES
(a) On July 13, 2000, the Company entered into an exchange agreement with
the holders of the Company's Series B Convertible Preferred Stock
under which the holders agreed to exchange all of their outstanding
shares of the Series B Convertible Preferred Stock for a new Series D
Convertible Preferred Stock. The exchanged occurred on July 17, 2000
and the preferred stockholders received one share of Series D
Convertible Preferred Stock for each of the 1,447 shares of Series B
Convertible Preferred Shares.
The exchange of the Series B Convertible Preferred Stock into the Series D
Convertible Preferred Stock was intended to be exempt from registration and
prospectus delivery requirements under the Securities Act of 1933, as amended
(the "Securities Act"), by virtue of Section 4(2) thereof due to, among other
things, (i) the limited number and nature of persons to whom the securities
were issued, (ii) the distribution of disclosure documents to the investors,
(iii) the fact that such persons represented and warranted to the Company,
among other things, that such persons were acquiring the securities for
investment only and not with a view to the resale or distribution thereof, and
(iv) the fact that a certificate representing the securities was issued with a
legend to the effect that such securities had not been registered under the
Securities Act or any state securities laws and could not be sold or
transferred in the absence of such registration or an exemption therefrom. In
addition, the exchange of the Series B Convertible Preferred Stock into the
Series D Convertible Preferred Stock was exempt under Section 3(a)(9) of the
Securities Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
--------
Exhibit
Number Description
------ -----------
27.1 Financial Data Schedule.
-------------------------
(b) Reports on Form 8-K. During the fiscal quarter ended September 30, 2000,
the Company filed the following Current Reports on Form 8-K:
o Current Report on Form 8-K, as amended by two filings, filed on July 14,
2000, with regard to the execution of a definitive merger agreement with
JFAX.COM, Inc. and a subsidiary of JFAX.COM, Inc.
o Current report on Form 8-K, filed on August 9, 2000, with regard to the
delisting of the Company's common stock from the Nasdaq National Market
System.
23
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: November 20, 2000 By: /s/ TODD J. KENCK
-----------------------
Todd J. Kenck
Vice President, Finance and
Chief Financial Officer
(Authorized Officer and
Principal Financial and
Accounting Officer)
