<PAGE>
As filed with the Securities and Exchange Commission on May 26, 1999
Registration No. 333-76477
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
Amendment No. 1
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
JFAX.COM, INC.
(Exact name of registrant as specified in its charter)
--------------
<TABLE>
<S> <C> <C>
Delaware 4822 51-0371142
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
--------------
10960 Wilshire Boulevard
Suite 500
Los Angeles, California 90024
(310) 966-1800
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Richard S. Ressler
Chief Executive Officer
JFAX.COM, INC.
10960 Wilshire Boulevard
Suite 500
Los Angeles, California 90024
(310) 966-1800
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------
Copies to:
<TABLE>
<S> <C>
Frank H. Golay, Jr., Esq. Nicholas P. Saggese, Esq.
Sullivan & Cromwell Skadden, Arps, Slate, Meagher & Flom LLP
1888 Century Park East 300 S. Grand Avenue
Los Angeles, California 90067 Los Angeles, California 90071
Telephone: (310) 712-6600 Telephone: (213) 687-5000
Fax: (310) 712-8800 Fax: (213) 687-5600
</TABLE>
--------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
--------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 464(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Title of each class of Proposed maximum Proposed maximum Amount of
securities to be Amount to be offering price aggregate registration
registered registered per unit(1) offering price(1) fee(2)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value................. 8,625,000 shares $11.00 $94,875,000 $26,376
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933.
(2) A registration fee of $25,020 was paid previously.
--------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+We will amend and complete the information in this prospectus. Although we +
+are permitted by US federal securities laws to offer these securities using +
+this prospectus, we may not sell them or accept your offer to buy them until +
+the documentation filed with the SEC relating to these securities has been +
+declared effective by the SEC. This prospectus is not an offer to sell these +
+securities or our solicitation of your offer to buy these securities in an +
+jurisdiction where that would not be permitted or legal. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION - May 26, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Prospectus
, 1999
[LOGO OF JFAX.COM, INC.]
JFAX.COM, INC.
7,500,000 Shares of Common Stock
- --------------------------------------------------------------------------------
Our Company: The Offering:
. JFAX.COM, INC. . JFAX.COM is
10960 Wilshire offering 7,500,000
Boulevard, shares. The selling
Suite 500 stockholders will
Los Angeles, not participate in
California 90024 this part of the
(310) 966-1800 offering.
www.jfax.com
. The underwriters
have an option to
purchase an
additional 655,200
shares from
JFAX.COM and
469,800 shares from
selling
stockholders to
cover over-
Proposed Symbol/Proposed allotments.
Market:
. "JFAX"/Nasdaq
National Market . This is our
initial public
offering.
. Closing: , 1999.
<TABLE>
<CAPTION>
- --------------------------------------------------------------
Per Share Total
- --------------------------------------------------------------
<S> <C> <C>
Estimated public offering price: $9.00 - $11.00 $
Underwriting fees:
Proceeds to JFAX.COM:
Proceeds to selling stockholders:
- --------------------------------------------------------------
</TABLE>
This investment involves risk. See "Risk Factors" beginning on Page 8.
- --------------------------------------------------------------------------------
Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
Donaldson, Lufkin & Jenrette BancBoston Robertson Stephens
CIBC World Markets
DLJdirectInc.
<PAGE>
[ARTWORK]
<PAGE>
In connection with this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may overallot in connection with
the offering and may bid for and purchase shares of the common stock in the
open market. For a description of these activities, see "Underwriting."
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
This prospectus includes statistical data regarding our company, the
Internet and the business areas in which we operate and compete. Data regarding
our company are based on our records and data regarding the Internet and the
business areas in which we operate and compete are taken or derived from
information published or prepared by various independent industry sources,
including International Data Corporation, a provider of market and strategic
information for the information technology industry. Although we believe that
these independent industry sources are reliable, we have not independently
verified these data.
Unless otherwise indicated, all information in this prospectus reflects a
1.25 for one common stock split that we effected by means of a stock dividend
on May 21, 1999.
Information contained in our web site does not constitute part of this
prospectus.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 8
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Consolidated Financial Data..................................... 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 24
Business................................................................. 34
Management............................................................... 49
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Principal and Selling Stockholders....................................... 55
Certain Transactions..................................................... 58
Description of Capital Stock............................................. 63
Shares Eligible for Future Sale.......................................... 67
Certain United States Federal Tax Consequences to Non-U.S. Holders of
Common Stock............................................................ 69
Underwriting............................................................. 72
Validity of Securities................................................... 75
Experts.................................................................. 75
Available Information.................................................... 75
Index to Financial Statements............................................ F-1
</TABLE>
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus, including "Risk Factors" beginning on
page 8, carefully. Unless we indicate otherwise, the information in this
prospectus assumes that the underwriters will not exercise their over-allotment
option.
JFAX.COM
Our Company
We are an Internet-based messaging and communications services provider to
individuals and businesses throughout the world. Our services enable the user's
e-mail box to function as a single repository for all e-mail, fax and voice
mail and permit convenient e-mail and voice mail message retrieval through e-
mail or by phone. Customers can sign up for all of our services through our web
site and can promptly receive a JFAX.COM phone number.
Our subscription services are as follows:
. Free Fax: free phone number enabling receipt of faxes in e-mail.
. Free Voice: free phone number enabling receipt of voice mail in e-mail.
. Business Fax: phone number in area code of customer's choice enabling
faxes to be sent and received in e-mail.
. E-mail by Phone: access and management of e-mail messages through a touch
tone phone, including the ability to listen to e-mail messages.
. Unified Messaging: phone number enabling the end-user's e-mail box to
function as a single repository for all e-mails, faxes and voice mails
and permitting convenient management of e-mails and faxes by phone,
management and retrieval of faxes and voice mails by e-mail,
and retrieval of e-mail by phone.
In addition to our subscription services, we provide a variety of services
for which we charge based on usage, including:
. Outbound fax: user can fax documents through e-mail.
. Broadcast fax: user can send the same outbound fax to multiple
recipients.
. Outbound voice: user can send a voice message through e-mail to a
telephone.
. Broadcast voice: user can send the same voice message to multiple
recipients.
To further enhance the value of our services to our customers, we are
developing additional Internet-based messaging and communications services. See
"Business."
We believe we are the world's largest provider of Internet-based unified
messaging services with over 30,000 paid subscriptions as of March 31, 1999.
Since we started offering our services on a commercial basis in June 1996, we
have expanded our network to offer services in over 60 area codes in the United
States and abroad, including in 21 of the 25 most populous metropolitan areas
in the United States and such international business centers as London, Paris,
Milan, Frankfurt, Zurich, Sydney and Tokyo. However, we have incurred operating
and net losses since our inception. See Summary Consolidated Financial and
Other Data at page 7.
4
<PAGE>
Our Strategy
Our objective is to be the leading global provider of Internet-based unified
messaging and related services to individuals and businesses. International
Data Corporation projects that there will be over 12.9 million unified
messaging mailboxes in operation in the United States by 2002, each generating
$20 in unified messaging revenue per month. To achieve our objective, we intend
to grow our traditional subscriber base, capitalize on our free services, build
the JFAX.COM brand, expand our service offerings, further develop strategic
alliances and expand our international network. We believe that our experience
in meeting the evolving needs of the unified messaging market positions us well
to capitalize on the rapidly growing demand for Internet-based unified
messaging services.
We are a Delaware corporation. The address of our principal executive office
is 10960 Wilshire Boulevard, Suite 500, Los Angeles, California 90024, and our
telephone number is (310)966-1800. Our web site address is http://www.jfax.com.
The information on our web site is not part of this prospectus.
5
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered:
By JFAX.COM................... 7,500,000 shares
Over-allotment option:
By JFAX.COM................... 655,200 shares
By selling stockholders....... 469,800 shares
Total..................... 1,125,000 shares
Common stock to be outstanding
after the offering.............. 31,812,276 shares
Use of proceeds.................. We will use the net proceeds from the
offering to expand our network around the
world, to repay indebtedness and redeem
preferred stock and to fund marketing and
advertising activities. We will use any
remaining proceeds for working capital and
general corporate purposes. See "Use of
Proceeds."
Dividend policy.................. We intend to retain all future earnings to
fund the development and growth of our
business. Therefore, at this time we do not
anticipate paying cash dividends.
Nasdaq National Market Symbol.... "JFAX"
</TABLE>
The shares of common stock to be outstanding after the offering are stated
as of May 15, 1999 in this prospectus and exclude:
. 4,375,000 shares of common stock reserved for issuance under our stock
option plan of which 1,515,693 shares are subject to outstanding
options, and
. 4,512,916 shares of common stock issuable upon exercise of outstanding
warrants.
In connection with this offering, we intend to grant options under our stock
option plan to our directors and certain officers and employees. We expect
these grants will consist of options to purchase an aggregate of approximately
760,000 shares of our common stock at an exercise price of $9.00 per share.
These options will begin vesting at the first anniversary of the grant date.
For additional information, see "Certain Transactions."
JFAX.COM is our service mark. This prospectus contains other product names,
trade names, trademarks and service marks of JFAX.COM and of other
organizations.
Risk Factors
An investment in our common stock involves a high degree of risk. See "Risk
Factors" beginning on page 8 to read about risks you should consider before
buying shares of our common stock, including financial, developmental,
operational, technological, regulatory, competitive and other risks associated
with our emerging business.
6
<PAGE>
Summary Consolidated Financial And Other Data
(In thousands, except per share and other data)
Below is summary historical consolidated financial and other data of
JFAX.COM. We derived the statement of operations and balance sheet financial
data from our audited and unaudited consolidated financial statements. You
should read this summary data together with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and the related notes appearing elsewhere in this
prospectus. The as adjusted balance sheet data below gives effect to the
application of the net proceeds from the sale of 7,500,000 shares of common
stock by JFAX.COM in the offering, assuming an initial public offering price of
$10.00 per share, after deducting estimated underwriting discounts and
commissions and estimated offering expenses.
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
------------------------- ----------------
1996 1997 1998 1998 1999
(unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue.......................... $ 105 $ 685 $ 3,520 $ 490 $ 1,411
Gross profit (loss).............. (45) (173) 122 (136) 357
Operating loss................... (768) (4,996) (10,975) (1,686) (2,290)
Net loss attributable to common
shares.......................... (769) (4,783) (12,404) (1,688) (2,976)
Loss per share:
Basic and diluted net loss per
common share................... $(0.12) $ (0.30) $ (0.56) $ (0.09) $ (0.12)
Common shares used in
determining net loss per
share.......................... 6,407 15,738 22,182 19,435 24,308
Other Data (at period end)
(unaudited):
Paid subscriptions............... 1,269 7,125 27,063 30,982
Available area codes............. 15 45 68 70
</TABLE>
<TABLE>
<CAPTION>
Year ended Three Months Ended
December 31, 1998 March 31, 1999
----------------- ------------------
(unaudited)
<S> <C> <C>
Pro Forma Statement of Operations Data:
Pro forma net loss attributable to common
shares.................................. $(10,709) $(2,083)
Pro forma net loss per common share...... $ (0.35) $ (0.07)
Common shares used in determining pro
forma per share data.................... 30,900 31,808
</TABLE>
<TABLE>
<CAPTION>
As of March 31, 1999
------------------------
Actual As Adjusted(1)
(unaudited)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............................. $ 5,510 $56,928
Working capital....................................... 4,229 55,912
Total assets.......................................... 8,960 60,378
Long-term debt........................................ 6,285 888
Redeemable common and preferred stock(/2/)............ 10,104 --
Stockholders' equity (deficiency)..................... (10,503) 57,068
</TABLE>
- -------
(1) For purposes of the pro forma statements of operations data, it is assumed
that the extinguishment of our Senior Subordinated Notes due 2004, as
described under "Use of Proceeds," occurred at the beginning of each of
the financial periods presented, and that the additional shares being
issued in this offering were outstanding throughout the respective
periods. The pro forma statement of operations data does not include an
extraordinary charge of approximately $4.8 million for the early
extinguishment of the Senior Subordinated Notes due 2004.
(2) See Note 4 of the notes to our consolidated financial statements for the
conditions applicable to the redeemable securities.
7
<PAGE>
RISK FACTORS
An investment in our common stock involves a high degree of risk. You should
consider the following factors carefully before deciding to purchase shares of
our common stock.
Because We Have Limited Operating History, it is Difficult to Evaluate Our
Business
We have a limited operating history. We were formed in December 1995, and
our services became commercially available in 1996. Because of our limited
operating history, you have limited operating and financial data about us upon
which to base an evaluation of our performance and an investment in our common
stock. You should consider our prospects in light of the risks, expenses and
difficulties we may encounter, including those frequently encountered by new
companies competing in rapidly evolving markets. If we are unable to execute
our plans and grow our business, either as a result of the risks identified in
this section or for any other reason, this failure would have a material
adverse effect on our business, prospects, financial condition and results of
operations.
We Expect Our Losses and Negative Cash Flow to Continue, Which May Adversely
Impact our Business and Our Stockholders
We have incurred substantial operating losses, net losses and negative cash
flow on both an annual and quarterly basis. For the year ended December 31,
1998, we had an operating loss of $11.0 million, a net loss attributable to
common shares of $12.4 million and negative cash flow from operating and
investing activities of $10.5 million. For the quarter ended March 31, 1999, we
had an operating loss of $2.3 million, a net loss attributable to common shares
of $3.0 million and negative cash flow from operating and investing activities
of $1.7 million. We expect to continue to incur net losses for the foreseeable
future and cannot assure you that we will ever achieve profitability or
generate positive cash flow.
We Expect Our Expenses to Increase, and our Expenses May Exceed Our Revenues
We expect our operating expenses and capital expenditures to increase
significantly, especially in the areas of sales and marketing expenses and
general and administrative expenses, as we develop and expand our business. As
a result, we will need to increase our revenue significantly to become
profitable. In order to grow our revenue, we need to add customers for our
services and increase the usage of our services by our customers, thereby
increasing the fees and usage charges that we collect. If our revenue does not
increase as much as we expect or if increases in our expenses are not in line
with our plans, there could be a material adverse effect on our business,
prospects, financial condition and results of operations.
We May Need and Be Unable to Obtain Additional Funding
We believe that, following the offering, our cash reserves should be
adequate to fund our operations and capital expenditures for at least the next
12 months. If our capital requirements or revenue vary materially from our
current plans or if unforseen circumstances occur, we may require additional
financing sooner than we anticipate. This may not be available on a timely
basis, in sufficient amounts or on terms acceptable to us. This financing may
also dilute existing stockholders. Any debt financing or other financing of
securities senior to common stock will likely include financial and other
covenants that will restrict our flexibility. At a minimum, we expect these
covenants to include restrictions on our ability to pay dividends on our common
stock. Any failure to comply with these covenants would have a material adverse
effect on our business, prospects, financial condition and results of
operation.
We Cannot Predict Whether We Will be Successful Because Our Business Model is
Unproven and Our Market is Developing
Our business strategy is unproven. A number of our services have been
offered to the public since June 1996. However, it is too early to reliably
gauge market penetration rates for our services.
8
<PAGE>
To date, we have not established a definite demand or a reliable cost to add a
subscriber for these services. In addition, there can be no assurance that we
will be successful in the offering of any additional services that we are
currently planning. If the demand is lower than anticipated, or the cost to add
a subscriber is higher, our business, prospects, financial condition and
results of operations would be materially and adversely affected.
Our Failure to Achieve or Sustain Market Acceptance at Desired Pricing Levels
Could Impair Our Ability to Achieve Profitability or Positive Cash Flow
Prices for messaging services have fallen historically. We expect prices in
our industry in general to continue to fall, and prices for our existing and
future services may fall correspondingly. Accordingly, we cannot predict
whether our pricing schedule will prove to be viable, whether demand for our
services will materialize at the prices we would like to charge or whether we
will be able to sustain adequate future pricing levels as competitors introduce
competing services.
In addition, the prices for our services are in some cases higher than those
charged by our competitors. Customers may be unwilling to pay our prices.
Furthermore, the widespread availability of free services, including our own,
may result in consumers being unwilling to pay for our services. Our failure to
achieve or sustain desired pricing levels would have a material adverse effect
on our business, prospects, financial condition and results of operations.
The Recent Introduction of Free Fax Services May Harm Our Business
We recently introduced free services. We expect to generate revenues from
our free service customers by selling them additional services for which
charges are usage-based. We will also encourage free service customers to
convert to paid subscriptions. We have no track record from which to predict
levels of revenue to be achieved from customers who are attracted by our free
services. Our introduction of free services may cause some of our paying
customers to switch to our free services and discontinue their payments to us.
Certain companies such as Efax and CallWave have recently introduced free
fax to e-mail services. We introduced our free services principally as a
promotional tool, and partially in response to the introductions by these other
companies. These companies provide banner advertising instead of charging
subscription fees. We do not intend to adopt a banner advertising method for
our free services. We expect the trend for free services will continue in our
industry. There can be no assurance that the recent introduction of these
competing services will not have a material adverse effect on our business,
prospects, financial condition and results of operations.
Our Operating Results In One or More Future Periods Are Likely to Fluctuate
Significantly and May Negatively Impact Our Stock Price
Our annual and quarterly operating results may fluctuate significantly in
the future as a result of numerous factors, including:
. the rate at which we are able to add subscriptions and sell additional
usage-based services to both free and paid customers of our subscription
services,
. the amount and timing of expenditures to form strategic relationships, to
enhance sales and marketing and to expand our infrastructure, or other
costs, as we expand our network,
. the announcement or introduction of new or enhanced services by our
competitors,
. technical difficulties, system failures or network downtime,
. loss of strategic alliances,
9
<PAGE>
. changes in the growth rate of Internet usage and acceptance by consumers
of electronic commerce, and
. economic and competitive conditions specific to our industry.
As a result, it is likely that in some future periods our operating results
will be below the expectations of securities analysts and investors. If this
happens, the trading price of our common stock would likely be materially
adversely affected.
Our Failure to Manage Growth Effectively Could Impair Our Business
Any expansion of our business could place a significant strain on our
management, financial and other resources. Our ability to manage future growth,
if it occurs, will also depend upon the capacity, reliability and security of
our network infrastructure.
We anticipate significantly increasing the size of our sales and marketing
efforts following the completion of the offering. We also will be required to
increase our customer support staff. There can be no assurance that these
expansions will be successfully completed. Our inability to promptly address
and respond to these circumstances could have a material adverse effect on our
business, prospects, financial condition and results of operations.
If We Fail to Expand and Adapt Our Network Infrastructure, Our Business May be
Harmed
We must continue to expand and adapt our network infrastructure, both
domestically and internationally, as the number of customers and the volume of
messages they wish to transmit increases. The expansion and adaptation of our
network infrastructure will require substantial financial, operational and
management resources, even if the expansion is primarily for our free service
offerings. There can be no assurance that we will be able to expand or adapt
our network infrastructure to meet any additional demand on a timely basis, at
a commercially reasonable cost or at all.
In addition, future growth in our subscriber base for both free and paid
services, together with growth in the subscriber bases of other companies who
have recently introduced free facsimile-to-email services and other Internet-
dependent services, will increase the demand for available network
infrastructure and Internet data transmission capacity. This could lead to
insufficient capacity and an inability on our part to acquire the necessary
network infrastructure and transmission capacity to accommodate our future
growth. In particular, insufficient network capacity could lead to a reduction
in our services' reliability. Since customers will not tolerate a service
hampered by slow delivery times or unreliable service levels, insufficient
network capacity could have a material adverse effect on our business,
prospects, financial condition and results of operations.
Our Business Could Suffer if We Cannot Obtain Telephone Numbers
Our future success will depend upon our ability to procure large quantities
of telephone numbers in the United States and foreign countries, including
telephone numbers in area codes that our customers demand. Our ability to
procure telephone numbers depends on applicable regulations, the practices of
telecommunications carriers that provide telephone numbers and the level of
demand for new telephone numbers. Failure to obtain these numbers in a timely
and cost-effective manner may prevent us from entering some foreign markets or
hamper our growth in domestic markets, and may have a material adverse effect
on our business, prospects, financial condition and results of operations.
Our ability to procure large quantities of phone numbers will be
particularly limited in area codes of large metropolitan areas, and we may at
some point be unable to provide our customers
10
<PAGE>
with phone numbers in the most desirable area codes (e.g., 212 in Manhattan and
171 in London) in such areas, having to rely instead on new area codes created
for these areas. We do not allow customers of our free services to choose the
area code for the phone number we provide, and to some extent this makes our
free services less attractive, particularly in comparison to our subscription
services, or subscription services provided by others where the customer may
select an area code.
In addition, future growth in our subscriber base for both free and paid
services, together with growth in the subscriber bases of providers of free fax
to e-mail services, will increase the demand for large quantities of telephone
numbers, which could lead to insufficient capacity and an inability on our part
to acquire the necessary phone numbers to accommodate our future growth.
Any Failure of the Internet as a Message Transmission Medium Could Harm Our
Business
Our future success will depend upon our ability to route our customers'
traffic through the Internet and through other data transmission media. Our
success is largely dependent upon the viability of the Internet as a medium for
the transmission of documents. We also depend on the continued operation of a
user's e-mail system. To date, we have transmitted a limited amount of customer
traffic. There can be no assurance that these will prove to be viable
communications media, that document transmission will be reliable or that
capacity constraints which inhibit efficient document transmission will not
develop.
We access the Internet and other data transmission media through dedicated
or shared connections to third party service providers. In many cases, we pay
fixed monthly fees for Internet and other access, regardless of our usage or
the volume of our customers' traffic. There can be no assurance that the
current pricing structure for access to and use of these media will not change
unfavorably and, if the pricing structure changes unfavorably, our business,
prospects, financial condition and results of operations could be materially
and adversely affected.
If the Internet Stops Growing, Our Business will Suffer.
Our future success is substantially dependent upon continued growth in the
use of the Internet in order to support the sale of our services. There can be
no assurance that the number of Internet users will continue to grow. As is
typical in the case of a new and rapidly evolving industry, demand and market
acceptance for recently introduced services are subject to a high level of
uncertainty. The Internet may not prove to be a viable avenue to transmit
communications for a number of reasons, including lack of acceptable security
technologies, lack of access and ease of use, traffic congestion, inconsistent
quality or speed of service, potentially inadequate development of the
necessary infrastructure, excessive governmental regulation, uncertainty
regarding intellectual property ownership or lack of timely development and
commercialization of performance improvements, including high-speed modems.
We Cannot Be Assured that the Market Will Switch to Our Services
Our ability to route existing customers' traffic through the Internet and
other data transmission media and to sell our services to new customers may be
inhibited by, among other factors, the reluctance of some customers to switch
from traditional fax delivery to delivery over the Internet, and by widespread
concerns over the adequacy of security in the exchange of information over the
Internet. Additionally, there may be delays in any transmission over the
Internet which may result in our service being regarded as less timely than a
traditional fax delivery. If our existing and potential customers do not accept
delivery through the Internet as a means of sending and receiving documents via
fax, our business, prospects, financial condition and results of operations
would be materially and adversely affected.
In addition, we face similar risks regarding the market acceptance of the
delivery of customers' voice mail messages through the Internet. As a result,
our business, prospects, financial condition and results of operations may be
materially and adversely affected.
11
<PAGE>
Our Business May be Constrained Because We Support a Limited Number of
Operating System Platforms
Our services can be utilized only by those users whose computers are run by
Windows 3.1, Windows 95, Windows 98, Windows NT, Macintosh, and UNIX operating
systems. Since there are other operating system platforms, we cannot provide
our services to all potential customers for our services. To the extent other
operating systems proliferate in the future, our ability to attract new
customers and keep existing customers could be significantly impaired.
The Market In Which We Operate is Highly Competitive, and We May Face Increased
Competition From New Entrants and Established Industry Competitors With
Significantly Greater Financial Resources
Competition in the converging Internet and telecommunications industries is
becoming increasingly intense. We face competition for our services from, among
others, voice mail providers, fax providers, paging companies, Internet service
providers, e-mail providers and telephone companies.
We compete against other companies that provide one or more of the services
that we do. In addition, these competitors may add services to their offerings
to provide unified messaging services comparable to ours. Future competition
could come from a variety of companies both in the Internet industry and the
telecommunications industry, which could include some of our strategic
alliances. These industries include major companies which have much greater
resources than we do, have been in operation for many years and have large
subscriber bases. These companies may be able to develop and expand their
communications and network infrastructures more quickly, adapt more swiftly to
new or emerging technologies and changes in customer requirements, take
advantage of acquisition and other opportunities more readily and devote
greater resources to the marketing and sale of their products and services than
we can. There can be no assurance that additional competitors will not enter
markets that we plan to serve or that we will be able to compete effectively.
Free Services Supported by Advertising May Cause Subscribers to Become
Unwilling to Pay for Our Services
Many services provided over the Internet are provided free of charge to
attract traffic to the service provider's website. These free services include
e-mail, news feeds and stock quotes along with many others. The providers of
free services attempt to recover their expenses by selling advertising based on
the traffic generated from users of free services. Services similar to ours are
being provided free to users on an advertising supported basis. Examples
include a free voice mail product provided by Echobuzz. These services require
the user to listen to taped ads before they can access their messages. Fax-4-
Free offers free faxing services to users with each outbound fax containing ads
in the margins. Efax and CallWave each offer fax to e-mail services free to
users, and their users view advertisements when they receive their faxes. We
expect that as these free services become popular with consumers, they will
require our subscription services to provide clear incremental benefits over
free services to justify paying for our services. In addition, to the extent
free services of another provider are used by a potential JFAX.COM customer, it
may be harder for us to persuade that potential customer to try our services.
We May Have Difficulty in Retaining Our Customers
Our sales and marketing and other costs of acquiring new subscriptions are
substantial relative to the monthly fees derived from subscriptions.
Accordingly, we believe that our long-term success depends largely on our
ability to retain our existing customers, while continuing to attract new ones.
We continue to invest significant resources in our network infrastructure and
customer and technical
12
<PAGE>
support capabilities to provide high levels of customer service. We cannot be
certain that these investments will maintain or improve customer retention. We
believe that intense competition from our competitors, some of which offer free
service or other enticements for new subscriptions, has caused, and may
continue to cause, some of our customers to switch to our competitors'
services. In addition, some new customers use the Internet only as a novelty
and do not become consistent users of Internet services and, therefore, may be
more likely to discontinue their service. These factors adversely affect our
customer retention rates. Any decline in customer retention rates could have a
material adverse effect on our business, prospects, financial condition and
results of operations.
The Messaging and Communications Industry is Undergoing Rapid Technological
Changes and New Technologies May Be Superior to the Technologies We Use
The messaging and communications industry is subject to rapid and
significant technological change. We cannot predict the effect of technological
changes on our business. Additionally, widely accepted standards have not yet
developed for the technologies we use.
We expect that new services and technologies will emerge in the market in
which we compete. These new services and technologies may be superior to the
services and technologies that we use or these new services may render our
services and technologies obsolete. In addition, these services and
technologies may not be compatible or operate in a manner sufficient for us to
execute our business plan, which could have a material adverse effect on our
business, prospects, financial condition and results of operations.
A System Failure or Breach of Network Security Could Delay or Interrupt Service
to Our Customers
Our operations are dependent on our ability to protect our network from
interruption by damage from fire, earthquake, power loss, telecommunications
failure, unauthorized entry, computer viruses or other events beyond our
control. There can be no assurance that our existing and planned precautions of
backup systems, regular data backups and other procedures will be adequate to
prevent significant damage, system failure or data loss.
Despite the implementation of security measures, our infrastructure may also
be vulnerable to computer viruses, hackers or similar disruptive problems
caused by our customers or other Internet users. Persistent problems continue
to affect public and private data networks, including computer break-ins and
the misappropriation of confidential information. Computer break-ins and other
disruptions may jeopardize the security of information stored in and
transmitted through the computer systems of the individuals and businesses
utilizing our services, which may result in significant liability to us and
also may deter current and potential customers from using our services. Any
damage, failure or security breach that causes interruptions or data loss in
our operations or in the computer systems of our customers could have a
material adverse effect on our business, prospects, financial condition and
results of operations.
Our Software May Have Defects and We May Encounter Development Delays
Software-based services and equipment, such as our services, may contain
undetected errors or failures when introduced or when new versions are
released. There can be no assurance that, despite testing by us and by current
and potential customers, errors will not be found in our software after
commercial release, or that we will not experience development delays,
resulting in delays in market acceptance, any of which could have a material
adverse effect on our business, prospects, financial condition and results of
operations.
We Depend on Third Parties to Market Our Services, and the Failure by These
Third Parties to Market Our Services May Hinder Our Marketing Efforts
Currently, we rely on third parties, including e-mail providers, Internet
service providers, online service providers, telecommunications companies,
systems integrators and value-added resellers as a
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<PAGE>
means of marketing our services. In the event of any prolonged technical
problems or failures experienced by these third parties or the termination of
these marketing agreements, our marketing capabilities would be significantly
hindered, which could have a detrimental effect on our business, prospects,
financial condition or results of operations. Many of these relationships are
terminable at will or upon short notice. Furthermore, none of our relationships
with these third parties includes long-term contractual commitments to continue
the relationship, and most of these relationships are in the early stages of
development. Because many of our strategic allies view unified messaging as
important to their future, they may elect to directly compete with us in the
provision of unified messaging services.
In addition, our success in developing an international customer base
depends on the formation of alliances with foreign companies and their ability
to successfully market our services. In any relationship with a third party,
particularly internationally, there may be difficulties in integrating or
coordinating our services and systems with those of the other party. The
failure to form and maintain these strategic alliances or the failure of these
companies to successfully develop and sustain a market for our services could
have a material adverse effect on our business, prospects, financial condition
and results of operations.
Our Success Depends on Our Retention of Our Executive Officers and Our Ability
to Hire and Retain Additional Key Personnel
Our future performance depends in significant part upon the continued
service of our executive officers named in the "Management" section at page 49
and other key technical, sales and management personnel. The loss of the
services of one or more of our executive officers or other key employees could
have a material adverse effect on our business, prospects, financial condition
and results of operations. Our future success also depends on our continuing
ability to attract and retain highly qualified technical, sales and managerial
personnel. Competition for such personnel is intense, and there can be no
assurance that we can retain our key employees or that we can attract,
assimilate or retain other highly qualified technical, sales and managerial
personnel in the future.
Our International Operations Are Risky
At the end of 1998, foreign telephone numbers represented a significant
portion of our total telephone numbers. These foreign numbers were sold through
our U.S. web site. We intend to continue to enter additional markets and to
expand our operations outside the United States. International sales are
subject to inherent risks, including:
. unexpected changes in regulatory requirements and tariffs,
. a more complex process to acquire telephone numbers,
. difficulties in staffing and managing foreign operations,
. the possibility of subsidization of our competitors and the
nationalization of business,
. longer payment cycles, and greater difficulty in accounts receivable
collection,
. differing technology standards,
. imposition of currency exchange controls, and
. potentially adverse tax consequences.
To the extent the services we sell are priced and paid for in foreign
currencies, gains and losses on the conversion of U.S. dollars of receivables
and payables arising from international operations could in the future
contribute to fluctuations in our results of operations. Additionally,
fluctuations in exchange rates could adversely affect demand for our services
and have a material adverse effect on our business, prospects, financial
condition and results of operations.
14
<PAGE>
The Price of Our Common Stock May Decline Due to Shares Eligible for Future
Sale
Sales of a large number of shares of our common stock in the market after
the offering or the perception that sales may occur could cause the market
price of our common stock to drop.
We will have 31,812,276 shares of common stock outstanding immediately after
the offering and 6,028,609 shares issuable upon the exercise of outstanding
warrants and options, in each case as of May 15, 1999 and as adjusted for the
issuance of shares in this offering. The 7,500,000 shares sold in the offering,
plus any shares issued or sold upon exercise of the underwriters' over-
allotment option, will be freely tradeable, except for any shares held at any
time by an "affiliate," as defined under Rule 144 under the Securities Act of
1933. Of the remaining shares, 23,171,913 shares, and an additional
5,941,735 shares issuable upon exercise of outstanding options and warrants,
are subject to lock-up agreements in which the holders of the shares have
agreed not to sell any shares for a period of 180 days after the date of this
prospectus without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation. There will be a large number of shares available for
sale after the end of the lock-up period. The shares not subject to lock-up
agreements may be sold without registration under the Securities Act to the
extent permitted by Rule 144 or another exemption under the Securities Act.
You Will Incur Immediate and Substantial Dilution
The initial public offering price, which we have assumed to be $10.00 per
share, will be substantially higher than the book value per share of our common
stock after this offering, which is calculated to be $1.80 per share.
Therefore, you will incur immediate and substantial book value dilution. You
will incur additional dilution if holders of stock options, whether currently
outstanding or subsequently granted, exercise their options or if warrant
holders exercise their warrants to purchase common stock. See "Dilution" for
more information.
Our Principal Stockholders and Management Own a Significant Percentage of Our
Stock and Will Be Able to Exercise Significant Influence
Our executive officers and directors and principal stockholders together
will beneficially own approximately 71% of our common stock, including shares
subject to options and warrants that confer beneficial ownership of the
underlying shares, after completion of the offering. Accordingly, these
stockholders will be able to determine the composition of our board of
directors, will retain the voting power to approve all matters requiring
stockholder approval and will continue to have significant influence over our
affairs. This concentration of ownership could have the effect of delaying or
preventing a change in our control or otherwise discouraging a potential
acquirer from attempting to obtain control of us, which in turn could have a
material and adverse effect on the market price of the common stock or prevent
our stockholders from realizing a premium over the market prices for their
shares of common stock. See "Principal and Selling Stockholders" for
information about the ownership of common stock by our executive officers,
directors and principal stockholders.
Anti-Takeover Provisions Could Negatively Impact Our Stockholders
Provisions of Delaware law and of our certificate of incorporation and
bylaws could make it more difficult for a third party to acquire control of us.
For example, we are subject to Section 203 of the Delaware General Corporation
Law which would make it more difficult for another party to acquire our company
without the approval of our board of directors. Additionally, our certificate
of incorporation authorizes our board of directors to issue preferred stock
without requiring any shareholder approval, and preferred stock could be issued
as a defensive measure in response to a takeover proposal. These provisions
could make it more difficult for a third party to acquire
15
<PAGE>
JFAX.COM even if an acquisition might be in the best interest of our
stockholders. See "Description of Capital Stock" for more information.
Our Stock Price May Be Volatile or May Decline
An active trading market for our common stock may not develop or be
sustained after the offering. We will determine the initial public offering
price in consultation with the underwriters. The price at which our common
stock will trade after the offering is likely to be volatile and may fluctuate
or decline substantially due to factors such as:
. assessments of our progress in adding paid subscriptions or free
customers, and comparisons of our results in these areas versus our
competitors,
. variations between our actual results and analyst and investor
expectations,
. new service or technology announcements by us or others, and regulatory
or competitive developments affecting our markets,
. investor perceptions of our company and comparable public companies, and
. conditions and trends in the communications, messaging and Internet-
related industries.
In particular, the stock market has from time to time experienced
significant price and volume fluctuations affecting the common stocks of
technology companies, which may include communications, messaging and Internet-
related companies. These fluctuations may result in a rapid and material
decline in the market price of our common stock.
We May Be Unable to Enforce or Defend Our Proprietary Technology
Our success depends to a significant degree upon our proprietary technology.
We rely on a combination of trademark, trade secret and copyright law and
contractual restrictions to protect our proprietary technology. However, these
measures provide only limited protection, and we may not be able to detect
unauthorized use or take appropriate steps to enforce our intellectual property
rights, particularly in foreign countries where the laws may not protect our
proprietary rights as fully as in the United States. In addition, we may face
challenges to the validity and enforceability of our proprietary rights and may
not prevail in any litigation regarding those rights. Companies in the
messaging industry have experienced substantial litigation regarding
intellectual property. Any litigation to enforce our intellectual property
rights would be expensive and time-consuming, would divert management resources
and may not be adequate to protect our business.
We May Be Found to Have Infringed the Intellectual Property Rights of Others
We could be subject to claims that we have infringed the intellectual
property rights of others. In addition, we may be required to indemnify our
resellers and users for similar claims made against them. Any claims against us
could require us to spend significant time and money in litigation, pay
damages, develop new intellectual property or acquire licenses to intellectual
property that is the subject of the infringement claims. These licenses, if
required, may not be available at all or on acceptable terms. As a result,
intellectual property claims against us could have a material adverse effect on
our business, prospects, financial conditions and results of operations. See
"Business--Patents and Proprietary Rights."
Our Services May Become Subject to Burdensome Government Regulation
We provide our services through data transmissions over public telephone
lines and other facilities provided by telecommunications companies. These
transmissions are subject to regulation by the Federal Communications
Commission, state public utility commissions and foreign governmental
authorities. These regulations affect the prices we pay for transmission
services, the
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<PAGE>
competition we face from telecommunications services and other aspects of our
market. As an Internet messaging services provider, we are not subject to
direct regulation by the FCC or any other governmental agency, other than
regulations applicable to businesses generally. However, as Internet services
and telecommunications services converge or as the services we offer expand,
there may be increased regulation of our business. Therefore, in the future, we
may become subject to FCC or other regulatory agency regulation. There also may
be changes in the regulatory environment outside the United States. Changes in
the regulatory environment could decrease our revenues, increase our costs and
affect our service offerings.
There have been various regulations and court cases relating to the
liability of Internet service providers and other online service providers for
information carried on or through their services or equipment, including in the
areas of copyright, indecency, obscenity, defamation and fraud. For example,
federal and state statutes prohibit the online distribution of obscene
materials. The law in this area is unsettled, and there may be new legislation
and court decisions that expose companies such as ours to liabilities or affect
their services.
Additional laws and regulations may be adopted with respect to the Internet,
covering issues such as support payments to fund Internet availability,
content, user privacy, pricing, libel, obscene material, indecency, gambling,
intellectual property protection and infringement and technology export and
other controls. Other federal Internet-related legislation has been introduced
which may limit commerce and discourse on the Internet. The FCC recently ruled
that calls to Internet service providers are jurisdictionally interstate and
Internet service providers should not pay access charges applicable to
telecommunications carriers. Several telecommunications carriers are advocating
that the FCC regulate the Internet in the same manner as other
telecommunications services by imposing access fees on Internet service
providers. The FCC is examining inter-carrier compensation for calls to
Internet service providers, which could affect Internet service providers'
costs and consequently substantially increase the costs of communicating via
the Internet. This increase in costs could slow the growth of Internet use and
thereby decrease the demand for our services.
Because our services relate principally to the Internet, but convert voice
and fax transmissions into e-mails, we are necessarily exposed to legal or
regulatory developments affecting either Internet services or
telecommunications services. Regulatory developments could cause our business,
prospects, financial condition and results of operations to be materially
adversely affected.
Our Failure and the Failure of Third Parties to Be Year 2000 Compliant Could
Negatively Impact Our Business
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. As a result, our
computer programs that have date-sensitive software and software of companies
with which our network is interconnected may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in system failures or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities. If our systems or the systems of other
companies on whose services we depend or with whom our systems interconnect are
not year 2000 compliant, it could have a material adverse effect on our
business, prospects, financial condition and results of operations. We have yet
to develop a comprehensive contingency plan to address the issues which could
result from such an event. The year 2000 issue is discussed at greater length
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Impact of Year 2000 Issue."
Because of Our High Degree of Cash and Cash Equivalents, We Could Be Required
to Register as an Investment Company and Become Subject to Substantial
Regulation That Would Interfere With Our Ability to Conduct Our Business
As a result of this offering, we will have substantial cash and short-term
investments. We plan to invest the proceeds in short-term instruments
consistent with prudent cash management and not
17
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primarily for the purpose of achieving investment returns. Investment in
securities primarily for the purpose of achieving investment returns could
result in our being treated as an "investment company" under the Investment
Company Act of 1940. The Investment Company Act requires the registration of
companies that are primarily in the business of investing, reinvesting or
trading securities or that fail to meet certain statistical tests regarding
their composition of assets and sources of income even though they consider
themselves not to be primarily engaged in investing, reinvesting or trading
securities.
If we are required to register as an investment company pursuant to the
Investment Company Act, we would become subject to substantial regulation with
respect to our capital structure, management, operations, transactions with
affiliated persons and other matters. Application of the provisions of the
Investment Company Act to us would materially and adversely affect our
business, prospects, financial condition and results of operations.
Since We Share Office Space, Administrative Items and the Services of Our
General Counsel with Other Entities Controlled by Our Chief Executive Officer,
We Face Potential Conflicts of Interest that Could Adversely Affect Our Company
We share contiguous office space and we pro-rate the cost of office space
and facilities, the cost of insurance and other related administrative costs
with other entities that are controlled by our chief executive officer. We also
make the services of our general counsel available to these other entities and
charge them for the proportionate cost of the services of our general counsel
that they incur. These arrangements are not pursuant to written agreements and
are adjusted from time to time according to the relative benefits given and
received. For example, one of the other entities is the named sublessee on the
lease of our office space, but we are named as an occupant. As a result, our
business, prospects, financial condition and results of operations could be
adversely affected if our chief executive officer implemented policies with
respect to these other entities which do not benefit us. Furthermore, either
the positive or negative operating results of these other entities could
require that our chief executive officer or general counsel spend a
disproportionate amount of their time on work for these entities. While we
attempt to share business expenses with the other entities on an equitable
basis, it is possible that we could pay less for office space or other shared
administrative items if we obtained these services on an independent basis. See
"Certain Transactions."
Our Management has Broad Discretion in the Application of Proceeds, Which May
Increase the Risk that the Proceeds Will Not Be Applied Effectively
Our management will have broad discretion in determining how to spend the
proceeds of the offering. Accordingly, we can spend the proceeds from the
offering in ways which turn out to be ineffective or with which the
stockholders may not agree.
Forward-Looking Statements are Inherently Uncertain
Some statements under the captions "Prospectus Summary," "Risk Factors,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business" and elsewhere in this prospectus are
forward-looking statements. These forward-looking statements include, but are
not limited to, statements about our industry, plans, objectives, expectations,
intentions and assumptions and other statements contained in the prospectus
that are not historical facts. When used in this prospectus, the words
"expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" and
similar expressions are generally intended to identify forward-looking
statements. Because these forward-looking statements involve risks and
uncertainties, including those described in this "Risk Factors" section, actual
results may differ materially from those expressed or implied by these forward-
looking statements. Market data and forecasts used in this prospectus,
including, for example, estimates of growth in unified messaging mailboxes,
have been obtained from independent industry sources. Although we believe these
sources are reliable, we have not independently verified these data.
18
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of common stock in the
offering will be approximately $68.8 million, or $74.9 million if the
underwriters exercise their over-allotment option in full, at an assumed public
offering price per share of $10.00 and after deducting estimated underwriting
discounts and commissions and estimated offering expenses.
We intend to use the net proceeds from the offering according to the
following approximate allocations:
. $25 million to expand our network around the world,
. $18 million to repay indebtedness and redeem preferred stock,
. $20 million to fund marketing and advertising activities, and
. any remaining proceeds for working capital and general corporate
purposes.
Except as indicated, we cannot specify with certainty the particular uses for
the net proceeds to be received from the offering or the amount to be used
specifically with respect to any use. Accordingly, our management will have
broad discretion in the application of the net proceeds. The indebtedness to be
repaid accrues interest on principal at a per annum rate of 10%, and half of
such indebtedness is due on June 30, 2003 and the other half is due on June 30,
2004, and the preferred stock to be redeemed accumulates dividends on stated
amount and unpaid dividends at a per annum rate of 15%. The indebtedness
consists of all our 10% Senior Subordinated Notes due 2004, which we issued in
June 1998, and the preferred stock is all our Series A Usable Redeemable
Preferred Stock, which we issued in July 1998. We issued this indebtedness and
preferred stock to fund capital expenditures, to upgrade our network, to fund
marketing and advertising expenses and to expand our user base.
Prior to the application of the net proceeds from the offering as described
above, the net proceeds from the offering will be invested in short-term
marketable securities.
DIVIDEND POLICY
We have never paid any dividends on our common stock and do not anticipate
declaring or paying cash dividends in the foreseeable future. We intend to
retain future earnings, if any, to reinvest in our business. We expect that
covenants in our future financing agreements will prohibit or limit our ability
to declare or pay cash dividends. Currently we are not permitted to pay cash
dividends pursuant to restrictions in our 10% Senior Subordinated Notes due
2004, which will be repaid with a portion of the proceeds of this offering.
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CAPITALIZATION
The following table sets forth:
. our cash position and capitalization as of March 31, 1999, and
. our cash position and capitalization as adjusted to give effect to our
sale of 7,500,000 shares of common stock in the offering and receipt and
application of the estimated net proceeds from the offering, assuming an
initial public offering price of $10.00 per share.
The information set forth below should be read in conjunction with our
consolidated financial statements and the related notes included elsewhere in
this prospectus. See "Use of Proceeds."
<TABLE>
<CAPTION>
As of March 31, 1999
---------------------
Actual As Adjusted
(Dollars in
thousands)
<S> <C> <C>
Cash and cash equivalents................................ $ 5,510 $ 56,928
========= ========
Debt:
Capital lease obligations, including short-term
portion................................................ 210 210
Long-term debt, including short-term portion............ 6,672 888
--------- --------
Total debt............................................. 6,882 1,098
Redeemable common stock; issued and outstanding 2,207,698
shares at March 31, 1999; no shares as adjusted(/1/).... 5,775 --
Mandatorily redeemable Series A preferred stock;
authorized 1,000,000 shares; issued and outstanding
5,000 shares at March 31, 1999, liquidation preference
$5,591; no shares as adjusted(/2/)...................... 4,329 --
Stockholders' equity (deficiency):
Common stock; $0.01 par value; authorized 100,000,000
shares (subsequently increased to 200,000,000
authorized shares); issued and outstanding 22,100,412
shares at March 31, 1999, excluding 2,207,698 shares
issued as redeemable at March 31, 1999; and 31,808,110
shares issued and outstanding as adjusted(/3/)......... 221 318
Additional paid-in capital.............................. 11,975 84,279
Notes receivable from stockholders...................... (2,499) (2,499)
Accumulated deficit(/4/)................................ (20,200) (25,030)
--------- --------
Total stockholders' equity (deficiency)................ (10,503) 57,068
--------- --------
Total capitalization................................. $ 6,483 $ 58,166
========= ========
</TABLE>
- --------
(1) See Note 4 of the notes to our consolidated financial statements for the
conditions applicable to the redeemable securities.
(2) The foregoing information reflects the redemption of our Series A
Preferred Stock and our 10% Senior Subordinated Notes due 2004 using a
portion of the proceeds of this offering.
(3) The number of shares of our common stock in the table exclude shares of
common stock that are issuable upon the exercise of outstanding options
and warrants. See notes 4 and 9 of our consolidated financial statements.
(4) The as adjusted accumulated deficit includes the effect of a $4.8 million
extraordinary charge for the early extinguishment of the Senior
Subordinated Notes as discussed under "Use of Proceeds."
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DILUTION
Our net tangible book value (deficit) at March 31, 1999 was a deficit of
approximately $4.7 million, or $0.19 per share of common stock. Net tangible
book value (deficit) per share of common stock represents the amount of total
tangible assets less total liabilities, divided by the total number of shares
of common stock outstanding. Net tangible book value excludes 5,000 redeemable
preferred shares with a carrying value of $4.3 million and includes the
carrying value of $5.8 million relating to 2,207,698 shares of redeemable
common stock.
Dilution per share represents the difference between the amount per share
paid by purchasers of shares of common stock in the offering and the pro forma
net tangible book value per share of common stock immediately after the
completion of the offering. After giving effect to the assumed sale of
7,500,000 shares of common stock at a price of $10.00 per share in the offering
and the application of the estimated net proceeds from the offering, including
the redemption of Series A preferred stock and the conversion of the redeemable
common shares, our pro forma net tangible book value as of March 31, 1999 would
have been approximately $57.1 million, or $1.80 per share. This represents an
immediate dilution in net tangible book value per share of $8.20 to investors
who purchase shares of common stock in the offering and an immediate increase
in net tangible book value per share to existing shareholders of $1.99. The
following table illustrates the dilution in net tangible book value per share
to such investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $10.00
------
Net tangible book value (deficit) per share as of March
31, 1999................................................. $(0.19)
Increase per share attributable to new investors.......... $ 1.99
------
Pro forma net tangible book value per share as of March
31, 1999 after giving effect to the offering............. 1.80
------
Dilution per share to new investors....................... $ 8.20
</TABLE>
The following table summarizes, as of May 15, 1999, the difference between
the existing stockholders and new investors with respect to the number of
shares of common stock purchased from us, including redeemable common shares,
the total consideration paid and the average price per share paid at an assumed
initial public offering price of $10.00 per share:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent per Share
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 24,312,276 76.4% $17,562,496 19.0% $ 0.72
New investors.......... 7,500,000 23.6 75,000,000 81.0 $10.00
---------- ----- ----------- -----
Total.............. 31,812,276 100.0% $92,562,496 100.0%
========== ===== =========== =====
</TABLE>
The foregoing table assumes no exercise of stock options or warrants. As of
May 15, 1999, there were options and warrants outstanding to purchase 6,028,609
shares of common stock at a weighted average exercise price of $2.05 per share.
If these outstanding options and warrants were exercised, the shares issued
upon those exercises would represent approximately 15.9% of the outstanding
common stock after giving effect to the exercises. To the extent outstanding
options and warrants are exercised, there will be further dilution to new
investors. If these outstanding options and warrants were exercised, the
additional dilution would be approximately $(0.03) per share to new investors,
based on receipt of the monetary consideration for the shares and the increase
in the number of shares outstanding resulting from those exercises.
The above information does not give effect to options which we expect to
grant in connection with this offering. We expect these grants will consist of
options to purchase an aggregate of approximately 760,000 shares of common
stock at an exercise price of $9.00 per share. These options will begin vesting
at the first anniversary of the grant date. For additional information, see
"Certain Transactions."
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected historical financial data and pro forma statement of
operations data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements, related notes and other financial information included elsewhere in
this prospectus. The statement of operations data for each of the years in the
three year period ended December 31, 1998, and the selected balance sheet data
as of December 31, 1998 and 1997, are derived from our consolidated financial
statements which have been audited by KPMG LLP and are included in this
prospectus. The consolidated financial data for the period from December 14,
1995 (the date of our inception) to December 31, 1995 and as of December 31,
1995 and 1996, are derived from our consolidated financial statements, which
have been audited by KPMG LLP and are not included in this prospectus.The
statement of operations data for the quarters ended March 31, 1998 and 1999,
and the balance sheet data as of March 31, 1999, are derived from our unaudited
consolidated financial statements for such interim periods and as of such date,
which are included in this prospectus. In the opinion of management, these
unaudited interim data include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results of
operations for such periods and the financial position at such date. Historical
results are not necessarily indicative of future results, and results for any
interim period are not necessarily indicative of results for a full year.
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
------------------------------------------------ ------------------------
1995 1996 1997 1998 1998 1999
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $ -- $ 105 $ 685 $ 3,520 $ 490 $ 1,411
Cost of revenue......... 1 150 858 3,398 626 1,054
---------- ---------- ----------- ----------- ----------- -----------
Gross profit
(loss)............. (1) (45) (173) 122 (136) 357
Operating expenses:
Sales and marketing... -- 150 1,069 4,990 372 708
Research and
development.......... -- 61 793 1,226 261 517
General and
administrative....... 20 512 2,962 4,881 917 1,422
---------- ---------- ----------- ----------- ----------- -----------
Total operating
expenses........... 20 723 4,824 11,097 1,550 2,647
---------- ---------- ----------- ----------- ----------- -----------
Operating loss...... (21) (768) (4,997) (10,975) (1,686) (2,290)
Interest expense
(income) net........... -- -- (215) 933 -- 426
Income tax expense...... -- 1 2 2 2 2
---------- ---------- ----------- ----------- ----------- -----------
Net loss............ $ (21) $ (769) $ (4,784) $ (11,910) $ (1,688) $ (2,718)
========== ========== =========== =========== =========== ===========
Net loss
attributable to
common shares...... $ (21) $ (769) $ (4,784) $ (12,404) $ (1,688) $ (2,976)
========== ========== =========== =========== =========== ===========
Basic and diluted net
loss per common share.. $ (0.00) $ (0.12) $ (0.30) $ (0.56) $ (0.09) $ (0.12)
========== ========== =========== =========== =========== ===========
Weighted average common
shares used in
determining net loss
per share.............. 5,575,000 6,406,666 15,738,334 22,181,960 19,435,000 24,308,111
========== ========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Year ended Three Months Ended
December 31, 1998 March 31, 1999
----------------- ------------------
(In thousands,
except per share data)
<S> <C> <C>
Pro Forma Statement of Operations
Data:(/1/)
Pro forma net loss attributable to common
shares.................................. $(10,709) $(2,083)
Pro forma net loss per common share...... $ (0.35) $ (0.07)
Common shares used in determining pro
forma per share data ................... 30,900 31,808
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
As of
As of December 31, March 31,
------------------------- ---------
1995 1996 1997 1998 1999
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............... $ -- $656 $ 23 $ 7,279 $ 5,510
Working capital (deficiency)............ (11) 479 58 6,735 4,229
Total assets............................ -- 896 2,613 10,513 8,960
Long-term debt.......................... -- -- -- 6,137 6,285
Redeemable common and preferred
stock(/2/)............................. -- -- -- 9,042 10,104
Total stockholders' equity
(deficiency)........................... (11) 677 1,618 (7,786) (10,503)
</TABLE>
- --------
(1) For purposes of the pro forma statements of operations data, it is assumed
that the extinguishment of our Senior Subordinated Notes due 2004
described under "Use of Proceeds" occurred at the beginning of each of the
financial periods presented, and that the additional shares being issued
in this offering were outstanding throughout the respective periods. The
pro forma statement of operations data does not include an extraordinary
charge of approximately $4.8 million for the early extinguishment of the
Senior Subordinated Notes due 2004.
(2) See Note 4 of the notes to our consolidated financial statements for the
conditions applicable to the redeemable securities.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with "Selected
Consolidated Financial Data" and our financial statements and related notes
included elsewhere in this prospectus.
Overview
We were founded in 1995 to provide Internet-based messaging and
communications services. Our company was initially conceived as a solution to
facilitate the receipt of faxes and voice messages via the Internet. Since
inception, our primary activities have included:
. developing our business model,
. hiring management and other key personnel,
. building our infrastructure,
. introducing our initial services,
. expanding geographic coverage and scope of services,
. entering into strategic alliances, and
. developing new services including our usage-based services and free
services.
We believe we are the world's largest provider of Internet-based unified
messaging services with over 30,000 paid subscriptions as of March 31, 1999.
We currently derive substantially all of our revenues from subscription
fees, activation fees and charges for usage-based services. In the future, we
expect to derive a growing proportion of our revenues from selling our
subscription and usage-based services to our free subscribers. Our customers
are mostly pre-billed on a month-to-month basis. Revenues are recognized as the
service is performed.
We expect to increase our sales and marketing expenses following the
offering. In the past, we have allocated limited resources to marketing our
services, relying on our web site to generate subscriptions and our strategic
alliances to market and sell our services to their customer base. We intend to
increase our direct and indirect marketing efforts substantially in order to
grow our subscriber base and to generate sales from our free and paying
subscribers and businesses looking to outsource their messaging requirements.
These marketing efforts will require a considerable investment on our part.
We also intend to continue to invest in the development of new services,
complete the development of our services currently under development and extend
and upgrade our network. In particular, we intend to invest in additional
infrastructure to increase our capacity and enable us to provide additional
Internet-based messaging and communications services.
We have incurred significant losses since our inception. As of March 31,
1999, we had an accumulated deficit of approximately $20.2 million. We expect
to incur substantial operating losses for the foreseeable future. See "Risk
Factors" for a discussion concerning the risks we face.
Although we cannot guarantee the success of our business plan, we expect the
increases in sales and marketing expenses and in our investments in new
services and services under development, together with our free services, will
improve our ability to add new subscriptions including paid subscriptions. We
also expect that the increased subscriptions will result in increased revenues
and, we anticipate, an increased rate of growth of revenues, which will be
partially offset, or may be more than offset for some period, by the expenses
incurred. There are numerous factors, however, that
24
<PAGE>
may materially adversely affect our business plans and the expectations noted
above. Finally, we believe that the introduction of free services, both by us
and by our competitors, has occurred too recently for us to accurately gauge
whether and to what degree they will negatively impact our revenues, our cost
structure or our ability to add new subscriptions including paid subscriptions.
Results of Operations
Three Months Ended March 31, 1999 and 1998
The following table sets forth, for the quarters ended March 31, 1998 and
1999, information derived from our statements of operations as a percentage of
revenues. This information should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Three
Months
Ended
March 31,
-----------
1998 1999
<S> <C> <C>
Revenue........................................................ 100% 100%
Cost of revenue................................................ 128 75
---- ----
Gross profit (loss)........................................ (28) 25
Operating expenses:
Sales and marketing.......................................... 76 50
Research and development..................................... 53 37
General and administrative................................... 187 101
---- ----
Total operating expenses................................... 316 188
---- ----
Operating loss............................................. (344) (163)
Interest expense (income), net................................. -- 30
---- ----
Loss before income taxes................................... (344) (193)
Income tax expense............................................. -- --
---- ----
Net loss................................................... (344)% (193)%
==== ====
</TABLE>
Revenue. Revenue was $1.4 million and $490,000 in the quarters ended March
31, 1999 and 1998. The absolute dollar increase in revenue was primarily due to
an increased number of subscriptions from both our direct marketing and our
strategic alliances. Our number of subscriptions were 30,982 and 11,102 as of
March 31, 1999 and 1998. Revenue derived from activation and monthly fees from
paid subscriptions accounted for substantially all revenues for the quarters
ended March 31, 1999 and 1998.
During the quarter ended March 31, 1999, several free fax services were
introduced by some of our competitors. See "Risk Factors--The Recent
Introduction of Free Fax Services May Harm Our Business." We do not believe
that the introduction of these free services impacted the growth of revenues in
the quarter ended March 31, 1999 over the quarter ended March 31, 1998, nor
have we experienced a drop in our paid subscription sign-up rate. In April
1999, we introduced our own free fax services principally as a promotional tool
to attract customers we can target for selling our paid services.
25
<PAGE>
Cost of Revenue. Cost of revenue is primarily comprised of data and voice
transmission costs, telephone numbers, customer service, online processing fees
and equipment depreciation. Cost of revenue was $1.1 million or 75% of revenue
and $626,000 or 128% of revenue for the quarters ended March 31, 1999 and 1998.
The absolute dollar increase in cost of revenue reflects the cost of building
and expanding our server and networking infrastructure and customer service to
accommodate growth of our subscriber base. Cost of revenue as a percentage of
revenue decreased as a result of the increases in revenue over the same period
last year. We anticipate that our data and voice transmission costs, telephone
numbers and related operating costs will continue to grow in absolute dollars
for the foreseeable future.
Operating Expenses
Sales and Marketing. Our sales and marketing costs consist primarily of
payments with respect to strategic alliances, sales and marketing personnel,
advertising, promotions, public relations, trade shows and business
development. Sales and marketing expenses were $708,000 or 50% of revenue and
$372,000 or 76% of revenue for the quarters ended March 31, 1999 and 1998. The
absolute dollar increases in sales and marketing expense from period to period
primarily reflect an increase in marketing payments as we have entered into
several key strategic relationships with leading Internet and
telecommunications companies, and the increase in sales and marketing
personnel. Sales and marketing as a percentage of revenue decreased as a result
of the increases in revenue over the same period last year. We anticipate that
our sales and marketing costs will grow significantly in absolute dollars for
the foreseeable future as we pursue our marketing strategy and hire additional
sales and marketing personnel.
Research and Development. Our research and development costs consist
primarily of personnel and consulting costs. Research and development costs
were $517,000 or 37% of revenue and $261,000 or 53% of revenue for the quarters
ended March 31, 1999 and 1998. The absolute dollar increase in research and
development costs from period to period primarily reflects increases in
personnel. Research and development as a percentage of revenue decreased as a
result of increases in revenue over the same period last year. We believe that
significant investments in research and development are required to remain
competitive. Therefore, we expect that our research and development costs will
continue to increase in absolute dollars for the foreseeable future.
General and Administrative. Our general and administrative costs consist
primarily of personnel costs, professional services, consulting expenses and
building and occupancy costs. General and administrative costs were $1.4
million or 101% of revenue and $917,000 or 187% or revenue for the quarters
ended March 31, 1999 and 1998. The absolute dollar increases in general and
administrative costs from period to period were primarily due to increases in
the number of general and administrative personnel as well as increased costs
associated with professional services and facility expenses to support the
growth of our operations. General and administrative costs as a percentage of
revenue decreased as a result of increases in revenue over the same period last
year. We expect that we will incur additional general and administrative costs
in absolute dollars as we hire additional personnel and incur additional
expenses related to the growth of our business and our operations as a public
company.
Interest Expense (Income) Net. Our interest expense is primarily related to
capital lease obligations and long-term debt. Interest expense (income), net
was $426,000 and $154 for the quarters ended March 31, 1999 and 1998. The
increase in interest expense (income), net in the first quarter of 1999
primarily resulted from the issuance in July 1998 of $10 million principal
amount of subordinated debt. We expect our interest expense (income), net to
decline going forward, both in absolute terms and as a percentage of revenues,
as a result of the intended use of a portion of the proceeds from this offering
to repay indebtedness and to redeem outstanding preferred stock. In addition,
we expect interest income to increase as a result of the investment of higher
cash balances in short-term marketable securities.
26
<PAGE>
Years Ended December 31, 1998, 1997 and 1996
The following table sets forth, for the years ended December 31, 1998, 1997
and 1996, information derived from our statements of operations as a percentage
of revenues. This information should be read in conjunction with the
consolidated financial statements and related notes included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
Years Ended
December 31,
------------------
1996 1997 1998
<S> <C> <C> <C>
Revenue..................... 100% 100% 100%
Cost of revenue............. 143 125 97
---- ---- ----
Gross profit (loss)..... (43) (25) 3
Operating expenses:
Sales and marketing....... 144 156 142
Research and development.. 59 116 35
General and
administrative........... 489 432 138
---- ---- ----
Total operating
expenses............... 692 704 315
---- ---- ----
Operating loss.......... (735) (729) (312)
Interest expense (income),
net........................ -- (31) 26
---- ---- ----
Loss before income
taxes.................. (735) (698) (338)
Income tax expense.......... -- -- --
---- ---- ----
Net loss................ (735)% (698)% (338)%
==== ==== ====
</TABLE>
Revenue. Revenue was $3.5 million, $685,000 and $105,000 in 1998, 1997, and
1996. The absolute dollar increases in revenue from year to year were due
primarily to increases in the number of subscriptions from both our direct
marketing and our strategic alliances. Our number of subscriptions were 27,063,
7,125 and 1,269 as of December 31, 1998, 1997 and 1996. Revenue derived from
monthly fees from paid subscriptions accounted for substantially all of the
revenue in the years ended December 31, 1998, 1997 and 1996. Our subscription
services and usage-based services were launched in June 1996. Therefore,
revenue for 1997 and 1996 are not directly comparable.
Cost of revenue. Cost of revenue is primarily comprised of data and voice
transmission costs, telephone numbers, customer service, online processing fees
and equipment depreciation. Cost of revenue was $3.4 million or 97% of revenue,
$858,000 or 125% of revenue and $150,000 or 143% of revenue, for the years
ended December 31, 1998, 1997 and 1996. The absolute dollar increases in cost
of revenue reflect the cost of building and expanding our server and networking
infrastructure and customer services to accommodate the growth of our
subscriber base. Cost of revenue as a percentage of revenue decreased from year
to year as a result of the increases in revenue over the same periods.
Operating Expenses
Sales and Marketing. Our sales and marketing costs consist primarily of
payments with respect to strategic alliances, sales and marketing personnel,
advertising, promotions, public relations, trade shows and business
development. Sales and marketing expenses were $5.0 million or 142% of revenue,
$1.1 million or 156% of revenue and $150,000 or 144% of revenue, for the years
ended December 31, 1998, 1997 and 1996. The absolute dollar increases in sales
and marketing expense primarily reflect an increase in marketing payments which
increased by $3.9 million from 1997 to 1998 and $919,000 from 1996 to 1997 as
we have entered into several key strategic relationships with leading Internet
and telecommunications companies, and the increase in expenses with respect to
sales and marketing personnel which increased by $900,000 from 1997 to 1998.
27
<PAGE>
In October 1997, we entered into an interactive marketing relationship with
America Online. In 1999, we expect to expense the $1 million in advertising
costs associated with America Online which is included in prepaid marketing
costs as of December 31, 1998. During 1998, we incurred $1,250,000 in
advertising expense for advertising activity through America Online. See Note
6(a) of the notes to our consolidated financial statements included in this
prospectus.
Research and Development. Our research and development costs consist
primarily of personnel and consulting costs. Research and development costs
were $1.2 million or 35% of revenue, $793,000 or 115% of revenue and $61,000 or
59% of revenue, for the years ended December 31, 1998, 1997 and 1996. The
absolute dollar increase in research and development costs from 1997 to 1998
primarily reflects increases in personnel. Prior to 1997, a significant portion
of our research and development activity was outsourced. Research and
development costs as a percentage of revenue decreased from 1997 to 1998 as a
result of increases in revenue over the same period.
General and Administrative. Our general and administrative costs consist
primarily of personnel costs, travel and professional services, consulting
expenses and building and occupancy costs. General and administrative costs
were $4.9 million or 138% of revenue, $3.0 million or 432% of revenue and
$512,000 or 489% of revenue, for the years ended December 31, 1998, 1997 and
1996. The absolute dollar increases in general and administrative costs from
year to year were primarily due to increases in the number of general and
administrative personnel which resulted in an increase of $1,531,000 from 1997
to 1998 and an increase of $596,000 from 1996 to 1997 in personnel costs, as
well as an increase of $158,000 from 1997 to 1998 and an increase of $206,000
from 1996 to 1997 in costs associated with facility expense to support the
growth of our operations. General and administrative costs as a percentage of
revenue decreased from year to year as a result of increases in revenue over
the same periods.
Interest Expense (Income), Net. Our interest expense is primarily related to
capital lease obligations and long-term debt. Interest expense (income), net
was $933,000, $(215,000) and $0 for December 31, 1998, 1997 and 1996. The
increase in interest expense (income), net for 1998 resulted from the issuance
in July 1998 of $10 million principal amount of subordinated debt.
Income Taxes. As of December 31, 1998, we had federal and state net
operating loss carryforwards of approximately $17.1 million available to offset
income in the future. Such net operating loss carryforwards will begin expiring
in the year 2000. Under the Tax Reform Act of 1986, the amounts of and benefits
from such net operating loss carryforwards may be impaired or limited following
changes in the ownership of our common stock.
28
<PAGE>
Quarterly Financial Information
The following table sets forth statement of operations data and such
statement of operations data as a percentage of revenues for the three months
ended March 31, 1999, December 31, September 30, June 30 and March 31, 1998,
and December 31, September 30 and June 30, 1997. The information for each of
these quarters has been prepared on substantially the same basis as the audited
financial statements included elsewhere in this prospectus and, in the opinion
of our management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of operations for
such periods. Historical results are not necessarily indicative of the results
to be expected in the future, and results of interim periods are not
necessarily indicative of results for the entire year.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------------------------------------
June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31,
1997 1997 1997 1998 1998 1998 1998 1999
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue............ $ 138,977 $ 202,294 $ 226,467 $ 490,427 $ 784,416 $ 975,243 $ 1,269,750 1,411,343
Cost of revenue.... 88,165 207,388 541,364 626,217 682,814 915,962 1,173,250 1,053,943
--------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit
(loss).......... 50,812 (5,094) (314,897) (135,790) 101,602 59,281 96,500 357,400
Operating expenses:
Sales and
marketing........ 206,242 351,727 325,128 371,969 513,347 1,291,218 2,813,654 707,594
Research and
development...... 48,696 114,706 163,293 261,482 287,462 329,366 347,232 517,071
General and
administrative... 771,221 1,005,057 1,203,820 917,320 1,105,454 1,240,300 1,617,780 1,422,332
--------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating
expenses........ 1,026,159 1,471,490 1,692,241 1,550,771 1,906,263 2,860,884 4,778,666 2,646,997
--------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating loss... (975,347) (1,476,584) (2,007,138) (1,686,561) (1,804,661) (2,801,603) (4,682,166) (2,289,597)
Interest expense
(income), net.... (119,063) (72,019) (7,162) 154 (970) 433,449 500,692 426,432
--------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss before
income taxes.... (856,284) (1,404,565) (1,999,976) (1,686,715) (1,803,691) (3,235,052) (5,182,858) (2,716,029)
Income tax
expense........... -- -- -- 1,500 -- -- -- 1,500
--------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss......... $(856,284) $(1,404,565) $(1,999,976) $(1,688,215) $(1,803,691) $(3,235,052) $(5,182,858) $(2,717,529)
========= =========== =========== =========== =========== =========== =========== ===========
As a percentage of
revenues:
Revenue.......... 100% 100% 100% 100% 100% 100% 100% 100%
Cost of revenue.. 63 102 239 128 87 94 92 75
--------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit
(loss).......... 37 (2) (139) (28) 13 6 8 25
Operating expenses:
Sales and
marketing........ 149 174 144 76 65 132 222 50
Research and
development...... 35 57 72 53 37 34 27 37
General and
administrative... 555 497 531 187 141 127 128 101
--------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating
expenses........ 739 728 747 316 243 293 377 188
--------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating loss... (702) (730) (886) (344) (230) (287) (369) (163)
Interest expense
(income), net.... (86) (36) (3) -- -- 45 39 30
--------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss before
income taxes.... (616) (694) (883) (344) (230) (332) (408) (193)
Income tax
expense........... -- -- -- -- -- -- -- --
--------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss......... (616)% (694)% (883)% (344)% (230)% (332)% (408)% (193)%
========= =========== =========== =========== =========== =========== =========== ===========
</TABLE>
29
<PAGE>
Fluctuations in Annual and Quarterly Results
Our annual and quarterly operating results may fluctuate significantly in
the future as a result of numerous factors, including:
. the rate at which we are able to add subscriptions and sell additional
usage-based services to both free and paid customers of our subscription
services,
. the amount and timing of expenditures to form strategic relationships, to
enhance sales and marketing and to expand our infrastructure, or other
costs, as we expand our network, and
. changes in the growth rate of Internet usage and acceptance by consumers
of electronic commerce.
In addition, historically, our quarterly as well as our annual results have
fluctuated as a result of the time it takes for a particular strategic alliance
to go from the negotiation stage to full project implementation. This
development cycle varies from strategic alliance to strategic alliance based on
the size, service requirements and capabilities of the reseller. The varying
nature of each development cycle has necessarily impacted the timing of revenue
and cost recognition. We expect this trend to continue to affect our quarterly
and annual results. In addition, we have in the past invested heavily in our
network infrastructure and in personnel in anticipation of future growth. We
believe that we will continue from time to time to make similar heavy
investments in anticipation of further growth.
For example, our interactive marketing relationship with America Online
produced significant new subscribers for us in 1998. But later in that year we
suspended our advertising on America Online largely because technical
integrations were not implemented. Our relationship with America Online was
significantly renegotiated and amended by the end of 1998. In the first quarter
of 1999, in the absence of advertising, America Online did not produce net new
subscribers for us. We expect to advertise with America Online and to achieve
the needed technical integrations in 1999.
Liquidity and Capital Resources
Since our inception, we have financed our operations through the private
placement of common stock, preferred stock and long-term debt and through
equipment lease financing. At March 31, 1999, we had approximately $5.5 million
in cash and cash equivalents.
Net cash used in operating activities increased to $10.0 million for 1998
from $4.5 million for 1997. The increase in net cash used in operating
activities from year to year primarily resulted from increasing net losses. Net
cash used in operating activities decreased to $1.6 million for the quarter
ended March 31, 1999 from $2.8 million for the quarter ended March 31, 1998.
The decrease in net cash used in operating activities for the respective
quarters was due to decreases in advertising/strategic alliance payments and
increases in accounts payable, partially offset by increasing net losses.
Net cash used in investing activities decreased to $543,000 for 1998 from
$1.6 million for 1997 primarily due to the completion of the initial build-out
of our network, resulting in decreased purchases of furniture, fixtures and
equipment in 1998. Net cash used in investing activities decreased to $107,000
for the quarter ended March 31, 1999 from $124,000 for the quarter ended March
31, 1998 due to decreased purchases of furniture, fixtures and equipment.
Net cash provided by financing activities increased to $17.9 million for
1998 from $5.5 million for 1997 resulting primarily from the issuance of $5
million liquidation preference of our redeemable preferred stock, $5 million of
subordinated debt net of issuance discount and $5 million of redeemable common
stock. Net cash used in financing activities was $111,000 for the quarter ended
March 31, 1999 as compared to cash provided by financing activities of $3.6
million for the quarter ended March 31, 1998. The decrease in net cash from
financing activities resulted primarily from the fact that we did not issue any
common stock or incur debt during the quarter ended March 31, 1999.
30
<PAGE>
Following the offering, we expect net cash provided by financing activities
to increase due to higher cash balances which will be invested in marketable
securities. At least initially, this will be partly offset by the intended
repayment of indebtedness and redemption of our outstanding preferred stock
contemplated in connection with the offering. Since these are relatively
expensive sources of funds, however, we expect to benefit from this repayment
and redemption.
Our capital requirements depend on numerous factors, including market
acceptance of our services, the amount of resources we devote to investments in
our network and services development, the resources we devote to the sales and
marketing of our services and our brand promotions and other factors. We have
experienced a substantial increase in our capital expenditures and operating
lease arrangements since our inception consistent with the growth in our
operations and staffing, and anticipate that this will continue for the
foreseeable future. Additionally, we expect to make additional investments in
technologies and our network, and plan to expand our sales and marketing
programs and conduct more aggressive brand promotions. We currently anticipate
that the net proceeds of the offering will be sufficient to meet our
anticipated needs for working capital and capital expenditures for at least the
next 12 months. Although operating activities may provide cash in certain
periods, to the extent we experience growth in the future, we anticipate that
our operating and investing activities may use cash. Consequently, any such
future growth may require us to obtain additional equity or debt financing,
which may not be available on attractive terms, or at all, or may be dilutive.
We intend to use the net proceeds from the offering according to the following
approximate allocations:
.$25 million to expand our network around the world,
.$18 million to repay indebtedness and redeem preferred stock,
.$20 million to fund marketing and advertising activities, and
.any remaining proceeds for working capital and general corporate
purposes.
Except as indicated, we cannot specify with certainty the particular uses
for the net proceeds to be received from the offering or the amount to be used
specifically with respect to any such use. The indebtedness to be repaid
accrues interest on principal at a per annum rate of 10%, and half of such
indebtedness is due on June 30, 2003 and the other half is due on June 30,
2004, and the preferred stock to be redeemed accumulates dividends on stated
amount and unpaid dividends at a per annum rate of 15%. The repayment or
redemption price of the indebtedness to be repaid is estimated to be $10.9
million (including $763,000 of accrued interest) and of the preferred stock to
be redeemed is estimated to be $6.6 million (including $804,000 of accrued
dividends). The indebtedness consists of all our 10% Senior Subordinated Notes
due 2004, which we issued in June 1998, and the preferred stock is all our
Series A Usable Redeemable Preferred Stock, which we issued in July 1998.
We believe that we have minimal interest rate risk with respect to our cash
equivalents due to the short term nature of the underlying instruments. We have
a borrowing arrangement which is subject to interest rate risk due to the fixed
interest rate of the debt instrument.
Impact of Year 2000 Issue
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any computer
programs or hardware that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations causing disruptions of
operations for any company using computer programs or hardware, including,
among other things, a temporary inability to process transactions, send
invoices or engage in normal business activities. As a result, many companies'
computer systems may need to be upgraded or replaced in order to avoid
Year 2000 issues.
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<PAGE>
We are a comparatively new company, and, accordingly, the software and
hardware we use to operate our business have all been purchased or developed in
the last three years. While this does not protect us against Year 2000
exposure, we believe we gain some mitigation from the fact that the information
technology we use to operate our business is of recent origin. All of the
software code we have internally developed to operate our business is written
with four digits to define the applicable year.
We are in the process of testing our internal information technology and
non-information technology systems. We have completed the majority of testing
of our internally developed systems, and are in the process of evaluating and
compiling test results and determining what remaining issues need to be
addressed. All of the testing we have completed has been performed by our own
personnel. To date, we have not retained any outside service or consultants to
test or review our systems for Year 2000 compliance. Based on the testing we
have performed, we believe that such software is Year 2000 compliant. However,
we intend to complete more testing later in the year.
In addition to our internally developed software, we utilize software and
hardware developed by third parties both for our network as well as our
internal information systems. We have tested this third-party software and
hardware to determine Year 2000 compliance. In addition, we have obtained
certifications from our key suppliers of hardware and networking equipment for
our data centers that such hardware and networking equipment are Year 2000
compliant. Additionally, we have received assurances from the providers of key
software applications for our internal operations that their software is Year
2000 compliant. Based upon an initial evaluation of our broader list of
software and hardware providers, we are aware that all of these providers are
in the process of reviewing and implementing their own Year 2000 compliance
programs, and we will work with these providers to address the Year 2000 issue
and continue to seek assurances from them that their products are Year 2000
compliant.
We have not incurred any significant expenses to date, and we do not
anticipate that any future costs associated with our Year 2000 remediation
efforts will be material. We estimate that the costs associated with
implementing our year 2000 compliance plan to be approximately $100,000. The
approximate expenses incurred for testing have been as follows: $5,000 for the
year ended December 31, 1997, $40,000 for the year ended December 31, 1998 and
$25,000 for the quarter ended March 31, 1999. The costs incurred to date,
together with our estimate of remaining costs, represent in the aggregate less
than 5% of the amounts that we have budgeted for research and development and
network operations. However, if we, our customers, our providers of hardware
and software or other third parties with whom we do business fail to remedy any
Year 2000 issues, our services could be interrupted and we could experience a
material loss of revenues that could have a material adverse effect on our
business, prospects, results of operations and financial condition. We consider
such an interruption to be the most reasonably likely unfavorable result of any
failure by us, or failure by the third parties upon whom we rely, to achieve
Year 2000 compliance. Presently, we are unable to reasonably estimate the
duration and extent of any interruption, or quantify the effect it may have on
our future revenues. We have yet to develop a comprehensive contingency plan to
address the issues which could result from such an event. We are prepared to
develop a plan if our ongoing assessment leads us to conclude we have
significant exposure based upon the likelihood of such an event. See "Risk
Factors--Our Failure and the Failure of Third Parties to Be Year 2000 Compliant
Could Negatively Impact Our Business."
Recently Issued Accounting Pronouncements
In June 1998, the FASB issued SFAS NO. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for transactions
entered into after January 1, 2000. This
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<PAGE>
statement requires that all derivative instruments be recorded on the balance
sheet at fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether
a derivative is designated as part of a hedge transaction and the type of hedge
transaction. The ineffective portion of all hedges will be recognized in
earnings. We are in the process of determining the impact that the adoption of
SFAS NO. 133 will have on our results of operations and financial position.
In February 1998, the FASB issued SFAS NO. 132, "Employees' Disclosures
About Pensions and Other Postretirement Benefit Plans." This statement is
effective for fiscal years beginning after December 15, 1997 and restatement of
disclosures for earlier periods is required. We adopted SFAS No. 132 in 1998.
33
<PAGE>
BUSINESS
Company Overview
We are an Internet-based messaging and communications services provider to
individuals and businesses throughout the world. Our services enable the user's
e-mail box to function as a single repository for all e-mail, fax and voice
mail and permit convenient message retrieval through e-mail or by phone.
Customers can sign-up for all of our services through our web site and can
promptly receive a JFAX.COM phone number.
We believe we are the world's largest provider of Internet-based unified
messaging services with over 30,000 paid subscriptions as of March 31, 1999.
Since we started offering our services on a commercial basis in June 1996, we
have expanded our network to offer our services in over 60 area codes in the
United States and abroad, including in 21 of the 25 most populous metropolitan
areas in the United States and such international business centers as London,
Paris, Milan, Frankfurt, Zurich, Sydney and Tokyo.
Industry Background
Growth of the Internet and Electronic Commerce
The Internet has experienced rapid growth and has developed into a
significant tool for global communications, commerce and media, enabling
millions of people to share information and transact business electronically.
International Data Corporation, or IDC, estimates that there were over
51 million web users in the United States and over 97 million worldwide at the
end of 1998. IDC projects these numbers to increase to over 135 million web
users in the United States and over 319 million worldwide by the end of 2002.
Internet-based businesses have emerged to offer a variety of products and
services over the Internet. Advances in online security and payment mechanisms
have also prompted more businesses and consumers to engage in electronic
commerce. IDC estimates that the value of purchases of goods and services,
excluding fund transfers and stock transfers, on the Internet will grow from
$32.4 billion worldwide in 1998 to $425.7 billion worldwide in 2002.
E-Mail
E-mail is the most widely adopted Internet application, ranging from a
personal messaging tool to a strategic business tool. According to Electronic
Mail & Messaging Systems, there were approximately 325 million e-mail accounts
in operation at the end of 1998. E-mail messages have increased in volume and
functionality, and this trend is expected to continue. For example, e-mail is
expected to become a major vehicle for electronic commerce transactions.
Forrester Research predicts that the typical online consumer will participate
in eight to ten commerce-related exchanges via e-mail per week by 2001. The e-
mail box as a locating and delivery device has become the platform for
additional applications such as directory services, scheduling and document
sharing. Furthermore, the e-mail box can function as a central repository to
receive, send, forward, organize and prioritize voice mail, fax and e-mail
messages, thus creating what the IDC calls unified messaging.
Traditional Faxing
The fax machine is a valuable tool for communication for businesses and
individuals. Although e-mail traffic is growing rapidly, faxing continues to
grow due to decreasing telephone rates and the increasing availability of
software that allows faxes, including broadcast faxes, to be sent from personal
computers. IDC has projected that worldwide fax transmissions will increase
from an estimated 395 billion minutes in 1998 to 647 billion minutes in 2002.
According to IDC, fax transmissions generated estimated revenues of $92 billion
in 1998 and are projected to generate $103 billion in 2002.
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Trends in Faxing
The transmission of faxes over the Internet has become an increasingly
popular tool and provides a low cost method to send and receive faxes. In
addition to Internet faxing, users are increasingly faxing documents directly
from their computers over traditional phone lines, thereby growing less
dependent on traditional fax machines. IDC estimates that the share of faxes
sent using a fax machine in the United States was 82% in 1997 and is projected
to be 58% in 2002.
Recent advances in technology allow users to send and receive faxes from
their computers using e-mail to transmit data over the Internet. Internet
faxing using e-mail reduces labor costs associated with traditional faxing by
allowing users to send, receive and manage faxes from their computers, and
reduces the cost of sending messages because of the use of the Internet rather
than telephone lines as the transmission medium.
Trends in Internet Messaging
With continuing developments in modern technology, the various message media
are currently in the process of converging. Communication channels are becoming
interchangeable as consumers can send the same message through e-mail, voice
mail and fax. With the unification of these functions, consumers increasingly
value messaging services that are "device-independent." Consumers appreciate
the ability to send and retrieve messages in any form and in the most
convenient manner, using e-mail, voice mail or fax, and accessing messages with
the telephone or personal computer or through the Internet.
As e-mail continues to grow and a portion of fax traffic migrates to the
Internet, industry analysts are predicting rapid growth of services that unify
and simplify the messaging and communications needs of e-mail users. IDC
defines unified messaging as "a single 'in-box' for voice, e-mail and fax
messages that is accessible by both telephone and PC." IDC predicts that the
market for unified messaging will grow from approximately 90,000 unified
messaging mailboxes in 1998 to over 12.9 million boxes in 2002 in the United
States alone with each generating $20 in unified messaging revenue per month.
Need for Cost-Effective Solutions
Whether it is an individual avoiding the cost of maintaining a fax machine,
answering machine and dedicated fax line or a large corporation attempting to
cost-effectively manage expanding and increasingly sophisticated communications
systems, individuals and businesses alike are making use of third parties to
manage their messaging needs. In addition, businesses often find it difficult
to implement state-of-the-art technology in their own infrastructure, and
individuals with the expertise to maintain a sophisticated messaging system can
be scarce and costly to hire, train and retain. As a result, we believe that
organizations seeking to lower their costs and to reduce the amount of time and
labor they invest in technological infrastructure and support systems, such as
messaging systems, will look to Internet-based solutions provided by third
parties to maintain competitiveness.
Our Solution
We provide individual consumers, end-users and businesses with convenient,
cost-effective and reliable Internet-based messaging and communications
services.
Individual Consumers and End-Users
Our services are designed to provide the following key benefits to
individual consumers and end-users:
.. Unified Messaging. We believe we are the first company to provide a
commercially available Internet-based messaging service that enables the
end-user's e-mail box to function
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<PAGE>
as a single repository for all e-mail, fax and voice mail and permit
convenient management of their messages through e-mail or by phone.
. Anytime, Anywhere Accessibility. We have designed our services to allow
easy access by customers seven days a week, 24 hours a day from any
location. Our customers can listen to their e-mail and voice mail and
manage their e-mails, faxes and voice mails from any touch-tone phone.
In addition to these capabilities, our customers can listen to their
voice mail and view their faxes anytime they read their e-mail.
. Access to International Network. We have built a network allowing our
customers to establish a local phone number in over 60 area codes in the
United States and abroad including in 21 of the 25 most populous
metropolitan areas in the United States and such international business
centers as London, Paris, Milan, Frankfurt, Zurich, Sydney and Tokyo.
Additionally, our proprietary Internet-based solution enables a customer
to activate service from our web site or over the phone within minutes.
. Cost Effective Service. We believe that by using our service, customers
can achieve cost savings and efficiency when compared to traditional
telephone and fax communication.
. Customization. Our services allow customers to create their own
messaging solutions. They may elect to use our free services or our paid
subscription services, or they may add any of our usage-based features,
such as telephone access to e-mail, outbound voice, outbound faxing,
broadcast voice and broadcast faxing.
. Customer Support. We offer our customers various levels of support seven
days a week, 24 hours a day.
We believe a large percentage of our subscribers are professionals or are
employed in upper management positions and that another large percentage of our
subscribers are self-employed or small business owners.
Businesses
In addition to the benefits listed above, our service provides the following
key benefits to businesses:
. Cost Effective Service. With our service, businesses have a reduced need
for personnel, traditional fax machines, phone lines or other costly
hardware. In addition, we offer a simple solution priced to reflect our
economies of scale.
. Award-Winning Technology. We provide our customers with access to
advanced, award-winning Internet-based messaging technologies based on
open standards. In addition to being the first to market a unified
messaging service, our technology has earned the 1998 CommerceNet award
for Electronic Commerce Excellence in the United States Business-to-
Consumer category.
. Scaleability and Reliability. Our network of services is designed to be
highly scaleable, meaning that it allows us to easily add additional
locations to our network and additional users at each location. Our
system is also designed with back-up components (including redundant
power supplies and multiple Internet connections) in the event of a
technological failure and is designed to provide reliable service to our
customers.
. Security. Our fax services provide a type of security not available with
traditional faxing since messages arrive directly into the customer's e-
mail box and do not remain in view on a traditional fax machine. In
addition, all of our message transmission services are merely a conduit
for electronic messaging and do not store copies of transmissions in any
format, electronic or otherwise.
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Our Strategy
Our objective is to be the leading global provider of Internet-based unified
messaging and related services to individuals and businesses. To achieve this
objective, we intend to:
. Grow Our Traditional Subscriber Base. We plan to add new subscribers
through our direct marketing efforts and through our strategic alliances
with major online service providers, Internet service providers, e-mail
service providers and others. We believe that our strategic alliances
provide us with direct access to their customer bases, which reinforces
our ability to be the first to reach these potential new subscribers
with unified messaging services.
. Capitalize on Free Services. We believe that our free services will
attract a critical mass of users and educate Internet users regarding
the benefits of our services. We then plan to build our paid subscriber
base by converting a portion of free subscriptions to paid subscriptions
and to sell usage-based services to both free and paid users.
. Build the JFAX.COM Brand. We intend to increase our focus on building
the JFAX.COM brand. Historically, our growth has been primarily by word
of mouth and the limited promotional efforts of our strategic alliances.
Following the offering, we intend to launch a new promotional campaign
to increase awareness of the JFAX.COM brand through our strategic
alliances and through traditional media, including print and radio.
. Expand Service Offerings. We continue to add features to make our
services more functional and convenient for end-users. Our goal is to
have sticky services, where each end-user discovers through use that our
services facilitate efficient messaging management and, as a result, the
end user increases his or her use of our services. For instance, we plan
to introduce notification service, follow me services, cardless calling
and cardless conference calling, each of which we more fully describe in
the table on page 39.
. Further Develop Strategic Alliances. Our indirect marketing efforts use
key relationships with companies such as Ameritech, Yahoo!, CompuServe,
Critical Path, Prodigy and others. These companies promote our services
and provide a base of potential customers. Our intention is to maximize
the value of our existing strategic alliances and enter into similar
relationships with other leading Internet and communications companies.
. Expand International Network. We are expanding our international
network, which currently includes locations in North America, Europe and
the Pacific Rim. We offer local phone numbers in over 60 area codes in
the United States and abroad, including area codes in 21 of the 25 most
populous major metropolitan areas in the United States. We have over 15
area codes outside the United States, including area codes in London,
Paris, Frankfurt, Milan, Sydney and Tokyo. We intend to increase the
number of area codes and target new international locations.
Our Services
We provide a comprehensive range of Internet-based services to address the
messaging and communication needs of individuals and businesses. All of our
inbound services provide a unique telephone number assigned from available area
codes and digitally compress and route messages to the customer's e-mail box.
We collect approximately 95% of our fees through billing customers' credit
cards provided at initiation. If a credit card declines to pay a customer's
balance, an e-mail notice is sent to the customer. If the customer does not
respond to that e-mail, a disconnection warning is sent to the customer who is
then allowed up to 60 days to resolve the outstanding bill before being
disconnected.
Revenues are accrued upon billing of a customer's credit card. Uncollected
credit card amounts are written off after 30 days. We write-off 100% of all
amounts declined by credit cards on a monthly basis.
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<PAGE>
Our subscription services are summarized in the following table:
SUBSCRIPTION SERVICES
<TABLE>
<CAPTION>
Services Description Attributes Pricing**
-------- ----------- ---------- ---------
Free Services
<C> <S> <C> <C>
Free Fax Fax to e-mail Free telephone number Free
Unlimited number of incoming faxes
Only incoming fax capability
User cannot choose area code
Free Voice Mail* Voice mail to e-mail Free telephone number Free
Unlimited number of incoming voice mails
User cannot choose area code
Paid Services
Business Fax Outbound faxing--User Can select area code for phone number Setup Fee of $15 and
can Unlimited incoming faxes $12.50 per phone
send faxes Annotation capability number per month plus
Broadcast fax--User can additional usage-based
send the same fax to charges
numerous recipients
E-mail by Phone Phone access--User can Access, manage and/or reply to e-mail, Setup Fee of $15 plus
call a toll-free number voice mail and faxes by phone $9.50 per month
and access plus additional
e-mail and voice mail usage-based charges
through
a touch tone telephone
Unified Messaging Combined suite of All benefits of Business Fax and Setup fee of $15 plus
services E-mail by Phone $12.50 per month
plus additional
usage-based charges
</TABLE>
- --------
(*) This service is not yet active, but we expect to release it within the next
30 days.
(**) These are United States dollar prices for phone numbers in most countries.
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In addition to our subscription services, we provide a number of value-added
services which are available to free and paid customers of our subscription
services for an incremental usage-based fee. The primary usage-based services
that we offer and we expect to offer in the near future are described in the
following table:
USAGE-BASED SERVICES
<TABLE>
<CAPTION>
Services Description Attributes
- -------- ----------- ----------
Current Usage-Based Services
<S> <C> <C>
Outbound Fax............ User can fax document through his/her e-mail outbox Per minute fax rates
via the Internet by using the intended recipient's Paperless forwarding of received
destination fax number followed by "@jfaxsend.com" faxes
as the e-mail destination address
Outbound Voice.......... User can send a voice message through his/her e-mail Respond to e-mails with a voice
outbox via the Internet by using the destination phone message
number "@jfaxsend.com" as the e-mail destination
address
Broadcast Faxing........ User can send the same outbound fax to multiple Powerful broadcast faxing
recipients via the Outbound Fax service capabilities
Broadcast Voice......... User can send the same voice message to multiple Powerful broadcast voice messaging
recipients via the Outbound Voice service capabilities
Telephone Access to User can call a toll-free number and access e-mail Access, manage and/or reply to
E-mail................. through a touch tone telephone e-mail by phone
Planned Services
Follow Me Services...... Will locate user by routing incoming calls to any phone User will be able to assign
number or series of phone numbers. Callers will have telephone/cell phone numbers and
option to leave a voice mail or to search for the user pager numbers at which user can be
located
Service will try all numbers and
track user down
Notification............ Will keep user updated regarding incoming messages. User will be able to choose to
User will be able to apply rules to filter which check messages immediately or do it
messages are received and which media is used later
for notification
Cardless Calling........ User will be able to make outgoing calls through User will be able to make calls
JFAX.COM number by entering a pin number without having to hang up and
reenter calling card number
Conference Calling...... User will be able to speak to more than one party at
a time
</TABLE>
Each of the above services listed under "Current Usage-Based Services" is
currently offered to our Unified Messaging and Business Fax customers. Pricing
for outbound and broadcast faxing and voice is based on per minute rates which
vary depending on the location of the destination fax/phone number. Pricing for
telephone access to e-mail is $0.25 per minute for access to e-mail via a toll-
free telephone number. We plan to make these usage-based services available in
the future to users of our free services, upon payment of a sign-up/activation
fee.
There can be no assurance that we will be successful in the development or
offering of any of these current or planned services. The planned services are
in the concept stage of development and are expected to be offered in the
fourth quarter of 1999.
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<PAGE>
Strategic Alliances
In order to introduce our services to end-users, we have developed strategic
relationships with various online and offline service providers. These service
providers have pre-existing relationships with their customer bases which
consist of individuals and entities that are heavy users of e-mail and phone
services. Those relationships provide us with access to likely consumers for
our services. The following table lists examples of our current relationships:
<TABLE>
<CAPTION>
E-
Mail Providers/Portals Internet/Online Service Providers
---------------------- ---------------------------------
<S> <C>
Yahoo! America Online
Critical Path CompuServe
CommTouch Prodigy
mail.com
<CAPTION>
Systems Integrators,
Telecommunications Value Added Resellers,
Companies and International Resellers
------------------ ---------------------------
<S> <C>
Ameritech Telos
Bell South Daimler-Benz IT Services
Telecom New Zealand E.com Global Ltd.
ESAT Telecom Kuni International Research/Eudora Japan
ACC Telecom
</TABLE>
The following is a summary of certain of these key relationships:
Ameritech
We are Ameritech's provider of telephone access to e-mail services. Our
agreement with Ameritech provides that Ameritech pay for the required toll-free
traffic to the telephone access servers and that we pay commissions to
Ameritech based on customer revenue. Under the agreement, the parties have
agreed to brand the JFAX.COM E-Mail by Phone product as Ameritech's "eListen,"
"powered by JFAX."
Critical Path
We are the exclusive unified messaging service offered by Critical Path, a
provider of e-mail hosting services to corporate clients. Critical Path's
customers as of March 1999 included E*Trade, U.S. West, Network Solutions and
America Online, or AOL, which has selected Critical Path to provide e-mail
accounts to all of its ICQ (real-time Internet messaging service) users. As the
exclusive provider of unified messaging to Critical Path's customers, we expect
to participate in the deployment of e-mail and related value-added services to
Critical Path's rapidly growing base of users.
CompuServe
We provide the exclusive unified messaging service for CompuServe, an online
service provider. We are an active advertiser on the CompuServe Network and
CompuServe.com and also share revenue with CompuServe to the extent that the
advertising produces greater customer sign-ups than anticipated.
CommTouch
We are the exclusive unified messaging service offered by CommTouch, a
provider of e-mail hosting services to corporate clients. CommTouch co-brands
our service as "powered by JFAX.COM" under a revenue-sharing arrangement.
Prodigy
We are the exclusive unified messaging service offered by Prodigy, an
Internet service provider. Prodigy co-brands our services for sale to its
customers under a revenue-sharing arrangement.
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Telecom New Zealand
We have a revenue sharing arrangement with Telecom New Zealand Limited,
which is the dominant telephone company and our exclusive reseller in New
Zealand.
Kuni Research International
Kuni Research International is our exclusive reseller in Japan. Kuni is a
major reseller of Eudora's e-mail products and is Eudora's exclusive reseller
in Japan, which has the largest number of e-mail users in the world outside of
the United States. Kuni has a revenue sharing arrangement with us.
Our agreements with our strategic alliance resellers generally provide for
exclusivity and marketing commitments, in exchange for which we make payments
to the reseller on a commission basis. We generally pay to the reseller a
portion of our activation fees, a percentage of our monthly service fees and a
percentage of customer usage fees. In certain cases, such as under our current
arrangement with America Online, we simply purchase advertising and other on-
line promotions from the strategic alliance partner. In other cases, such as in
our agreement with CompuServe, we use a combination of advertising payments and
commissions (with commission being paid only to the extent the advertising
purchased produces more subscriptions than anticipated).
Many of these relationships are terminable at will or upon short notice.
Furthermore, none of these relationships include long-term contractual
commitments to continue the relationship, and most of these relationships are
in the early stages of development. Although we believe that individually none
of these relationships is material to our business, we consider our strategic
alliances in their entirety to be important to our future success.
Sales and Marketing
Within the unified messaging market, we believe that we have a significant
level of brand recognition. This is despite the fact that we have spent little
on marketing and promotion. We believe that we have the largest market share in
the world-wide unified messaging market. We intend to enhance our market
position by implementing the following strategy.
Direct Marketing
Our direct marketing efforts have consisted of attracting visitors to our
web site and signing them up as customers. In the past, approximately 60% of
our new subscriptions have originated directly through our web site. We believe
that our free service offerings will result in a significant increase in
traffic to our web site. In the past, we have only engaged in modest
advertising through direct channels due to limited financial resources.
To fully capitalize on our business model, we intend to initiate a more
traditional marketing campaign, which will initially include targeted
advertising, direct mail, radio and outbound telemarketing.
Indirect Marketing
Online Advertising and Reselling. We have revenue sharing and commission
based arrangements with a large number of resellers that allow us to advertise
on their web sites and permit them to resell our service. We have implemented
our affiliates program, a tool for enabling companies and individuals to sign
up as JFAX.COM resellers online.
Integrated Services. With some of our strategic alliances, we co-brand our
service, allowing them to integrate their service with ours and sell a "powered
by JFAX.COM" service.
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<PAGE>
Telecommunications Companies. Recently, we have contracted with Ameritech,
Telecom New Zealand and ESAT Telecom in Ireland to offer services to their
customers. These agreements represent a first step in executing a broad
recruitment program targeting traditional telephone companies, competitive
telephone companies, long distance providers and wireless carriers.
Value-Added Resellers and Systems Integrators. We are in the early stages of
our relationship with value-added resellers and systems integrators, by which
we mean businesses that take our services and bundle them with services of
other companies to be sold as a convenient package of services to the customer.
We intend to build a network of value-added resellers and systems integrators
that will offer our services as part of an overall information technology
solution for their corporate and government customers.
International Marketing. We believe that we benefit from local
representatives in our international markets, since they have the cultural
understanding and relationships necessary to sell our services. Our
international department in Los Angeles focuses on recruiting and supporting
our international marketing effort. We intend to move our European
representative recruitment and support activities to Europe by adding an office
there, maintaining our Pacific Rim and Latin American representative
recruitment and support activities in Los Angeles.
Marketing Our Usage Based Services
A critical piece of our direct and indirect marketing strategies is to offer
free services. The free services allow us to expand our customer base and get
customers in the habit of using our services. By virtue of our component-by-
component service approach and flexible billing systems, we can then engage in
the following two-step approach to sales:
. sell additional usage-based services to both free and paid subscribers,
and
. convert our free subscribers to paid subscriptions.
In order to effectively execute this sales strategy, we must identify
reasons why our customers may hesitate to buy new services. We believe the
primary reasons include:
. mere resistance to change, and
. the existence of functional alternatives, such as answering machines and
fax machines.
We intend to overcome this resistance by selling the factors of unified
messaging one at a time. In offering our services on a menu basis, we believe
we can:
. decrease the risk, or perceived risk, to the customer,
. take advantage of immediate, compelling needs to bring about behavior
changes, for instance, leveraging the privacy afforded by fax to e-mail
to wean the customer of dependence on an actual fax machine, and
. render functional alternatives redundant through the gradual
introduction of more complete unified messaging services.
For example, a free fax customer may, initially, only see the need for a fax
machine substitute and see no value in fax to e-mail, voice to e-mail or
telephone access to e-mail. By introducing this customer to unified messaging
via the free fax service, this customer may, through targeted selling of add-on
features, gradually see the power of combined fax to e-mail, voice to e-mail
and telephone access to e-mail, and thereby migrate to unified messaging.
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Our unified messaging resources allow us to execute this sales strategy
efficiently. As a unified messaging company, we have access to our subscribers'
e-mail and are able to customize our marketing efforts to specific customers.
As a result, we have a direct, low cost channel in which to advertise our
services by sending the customer a promotional fax, e-mail or voice mail
message.
International Network and Operations
We offer our services in over 60 area codes in the United States and abroad,
including in 21 of the 25 most populous major metropolitan areas in the United
States and such international business centers as London, Milan, Frankfurt,
Zurich, Sydney and Tokyo. We obtain phone numbers on an as-needed basis from
various local carriers throughout the United States and internationally with
whom we have relationships. As of May 15, 1999, we have over 80,000 phone
numbers in use by our subscribers and we have an additional 80,000 phone
numbers which we have already acquired from local carriers and which are in our
inventory. Our ability to continue to acquire additional quantities of phone
numbers in the future will depend on our relationships with our local carriers
and our ability to pay market prices for such phone numbers. We intend to take
advantage of the fact that we were the first company to offer unified message
services by creating a leading position in major cities as quickly as possible.
We have pursued two basic types of commercial relationships in rolling out our
network:
. International Strategic Alliances. To expand our international network
rapidly, we are pursuing strategic alliances with telecommunications
providers in a number of foreign markets. These alliances provide us
with local marketing, billing, customer support, co-location and phone
numbers. Our agreements with our international strategic alliance
resellers provide that the reseller is granted a license as our
exclusive reseller in the particular country in question. The license
generally has an initial term of one-year following commercial launch
and is renewable by the reseller for additional one-year renewal terms,
provided that certain threshold requirements for JFAX.COM subscribers
are met at the expiration of each term. The reseller agreement provides
for the reseller to pay for local phone numbers and hardware, local
marketing expenses and local help desk support, in exchange for which
the reseller receives a commission based on the JFAX.COM revenues
associated with the reseller.
. Co-location. Our servers are housed in spaces owned by third parties,
frequently local telephone companies, from which they are connected to a
network of phone lines dedicated to JFAX.COM or connected to the
Internet. We refer to this service provided by third parties as "co-
location." (We generally arrange independently for the connection of
local phone numbers for our customers to the servers.) Most servers have
a direct connection to the Internet. In addition, in the event that a
direct connection is not functioning or a server has no connection, each
server is also connected to a dedicated network of phone lines and, by
virtue of that network, to at least two of our hubs, or central servers,
through which messages can be routed to the Internet. Either the local
telephone company or an alternate provides us the ability to access our
servers through the telephone lines for the purposes of maintenance and
repair. Given the simple nature of the services provided by the co-
locators, our co-location agreements are much simpler arrangements than
the agreements with our strategic alliances and provide for a fixed
monthly fee.
We have entered into co-location agreements primarily with two carriers.
For locations in the United States, we generally co-locate with
WorldCom/MFS, which is now MCI WorldCom. For international locations, our
co-location agreements are for the most part with a U.S. subsidiary of
Telecom Italia. We have certain other co-location agreements, in which we
own both the lines and equipment. We pay a fixed fee per month for all of
the above co-locations.
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We intend to enter additional markets and to expand our operations outside
the United States. International sales are subject to a number of inherent
risks. We face a more complex process to acquire telephone numbers outside the
United States, and in many countries we may not acquire telephone numbers
directly, but we must use a local company, which increases the importance of
our international strategic alliances. We must depend to a greater extent on
our foreign strategic alliances for day-to-day management. Internationally,
there may be different technology standards, or changes in regulatory
requirements and tariffs, which are more difficult for us to anticipate, and
will frequently be more difficult for us to accommodate.
Services and Information Systems
Inbound Services
Inbound servers accept incoming fax and voice mail messages on telephone
lines from local telephone providers. The servers run on the Unix operating
system, known for reliability in telecom environments, using equipment supplied
by leading telephony hardware manufacturers, and software designed and written
by our programmers. After a fax transmission or a voice message is received by
the server, it is compressed into a standard form, and sent to the user's e-
mail address via the Internet. By using the Internet we are able to connect
efficiently with third parties on a worldwide basis. Voice messages are
typically compressed by a factor of 5 to 1 using the internationally-proven
Global Systems for Mobile Communications technology, which results in telephone
quality voice, with small file sizes. Faxes are compressed to the TIF/F, an
Internet standard for multi-page fax documents, with an average page requiring
about 40 kilobytes of memory.
Outbound Services
The outbound system accepts e-mail messages via the Internet that are
addressed to fax machines anywhere in the world, or voice messages that are
addressed to telephones anywhere in the world. After a message is received by
the outbound system, it determines a least cost route for transmitting the
message to the final destination fax machine or telephone. The system comprises
servers in a distributed network with several scheduling, prioritization and
routing procedures designed and written by our programmers, to ensure that the
message is delivered in a timely and cost-effective manner to the destination.
Telephone Access Services
Our telephone access system offers users the capability to call from any
touch-tone telephone and listen to their e-mails and voice mails and manage
their e-mails, faxes and voice mails. Our servers connect via the Internet to
the user's e-mail servers, and retrieve all of the user's messages, permitting
customers to listen to their e-mails via a text-to-speech conversion technology
and manage their e-mails, faxes and voicemails by phone.
Internet Access and Provisioning Services
Our Internet-based provisioning systems, by which customers can initiate our
services from our web site, permit us to provision phone numbers and manage
account information promptly and efficiently. These systems work on a network
of servers connected to a centralized database, and are built to handle high
volume traffic with back-up technology in the event of a failure and the
ability to add servers and users easily.
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Reliability and Capacity Issues
Future growth in our subscriber base for both free and paid services, and
growth in the subscriber bases of competing companies, will increase the demand
for available network infrastructure and Internet data transmission capacity.
This growth could lead to insufficient capacity and an inability on our part to
acquire the necessary capacity to accommodate our future growth. Additionally,
these trends will increase the demand for large quantities of telephone numbers
and may lead to an inability on our part to acquire the necessary phone
numbers, particularly in desirable metropolitan areas, to accommodate our
future growth. These issues could also lead to a reduction in our services'
reliability. Since customers will not tolerate a service hampered by slow
delivery times or unreliable service levels, or failures or security breaches,
lack of capacity in our network or insufficient telephone numbers could have a
material adverse effect on our business, prospects, financial condition and
results of operations.
Customer Support Services
Our customer service department provides various levels of 24-hour support,
seven days a week. This department provides support primarily in English,
although this department also has French, Spanish and German speakers. The
department handles all account issues for our subscribers, ranging from initial
sales and sign-up to technical support and account administration. To provide
this "one-stop shop," we have installed a technology infrastructure for our
customer service representatives to leverage available data from our main
enterprise database and our customer database. These databases give our
customer service representatives the ability to track purchase history, payment
history, caller history, contact history, and report, analyze and solve
technical issues in an efficient and organized manner. We maintain a list of
frequently asked questions for use by customer service representatives in
responding to common queries and issues. This list of questions is updated to
keep our customer service representatives abreast of new issues.
Further, we offer Internet-based online self-help. This allows customers to
resolve simple issues on their own. We have found that most customer questions
come from new users, and with an online self-help guide we believe we are able
to address the majority of new users' questions efficiently.
Competition
We principally compete to provide Internet enabled e-mail users with unified
messaging and related communications services. Because unified messaging is a
new service that is designed to consolidate other methods of messaging (e.g.,
voice mail, fax and e-mail) into a single repository, we compete with worldwide
providers of voice mail services and products and fax services and products.
Each of these markets on a stand-alone basis is highly competitive and has
numerous service and product providers.
Although we currently have direct competitors for some of our services, we
are not aware of any service provider currently offering an international
unified messaging suite of services directly competitive to our own. We believe
this lack of direct competition will change. To the extent our services face
competition, that competition is based on price, quality, brand recognition,
geography and customer support.
Many services provided over the internet are provided free of charge to
attract traffic to the service provider's website. These free services include
e-mail, news feeds and stock quotes along with many others. The providers of
free services attempt to recoup their expenses by selling advertising based on
the traffic generated from users of free services. Services similar to ours are
being provided free to users on an advertising supported basis. Examples
include a free voice mail product provided by Echobuzz. These services require
the user to listen to taped ads before they can
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<PAGE>
access their messages. Fax-4-Free offers free faxing services to users with
each outbound fax containing ads in the margins. Efax and CallWave each offer
fax to e-mail services free to users, and their users view advertisements when
they retrieve their faxes. We expect that as these free services become
popular with consumers, they will require our subscription services to provide
clear incremental benefits over free services to justify paying for our
services. In addition, to the extent free services of another provider are
used by a potential JFAX.COM customer, it may be harder for us to persuade
that potential customer to try our services.
Future competition could come from a variety of companies both in the
Internet industry and the telecommunications industry. These industries
include major companies which have much greater resources than we have, have
been in operation for many years and have large subscriber bases. Such
companies may be able to develop and expand their communications and network
infrastructures more quickly, adapt more swiftly to new or emerging
technologies and changes in customer requirements, take advantage of
acquisition and other opportunities more readily, and devote greater resources
to the marketing and sale of their products and services than we can. There
can be no assurance that additional competitors will not enter markets that we
plan to serve or that we will be able to compete successfully.
We believe that our solution competes favorably with that of other current
and potential providers with respect to the following:
. range and quality of service offerings,
. access to phone numbers in major metropolitan areas in the United States
and abroad,
. pricing and cost savings for customers,
. customer support, and
. brand recognition.
We believe we can compete effectively in unified messaging because it is a
relatively new service and, as the first company offering unified messaging in
its complete form, we have a head start on our current and potential
competitors with respect to these factors. However, we face strong competition
in each of the component portions of our service (e.g., voice mail, fax and e-
mail) from larger, financially stronger and better established competitors.
Patents and Proprietary Rights
We rely on a combination of trademark, trade secret and copyright law and
contractual agreements to protect our proprietary technology and intellectual
property rights.
We have developed substantially all of our software internally. We have
entered into agreements with our software programmers that provide for our
ownership of all software and intellectual property.
We have licensed from third parties some components of our end-user
software for unlimited use for one-time, up-front payments pursuant to written
license agreements. Some of our license agreements provide for a modest
additional payment in the event of a subsequent major upgrade.
We have multiple pending U.S. patent applications and one Patent and
Trademark Office application for proprietary aspects of the major components
of our technology, but we have no issued patents. Unless and until patents are
issued, no patent rights can be enforced. We have obtained U.S. copyright
registrations for certain proprietary software.
We own registrations in the United States for the service marks JFAX(R),
JFAX.COM(R) and our J(R) logo, as shown on the cover, as well as a European
Community registration and a European Community application for registration
of JFAX(R). We also own registrations and applications for registration in the
United States of other service marks and slogans that we use.
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We hold the Internet domain names "jfax.com" and "jconnect.com." Under
current domain name registration practices, no one else can obtain an identical
domain name, but can obtain a similar name, or the identical name with a
different suffix, such as ".net" or ".org" or with a country designation. The
relationship between regulations governing domain names and the laws protecting
trademarks and similar proprietary rights is evolving. Domain names are
regulated by Internet regulatory bodies, while trademarks are enforceable under
local national law. In addition, the regulation of domain names in the United
States and in foreign countries is subject to change. There are plans to
establish additional top-level domains, appoint additional domain name
registrars or modify the requirements for holding domain names in all of the
countries in which we conduct business, and we could be unable to prevent
third-parties from acquiring domain names that infringe or otherwise decrease
the value of our domain names or trademarks.
Like other technology-based businesses, we face the risk that we will be
unable to protect our intellectual property and other proprietary rights, and
the risk that we will be found to have infringed the proprietary rights of
others. For an expanded discussion of these risks, see "Risk Factors--We May Be
Unable to Enforce or Defend Our Proprietary Technology" and "--We May Be Found
to Have Infringed the Intellectual Property Rights of Others."
We have received communications from AudioFAX IP LLC asserting the ownership
of certain United States and Canadian patents, making a licensing proposal for
these patents on unspecified terms, and demanding that we immediately cease and
desist from infringement of these patents. We have reviewed the AudioFAX
patents with our business and technical personnel and outside patent counsel
and have concluded that we do not infringe these patents. We have communicated
this conclusion to AudioFAX, but it is possible that they will pursue further
action in this matter. We intend to defend vigorously our intellectual property
rights.
Government Regulation
There is currently only a small body of laws and regulations directly
applicable to access to or commerce on the Internet. However, due to the
increasing popularity and use of the Internet, it is possible that a number of
laws and regulations may be adopted at the international, federal, state and
local levels with respect to the Internet, covering issues such as user
privacy, freedom of expression, pricing, characteristics and quality of
products and services, taxation, advertising, intellectual property rights,
information security and the convergence of traditional telecommunications
services with Internet communications. Moreover, a number of laws and
regulations have been proposed and are currently being considered by federal,
state and foreign legislatures with respect to these issues. The nature of any
new laws and regulations and the manner in which existing and new laws and
regulations may be interpreted and enforced cannot be fully determined. For
example, in 1998, Congress passed and the President signed into law:
. The Digital Millennium Copyright Act, which provides stronger copyright
protection for software, music and other works on the Internet. Under
this law, Internet service providers and web site operators must register
with the U.S. Copyright Office to avoid liability for infringement by
their subscribers.
. Child Online Protection Act, which makes illegal the communication of
material that is harmful to minors on the Internet for commercial
purposes in such a manner as to be available to minors. This law also
contains a section that requires web sites to obtain parental consent
before collecting information from children 12 and younger.
. Child Protection and Sexual Predator Punishment Act, which imposes
stronger criminal penalties for using the Internet to solicit minors for
sexual purposes and criminalizes sending obscene material to persons
under the age of 16.
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. The Internet Tax Freedom Act, which provides a three-year moratorium on
taxes deemed discriminatory in order to give state and federal lawmakers
time to develop a more comprehensive approach to Internet taxation.
In addition, there is substantial uncertainty as to the applicability to the
Internet of existing laws governing issues such as property ownership,
copyrights and other intellectual property issues, taxation, libel, obscenity
and personal privacy. The vast majority of these laws were adopted prior to the
advent of the Internet and, as a result, did not contemplate the unique issues
of the Internet. Future developments in the law might decrease the growth of
the Internet, impose taxes or other costly technical requirements, create
uncertainty in the market or in some other manner have an adverse effect on the
Internet. These developments could, in turn, have a material adverse effect on
our business, prospects, financial condition and results of operations.
The United Kingdom and the European Union have adopted legislation which has
a direct impact on business conducted over the Internet and on the use of the
Internet. For example, the United Kingdom Defamation Act of 1996 protects an
Internet service provider, under certain circumstances, from liability for
defamatory materials stored on its servers. The European Directive on the
Protection of Consumers is expected to have a direct effect on the use of the
Internet for commercial transactions and will create an additional layer of
consumer protection legislation with respect to electronic commerce. In
addition, numerous other regulatory schemes are being contemplated by
governmental authorities in both the United Kingdom and the European Union. As
in the United States, there is uncertainty as to the enactment and impact of
foreign regulatory and legal developments. These developments may have a
material and adverse impact on our business, prospects, financial condition and
results of operations.
Facilities
We currently occupy approximately 15,000 square feet of office space for our
headquarters in Los Angeles, California. We sublease this space through an
informal arrangement with CIM Group LLC, the named sublessee, which is a
limited liability company controlled by Richard S. Ressler, our chief executive
officer. Our share of the monthly rent is approximately $20,000. Our Los
Angeles sublease expires in 2000. We have an additional 1,000 square feet of
office space at 11 Broadway in downtown New York City. Our New York sublease
expires in 2000.
All of our network equipment is housed either at our Los Angeles or New York
leased space or at one of our 40 co-location facilities around the world.
Employees
As of April 15, 1999, we employed or contracted a total of 79 employees,
including 11 consultants on a full or part-time basis. We have 62 full-time and
6 hourly workers. Thirty of our employees are technical staff, reflecting our
emphasis on the development of new technologies.
Our future success will depend, in part, on our ability to continue to
attract, retain and motivate highly qualified technical, marketing and
management personnel. Our employees are not represented by any collective
bargaining unit. We have never experienced a work stoppage. We believe our
relationship with our employees is good.
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MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information regarding our directors
and executive officers. We currently have seven directors, each of whom serves
for a one year term which will expire at the next annual meeting of
stockholders expected to be held in May 2000. We do not currently plan to add
any additional directors following the offering.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Richard S. Ressler.... 40 Co-Chairman of the Board and Chief Executive Officer
Jaye Muller........... 26 Co-Chairman of the Board and Director
Gary H. Hickox........ 42 President and Chief Operating Officer
Dr. Anand Narasimhan.. 33 Chief Technology Officer
Nehemia Zucker........ 42 Chief Financial Officer
Zohar Loshitzer....... 41 Chief Information Officer and Director
John F. Rieley........ 54 Director
Michael P. Schulhof... 55 Director
R. Scott Turicchi..... 35 Director
Robert J. Cresci...... 55 Director
</TABLE>
Richard S. Ressler has been our chief executive officer, co-chairman of the
board and a director since 1997. He is a member and manager of Orchard/JFax
Investors, LLC, one of our principal stockholders. Since 1994, Mr. Ressler has
been the president, sole director and sole shareholder of Orchard Capital
Corporation, a consulting firm which provides investment, operational, and
financial consulting services to, among others, start-up and turn-around
companies including JFAX.COM. From 1995 to 1997, Mr. Ressler was chief
executive officer of MAI Systems Corporation, a software and network computing
company, and he currently serves as MAI's chairman. Mr. Ressler has served MAI
in such capacities pursuant to a consulting agreement between MAI and Orchard
Capital. Since 1995, Orchard Capital has also acted as the manager of CIM
Group, LLC, a real estate investment, development and management company. Since
1996, Mr. Ressler has also been a director and shareholder of Orchard Telecom,
Inc., a telecommunications consulting firm.
Jaye Muller is a co-founder and co-chairman of the board and has been a
director since 1995. From December 1995 until March 1997, he held various
offices with JFAX.COM. After March 1997, he has provided consulting services to
us under an agreement between us and Boardrush Media LLC, one of our principal
stockholders. He is a member and manager of Boardrush. Mr. Muller received his
technical education and began his electronics design work in East Germany. He
is a musician and the founder of one of the world's first Internet based
newsletters, Germany Alert.
Gary H. Hickox has been our president and chief operating officer since
1998. From 1996 to 1998 he was global marketing vice president for AT&T
Internet Services, where he was responsible for marketing and securing the
delivery of an array of Internet-related voice and call center services. From
1983 to 1996, Mr. Hickox held other executive positions within AT&T.
Dr. Anand Narasimhan has been our chief technology officer since 1996. Dr.
Narasimhan began his career with IBM in 1990 as a graduate fellow and conducted
research and design work in areas that included audio and speech coding
techniques. He developed technologies on several patented telecommunications,
digital cellular and network devices, and additional patents are pending on
devices he helped develop in the areas of Internet telephony, voice and audio
data transfer and data network switching.
Nehemia Zucker has been our chief financial officer since 1996. Prior to
joining JFAX.COM in 1996, he was chief operations manager of Motorola's EMBARC
division, which packages CNBC and ESPN
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for distribution to paging and wireless networks. From 1980 to 1996, Mr. Zucker
held various positions in finance, operations and marketing at Motorola in the
United States and abroad.
Zohar Loshitzer has been our chief information officer and a director since
1997. Since 1995, he has been a managing director of Orchard Telecom, Inc., a
telecommunications consulting company. From 1987 to 1995, Mr. Loshitzer was the
general manager and part owner of Life Alert, a nationwide emergency response
service. Mr. Loshitzer has been a director of MAI Systems Corporation since
1998.
John F. Rieley is a co-founder and has been a director since 1995. From
December 1995 when our business was founded until March 1997, he held various
offices with JFAX.COM. After March 1997 he has provided consulting services to
us under an agreement between us and Boardrush Media LLC, one of our principal
stockholders. He has managed, marketed and consulted on other projects in the
media field, the airline industry and in public affairs.
Michael P. Schulhof has been a director since 1997. Mr. Schulhof is a
private investor in the media, communications and entertainment industry. From
1993 to 1996, he was president and chief executive officer of Sony Corporation
of America. Mr. Schulhof is a trustee of Brandeis University, the Lincoln
Center for the Performing Arts, New York University Medical Center and the
Brookings Institution. He is a member of the Council on Foreign Relations and
the Investment and Services Policy Advisory Committee to the U.S. Trade
Representative. Mr. Schulhof is a director of SportsLine, USA, Inc., an
Internet-based sports media company.
R. Scott Turicchi has been a director since 1998. Mr. Turicchi is a Managing
Director in Donaldson, Lufkin & Jenrette Securities Corporation's Investment
Banking department. He is responsible for Corporate Finance activities
including public equity offerings, high grade and high yield debt offerings,
private equity placements and mergers and acquisitions advisory services.
Mr. Turicchi joined Donaldson, Lufkin & Jenrette Securities Corporation in
1990.
Robert J. Cresci has been a director since 1998. Mr. Cresci has been a
Managing Director of Pecks Management Partners Ltd., an investment management
firm, since September 1990. Mr. Cresci currently serves on the boards of
Bridgeport Machines, Inc., EIS International, Inc., Sepracor, Inc., Arcadia
Financial, Ltd., Hitox, Inc., Aviva Petroleum Ltd., Film Roman, Inc., Quest
Education Corporation, Castle Dental Centers, Inc., Candlewood Hotel Co., Inc.,
SeraCare, Inc. and on the boards of several other private companies.
The holders of our outstanding subordinated notes and preferred stock issued
in June and July 1998 are parties to a securityholders' agreement together with
us and Orchard/JFAX Investors, LLC. Under that agreement, each of the parties
to the agreement has agreed to vote its shares in favor of one designee of the
holders of the notes and one designee of the holders of the preferred stock.
Pursuant to the agreement, Mr. Turicchi was appointed to the board of directors
as the representative of the holders of the preferred stock and Mr. Cresci was
appointed to the board of directors as the representative of the holders of the
notes.
Committees of the Board of Directors
In April 1999, the board of directors established an audit committee and a
compensation committee. The audit committee consists of Messrs. Cresci,
Schulhof and Turicchi, all of whom are outside directors, by which we mean they
are directors who are not also officers or employees of JFAX.COM. The audit
committee recommends engagement of our independent auditors, approves the
services performed by such auditors and reviews and evaluates our accounting
policies and our systems of internal accounting controls. The compensation
committee consists of Messrs. Cresci, Schulhof and Turicchi, all of whom are
outside directors. The compensation committee makes recommendations to the
board of directors in connection with matters of compensation, including
determining the compensation of our executive officers. The compensation
committee also administers our 1997 Stock Option Plan.
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Compensation Committee Interlocks and Insider Participation
During the year ended December 31, 1998, we had no compensation committee.
Decisions regarding compensation for 1998 were made by our board of directors.
During the last fiscal year, Mr. Ressler and Mr. Loshitzer participated in
deliberations of our board of directors concerning executive officer
compensation. Following the completion of the offering, compensation decisions
will be made by the compensation committee.
Director Compensation
Our directors who are also officers receive no separate compensation for
serving as directors. Our outside directors, Messrs. Schulhof, Turicchi and
Cresci, are themselves, or are representatives of, significant stockholders.
They receive no compensation for serving as directors. They are reimbursed for
their expenses in attending directors' meetings and committee meetings. Some of
our directors will receive stock options in connection with this offering at an
exercise price of $9.00 per share. See "Certain Transactions."
Executive Compensation
The following table sets forth information concerning compensation of our
chief executive officer and the top four other highly compensated executive
officers whose salary and incentive compensation exceeded $100,000 for the year
ended December 31, 1998 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
--------------------- ------------
Shares
Name And Principal Other Annual Underlying
Position Salary Bonus Compensation Options
- ------------------ -------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Richard S. Ressler....... $200,000 $ 0.00 $ 0.00 N/A
Chief Executive Officer
Gary H. Hickox........... $ 60,874(/1/) $ 0.00 $40,542(/2/) 375,000
President
Nehemia Zucker........... $150,000 $33,261 $ 0.00 12,500
Chief Financial Officer
Zohar Loshitzer.......... $140,000 $43,677 $ 0.00 50,000
Chief Information
Officer
Anand Narasimhan......... $137,453 $25,798 $ 0.00 112,500
Chief Technology Officer
</TABLE>
- --------
(1) Represents compensation for the period from September 1998 to December
1998.
(2) Consists of re-location expenses reimbursed to Mr. Hickox.
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OPTION GRANTS AND EXERCISES
The following table provides information concerning grants of options to
purchase our common stock made during the fiscal year ended December 31, 1998
to the Named Executive Officers. They did not exercise any options during this
period. No stock appreciation rights were granted during 1998.
Option Grants In Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable Value
Number of At Assumed Annual Rates
Securities % of Total of Stock Price Appreciation
Underlying Options Granted Exercise or For Option Term
Options to Employees in Base Price Expiration ---------------------------
Name Granted Fiscal Year ($/SH) Date 5% ($) 10% ($)
---- ---------- --------------- ----------- ---------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Richard S. Ressler...... 0 N/A N/A N/A N/A N/A
Chief Executive Officer
Gary H. Hickox.......... 375,000 42.0% $2.40 9/17/08 $ 566,005 $ 1,434,368
President
Nehemia Zucker.......... 12,500 1.4% $2.40 9/30/08 $ 18,867 $ 47,812
Chief Financial Officer
Zohar Loshitzer......... 50,000 5.6% $2.40 9/30/08 $ 75,467 $ 191,249
Chief Information
Officer
Anand Narasimhan........ 112,500 12.6% $2.40 9/30/08 $169,082 $ 430,310
Chief Technology
Officer
</TABLE>
Each option represents the right to purchase one share of common stock. One
third of the options vest on the one-year anniversary of the grant date and
each of the remaining one-third portions of the options vest on each annual
anniversary of the grant date thereafter. In the event of a sale of all or
substantially all of our assets, or our merger with or into another
corporation, each option will become immediately exercisable in full unless the
board of directors determines that the optionee has been offered substantially
identical replacement options.
Potential realizable value is based on the assumption that our common stock
appreciates at the annual rate shown (compounded annually) from the date of
grant until the expiration of the option term. These numbers are calculated
based on the requirements promulgated by the SEC and do not represent our
estimate of future stock price growth.
Some of the Named Executive Officers will receive stock options in
connection with this offering at an exercise price of $9.00 per share. See
"Certain Transactions".
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<PAGE>
AGGREGATE OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table provides information concerning unexercised options held
as of December 31, 1998 by the Named Executive Officers. They did not exercise
any options during this period.
<TABLE>
<CAPTION>
Number of Unexercised Options Value of Unexercised
Held In-The-Money Options
at December 31, 1998 at December 31, 1998(1)
--------------------------------- ---------------------------------
Name Exercisable (#)/Unexercisable (#) Exercisable ($)/Unexercisable ($)
---- --------------------------------- ---------------------------------
<S> <C> <C>
Richard S. Ressler...... 0/0 $0/0
Chief Executive Officer
Gary H. Hickox.......... 0/375,000 $0/0
President
Nehemia Zucker.......... 145,834/116,666 $238,000/169,999
Chief Financial Officer
Zohar Loshitzer......... 225,000/50,000 $360,000/0
Chief Information
Officer
Anand Narasimhan........ 75,000/112,500 $122,400/0
Chief Technology
Officer
</TABLE>
- --------
(1) The value of the unexercised in-the-money options is based on fair market
value at December 31, 1998, as determined by the Board of Directors, and is
net of the exercise price of such options.
1997 Stock Option Plan
Our 1997 Stock Option Plan was adopted by the board of directors and
approved by the stockholders in November 1997. A total of 4,375,000 shares of
common stock has been reserved for issuance under the plan. As of May 15, 1999,
options to purchase 1,515,693 shares of common stock were outstanding under the
plan, and 53,329 shares had been issued upon exercise of previously granted
options.
The plan provides for grants to employees (including officers and employee
directors) of "incentive stock options" within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), and for grants of
nonstatutory stock options to employees (including officers and employee
directors) and consultants (including non-employee directors).
The plan is administered by the compensation committee of the board of
directors. The plan administrator may determine the terms of the options
granted, including the exercise price, the number of shares subject to each
option and the exercisability of the option. The plan administrator also has
the full power to select the individuals to whom options will be granted and to
make any combination of grants to any participants.
Options generally have a term of 10 years. One-third of the options vest on
the one-year anniversary of the grant date and each of the remaining one-third
portions of the options vest on each annual anniversary of the grant date
thereafter.
The option exercise price may not be less than the higher of the par value
or 100% of the fair market value of the common stock on the date of grant;
provided, however, that nonstatutory options may be granted at exercise prices
of not less than the higher of the par value or 85% of the fair market value on
the date the option is granted. In the case of an incentive option granted to a
person who at the time of the grant owns stock representing more than 10% of
the total combined voting power of all classes of our stock, the option
exercise price for each share covered stock by such option may not be less than
110% of the fair market value of share of common stock on the date of grant of
such option.
53
<PAGE>
In the event of a sale of all or substantially all of our assets, or our
merger with or into another corporation, each option will become immediately
exercisable in full unless the board of directors determines that the optionee
has been offered substantially identical replacement options.
Employment Agreements
We have employment agreements with Mr. Zucker and Mr. Narasimhan. Each of
the employment agreements has no specified term and is terminable at will by
either party, but provide for severance payments equal to six-months' salary,
in the case of Mr. Zucker, and three-months' salary, in the case of Mr.
Narasimhan, in the event of a termination by us without cause. Neither of these
agreements provides for accelerated vesting of any employee options upon
termination for any reason but do provide for accelerated vesting in the event
of a change in control of JFAX.COM.
We also have an employment agreement with Mr. Hickox. The agreement has a
one year term, which term will be renewed for successive one year terms unless
either we or Mr. Hickox give prior notice of termination. We will pay Mr.
Hickox 12 months' severance in the event that:
. he terminates his employment as a result of a relocation of our
principal headquarters or a material change in his powers or duties,
. we terminate his employment without cause, or
. we choose not to renew his employment at the end of the initial term or
any successive renewal term.
Under the employment agreement, Mr. Hickox's employee options scheduled to
vest within 90 days of such termination will vest immediately in the event he
terminates his employment as a result of a relocation of our principal
headquarters or a material change in his powers or duties or we terminate his
employment without cause. Finally, Mr. Hickox is also entitled under the
employment agreement to a bonus of 50% of his annual salary if agreed-upon
milestones are met and up to 100% of his annual salary if such milestones are
exceeded.
We have established an incentive compensation bonus plan designed to
recognize efforts required to achieve our annual objectives. A management
committee administers the plan. This committee is exclusively responsible for
determining and approving the following:
. financial planning and setting of corporate goals,
. eligibility of plan participants,
. bonus structure amounts, which are based on base salary, and
. individual assessment guidelines and goals.
Corporate attainment of goals drives the funding of the bonus plan. If we
meet or exceed the semi-annual revenue and paid subscriptions goals set by the
management committee of the board of directors, a fixed percentage (either 75%,
100% or 110%, depending on the extent to which the goals are met or exceeded)
of a targeted bonus pool (a total of $921,350 for 1999) is funded. If our
financial performance does not reach the goals set by the management committee,
no bonuses of any amount will be paid. Assuming that the plan is funded, the
individual funding is based on a targeted bonus amount (which is set by the
management committee as a percentage of the individual's salary). A percentage
of the target amount is paid, which percentage is based on the extent to which
the aggregate bonus pool has been funded (i.e., based on our performance) and
on an individual's attainment of his or her goals, which may be either
quantitative goals or numerical goals. An individual's supervisor determines
what percentage of that individual's goals have been attained, and recommends a
bonus accordingly. Each of Messrs. Hickox, Zucker, Loshitzer and Narasimhan
participates in the bonus plan and could receive a bonus of up to 50% of his
base salary.
54
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information as of May 15, 1999 with respect
to the beneficial ownership of our common stock both before and immediately
following the offering by:
. each person known by us to own beneficially more than five percent, in
the aggregate, of the outstanding shares of our common stock,
. the selling stockholders in this offering,
. our directors and our Named Executive Officers, and
. all executive officers and directors as group.
The following calculations of the percentages of outstanding shares are
based on 24,312,276 shares of our common stock outstanding as of May 15, 1999
and 31,812,276 outstanding immediately following the completion of the
offering, but these calculations do not take into account shares of our common
stock that we will issue if the underwriters' overallotment option is
exercised. We determined beneficial ownership in accordance with the rules of
the Securities and Exchange Commission, which generally require inclusion of
shares over which a person has voting or investment power. Share ownership in
each case includes shares issuable upon exercise of outstanding options and
warrants that are exercisable within 60 days of May 15, 1999 as described in
the footnotes below. Percentage of ownership is calculated pursuant to SEC Rule
13d-3(d)(1).
This table gives effect to the intended redemption of the shares of our
Series A Usable Redeemable Preferred Stock.
55
<PAGE>
Numbers of shares to be sold by each of the selling stockholders are stated
on the assumption that the underwriters exercise their over-allotment option in
full, since none of the selling stockholders is participating in the main
offering with JFAX.COM. We will issue any other shares that are subject to the
underwriters' over-allotment option. Shares to be sold by the selling
stockholders may be adjusted prior to the pricing of this offering, and shares
to be sold by us will be adjusted to account for any increase or decrease in
the shares to be sold by the selling stockholders.
<TABLE>
<CAPTION>
Shares of Common Shares of Common
Stock Beneficially Stock to be
Owned Before the Beneficially Owned
Offering After the Offering
------------------ ------------------
Name and Address of Beneficial Number of
Owner(1) Shares to
- ------------------------------ Number Percent be Sold Number Percent
<S> <C> <C> <C> <C> <C>
Five Percent Stockholders:
Orchard/JFAX Investors,
LLC(2)....................... 13,453,278 54.63% -- 13,453,278 41.88%
Boardrush Media LLC
972 Putney Road, Suite 299
Brattleboro, VT 05301........ 5,031,250 20.69% 166,600 4,864,650 15.29%
Pecks Management Partners
Ltd.(3)
One Rockefeller Plaza
New York, NY 10020........... 2,676,448 10.80% -- 2,676,448 8.29%
DLJ Entities(4)
277 Park Avenue
New York, NY 10172........... 1,990,625 7.57% -- 1,990,625 5.89%
Directors and Officers:
Jaye Muller(5)................ 5,031,250 20.69% 166,600 4,864,650 15.29%
Richard Ressler(6)............ 13,453,278 54.63% -- 13,453,278 41.88%
John F. Rieley................ 175,000 * -- 175,000 *
Gary Hickox................... 41,250 * -- 41,250 *
Michael P. Schulhof(7)........ 1,103,104 4.39% -- 1,103,104 3.38%
Dr. Anand Narasimhan(8)....... 253,459 1.04% -- 253,459 *
Nehemia Zucker(9)............. 449,239 1.83% 449,239 1.40%
Zohar Loshitzer(10)........... 150,000 * -- 150,000 *
R. Scott Turicchi(11)......... 143,750 * -- 143,750 *
Robert Cresci(12)............. 0 * -- 0 *
All directors and executive
officers as a group
(10 persons)................. 20,800,330 79.94% 166,600 20,633,730 62.05%
Other Selling Stockholders:
Steve M. Aaronson ............ 17,360 * 3,700 13,660 *
William D. and Arlene Brown .. 41,665 * 10,400 31,265 *
Geoffrey S. Goodfellow ....... 98,491 * 50,000 48,491 *
Greg James ................... 375,000 1.54% 187,500 187,500 *
Regent Trust Company Ltd. R165
Account ..................... 155,000 * 51,600 103,400 *
</TABLE>
- --------
(*) Designates less than 1%.
56
<PAGE>
(1) The address for all executive officers and directors and for Orchard/JFAX
Investors, LLC is c/o JFAX.COM, Inc., 10960 Wilshire Blvd., Suite 500, Los
Angeles, CA 90024.
(2) Consist of 13,140,778 shares of common stock and 312,500 vested warrants.
(3) Consist of:
. 1,391,084 shares of common stock and 295,625 vested warrants held
by Delaware State Employees Retirement Fund,
. 382,979 shares of common stock and 81,250 vested warrants held by
ICI American Holdings, Inc. Defined Benefit Plan,
. 257,070 shares of common stock and 54,375 vested warrants held by
Zeneca Holdings Inc. Defined Benefit Plan, and
. 176,565 shares of common stock and 37,500 vested warrants held by
the JW McConnell Family Foundation.
(4) Consist of:
. 15,625 vested warrants held by DLJ Capital Corp.
. 1,181,875 vested warrants held by DLJ Private Equity Partners Fund,
L.P.
. 460,625 vested warrants held by DLJ Fund Investment Partners II,
L.P.
.41,875 vested warrants held by DLJ Private Equity Employees Fund,
L.P.
.247,250 vested warrants held by DLJ Securities Corp.
.43,375 vested warrants held by DLJ ESC II, L.P.
(5) Consist of holdings of Boardrush Media LLC, which is controlled by Mr.
Muller.
(6) Consist of holdings of Orchard/JFAX Investors, LLC, which is controlled by
Mr. Ressler.
(7) Consist of 263,104 shares of common stock and 840,000 vested warrants. For
accounting purposes, these warrants are treated as options. See note 8 of
the notes to our consolidated financial statements.
(8) Consist of 178,459 shares of common stock and 75,000 employee options that
are exercisable within 60 days of April 15, 1999.
(9) Consist of 261,739 shares of common stock and 187,500 employee options
that are exercisable within 60 days of April 15, 1999.
(10) Consist of 150,000 employee options that are exercisable within 60 days of
May 15, 1999.
(11) Consist of 143,750 vested warrants; Mr. Turicchi was appointed as the
board representative for the holders of the Series A Usable Redeemable
Preferred Stock and the related warrants.
(12) Mr. Cresci was appointed as the board representative of Delaware State
Employees Retirement Fund, ICI American Holdings, Inc. Defined Benefit
Plan, Zeneca Holdings Inc. Defined Benefit Plan and the JW McConnell
Family Foundation.
57
<PAGE>
CERTAIN TRANSACTIONS
Indebtedness of Officers and Directors
The following directors and officers are indebted to us. Nehemia Zucker is
indebted to us in the amount of $113,250. This amount represents the principal
balance of a loan in the original principal amount of $100,000 that was
advanced to Mr. Zucker on April 11, 1997. The loan matures on March 31, 2001
and bears interest at the rate of 6.32% per annum. However, interest is not
paid periodically, but rather is accrued and added to principal each September
30 and March 31. Anand Narasimhan is indebted to us in the amount of $50,000.
This loan was advanced to Mr. Narasimhan on September 17, 1997, matures on
September 17, 1999 and bears interest at the rate of 8.0% per annum with
interest deducted from Mr. Narasimhan's salary. Boardrush Media LLC, a company
controlled by Jaye Muller, is indebted to us in the amount of approximately
$2,250,000. The loan to Boardrush was advanced to Boardrush on March 17, 1997.
The loan to Boardrush matures on March 17, 2004. However, Boardrush shall be
required to repay this loan to us upon the sale by Boardrush or its affiliates
of at least $4 million of our common stock, except we have waived this
requirement with respect to any sale of stock by Boardrush in this offering.
This loan bears interest at the rate of 6.32% per annum with interest payments
offset against amounts due and owing to Boardrush under the consulting
agreement described below. Gary Hickox is indebted to us in the approximate
amount of $101,500. This amount represents the principal balance of a loan in
the original principal amount of $99,000 that was advanced to Mr. Hickox in
October 1998 when he joined us together with accrued interest through May 15,
1999. Mr. Hickox used the proceeds of this loan to purchase 41,250 shares of
our common stock. The loan matures on October 7, 2001 and bears interest at
4.25% per annum. However, interest is not paid periodically, but rather is
accrued and payable on maturity.
Employment, Consulting and Reimbursement Arrangements
We have employment agreements with Mr. Zucker and Mr. Narasimhan. Each of
the employment agreements has no specified term and is terminable at will by
either party, but provide for severance payments equal to six-months' salary,
in the case of Mr. Zucker, and three-months' salary, in the case of
Mr. Narasimhan, in the event of a termination by us without cause.
We also have an employment agreement with Mr. Hickox. The agreement has a
one year term, which term will be renewed for successive one year terms unless
either we or Mr. Hickox give prior notice of termination. We will pay Mr.
Hickox 12 months' severance in the event that:
. he terminates his employment as a result of a relocation of our
principal headquarters or a material change in his powers or duties,
. we terminate his employment without cause, or
. we choose not to renew his employment at the end of the initial term or
any successive renewal term.
Under the employment agreement, Mr. Hickox's employee options scheduled to vest
within 90 days of such termination will vest immediately in the event he
terminates his employment as a result of a relocation of our principal
headquarters or a material change in his powers or duties or we terminate his
employment without cause.
Under the employment agreement, we reimbursed Mr. Hickox for $40,542 of
expenses incurred in connection with his relocation to Los Angeles. Finally,
Mr. Hickox is also entitled under the employment agreement to a bonus of 50% of
his annual salary if agreed-upon milestones are met and up to 100% of his
annual salary if such milestones are exceeded.
58
<PAGE>
We are a party to a consulting agreement with Boardrush, a limited liability
company that owns approximately 20% of our common stock and of which Mr. Muller
is the manager and therefore the controlling person, pursuant to which
Boardrush provides the services of Mr. Muller and Mr. Rieley to us for a
maximum of two days each per month. We consider Mr. Muller and Mr. Rieley to be
the co-founders of our company. The term of the consulting agreement runs
through the earlier of the date on which the Boardrush loan is repaid in full
as described above and March 17, 2004. Therefore, there can be no assurance
that upon the repayment of the Boardrush loan, Mr. Muller and Mr. Rieley will
continue to provide any consulting services to us. Until March 17, 1999, we
paid Boardrush $400,000 per year, payable in equal monthly payments, pursuant
to the consulting agreement. From and after March 17, 1999, Boardrush's
compensation under the consulting agreement consists solely of forgiveness of
interest and principal under the loan discussed above, with principal
reductions being made pro rata over the five-year period from March 17, 1999
through March 17, 2004. Pursuant to the consulting agreement, we also reimburse
Boardrush for expenses it incurs on our behalf. Monthly reimbursements to
Boardrush are approximately $10,000 on average. Pursuant to the consulting
agreement, for a period of three years which will expire in March 2000,
Boardrush, and each of Mr. Muller and Mr. Rieley, will not engage in a business
in direct competition with our products and services in those areas where we
conduct our business.
We are also a party to a consulting arrangement with Orchard Capital
Corporation, a company controlled by Richard S. Ressler, our chief executive
officer and a member and the manager of Orchard/JFax Investors, LLC, one of our
principal stockholders. Under this consulting arrangement, we pay Orchard
Capital $200,000 per year, payable in equal monthly payments, for the services
of Mr. Ressler. We also reimburse Orchard Capital for expenses it incurs on our
behalf. Monthly reimbursements to Orchard Capital are approximately $3,000 on
average. These arrangements are not pursuant to a written agreement.
In January 1997, we entered into a consulting agreement with Michael P.
Schulhof, now a member of our board of directors. Pursuant to this agreement,
Mr. Schulhof agreed to provide financial, investment and operational advice to
our management team. In consideration for these services, Mr. Schulhof was
granted a warrant to purchase 420,000 shares of our common stock at an exercise
price of $0.70 per share and a second warrant to purchase 420,000 shares of our
common stock at an exercise price of $1.80 per share. Each of these warrants is
currently exercisable and expires in January 2007. The consulting agreement had
a two year term and expired by its terms in January 1999.
Shared Space and Services
We share contiguous office space and we pro-rate the cost of office space
and facilities, the cost of insurance and other related administrative costs
with other entities that are controlled by our chief executive officer. We also
make available the services of our general counsel to these other entities and
charge them for the proportionate cost of the services of our general counsel
that they incur. The entities involved are Orchard Capital, Orchard Telecom,
CIM Group, LLC and MAI Systems Corporation, but we do not share space with MAI.
These arrangements are not pursuant to written agreements and are adjusted from
time to time according to the relative benefits given and received. For
example, CIM is the named sublessee on the lease of our office space, but we
are named as an occupant.
Monthly reimbursements from Orchard Capital, Orchard Telecom, CIM and MAI to
us are currently approximately $12,500. This amount reflects our business
activity, vis a vis the other affiliated entities, as of March 31, 1999, and
could increase or decrease as we and/or these affiliated entities grow.
59
<PAGE>
Investments in JFAX.COM by Officers, Directors and Principal Stockholders
Between December 1995, when we were founded, and March 1997, when Mr.
Ressler invested in us through Orchard/JFax Investors, LLC and obtained a
controlling interest, we issued a total of 6,910,000 shares of our common stock
to our founders, Mr. Muller and Mr. Rieley, in exchange for cash investments.
In March 1997, we issued 5,375,000 shares of common stock to Boardrush in
exchange for an equivalent number of Mr. Muller's then-current stock holdings,
which holdings were canceled. At the same time, we issued 10,060,000 shares of
common stock to Orchard/JFax Investors, LLC in exchange for a cash investment
of $7,750,000. In March and May 1997, we issued 220,000 shares and 150,000
shares, respectively, to Nehemia Zucker and Anand Narasimhan, upon the exercise
by Messrs. Zucker and Narasimhan of employee options granted to them when they
joined us in 1996 and payment by each of them of the option price of 0.02c per
share. In connection with the investments by Boardrush, Orchard/JFax Investors,
LLC, and Messrs. Zucker and Narasimhan, we entered into a registration rights
agreement with those investors as well as Messrs. Reiley and Muller. Under that
registration rights agreement, the investors have the right to participate in
registrations initiated by JFAX.COM, but they have no right to demand that we
effect a registration. These registration rights will expire on March 17, 2007.
Except for any shares sold by these persons in this offering, the holders of
these registration rights have agreed not to exercise their registration rights
for a period of 180 days after the date of this prospectus, except with the
prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation.
In March 1998, we issued a total of 3,750,000 shares of common stock at
$0.80 per share pursuant to a rights offering that was made available to all of
our then shareholders and warrant holders on the same terms. The principal
stockholders, officers and directors who participated and the number of shares
purchased by each were as follows: Orchard/JFax Investors, LLC (3,080,776
shares), Michael P. Schulhof (263,104 shares), Nehemia Zucker (41,739 shares)
and Anand Narasimhan (28,459 shares). A portion of the proceeds of the rights
offering was used to repay a loan to us from Orchard/JFax Investors, LLC. That
loan was in the principal amount of $1,400,000, accrued interest at a rate of
15% per annum and was repaid for an aggregate of $1,444,100.
In June 1998, we issued $10 million of our 10% Senior Subordinated Notes due
2004 together with 2,101,971 shares of our common stock to an investor group
advised by Pecks Management Partners Ltd., consisting of Declaration of Trust
for Defined Benefit Plans of Zeneca Holdings, Inc., Declaration of Trust for
Defined Benefit Plans of ICI American Holdings, Inc., Delaware State Employees'
Retirement Fund and the J.W. McConnell Family Foundation. Mr. Cresci, one of
our directors, is a managing director of Pecks Management Partners, Ltd.
Pursuant to the terms of the notes, which permit us to make some payments of
interest by issuing additional notes and shares of common stock, we have issued
an additional $512,500 principal amount of notes and 105,727 shares of common
stock to that investor group. The total purchase price was $10 million.
In July 1998, we also issued $5 million in liquidation preference of our
Series A Usable Redeemable Preferred Stock and warrants to acquire 3,125,000
shares of our common stock. The total purchase price was $5 million. The
warrants issued in connection with both the preferred stock and the notes have
an exercise price of $2.40 per share and expire on July 1, 2005. Donaldson,
Lufkin & Jenrette Securities Corporation, an underwriter in this offering who
acted as placement agent for the offerings of notes and preferred stock,
received warrants to acquire 268,750 shares of our common stock and a cash
payment of $900,000, as compensation for its services. Mr. Turicchi, one of our
directors, is a managing director of Donaldson, Lufkin & Jenrette Securities
Corporation. The purchasers of the preferred stock and related warrants
included the following entities in the following amounts:
. Affiliates of Donaldson, Lufkin and Jenrette Securities Corporation
purchased 3,500 shares and received 2,187,500 warrants;
60
<PAGE>
. Orchard/JFax Investors, LLC purchased 500 shares and received 312,500
warrants; and
. The investor group managed by Pecks Management Partners, Ltd. purchased
750 shares and received 468,750 warrants.
A portion of the proceeds of the notes and preferred stock offerings was used
to repay a loan to us from Orchard/JFax Investors, LLC. That loan was in the
principal amount of $1,000,000, accrued interest at a rate of 15% per annum and
was repaid for an aggregate of $1,013,625.
The holders of the common stock and warrants issued in connection with the
notes and the preferred stock offerings are entitled to registration rights
following this offering pursuant to an agreement between us and those investors
entered into at the time of the notes and preferred stock offerings. Under that
agreement, among other things, the holders are generally entitled to demand two
registrations of the common stock issued in connection with the notes offering
or of the common stock issued upon exercise of the warrants. In addition, the
holders are entitled to participate in registrations initiated by us. Finally,
under the registration rights agreement, we have also agreed to file a
registration statement on Form S-3 permitting resales of the shares of common
stock held by such investors when we are eligible to use that form. The holders
of these registration rights have agreed not to exercise their registration
rights for a period of 180 days after the date of this prospectus, except with
the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation.
In addition, the holders of the common stock and warrants issued in
connection with the notes and preferred stock offerings are entitled to have us
repurchase such shares of common stock issued upon exercise of the warrants in
the event of a change of control of JFAX.COM. In such event, the shares of
common stock issued at the time of the notes and preferred stock offerings are
to be repurchased at $3.20 per share, the warrants to be redeemed at $1.60 per
warrant and the shares issued upon exercise of warrants to be repurchased at
$4.00 per share.
Finally, we are party to a securityholders' agreement dated June 30, 1998
with the holders of the notes and preferred stock, including those listed
above, and other stockholders, including Orchard/JFax Investors, LLC. Under
that agreement, the stockholders have agreed to vote their shares of common
stock in favor of one designee to the board of directors selected by the
initial purchasers of the notes and one designee to the board of directors
selected by the initial purchasers of the preferred stock. Currently, Mr.
Cresci has been elected to the board of directors as the designee of the
initial purchasers of the notes and Mr. Turicchi has been elected to the board
of directors as the designee of the initial purchasers of the preferred stock.
Although most provisions in the securityholders' agreement terminate as a
result of this offering, the rights of the initial purchasers of the notes to
designate a director as described above will survive this offering for so long
as such purchasers continue to hold at least 25% of the shares of common stock
issued in connection with the notes offering and the right of the initial
purchasers of preferred stock to designate a director as described above will
survive this offering for so long as such purchasers continue to hold at least
25% of the shares issued or issuable upon exercise of the related warrants.
The proceeds of this offering will be used in part to repay the Senior
Subordinated Notes and the Series A Usable Redeemable Preferred Stock for
amounts estimated to be $10,878,000 and $6,554,000, respectively, including
accrued and unpaid interest of $262,000 and dividends of $804,000. Persons
participating in these investments will retain their shares of our common stock
and warrants to acquire our common stock. To the extent required by the rules
of the SEC, the ownership of shares and warrants by such persons is reflected
in the table under "Principal and Selling Stockholders."
In October 1998, we issued 41,250 shares of our common stock to Mr. Hickox
in exchange for the proceeds of the loan discussed above.
61
<PAGE>
In connection with the warrants granted to Mr. Schulhof, we also granted to
him registration rights with respect to the shares issued upon exercise of the
warrants. Mr. Schulhof is entitled to participate in registrations initiated by
JFAX.COM and, beginning 180 days after the date of this prospectus, is entitled
to demand registration of the shares owned by him. Mr. Schulhof's rights to
demand a registration of his shares will expire in January 2007, but there is
no express termination of his right to participate in registrations effected by
us.
We believe that the transactions described above were made on terms no less
favorable than could have been obtained from third parties. At the time of the
transactions concerned--the initial Orchard/JFAX Investors, LLC investment in
our company, the June 1998 issuance of notes and common stock, and the July
1998 issuance of preferred stock and warrants--those transactions were
negotiated at arms' length with previously unaffiliated parties. We intend to
have all future transactions between us and our officers, directors and
affiliates be approved by a majority of disinterested directors of the board of
directors or one of its committees, as appropriate, in a manner consistent with
Delaware law and the fiduciary duties of our directors.
Stock Option Grants to Directors and Officers
In connection with this offering, we intend to grant options under our stock
option plan to our directors and certain officers and employees. We expect
these grants will consist of options to purchase an aggregate of up to 760,000
shares of our common stock at an exercise price $9.00 per share public offering
price in this offering. We expect these options will be allocated as follows:
. To four of our directors, Messrs. Rieley, Schulhof, Turicchi and
Cresci--options to purchase 40,000 shares each, or 160,000 shares in the
aggregate,
. To our chief executive officer--options to purchase 500,000 shares, and
. To other officers and employees, options to purchase approximately
100,000 shares in the aggregate.
These options will have a term of 10 years and will follow our standard vesting
schedule so that one-third of the shares will vest on each of the first three
anniversaries of the grant date. However, we may accelerate the vesting of
options granted to our outside directors.
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DESCRIPTION OF CAPITAL STOCK
The following summary information is qualified in its entirety by the
provisions of our certificate of incorporation and by-laws, copies of which
have been filed as exhibits to the registration statement of which this
prospectus is a part. See "Available Information" for more information.
Our authorized capital stock consists of 200,000,000 shares of common stock,
par value $0.01 per share, and 1,000,000 shares of preferred stock, par value
$0.01 per share. As of May 15, 1999, 24,312,276 shares of common stock were
issued and outstanding, and there were 36 holders of record of common stock. As
of May 15, 1999, 5,000 shares of Series A Usable Redeemable Preferred Stock
were issued and outstanding, and there were 20 holders of record of preferred
stock. We also have warrants and stock options outstanding, as described below.
Common Stock
Dividends
Subject to the prior rights of any outstanding preferred stock, the holders
of common stock are entitled to receive dividends out of assets legally
available for payment of dividends at such times and in such amounts as the
board of directors may from time to time determine. See "Dividend Policy."
Voting Rights
Each outstanding share of common stock entitles the holder to one vote on
all matters submitted to a vote of stockholders, including the election of our
directors, subject to any class or series voting rights granted to the
preferred stock. There is no cumulative voting. The board of directors is
expressly authorized to adopt, amend or repeal the by-laws in any manner not
inconsistent with Delaware law or the certificate of incorporation, subject to
the power of the stockholders to adopt, amend or repeal the by-laws. The
certificate of incorporation may be amended by an affirmative vote of the
holders of a majority of our outstanding capital stock entitled to vote on the
matter, subject to any class or series voting rights granted to the preferred
stock.
Liquidation Rights and Other Matters
The shares of common stock are neither redeemable nor convertible, and the
holders of common stock have no preemptive or subscription rights to purchase
any of our securities. Upon our liquidation, dissolution or winding up, the
holders of common stock are entitled to receive pro rata any of our assets
which are legally available for distribution after payment of all debts and
other liabilities and subject to any preferential rights of the holders of
preferred stock.
The holders of 2,207,698 shares of our common stock were granted put rights
with respect to those shares, which would be available following a change of
control, as defined, in a manner similar to the redemption rights applicable to
warrants as described below. The put price is $3.20 per share, subject to anti-
dilution adjustments. If the put is triggered, the holders of these shares may
require us to purchase these shares at the put price.
Preferred Stock
As of May 15, 1999, we have one series of preferred stock issued and
outstanding, consisting of 5,000 shares of Series A Usable Redeemable Preferred
Stock, which will be redeemed for approximately $6.6 million using a portion of
the proceeds of the offering. This redemption is expected to occur no later
than July 1999. After this stock is redeemed, it will be restored to the status
of authorized but unissued shares of preferred stock undesignated as to series.
The board of directors may authorize the issuance of one or more additional
series of preferred stock having such rights, including voting, conversion and
redemption rights, and such preferences,
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including dividend and liquidation preferences, as the board may determine,
without further action by our stockholders.
The issuance of additional preferred stock by the board of directors could
adversely affect the rights of holders of common stock. For example, the
issuance of preferred stock could result in another series of securities
outstanding with preferences over the common stock with respect to dividends
and in liquidation, with voting rights superior to the common stock, or with
rights, upon conversion or otherwise, the same or superior to the common stock.
We believe that the board of directors' ability to issue preferred stock on
such a wide variety of terms will enable the preferred stock to be used for
important corporate purposes, such as financing acquisitions or raising
additional capital. However, were it inclined to do so, the board of directors
could issue all or part of the preferred stock with, among other things,
substantial voting power or advantageous conversion rights. This stock could be
issued to persons deemed by the board of directors likely to support current
management in a contest for control of the company, either as a precautionary
measure or in response to a specific takeover threat. The ability of the board
of directors to issue additional preferred stock or the issuance of such
preferred stock could have the effect of delaying, deferring or preventing a
change in control of JFAX.COM without any further action by the holders of
common stock. We have no current plans to issue preferred stock for any
purpose.
Warrants and Options
In connection with the preferred stock offering in July 1999, we issued
3,393,750 warrants to purchase an aggregate of 3,393,750 shares of common stock
at an exercise price of $ 2.40 per share, subject to adjustment. These warrants
are currently exercisable and expire in July 2005. Holders of unexercised
warrants do not have voting or any other rights of stockholders.
Upon the occurrence of a change of control, as defined, that is not approved
by the holders of 66 2/3% in interest of the warrants and the shares of common
stock received on the exercise of warrants, the holders of the warrants and the
shares of common stock held as a result of the exercise of the warrants will
have the right to require us:
. to redeem the warrants at $1.60 each, and
. to redeem the shares of common stock received on exercise of any
warrants at $4.00 each, in each case subject to anti-dilution
adjustment.
We have also issued warrants to purchase 420,000 shares of common stock at
an exercise price of $0.70 per share, to purchase 420,000 shares of common
stock at $1.80 per share and to purchase 29,166 shares of common stock at $2.40
per share, in each case subject to anti-dilution adjustment. The latter
warrants expire in April 1, 2005, and the former two series of warrants expire
in January 2007.
We also issued 250,000 warrants to America Online on October 15, 1997 to
purchase 250,000 shares of our common stock at $2.40 per share. These warrants
expire on October 15, 2004.
All of the above warrants are immediately exercisable.
We also have options outstanding and available for grant under our stock
option plan, including outstanding and currently exercisable options to acquire
496,315 shares of our common stock. See "Management--1997 Stock Option Plan"
and "Certain Transactions."
Registration Rights
Pursuant to various registration rights agreements, including agreements
with most of our officers, directors and significant stockholders, the holders
of 21,258,026 shares of our common stock may make requests that we register
their shares, or include their shares in other registrations, under
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the Securities Act, subject to conditions as to the minimum aggregate value of
shares to be sold and other customary conditions. These registration rights
also extend to another 4,933,750 shares not yet issued, for example shares
issuable upon the exercise of warrants, for the benefit of the persons having
these rights. Including the shares not yet issued, these registration rights
will cover approximately 70% of our outstanding shares of common stock,
including shares issuable upon the exercise of warrants or options, after the
offering. Each person or entity that holds registration rights has agreed,
pursuant to a separate agreement between that person or entity and the
underwriters, not to exercise any of their rights to demand or participate in a
registration for a period of 180 days following the date of this prospectus,
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation. For a further description of the terms of those agreements, see
"Underwriting." For a further description of the terms of the registration
rights agreements with our officers, directors and principal stockholders, see
"Certain Transactions."
Securityholders' Agreement
We have a securityholders' agreement dated as of June 30, 1998 with
investors in our notes and preferred stock in the June and July 1998 private
placements. For a description of the terms of that securityholders' agreement,
see "Certain Transactions."
Anti-Takeover Effects of Delaware Law
We are a Delaware corporation and are subject to Delaware law, which
generally prohibits a publicly held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the time that the person became an interested stockholder, unless:
. before such time the board of directors of the corporation approved
either the business combination or the transaction in which the
person became an interested stockholder;
. upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested
person owns at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding shares
owned by persons who are directors and also officers of the
corporation and by certain employee stock plans; or
. at or after such time the business combination is approved by the
board of directors of the corporation and authorized at an annual or
special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock
of the corporation that is not owned by the interested stockholder.
A "business combination" generally includes mergers, asset sales and similar
transactions between the corporation and the interested stockholder, and other
transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person:
. who, together with affiliates and associates, owns 15% or more of
the corporation's outstanding voting stock, or
. who is an affiliate or associate of the corporation and, together
with his or her affiliates and associates, has owned 15% or more of
the corporation's outstanding voting stock within three years.
The provisions of Delaware law described above would make more difficult or
discourage a proxy contest or acquisition of control by a holder of a
substantial block of our stock or the removal of the incumbent board of
directors. Such provisions could also have the effect of discouraging an
outsider from making a tender offer or otherwise attempting to obtain control
of JFAX.COM, even though such an attempt might be beneficial to us and our
stockholders.
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Our certificate of incorporation and by-laws also:
. eliminate the personal liability of directors for monetary damages
resulting from breaches of fiduciary duty to the extent permitted
by Delaware law; and
. indemnify directors and officers to the fullest extent permitted
by Delaware law, including in circumstances in which
indemnification is otherwise discretionary.
We believe that these provisions are necessary to attract and retain
qualified directors and officers.
Our by-laws require that any stockholder proposals to be considered at an
annual meeting of stockholders must be delivered to us not less than 60 nor
more than 90 days prior to the meeting. In addition, in the notice of any such
proposal, the proposing stockholder must state the proposals, the reasons for
the proposal, the stockholder's name and address, the number of shares held by
such stockholder and any material interest of the stockholder in the
proposals. There are additional informational requirements in connection with
a proposal concerning a nominee for the board of directors.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American
Securities Transfer & Trust, Inc.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have 31,812,276 shares of common
stock issued and outstanding, or 32,467,476 shares if the underwriters' over-
allotment option is exercised in full, and 6,028,609 shares issuable upon the
exercise of outstanding warrants and options, in each case as of May 15, 1999
and as adjusted for the issuance of shares in this offering. The 7,500,000
shares sold in the offering, plus any shares issued or sold upon exercise of
the underwriters' over-allotment option, will be freely tradable without
restriction or further registration under the Securities Act, except that any
shares purchased by "affiliates" as that term is defined in Rule 144 under the
Securities Act, may generally only be resold in compliance with applicable
provisions of Rule 144.
We issued and sold the remaining 24,312,276 shares in private transactions.
These shares may be publicly sold only if registered under the Securities Act
or sold in accordance with an applicable exemption from registration, such as
Rule 144. In general, under Rule 144, as currently in effect, a person who has
beneficially owned shares for at least one year, including an "affiliate," is
entitled to sell, within any three-month period, a number of "restricted"
shares that does not exceed the greater of one percent (1%) of the then
outstanding shares of common stock, or 318,122 shares based on the number of
shares expected to be outstanding after the offering, or the average weekly
trading volume during the four calendar weeks preceding such sale. Sales under
Rule 144 are subject to manner of sale limitations, notice requirements and the
availability of current public information about the issuer. Rule 144(k)
provides that a person who is not deemed an "affiliate" and who has
beneficially owned shares for at least two years is entitled to sell such
shares at any time under Rule 144 without regard to the limitations described
above. We estimate that 2,248,750 outstanding shares fall in this category Of
the 24,312,276 shares outstanding before the offering, affiliates beneficially
own over 90% of such shares. See "Risk Factors--The Price of Our Common Stock
May Decline Due to Shares Eligible for Future Sale."
Any employee, officer, director, advisor or consultant who purchased his or
her shares pursuant to a written compensatory plan or contract is entitled to
rely on the resale provisions of Rule 701, which permits non-affiliates to sell
their Rule 701 shares without having to comply with the public information,
holding period, volume limitation or notice provisions of Rule 144 and permits
affiliates to sell their Rule 701 shares without having to comply with Rule
144's holding period restrictions, in each case commencing 90 days after we
become subject to the reporting requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934.
As of May 15, 1999, there were outstanding stock options to purchase an
aggregate of 1,515,693 shares of common stock, of which 521,734 are presently
exercisable or exercisable within 60 days. These outstanding stock options are
held by our executive officers or employees. Following the offering, we intend
to file a registration statement on Form S-8 covering the 4,375,000 shares of
common stock issuable under our stock option plan, including shares subject to
outstanding options, thus permitting the resale of such shares in the public
market without restriction under the Securities Act, other than restrictions
applicable to affiliates.
As of May 15, 1999, there were also outstanding warrants to purchase an
aggregate of 4,512,916 shares of common stock, which are all presently
exercisable. The warrants have a weighted-average exercise price of $2.19 per
share.
We have granted registration rights to many of our stockholders. As of the
date of this prospectus, 21,258,026 of the outstanding shares of common stock
are entitled to these registration rights. These registration rights also
extend to another 4,933,750 shares not yet issued, for example shares issuable
upon the exercise of warrants. See "Certain Transactions" for a description of
the agreements governing those registration rights.
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We, our executive officers and directors, and many of our stockholders have
agreed that, subject to limited exceptions in which the transferee agrees to
the same restriction, for a period of 180 days from the date of this
prospectus, neither we nor they will, without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
. enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any common
stock, regardless of whether any of these transactions are to be settled
by the delivery of common stock, or such other securities, in cash or
otherwise.
In addition, during the same period, we have agreed not to file any
registration statement with respect to, and each of our executive officers,
directors and stockholders entitled to registration rights has agreed not to
make any demand for, or exercise any right with respect to, the registration of
any shares of our common stock or any securities convertible into or
exercisable or exchangeable for common stock without the prior written consent
of Donaldson, Lufkin & Jenrette Securities Corporation. The lock-up agreements
by persons other than us cover an aggregate of 23,171,913 shares, and an
additional 5,941,735 shares issuable upon exercise of outstanding options and
warrants. Of the 1,227,236 outstanding shares and shares issuable upon exercise
of outstanding options and warrants not subject to lock-up agreements, only
738,750 of such shares will be freely tradable immediately following the
offering under Rule 144 as discussed above. Under Rule 144, the remaining
488,486 shares will be available for resale subject to the limitations of Rule
144 beginning 90 days following the offering.
Prior to the offering, there has been no public market for our common stock.
We are unable to estimate the number of shares that may be sold in the future
by our existing stockholders or the effect, if any, that sales of shares by
such stockholders, or the availability of shares for sale, will have on the
market price of the common stock prevailing from time to time. Sales of
substantial amounts of common stock by existing stockholders could adversely
affect prevailing market prices.
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CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-U.S. HOLDERS OF COMMON STOCK
The following discussion summarizes certain United States federal income and
estate tax consequences of the ownership and disposition of our common stock by
a "non-U.S. holder." You are a "non-U.S. holder" if you are, for United States
federal income tax purposes:
. a non-resident alien individual,
. a foreign corporation,
. a foreign partnership, or
. an estate or trust that is not subject to United States federal income
tax on a net income basis on income or gain from our common stock.
This summary does not discuss all aspects of United States federal income
taxation which may be important to particular non-U.S. holders in light of
their specific investment circumstances, such as non-U.S. holders subject to
special tax rules (e.g., financial institutions, insurance companies, broker-
dealers, and tax-exempt organizations) or to non-U.S. holders that hold our
common stock as a part of a straddle, hedge, conversion, or synthetic security
transaction for United States federal income tax purposes, all of whom may be
subject to tax rules that differ significantly from those summarized below. The
discussion is based on the tax laws of the United States (including the
Internal Revenue Code of 1986, as amended, existing and proposed regulations,
and administrative and judicial interpretations) as currently in effect. These
laws are subject to change, possibly on a retroactive basis. You are urged to
consult a tax advisor regarding the United States federal tax consequences of
acquiring, holding and disposing of our common stock in your particular
circumstances, as well as any tax consequences that may arise under the laws of
any state, local or foreign taxing jurisdiction.
Dividends
If you are a non-U.S. holder of our common stock, dividends paid to you are
subject to withholding of United States federal income tax at a 30% rate or at
a lower rate if you are eligible for the benefits of an income tax treaty that
provides for a lower rate. If, however, the dividends are "effectively
connected" with your conduct of a trade or business within the United States
(and they are attributable to a permanent establishment that you maintain in
the United States, if that is required by an applicable income tax treaty as a
condition for subjecting you to United States income tax on a net income
basis), then the dividends generally will not be subject to withholding tax.
Instead, "effectively connected" dividends are subject to tax at rates
applicable to United States citizens, resident aliens and domestic United
States corporations and if you are a non-U.S. corporation, "effectively
connected" dividends that you receive may, under certain circumstances, be
subject to an additional "branch profits tax" at a 30% rate or at a lower rate
if you are eligible for the benefits of an income tax treaty that provides for
a lower rate.
Under currently effective United States Treasury regulations, dividends paid
to an address in a foreign country are presumed to be paid to a resident of
that country (unless the person making the payment has knowledge to the
contrary) for purposes of the 30% withholding tax discussed above. Under
current interpretations of United States Treasury Regulations, this presumption
also applies for purposes of determining whether a lower withholding rate
applies under an income tax treaty.
Under United States Treasury withholding regulations that will generally
apply to dividends paid after December 31, 2000, you must satisfy certain
certification requirements in order to claim the benefit of a lower treaty
rate. In addition, in the case of common stock held by a foreign partnership,
the certification requirement generally will apply to the partners of the
partnership and the
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partnership must provide certain information, including a United States
taxpayer identification number. These regulations also provide look-through
rules for tiered partnerships.
If you are eligible for a reduced rate of United States withholding tax
under a tax treaty, you may claim a refund of amounts withheld in excess of
that rate by filing a refund claim with the United States Internal Revenue
Service.
Gain on Disposition of Common Stock
If you are a non-U.S. holder, you generally will not be subject to United
States federal income tax on gain that you recognize on a disposition of our
common stock unless:
.the gain is "effectively connected" with your conduct of a trade or
business in the United States (and the gain is attributable to a permanent
establishment that you maintain in the United States, if that is required
by an applicable income tax treaty as a condition for subjecting you to
United States taxation on a net income basis), or
.you are an individual, you hold our common stock as a capital asset, and
you are present in the United States for 183 or more days in the taxable
year of the sale and certain other conditions exist.
If you are a corporate non-U.S. holder, "effectively connected" gains that
you recognize may also, under certain circumstances, be subject to an
additional "branch profits tax" at a 30% rate or at a lower rate if you are
eligible for the benefits of an income tax treaty that provides for a lower
rate.
Federal Estate Taxes
Our common stock held by a non-U.S. holder at the time of death will be
included in the holder's gross estate for United States federal estate tax
purposes, unless an applicable estate tax treaty provides otherwise.
Information Reporting and Backup Withholding
In general, dividends paid to you will not be subject to United States
information reporting requirements and backup withholding tax if you are
either:
.subject to the 30% withholding tax (discussed above), or
.not subject to the 30% withholding tax because you are eligible for the
benefits of an income tax treaty that reduces or eliminates the
withholding tax.
Dividend payments to you will be reported to the Internal Revenue Service,
however, for purposes of the 30% withholding tax (discussed in the "Dividends"
section above). If you do not meet either of the two requirements above for
exemption from backup withholding tax, and you fail to provide certain
information (including your United States taxpayer identification number) or
otherwise establish your status as an "exempt recipient", you may be subject to
backup withholding of United States federal income tax at a rate of 31% on
dividends paid on our common stock.
However, under the withholding regulations discussed above, dividend
payments generally will be subject to information reporting and backup
withholding unless certain certification requirements are met. (See the
discussion under "Dividends" for the rules applicable to foreign partnerships
under these regulations.)
If you sell our common stock outside of the United States through a non-U.S.
office of a non-U.S. broker, and the sale proceeds are paid to you outside the
United States, then United States backup withholding and information reporting
requirements generally will not apply to that payment.
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However, United States information reporting (but not backup withholding) will
apply to a payment of sales proceeds (even if that payment is made to you
outside the United States) if you sell your Common Stock through a non-U.S.
office of a broker that:
.is a United States person,
.derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States,
.is a "controlled foreign corporation" under United States federal tax law,
or
.with respect to payments made after December 31, 2000, is a foreign
partnership, if at any time during its tax year:
. one or more of its partners are U.S. persons (as defined in U.S.
Treasury regulations) who in the aggregate hold more than 50% of the
income or capital interest in the partnership, or
. such foreign partnership is engaged in a United States trade or
business,
unless the broker has documentary evidence in its files that you are a non-U.S.
person or you otherwise establish an exemption.
If you receive payments of the proceeds of a sale of common stock to or
through a United States office of a broker, the payment is subject to both
United States backup withholding and information reporting unless you certify
that you are a non-U.S. person (under penalties of perjury) or you otherwise
establish an exemption.
You generally may claim a refund of any amounts withheld under the backup
withholding rules that exceed your income tax liability by filing a refund
claim with the United States Internal Revenue Service.
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UNDERWRITING
Subject to the terms and conditions of an underwriting agreement, dated
, 1999, the underwriters named below, who are represented by Donaldson,
Lufkin & Jenrette Securities Corporation, BancBoston Robertson Stephens, Inc.
and CIBC World Markets Corp., have severally and not jointly agreed to purchase
from us and the selling stockholders the number of shares of common stock set
forth opposite their names below.
<TABLE>
<CAPTION>
Number
Underwriters: of Shares
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation................
BancBoston Robertson Stephens, Inc. ...............................
CIBC World Markets Corp. ..........................................
---------
Total.......................................................... 7,500,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
included in the offering are subject to approval of certain legal matters by
their counsel and to certain other conditions. The underwriters are obligated
to purchase and accept delivery of all the shares, other than those covered by
the over-allotment option described below, if they purchase any of the shares.
The underwriters propose to initially offer some of the shares of common
stock directly to the public at the public offering price set forth on the
cover page of this prospectus and some of the shares to certain dealers at the
public offering price less a concession not in excess of $ per share. The
underwriters may allow, and such dealers may re-allow, a concession not in
excess of $ per share on sales to certain other dealers. After the initial
offering of the shares to the public, the representatives may change the public
offering price and such concessions. The underwriters do not intend to confirm
sales to any accounts over which they exercise discretionary authority.
The following table shows the underwriting fees to be paid to the
underwriters by us and the selling stockholders in connection with the
offering. These amounts are shown assuming both no exercise and full exercise
of the underwriters' option to purchase additional shares of common stock.
<TABLE>
<CAPTION>
Paid by Selling
Paid by JFAX.COM Stockholders
------------------------- -------------------------
No Exercise Full Exercise No Exercise Full Exercise
<S> <C> <C> <C> <C>
Per share................ $ $ $ $
Total.................... $ $ $ $
</TABLE>
We will pay the offering expenses, estimated to be $900,000.
DLJdirect Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation and a member of the selling group, is facilitating the distribution
of the shares sold in the offering over the Internet. The underwriters have
agreed to allocate a limited number of shares to DLJdirect Inc. for sale to its
brokerage account holders.
We and the selling stockholders have granted to the underwriters an option,
exercisable for 30 days from the date of the underwriting agreement, to
purchase up to 1,125,000 additional shares at the public offering price less
the underwriting fees. The underwriters may exercise such option solely to
cover over-allotments, if any, made in connection with the offering. To the
extent that the underwriters exercise such option, each underwriter will become
obligated, subject to certain conditions, to purchase a number of additional
shares approximately proportionate to such underwriter's initial purchase
commitment.
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We and the selling stockholders have agreed to indemnify the underwriters
against certain civil liabilities, including liabilities under the Securities
Act of 1933, or to contribute to payments that the underwriters may be required
to make in respect of any of those liabilities.
We, our executive officers and directors, and certain of our stockholders
(including the selling stockholders) have agreed that, subject to limited
exceptions in which the transferee agrees to the same restriction, for a period
of 180 days from the date of this prospectus, neither we nor they will, without
the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
. enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any common
stock, regardless of whether any of these transactions is to be settled
by the delivery of common stock, or such other securities, in cash or
otherwise.
In addition, during the same period, we have agreed not to file any
registration statement with respect to, and each of our executive officers,
directors and stockholders entitled to registration rights has agreed not to
make any demand for, or exercise any right with respect to, the registration of
any shares of our common stock or any securities convertible into or
exercisable or exchangeable for common stock without the prior written consent
of Donaldson, Lufkin & Jenrette Securities Corporation. The lock-up agreements
by persons other than us cover an aggregate of 23,171,913 shares, and an
additional 5,941,735 shares issuable upon exercise of outstanding options and
warrants.
We have applied to have our common stock approved for quotation on the
NASDAQ National Market under the symbol "JFAX."
Prior to the offering, there has been no established trading market for our
common stock. The initial public offering price for our shares of common stock
offered hereby will be determined by negotiation among us, the selling
stockholders and the representatives of the underwriters. The factors to be
considered in determining the initial public offering price include the history
of and the prospects for the industry in which we compete, our past and present
operations, our historical results of operations, the prospects for future
earnings, the recent market prices of securities of generally comparable
companies and the general condition of the securities markets at the time of
the offering.
Other than in the United States, no action has been taken by us, the selling
stockholders or the underwriters that would permit a public offering of the
shares of our common stock included in the offering in any jurisdiction where
action for that purpose is required. The shares included in the offering may
not be offered or sold, directly or indirectly, nor may this prospectus or any
other offering material or advertisement in connection with the offer and sale
of any such shares be distributed or published in any jurisdiction, except
under circumstances that will result in compliance with the applicable rules
and regulations of such jurisdiction. Persons who receive this prospectus are
advised to inform themselves about and to observe any restrictions relating to
the offering of the common stock and the distribution of this prospectus. This
prospectus is not an offer to sell or a solicitation of an offer to buy any
shares of common stock included in the offering in any jurisdiction where that
would not be permitted or legal.
At our request, the Underwriters have reserved for sale, at the initial
public offering price, up to 750,000 of the shares included in the offering, to
be sold to certain of our directors, officers, employees, distributors,
dealers, business associates and related persons. The number of shares
73
<PAGE>
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares that are not orally
confirmed for purchase within one day of the pricing of the offering will be
offered by the underwriters to the general public on the same terms as the
other shares offered hereby.
Because affiliates of Donaldson, Lufkin & Jenrette Securities Corporation
hold more than 10% of our preferred equity (which we will redeem with the
proceeds of this offering), Donaldson, Lufkin & Jenrette Securities Corporation
may be deemed to have a conflict of interest with us. Consequently, the
offering will be conducted in accordance with Conduct Rule 2720 of the National
Association of Securities Dealers, Inc., which requires that the public
offering price of any equity security be no higher than the price recommended
by a qualified independent underwriter that has participated in the preparation
of the registration statement and performed its usual standard of due diligence
with respect thereto. BancBoston Robertson Stephens, Inc. has agreed to act as
qualified independent underwriter with respect to the offering, and the public
offering price of the common stock will be no higher than that recommended by
BancBoston Robertson Stephens, Inc.
In connection with the offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of our common stock.
Specifically, the underwriters may overallot the offering, creating a syndicate
short position. The underwriters may bid for and purchase shares of our common
stock in the open market to cover such syndicate short position or to stabilize
the price of the common stock. In addition, the underwriting syndicate may
reclaim selling concessions from syndicate members if Donaldson, Lufkin &
Jenrette Securities Corporation repurchases previously distributed common stock
in syndicate covering transactions, in stabilizing transactions or otherwise or
if Donaldson, Lufkin & Jenrette Securities Corporation receives a report that
indicates that the clients of such syndicate members have "flipped" the common
stock. These activities may stabilize or maintain the market price of our
common stock above independent market levels. The underwriters are not required
to engage in these activities, and may end any of these activities at any time.
Pursuant to the terms of our securityholders' agreement dated as of June 30,
1998, affiliates of Donaldson, Lufkin & Jenrette Securities Corporation that
hold some of our securities have the right to designate one of the members of
our board of directors. Accordingly, R. Scott Turicchi, a Managing Director of
Donaldson, Lufkin & Jenrette Securities Corporation, has been elected to and is
a member of our board of directors.
Donaldson, Lufkin & Jenrette Securities Corporation acted as the placement
agent for the sale of our common stock and 10% Senior Subordinated Notes due
2004 in June 1998 and for the sale of our preferred stock and warrants to
purchase common stock in July 1998. Donaldson, Lufkin & Jenrette Securities
Corporation and its affiliates purchased shares of our preferred stock and
warrants to purchase our common stock on the same terms and at the same price
as other purchasers in that placement. See "Certain Transactions."
74
<PAGE>
VALIDITY OF SECURITIES
The validity of the shares of common stock offered hereby will be passed
upon for us by Sullivan & Cromwell, Los Angeles, California, our counsel.
Certain legal matters in connection with the offering will be passed upon for
the underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles,
California.
EXPERTS
Our consolidated financial statements as of December 31, 1997 and 1998, and
for each of the years in the three-year period ended December 31, 1998 included
in this prospectus and in the registration statement have been so included in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere in this prospectus and in the registration statement, and
upon the authority of that firm as experts in accounting and auditing.
AVAILABLE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the shares of common stock offered by this
prospectus. This prospectus does not contain all the information set forth in
the registration statement, certain portions of which are omitted as permitted
by the rules and regulations of the SEC.
For further information about us and the shares offered by this prospectus,
you should refer to the registration statement, including the exhibits and
schedules filed with the registration statement. You may obtain copies of the
registration statement, of which this prospectus is a part, together with such
exhibits and schedules, upon payment of the fee prescribed by the SEC, or you
may examine these documents without charge at the office of the SEC.
After the offering is completed, we will be subject to the informational
requirements of the Securities Exchange Act of 1934 and will be required to
file annual and quarterly reports, proxy statements and other information with
the SEC. You can inspect and copy reports and other information filed by us
with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may also obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0300. The SEC also
maintains an Internet site at http://www.sec.gov that contains reports, proxy
and information statements regarding issuers, including us, that file
electronically with the SEC.
75
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditor's Report............................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Stockholders' Equity (Deficiency)............... F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
JFAX.COM, Inc.:
We have audited the accompanying consolidated balance sheets of JFAX.COM,
Inc. (formerly known as JFAX Communications, Inc.) and subsidiary as of
December 31, 1997 and 1998 and the related consolidated statements of
operations, stockholders' equity (deficiency) and cash flows for each of the
years in the three-year period ended December 31, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of JFAX.COM,
Inc. and subsidiary as of December 31, 1997 and 1998 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Los Angeles, California
March 26, 1999, except for note 14
which is as of May 21, 1999
F-2
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31, As of
------------------------ March 31,
1997 1998 1999
(unaudited)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............. $ 23,039 7,278,873 5,510,066
Accounts receivable................... 10,774 112,729 88,655
Due from related parties.............. -- 128,578 159,607
Interest receivable................... 4,639 48,603 55,734
Prepaid marketing costs............... 1,000,000 1,000,000 1,100,000
Capitalized offering costs............ -- -- 105,000
Other current assets.................. 14,100 81,888 166,245
----------- ----------- -----------
Total current assets................ 1,052,552 8,650,671 7,185,307
Furniture, fixtures and equipment,
net................................... 1,560,145 1,777,646 1,698,406
Other long-term assets................. -- 84,372 76,527
----------- ----------- -----------
$ 2,612,697 10,512,689 8,960,240
=========== =========== ===========
<CAPTION>
LIABILITIES, REDEEMABLE SECURITIES AND
STOCKHOLDERS' EQUITY (DEFICIENCY)
<S> <C> <C> <C>
Current liabilities:
Accounts payable and accrued
expenses............................. $ 945,164 1,100,544 1,787,860
Interest payable...................... -- -- 265,008
Deferred revenue...................... 49,184 328,740 345,561
Current portion of capital lease
obligations.......................... -- 89,931 91,470
Current portion of long-term debt..... -- 317,402 386,823
Customer deposits..................... -- 79,286 79,286
----------- ----------- -----------
Total current liabilities........... 994,348 1,915,903 2,956,008
Capital lease obligations.............. -- 141,783 118,491
Long-term debt......................... -- 6,137,004 6,284,939
Put warrants........................... -- 1,062,331 --
Redeemable common stock; issued and
outstanding 2,207,698 shares at
December 31, 1998 and March 31, 1999
(unaudited) (redemption value of
$7,065,000 at December 31, 1998 and
$19,428,000 at March 31, 1999
(unaudited), respectively)............ -- 4,970,975 5,774,975
Mandatorily redeemable Series A
preferred stock. Authorized
1,000,000 shares; issued and
outstanding 5,000 shares at December
31, 1998 and March 31, 1999
(unaudited) at par value of $1,000
(liquidation preference $5,386,915 at
December 31, 1998 and $5,591,459
(unaudited) at March 31, 1999)........ -- 4,070,671 4,329,019
Stockholders' equity (deficiency):
Common stock, $0.01 par value.
Authorized 200,000,000 shares; total
issued and outstanding 18,185,000,
22,099,996 and 22,100,413
(unaudited) shares at December 31,
1997 and 1998, and March 31, 1999,
respectively, excluding 2,207,698
issued as redeemable at December 31,
1998 and March 31, 1999
(unaudited).......................... 181,851 221,000 221,004
Additional paid-in capital............ 9,409,703 11,975,043 11,975,354
Notes receivable from stockholders.... (2,400,000) (2,499,000) (2,499,000)
Accumulated deficit................... (5,573,205) (17,483,021) (20,200,550)
----------- ----------- -----------
Total stockholders' equity
(deficiency)....................... 1,618,349 (7,785,978) (10,503,192)
Commitment and Contingencies (note
11)...................................
Liquidity (note 13)....................
Subsequent Events (note 14)............
----------- ----------- -----------
$ 2,612,697 10,512,689 8,960,240
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
---------------------------------- ----------------------
1996 1997 1998 1998 1999
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue................. $ 104,531 685,465 3,519,836 490,427 1,411,343
Cost of revenue......... 149,651 857,924 3,398,243 626,217 1,053,943
--------- ---------- ----------- ---------- ----------
Gross profit
(loss)............. (45,120) (172,459) 121,593 (135,790) 357,400
Operating expenses:
Sales and marketing... 150,218 1,068,523 4,990,188 371,969 707,594
Research and
development.......... 61,291 792,985 1,225,542 261,482 517,071
General and
administrative....... 511,382 2,962,477 4,880,854 917,320 1,422,332
--------- ---------- ----------- ---------- ----------
Total operating
expenses........... 722,891 4,823,985 11,096,584 1,550,771 2,646,997
--------- ---------- ----------- ---------- ----------
Operating loss...... (768,011) (4,996,444) (10,974,991) (1,686,561) (2,289,597)
Other:
Interest expense...... -- -- (1,353,751) (154) (535,421)
Interest income....... -- 214,663 420,426 -- 108,989
--------- ---------- ----------- ---------- ----------
Loss before income
taxes.............. (768,011) (4,781,781) (11,908,316) (1,686,715) (2,716,029)
Income tax expense...... 721 1,640 1,500 1,500 1,500
--------- ---------- ----------- ---------- ----------
Net loss.............. $(768,732) (4,783,421) (11,909,816) (1,688,215) (2,717,529)
--------- ---------- ----------- ---------- ----------
Cumulative preferred
dividends and accretion
of discount
attributable to
preferred stock........ -- -- (494,523) -- (258,349)
--------- ---------- ----------- ---------- ----------
Net loss attributable
to common
shareholders......... (768,732) (4,783,421) (12,404,339) (1,688,215) (2,975,878)
========= ========== =========== ========== ==========
Net loss per common
share:
Basic................. $ (0.12) (0.30) (0.56) (0.09) (0.12)
Diluted............... (0.12) (0.30) (0.56) (0.09) (0.12)
========= ========== =========== ========== ==========
Weighted average common
shares used in
determining loss per
share:
Basic and diluted..... 6,406,666 15,738,394 22,181,960 19,435,000 24,308,111
========= ========== =========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Notes
Common stock Additional receivable Stockholders'
-------------------- paid-in Accumulated from equity
Shares Amount capital deficit stockholders (deficiency)
---------- -------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... 5,000,000 $ 10,000 -- (21,052) -- (11,052)
Issuance of common
stock.................. 2,452,500 64,525 1,301,955 -- -- 1,366,480
Common stock issued for
services............... 112,500 1,125 88,875 -- -- 90,000
Net loss................ -- -- -- (768,732) -- (768,732)
---------- -------- ---------- ----------- ---------- -----------
Balance, December 31,
1996................... 7,565,000 75,650 1,390,830 (789,784) -- 676,696
Exercise of stock
options................ 370,000 74 -- -- -- 74
Stock option
compensation........... -- -- 120,000 -- -- 120,000
Repurchase of common
stock.................. (200,000) (2,000) (118,000) -- -- (120,000)
Issuance of common
stock.................. 10,450,000 108,127 8,016,873 -- -- 8,125,000
Issuance of notes
receivable from
stockholders........... -- -- -- -- (2,400,000) (2,400,000)
Net loss................ -- -- -- (4,783,421) -- (4,783,421)
---------- -------- ---------- ----------- ---------- -----------
Balance, December 31,
1997................... 18,185,000 181,851 9,409,703 (5,573,205) (2,400,000) 1,618,349
Accretion to common
stock redemption....... -- -- (39,000) -- -- (39,000)
Dividends on mandatorily
redeemable Preferred
Stock.................. -- -- (386,915) -- -- (386,915)
Accretion to preferred
stock redemption....... -- -- (107,608) -- -- (107,608)
Issuance of common
stock.................. 3,791,250 37,912 3,061,088 -- (99,000) 3,000,000
Exercise of stock
options................ 123,746 1,237 37,775 -- -- 39,012
Net loss................ -- -- -- (11,909,816) -- (11,909,816)
---------- -------- ---------- ----------- ---------- -----------
Balance, December 31,
1998................... 22,099,996 $221,000 11,975,043 (17,483,021) (2,499,000) (7,785,978)
Exercise of stock
options (unaudited).... 416 4 329 -- -- 333
Accretion to common
stock redemption
(unaudited)............ -- -- (804,000) -- -- (804,000)
Dividends on mandatorily
redeemable Preferred
Stock (unaudited)...... -- -- (204,544) -- -- (204,544)
Accretion to preferred
stock redemption
(unaudited)............ -- -- (53,805) -- -- (53,805)
Conversion of put
warrants (unaudited)... -- -- 1,062,331 -- -- 1,062,331
Net loss (unaudited).... -- -- -- (2,717,529) -- (2,717,529)
---------- -------- ---------- ----------- ---------- -----------
Balance, March 31, 1999
(unaudited)............ 22,100,412 $221,004 11,975,354 (20,200,550) (2,499,000) (10,503,192)
========== ======== ========== =========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
---------------------------------- ----------------------
1996 1997 1998 1998 1999
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $(768,732) (4,783,421) (11,909,816) (1,688,215) (2,717,529)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization......... 64,775 216,553 634,158 138,673 214,815
Stock option
compensation
expense.............. -- 120,000 -- -- --
Common stock issued
for services......... 90,000 -- -- -- --
Redeemable common
stock issued in lieu
of interest.......... -- -- 251,999 -- --
Notes issued for
payment of interest
expense.............. -- -- 499,665 -- --
Amortization of note
payable discount..... -- -- 436,304 -- 210,197
Changes in assets and
liabilities:
Decrease (increase)
in:
Accounts
receivable........ (34,592) 23,892 (101,955) (49,210) 24,074
Due from related
parties........... -- -- (128,578) -- (31,029)
Interest
receivable........ -- (4,639) (43,964) (1,657) (7,131)
Prepaid marketing
costs............. -- (1,000,000) -- (1,250,000) (100,000)
Capitalized
offering costs.... -- -- -- -- (105,000)
Other.............. (8,000) (6,100) (152,160) (39,334) (7,912)
Increase in:
Accounts payable... 107,086 838,078 155,380 87,019 687,316
Interest payable... -- -- -- -- 265,008
Deferred revenue... -- 49,184 279,556 (12,454) 16,821
Customer
deposits.......... -- -- 79,286 -- --
--------- ---------- ----------- ---------- ----------
Net cash used in
operating
activities...... (549,463) (4,546,453) (10,000,125) (2,815,178) (1,550,370)
--------- ---------- ----------- ---------- ----------
Cash flows from
investing activities--
purchase of furniture,
fixtures and
equipment.............. (265,848) (1,579,409) (543,170) (123,944) (107,485)
--------- ---------- ----------- ---------- ----------
Cash flows from
financing activities:
Proceeds from issuance
of common stock....... 1,366,480 8,125,000 3,099,000 3,000,000 --
Issuance of notes
receivable from
stockholders.......... -- (2,400,000) (99,000) -- --
Common stock
repurchased........... -- (120,000) -- -- --
Exercise of stock
options............... -- -- 39,012 -- 333
Proceeds from issuance
of mandatorily
redeemable preferred
stock and put
warrants, net......... -- -- 4,638,479 -- --
Proceeds from issuance
of notes payable...... -- -- 5,698,717 30,000 --
Proceeds from issuance
of redeemable common
stock, net............ -- -- 4,679,976 -- --
Repayments of notes
payable............... -- -- (208,910) (2,399) (89,532)
Repayments of capital
lease obligations..... -- -- (48,145) -- (21,753)
Net increase (decrease)
in due to related
parties............... 104,519 (111,787) -- 571,240 --
Proceeds from note
payable, net.......... -- -- -- -- --
--------- ---------- ----------- ---------- ----------
Net cash provided
by financing
activities...... 1,470,999 5,493,213 17,799,129 3,598,841 (110,952)
--------- ---------- ----------- ---------- ----------
Net increase
(decrease) in
cash and cash
equivalents..... 655,688 (632,649) 7,255,834 659,719 (1,768,807)
Cash and cash
equivalents at
beginning of year...... -- 655,688 23,039 23,039 7,278,873
--------- ---------- ----------- ---------- ----------
Cash and cash
equivalents at end of
year................... $ 655,688 23,039 7,278,873 682,758 5,510,066
========= ========== =========== ========== ==========
Cash paid during the
year for:
Income taxes........... $ -- 721 1,500 -- 1,500
Interest............... -- -- 137,148 -- 23,453
========= ========== =========== ========== ==========
Supplemental disclosure
of noncash investing
and financing
activities (see notes
3, 4, 9 and 11)
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
(Information relating to the three months ended March 31, 1998 and 1999 is
unaudited)
(1) Organization
JFAX.COM, Inc., formerly known as JFAX Communications, Inc., (the Company or
JFAX) was incorporated in the state of Delaware on December 14, 1995. The
Company is engaged in providing delivery of fax and voice messages via
telephone and the Internet network. JFAX has strategic alliances with online
network/service providers (OSPs), Internet service providers (ISPs), software
and hardware producers (OEMs), other significant online communities and
international resellers.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of JFAX.COM, Inc.
and its wholly owned marketing subsidiary, JFAX.COM Europe Ltd. All
intercompany accounts and transactions have been eliminated in consolidation.
In the opinion of the Company's management, the consolidated financial
statements as of March 31, 1999 and for the three-month periods ended March 31,
1998 and 1999 include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of operations for
such periods and the financial position at such date.
(b) Revenue Recognition
The Company recognizes revenue as services are provided to the customer.
Substantially all of the Company's revenue is collected by use of credit cards
and is paid in advance. The Company provides customer support as an
accommodation to purchasers of its services. These amounts are expensed as
incurred. Deferred revenue represents prepayments received from customers in
advance of services provided.
The Company recognizes revenue for activation fees when the customer's
account is activated at which time related direct selling costs are incurred,
which substantially offset the activation fee.
(c) Research and Development
Research and development costs are expensed as incurred. Costs for software
development incurred subsequent to establishing technological feasibility, in
the form of a working model, are capitalized and amortized over their estimated
useful lives. To date, software development costs incurred after technological
feasibility has been established have not been material.
F-7
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Information relating to the three months ended March 31, 1998 and 1999 is
unaudited)
(d) Prepaid Advertising Costs
Prepaid advertising costs are recorded for amounts paid to online service
providers. The Company expenses advertising cost, as advertising is placed on
the providers' respective sites.
(e) Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments with original maturities of three
months or less to be cash equivalents.
(f) Depreciation and Amortization
Furniture, fixtures and equipment are stated at cost. Depreciation is
provided on furniture and equipment using the straight-line method over a three
to five year period. Leasehold improvements are amortized on a straight-line
basis over the shorter of the lease term or their estimated useful lives.
(g) Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes" (SFAS No.
109). SFAS No. 109 requires that deferred income taxes be recognized for the
tax consequences of "temporary differences" by applying enacted statutory tax
rates applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities and
operating loss carryforwards. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date.
(h) Accounting for Stock Options
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. As such, compensation
expense for option grants to employees would be recorded on the date of the
grant only if the current fair value of the underlying stock exceeds the
exercise price. Effective January 1, 1997, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits entities to recognize
as expense over the vesting period the fair value of all stock-based awards on
the date of the grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro-forma
net loss disclosures for employee stock option grants made in 1995 and future
years as if the fair-value based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB No.
25 and provide the pro-forma disclosure provisions of SFAS No. 123 for options
granted to employees.
(i) Use of Estimates
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to
F-8
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Information relating to the three months ended March 31, 1998 and 1999 is
unaudited)
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the dates
of the balance sheets and revenues and expenses for the periods. Actual results
could differ from those estimates.
(j) Long-Lived Assets
Long-lived assets to be held and used by the Company are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to future undiscounted net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured as the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets that are to be disposed of are
reported at the lower of the carrying amount or fair value less cost to sell.
(k) Fair Value of Financial Instruments
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments,"
requires entities to disclose the fair value of financial instruments, both
assets and liabilities recognized and not recognized on the balance sheet, for
which it is practicable to estimate fair value. SFAS No. 107 defines fair value
of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties. As of December 31,
1997 and 1998, the carrying value of cash and cash equivalents, accounts
receivable, interest receivable, accounts payable, accrued expenses, interest
payable and customer deposits approximate fair value due to the short- term
nature of such instruments. The carrying value of long-term debt and notes
payable, approximate fair value as the related interest rates approximate rates
currently available to the Company.
(l) Loss Per Share of Common Stock
The Company has adopted SFAS No. 128, "Earnings Per Share." Basic net loss
per share is computed using the weighted average number of common shares
outstanding during the period. Dividends on Preferred Stock and amortization of
Preferred Stock issuance costs and mandatory redemption value increase the net
loss for determining basic and diluted net loss per share attributable to
Common Stock. Diluted net loss per share excludes the effect of common stock
equivalents, because their effect would be anti-dilutive.
(m) Reclassifications
Certain reclassifications have been made to the 1996 and 1997 consolidated
financial statements to conform to the 1998 presentation.
(n) Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
Nos. 130 and 131, "Reporting Comprehensive Income" (SFAS 130) and "Disclosure
about Segments of an Enterprise and Related Information" (SFAS 131),
respectively, (collectively, the Statements). The Statements are effective for
fiscal years beginning after December 15, 1997. SFAS 130 establishes standards
for
F-9
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Information relating to the three months ended March 31, 1998 and 1999 is
unaudited)
reporting of comprehensive income and its components in annual financial
statements. SFAS 131 establishes standards for reporting financial and
descriptive information about an enterprise's operating segments in its annual
financial statements and selected segment information in interim financial
reports. Reclassification or restatement of comparative financial statements
or financial information for earlier periods is required upon adoption of SFAS
130 and SFAS 131, respectively. Application of the statement requirements did
not have a material impact on the Company's consolidated financial position,
results of operations or loss per share data as currently reported. With
respect to SFAS 130, the Company has no elements of other comprehensive
income, therefore net loss equals total comprehensive loss for all periods
presented.
With respect to SFAS 131, the Company operates in one reportable segment:
unified messaging service, which provides delivery of fax and voice messages
via telephone and the Internet network. The Company has a U.K. subsidiary,
which operated as a marketing division for nine months in 1998 and, as such,
did not generate revenue as of December 31, 1998. Thus, the Company considers
that thus far it has only operated in one geographic segment. As the Company
operates in one segment, additional disclosure per SFAS 131 has not been
presented.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
About Pensions and Other Postretirement Benefit Plans." This statement is
effective for fiscal years beginning after December 15, 1997 and restatement
of disclosures for earlier periods is required. The Company adopted SFAS No.
132 in 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for
transactions entered into after January 1, 2000. This statement requires that
all derivative instruments be recorded on the balance sheet at fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and the type of hedge transaction.
The ineffective portion of all hedges will generally be recognized in
earnings. The Company does not presently engage in hedging activities and
accordingly the adoption of SFAS No. 133 will not have an impact on its
results of operations and financial position.
(3) Furniture, Fixtures and Equipment
Furniture, fixtures and equipment, stated at cost, at December 31, 1997 and
1998 consists of the following:
<TABLE>
<CAPTION>
1997 1998
---------- ---------
<S> <C> <C>
Computer and related equipment........................ $1,692,052 2,232,397
Furniture and equipment............................... 36,905 39,729
Capital leases--computer and related equipment........ -- 279,859
Leasehold improvements................................ 116,661 116,661
---------- ---------
1,845,618 2,668,646
Less accumulated depreciation and amortization........ (285,473) (891,000)
---------- ---------
$1,560,145 1,777,646
========== =========
</TABLE>
Included in accumulated amortization at December 31, 1998 is $58,791
related to capital leases.
F-10
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Information relating to the three months ended March 31, 1998 and 1999 is
unaudited)
(4) Redeemable Securities and Stockholders' Equity (Deficiency)
(a) Private Placement Offering
In June 1998, the Company completed a private placement offering of Senior
Subordinated Notes (Notes), Common Stock (Common Shares), and Series A Usable
Redeemable Preferred Stock (Preferred Shares) with 3,125,000 detachable
warrants (Warrants) for proceeds aggregating $15,000,000 before offering
expenses. The private placement offering consisted of the following components:
Notes and Common Shares
$10,000,000 principal amount of Notes (see note 9) together with 2,101,971
Common Shares were issued for combined proceeds of $10,000,000.
The Notes bear interest at 10% per annum of the principal amount. Through
June 30, 1999, the Company may pay interest through the issuance of additional
interest notes in the form of Senior Subordinated Notes together with a
proportionate number of additional Shares. As of December 31, 1998, the Company
issued approximately $500,000 of interest notes and 105,726 additional shares
(at a value of $251,999) in lieu of interest payments.
The Notes are due at maturity on June 30, 2004, but half the Notes must be
paid one year earlier, in each case payable at 100% of the principal amount
plus accrued and unpaid interest.
The Notes and Shares were recorded at their fair values at the date of
issuance of $4,955,269 and $5,044,731, respectively. The discount attributable
to the Notes is being amortized to interest expense over the term of the Notes
using the interest method.
The Notes are subject to optional redemption by the Company at any time at
101% of the principal amount plus accrued and unpaid interest.
The Common Shares issued in this transaction including shares issued in
connection with interest notes are subject to certain put rights by the holders
at $3.20 per share, upon a change of control or as an exit put at fair market
value if the Company has not completed a qualified public offering by July 1,
2003. Accordingly, the Common Shares issued in the transaction are shown as
redeemable securities in the accompanying 1998 consolidated balance sheet. The
fair market value put rights terminate in the event of a public offering of
equity securities by the Company. The Company is accreting to the redemption
amount (fair market value) of the Common Shares through a charge to additional
paid-in capital using the straight line method.
Preferred Shares and Warrants
The Company issued $5,000,000 in stated value of Preferred Shares consisting
of 5,000 shares together with 3,125,000 Warrants to acquire a like number of
shares of the Company's common stock, for an exercise price of $2.40 per share,
for a combined purchase price of $5,000,000.
The Preferred Shares are entitled to cumulative dividends at 15% per annum
based on the stated value and accrued and unpaid dividends. Until and including
the dividend payment date falling on June 30, 2005, the Company has the option
of accruing dividends or paying in cash.
F-11
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Information relating to the three months ended March 31, 1998 and 1999 is
unaudited)
The Preferred Shares are mandatorily redeemable by the holders on June 30,
2005 at the stated value plus all accrued and unpaid dividends. The Company is
accreting to the mandatory redemption amount through a charge to additional
paid-in capital using the straight line method.
Preferred Shares are subject to optional redemption by the Company after
July 1, 1999 at the following prices:
<TABLE>
<CAPTION>
Until Date Percent of Stated Value
---------- -----------------------
<S> <C>
07/01/2000......... 115.0%
07/01/2001......... 107.5
Thereafter......... 100.0 (in each case plus accrued and unpaid dividends)
</TABLE>
The Preferred Shares and Warrants and/or warrant shares (if converted to
common stock) are subject to certain put rights by the holders, upon a change
of control. The warrants are exercisable by the holders at $2.40 per share at
any time until June 30, 2005 and may be "put" to the Company upon a change in
control. The warrants were recorded at their estimated fair value of $1,145,000
as of the date of issuance, as determined using a Black-Scholes model, and are
reflected outside of stockholders' equity as a reduction of the proceeds
received from the issuance of Preferred Shares in the accompanying consolidated
balance sheets. Any increase in fair value of these put rights above the
initially determined amount of $.36 per warrant will be expensed by the Company
in its Statements of Operations as such values accrue. (see note 14)
In connection with the placement of Notes, Warrants and Preferred and Common
Shares, an additional 268,750 warrants were issued to the placement agent. Such
warrants carry the same exercise price and put features as those issued in
connection with the preferred shares. (see note 14)
Fees and expenses related to the offering aggregated $1,084,564 which were
allocated based on the relative fair value of the instruments as follows:
<TABLE>
<S> <C>
Notes............................................................. $ 358,288
Common Shares..................................................... 364,755
Preferred Shares.................................................. 278,852
Warrants.......................................................... 82,669
----------
$1,084,564
==========
</TABLE>
Capitalized offering fees and expenses allocated to the Notes and Warrants
are being amortized to interest expense; offering costs attributable to Common
Shares and Preferred Shares were recorded as a reduction of the proceeds
received at the date of issuance.
In addition, warrants to purchase 29,166 common shares at $2.40 per share
were issued in connection with issuance of long-term notes to a financial
institution and warrants to purchase 250,000 common shares at $2.40 per share
were issued to America Online (see note 6).
F-12
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Information relating to the three months ended March 31, 1998 and 1999 is
unaudited)
(b) Notes Receivable from Stockholders
Notes receivable from stockholders were issued in connection with sales of
common stock and consist of the following at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
---------- ---------
<S> <C> <C>
Loan receivable secured by 2,925,000 shares of the
Company's common stock held by the stockholder;
interest accrues at 6.32% and is payable monthly, due
in March 2004. This amount will be repaid in services
rendered by the stockholder ratably over five years... $2,250,000 2,250,000
Loan receivable secured by 220,000 shares of the
Company's common stock held by the stockholder;
interest accrues at 6.32% with all principal and
accrued interest due in March 2001.................... 100,000 100,000
Loan receivable secured by 150,000 shares of the
Company's common stock held by the stockholder;
interest accrues at 8.00% and is payable monthly, due
in September 1999..................................... $ 50,000 50,000
Loan receivable secured by 41,250 shares of the
Company's common stock held by the stockholder;
interest accrues at 4.25% and is payable monthly, due
in October 2001....................................... -- 99,000
---------- ---------
$2,400,000 2,499,000
========== =========
</TABLE>
(5) Amounts Due to Related Parties, Principally Stockholders
Amounts due to related parties were $111,787 as of December 31, 1996 and
represented advances by certain stockholders of the Company to fund operations.
These amounts did not bear interest, were due upon demand and were repaid in
full in 1997.
In January 1998, the Company received bridge financing from a related party.
The borrowings were repaid in full in May 1998 with proceeds received from a
capital stock rights offering. Interest expense related to the borrowings
aggregated $57,725.
As of December 31, 1998, there were $128,578 of amounts due from related
parties. Such amounts represent salary advances.
As of December 31, 1998, the Company is involved in a consulting arrangement
with a related party, pursuant to which the Company pays $200,000 per year, for
services provided by the related party. The Company also reimbursed the related
party for expenses incurred on the Company's behalf of approximately $27,000
per month. Of the $27,000 per month, approximately $20,000 was related to a
subleasing arrangement with CIM Group, LLC for office space to house our
headquarters in Los Angeles, California. The remaining portion is for certain
shared expenses.
In connection with the private placement offering in June 1998, certain
related parties were directly associated with the investor groups that provided
the funding to the Company.
F-13
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Information relating to the three months ended March 31, 1998 and 1999 is
unaudited)
(6) Agreements with OnLine Service Providers
(a) America Online
In October 1997, the Company entered into an interactive marketing
relationship with AOL. In connection with this agreement, the Company issued
warrants to purchase 250,000 common shares at $2.40 per share. The fair value
of the warrants as of the date of issuance was de minimis. Under the agreement,
the Company pays amounts to AOL based on advertising placed on the AOL site.
During 1998, the Company incurred $1,250,000 in advertising expense for
advertising activity placed on the site. Such amount is included in sales and
marketing expense in the accompanying Statement of Operations.
As of December 31, 1997 and 1998, the Company had $1,000,000 in prepaid
advertising costs included in the accompanying consolidated balance sheets. The
current agreement stipulates that AOL will provide the Company with a credit of
$1,000,000 towards impressions on the AOL site. The value of the credit is
allocated evenly between impressions on AOL's Email, Netmail and various
service banners throughout the site. As the impressions are utilized, the
Company expenses the associated value of these impressions in the period
incurred at a predetermined value per impression.
The Company expects to fully amortize all prepaid advertising costs during
1999 as services are provided by AOL.
(b) CompuServe and Yahoo
The Company is the exclusive unified messaging provider for CompuServe and
Yahoo under interactive marketing agreements. These marketing agreements
provide for the Company to make certain fixed and revenue share payments based
on advertising amounts placed on the respective sites and customers acquired.
Amounts expensed under agreements with all on line service providers are
included in sales and marketing expense and amounted to $7,888 and $2,959,313
in 1997 and 1998, respectively. Future annual fixed payments associated with
all arrangements with on line service providers for future services aggregate
$550,000 in 1999.
Specific terms of the CompuServe agreement are as follows:
From June 1997 through June 1998, the Company's agreement with CompuServe
provided for the payment of a per-sign-up commission or bounty to CompuServe
for each subscriber who was directed to the JFAX.COM website via the CompuServe
web site. This agreement was modified in June 1998. The modified agreement
required fixed, guaranteed quarterly payments and further provided for
commission payments, based on customer revenues, to the extent such revenues
exceeded the amount targeted. Effective February 1, 1999, the agreement was
again modified. The current agreement calls for fixed, guaranteed quarterly
payments through January 31, 2000, as well as a per-sign-up commission or
bounty for each subscriber in excess of a targeted number of sign-ups.
CompuServe agrees to produce a certain number of subscribers each quarter and
cumulatively over the course of the contract. In the event that results are
below target, CompuServe will provide additional advertising to compensate for
the shortfall.
F-14
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Information relating to the three months ended March 31, 1998 and 1999 is
unaudited)
Specific terms of the Yahoo agreement are as follows:
The Company's original agreement with Yahoo was in effect from June 1, 1998
through December 1, 1998. The original agreement required fixed, guaranteed
monthly payments, together with commission payments, based on customer
revenues, to the extent such revenues exceeded targeted revenues. The
agreement was amended effective December 1, 1998 and now calls for fixed,
guaranteed monthly payments through May 31, 1999, as well as a per-sign-up
bounty for each subscriber (in excess of a targeted number of sign-ups) who
signs up in response to e-mail solicitations, as well as a commission payment
based on the customer revenue received from all other subscribers.
All these above are expensed as incurred and are reflected in sales and
marketing expense.
(7) Income Taxes
The income tax provision for all years presented is comprised of state
minimum tax expense.
Deferred tax assets and liabilities result from differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. The significant components of deferred income taxes are as
follows:
<TABLE>
<CAPTION>
December 31, March 31,
------------------------ 1999
1997 1998 (unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....... $ 2,088,997 $ 6,863,361 7,841,254
Accrued expenses....................... 70,900 127,350 232,869
----------- ----------- ----------
2,159,897 6,990,711 8,074,123
Less valuation allowance............... (2,159,897) (6,990,711) (8,074,123)
----------- ----------- ----------
Net deferred tax assets.............. $ -- -- --
=========== =========== ==========
</TABLE>
The Company has recorded a valuation allowance in the amount set forth
above for certain deductible temporary differences and net operating loss
carryforwards where it is not more likely than not the Company will receive
future tax benefits. The net change in the valuation allowance for the years
ended 1997 and 1998 and the three months ended March 31, 1999 (unaudited) was
$1,867,070, $4,830,814 and $1,083,412, respectively.
As of December 31, 1998, the Company has Federal and state net operating
losses (NOL) carryforwards of approximately $17,100,000. These NOL
carryforwards will expire through year 2013 for Federal NOLs and 2003 for
state NOLs.
The Tax Reform Act of 1986 imposed substantial restrictions on the
utilization of net operating losses in the event of an "ownership change" of a
corporation. Accordingly, the Company's ability to utilize net operating
losses may be limited as a result of such an "ownership change," as defined in
the Internal Revenue Code.
F-15
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Information relating to the three months ended March 31, 1998 and 1999 is
unaudited)
Income tax expense differs from the amount computed by applying the Federal
corporate income tax rate of 34% to loss before income taxes as follows (in
percentages):
<TABLE>
<CAPTION>
Year ended
December 31
-----------
1996 1997 1998
<S> <C> <C> <C>
Statutory tax rate...................................... (34.0)% (34.0)% (34.0)%
Change in valuation allowance........................... 38.1 40.0 41.0
State income taxes, net................................. (5.9) (5.7) (5.9)
Other................................................... 1.9 (0.2) (1.0)
----- ----- -----
Effective tax rate.................................... 0.1% 0.1% 0.1%
===== ===== =====
</TABLE>
(8) Stock Option Plan
In November 1997, the Board of Directors adopted the JFAX Communications,
Inc. 1997 Stock Option Plan (the 1997 Plan). Under the 1997 Plan, 4,375,000
authorized shares of common stock are reserved for issuance of options. An
additional 840,000 shares were authorized for issuance of options outside the
1997 Plan for which 840,000 options were issued to Michael P. Schulhof, then a
consultant and currently a director for services to be provided to the Company
under a consulting contract. The Company recorded $120,000 in compensation
expense during 1997 relating to these options. These options are treated by the
Company as warrants. Options under the 1997 Plan may be granted at exercise
prices determined by the Board of Directors, provided that the exercise prices
shall not be less than the fair market value of the Company's common stock on
the date of grant for incentive stock options and not less than 85% of the fair
market value of the Company's common stock on the date of grant for
nonstatutory stock options. At December 31, 1998, 340,690 options and 840,000
options were exercisable under and outside of the 1997 Plan, respectively, and
the weighted average exercise price of these options were $0.78 and $1.26.
Stock options generally expire after 10 years and vest over a three-year
period.
At December 31, 1998, there were 1,060,353 additional shares available for
grant under the 1997 Plan and no additional shares available for grant outside
of the 1997 Plan. The per share weighted-average fair value of stock options
granted during 1997 and 1998 was $0.22 and $0.49, respectively, on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions: risk-free interest rate of 6.5% and 4.6% for 1997 and
1998, respectively, and an expected life of 5 years.
F-16
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Information relating to the three months ended March 31, 1998 and 1999 is
unaudited)
The Company applies APB Opinion No. 25 in accounting for its stock option
plan and, accordingly, no compensation cost using the intrinsic value method
has been recognized for its stock option grants in the consolidated financial
statements. Had the Company determined compensation cost based on the fair
value at the grant date for its stock options under SFAS No. 123, the Company's
net loss attributable to common shareholders for fiscal 1997 and 1998 would
have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1998
---------- -----------
<S> <C> <C> <C>
Net loss attributable to common
stockholders.............................. As reported $4,783,421 $12,404,339
Pro forma 4,868,421 12,614,339
Basic loss per common share................ As reported 0.30 0.56
Pro forma 0.30 0.57
Diluted loss per common share.............. As reported 0.30 0.56
Pro forma 0.30 0.57
========== ===========
</TABLE>
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
Number of Weighted-average
shares exercise price
--------- ----------------
<S> <C> <C>
Options outstanding at December 31, 1996............ -- --
Granted........................................... 2,291,250 0.82
Exercised......................................... (370,000) 0.01
---------
Options outstanding at December 31, 1997............ 1,921,250 0.99
Granted........................................... 890,625 2.34
Exercised......................................... (123,746) 0.31
Canceled.......................................... (277,228) 0.80
---------
Options outstanding at December 31, 1998............ 2,410,901 1.53
=========
</TABLE>
At December 31, 1998, the exercise prices of options ranged from $.70 to
$2.40 with a weighted-average remaining contractual life of 8.9 years.
<TABLE>
<CAPTION>
Options outstanding Options exercisable
--------------------------------------- ---------------------
Range of Number Weighted- Number Weighted
exercise outstanding Weighted average average exercisable average
prices December 31, remaining exercise December 31, exercise
-------- 1998 contractual life price 1998 price
<S> <C> <C> <C> <C> <C>
$ 0.70.... 420,000 8.1 $0.70 420,000 $0.70
$0.77-0.80.... 679,860 8.5 $0.78 340,690 $0.78
$ 1.80.... 420,000 8.1 $1.80 420,000 $1.80
$1.60-2.40.... 890,625 9.7 $2.34 -- $ --
--------- --- ----- --------- -----
2,410,485 8.9 $1.53 1,180,690 $1.11
========= === ===== ========= =====
</TABLE>
At December 31, 1997 and 1998, 434,705 and 1,180,690 options, respectively,
were exercisable.
F-17
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Information relating to the three months ended March 31, 1998 and 1999 is
unaudited)
(9) Long Term Debt
Long term debt consists of the following:
<TABLE>
<CAPTION>
March 31,
December 31, 1999
1998 (unaudited)
------------ -----------
<S> <C> <C>
Loan payable secured by certain computer equipment
bearing interest at 15%. Monthly principal and
interest payments of $26,086 from April 21, 1998 to
April 2001............................................ $ 716,155 651,936
Loan payable secured by certain computer equipment
bearing interest at 15%. Monthly principal and
interest payments of $5,879 from December 22, 1998 to
January 1, 2001....................................... 192,580 183,535
Senior Subordinated Notes with aggregate principal
value of $10,000,000 bearing interest at 10% per annum
of principal amount, with maturity date of June 30,
2004, less unamortized debt discount of $4,624,337 at
December 31, 1998 and $4,412,939 at March 31, 1999
(unaudited) and debt issuance costs of $329,656 at
December 31, 1998 and $314,401 at March 31, 1999. The
Company also satisfied accrued interest of $499,665 as
of July 1, 1998 through the issuance of additional
notes payable......................................... 5,545,671 5,783,956
Other.................................................. -- 52,335
---------- ---------
6,454,406 6,671,762
Less current installments of long term debt............ (317,402) (386,823)
---------- ---------
Long term debt, excluding current installments....... $6,137,004 6,284,939
========== =========
</TABLE>
At December 31, 1998, annual maturities of long-term debt, before
consideration of unamortized original issue discount and debt issuance costs,
are as follows:
<TABLE>
<S> <C>
1999............................................................. $ 317,402
2000............................................................. 352,632
2001............................................................. 220,257
2002............................................................. 18,443
2003............................................................. 5,000,000
Thereafter....................................................... 5,499,665
-----------
$11,408,399
===========
</TABLE>
(10) Employee Benefit Plan
The Company has a 401(k) savings plan covering substantially all of its
employees. Eligible employees may contribute through payroll deductions. The
Company matches employees' contributions at the discretion of the Company's
Board of Directors. To date, the Company has not matched employee contributions
to the 401(k) savings plan.
F-18
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Information relating to the three months ended March 31, 1998 and 1999 is
unaudited)
(11) Commitments and Contingencies
(a) Leases
The Company leases certain facilities and equipment under noncancelable
capital and operating leases which expire at various dates through 2001. The
Company sub-leases its corporate facilities from a related party. The sub-lease
expires in January 2000 and requires monthly payments of $19,310.
Future minimum lease payments at December 31, 1998, under agreements
classified as capital and operating leases with noncancelable terms in excess
of one year, are as follows:
<TABLE>
<CAPTION>
Capital leases Operating leases
-------------- ----------------
<S> <C> <C>
Fiscal year:
1999..................................... $106,860 286,078
2000..................................... 106,860 41,452
2001..................................... 44,681 --
-------- -------
Total minimum lease payments........... 258,401 327,530
=======
Amounts representing interest.............. (26,687)
--------
Present value of net minimum lease
payments.............................. 231,714
Less current maturities.................... 89,931
--------
Long-term maturities................... $141,783
========
</TABLE>
Rental expense was $18,175, $224,289 and $346,515 for the years ended
December 31, 1996, 1997 and 1998, respectively.
F-19
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Information relating to the three months ended March 31, 1998 and 1999 is
unaudited)
(12) Loss Per Share
As discussed in note 1, the Company adopted SFAS No. 128 for all periods
presented. The following table illustrates the computation of basic and diluted
loss per common share under the provisions of SFAS No. 128:
<TABLE>
<CAPTION>
Three Months Ended
Year ended December 31 March 31,
---------------------------------- ----------------------
1996 1997 1998 1998 1999
(unaudited)
<S> <C> <C> <C> <C> <C>
Numerator--numerator
for basic and diluted
loss per common share:
Net loss............. $(768,732) (4,783,421) (11,909,816) (1,688,215) (2,717,529)
Dividends on
Preferred Stock..... -- -- (386,915) -- (204,544)
Accretion to
Preferred Stock
redemption.......... -- -- (107,608) -- (53,805)
--------- ---------- ----------- ---------- ----------
Numerator for basic
and diluted loss
per common share.. (768,732) (4,783,421) (12,404,339) (1,688,215) (2,975,878)
Denominator:
Denominator for
basic loss per
common share--
weighted average
number of common
shares outstanding
during the
period............ 6,406,666 15,738,334 22,181,960 19,435,000 24,308,111
--------- ---------- ----------- ---------- ----------
Denominator for
diluted loss per
common share...... 6,406,666 15,738,334 22,181,960 19,435,000 24,308,111
========= ========== =========== ========== ==========
Basic loss per common
share................. (.12) (.30) (.56) (.09) (.12)
Diluted loss per common
share................. (.12) (.30) (.56) (.09) (.12)
========= ========== =========== ========== ==========
</TABLE>
The computation of diluted loss per share for each of the years in the
three-year period ended December 31, 1998 excludes the effects of incremental
common shares attributable to the exercise of 2,410,485 outstanding common
stock options and 3,672,916 warrants because their effect would be antidilutive
(see notes 4 and 8). Redeemable common shares outstanding have been included in
the computation of both basic and diluted loss per share.
(13) Liquidity
The Company has incurred operating losses since its inception and has funded
such losses through equity infusions and advances from stockholders. The
Company expects losses and negative cash flows from operations during 1999.
Based on its present cost structure, financing arrangements, and revenue growth
rate, management believes the Company has sufficient capital to fund operations
for the upcoming fiscal year. Additionally, management closely monitors its
cash balances and projected cash flows and evaluates discretionary operating
items accordingly.
F-20
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Information relating to the three months ended March 31, 1998 and 1999 is
unaudited)
(14) Subsequent Events
Subsequent to December 31, 1998, holders of a majority of the put warrants
discussed in note 4 agreed to eliminate a fair market value put feature
associated with these warrants for nominal consideration, effective January 1,
1999. As a result of the elimination of the put feature, the Company
reclassified the put warrant liability of $1,062,331 at December 31, 1998 to
additional paid in capital effective in January 1999.
Effective May 21, 1999, the Company completed a 1.25:1.00 stock split that
was effected by means of a stock dividend. Accordingly, all shares and per
share information has been restated for all periods presented to give effect to
the stock split.
F-21
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
May , 1999
[JFAX LOGO APPEARS HERE]
JFAX.COM, Inc.
7,500,000 Shares of Common Stock
---------------------
PROSPECTUS
---------------------
Donaldson, Lufkin & Jenrette
BancBoston Robertson Stephens
CIBC World Markets
DLJdirectInc.
----------------
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor
any sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of the company
have not changed since the date hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 1999 (25 days after the date of this prospectus), all
dealers that effect transactions in these securities may be required to deliver
a prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter in the offering and when selling
previously unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
<PAGE>
Inside Front Cover
[Graphic depicting the JFAX.COM Website Homepage. The homepage contains texts
and graphics as follows:]
Sign-up Now!
JFAX.COM Unified Messaging
JFAX.COM Business Fax
JFAX.COM Email-by-Phone
JFAX.COM Free Fax
JFAX.COM Free Voice
JFAX.COM Customer Care
JFAX.COM Community
JFAX.COM The Company
JFAX.COM Opportunities
[GRAPHIC #1:] A picture of a lightbulb
[ASSOCIATED TEXT:] Access My Account
[GRAPHIC #2:] Depiction of a Phone, Letter, Envelope & Mailbox
[ASSOCIATED TEXT:] JFAX.COM United Messaging Brings All of Your Voicemail,
Faxes and Email Together.
Learn More. Sign-Up.
[GRAPHIC #3:] Depiction of a fax machine and a globe
[ASSOCIATED TEXT:] JFAX.COM Business Fax Send and Receive Faxes from Your
Email.
Learn More. Sign-Up.
[GRAPHIC #4:] Depiction of documents/letters.
[ASSOCIATED TEXT:] JFAX.COM Free Fax Receive Faxes In Your Email Forever!
Learn More. Sign-Up.
[GRAPHIC #5:] Depiction of a globe, telephone and envelope.
[ASSOCIATED TEXT:] JFAX.COM Email-by-Phone Listen to Your Email.
Learn More. Sign-Up.
[GRAPHIC #6:] Depiction of a globe, envelope and telephone
<PAGE>
[ASSOCIATED TEXT:] JFAX.COM Free Voice, Receive Voice Messages in Your
Email Forever!
Learn More. Sign-Up. COMING SOON.
JFAX.COM has strategic relationships with the following online and offline
service providers:
[YAHOO! Logo]
[CriticalData Logo]
[Prodigy Communications Corporation Logo]
[Ameritech Logo]
[Bell South Logo]
[Esat.net Logo]
[Commtouch Logo]
[Telecom Internet Services Logo]
[Mail.Com Logo]
[CompuServe Logo]
Logos reproduced with the permission of their respective owners. All logos are
trademarks, and the property, of their respective owners.
<PAGE>
Inside Front Cover Fold-Out
[JFAX.COM Logo.]
[In the left-hand column are five graphics and associated text as follows:]
[GRAPHIC #1:] Depiction of a Phone, Letter, Envelope & Mailbox
[ASSOCIATED TEXT:] JFAX.COM Unified Messaging
Brings all of your voice mail, faxes, and email
together
. Saves time and money
. Easy-to-use, secure, instant activation
. Virtual office
[GRAPHIC #2:] Depiction of a fax machine and a globe
[ASSOCIATED TEXT:] JFAX.COM Email-By-Phone
Listen to your email from any touch tone phone
. Secure and reliable
. Always stay in touch anytime, anywhere
[GRAPHIC #3:] Depiction of documents/letters and a globe.
[ASSOCIATED TEXT:] JFAX.COM Business Fax
Send and receive faxes from your email
. Convenient - choose your own area code
. Simple, fast, and saves money
[GRAPHIC #4:] Depiction of a globe, telephone and envelope.
[ASSOCIATED TEXT:] JFAX.COM Free Voice
Receive voice messages in your email
. Simple - no additional phone line
. It's FREE
[GRAPHIC #5:] Depiction of a globe, envelope and telephone
[ASSOCIATED TEXT:] JFAX.COM Free Fax
Receive faxes in your email
. Fast and easy-to-use
. It's FREE
[In the center of the fold-out are maps and text as follows:]
<PAGE>
Cities available on the JFAX.COM network
[MAP #1:] Map of the United State overlaid on a map of portions of the world
[Cities identified on the map are:]
Tokyo, Vancouver, Seattle, Portland, Phoenix, Denver, Minneapolis, Chicago,
Detroit, Cleveland, Pittsburgh, Toronto, Dallas, Houston, Tampa, Atlanta,
Montreal, Boston, Philadelphia, New York, Washington D.C., Orlando, Ft.
Lauderdale, Miami, Dublin, Amsterdam, London, Brussels, Paris, Zurich, Berlin,
Frankfurt, Sydney, Auckland, Munich, Milan, and Helsinki.
[MAP #2:] Blow-up of a map of California
[Cities identified on the map of California are:] Redding, Sacramento,
Stockton, Santa Rosa, San Francisco, Oakland, San Mateo, San Jose, Modesto,
Pleasanton, Santa Cruz, Pasadena, Van Nuys, Los Angeles, San Bernardino, Long
Beach, San Diego, and Anaheim.
Pending Locations:
. Las Vegas
. Hong Kong
. Melbourne
. Osaka
<PAGE>
Inside Back Cover
"[Unified Messaging is a] single 'in-box' for voice, fax, and email
accessible by both telephone and PC."
- IDC
[In the center of the page are text headers and two sets of graphics with
associated text as follows:]
OLD WAY
[GRAPHIC #1:] Depiction of a telephone with an arrow pointing downward
towards a text-bubble which reads "Voicemail"
[GRAPHIC #2:] Depiction of a fax machine with an arrow pointing downward
towards a text-bubble which reads "Faxes."
[GRAPHIC #3:] Depiction of a computer with an arrow pointing downward
toward a text-bubble which reads "Email."
UNIFIED MESSAGING SOLUTION
[In this section, [JFAX.COM logo] is surrounded by 5 graphics, each with two-way
arrows pointing to the logo and the graphic:]
[GRAPHIC #1:] Depiction of a telephone with the text "Voicemail"
[GRAPHIC #2:] Depiction of a fax machine with the text "fax"
[GRAPHIC #3:] Depiction of a beeper and other communications devise with
the text "Other Devices"
[GRAPHIC #4:] Depiction of a text-box with the text "Email Box"
[GRAPHIC #5:] Depiction of a laptop computer with the text "Email"
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following is a statement of the estimated expenses, other than
underwriting discounts and commissions, to be incurred by JFAX.COM in
connection with the distribution of the securities registered under this
registration statement.
<TABLE>
<CAPTION>
Amount
to be
paid
--------
<S> <C>
SEC registration fee............................................... $ 26,376
NASD fees and expenses............................................. $ 9,988
Legal fees and expenses............................................ $350,000
Nasdaq National Market listing fees................................ $ 95,000
Accounting fees and expenses....................................... $125,000
Printing and engraving fees........................................ $200,000
Registrar and transfer agent's fees................................ $ 10,000
Miscellaneous...................................................... $ 83,636
--------
Total.......................................................... $900,000
========
</TABLE>
Item 14. Indemnification of Directors and Officers
As permitted by Delaware law, our certificate of incorporation includes a
provision that eliminates the personal liability of our directors to us or our
stockholders for monetary damages for breach of fiduciary duty as a director.
Article VI of our by-laws provides:
"The Corporation shall indemnify to the full extent permitted by law any
person made or threatened to be made a party to any action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that such person or such person's testator or intestate is or was a director,
officer or employee of the Corporation or serves or served at the request of
the Corporation any other enterprise as a director, officer or employee.
Expenses, including attorneys' fees, incurred by any such person in defending
any such action, suit or proceeding shall be paid or reimbursed by the
Corporation promptly upon receipt by it of an undertaking of such person to
repay such expenses if it shall ultimately be determined that such person is
not entitled to be indemnified by the Corporation. The rights provided to any
person by this by-law shall be enforceable against the Corporation by such
person who shall be presumed to have relied upon it in serving or continuing to
serve as a director, officer or employee as provided above. No amendment of
this by-law shall impair the rights of any person arising at any time with
respect to events occurring prior to such amendment. For purposes of this by-
law, the term "Corporation' shall include any predecessor of the Corporation
and any constituent corporation (including any constituent of a constituent)
absorbed by the Corporation in a consolidation or merger; the term "other
enterprise' shall include any corporation, partnership, joint venture, trust or
employee benefit plan; service "at the request of the Corporation' shall
include service as a director, officer or employee of the Corporation which
imposes duties on, or involves services by, such director, officer or employee
with respect to an employee benefit plan, its participants or beneficiaries;
any excise taxes assessed on a person with respect to an employee benefit plan
shall be deemed to be indemnifiable expenses; and action by a person with
respect to an employee benefit plan which such person reasonably believes to be
in the interest of the participants and beneficiaries of such plan shall be
deemed to be action not opposed to the best interests of the Corporation."
II-1
<PAGE>
In addition, the underwriting agreement for the offering will include
customary provisions indemnifying the officers, directors and our control
persons against liabilities in respect of information provided by the
underwriters for use in this registration statement.
We have also obtained a policy of directors' and officers' liability
insurance for our directors and officers to insure directors and officers
against the cost of defense, settlement or payment of a judgment under certain
circumstances.
Item 15. Recent Sales of Unregistered Securities
Between December 1995, when we were founded, and March 1997, when Mr.
Ressler invested in the Company through Orchard/JFAX Investors LLC and obtained
a controlling interest, we issued a total of 6,910,000 shares of our common
stock to our founders, Jaye Muller and John F. Rieley, as well as to various
individuals who made cash investments totaling $212,830 and who provided
investment, software and development consulting services to us in our early
stages of growth. During this time, we also issued 155,000 shares to The Regent
Trust Company Limited in September 1996 in exchange for a cash investment of
$412,500 and we issued 300,000 shares to Toxford Corporation in October 1996 in
exchange for a cash investment of $750,000.
In March 1997, we issued 5,375,000 shares of common stock to Boardrush Media
LLC in exchange for an equivalent number of Mr. Muller's then-current stock
holdings, which holdings were canceled. At the same time, we issued 10,060,000
shares of common stock to Orchard/JFAX Investors LLC in exchange for a cash
investment of $7,750,000 and 240,000 shares to Globetrans Ltd. in satisfaction
of a consultant's fee due to Globetrans as a result of helping to procure
Orchard's investment.
In March and May 1997, we issued 220,000 shares and 150,000 shares to
Nehemia Zucker and Anand Narasimhan, upon the exercise by Messrs. Zucker and
Narasimhan of employee options granted to them when they joined us in 1996 and
payment by each of them of the option price of .02c per share. The total
purchase price was $44 and $30, respectively.
In November 1997, we issued 150,000 shares to Toxford Corporation upon the
exercise by Toxford Corporation of a previously issued warrant and the payment
by Toxford Corporation of the warrant exercise price of $2.50 per share, or a
total of $375,000.
In March 1998, we issued a total of 3,750,000 shares of common stock at
$0.80 per share pursuant to a rights offering that was made available to all of
our then shareholders and warrant holders on the same terms. The total purchase
price was $3 million. The shareholders who participated and the number of
shares purchased were as follows: Orchard/JFAX Investors LLC (3,080,776),
Michael P. Schulhof (263,104), Globetrans Ltd. (147,481), Toxford Corporation
(140,949), Nehemia Zucker (41,739), Anand Narasihman (28,459), Geoff Goodfellow
(23,491), Neil Seeman (15,000) and Marc Seeman (9,000).
In April 1998, we granted Transamerica Business Credit Corporation a warrant
to purchase 29,166 shares of common stock for $2.40 per share, exercisable
until April 21, 2005, as partial consideration for a secured equipment loan in
the amount of approximately $1 million. On October 15, 1997, we also issued
250,000 warrants to America Online to purchase 250,000 shares of our common
stock at $2.40 per share, as part of our contract with America Online.
In June 1998, we issued $10 million of our 10% Senior Subordinated Notes due
2004 together with 2,101,971 shares of our common stock to an investor group
advised by Pecks Management Partners Ltd. consisting of Declaration of Trust
for Defined Benefit Plans of Zeneca Holdings, Inc.,
II-2
<PAGE>
Declaration of Trust for Defined Benefit Plans of ICI American Holdings, Inc.,
Delaware State Employees' Retirement Fund and The J.W. McConnell Family
Foundation. The total purchase price was $10 million. At the same time, we also
issued $5 million in liquidation preference of our Series A Usable Redeemable
Preferred Stock and related warrants to acquire 3,125,000 shares of our common
stock at $2.40 per share, $3.5 million of which was purchased by DLJ Capital
Corp. and its affiliates and $750,000 of which was purchased by the group
advised by Pecks Management Partners Ltd. discussed above. In addition,
Donaldson Lufkin & Jenrette Securities Corporation, the affiliate of DLJ
Capital Corp. that acted as placement agent for the offerings, received
warrants to acquire 268,750 shares of our common stock on the same terms as
purchasers, as compensation for its services. The total purchase price was $5
million. Orchard/JFAX Investors LLC, a company in which Richard S. Ressler is
the managing member, participated to the extent of $500,000 and GMT Partners,
LLC participated to the extent of $250,000 in the latter investment.
In October 1998 and January 1999, we issued $506,250 of our 10% Senior
Subordinated Notes due 2004 together with 105,726 shares of our common stock to
the investor group advised by Pecks Management Partners Ltd. above in
satisfaction of certain pay-in-kind obligations owing under the terms of the
original issued $10 million in 10% Senior Subordinated Notes due 2004 issued in
June 1998.
In October 1998, we issued 41,250 shares of our common stock to Gary H.
Hickox at a purchase price of $99,000. We loaned such amount to Mr. Hickox
pursuant to a $99,000 promissory note given to us by Mr. Hickox. The sale and
related note issuance were part of the terms of Mr. Hickox's employment
agreement with us. Also in October 1998, we issued 75,000 shares to an
individual upon the exercise of an option granted in January 1996 and payment
by such individual of the total option price of $15.00.
Between August 1998 and January 1999, we issued a total of 49,163 shares of
our common stock to various employees who exercised employee options to
purchase such stock at a price of $1.00 per share for a total purchase price of
$49,163.
As of May 21, 1999, we effected a 1.25 for one stock split of our common
stock by means of a stock dividend, with a result that share numbers and
numbers of shares issuable upon exercise of warrants and options were
proportionately increased, and the purchase price per share of warrants and
options was proportionately reduced.
All of the above issuances were effected in private transactions pursuant to
the exemption provided by Section 4(2) under the Securities Act.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<C> <S>
*1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation, as amended and restated.
3.2 By-laws, as amended and restated.
*4.1 Specimen of common stock certificate.
+5.1 Opinion of Sullivan & Cromwell, counsel to the Company.
9.1 Securityholders' Agreement, dated as of June 30, 1998, with the
investors in the June and July 1998 private placements.
10.1 JFAX.COM Incentive Compensation Bonus Plan.
+10.2 JFAX Communications, Inc. (JFAX.COM) 1997 Stock Option Plan.
10.3 Employment Agreement for Gary H. Hickox, dated September 2, 1998.
+10.3.1 Promissory Note issued by Gary H. Hickox to JFAX Communications,
Inc. on October 7, 1998, due October 7, 2001.
10.4 Employment Agreement for Dr. Anand Narasimhan, dated March 17, 1997.
+10.4.1 Amended and Restated Interest Only Note issued by Anand Narasimhan
to JFAX Communications, Inc. on September 17, 1997, due September
17, 1998.
10.5 Employment Agreement for Nehemia Zucker, dated March 21, 1997.
+10.5.1 Promissory Note issued by Nehemia Zucker to JFAX Communications,
Inc. on April 11, 1997, due March 31, 2001.
10.6 Consulting Agreement for Boardrush Media LLC, dated as of March 17,
1997.
10.7 Put Rights, for the benefit of the investors in the June and July
1998 private placements
10.8 Registration Rights Agreement, dated as of June 30, 1998, with the
investors in the June and July 1998 private placements.
10.9 Registration Rights Agreement, dated as of March 17, 1997, with
Orchard/JFax Investors, LLC, Boardrush LLC (Boardrush Media LLC),
Jaye Muller, John F. Rieley, Nehemia Zucker and Anand Narasimhan.
+10.9.1 Letter, dated as of June 30, 1998, to Boardrush LLC, Jens Muller,
John F. Rieley, Anand Narasimhan, and Nehemia Zucker from Richard S.
Ressler regarding the Registration Rights Agreement, dated as of
March 17, 1997, among JFAX Communications, Inc., Boardrush LLC, Jens
Muller, John F. Rieley, Anand Narasimhan, and Nehemia Zucker.
+10.10 Stock Option Agreement, dated as of January 24, 1997, by and among
JFAX Communications, Inc. and Michael P. Schulhof.
+10.11 Letter, dated as of June 30, 1998, to Michael P. Schulhof from
Richard S. Ressler regarding the Stock Option Agreement, dated as of
January 24, 1997, between JFAX Communications, Inc. and Michael P.
Schulhof.
+10.12 Purchase Agreement, dated as of July 2, 1998, relating to $5 million
of preferred stock and warrants.
+10.13 Consent to Amendment of Purchase Agreement, dated as of April 16,
1999.
+10.14 Form of warrant pursuant to such Purchase Agreement.
+10.15 Master Loan and Security Agreement, dated as of March 10, 1998, by
JFAX Communications, Inc. in favor of Transamerica Business Credit
Corporation.
+10.16 Promissory Note issued by JFAX Communications, Inc. to Transamerica
Business Credit Corporation on April 21, 1998 due May 1, 2001.
+10.17 Promissory Note issued by JFAX Communications, Inc. to Transamerica
Business Credit Corporation on December 22, 1998 due January 1,
2002.
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
+10.18 Investment Agreement among JFAX Communications, Inc., Jens Muller,
John F. Rieley and Boardrush LLC and Orchard/JFax Investors, L.L.C.
and Richard S. Ressler, dated as of March 14, 1997 and effective as
of March 17, 1997.
+10.19 Promissory Note issued by Boardrush LLC to JFAX Communications, Inc.
dated March 17, 1997 due March 17, 2004.
21.1 List of subsidiaries of the Company.
+23.1 Consent of KPMG LLP.
+23.2 Consent of Sullivan & Cromwell (included in 5.1 above).
24.1 Power of Attorney (included in Signature Page of the original
Registration Statement).
+27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment
+ Filed herewith
All other exhibits were previously filed
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted for directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) It will provide to the underwriters at the closing(s) specified in
the underwriting agreements certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on the 26th day of May, 1999.
JFAX.COM, Inc.
/s/ Richard S. Ressler
By: _________________________________
Richard S. Ressler
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on May 26, 1999:
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Richard S. Ressler Co-Chairman of the Board and
____________________________________ Chief Executive Officer
Richard S. Ressler (Principal Executive
Officer)
* Chief Financial and
____________________________________ Accounting Officer
Nehemia Zucker (Principal Financial and
Accounting Officer)
* Director
____________________________________
Jaye Muller
* Director
____________________________________
Zohar Loshitzer
* Director
____________________________________
John F. Rieley
* Director
____________________________________
Michael P. Schulhof
* Director
____________________________________
R. Scott Turicchi
* Director
____________________________________
Robert J. Cresci
*By: /s/ Richard S. Ressler
__________________________________
Richard S. Ressler
Attorney-in-fact
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
*1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation, as amended and restated.
3.2 By-laws, as amended and restated.
*4.1 Specimen of common stock certificate.
+5.1 Opinion of Sullivan & Cromwell, counsel to the Company.
9.1 Securityholders' Agreement, dated as of June 30, 1998, with the
investors in the June and July 1998 private placements.
10.1 JFAX.COM Incentive Compensation Bonus Plan.
+10.2 JFAX Communications, Inc. (JFAX.COM) 1997 Stock Option Plan.
10.3 Employment Agreement for Gary H. Hickox, dated September 2, 1998.
+10.3.1 Promissory Note issued by Gary H. Hickox to JFAX Communications, Inc.
on October 7, 1998, due October 7, 2001.
10.4 Employment Agreement for Dr. Anand Narasimhan, dated March 17, 1997.
+10.4.1 Amended and Restated Interest Only Note issued by Anand Narasimhan to
JFAX Communications, Inc. on September 17, 1997, due September 17,
1998.
10.5 Employment Agreement for Nehemia Zucker, dated March 21, 1997.
+10.5.1 Promissory Note issued by Nehemia Zucker to JFAX Communications, Inc.
on April 11, 1997, due March 31, 2001.
10.6 Consulting Agreement for Boardrush Media LLC, dated as of March 17,
1997.
10.7 Put Rights, for the benefit of the investors in the June and July 1998
private placements
10.8 Registration Rights Agreement, dated as of June 30, 1998, with the
investors in the June and July 1998 private placements.
10.9 Registration Rights Agreement, dated as of March 17, 1997, with
Orchard/JFax Investors, LLC, Boardrush LLC (Boardrush Media LLC), Jaye
Muller, John F. Rieley, Nehemia Zucker and Anand Narasimhan.
+10.9.1 Letter, dated as of June 30, 1998, to Boardrush LLC, Jens Muller, John
F. Rieley, Anand Narasimhan, and Nehemia Zucker from Richard S.
Ressler regarding the Registration Rights Agreement, dated as of
March 17, 1997, among JFAX Communications, Inc., Boardrush LLC, Jens
Muller, John F. Rieley, Anand Narasimhan, and Nehemia Zucker.
+10.10 Stock Option Agreement, dated as of January 24, 1997, by and among
JFAX Communications, Inc. and Michael P. Schulhof.
+10.11 Letter, dated as of June 30, 1998, to Michael P. Schulhof from Richard
S. Ressler regarding the Stock Option Agreement, dated as of January
24, 1997, between JFAX Communications, Inc. and Michael P. Schulhof.
+10.12 Purchase Agreement, dated as of July 2, 1998, relating to $5 million
of preferred stock and warrants.
+10.13 Consent to Amendment of Purchase Agreement, dated as of April 16,
1999.
+10.14 Form of warrant pursuant to such Purchase Agreement.
+10.15 Master Loan and Security Agreement, dated as of March 10, 1998, by
JFAX Communications, Inc. in favor of Transamerica Business Credit
Corporation.
+10.16 Promissory Note issued by JFAX Communications, Inc. to Transamerica
Business Credit Corporation on April 21, 1998 due May 1, 2001.
+10.17 Promissory Note issued by JFAX Communications, Inc. to Transamerica
Business Credit Corporation on December 22, 1998 due January 1, 2002.
+10.18 Investment Agreement among JFAX Communications, Inc., Jens Muller,
John F. Rieley and Boardrush LLC and Orchard/JFax Investors, L.L.C.
and Richard S. Ressler, dated as of March 14, 1997 and effective as of
March 17, 1997.
+10.19 Promissory Note issued by Boardrush LLC to JFAX Communications, Inc.
dated March 17, 1997 due March 17, 2004.
21.1 List of subsidiaries of the Company.
+23.1 Consent of KPMG LLP.
+23.2 Consent of Sullivan & Cromwell (included in 5.1 above).
24.1 Power of Attorney (included in Signature Page of the original
Registration Statement).
+27.1 Financial Data Schedule.
</TABLE>
- -------
* To be filed by amendment
+ Filed herewith
All other exhibits were previously filed
<PAGE>
Exhibit 5.1
May 25, 1999
JFAX.COM, Inc.,
10960 Wilshire Boulevard,
Suite 500,
Los Angeles, California 90024.
Dear Sirs:
In connection with the registration under the Securities Act of 1933
(the "Act") of 8,625,000 shares (the "Securities") of Common Stock, par value
$0.01 per share, of JFAX.COM, Inc., a Delaware corporation (the "Company"), we,
as your counsel, have examined such corporate records, certificates and other
documents, and such questions of law, as we have considered necessary or
appropriate for the purposes of this opinion. Upon the basis of such
examination, we advise you that, in our opinion, when the registration statement
relating to the Securities (the "Registration Statement") has become effective
under the Act, the terms of the sale of the Securities have been duly
established in conformity with the Company's certificate of incorporation, and
the Securities have been duly issued and
<PAGE>
JFAX.COM, Inc. -2-
sold as contemplated by the Registration Statement, the Securities will be
validly issued, fully paid and nonassessable.
The foregoing opinion is limited to the Federal laws of the United
States and the General Corporation Law of the State of Delaware, and we are
expressing no opinion as to the effect of the laws of any other jurisdiction.
We have relied as to certain matters on information obtained from
public officials, officers of the Company and other sources believed by us to be
responsible.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the heading "Validity of
Securities" in the Prospectus. In giving such consent, we do not thereby admit
that we are in the category of persons whose consent is required under Section 7
of the Act.
Very truly yours,
/s/ SULLIVAN & CROMWELL
<PAGE>
EXHIBIT 10.2
JFAX.COM, INC.
AMENDED AND RESTATED
1997 STOCK OPTION PLAN
----------------------
ARTICLE I
PURPOSES
--------
1.1. Purpose of Plan. The purpose of the JFAX Communications, Inc. (JFAX.COM)
----------------
1997 Stock Option Plan (the "Plan") are to advance the interests of JFAX.COM,
Inc.(the "Company") and its shareholders by providing significant incentives to
selected officers, employees, and consultants of the Company who contribute and
are expected to contribute to the success of the Company, and to enhance the
interest of such officers and employees in the Company's success and progress by
providing them with an opportunity to become shareholders of the Company.
Further, the Plan is designed to enhance the Company's ability to attract and
retain qualified employees necessary for the success and progress of the
Company.
ARTICLE
DEFINITIONS
-----------
2.1. Definitions. Certain terms used herein shall have the meaning below
------------
stated, subject to the provisions of Section 7.1 hereof.
(a) "Board" or "Board of Directors" means the Board of Directors of the
Company.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
(c) "Committee" means either (i) the Board of Directors or (ii) the
Compensation Committee of the Board of Directors or such other committee of
the Board as shall be appointed by the Board to administer the Plan pursuant
to Article VII hereof.
(d) "Common Stock" means, subject to the provisions of Section 9.3, the
authorized common stock of the Company, par value $.01 per share.
(e) "Company" means JFAX.COM, Inc.
(f) "Effective Date" means the date on which the Company's 1997 Stock
Option Plan is adopted by the Board or
<PAGE>
the date the Plan is approved by the stockholders of the Company, whichever
is earlier.
(g) "Employee" means (i) any individual who is a common-law employee of
the Company or of a Subsidiary, (ii) a member of the Board of Directors, or
(iii) any consultant or other persons to the extent permitted by the
instructions to Form S-8 under the Securities Act of 1933, as amended, who
performs services for the Company or a Subsidiary. Service as a member of the
Board of Directors or as a consultant shall be considered employment for all
purposes under the Plan except the third sentence of Section 4.1.
(h) "Fair Market Value" means, in respect of a share of Common Stock on
any date, the last reported sales price regular way on such date or, in case
no such reported sale takes place on such date, the last reported sales price
regular way on the day preceding such date on which a reported sale occurred,
in either case on the New York Stock Exchange or, if at the time the Common
Stock is not listed or admitted to trading on such Exchange, on the principal
national securities exchange on which the Common Stock is listed or admitted
to trading or, if at the time the Common Stock is not listed or admitted to
trading on any national securities exchange, in the National Association of
Securities Dealers Automated Quotations National Market System or, if at the
time the Common Stock is not listed or admitted to trading on any national
securities exchange or quoted on such National Market System, the average of
the closing bid and asked prices in the over-the-counter market as furnished
by any New York Stock Exchange member firm selected from time to time by the
Company for that purpose or, if the Common Stock is not traded over-the-
counter, as determined by the Committee using any reasonable valuation method.
(i) "Incentive Stock Option" means an Option to purchase Common Stock,
granted by the Company to an Employee pursuant to Section 5.1 hereof, which
meets the requirements of Section 422 of the Code.
(j) "Nonstatutory Stock Option" means and Option to purchase Common
Stock, granted by the Company to an Employee pursuant to Section 5.1 hereof,
which does not meet the requirements of Section 422 of the Code or which
provides, as of the time the Option is granted, that it will not be treated as
an Incentive Stock Option.
(k) "Option" means an Incentive Stock Option or a Nonstatutory Stock
Option.
(l) "Option Agreement" means an agreement between the Company and an
Optionee evidencing the terms of an Option
2
<PAGE>
Granted under the Plan.
(m) "Optionee" means an Employee to whom an Option has been granted
under the Plan.
(n) "Plan" means the JFAX.COM, Inc. 1997 Stock Option Plan, as set forth
herein and as from time to time amended.
(o) "Subsidiary" means a subsidiary of the Company within the meaning of
Section 424(f) of the Code.
ARTICLE III
EFFECTIVE DATE OF THE PLAN; RESERVATION OF SHARES
-------------------------------------------------
3.1. Effective Date. The Plan shall become effective as of the Effective
---------------
Date.
3.2. Shares Reserved Under Plan. The aggregate number of shares of Common
---------------------------
Stock which may be issued upon the exercise of Options granted under the Plan
shall not exceed 4,375,000 of the authorized shares of Common Stock on the
Effective Date, all or any part of which may be issued pursuant to Incentive
Stock Options or Nonstatutory Stock Options or any combination thereof. Shares
of Common Stock issued upon the exercise of Options granted under the Plan may
consist of either authorized but unissued shares or shares which have been
issued and which shall have been reacquired by the Company. The total number of
shares authorized under the Plan shall be subject to increase or decrease in
order to give effect to the provisions of Section 9.3 and to give effect to any
amendment adopted pursuant to Article VIII. If any Option granted under the
Plan shall expire, terminate or be cancelled for any reason without having been
exercised in full, the number of shares as to which such Option was not
exercised shall again be available for purposes of the Plan. The Company shall
at all times while the Plan is in effect reserve such number of shares of Common
Stock as will be sufficient to satisfy the requirements of the Plan.
ARTICLE IV
PARTICIPATION IN PLAN
---------------------
4.1. Eligibility. Options under the Plan may be granted to any key Employee
------------
of the Company or a Subsidiary who performs services for the Company or a
Subsidiary that the Committee deems to be of special importance to the growth
and success of the Company. The Committee shall determine those Employees to
whom Options shall be granted, the type of Option to be granted to each such
person, and, subject to Sections 3.2 hereof, the number of shares of Common
Stock subject to each such Option. Only
3
<PAGE>
individuals who are employed as common-law employees by the Company or a
Subsidiary shall be eligible for the grant of Incentive Stock Options.
4.2. Participation Not Guarantee of Employment or Retention. Nothing in this
-------------------------------------------------------
Plan or in any Option Agreement shall in any manner be construed to limit in any
way the right of the Company or any Subsidiary to terminate an Employee's
employment at any time, without regard to the effect of such termination on any
rights such Employee would otherwise have under this Plan, or give any right to
an Employee to remain employed by the Company or a Subsidiary thereof in any
particular position or at any particular rate of compensation.
ARTICLE V
GRANT AND EXERCISE OF OPTIONS
-----------------------------
5.1. Grant of Options. The Committee may from time to time in its discretion
-----------------
grant Incentive Stock Options and/or Nonstatutory Stock Options to Employees at
any time after the Effective Date. All Options under the Plan shall be granted
within ten (10) years from the date the Plan is adopted by the Board or the date
the Plan is approved by the stockholders of the Company, whichever is earlier.
5.2. Option Terms. Options granted under the Plan shall be subject to the
-------------
following requirements:
(a) Option Price. The exercise price of each Incentive Stock Option
shall not be less than the higher of the par value or 100% of the Fair Market
Value of the shares of Common Stock subject to the Option on the date the
Option is granted. The exercise price of each Nonstatutory Stock Option shall
be the amount determined by the Committee as set forth in the applicable
Option Agreement, provided that such amount shall not be less than the higher
of the par value or 85% of the Fair Market Value of the shares of Common Stock
subject to the Option on the date the Option is granted, provided further that
options may only be granted at less than 100% of the Fair Market Value of the
shares of Common Stock subject to the Option on the date of grant if the
discount is expressly in lieu of a reasonable amount of salary or cash bonus,
as determined by the Board of Directors or the Committee in its sole
discretion. The exercise price of an Option may be subject to adjustment
pursuant to Section 9.3 hereof.
(b) Term of Option. The term during which an Option is exercisable
shall be that period determined by the Committee as set forth in the
applicable Option Agreement, provided that no Option shall have a term that
exceeds a period of 10 years from the date of its grant.
4
<PAGE>
(c) Nontransferability of Option. No Option granted under the Plan
shall be transferable by the Optionee otherwise than by will or the laws of
descent and distribution, and each such Option shall be exercisable during the
Optionee's lifetime only by him. No transfer of an Option by an Optionee by
will or by the laws of descent and distribution shall be effective to bind the
Company unless the Company shall have been furnished with written notice
thereof and a copy of the will and/or such other evidence as the Committee may
determine necessary to establish the validity of the transfer.
(d) Exercise of Option. Unless the Option Agreement pursuant to which
an Option is granted provides otherwise, each Option shall become exercisable,
on a cumulative basis, with respect to 33% of the aggregate number of the
shares of Common Stock covered thereby on the first anniversary of the date of
grant and with respect to an additional 33% of the shares of Common Stock
covered thereby on each of the next two succeeding anniversaries of the date
of grant; provided, however, the Committee may establish a different vesting
--------
schedule for any optionee or group of optionees. Any portion of an Option
which has become exercisable shall remain exercisable until it is exercised in
full or terminates pursuant to the terms of the Plan or the Option Agreement
pursuant to which it is granted.
(e) Acceleration of Exercise on Change of Control. Notwithstanding the
provisions of paragraph (d) of this Section or any other restrictions limiting
the number of shares of Common Stock as to which an Option may be exercised,
each Option shall become immediately exercisable in full upon and
simultaneously with any "Change of Control" of the Company unless the Board
determines that the optionee has been offered substantially identical
replacement options and a comparable position at any acquiring company. For
purposes of this Plan, a "Change of Control" shall be deemed to have occurred
if:
(i) any "person," as such term is used in Sections 13(d) and 14(d)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act")
(other than the Company, any employee benefit plan sponsored by the
Company, any trustee or other fiduciary holding securities under an
employee benefit plan of the Company, or any corporation owned, directly
or indirectly, by the stockholders of the Company in substantially the
same proportions as their ownership of stock of the Company), is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the
5
<PAGE>
Company representing 50% or more of the combined voting power of the
Company's then outstanding securities;
(ii) during any period of two consecutive years individuals who at
the beginning of such period constitute the Board, and any new director
(other than a director designated by a person who has entered into an
agreement with the Company to effect a transaction described in clause
(i), (iii) or (iv) of this Section) whose election by the Board or
nomination for election by the Company's stockholders was approved by a
vote of at least a majority of the directors then still in office who
either were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason
to constitute at least a majority thereof;
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a
merger or consolidation which would result in the voting securities of
the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than 50% of the combined voting
power of the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation; or
(iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by
the Company of all or substantially all of the Company's assets. For the
purposes of this subsection (iv), "substantially all" of the Company's
assets shall mean assets for which the price or consideration upon sale
or disposition equals or exceeds seventy-five percent (75%) or more of
the fair market value of the Company.
(f) Incentive Stock Options Granted to Ten Percent Shareholders. No Incentive
Stock Options shall be granted to any Employee who owns, directly or indirectly
within the mean of Section 424(d) of the Code, stock possessing more than 10% of
the total combined voting power of all classes of stock of the Company or any
Subsidiary, unless at the time the Incentive Stock Option is granted, the
exercise price of the Incentive Stock Option is at least 110% of the Fair Market
Value of the Common Stock subject to such Incentive Stock Option and such
Incentive Stock Option, by its terms, is not exercisable after the expiration of
five years from the date such Incentive Stock Option is granted.
(g) Limitation on Incentive Stock Options. To the extent that the aggregate
Fair Market Value of the Common Stock with
6
<PAGE>
respect to which Incentive Stock Options are exercisable for the first time by
an Optionee during any calendar year (under all plans of the Company and its
parent and subsidiary corporations) exceeds $100,000, such Options shall be
treated as Nonstatutory Stock Options. For this purpose, Options shall be taken
into account in the order in which they were granted and the Fair Market Value
of the Common Stock shall be determined as of the time the Option with respect
to such Common Stock is granted.
5.3. Payment of Exercise Price and Delivery of Shares.
-------------------------------------------------
(a) Notice and Payment for Shares. Each Option shall be exercised by delivery
of a written notice to the Company in such form as the Committee shall approve
stating the number of the whole shares of Common Stock as to which the Option is
being exercised and accompanied by payment therefor. No Option shall be deemed
exercised in the event that payment therefor is not received and shares of
Common Stock shall not be issued upon the exercise of an Option unless the
exercise price is paid in full. Payment for shares of Common Stock purchased
upon the exercise of an Option shall be made by (i) cash, (ii) certified check
payable to the order of the Company, (iii) outstanding shares of Common Stock
duly endorsed to the Company (which shares of Common Stock shall be valued at
their Fair Market Value as of the day preceding the date of such exercise), (iv)
any combination of the foregoing, or (v) such other method of payment as may be
provided in the applicable Option Agreement.
(b) Rights of Optionee in Stock. Neither any Optionee nor the legal
representatives, heirs, legatees or distributees of any Optionee, shall be
deemed to be the holder of, or to have any of the rights of a holder with
respect to, any shares of Common Stock issuable upon exercise of an Option
granted hereunder unless and until such shares are issued to him or them and
such person or persons have received a certificate or certificates therefor.
Upon the issuance and receipt of such certificate or certificates, such Optionee
or the legal representatives, heirs, legatees or distributees of such Optionee
shall have absolute ownership of the shares of Common Stock evidenced thereby,
including the right to vote such shares, to the same extent as any other owner
of shares of Common Stock, and to receive dividends thereon, subject, however,
to the terms, conditions and restrictions of this Plan.
ARTICLE VI
TERMINATION AND DEATH
---------------------
6.1. Termination Other Than by Death or for Cause. If an Optionee's position
---------------------------------------------
as an Employee of the Company or a Subsidiary terminates for any reason other
than death or for Cause (as defined in Section 6.2) he may, unless the
applicable Option Agreement provides otherwise, exercise an Option previously
7
<PAGE>
granted and vested within three months after the date of such termination, but
in no event later than the date on which the Option would have expired in
accordance with its terms. To the extent the Option is not so exercised, it
shall expire at the end of such three-month period.
6.2. Termination for Cause. If an Optionee's position as an Employee of the
----------------------
Company or a Subsidiary is terminated for Cause, any Option theretofore granted
to him shall expire and cease to be exercisable on the date notice of such
termination is delivered to the Optionee. "Cause" shall mean (a) the willful
and continued failure by an Optionee to substantially perform his duties with
the Company (other than any such failure resulting from his incapacity due to
physical or mental illness), after a written demand for substantial performance
is delivered to the Optionee by the Board, which demand specifically identifies
the manner in which the Board believes that the Optionee has not substantially
performed his duties, or (b) the willful engaging by the Optionee in conduct
which is demonstrably and materially injurious to the Company, monetarily or
otherwise. For purposes of this Section 6.2, no act, or failure to act, shall
be deemed "willful" unless done, or omitted to be done, not in good faith and
without reasonable belief that such action or omission was in the best interest
of the Company.
6.3. Death. If an Optionee dies (i) while he is an Employee of the Company or
------
a Subsidiary or (ii) during the three-month period after the termination of his
position as an Employee of the Company or a Subsidiary, and at the time of his
death the Optionee was entitled to exercise an Option theretofore granted to
him, such Option shall, unless the applicable Option Agreement provides
otherwise, expire one year after the date of his death, but in no event later
than the date on which the Option would have expired if the Optionee had lived.
During such one-year period the Option may be exercised by the Optionee's
executor or administrator or by any person or persons who shall have acquired
the Option directly from the Optionee by bequest or inheritance, but only to the
extent that the Optionee was entitled to exercise the Option at the date of his
death and, to the extent the Option is not so exercised, it shall expire at the
end of such one-year period.
ARTICLE VII
ADMINISTRATION OF PLAN
----------------------
7.1. Administration. The Plan shall be administered by the Compensation
---------------
Committee of the Board of Directors or such other committee as may be appointed
by the Board of Directors of the Company, which Committee shall consist of not
less than two members, all of whom are members of the Board of Directors. A
majority of the Committee shall constitute a quorum thereof and the actions of a
majority of the Committee at a meeting at which a quorum is present, or actions
unanimously approved in writing by
8
<PAGE>
all members of the Committee, shall be the actions of the Committee. Vacancies
occurring on the Committee shall be filled by the Board. The Committee shall
have full and final authority (i) to interpret the Plan and each of the Option
Agreements, (ii) to prescribe, amend and rescind rules and regulations, if any,
relating to the Plan, (iii) to make all determinations necessary or advisable
for the administration of the Plan and (iv) to correct any defect, supply any
omission and reconcile any inconsistency in the Plan and any Option Agreement.
The Committee's determination in all matters referred to herein shall be
conclusive and binding for all purposes and upon all persons including, but
without limitation, the Company, the shareholders of the Company, the Committee,
and each of the members thereof, Employees and their respective successors in
interest.
7.2. Liability. No member of the Committee shall be liable for anything done
----------
or omitted to be done by him or by any other member of the Committee in
connection with the Plan, except for his own willful misconduct or gross
negligence. The Committee shall have power to engage outside consultants,
auditors or other professional help to assist in the fulfillment of the
Committee's duties under the Plan at the Company's expense.
7.3. Determinations. In making its determinations concerning the key
---------------
Employees who shall receive Options as well as the number of shares to be
covered thereby and the time or times at which they shall be granted, the
Committee shall take into account the nature of the services rendered by such
key Employees, their past, present and potential contribution to the Company's
success and such other factors as the Committee may deem relevant. The
Committee shall determine the form of Option Agreements under the Plan and the
terms and conditions to be included therein, provided such terms and conditions
are not inconsistent with the terms of the Plan. The Committee may waive any
provisions of any Option Agreement, provided such waiver is not inconsistent
with the terms of the Plan as then in effect. The Committee's determinations
under the Plan need not be uniform and may be made by it selectively among
persons who receive, or are eligible to receive, Options under the Plan, whether
or not such persons are similarly situated.
ARTICLE VIII
AMENDMENT AND TERMINATION OF PLAN
---------------------------------
8.1. Amendment of Plan. (a) Generally. The Board of Directors may amend the
------------------
Plan at any time and from time to time. Rights and obligations under any Option
granted before amendment of the Plan shall not be materially altered, or
impaired adversely, by such amendment, except with consent of the Optionee. An
amendment of the Plan shall be subject to the approval of the Company's
stockholders only to the extent required by applicable laws, regulations or
rules.
9
<PAGE>
(b) Amendments Relating to Incentive Stock Options. To the extent
applicable, the Plan is intended to permit the issuance of Incentive Stock
Options to Employees in accordance with the provisions of Section 422 of the
Code. Subject to paragraph 8.1(a) above, the Plan and Option Agreements may be
modified or amended at any time, both prospectively and retroactively, and in a
manner that may affect Incentive Stock Options previously granted, if such
amendment or modification is necessary for the Plan and Incentive Stock Options
granted hereunder to qualify under said provisions of the Code.
8.2. Termination. The Board may at any time terminate the Plan as of any date
------------
specified in a resolution adopted by the Board. If not earlier terminated, the
Plan shall terminate on November 11, 2007. No Options may be granted after the
Plan has terminated, but the Committee shall continue to supervise the
administration of Options previously granted.
ARTICLE IX
MISCELLANEOUS PROVISIONS
------------------------
9.1. Restrictions upon Grant of Options. If the listing upon any stock
-----------------------------------
exchange or the registration or qualification under any federal or state law of
any shares of Common Stock to be issued on the exercise of Options granted under
this Plan (whether to permit the grant of Options or the resale or other
disposition of any such shares of Common Stock by or on behalf of Optionees
receiving such shares) should be or become necessary or desirable, the Board in
its sole discretion may determine that delivery of the certificates for such
shares of Common Stock shall not be made until such listing, registration or
qualification shall have been completed. The Company agrees that it will use
its best efforts to effect any such listing, registration or qualification,
provided, however, that the Company shall not be required to use its best
efforts to effect such registration under the Securities Act of 1933 other than
on Form S-8 or such other forms as may be in effect from time to time calling
for information comparable to that presently required to be furnished under Form
S-8.
9.2. Restrictions upon Resale of Unregistered Stock. Each Optionee shall, if
-----------------------------------------------
the Company deems it advisable, represent and agree in writing (i) that any
shares of Common Stock acquired by such Optionee pursuant to this Plan will not
be sold except pursuant to an effective registration statement under the
Securities Act of 1933 or pursuant to an exemption from registration under said
Act, (ii) that such Optionee is acquiring such shares of Common Stock for his
own account and not with a view to the distribution thereof, and (iii) to such
other customary matters as the Company may request. In such case, no shares of
Common Stock shall be issued to such Optionee unless
10
<PAGE>
such Optionee provides such representations and agreements and the Company is
reasonably satisfied that such representations and agreements are correct.
9.3. Adjustments.
------------
(a) General. In the event of a subdivision of the outstanding Common Stock,
a declaration of a dividend payable in shares of Common Stock, a declaration of
a dividend payable in a form other than shares in an amount that has a material
effect on the value of shares of Common Stock, a combination or consolidation of
the outstanding Common Stock into a lesser number of shares of Common Stock, a
recapitalization, a reclassification or a similar occurrence, the Committee
shall make appropriate adjustments in one or more of (i) the number of shares of
Common Stock available for future grants of Options under Section 3.2, (ii) the
number of shares of Common Stock covered by each outstanding Option, or (iii)
the exercise price of each outstanding Option.
(b) Reorganizations. In the event that the Company is a party to a merger
or reorganization, outstanding Options shall be subject to the agreement of
merger or reorganization.
(c) Reservation of Rights. Except as provided in this Section 9.3, an
Optionee shall have no rights by reason of (i) any subdivision or consolidation
of shares of stock of any class, (ii) the payment of any dividend, or (iii) any
other increase or decrease in the number of shares of stock of any class. Any
issue by the Company of shares of stock of any class, or securities convertible
into shares of stock of any class, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number or exercise price of shares of
Common Stock subject to an Option. The grant of an Option Shares pursuant to the
Plan shall not affect in anyway the right or power of the Company to make
adjustments, reclassifications, reorganizations or changes of its capital or
business structure, to merge or consolidate or to dissolve, liquidate, sell or
transfer all or any part of its business or assets.
9.4. Withholding of Taxes. (a) Each Optionee who exercises a Nonstatutory
---------------------
Stock Option shall agree that no later than the date of such exercise or receipt
of shares of Common Stock pursuant thereto he will pay to the Company, or make
arrangements satisfactory to the Committee regarding payment of, any Federal,
state or local taxes of any kind required by law to be withheld with respect to
the transfer to him of such shares of Common Stock.
(b) The applicable Option Agreement may provide that an Optionee may satisfy,
in whole or in part, the requirements of paragraph (a):
11
<PAGE>
(i) by delivery of shares of Common Stock owned by the Optionee for at
least six months (or such shorter or longer period as the Committee may
approve) having a Fair Market Value (determined as of the date of such
delivery) equal to all or part of the amount to be so withheld, or
(ii) by electing to have the Company withhold the requisite number of
shares from shares otherwise deliverable pursuant to the exercise of the
Option giving rise to the tax withholding obligation provided, however, that
(A) the Optionee's election and the withholding pursuant thereto
take effect during the period beginning on the third business day
following the date of release for publication of the quarterly and annual
summary statements of the Company's sales and earnings and ending on the
twelfth business day following such date, and six months have elapsed
since the date the Option was granted, or
(B) such election was irrevocably made by the Optionee and filed
with the Committee in writing at least six months in advance of the date
on which such withholding occurs.
The Committee may require, as a condition of accepting any such delivery of
Common Stock or any such election by the Optionee, that the Optionee furnish to
the Company an opinion of counsel to the effect that such delivery or election
will not result in the Optionee incurring any liability under Section 16(b) of
the Securities Exchange Act of 1934, as amended.
9.5. Use of Proceeds. The proceeds from the sale of Common Stock pursuant to
----------------
Options granted under the Plan shall constitute general funds of the Company and
may be used for such corporate purposes as the Company may determine.
9.6. Substitution of Options. (a) The Committee may, with the consent of the
------------------------
holder of any Option granted under the Plan, cancel such Option and grant a new
Option in substitution therefor, provided that the Option as so substituted
shall satisfy all of the requirements of the Plan as of the date such new Option
is granted.
(b) Options may be granted under this Plan in substitution for options held by
individuals who are employees of another corporation and who become Employees of
the Company or any Subsidiary of the Company eligible to receive Options
pursuant to the Plan as a result of a merger, consolidation, reorganization or
similar event. The terms and conditions of any Options so granted may vary from
those set forth in the Plan to the extent deemed appropriate by the Committee in
order to conform the provisions of Options granted pursuant to the Plan to the
provisions of the
12
<PAGE>
options in substitution for which they are granted.
9.7. Notices. Any notice required or permitted hereunder shall be
--------
sufficiently given only if sent by registered or certified mail, return receipt
requested, postage prepaid, addressed to the Company at its principal place of
business, and to the Optionee at the address on file with the Company at the
time of grant hereunder, or to such other address as either party may hereafter
designate in writing by notice similarly given by one party to the other.
9.8. Governing Law. The Plan and all determinations made and actions taken
--------------
hereunder, to the extent not otherwise governed by the Code or the laws of the
Untied States of America, shall be governed by the laws of the State of
California and construed accordingly.
13
<PAGE>
EXHIBIT 10.3.1
PROMISSORY NOTE
---------------
U.S. $99,000.00 October 7, 1998
W I T N E S S E T H:
- - - - - - - - - -
FOR VALUE RECEIVED, GARY H. HICKOX, an individual whose business address is
10960 Wilshire Blvd., Fifth Floor, Los Angeles, California 90024 ("Borrower"),
--------
hereby promises to pay JFAX COMMUNICATIONS, INC., a Delaware corporation having
a place of business at 10960 Wilshire Blvd., Fifth Floor, Los Angeles,
California 90024 ("Lender"), or any subsequent assignee of this Note
------
("Lender"), the principal sum of Ninety-nine Thousand Dollars ($99,000.00), with
------
interest on the unpaid balance of such amount from the date hereof until repaid,
at the rate of interest specified herein. This Note evidences Borrower's
obligation to repay a loan (the "Loan") made by Lender to Borrower in the
----
principal amount hereof on the date hereof.
All principal and accrued but unpaid interest thereon shall be due and payable
to Lender on October 7, 2001 (the "Maturity Date"). The principal of the Loan
-------------
shall bear interest at a rate equal to four and one-quarter percent (4.25%) per
annum, and all interest on the principal balance hereof shall be due and payable
in arrears on the Maturity Date. In the case of partial years, interest shall
be computed at the above rate on the basis of the actual number of days during
which the principal balance is outstanding, dividing by 360, which shall, for
interest computation purposes, be considered one year.
Borrower agrees that this Note, or any payment hereunder, may be extended from
time to time by the holder hereof without notice to or consent of Borrower, and
Borrower hereby consents to the acceptance of the holder hereof of any security
for this Note or the release by the holder hereof of any such security, without
any need for any consent by or notice to, and without affecting the liability
of, Borrower. Upon any extension of the maturity date of this Note, or any
additions to the principal amount of this Note (other than on account of the
accrual of interest), Borrower shall execute and deliver to Lender either a
restated Note (setting forth the applicable provisions of such extension or
addition) or an appropriate addendum to this Note. No extension of time for the
payment of this Note made by agreement by the holder hereof with any person now
or hereafter liable for the payment of this Note shall affect the original
liability under this Note of Borrower, whether or not Borrower is a party to
such agreement.
Borrower hereby waives diligence, presentment, protest, and demand, and also
notice of dishonor, protest, demand, and
<PAGE>
nonpayment, and all other demands and notices in connection with the delivery,
acceptance, performance, or enforcement of this Note.
This Note may be prepaid at any time, in whole or in part.
IN WITNESS WHEREOF, Borrower has executed this instrument as of the date first
above written.
/s/ Gary H. Hickox
------------------------------
GARY H. HICKOX
2
<PAGE>
EXHIBIT 10.4.1
Amended and Restated Interest Only Note
$50,000 Los Angeles, California October 16, 1998
Anand Narasimhan ("Borrower"), for value received, hereby promises to pay to
JFAX Communications, Inc. ("JFAX"), the principal sum of $50,000 on September
17, 1999 and to pay interest thereon from September 17, 1997 payable monthly on
the last business day of each month, commencing in October, 1997, at a rate of
8% per annum. Interest shall be computed on the basis of a 360 day year of
twelve 30 day months.
The note is a senior obligation of the Borrower secured by Borrowers 120,000
shares of JFAX common stock outstanding as of the date of this note.
At any time, the privilege is reserved to pay more than the sum due. Each
payment shall be credited first on the interest due, and the remainder on the
principal sum. Should default be made in the payment of principal or interest
when due or in the performance or observance when due of any term, covenant or
condition of the stock options securing this note, then, at the option of the
holder hereof and without notice or demand, the entire balance of principal and
accrued interest then remaining unpaid shall become immediately due and payable
and thereafter bear interest, until paid in full, at the rate of 8% per annum,
but not in excess of the maximum rate allowed by law to the holder hereof.
Should suit be commenced to collect this note or any portion thereof, such sum
as the Court may deem reasonable shall be added hereto as attorney's fees.
Principal and interest payable in lawful money of the United States of America.
Anand Narasimhan
/s/ Anand Narasimhan
_________________________
<PAGE>
Exhibit 10.5.1
THIS NOTE IS SUBJECT TO RESTRICTIONS ON TRANSFER AS SET FORTH ON THE REVERSE.
PROMISSORY NOTE
ISSUED BY
MR. NEHEMIA ZUCKER
6.32% Secured Non-Recourse Note due 2001
No. 1 $100,000
Mr. Nehemia Zucker, an individual ("Maker"), for value received,
hereby promises to pay to JFAX Communications, Inc., or registered assigns
("Holder"), the principal sum of $100,000 on March 31, 2001, together with
additions to such original principal amount as specified below. The Maker shall
also be responsible for interest on the unpaid principal of this Note, from
April 11, 1997, provided that interest shall not be paid periodically, but
instead shall be accrued and added to principal on a semi-annual compounding
basis, on the last day of March and September each year, commencing in September
1997, and at the date the principal is to be paid, at the rate of 6.32% per
annum. Interest shall be computed on the basis of a 360-day year of twelve 30-
day months. This Note may be prepaid by the Maker at any time prior to
maturity, at the principal amount hereof, subject to increase of such principal
amount as referred to herein.
This Note is issued pursuant to the Employment Agreement, dated as of
March 21, 1997, between Mr. Zucker (as Employee) and JFAX Communications, Inc.
(as the Company) (the "Employment Agreement") and is subject to the provisions
thereof.
The indebtedness evidenced by this Note is, to the extent provided in
the Employment Agreement, subject to the provisions stating that this Note is a
non-recourse obligation of the Maker, with recourse solely against shares to be
issued upon exercise of a certain stock option granted to the Maker, as provided
in Paragraph 7 of the Employment Agreement and as described more fully below,
and provisions permitting an extension of the maturity date of this Note in
certain circumstances, or additions to the principal amount of this Note, both
as provided in Paragraph 7 of the Employment Agreement. The Holder of this
Note, by accepting the same, agrees to and shall be bound by such provisions.
As provided in the Employment Agreement, the indebtedness represented
by this Note shall be recourse only against shares to be issued upon exercise of
a stock option granted to the Maker for forty shares of the common stock of JFAX
Communications, Inc., exercisable at $1 per share. In
<PAGE>
case arrangements mutually satisfactory to the Maker and the Holder are not made
for the payment of this Note at the maturity date hereof (subject to extension
as mentioned above), or at such earlier date as the Maker wishes to exercise
such option, then the Holder shall be entitled to cancel such option and the
Maker agrees that he (and any of his successor(s) in interest) shall not be
entitled to exercise the same and shall not attempt to exercise the same. In
order to effectuate this provision, it is agreed by the Maker and the Holder,
that the Holder will not issue shares issuable upon exercise of the Stock Option
Agreement evidencing such stock option until such time as this Note is paid, or
other arrangements mutually acceptable to the Maker and the Holder are agreed
to. The Maker shall in no event be entitled to transfer such option except by
will or intestate distribution, and these provisions with respect to such option
and this Note shall be binding on any such successor(s) to the Maker. Upon any
extension of the maturity date of this Note, or any additions to the principal
amount of this Note (other than on account of the accrual of interest), the
Maker shall execute and deliver to the Holder either a replacement Note (setting
forth the applicable provisions of such extension or addition) or an appropriate
addendum to this Note.
The undersigned Maker hereby waives presentment, demand, notice of
dishonor, protest and all other demands and notices in connection with the
delivery, acceptance, performance and enforcement of this Note.
IN WITNESS WHEREOF, the Maker has caused this Note to be duly executed.
Dated: April 11, 1997
/s/ Nehemia Zucker
---------------------------------------------
Nehemia Zucker
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED EXCEPT IN ACCORDANCE THEREWITH.
THE HOLDER OF THIS NOTE SHALL NOT BE ENTITLED TO TRANSFER IT WITHOUT THE PRIOR
WRITTEN CONSENT OF THE MAKER. HOWEVER, THE MAKER AGREES THAT HE WILL NOT
UNREASONABLY WITHHOLD HIS CONSENT IN THE CASE OF ANY TRANSFER IN CONNECTION WITH
ANY MERGER, CONSOLIDATION, OR SALE OF ALL OR SUBSTANTIALLY ALL ASSETS BY THE
HOLDER, OR OTHER SIMILAR CORPORATE RESTRUCTURING TRANSACTION.
- 2 -
<PAGE>
EXHIBIT 10.9.1
June 30, 1998
John F. Rieley Orchard/JFAX Investors, L.L.C.
Jens Muller 10960 Wilshire Blvd, Suite 500
Boardrush LLC Suite 500
225 Lafayette Street, # 306 Los Angeles, California 90024
New York, New York 10012 Attn: Richard S. Ressler
Anand Narasimhan Nehemia Zucker
10960 Wilshire Blvd. 10960 Wilshire Blvd.
Suite 500 Suite 500
Los Angeles, California 90024 Los Angeles, California 90024
Re: Registration Rights Agreement, dated as of March 17, 1997 (the
"Boardrush Agreement"), among JFAX Communications, Inc. ("JFAX"),
Boardrush LLC, Jens Muller, John F. Rieley, Anand Narasimhan, and
Nehemia Zucker
Dear Sirs:
Reference is hereby made to the Boardrush Agreement for the definition of
certain capitalized terms used but not defined herein. This letter will serve to
clarify the following in connection with the Boardrush Agreement and a certain
Registration Rights Agreement, dated as of June 30, 1998 (the "Investors
Agreement"), among and certain investors ("Investors") named therein:
1. If, in the event of a registration by JFAX demanded by one or more
Investors pursuant to Section 2.1 of the Investors Agreement (with
respect to which any Holder or Holders requests to be included pursuant
to Section 2(b) of the Boardrush Agreement), the managing underwriter
shall advise JFAX that, in its opinion, the number of securities
requested to be included in such registration exceeds the number which
can be sold in such offering within a price range
<PAGE>
acceptable to the requesting Investors, the number of securities that
are otherwise entitled to be included in the registration shall be
allocated in the following manner: (i) all securities other than the
securities of the requesting Investors (including the Common Stock held
by any Holder) shall be reduced on a pro rata basis (based on the
number of securities requested to be included in such registration) and
(ii) if, after the exclusion of all such securities (if necessary),
further reductions are still required, securities of the requesting
Investors shall be reduced on a pro rata basis (based on the number of
securities requested to be included in such registration).
2. If, in the event of a registration by JFAX pursuant to Section 2.3 of
the Investors Agreement (with respect to which any Holder or Holders
requests to be included pursuant to Sections 2(a) or 2(b) of the
Boardrush Agreement), the managing underwriter shall advise JFAX that
marketing considerations require a limitation on the number of
securities that can be included in such registration, then JFAX may
include in such registration all securities proposed to be sold by JFAX
for its own account or by any applicable person exercising demand
registration rights, or the maximum amount that the underwriter
considers saleable, and such limitation on any remaining securities
that may, in the opinion of the underwriter, be sold will be imposed on
all securities (including securities held by any Investor and the
Common Stock held by any Holder) on a pro rata basis (based on the
number of securities requested to be included in such registration).
To the extent the provisions of this letter are contrary to the provisions
of the Boardrush Agreement, the provisions of this letter shall govern and this
letter shall operate as an amendment to the Boardrush Agreement. Except as
otherwise expressly modified herein, the Boardrush Agreement shall continue in
full force and effect.
Very truly yours,
JFAX COMMUNICATIONS, INC.
By:
---------------------
Richard S. Ressler
President
2
<PAGE>
ACCEPTED AND AGREED:
ORCHARD/JFAX INVESTORS, L.L.C.
By: /s/ Richard S. Ressler
------------------------
Richard S. Ressler
Manager Dated: June 30, 1998
-------
BOARDRUSH L.L.C.
By: /s/ Jens Muller
-------------------
Jens Muller
Manager Dated: June 30, 1998
-------
/s/ Jens Muller
- -----------------------------
JENS MULLER Dated: June 30, 1998
-------
/s/ John F. Rieley
- --------------------------
JOHN F. RIELEY Dated: June 30, 1998
-------
/s/ N. Zucker
- -----------------------------
NEHEMIA ZUCKER Dated: June 30, 1998
-------
/s/ Anand Narasimhan
- --------------------------
ANAND NARASIMHAN Dated: June 30, 1998
-------
3
<PAGE>
EXHIBIT 10.10
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (this "Agreement") made as of the 24th day
of January, 1997, by and among JFAX Communications, Inc., a Delaware corporation
(the "Company"), Michael P. Schulhof (the "Optionee"); and, for purposes of
Section 8 hereof only, Jens Muller and John F. Rieley (each a "Shareholder" and
together, the "Majority Shareholder"; the Company, the Optionee and the Majority
Shareholder hereinafter collectively the "Parties");
W I T N E S S E T H:
- - - - - - - - - --
WHEREAS, the Company and the Optionee have entered into an Engagement
Agreement, dated January 24, 1997, a copy of which is attached hereto as Exhibit
A (the "Engagement Agreement"), pursuant to which the Optionee shall provide
consulting services to the Company on a non-exclusive basis for a two-year
period commencing from the date of such Engagement Agreement;
WHEREAS, as compensation for the performance of the Optionee's duties
under the Engagement Agreement, the Company has agreed to grant the Optionee an
option to purchase shares of common stock of the Company upon the terms and
conditions set forth herein;
NOW, THEREFORE, for good and valuable consideration, the receipt of
which is hereby acknowledged, the Parties hereby agree as follows:
SECTION 1. Option to Purchase. The Company hereby grants to the
--------- ------------------
Optionee an Option (the "Option"), exercisable in whole or in part, at the sole
discretion of the Optionee, on the terms and subject to the conditions set forth
in this Agreement, to purchase (a) eighty-four (84) shares of the common stock
of the Company ("A Option Shares") at an exercise price per share of $3,500 and
(b) eighty-four (84) shares of the common stock of the Company ("B Option
Shares") at an exercise price per share of $9,000, from the Company.
SECTION 2. Exercise of Option.
--------- ------------------
(a) Exercise of Option for A Option Shares. The Optionee may exercise
--------------------------------------
the option with respect to the A Option Shares, by notice provided to the
Company in writing, in part or in whole at any time or from time to time during
the period from the date hereof until the date which is ten years from the date
hereof (the "A Option Exercise Period"), which notice shall specify (a) the
number of A Option Shares to be purchased, (b) the aggregate purchase price
therefor, (c) the date (the "Option Payment Date") upon which payment of such
purchase price shall be made, which date
<PAGE>
shall be no earlier than fifteen (15) days following the receipt by the Company
of such notice, and (d) the name in which the A Option Shares being purchased
shall be registered.
(b) Exercise of Option for B Option Shares. The Option with respect
--------------------------------------
to the B Option Shares shall vest in equal monthly installments over an eighteen
(18) month period (the "B Option Vesting Period") on the last calendar day of
each month commencing with the seventh (7th) month following the date of this
Agreement. The Optionee may exercise the Option with respect to the B Option
Shares, to the extent vested, by notice provided to the Company in writing, in
part or in whole at any time or from time to time during the period from the
initial vesting of the Option with respect to the B Option Shares until the date
which is ten years from the date hereof (the "B Option Exercise Period"), which
notice shall specify (a) the number of B Option Shares to be purchased, (b) the
aggregate purchase price therefor, (c) the Option Payment Date upon which
payment of such purchase price shall be made, which date shall be no earlier
than fifteen (15) days following the receipt by the Company of such notice, and
(d) the name in which the B Option Shares being purchased shall be registered.
(c) Notwithstanding the foregoing, in the event of an initial public
offering by the Company of the common stock of the Company at any time during
the B Option Vesting Period, the Option with respect to the B Option Shares
shall fully vest and the Optionee shall have the right to purchase all of the B
Option Shares immediately prior to the occurrence of such initial public
offering or at any time thereafter.
SECTION 3. Confirmation. Within five (5) days of receipt of notice
--------- ------------
pursuant to Section 2(a) or (b) hereof, the Company shall provide to the
Optionee written confirmation of the purchase of the specified A Option Shares
or B Option Shares, as the case may be, pursuant to the Option. All notices
provided for in this Agreement shall be deemed given when received, receipt
thereof being evidenced by confirmation of delivery.
SECTION 4. Payment. The Optionee shall make payment of the purchase
--------- -------
price payable upon exercise of all or any portion of the Option to the Company
(i) by certified check payable to the Company on the Option Payment Date
therefor or (ii) by wire transfer to the account of the Company at PNC Bank,
4323 Governor Printz Blvd., Wilmington, Delaware 19802, Account No. 5600034872,
Routing No. 031100089, for value as of the Option Payment Date, or such other
account as shall be specified by the Company to the Optionee.
SECTION 5. Delivery of Shares. Promptly upon receipt of the purchase
--------- ------------------
price for the A Option Shares or B Option Shares, as the case may be, the
Company shall deliver to the Optionee a duly and validly issued certificate
representing the relevant
-2-
<PAGE>
number of such A Option Shares or B Option Shares, registered in the name of the
Optionee or the Optionee's nominee.
SECTION 6. Effect of Termination of the Engagement Agreement;
--------- --------------------------------------------------
Restrictions.
- ------------
(a) In the event that the Engagement Agreement is terminated at any
time during the Term (as defined in the Engagement Agreement), the Optionee's
right to exercise the Option with respect to the A Option Shares and/or the B
Option Shares, as the case may be, shall be as set forth in Section 4 of the
Engagement Agreement.
(b) The Optionee agrees that, prior to the earlier of (i) consummation
of an initial public offering by the Company of the Company's common stock, and
(ii) expiration of the Restricted Period (as defined in the Engagement
Agreement), the Optionee shall not sell, other than to the Company or a designee
of the Company, pursuant to the provisions of Section 8 hereof, or with the
prior written consent of the Company, any of the A Option Shares or B Option
Shares acquired pursuant to the Option provided for herein.
(c) The Optionee agrees that, in the event the Optionee intends to
sell any of the A Option Shares or B Option Shares acquired pursuant to the
Option at any time following the expiration of the Restricted Period and prior
to the consummation of an initial public offering by the Company of the common
stock of the Company, the Company shall have a right of first refusal with
respect to the purchase of any such A Option Shares or B Option Shares, as
follows: In the event that the Optionee desires to make a bona fide sale or
other transfer of any or all of such shares, the Optionee shall give prior
written notice to the Company, which notice shall specify (i) the number of
shares proposed to be sold or otherwise transferred, (ii) the proposed cash
purchase price, (iii) the name and address of the proposed Optionee or
transferee thereof, and (iv) all other material terms and conditions of the
proposed sale or transfer. The Company shall, within ten (10) days of receipt
of such notice, notify the Optionee of its election to purchase the relevant
shares at a purchase price equal to the proposed cash purchase price specified
in the Optionee's notice. In the event that the Company elects to purchase the
relevant shares, the Optionee and the Company shall use their reasonable efforts
to consummate such purchase transaction as promptly as practicable thereafter.
In the event that the Company elects not to purchase the relevant shares or
fails to provide the required notice of its election within the specified
period, then the Optionee shall be entitled to effect the proposed sale or other
transfer in accordance with the terms set forth in its notice; provided,
--------
however, that the Company shall be entitled to receive an opinion, reasonably
- -------
satisfactory to the Company, of counsel to the Optionee and at the sole cost and
expense of the Optionee, that such sale or transfer does not require
registration under the Securities Act of 1933, as amended (the "Act").
-3-
<PAGE>
SECTION 7. Anti-Dilution Provision. If the Company shall at any time
--------- -----------------------
subdivide its outstanding shares of common stock by recapitalization,
reclassification or split-up thereof, or if the Company shall declare a stock
dividend or distribute shares of common stock to its shareholders, the number of
A Option Shares and B Option Shares then subject to the Option immediately prior
to such subdivision shall be proportionately increased and the purchase price
for such A Option Shares and B Option Shares shall be proportionately decreased;
and if the Company shall at any time combine the outstanding shares of common
stock by recapitalization, reclassification, or combination thereof, the number
of A Option Shares and B Option Shares then subject to the Option immediately
prior to such combination shall be proportionately decreased and the purchase
price for such A Option Shares or B Option Shares shall be proportionately
increased. Any such adjustments pursuant to this Section 7 shall be effective
as of the close of business on the effective date of such subdivision or
combination or if any adjustment is the result of a stock dividend or
distribution then the effective date for such adjustment based thereon shall be
the record date therefor.
SECTION 8. Tag-Along Rights. In the event that the Majority
--------- ----------------
Shareholder proposes to sell, transfer or otherwise dispose of, in a single
transaction or a series of related transactions, shares of common stock of the
Company, on a fully diluted basis, such that upon consummation of such
transaction or transactions the Majority Shareholder shall hold directly or
indirectly a percentage of the issued and outstanding common stock of the
Company which is less than 20% of the issued and outstanding common stock of the
Company as the proposed date of closing of such transaction (a "Tag-Along
Sale"), the Majority Shareholder shall provide notice of such proposed Tag-Along
Sale to Optionee (a "Tag-Along Notice"), which Tag-Along Notice shall state the
proposed purchase price, date of closing and all other proposed material terms
and conditions of the Tag-Along Sale, not later than fifteen (15) days prior to
the proposed date of closing of such Tag-Along Sale. Optionee shall have the
right (a "Tag-Along Right") to require the Majority Shareholder to reduce the
number of shares of common stock to be sold by them and have the acquiring
entity acquire from Optionee that number of shares of common stock derived by
multiplying the total number of shares of common stock to be purchased in such
Tag-Along Sale by Optionee's "fractional interest" rounded up to the nearest
whole number. For purposes of this Section 8, the term "fractional interest"
means (a) the sum of the total number of shares of common stock previously
acquired by Optionee pursuant to the Option and the number of additional A
Option Shares and B Option Shares, to the extent vested pursuant to Section 2(b)
hereof as of the proposed date of closing of the Tag-Along Sale, to which the
Optionee would be entitled upon exercise of the Option as of such date, divided
by (b) the sum of the total number of shares calculated pursuant to clause (a)
of this sentence and the number of shares owned by the Majority Shareholder,
calculated on a fully-diluted basis. Optionee shall give written notice of his
election to the Majority Shareholder no later than five (5) days after his
receipt of a Tag-Along Notice. In the event the Majority Shareholder shall
grant other
-4-
<PAGE>
shareholders of the Company "tag along" rights on more favorable terms than
those provided in this Section 8, then equivalent rights shall be made available
to Optionee.
SECTION 9. Piggy-Back Registration.
--------- -----------------------
(a) If, at any time following an exercise by the Optionee of the
Option hereunder in whole or in part, the Company proposes to register any of
the common stock of the Company under the Act (in a secondary offering and not
solely in connection with an initial public offering), it shall give Optionee
notice of its intention to do so at least thirty (30) days prior to the filing
of the registration statement with respect thereto. If Optionee shall notify
the Company within fifteen (15) days after receipt of any such notice of his
desire to have any of the A Option Shares and/or B Option Shares, as the case
may be, which have been purchased by the Optionee or which the Optionee intends
to purchase pursuant to the Option included in such registration and covered by
such proposed registration statement, the Company shall include such A Option
Shares and/or B Option Shares in such registration statement. Notwithstanding
the foregoing, the Company shall have the right at any time (irrespective of
whether a written request for inclusion of any A Option Shares and/or B Option
Shares shall have been made) to elect not to file any such proposed registration
statement, or to withdraw the same after the filing but prior to the effective
date thereof.
(b) If at any time the Company proposes to register its shares of
common stock on Form S-8 or successor form in connection with an employee stock
option or other employee benefit plan, then it shall include in such
registration statement, to the extent it is legally permitted to do so, the
Option Shares.
(c) In connection with any registration under Section 9(a) or (b)
above or Section 10, the Company covenants and agrees as follows:
(i) the Company shall furnish Optionee such number of prospectuses as
reasonably shall be requested;
(ii) the Company shall pay all costs, fees and expenses in connection
with such registration including, without limitation, the Company's legal
and accounting fees, printing expenses and registration and filing fees.
Optionee shall pay his pro rata share of underwriting or selling
commissions in connection with any sale of the A Option Shares and/or B
Option Shares sold upon such registration;
(iii) the Company shall take all necessary action which may be
required to qualify or register the A Option Shares and/or B Option Shares,
as the case may be, for offering and sale under the securities or blue sky
laws of such jurisdictions
-5-
<PAGE>
as reasonably are requested by Optionee; provided, however, that the
-------- -------
Company shall not be obligated to execute or file any general consent to do
business under the laws of any such jurisdiction;
(iv) the Company shall use its best efforts to keep such registration
statement effective for the shorter of (i) six months or (ii) until the A
Option Shares and/or B Option Shares, as the case may be, included therein
have been sold;
(v) the Company shall indemnify Optionee from and against any and all
loss, claim, damage, expense or liability (including all expenses
reasonably incurred in investigating, preparing or defending against any
claim whatsoever) to which Optionee may become subject under the Act, the
Securities Exchange Act of 1934, as amended (the "Exchange Act") or
otherwise, arising from such registration statement, except to the extent
that the same arises out of or is based upon information supplied or
omitted to be supplied in such registration statement by Optionee; and
(vi) Optionee shall indemnify the Company, its officers and directors
and each person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, from and
against any and all loss, claim, damage, expense or liability (including
all expenses reasonably incurred in investigating, preparing or defending
against any claim whatsoever) to which they may become subject under the
Act, the Exchange Act or otherwise, arising from information furnished by
or on behalf of Optionee for specific inclusion in such registration
statement.
SECTION 10. Demand Registration.
---------- -------------------
(a) At any time commencing 180 days from the date of the Company's
initial public offering under the Act and expiring on the tenth anniversary of
this Agreement (the "Demand Registration Period"), the Optionee shall have the
right, on one occasion, to request, exercisable by written notice to the
Company, to have the Company prepare and file with the Securities and Exchange
Commission (the "Commission") a registration statement to permit the public
offering and sale of any or all of the Option Shares at any time after the date
of effectiveness of such registration statement up to and including the date
that is six months thereafter. The Company agrees to file such registration
statement reasonably promptly following demand therefor and to use its best
efforts to (i) cause such registration statement to be declared effective at the
earliest practicable time, and (ii) maintain the effectiveness of such
registration statement until the earlier of the sale of all the Option Shares or
six months.
-6-
<PAGE>
(b) Notwithstanding the foregoing, the Company's obligation to effect
such action and to keep such registration statement effective shall be
conditioned upon the Company's meeting and continuing to meet the then current
eligibility requirements for the use of Form S-3 or successor form, provided,
--------
however, that if the demand is made during the last twelve months of the Demand
- -------
Registration period, and the Company is unable to utilize a Form S-3 or
successor form at that time, then the Company shall promptly prepare and file
with the Commission a registration statement on Form S-1, or on such other Form
as will permit Optionee to sell any or all of the Option Shares in accordance
with the provisions of this Section 10.
SECTION 11. No Representations and Warranties. The Optionee
---------- ---------------------------------
acknowledges and agrees that (a) the A Option Shares and B Option Shares will be
sold to and purchased by the Optionee on an "as is" basis, (b) the Optionee is a
sophisticated investor capable of making an informed investment decision, (c)
the Optionee has made such examinations and investigations, including legal due
diligence, of the Company, its organizational and other legal documentation and
its business as it has required in order to make an informed business decision
regarding the purchase of the A Option Shares and B Option Shares, (d) neither
the Company, any of the officers of the Company nor the Shareholder has made or
will make any representations or warranties, express or implied, with respect to
the A Option Shares, the B Option Shares or the Company, its due incorporation,
good standing, business or financial condition, and (e) the Optionee will, if
the Option is exercised, be purchasing the A Option Shares and/or the B Option
Shares, as the case may be, for investment and not with the intent of selling
such shares. The Optionee agrees the neither the Shareholder, any of the
Officers of the Company nor any of their respective representatives shall have
any liability with respect to the sale of the A Option Shares and B Option
Shares contemplated hereby.
SECTION 12. Execution of Customary Documents. The Optionee agrees to
---------- --------------------------------
execute such customary agreements and instruments as the Company deems
reasonably necessary to effectuate the arrangements set forth in this Agreement.
SECTION 13. Assignment. The rights of the Optionee under this
---------- ----------
Agreement shall not be assignable or otherwise transferable, except to the heirs
or representatives of the Optionee in the event of the Optionee's death or
otherwise by operation of law, without the prior express written consent of the
Company, which consent shall be at the sole discretion of the Company. In the
event of a sale by the Optionee of any of the A Option Shares and/or B Option
Shares purchased by the Optionee pursuant to the Option, the rights provided for
in Sections 8 and 9 of this Agreement shall be terminated with respect to such A
Option Shares and B Option Shares sold.
-7-
<PAGE>
SECTION 14. Severability. In the event that one or more of the
---------- ------------
provisions hereof should be null and void, unlawful or unenforceable in any way
under any law, the validity and enforceability of the other provisions hereof
shall not in any way be affected thereby.
SECTION 15. Counterparts. This Agreement may be executed by the
---------- ------------
Parties in counterparts, all of which together shall constitute one and the same
instrument.
SECTION 16. Governing Law. This Agreement shall be governed by and
---------- -------------
construed in accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the Parties hereto have duly executed this
Agreement as of the day and year first above written.
JFAX COMMUNICATIONS, INC.
/s/ Jens Muller
----------------------------
Name: Jens Muller
Title: President
MICHAEL P. SCHULHOF
/s/ Michael P. Schulhof
----------------------------
Acknowledged and Agreed for purposes
of Section 8 hereof only:
JENS MULLER, as Shareholder
/s/ Jens Muller
- --------------------------------------
JOHN F. RIELEY, as Shareholder
/s/ John F. Rieley
- --------------------------------------
-8-
<PAGE>
EXHIBIT 10.11
June 30,1998
Michael P. Schulhof
375 Park Avenue
Suite 1506
New York, New York 10152
Re: Stock Option Agreement, dated as of January 24, 1997 (the "Option
Agreement"), between JFAX Communications, Inc. ("JFAX") and Michael
P. Schulhof
Dear Mickey:
Reference is hereby made to the Option Agreement for the definition of
certain capitalized terms used but not defined herein. This letter will serve to
clarify the following in connection with the Option Agreement and a certain
Registration Rights Agreement, dated as of June 30, 1998 (the "Investors
Agreement"), among JFAX and certain investors ("Investors") named therein:
1. If, in the event of a registration by JFAX demanded by one or more
Investors pursuant to Section 2.1 of the Investors Agreement (with
respect to which Optionee requests to be included pursuant to Section 9
of the Option Agreement), the managing underwriter shall advise JFAX
that, in its opinion, the number of securities requested to be included
in such registration exceeds the number which can be sold in such
offering within a price range acceptable to the requesting Investors,
the number of securities that are otherwise entitled to be included in
the registration shall be allocated in the following manner: (i) all
securities other than the securities of the requesting Investors
(including the Option Shares held by the Optionee) shall be reduced on a
pro rata basis (based on the number of securities requested to be
included in such registration) and (ii) if, after the exclusion of all
such securities (if necessary), further reductions are still required,
securities of the requesting Investors shall be reduced on a pro rata
basis (based on the number of securities requested to be included in
such registration).
2. If, in the event of a registration by JFAX pursuant to Section 2.3 of
the Investors Agreement (with respect to which the Optionee requests to
<PAGE>
be included pursuant to Section 9 of the Option Agreement), the managing
underwriter shall advise JFAX that marketing considerations require a
limitation on the number of securities that can be included in such
registration, then JFAX may include in such registration all securities
proposed to be sold by JFAX for its own account or by any applicable
person exercising demand registration rights, or the maximum amount that
the underwriter considers saleable, and such limitation on any remaining
securities that may, in the opinion of the underwriter, be sold will be
imposed on all securities (including securities held by any Investor and
the Option Shares held by Optionee) on a pro rata basis (based on the
number of securities requested to be included in such registration).
To the extent the provisions of this letter are contrary to the provisions
of the Option Agreement, the provisions of this letter shall govern and this
letter shall operate as an amendment to the Option Agreement. Except as
otherwise expressly modified herein, the Option Agreement shall continue in full
force and effect.
This letter will further clarify that solely in connection with the
investment being made by the Investors in JFAX on the date hereof (on
substantially the same terms described on Exhibit A attached hereto), you have
waived your rights to purchase additional shares of JFAX's common stock, at the
price per share being paid by such Investors, pursuant to the rights granted to
in Section 5 (Anti-Dilution) of the letter agreement, dated January 24, 1997,
between you and JFAX.
Very truly yours,
JFAX COMMUNICATIONS, INC.
By: /s/ Richard S. Ressler
______________________
Richard S. Ressler
President
ACCEPTED AND AGREED:
/s/ Michael P. Schulhof
__________________________
MICHAEL P. SCHULHOF Dated: June 30, 1998
(Attachment)
2
<PAGE>
EXHIBIT 10.12
================================================================================
JFAX COMMUNICATIONS, INC.
$5,000,000
Preferred Stock
and
Warrants
--------------------------
PURCHASE AGREEMENT
--------------------------
Dated as of July 2, 1998
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. AUTHORIZATION OF ISSUE OF SECURITIES................................... 1
A. Authorization.......................................................... 1
B. Sale of Series A Preferred Shares and Warrants to the Investors........ 1
2. PURCHASE AND SALE OF SECURITIES........................................ 1
A. Purchase and Sale...................................................... 1
B. Closing................................................................ 2
3. CONDITIONS OF CLOSING.................................................. 2
A. Opinions of Counsel to the Company..................................... 2
B. Representations and Warranties......................................... 2
C. Certificate of Incorporation and By-laws............................... 3
D. Purchase Permitted by Applicable Laws.................................. 3
E. Securityholders Agreement.............................................. 3
F. Registration Rights Agreement.......................................... 3
G. Compliance with Securities Laws........................................ 3
H. Proceedings............................................................ 3
I. No Adverse U.S. Legislation, Action or Decision........................ 3
J. Approval and Consents.................................................. 4
K. Material Changes....................................................... 4
L. Board Nominees......................................................... 4
M. Sale of Senior Subordinated Notes and Common Stock..................... 4
N. Payment of Expenses.................................................... 4
O. Certificate of Designations............................................ 4
P. Purchase of Securities................................................. 5
4. PUT RIGHTS WITH RESPECT TO THE WARRANTS AND WARRANT SHARES............. 5
A. Option of Holders Upon Change of Control............................... 5
B. Notice of Redemption of Warrants and Warrant Shares Upon Change of
Control................................................................ 5
C. Option of Holders to Put Securities at Exit............................ 5
D. Exercise of the Exit Put Option........................................ 6
</TABLE>
<PAGE>
<TABLE>
<S> <C>
5. AFFIRMATIVE COVENANTS.................................................. 6
A. Financial Statements................................................... 7
B. Use of Proceeds........................................................ 8
C. Books and Records; Inspection of Property.............................. 8
D. Additional Covenant Pending the Closing................................ 9
E. Compliance With Laws, etc.............................................. 9
F. Corporate Existence; Maintenance of Properties......................... 9
G. Insurance.............................................................. 9
H. Further Assurances..................................................... 10
I. Rule 144A.............................................................. 10
J. Filing of Reports Under the Exchange Act............................... 10
K. Securities Act Registration Statements................................. 10
L. Notices of Certain Events.............................................. 11
M. Board Nominees......................................................... 11
N. Listing of Common Stock................................................ 12
O. Investors' Right of First Refusal...................................... 12
P. Company's Right of First Refusal....................................... 13
6. NEGATIVE COVENANTS..................................................... 13
A. Limitation on Transaction with Affiliates.............................. 14
B. Registration Rights.................................................... 14
C. Offering of Securities................................................. 14
D. Registration Exceptions................................................ 14
7. REMEDIES............................................................... 14
8. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......................... 15
A. Organization, Qualification and Authority.............................. 15
B. Financial Statements................................................... 15
C. Capital Stock and Related Matters...................................... 15
D. Actions Pending........................................................ 16
E. Outstanding Debt; Defaults............................................. 16
F. Title to Properties.................................................... 17
G. Taxes.................................................................. 17
H. Conflicting Agreements................................................. 17
I. Offering of Securities................................................. 17
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
J. Broker's or Finder's Commissions...................................... 18
K. Federal Reserve Regulations........................................... 18
L. Environmental Matters................................................. 18
1. ............................................................ 18
2. ............................................................ 18
3. ............................................................ 18
4. ............................................................ 18
M. ERISA................................................................. 19
N. Possession of Franchises, Licenses, etc............................... 19
O. Patents, etc.......................................................... 19
P. Holding Company and Investment Company Status......................... 19
Q. Governmental Consents................................................. 20
R. Insurance Coverage.................................................... 20
S. Subsidiaries.......................................................... 20
T. Disclosure............................................................ 20
U. Related Party Transactions............................................ 20
V. Registration Rights................................................... 21
W. Absence of Foreign or Enemy Status.................................... 21
X. Agreements with Affiliates............................................ 21
Y. Employees............................................................. 21
Z. Year 2000............................................................. 21
AA. Validity of Stock..................................................... 22
9. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS....................... 22
10. DEFINITIONS........................................................... 23
11. MISCELLANEOUS......................................................... 29
A. Expenses; Indemnification............................................. 29
B. Consent to Amendments................................................. 30
C. Form, Registration, Transfer and Exchange of Series A Preferred Stock
and Warrants; Lost Series A Preferred Stock and Warrants.............. 30
D. Provisions Applicable if any of the Securities are Sold............... 30
E. Restrictive Legends................................................... 31
F. Persons Deemed Owners................................................. 31
G. Survival of Representations and Warranties............................ 31
H. Successors and Assigns................................................ 31
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
I. Notices............................................................... 31
J. Descriptive Headings.................................................. 32
K. GOVERNING LAW; CONSENT TO JURISDICTION................................ 32
L. Delay Fees............................................................ 32
M. Allocation of Purchase Price.......................................... 33
N. Remedies.............................................................. 33
O. Entire Agreement...................................................... 33
P. Severability.......................................................... 33
Q. WAIVER OF TRIAL BY JURY............................................... 34
R. Counterparts.......................................................... 34
S. Confidentiality....................................................... 34
</TABLE>
EXHIBITS
Exhibit A Form of Certificate of Designations
Exhibit B Form of Warrant
Exhibit C Forms of Opinions of Counsel to the Company
Exhibit D Form of Registration Rights Agreement
Exhibit E Form of Securityholders Agreement
iv
<PAGE>
JFAX COMMUNICATIONS, INC.
PREFERED STOCK AND WARRANTS PURCHASE AGREEMENT
------------------
Dated as of
July 2, 1998
------------------
This Preferred Stock and Warrants Purchase Agreement (this "Agreement"),
--------
dated as of July 1, 1998, is among JFAX Communications, Inc. (the "Company"), a
-------
Delaware corporation, and each of the investors named on the signature pages
hereto (the "Investors").
---------
AGREEMENTS
In consideration of the mutual promises, covenants and agreements contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto hereby agree as follows (with
certain terms used herein being defined in Section 10):
1. AUTHORIZATION OF ISSUE OF SECURITIES.
------------------------------------
A. Authorization. The Company will, prior to the Closing, (a) cause its
-------------
Certificate of Incorporation to be duly amended by filing the Certificate of
Designations in the form attached as Exhibit A (the "Certificate of
--------------
Designations"), (b) duly authorize the issuance of 5,000 units ("Units") with
- ------------ -----
each Unit consisting of one share of Series A Usable Redeemable Preferred Stock
of the Company ("Series A Preferred Stock") and 500 Warrants (the "Warrants"),
------------------------ --------
with each Warrant representing the right to purchase one share of Common Stock,
of the Company, and (c) duly authorize and reserve 2,500,000 shares of Common
Stock, subject to adjustment as provided in the certificate evidencing the
Warrants, for issuance upon exercise of such Warrants. The Warrants shall be
evidenced by certificates in the form of Exhibit B. The Series A Preferred Stock
and the Warrants shall be referred to herein collectively as the "Securities".
----------
B. Sale of Series A Preferred Shares and Warrants to the Investors.
---------------------------------------------------------------
Subject to the satisfaction of the terms and conditions herein set forth and in
reliance upon the respective representations and warranties of the parties set
forth herein or in any document delivered pursuant hereto, the Company agrees to
sell to the Investors, free and clear of any liens, claims, charges or
encumbrances whatsoever, and each of the Investors, severally but not jointly,
agrees to purchase from the Company, Units consisting of the number of shares of
Series A Preferred Stock and detachable Warrants set forth opposite such
Investor's name on Schedule 1.B to this Agreement at a purchase price of
$1,000.00 per Unit and for the aggregate purchase price set forth opposite such
Investor's name on Schedule 1.B to this Agreement.
2. PURCHASE AND SALE OF SECURITIES.
-------------------------------
A. Purchase and Sale. The Company hereby agrees to sell to the Investors
-----------------
and, subject to the terms and conditions herein set forth, the Investors
severally agree to purchase
<PAGE>
from the Company, the Securities set forth opposite the name of each of the
Investors on the signature pages hereof. The parties hereby agree that the
aggregate purchase price for the Securities is $5,000,000.
B. Closing. The purchase and delivery of the Securities to be purchased
-------
by the Investors shall take place at a closing (the "Closing") at the offices of
-------
Willkie Farr & Gallagher, 787 Seventh Avenue, New York, New York 10019 at 10:00
a.m., local time, on July 1, 1998 (or at such other time and place or on such
other Business Day thereafter as the parties hereto shall agree) (herein called
the "Closing Date"). On the Closing Date, the Company will deliver the
------------
Securities to be purchased by the Investors payable to or registered in the
names of the Investors and/or the Investors' nominees or other designees
specified on the signature pages hereof in the amounts set forth opposite the
name of the Investors on the signature pages hereof, against receipt of the
purchase price therefor by wire transfer to the account of: JFAX Communications,
Inc., Union Bank of California, ABA No. 122-000-496, Account No. 072-00-491-63,
Attn: Denise Decker. If at the Closing, the Company shall, in breach of this
Agreement, fail to tender to the Investors any of the Securities to be purchased
by them or if any of the conditions specified in Section 3 hereof shall not have
been satisfied or waived by the Investors, the Investors shall, at their
election, be relieved of all further obligations under this Agreement without
thereby waiving any other rights they may have by reason of such failure or such
non-fulfillment. Notwithstanding anything to the contrary, the obligation of
the Company to deliver any Securities to any Investor at the Closing shall be
conditioned on its concurrent receipt of the purchase price of all of the
Securities from the Investors.
3. CONDITIONS OF CLOSING.
---------------------
The obligation of each of the Investors to purchase and pay for the
Securities to be purchased hereunder is subject to the satisfaction, on or
before the Closing Date, of the following conditions:
A. Opinions of Counsel to the Company. The Investors shall have received
----------------------------------
from each of Sullivan & Cromwell and Nicholas V. Morosoff, each counsel to the
Company, a legal opinion addressed to the Investors and dated the Closing Date,
substantially in the form of Exhibit C attached hereto. Such opinions shall also
---------
cover such other matters incident to the matters herein contemplated as the
Investors may reasonably request.
B. Representations and Warranties. Each of the representations and
------------------------------
warranties contained in Section 8 hereof and those otherwise made in writing by
or on behalf of the Company and contained in any document, certificate or other
written statement provided to the Investors in connection with the transactions
contemplated by this Agreement shall be true and correct in all material
respects when made and on and as of the Closing Date, without giving additional
effect to any qualification as to materiality contained therein and except to
the extent of changes caused by the transactions herein contemplated; all of the
covenants and obligations of the Company hereunder to be performed or observed
on or prior to the Closing shall have been duly performed or observed; and the
Company shall have delivered to the Investors an Officer's Certificate, dated
the Closing Date, to the foregoing effects.
2
<PAGE>
C. Certificate of Incorporation and By-laws. The Investors shall have
----------------------------------------
received certificates, dated the Closing Date, of the Secretary of the Company
and its Subsidiaries attaching (i) true and complete copies of the Certificate
of Incorporation of the Company (which shall be amended by the Certificate of
Designations) and its Subsidiaries as filed with the appropriate state officials
of its jurisdiction of incorporation with all amendments thereto, (ii) true and
complete copies of the By-laws of the Company and its Subsidiaries in effect as
of such date, (iii) certificates of good standing of the appropriate officials
of the jurisdiction of incorporation of the Company and its Subsidiaries and of
each state in which each of the Company and its Subsidiaries is required to be
qualified to do business as a foreign corporation, (iv) resolutions of the Board
of Directors of the Company authorizing (a) the execution, delivery and
performance of the Related Documents, (b) the filing of the Certificate of
Designations, and (c) the issuance and delivery of the Securities and the
reservation of the Warrant Shares and certificates as to the incumbency of the
officers of the Company executing this Agreement or any other Related Document.
D. Purchase Permitted by Applicable Laws. The purchase of and payment for
-------------------------------------
the Securities shall not be prohibited by any applicable law or governmental
regulation and shall not subject the Investors to any tax, penalty, liability or
other onerous condition under or pursuant to any applicable law or governmental
regulation, and the Investors shall have received such certificates or other
evidence as they may request to establish compliance with this condition.
E. Securityholders Agreement. The Investors shall have received a fully
-------------------------
executed counterpart of the Securityholders Agreement, and such Securityholders
Agreement shall be in full force and effect and no term or condition thereof
shall have been amended, modified or waived.
F. Registration Rights Agreement. The Investors shall have received a
-----------------------------
fully executed counterpart of the Registration Rights Agreement, and such
Registration Rights Agreement shall be in full force and effect and no term or
condition thereof shall have been amended, modified or waived.
G. Compliance with Securities Laws. The offering and sale of the
-------------------------------
Securities under this Agreement shall have complied with all applicable
requirements of federal and state securities laws, and the Investors shall have
received evidence of such compliance in form and substance satisfactory to them.
H. Proceedings. All required corporate and other proceedings taken or
-----------
required to be taken in connection with the transactions contemplated hereby and
all documents incident thereto shall be reasonably satisfactory in form and
substance to the Investors and their counsel, and the Investors and their
counsel shall have received all such counterpart originals or certified or other
copies of such documents as they may reasonably request.
I. No Adverse U.S. Legislation, Action or Decision. No legislation,
-----------------------------------------------
order, rule, ruling or regulation shall have been enacted or made by or on
behalf of any governmental body, department or agency of the United States, nor
shall any legislation have been introduced and favorably reported for passage to
either House of Congress by any committee of either such House to which such
legislation has been referred for consideration, nor shall any decision of any
3
<PAGE>
court of competent jurisdiction within the United States have been rendered
which, in the Investors' reasonable judgment, would materially and adversely
affect their investment in the Securities. There shall be no action, suit,
investigation or proceeding, pending or threatened, against or affecting the
Company, its Subsidiaries or any of their respective properties or rights, or
any of their respective affiliates, associates, officers or directors, before
any court, arbitrator or administrative or governmental body which (i) seeks to
restrain, enjoin, prevent the consummation of or otherwise affect the
transactions contemplated by any of the Related Documents or (ii) questions the
validity or legality of any such transaction or seeks to recover damages or to
obtain other relief in connection with any such transaction, and there shall be
no valid basis for any such action, proceeding or investigation.
J. Approval and Consents. The Company and each Subsidiary shall have duly
---------------------
received all authorizations, consents, approvals, licenses, franchises, permits
and certificates by or of all Governmental Authorities necessary or advisable
for the issuance of the Securities, the issuance of Warrant Shares and the
consummation of the transactions contemplated hereby and by the Related
Documents, and all such authorizations, consents, approvals, licenses,
franchises, permits and certificates shall be in full force and effect at the
time of the Closing. The Company shall have delivered to the Investors an
Officer's Certificate, dated the Closing Date, to such effect.
K. Material Changes. Since December 31, 1997, there shall not have been
----------------
any changes in the business of the Company or any of its Subsidiaries which have
or could reasonably be expected to, individually or in the aggregate, have a
Material Adverse Effect, nor shall there have been any development or discovery
or any material contingency or other liability which could have such effect.
There shall exist no defaults under the provisions of any instrument evidencing
Indebtedness of the Company or its Subsidiaries and the Company shall have
delivered to the Investors an Officer's Certificate, dated the Closing Date, to
such effect.
L. Board Nominees. The Board of Directors of the Company shall be
--------------
constituted as contemplated by Section 3.1 of the Securityholders Agreement and
the nominee designated by the Investors shall have been appointed to the Board
of Directors effective upon the Closing.
M. Sale of Senior Subordinated Notes and Common Stock. The Company shall
--------------------------------------------------
have consummated the sale of no less than $10,000,000 aggregate principal amount
of its Senior Subordinated Notes and 1,681,577 shares of Common Stock for an
aggregate purchase price equal to $10,000,000, pursuant to the terms of that
certain Securities Purchase Agreement, dated as of the date hereof, among the
Company and the investors party thereto, without waiver of any material term or
condition thereunder; and the Investors shall have received an Officer's
Certificate, dated the Closing Date, to the foregoing effect.
N. Payment of Expenses. The Company shall have paid to the Investors all
-------------------
reasonable fees and expenses of the Investors (including legal fees) incurred in
connection with the transactions contemplated by this Agreement and the Related
Documents.
O. Certificate of Designations. The Certificate of Designations relating
---------------------------
to the terms and conditions of the Series A Preferred Stock shall have been
filed with the Secretary of State of the State of Delaware and shall be in full
force and effect.
4
<PAGE>
P. Purchase of Securities. At the Closing, the Investors severally shall
----------------------
have purchased the Securities in the amounts set forth opposite their names on
Schedule 1.B to this Agreement.
4. PUT RIGHTS WITH RESPECT TO THE WARRANTS AND WARRANT SHARES.
-----------------------------------------------------------
A. Option of Holders Upon Change of Control. Upon the occurrence of a
----------------------------------------
Change of Control, unless the holders of at least 66-2/3% in interest of the
Warrants and Warrant Shares approve such Change of Control in writing, each
holder of Warrants and/or Warrant Shares ("Warrant Investor") has the option to
----------------
require the Company to redeem all of the outstanding Warrants and/or Warrant
Shares (or any portion thereof), and all shares of Common Stock issued pursuant
to stock splits, dividends or similar events in respect of such Warrants or
Warrant Shares ("Additional Warrant Shares"; the Warrants, Warrant Shares and
-------------------------
Additional Warrant Shares being referred to herein as "Warrant Securities") held
------------------
by such holder at a price equal to (i) for unexercised Warrants, $2.00 per
Warrant and (ii) for each of the Warrant Shares that were issued upon exercise
of a Warrant and for each of the Additional Warrant Shares, if any related to
such Warrant Share, an amount equal to 1.67 multiplied by the exercise price
paid for such Warrant Share being redeemed (such exercise price to be
appropriately adjusted for subsequent stock splits, dividends or similar events
occurring after such exercise to the extent that the holders of Warrant Shares
received their proportionate benefit of such stock splits, dividends or similar
events in the form of Additional Warrant Shares which are included in the
package of securities which the Company must redeem).
B. Notice of Redemption of Warrants and Warrant Shares Upon Change of
------------------------------------------------------------------
Control.
- -------
The Company shall give each Warrant Investor written notice (a "Notice of
---------
Change of Control Event") within five (5) days after the Company or any of its
- -----------------------
executive officers or directors obtains knowledge of the occurrence of a Change
of Control Event, specifying that a Change of Control Event has occurred, the
material facts and circumstances of such Change of Control Event, the applicable
purchase price(s) and instructions that a Warrant Investor must follow in order
to have his Warrant Securities redeemed. Within five (5) days after receipt of
a Notice of Change of Control Event, a Warrant Investor may, at his option, if
applicable give notice to the Company specifying the number of Warrant
Securities held by such holder that such holder requires the Company to redeem.
The redemption date for any Change of Control Event (each, a "Change of Control
-----------------
Redemption Date") shall be the twenty-fifth date following such Change of
- ---------------
Control Event. In the event some or all of the Warrant Securities are not
tendered for redemption, the holder of such Warrant Securities not so tendered
shall be deemed to have consented to the redemption by the Corporation of any
Junior Stock being prepaid, retired or exchanged pursuant to a Change of Control
Event.
C. Option of Holders to Put Securities at Exit. In the event that the
-------------------------------------------
Company has not completed a Qualified Public Offering by July 1, 2003, each
Warrant Investor shall have the right upon written notice to require the Company
to purchase at the Exit Closing (as defined below), and the Company agrees to so
purchase, all or any of the Warrant Securities. The purchase price for such
Warrant Securities held by such Warrant Investor shall be paid by certified
check at the Exit Closing or by wire transfer of immediately available funds
5
<PAGE>
denominated in U.S. dollars to one or more accounts designated by such Warrant
Investor to the Company prior to the Exit Closing in an amount equal to, (i) for
unexercised Warrants, the Fair Market Value of such unexercised Warrants at the
time of the Exit Notice with respect to such unexercised Warrants and (ii) for
each of the Warrant Shares that were issued upon exercise of a Warrant and for
each of the Additional Warrant Shares, if any related to such Warrant Share, the
greater of the Fair Market Value of such Warrant Share and such Additional
Warrant Share at the time of the Exit Notice with respect to such Warrant Share
and the exercise price paid for such Warrant Share issued upon exercise of the
Warrant (such exercise price to be appropriately adjusted for stock splits,
dividends or similar events occurring after such exercise to the extent that the
holders of Warrant Shares received their proportionate benefit of such stock
splits, dividends or similar events in the form of Additional Warrant Shares
which are included in the package of securities which the Company must redeem).
The Company shall not be required to hold more than one Exit Closing during any
six-month period, and no holder may participate in more than one Exit Closing.
D. Exercise of the Exit Put Option. Upon the receipt of a notice given
-------------------------------
pursuant to paragraph 4C, the Company shall provide notice to each Warrant
Investor (the "Exit Notice"), which shall (i) refer specifically to this
-----------
paragraph 4D, (ii) state that the Company may be required to purchase all of the
outstanding Warrant Securities, (iii) contain the Company's calculation of the
purchase price for the Warrant Securities to be purchased (including a detail of
any adjustments for stock splits, recombinations, dividends or similar events or
of the applicable Fair Market Value, as the case may be), (iv) indicate that the
Company will purchase the Warrant Securities at the Exit Closing upon written
notice of the exercise of an option by a Warrant Investor, (v) indicate that a
closing (the "Exit Closing") for such purchase and sale shall take place on a
------------
date specified in the notice, which date shall be a date occurring not later
than 30 days nor more than 60 days after the date on which the notice to the
Company is given pursuant to paragraph 4C, (vi) indicate where the Exit Closing
shall take place and (vii) be delivered by certified mail return receipt
requested. A Warrant Investor who desires to exercise its option shall furnish
written notice to the Company of the exercise of such option within at least 10
days prior to the Exit Closing. At the Exit Closing, the Company shall pay the
purchase price for the Warrant Securities being purchased determined as
described above against delivery of the securities being purchased. No waiver by
a Warrant Investor of its right under this paragraph 4D to require the purchase
of any or all of the Warrant Securities held by such Warrant Investor at any
Exit Closing shall affect the rights of such Warrant Investor to participate in
another Exit Closing.
5. AFFIRMATIVE COVENANTS.
----------------------
All covenants contained herein shall be given independent effect so that if
a particular action or condition is not permitted by any such covenant, the fact
that such action or condition would be permitted by an exception to, or
otherwise be within the limitations of, another covenant shall not avoid the
occurrence of a breach if such action is taken or condition exists. The
provisions of this Section 5 are for the benefit of the Investors so long as
they hold any of the Securities or other Warrant Securities and, to the extent
set forth herein, for the benefit of each other holder of the Securities or
other Warrant Securities; provided, however, that (i) upon the redemption of all
-------- -------
of the Series A Preferred Stock, the Company and its Subsidiaries shall no
6
<PAGE>
longer be bound by the covenants set forth in paragraphs 5A(i) and 5B, (ii) upon
consummation of a Qualifying Public Offering, the Company shall no longer be
bound by the covenant set forth in paragraph 5O, (iii) upon the conditions in
both clauses (i) and (ii) above being satisfied, the Company shall no longer be
bound by any covenants set forth in this Section 5 other than those set forth in
paragraphs 5I, 5M and 5N and (iv) the provisions of paragraph 5P are for the
benefit of the Company so long as an Initial Public Offering has not occurred.
A. Financial Statements. The Company will deliver to each holder of
--------------------
Securities:
(i) as soon as practicable and in any event within 30 days
after the end of each month in each fiscal year commencing with May 1998,
unaudited management reports of the Company and its Subsidiaries setting
forth the financial, operational and other performance data of the Company
and its Subsidiaries in reasonable detail and reasonably satisfactory in
scope to the Investors (taking into account the human and technical
resources that the Company has or reasonably ought to have and the
importance of such information to the Investors under the circumstances),
which shall include at least a consolidated statement of operations, a
consolidated statement of cash flows and a consolidated balance sheet for
or as at the end of such month, in each case setting forth, in comparative
form, management's budget for such month and comparable information from
the same month in the preceding fiscal year, all in the format in which
such reports are then prepared by management of the Company in the conduct
of its business;
(ii) as soon as practicable and in any event within 45 days
after the end of each quarterly period in each fiscal year, consolidated
statements of income, changes in stockholders' equity and cash flow of the
Company and its Subsidiaries for such quarterly period and for the period
from the beginning of the current fiscal year to the end of such quarterly
period and a consolidated balance sheet of the Company and its Subsidiaries
as at the end of the most recent year and at the end of such quarterly
period, setting forth in each case in comparative form figures for the
corresponding period in the preceding fiscal year, all in reasonable detail
and reasonably satisfactory in scope to the holders of Securities (taking
into account the human and technical resources that the Company has or
reasonably ought to have and the importance of such information to the
Investors under the circumstances), and prepared in accordance with GAAP
(except for footnote disclosure) on a basis consistent with past practice
and certified by the chief financial officer or chief executive officer of
the Company as fairly presenting the financial condition of the Company and
its Subsidiaries, subject to the changes resulting from audit and year-end
adjustments;
(iii) as soon as practicable and in any event within 120 days
after the end of each fiscal year, consolidated statements of income,
changes in stockholders' equity and cash flow of the Company and its
Subsidiaries for such year, and a consolidated and consolidating balance
sheet of the Company and its Subsidiaries as at the end of such year,
setting forth in each case in comparative form corresponding figures from
the preceding annual audit, all in reasonable detail and reasonably
satisfactory in scope to the holders of Securities (taking into account the
human and technical resources that the Company has or reasonably ought to
have and the importance of such information to the Investors under the
circumstances), and in each case audited by KPMG Peat Marwick
7
<PAGE>
LLP or such other independent public accountants of recognized national
standing selected by the Company, whose report in each case shall state
that such consolidated financial statements present fairly the results of
operations and cash flows of the Company and its Subsidiaries, in
accordance with GAAP on a basis consistent with prior years and that the
examination by such accountants has been made in accordance with generally
accepted auditing standards then in effect in the United States;
(iv) as soon as practicable and in any event by the end of each
fiscal year beginning with fiscal year 1998, a budget for the Company and
its Subsidiaries, as approved by the Board of Directors of the Company, for
the following fiscal year setting forth in comparative form corresponding
figures from the preceding fiscal year's budget, in reasonable detail and
certified as to its good-faith preparation by the chief financial officer
or chief executive officer of the Company and each Subsidiary;
(v) promptly upon transmission thereof, copies of all financial
statements, information circulars, proxy statements and reports as the
Company or any Subsidiary shall send to its stockholders that are material
to the business of the Company and its Subsidiaries, taken as a whole, and
copies of all registration statements and prospectuses and all reports
which it or any of its officers or directors file with the Commission (or
any governmental body or agency succeeding to the functions of the
Commission) or with any securities exchange on which any of its securities
are listed or with Nasdaq, and copies of all press releases and other
statements made available generally by the Company or its Subsidiaries to
the public concerning material developments in the business of the Company
and its Subsidiaries;
(vi) promptly upon receipt thereof, a copy of each other report
submitted to the Company or any of its Subsidiaries by independent
accountants in connection with any annual, interim or special audit made by
them of the books of the Company or any of its Subsidiaries; and
(vii) with reasonable promptness, such other financial and/or
operating data as any holder of Securities may reasonably request.
Each holder of Securities is hereby authorized to deliver a copy of any
financial statement or certificate delivered pursuant to this paragraph 5A to
any regulatory body having jurisdiction over such holder that requests or
requires delivery of such information.
B. Use of Proceeds. The proceeds of the sale of the Securities shall be
---------------
used for capital expenditures and general corporate purposes.
C. Books and Records; Inspection of Property. The Company will keep, and
-----------------------------------------
will cause each of its Subsidiaries to keep, proper books of record and account
in which full, true and correct entries in conformity in all material respects
with GAAP shall be made of all material dealings and transactions in relation to
their business and activities. The Company will, upon reasonable advance notice,
permit any Person representing any holder of Securities and designated in
writing by such holder, at such holder's expense, to visit and inspect any of
the properties of the Company and its Subsidiaries during normal business hours
in a manner which
8
<PAGE>
does not unduly interrupt the normal course of business, to examine the
corporate, financial and operating records of the Company or any of its
Subsidiaries and make copies thereof or extracts therefrom and to discuss the
affairs, finances and accounts of any of such corporations with the directors,
officers and independent accountants of the Company and its Subsidiaries, all at
such reasonable times and as often as the holders may reasonably request.
D. Additional Covenant Pending the Closing. Pending the Closing, the
---------------------------------------
Company will not, without the prior written consent of the Investors, take any
action which would result (i) in any of the representations or warranties
contained in this Agreement not being true and correct in all material respects
(without giving additional effect to any qualification as to materiality
contained therein) at and as of the time immediately after such action or (ii)
in any of the covenants contained in this Agreement becoming incapable of
performance. Pending the Closing, the Company will promptly advise the Investors
of any action or event of which either becomes aware which has the effect of
making incorrect, in any material respect, any of such representations or
warranties (without giving additional effect to any qualification as to
materiality contained therein) or which has the effect of rendering any of such
covenants incapable of performance. The Company will duly perform, in all
material respects, all of its respective obligations required to be performed
under each of the Related Documents to which it is a party.
E. Compliance With Laws, etc. The Company will, and will cause each of
-------------------------
its Subsidiaries to, comply with the requirements of all applicable laws, rules,
regulations and orders of any Governmental Authority, and obtain and maintain in
good standing all licenses, permits and approvals from any and all governments,
governmental commissions, boards or agencies of jurisdictions in which they
carry on business required in respect of the operations of the Company and its
Subsidiaries, except for those with which the failure to comply or maintain
would not have a Material Adverse Effect.
F. Corporate Existence; Maintenance of Properties. The Company (i) will
----------------------------------------------
do or cause to be done all things reasonably necessary to preserve and keep in
full force and effect its corporate existence, rights and franchises and the
corporate existence, rights and franchises of its Subsidiaries (except as
specifically permitted by paragraphs7E and 7F of the Securities Purchase
Agreement), (ii) will cause its material properties and the material properties
of its Subsidiaries to be maintained and kept in good condition, repair and
working order (ordinary wear and tear excepted) and will cause to be made all
necessary repairs, renewals, replacements, betterments and improvements thereto,
and (iii) will, and will cause each of its Subsidiaries to, qualify and remain
qualified to conduct business in each jurisdiction where the nature of the
business of or ownership of property by the Company or such Subsidiary may
require such qualification.
G. Insurance. The Company will maintain, and will cause each of its
---------
Subsidiaries to maintain, with financially sound and reputable insurance
companies, funds or underwriters, insurance for itself and its Subsidiaries of
the kinds, covering the risks and in the relative proportionate amounts usually
carried by companies conducting business activities similar to those of the
Company and its Subsidiaries. From and after an Initial Public Offering, the
Company will use its reasonable efforts to obtain and maintain directors and
officers liability insurance similar to the insurance usually carried by
companies conducting business activities similar to those of the Company and its
Subsidiaries.
9
<PAGE>
H. Further Assurances. The Company shall cooperate with any of the
------------------
Investors and execute such further instruments and documents as the Investors
shall reasonably request to carry out to the reasonable satisfaction of such
Investors the transactions contemplated by this Agreement.
I. Rule 144A. In connection with any prospective transfer pursuant to
---------
Rule 144A promulgated by the Securities and Exchange Commission, to the extent
permitted under such rule, of (a) Securities, (b) Warrant Shares, or (c) shares
of Common Stock or other securities issued as, or upon conversion or exercise of
other securities issued as, a dividend or other distribution with respect to or
in replacement of any shares referred to in clause (a) or (b), upon the written
request of any holder of such shares, the Company will make available to such
holder and any prospective purchaser of such shares, promptly after such
request, the information required pursuant to paragraph (d)(4)(i) of Rule 144A
of the Commission.
J. Filing of Reports Under the Exchange Act. The Company shall, and
----------------------------------------
shall cause each of its Subsidiaries to, give prompt notice to each Investor of
the filing of any registration statement (an "Exchange Act Registration
-------------------------
Statement") pursuant to the Exchange Act relating to any class of securities of
- ---------
the Company or any of its Subsidiaries and the effectiveness of such Exchange
Act Registration Statement and, with respect to equity securities, the number of
shares of such class of equity security outstanding as reported in such Exchange
Act Registration Statement. If and for so long as the Company or any of its
Subsidiaries has a class of equity securities required to be registered under
the Exchange Act, the Company and such Subsidiaries shall (i) comply in all
material respects with the reporting requirements of the Exchange Act, and (ii)
comply in all material respects with all other public information reporting
requirements of the Commission that are a condition to the availability of an
exemption from the Securities Act (under Rule 144 thereof, as amended from time
to time, or successor rule thereto or otherwise) for the sale of shares of
Common Stock by any Investor. The Company shall, and shall cause each of its
Subsidiaries to, cooperate with each Investor in supplying such information as
may be reasonably necessary for such Investor to complete and file any
information reporting forms presently or hereafter required by the Commission as
a condition to the availability of an exemption from the Securities Act (under
Rules 144 or 144A thereunder or otherwise) for the sale of shares of Common
Stock by any Investor.
K. Securities Act Registration Statements. The Company covenants that it
--------------------------------------
shall not, and shall cause each of its Subsidiaries not to, file any
registration statement under the Securities Act covering any securities unless
it shall first have given to each Investor 20 days written notice thereof. The
Company further covenants that each Investor shall have the right, at any time
when it may reasonably be deemed by such Investor or the Company or any of its
Subsidiaries to be a controlling person of the Company or any of its
Subsidiaries, to participate in the preparation of such registration statement
(regardless of whether or not an Investor will be a selling security holder in
connection with such registration statement) and to request the insertion
therein of material furnished to the Company or any of its Subsidiaries in
writing which in such Investor's reasonable judgment should be included. In
connection with any registration statement referred to in this paragraph 5K, the
Company will indemnify each Investor, its partners, officers and directors and
each person, if any, who controls such Investor within the meaning of Section 15
of the Securities Act (collectively, the "Investor Parties"), against all
----------------
losses, claims, damages, liabilities and expenses caused by any untrue statement
or alleged
10
<PAGE>
untrue statement of a material fact contained in any registration statement or
prospectus or any preliminary prospectus or any amendment thereof or supplement
thereto or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses, claims, damages,
liabilities or expenses are caused by any untrue statement or alleged untrue
statement or omission or alleged omission contained in written information
furnished to the Company or any of its Subsidiaries by such Investor Parties
expressly for use in such registration statement. If, in connection with any
such registration statement, such Investor Parties shall furnish written
information to the Company or any of its Subsidiaries expressly for use in the
registration statement, such Investor will indemnify the Company, its directors,
each of its officers who signs such registration statement and each person, if
any, who controls the Company within the meaning of the Securities Act against
all losses, claims, damages, liabilities and expenses caused by any untrue
statement or alleged untrue statement of a material fact or any omission or
alleged omission of a material fact required to be stated in the registration
statement or prospectus or any preliminary prospectus or any amendment thereof
or supplement thereto or necessary to make the statements therein not
misleading, but only to the extent that such untrue statement or alleged untrue
statement or such omission or alleged omission is contained in information so
furnished in writing by such Investor for use therein. The provisions of this
paragraph 5K are in addition to, and not in limitation of, the provisions of the
Registration Rights Agreement.
L. Notices of Certain Events. The Company shall promptly give notice to
-------------------------
each holder of Securities (i) of the occurrence of any breach of its obligations
hereunder, (ii) of any default or event of default under any contractual
obligation of the Company or any of its Subsidiaries if such default or event of
default, individually or in the aggregate, would reasonably be expected to
result in a Material Adverse Effect, (iii) of any pending or threatened
litigation, investigation or proceeding to which the Company or any of its
Subsidiaries is or is threatened to be a party which, if such pending or
threatened litigation, investigation or proceeding were adversely determined,
would reasonably be expected to result in a Material Adverse Effect and (iv) of
a Change of Control Event. Any notice delivered pursuant to this paragraph 5L
shall be accompanied by an Officer's Certificate specifying the details of the
occurrence referred to therein and stating what action the Company proposes to
take with respect thereto. In addition to the foregoing, in the case
contemplated by clause (iv) of this paragraph 5L, the Company will also comply
with the provisions of Section 4 hereof.
M. Board Nominees. During the period specified in Section 3.1 of the
--------------
Securityholders' Agreement, the Company will use its reasonable best efforts to
(i) have the Preferred Designee, as defined in the Securityholders' Agreement,
designated in the manner provided therein, elected to the Board of Directors of
the Company, and (ii) if requested in writing by the Investors, cause the number
and composition of directors of the Board of Directors of any Subsidiary to be
identical to the number and composition of the Board of Directors of the
Company. Any Preferred Designee shall receive (A) all materials distributed to
the Board of Directors of the Company or any Subsidiary, as the case may be,
whether provided to directors in advance of, during or after, any meeting of the
applicable Board of Directors, regardless of whether such director shall be in
attendance at any such meeting, (B) the same compensation other outside members
of the Board of Directors of the Company or any Subsidiary, as the case may be,
shall receive in his or her capacity as a director and (C)
11
<PAGE>
reimbursement of the reasonable out-of-pocket expenses of such director incurred
in attending the meetings of the Board of Directors of the Company or any
Subsidiary, as the case may be.
N. Listing of Common Stock. The Company covenants and agrees for the
-----------------------
benefit of the Investors and each holder of any Warrant Shares and Additional
Warrant Shares, if any, that at the time of and in connection with the listing
of Common Stock or any other equity securities of the Company on any national
securities exchange, it will, at its expense, use its reasonable best efforts to
cause the Warrant Shares and Additional Warrant Shares, if any, to be approved
for listing, subject to notice of issuance, and will provide prompt notice to
each such exchange of the issuance thereof from time to time.
O. Investors' Right of First Refusal.
---------------------------------
(a) The Company hereby grants to each Warrant Investor the right of
first refusal to purchase its Pro Rata Share of New Securities which the
Company may, from time to time, propose to sell and issue. "Pro Rata
--------
Share," for purposes of this right of first refusal, is the ratio that (i)
-----
the number of Warrant Shares and Additional Warrant Shares, if any, then
held by such Warrant Investor (including the Warrant Shares that have not
been issued under unexercised Warrants) bears to (ii) the Fully Diluted
Outstanding Shares of Common Stock.
(b) Except as set forth below, "New Securities" shall mean any
--------------
shares of capital stock of the Company, including Common Stock and any
series of preferred stock, whether now authorized or not, and rights,
options or warrants to purchase said shares of Common Stock or preferred
stock, and securities of any type whatsoever that are, or may become,
convertible into or exchangeable for said shares of Common Stock or
preferred stock. Notwithstanding the foregoing, "New Securities" does not
include (i) Common Stock offered to the public generally pursuant to a
registration statement under the Securities Act in connection with the
Company's Initial Public Offering, (ii) securities issued pursuant to the
acquisition of another corporation by the Company by merger, purchase of
all or substantially all of the assets or other reorganization whereby the
Company or its stockholders own more than fifty percent (50%) of the voting
power of the surviving or successor corporation, (iii) up to 6% of the
Fully Diluted Outstanding Shares (net of any repurchase) of the Company's
Common Stock or related options, warrants or other rights to purchase such
Common Stock issued on or after the Closing Date to employees, officers and
directors of and consultants to the Company, pursuant to arrangements
approved by the Board of Directors of the Company, (iv) stock issued
pursuant to any rights, agreements or convertible securities, including
without limitation options and warrants, provided that (A) such rights,
agreements or convertible securities were outstanding prior to the date of
this Agreement or (B) the rights of first refusal established by this
paragraph 5O applied with respect to the initial sale or grant by the
Company of such rights, agreements or convertible securities, (v) stock
issued in connection with any stock split, stock dividend or
recapitalization by the Company, (vi) securities issued in connection with
an equipment lease or other similar transaction which is approved by the
Board of Directors of the Company or (vii) securities issued pursuant to
the Securities Purchase Agreement.
12
<PAGE>
(c) In the event the Company proposes to undertake an issuance of
New Securities, it shall give each Warrant Investor written notice of its
intention, describing the amount and type of New Securities, and the price
and terms upon which the Company proposes to issue the same. Each Warrant
Investor shall have ten (10) Business Days from the date of receipt of any
such notice to agree to purchase up to its respective Pro Rata Share of
such New Securities for the price and upon the terms specified in the
notice by giving written notice to the Company and stating therein the
quantity of New Securities to be purchased.
(d) In the event all of the New Securities are not elected to be
purchased by Warrant Investors within ten (10) Business Days after the
notice pursuant to clause (c) above, the Company shall have ninety (90)
days thereafter to sell the New Securities not elected to be purchased by
Warrant Investors at the price and upon the terms no more favorable to the
purchasers of such securities than specified in the Company's notice. In
the event the Company has not sold the New Securities within said ninety
(90) day period, the Company shall not thereafter issue or sell any New
Securities without first offering such securities in the manner provided
above.
P. Company's Right of First Refusal.
--------------------------------
(a) In the event any Warrant Investor proposes to sell or transfer
any Warrant Securities prior to the consummation of an Initial Public
Offering, it shall give the Company written notice of its intention,
describing the number of Warrants and/or other Warrant Securities and the
price and other material terms upon which such Warrant Investor proposes to
sell or transfer such Warrant Securities; provided, however, that the sale
on transfer of Warrants and/or other Warrant Securities in an aggregate
amount equal to or less than 10% of the Warrant Shares and Additional
Warrant Shares issued or issuable to such Warrant Investor shall not be
subject to this paragraph 5P. The Company shall have ten (10) Business Days
from the date of receipt of any such notice to agree to purchase all, but
not less than all, of such Warrant Securities for the price and upon the
terms specified in the notice by giving written notice to the Investor.
(b) In the event the Company fails to elect to so purchase all of
such Warrant Securities within ten (10) Business Days after the notice
pursuant to clause (a) above, the Warrant Investor shall have ninety (90)
days thereafter to sell such Warrant Securities at the price and upon the
terms no more favorable to the purchaser of such Warrant Securities than
specified in the Warrant Investor's notice. In the event the Warrant
Investor has not sold such Warrant Securities within said ninety (90) day
period, such Warrant Investor shall not thereafter sell or transfer any
Warrant Securities without first offering such securities in the manner
provided above.
6. NEGATIVE COVENANTS.
-------------------
All covenants contained herein shall be given independent effect so that if
a particular action or condition is not permitted by any of such covenants, the
fact that such action or condition would be permitted by an exception to, or
otherwise be within the limitations of, another covenant shall not avoid the
occurrence of a breach if such action is taken or condition
13
<PAGE>
exists. The provisions of this Section 6 are for the benefit of the Investors so
long as they hold any of the Securities or other Warrant Securities and for the
benefit of each other holder of Securities or other Warrant Securities, provided
that Section 6A shall cease to be applicable to any such other holder from and
after the date on which both of the following occur: (i) the redemption or other
retirement of all of the Series A Preferred Stock and (ii) the consummation of a
Qualifying Public Offering.
A. Limitation on Transaction with Affiliates. After the Closing, the
-----------------------------------------
Company will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, enter into any transaction including, without
limitation, the purchase, sale, lease or exchange of any property or the
rendering of any service, with any Affiliate, unless such transaction (including
any investments, loans or advances by or to any Affiliate) is conducted in good
faith, the terms of which are fair and reasonable to the Company. For the
purposes of this section 6A, any transaction in excess of $250,000 or any series
of transactions in excess of $1,000,000 in the aggregate shall be approved by a
majority of the Board of Directors, including a majority of the disinterested
directors.
B. Registration Rights. The Company will not hereafter, so long as the
-------------------
Registration Rights Agreement is in effect, enter into any agreement with
respect to its securities any provision of which is inconsistent with or more
favorable than the rights granted to the Investors in the Registration Rights
Agreement.
C. Offering of Securities. The Company will not, directly or indirectly,
----------------------
take any action which would subject the issuance or sale of any of the
Securities to the provisions of Section 5 of the Securities Act or violate the
provisions of any securities or "blue sky" law of any applicable jurisdiction.
D. Registration Exceptions. The Company will not take any action
-----------------------
hereafter that could cause the loss of the exemptions from the registration
requirements of the Securities Act for the sale and issuance of the Securities
and the issuance of the Warrant Shares.
7. REMEDIES.
---------
Without limiting the rights of the Investors to pursue all other legal and
equitable rights available to them for the Company's failure to perform any of
its obligations under this Agreement, the Related Documents or the Certificate
of Incorporation of the Company, the parties hereto acknowledge and agree that,
while such Investor will be entitled to recover damages and to exercise all
other rights granted by law, the remedy at law for any failure by the Company to
perform any of such obligations may be inadequate and that the Investors may be
entitled to specific performance, injunctive relief or other equitable remedies
in the event of any such failure. No remedy conferred in this Agreement upon
the Investors or any other holder of any Security is intended to be exclusive of
any other remedy, and each and every such remedy shall be cumulative and shall
be in addition to every other remedy conferred herein or now or hereafter
existing at law or in equity or by statute or otherwise.
14
<PAGE>
8. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
----------------------------------------------
The Company represents and warrants to each Investor that:
A. Organization, Qualification and Authority. The Company and each of
-----------------------------------------
its Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and is duly
qualified to do business as a foreign corporation and in good standing in each
jurisdiction in which the character of its properties or the nature of its
business makes such qualification necessary, except where the failure to so
qualify would not have a Material Adverse Effect. The Company and each of its
Subsidiaries has the corporate power to own its properties and to carry on its
business as now being conducted. The Company has all requisite corporate power
and authority to enter into each of the Related Documents, to issue and sell the
Securities hereunder and the Warrant Shares, and has the requisite corporate
power and authority to carry out the transactions contemplated hereby and
thereby to be performed by it, and the execution, delivery and performance
hereof and thereof have been duly authorized by all necessary corporate action.
This Agreement constitutes, and each other agreement (including the Related
Documents) or instrument (including the Securities) executed and delivered by
the Company pursuant hereto or thereto or in connection herewith or therewith
will constitute, legal, valid and binding obligations of the Company enforceable
against the Company in accordance with their respective terms, except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
arrangement, moratorium or other similar laws or by the application of
principles of equity.
B. Financial Statements. The Company has furnished the Investors with (a)
--------------------
its audited consolidated balance sheets for the year ended December 31, 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the year then ended (collectively, the "Financial Statements")
--------------------
and (b) its unaudited consolidated balance sheet as of March 31, 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the quarter then ended (collectively, the "Interim Financials").
------------------
Except as set forth on Schedule 8B, the Financial Statements and the Interim
Financials (including any related schedules and notes) have been prepared in
accordance with GAAP consistently applied throughout the period or periods in
question and show all material liabilities, direct or contingent, required to be
shown in accordance with GAAP consistently applied throughout the period or
periods in question and fairly present, in all material respects, the financial
condition of the Company for the periods indicated therein, except for normal
audit adjustments and the omission of footnotes in the case of the Interim
Financials. There has been no material adverse change in the business, condition
(financial or other), assets, properties, rights, operations or prospects of the
Company or its Subsidiaries since the date of the balance sheet included in the
Financial Statements.
C. Capital Stock and Related Matters. As of the Closing Date, and after
---------------------------------
giving effect to the transactions contemplated hereby and pursuant to the
Related Documents, (i) the authorized capital stock of the Company will consist
of a total of 101,000,000 shares as follows: (a) 100,000,000 shares of Common
Stock, of which 19,229,577 shares are issued and outstanding after giving effect
to the closing under the Securities Purchase Agreement, the ownership and the
consideration paid for which is set forth on Schedule 8C and (1) 4,383,333
shares of which are reserved for the exercise of options or warrants to purchase
such shares
15
<PAGE>
issued or issuable to officers, directors, consultants, independent contractors
and employees of the Company and its Subsidiaries and other providers of
services to the Company and its Subsidiaries and (2) 2,715,000 shares of which
are reserved for issuance upon exercise of the Warrants and other warrants,
after giving effect to the Closing; and (b) 1,000,000 shares of preferred stock,
par value $.01, of which 5,000 shares are designated Series A Preferred Stock,
all of which are issued and outstanding as of the Closing Date after giving
effect to the Closing; (ii) all issued and outstanding shares shall have been
duly and validly issued, fully paid and non-assessable; (iii) no shares of
capital stock of the Company will be owned or held by or for the account of the
Company or any of its Subsidiaries; (iv) except as set forth on Schedule 8C,
neither the Company nor any of its Subsidiaries will have outstanding any
securities convertible into or exchangeable for any shares of capital stock or
any rights (either preemptive or other) to subscribe for or to purchase, or any
options for the purchase of, or any agreements providing for the issuance
(contingent or otherwise) of, or any calls, commitments or claims of any other
character relating to the issuance of, any capital stock, or any stock or
securities convertible into or exchangeable for any capital stock; (v) except as
set forth on Schedule 8C, neither the Company nor any of its Subsidiaries will
be subject to any obligation (contingent or otherwise) to repurchase or
otherwise acquire or retire any shares of its capital stock or warrants or
options to purchase shares of its capital stock; (vi) except as set forth on
Schedule 8C, neither the Company nor any of its Subsidiaries is a party to any
agreement (other than this Agreement, the Securities Purchase Agreement and the
Securityholders Agreement) restricting the transfer of any shares of its capital
stock; and (vii) neither the Company nor any of its Subsidiaries will have filed
or be required to file, pursuant to Section 12 of the Exchange Act, a
registration statement relating to any class of debt or equity securities as of
the date hereof. Upon the Closing, and after giving effect the issuance of
2,500,000 Warrant Shares upon exercise of the Warrants, such Warrant Shares will
constitute 10.41% of the Fully Diluted Outstanding Shares.
D. Actions Pending. Except as set forth in Schedule 8D, there is no
---------------
action, suit, investigation or proceeding pending or, to the knowledge of the
Company, threatened against the Company or any Subsidiary or any of their
properties or rights, by or before any court, arbitrator or administrative or
governmental body, which if adversely decided, could have a Material Adverse
Effect.
E. Outstanding Debt; Defaults. Neither the Company nor any of its
--------------------------
Subsidiaries (i) has outstanding Indebtedness, except as set forth on Schedule
8E, and there exist no material defaults under the provisions of any instrument
evidencing such Indebtedness or of any agreement relating thereto, (ii) is in
default under its Certificate of Incorporation (as amended to date) or By-laws,
(iii) is in violation of or in default under or with respect to any indenture,
mortgage, lease or any other contract or agreement to which it is a party or by
which it or any of its property is bound or affected in any respect which could
have a Material Adverse Effect, and there exists no condition, event or act
which constitutes, or which after notice, lapse of time, or both, would
constitute, such a violation or default under the foregoing, (iv) has any
material debts, liabilities, obligations (whether absolute, accrued, contingent
or otherwise) of any nature whatsoever other than (A) liabilities appearing on
the Financial Statements, (B) liabilities incurred in the ordinary course of
business since December 31, 1997, and (C) liabilities under contracts to which
the Company or any of its Subsidiaries is a party and which are listed on
Schedule 8E hereto or which have an obligation thereunder of less than $100,000
and which were entered into in the ordinary course of business or (D)
liabilities described on the other
16
<PAGE>
schedules hereto or (v) is in material default with respect to any order, writ,
injunction or decree of any court or Governmental Authority, and there exists no
condition, event or act which constitutes, or which after notice, lapse of time,
or both, would constitute, such a violation or default under any of the
foregoing.
F. Title to Properties. Each of the Company and its Subsidiaries has (i)
-------------------
indefeasible, sufficient and legal title to its real property (other than real
properties which it leases from others), subject to no Lien of any kind except
as set forth on Schedule 8F and (ii) good title to all of its other properties
and assets (other than properties and assets which it leases from others),
subject to no Lien of any kind except as set forth on Schedule 8F. Each of the
Company and its Subsidiaries enjoys peaceful and undisturbed possession under
all leases necessary in any material respect for the operation of its properties
and assets and all such leases are valid and subsisting and in full force and
effect.
G. Taxes. Each of the Company and its Subsidiaries has filed all
-----
Federal, state and other income tax returns which are required to be filed, and
each has paid all taxes as shown on said returns and on all assessments received
by it to the extent that such taxes have become due, or except such as any of
the foregoing are being contested in good faith by appropriate proceedings for
which adequate reserves have been established in accordance with GAAP; and no
tax lien has been filed and no claim is being asserted with respect to any tax
or other similar charge.
H. Conflicting Agreements. Neither the execution or delivery of the
----------------------
Related Documents nor the offering, issuance and sale of the Securities, nor
fulfillment of or compliance with the terms and provisions hereof, will conflict
with, or result in a breach of the terms, conditions or provisions of, or
constitute a default under, or result in any violation of, or result in the
creation of any Lien upon any of the properties or assets of the Company or any
of its Subsidiaries pursuant to (i) the Certificate of Incorporation (as amended
to date) or By-laws of the Company or any of its Subsidiaries, or (ii) any award
of any arbitrator or any agreement (including any agreement with stockholders),
instrument, order, judgment, decree, statute, law, rule or regulation to which
the Company or any of its Subsidiaries is subject. Except as set forth on
Schedule 8H, neither the Company nor any of its Subsidiaries is a party to, or
otherwise subject to any provision contained in, any instrument evidencing
Indebtedness of the Company or any of its Subsidiaries, any agreement relating
thereto or any other contract or agreement (including its Certificate of
Incorporation (as amended to date) and By-laws) which limits the amount of, or
otherwise imposes restrictions on the incurring of, redeemable preferred stock
of the type to be evidenced by the Series A Preferred Stock, or contains
dividend or redemption limitations on any capital stock of the Company or any of
its Subsidiaries, except for the Related Documents.
I. Offering of Securities. The offer, sale and issuance of the
----------------------
Securities pursuant to this Agreement do not require registration of such
securities under the Securities Act or registration or qualification under any
applicable state "blue sky" or securities laws (or if so required, has been so
registered or qualified). The Company has not taken any action which would
subject the issuance or sale of any of the Securities or the Common Stock to the
provisions of Section 5 of the Securities Act or violate the provisions of any
securities or "blue sky" law of any applicable jurisdiction.
17
<PAGE>
J. Broker's or Finder's Commissions. Except for Donaldson, Lufkin &
--------------------------------
Jenrette Securities Corporation, no broker's or finder's fee or commission will
be payable by the Company or any of its Subsidiaries with respect to the
issuance and sale of the Securities or the transactions contemplated hereby or
under the Related Documents. The fee of Donaldson, Lufkin & Jenrette Securities
Corporation will be paid by the Company.
K. Federal Reserve Regulations. Neither the Company nor any of its
---------------------------
Subsidiaries owns or has any present intention of acquiring, any "margin stock"
as defined in Regulation U of the Board of Governors of the Federal Reserve
System (herein called a "margin stock"). None of the proceeds resulting from the
------------
sale of the Senior Subordinated Notes will be used, directly or indirectly, for
the purpose of purchasing or carrying any margin stock or for the purpose of
reducing or retiring any indebtedness which was originally incurred to purchase
or carry margin stock or for any other purpose which might constitute this
transaction a "purpose credit" within the meaning of Regulation U. Neither the
Company nor any of its Subsidiaries nor any agent acting on its behalf has taken
or will take any action which might cause the Securities Purchase Agreement or
the Senior Subordinated Notes to violate Regulation U, Regulation T, Regulation
X or any other regulation of the Board of Governors of the Federal Reserve
System or to violate the Exchange Act, in each case as in effect now or as the
same may hereafter be in effect.
L. Environmental Matters. (i) The Company and each of its Subsidiaries
---------------------
has obtained and is in compliance with all licenses, permits and other
authorizations required under all Environmental Laws, with the exceptions of
instances that will not in the aggregate result in any Material Adverse Effect.
1. Neither the Company nor any of its Subsidiaries has received
written notice of any failure to comply with, nor has any such notice been
issued that has not been fully satisfied so as to bring the subject property
into full compliance with, all Environmental Laws.
2. All licenses, permits or registrations (or any extensions thereof)
required under any Environmental Law for the business of the Company or any of
its Subsidiaries have been obtained and the Company and its Subsidiaries, as the
case may be, will be in compliance therewith, except in such instances as will
not in the aggregate result in a Material Adverse Effect.
3. Neither the Company nor any of its Subsidiaries is in
noncompliance with, breach of or default under any applicable writ, order,
judgment, injunction or decree where such noncompliance, breach or default would
materially and adversely affect the ability of the Company or any of its
Subsidiaries to operate any real property owned or leased by them and no event
has occurred and is continuing that, with the passage of time or the giving of
notice or both, would constitute such noncompliance, breach or default
thereunder.
4. No Hazardous Substance has been Released (as such term is defined
in CERCLA) (and no oral or written notification of such Release has been filed)
(whether or not in a reportable or threshold planning quantity) at, on or under
any property owned or leased by the Company or any of its Subsidiaries, or to be
acquired or leased by the Company or any of its Subsidiaries, during the period
of the Company's or any of its Subsidiaries' ownership or lease of such
property, or at any time previous to such ownership or lease, under conditions
that
18
<PAGE>
require remedial action under applicable Environmental Laws. Neither the Company
nor any of its Subsidiaries has, directly or indirectly, transported or arranged
for the transportation of any Hazardous Substances to any site listed, or
proposed for listing, on the National Priorities List promulgated pursuant to
CERCLA, on CERCLIS (as defined in CERCLA) or on any similar Federal, state or
foreign list of sites requiring investigation or cleanup. Neither the Company
nor any of its Subsidiaries is aware of any event, condition or circumstance
involving environmental pollution or contamination, or employee safety or health
relating to the use or handling of, or exposure to, Hazardous Substances, that
could result in a Material Adverse Effect.
M. ERISA. None of the Company, any Subsidiary or any ERISA Affiliate
-----
maintains or has an obligation to contribute to any Pension Plan or any
Multiemployer Pension Plan. None of the Company, any Subsidiary or any ERISA
Affiliate has incurred any liability to the PBGC (other than annual premiums due
to the PBGC), a Pension Plan under Title IV of ERISA or a Multiemployer Pension
Plan under Title IV of ERISA. The execution and delivery by the Company of this
Agreement and the purchase and delivery of the Securities will not involve any
prohibited transaction within the meaning of ERISA or Section 4975 of the Code.
The Company has delivered to the Investors a complete list and accurate
description of each Pension Plan and each other employee benefit plan covered by
ERISA maintained or contributed to by the Company, any Subsidiary and any ERISA
Affiliate.
N. Possession of Franchises, Licenses, etc. The Company and each of its
---------------------------------------
Subsidiaries possesses all franchises, certificates, licenses, permits and other
authorizations from governmental political subdivisions or regulatory
authorities, that are necessary for the ownership, maintenance and operation of
its properties and assets, except where the failure to be in such compliance
would not have a Material Adverse Effect, and the Company and each of its
Subsidiaries is not in violation of any thereof in any material respect.
O. Patents, etc. The Company and each of its Subsidiaries owns or has
------------
the right to use all material patents, trademarks, service marks, trade names,
copyrights, industrial designs, licenses and other rights, free from non-
customary burdensome restrictions, which are material to the operation of its
business substantially as presently conducted. No product, process, method,
substance, part or other material presently sold by or employed by the Company
or any of its Subsidiaries in connection with their business infringes in any
material respect any patent, trademark, service mark, trade name, copyright,
industrial design, license or other right owned by any other Person. No claim or
litigation is pending or, to the Company's knowledge, threatened against or
affecting the Company or any of its Subsidiaries contesting their right to sell
or use any such product, process, method, substance, part or other material
which would prevent, inhibit or render obsolete in any material respect the
production or sale of any products of, or substantially reduce the projected
revenues of, the Company or any of its Subsidiaries, or otherwise have a
Material Adverse Effect.
P. Holding Company and Investment Company Status. Neither the Company
---------------------------------------------
nor any of its Subsidiaries is a "holding company", or a "subsidiary company" of
a "holding company", or an "affiliate" of a "holding company" or of a
"subsidiary company" of a "holding company", or a "public utility", within the
meaning of the Public Utility Holding Company Act of 1935, as amended, or a
"public utility" within the meaning of the Federal Power Act, as amended.
Neither the Company nor any of its Subsidiaries is an "investment company" or a
19
<PAGE>
company "controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended, or an "investment adviser" within
the meaning of the Investment Advisers Act of 1940, as amended.
Q. Governmental Consents. Neither the nature of the Company or any of
---------------------
its Subsidiaries nor any of their businesses or properties, nor any relationship
between the Company or any of its Subsidiaries and any other Person, nor any
circumstance in connection with the offer, issue, sale or delivery of the
Securities being purchased by the Investors hereunder is such as to require on
behalf of the Company or any of its Subsidiaries any consent, approval or other
action by or any notice to or filing with any court or administrative or
governmental body in connection with the execution, delivery and performance of
this Agreement, the other Related Documents, the offer, issue, sale or delivery
of the Securities being purchased hereunder, or fulfillment of or compliance
with the terms and provisions hereof or the Securities being purchased
hereunder, except for such filings or consents all of which have been heretofore
made or obtained, or, with respect to filings, will be promptly and timely made
hereafter.
R. Insurance Coverage. The business and properties of the Company and
------------------
each of its Subsidiaries are insured for the benefit of the Company and each of
its Subsidiaries in amounts deemed adequate by the Company's management against
risks usually insured against by Persons operating businesses similar to those
of the Company and each of its Subsidiaries in the localities where such
properties are located.
S. Subsidiaries. The Subsidiaries set forth on Schedule 8S hereto are
------------
the only Subsidiaries of the Company. All the outstanding shares of capital
stock of such Subsidiaries have been validly issued and are fully paid and non-
assessable and are owned by the Company free and clear of any Lien or claim. No
such Subsidiary has outstanding capital stock or securities convertible into or
exchangeable or exercisable for any shares of capital stock, nor does it have
outstanding any rights to subscribe for or to purchase, any options for the
purchase of, any agreements providing for the issuance (contingent or otherwise)
of, or any calls, commitments or claims of any other character relating to the
issuance of, any shares of capital stock or any securities convertible into or
exchangeable or exercisable for any shares of capital stock.
T. Disclosure. This Agreement and the other Related Documents, and the
----------
other documents, certificates and written statements furnished to the Investors
by or on behalf of the Company in connection herewith or therewith (including,
without limitation, that certain Private Placement Offering Memorandum of the
Company dated December 1997 do not contain any untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
contained herein and therein not misleading that have not been corrected or
disclosed, as the case may be, in a written statement furnished subsequently to
the Investors.
U. Related Party Transactions. Except as described on Schedule 8U, no
--------------------------
current or former stockholder, director, officer of the Company, nor any
"Associate" (as defined in Rule 405 promulgated under the Securities Act) of any
such Person, is presently, directly or indirectly through his affiliation with
any other Person, a party to any transaction with the Company and any Subsidiary
providing for the furnishing of services by or to, or rental of real or personal
property from or to, or otherwise requiring cash payments to or by any such
Person.
20
<PAGE>
V. Registration Rights. Except as contemplated by the Registration
-------------------
Rights Agreement or as specified on Schedule 8V, no Person has the right to
cause the Company or any of its Subsidiaries to effect the registration under
the Securities Act of any shares of Common Stock or any other securities
(including debt securities) of the Company or any of its Subsidiaries.
W. Absence of Foreign or Enemy Status. Neither the Company nor any of
----------------------------------
its Subsidiaries is (i) a "national" of a foreign country designated in
Executive Order No. 8389, as amended, or of any "designated enemy country" as
defined in Executive Order No. 9193, as amended, of the President of the United
States of America within the meaning of said Executive Orders, as amended, or of
any regulation issued thereunder, or a "national" of any "designated foreign
country" within the meaning of the Foreign Assets Control regulations, 31 CFR,
Part 500, as amended, or of the Cuban Assets Control Regulations, 31 CFR, Part
515, as amended, of the United States Treasury Department, or (ii) an "Iranian
entity" or a "person subject to the jurisdiction of the United States" in which
an "Iranian entity" has any "interest" within the meaning of the Iranian Assets
Control Regulations, 31 CFR, Part 535, as amended.
X. Agreements with Affiliates. Except as set forth on Schedule 8X or 8U,
--------------------------
neither the Company nor any of its Subsidiaries is a party to any contract or
agreement with, or any other commitment to, an Affiliate of the Company or any
of its Subsidiaries.
Y. Employees. The Company does not have any collective bargaining
---------
agreements with any of its employees, and no labor union organizing activity is
pending or threatened with respect to the Company. To the Company's knowledge,
no employee is obligated under any agreement or judgment that would conflict
with such employee's obligation to use his or her reasonable best efforts to
promote the interests of the Company or that would conflict with the Company's
business as currently conducted or proposed to be conducted. To the Company's
knowledge, no employee is in violation of any term of any employment agreement,
proprietary information agreement, noncompetition agreement or any other
agreement relating to such employee's relationship with any previous employer.
To the Company's knowledge, neither the execution nor delivery of this Agreement
or any of the Related Documents nor the carrying on of the Company's business by
the employees of the Company, nor the conduct of the Company's business as
proposed, will conflict with or result in a breach of the terms, conditions or
provisions of, or constitute a default under, any contract, covenant or
instrument under which any of such employees is now obligated. The Company is
not a party to or bound by any currently effective employment contract, deferred
compensation agreement, bonus plan, incentive plan, profit sharing plan,
retirement agreement, or other employee compensation agreement.
Z. Year 2000. None of the custom-made software or hardware designed or
---------
purchased or licensed by the Company or any of its Subsidiaries from third
parties and, to the knowledge of the Company, none of the commercially available
software used by the Company or any of its Subsidiaries in the course of the
operation or management of, or the compiling, reporting or generation of data
relating to, its business contains any deficiency (i) in the ability of such
software or hardware to identify correctly or perform calculations or other
processing with respect to dates after December 31, 1999 or (ii) that would
cause such software or hardware to be fit no longer for the purpose for which it
was intended by reason of the changing of the date form
21
<PAGE>
1999 to 2000, in each case that would be reasonably expected to result in a
Material Adverse Effect.
AA. Validity of Stock. The Securities, when issued, sold and delivered in
-----------------
accordance with the terms of this Agreement, will be duly and validly issued,
fully paid, non-assessable and free and clear of all liens, charges, claims and
encumbrances whatsoever and will be issued free of any preemptive rights
(contractual or otherwise). The Warrant Shares have been duly and validly
reserved and, upon issuance in accordance with the exercise provisions of the
Certificate of Warrants, will be duly and validly issued, fully paid, non-
assessable and free and clear of all liens, charges, claims and encumbrances
whatsoever and will be issued free of any preemptive rights (contractual or
otherwise).
9. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS.
------------------------------------------------
Each Investor represents and warrants that it is acquiring the Securities
to be purchased by it hereunder for its own account for the purpose of
investment and not with a view to or for sale in connection with any
distribution thereof in violation of the Securities Act; provided, however, that
-------- -------
nothing herein contained shall prevent the Investors from selling or
transferring any Securities or Warrant Shares in any transaction that, in the
opinion of their special counsel, is exempt from the registration provisions of
the Securities Act and applicable state securities laws. It is agreed that the
Company will include a customary legend on each of the Securities referring to
the absence of registration of the Securities and to limitations on resale
thereof; and the Investors understand that they may be required to maintain
their investment in the Securities for an indefinite period and that the
Securities will not be readily marketable except under "private placement"
procedures; and the Company may require an opinion of counsel to be delivered as
a condition to any transfer not effected in accordance with Rule 144 under the
Securities Act (including paragraph (k) thereof); provided that, in connection
with any such opinion requested by the Company, the Company shall pay the
reasonable fees and expenses of counsel to the Investors in an aggregate amount
not to exceed $10,000. Notwithstanding the foregoing, the Company shall not
unreasonably require an opinion of counsel if such transfer is (i) to any Person
Affiliated or associated (as defined in the Exchange Act, and the rules and
regulations thereunder) with Donaldson, Lufkin & Jenrette Securities Corporation
or (ii) to any employee of Donaldson, Lufkin & Jenrette Securities Corporation
or its Affiliates; provided, that the transferee referred to in (i) and (ii)
shall deliver to the Company a certificate stating that such transferee is an
"accredited investor" as that term is defined in Rule 501(a) of Regulation D
under the Securities Act and is capable of evaluating the risks and merits of
acquiring the Securities and/or Warrants and is acquiring the Securities and/or
Warrants for its own account for investment only and not with a view to
distribution. In addition, each Investor represents and warrants that it (a)
has full power and authority to enter into and perform its obligations under
this Agreement and that this Agreement has been duly authorized, executed and
delivered by a Person authorized to do so, (b) has such knowledge and experience
in financial and business matters that it is capable of evaluating the merits
and risks of its investment in the Securities, (c) is able to bear the complete
loss of its investment in the Securities and (d) has had the opportunity to ask
questions of, and receive answers from, the Company and its management
concerning the terms and conditions of the offering of the Securities and to
obtain additional
22
<PAGE>
information. In addition, each Investor represents and warrants that it is an
"accredited investor" as defined in Rule 501 of the General Rules and
Regulations under the Securities Act.
10. DEFINITIONS.
------------
For the purpose of this Agreement, and in addition to terms defined
elsewhere in this Agreement, the following terms shall have the following
meanings. In addition, all terms of an accounting character not specifically
defined herein shall have the meanings assigned thereto by GAAP.
"Acceptable Controlling Person" shall mean any of Orchard/JFAX Investors,
-----------------------------
L.L.C. or any other entity controlled by Richard Ressler.
"Additional Warrant Shares" shall have the meaning set forth in paragraph
-------------------------
4A.
"Affiliate" shall mean, with respect to any Person, a Person directly or
---------
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. A Person shall be deemed to control a corporation if
such Person possesses, directly or indirectly, the power to direct or cause the
direction of the management and policies of such corporation, whether through
the ownership of voting securities, by contract or otherwise. For purposes of
this Agreement, the Investors shall not be deemed to be Affiliates of the
Company or any of its Subsidiaries.
"Business Day" shall mean any day which is not a Saturday, Sunday or day on
------------
which banks are authorized by law to close in the State of New York.
"Capital Lease" shall mean any lease of any Property (whether real,
-------------
personal, or mixed) that, in conformity with GAAP, is accounted for as a capital
lease on the balance sheet of the lessee.
"Capitalized Lease Obligations" of any Person means all obligations of such
-----------------------------
Person, as lessee, under leases which should, in accordance with GAAP, be
recorded as Capital Leases.
"CERCLA" shall mean the Comprehensive Environmental Response, Compensation,
------
and Liability Act of 1980, as amended (42 U.S.C. (S)(S) 9601 et seq.), and any
------
regulations promulgated thereunder.
"Change of Control" shall mean the occurrence of any of the following:
-----------------
(a) the acquisition or holding by
(i) any person (as such term is used in section 13(d) and
section 14(d)(2) of the Exchange Act as in effect on the Closing Date)
other than an Acceptable Controlling Person or the Investors, or
(ii) related Persons constituting a group (as such term is used
in Rule 13d-5 under the Exchange Act as in effect on the Closing Date)
other than related Acceptable Controlling Persons or Investors constituting
such a group,
23
<PAGE>
of legal and/or beneficial ownership of more than 35% of the Common Stock or any
securities convertible into more than 35% of the Common Stock of the Company
outstanding at such time if at such time the owners of Common Stock on the
Closing Date, the Investors and the investors under the Securities Purchase
Agreement beneficially own in the aggregate less than a majority of the Common
Stock or any securities convertible into less than a majority of the Common
Stock of the Company (excluding for such purpose persons who own shares through
any employee benefit plan of the Company in connection therewith);
(b) all or substantially all of the assets of the Company are sold or
otherwise transferred, in a single transaction or in a series of related
transactions, to any other Person;
(c) any merger, consolidation or other similar transaction of, or in
respect of, the Company which results in the failure by the owners of Common
Stock on the Closing Date, the Investors and the investors under the Securities
Purchase Agreement to, directly or indirectly in the aggregate, maintain
beneficial ownership and voting control of at least fifty percent (50%) of the
outstanding common sock of the surviving entity in such merger, consolidation or
similar transaction; or
(d) any liquidation or dissolution of the Company, or action taken by the
Board of Directors of the Company to authorize any such liquidation or
dissolution.
Notwithstanding the foregoing, any transaction permitted under paragraph 7E
of the Securities Purchase Agreement shall not constitute a "Change of Control."
Any sale of assets of the Company (or any of its Subsidiaries) which generated
2/3 or more of the revenues of the Company (on a consolidated basis) during the
immediately preceding fiscal year shall constitute a "Change of Control".
"Change of Control Event" shall mean the earlier of the occurrence of a
-----------------------
Change of Control or the Company acquiring knowledge of a pending Change of
Control.
"Closing" shall have the meaning specified in paragraph 2B.
-------
"Closing Date" shall have the meaning specified in paragraph 2B.
------------
"Code" shall mean the Internal Revenue Code of 1986, as amended.
----
"Commission" shall mean the United States Securities and Exchange
----------
Commission.
"Common Stock" shall mean the shares of Common Stock, par value $.01 per
------------
share, of the Company.
"Company" shall have the meaning specified in the preamble.
-------
"Environmental Laws" shall mean all applicable laws, regulations, orders,
------------------
notices and other requirements of Governmental Authorities relating to public
health and safety, pollution or to the protection of the environment.
24
<PAGE>
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
-----
amended from time to time, and the regulations promulgated and rulings issued
thereunder.
"ERISA Affiliate" shall mean each trade or business (whether or not
---------------
incorporated) which together with the Company or a Subsidiary would be deemed to
be a "single employer" within the meaning of Section 4001 of ERISA.
"Exchange Act" shall mean the United States Securities Exchange Act of
------------
1934, as amended.
"Exchange Act Registration Statement" shall have the meaning specified in
-----------------------------------
paragraph 5J.
"Exit Closing" shall have the meaning set forth in paragraph 4D.
------------
"Fair Market Value" shall mean either (i) the Market Price, if applicable,
-----------------
of the Common Stock or (ii) if no Market Price exists, the value (which shall
not take into effect any minority discounts) of the Common Stock as determined
by a nationally recognized investment banking firm or accounting firm designated
by the Investors and reasonably acceptable to the Company; provided that if the
parties cannot agree on such a firm, each party shall choose a nationally
recognized investment banking firm, which shall choose a third nationally
recognized firm and that third firm shall determine the Fair Market Value, which
determination shall be final and binding. The cost relating to retaining any
such firm(s) pursuant to this Agreement or the other Related Documents shall be
borne by the Company.
"Fully Diluted Outstanding Shares" shall mean, when used with reference to
--------------------------------
Common Stock on any date of determination, all shares of Common Stock or any
other capital stock of the Company Outstanding at such date, including all
shares of Common Stock or any other capital stock of the Company issuable upon
exercise or conversion of any outstanding warrants, options or convertible
securities that are then "in the money" (excluding that portion of the warrants
of American Online, Inc. that are performance based).
"GAAP" shall mean generally accepted accounting principles set forth in the
----
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board, or in such other statements by such
other entity as may be in general use by significant segments of the accounting
profession in the United States, which are applicable to the circumstances as of
the date of determination.
"Governmental Authority" shall mean any governmental agency, authority,
----------------------
instrumentality or regulatory body, other than a court or other tribunal, in
each case whether federal, state, local or foreign.
"Hazardous Substances" shall mean any hazardous substance, hazardous waste,
--------------------
contaminant, pollutant or toxic substance (as such terms are defined in any
applicable Environmental Law).
25
<PAGE>
"Indebtedness" shall mean (without duplication), for any Person, (a)
------------
indebtedness of such Person for borrowed money or arising out of any extension
of credit to or for the account of such Person (including, without limitation,
extensions of credit in the form of reimbursement or payment obligations of such
Person relating to letters of credit issued for the account of such Person) or
for the deferred purchase price of property or services, except indebtedness
which is owing to trade creditors in the ordinary course of business and which
is due within ninety (90) days after the original invoice date; (b) indebtedness
of the kind described in clause (a) of this definition which is secured by (or
for which the holder of such Indebtedness has any existing right, contingent or
otherwise, to be secured by) any Lien upon or in Property (including, without
limitation, accounts and contract rights) owned by such Person, whether or not
such Person has assumed or become liable for the payment of such indebtedness or
obligations; (c) Capitalized Lease Obligations of such Person; (d) obligations
under direct or indirect Guaranties in respect of, and obligations (contingent
or otherwise) to purchase or otherwise acquire, or otherwise to assure a
creditor against loss in respect of, indebtedness or obligations of others of
the kinds referred in clauses (a) through (c) above, including without
limitation, (i) any endorsement not for collection in the ordinary course of
business or discount with recourse or undertaking substantially equivalent to or
having economic effect similar to a guaranty in respect of any such
Indebtedness; (ii) any agreement (1) to purchase, or to advance or supply funds
for the payment or purchase of, any such Indebtedness, (2) to purchase, sell, or
lease property, products, materials, supplies, transportation, or services, in
order to enable such Person to pay any such Indebtedness or to assure the owner
thereof against loss regardless of the delivery or non-delivery of the property,
products, materials, supplies, transportation, or services or (3) to make any
loan, advance, or capital contribution to, or other investment in, or to
otherwise provide funds to or for, such other Person in order to enable such
Person to satisfy any obligation (including any liability for a dividend, stock
liquidation payment or expense) or to assure a minimum equity, working capital,
or other balance sheet condition in respect of any such obligation; and (iii)
obligations under surety, appeal, or custom bonds; and (e) liabilities in
respect of unfunded vested benefits under plans covered by Title IV of ERISA.
"Indemnitee" shall mean the Investors and each holder from time to time of
----------
the Securities and each of their respective directors, officers, employees,
agents, partners and Affiliates.
"Initial Public Offering" shall mean the closing of the Company's initial
-----------------------
public offering of its Common Stock pursuant to a registration statement
declared effective under the Securities Act, except that an Initial Public
Offering shall not include an offering made solely in connection with a business
acquisition or an employee benefit plan.
"Interim Financials" shall have the meaning set forth in paragraph 8B.
------------------
"Investor Parties" shall have the meaning set forth in paragraph 5K.
----------------
"Investors" shall have the meaning set forth in the preamble.
---------
"Lien" shall mean any mortgage, pledge, security interest, encumbrance,
----
lien or charge of any kind, including, without limitation, any agreement to give
any of the foregoing, any conditional sale or other title retention agreement,
any lease in the nature thereof and the filing of
26
<PAGE>
or agreement to file any financing statement under the Uniform Commercial Code
of any jurisdiction.
"Margin stock" shall have the meaning set forth in paragraph 8K.
------------
"Market Price" of any security shall mean the value determined in
------------
accordance with the following provisions:
(i) if such security is listed on a national securities exchange
registered under the Exchange Act, a price equal to the average of the
closing sales prices for such security on such exchange for each day during
the 20 consecutive trading days immediately preceding the measurement date;
and
(ii) if not so listed, and such security is quoted on Nasdaq, a
price equal to the average of the average of the closing bid and asked
prices for such security quoted on such system each day during the 20
consecutive trading days immediately preceding the measurement date.
"Material Adverse Effect" shall mean (i) a material adverse effect on the
-----------------------
business, condition or prospects (financial or other), assets, properties,
rights or operations of the Company and its Subsidiaries taken as a whole or
(ii) any effect which could materially adversely affect the ability of the
Company or its Subsidiaries to perform their respective obligations under any of
the Related Documents.
"Multiemployer Pension Plan" shall mean any multiemployer plan, as defined
--------------------------
in Section 4001 of ERISA and subject to Title IV of ERISA, which the Company,
any Subsidiary or any ERISA Affiliate has an obligation to make contributions
(or has had an obligation to make contributions during the five calendar years
preceding the Closing) for the employees of the Company, any of its
Subsidiaries, or any ERISA Affiliates.
"Nasdaq" shall mean the Nasdaq Stock Market's National Market or Smallcap
------
Market of the National Association of Securities Dealers.
"Notice of Change of Control Event" shall have the meaning set forth in
---------------------------------
paragraph 4B.
"Officer's Certificate" of a Person shall mean a certificate of the
---------------------
President, one of the Vice Presidents, the Chief Financial Officer or the
Treasurer or Controller of such Person.
"Outstanding" shall mean, when used with reference to Common Stock, at any
-----------
date as of which the number of shares thereof is to be determined, all issued
and outstanding shares of Common Stock.
"PBGC" shall mean the Pension Benefit Guaranty Corporation established
----
pursuant to Section 4002 of ERISA, or any successor entity thereto.
"Pension Plan" shall mean any single-employer plan, as defined in Section
------------
4001 of ERISA and subject to Title IV of ERISA, which is maintained or
contributed to (or previously
27
<PAGE>
maintained or contributed to during the five calendar years preceding the
Closing) for employees of the Company, any of its Subsidiaries or any ERISA
Affiliates.
"Person" shall mean and include an individual, partnership, corporation
------
(including a business trust), a limited liability company, joint stock company,
trust, unincorporated association, joint venture, or other entity, or a
government, or any political subdivision or agency of any of the foregoing.
"Property" shall mean any interest or right in any kind of property or
--------
asset, whether real, personal or mixed, owned or leased, tangible or intangible,
and whether now held or hereafter acquired.
"Qualifying Public Offering" shall mean the sale by one or more Persons in
--------------------------
one or more underwritten offerings registered under the Securities Act of any
Common Stock of the Company (or its successor) which results in aggregate net
proceeds from such sales (after underwriters' discounts and selling commissions)
to the Company greater than or equal to $20,000,000.
"Registration Rights Agreement" shall mean the Registration Rights
-----------------------------
Agreement between the Company and the Investors in the form of Exhibit D
attached hereto.
"Related Documents" shall mean this Agreement, the Certificate of
-----------------
Designations, the Certificate of Warrants, the Securities Purchase Agreement,
the Senior Subordinated Notes, the Securityholders Agreement and the
Registration Rights Agreement.
"Released" shall have the meaning set forth in paragraph 8L.
--------
"securities" shall mean "securities" as defined in Section 2(1) of the
----------
Securities Act and includes, with respect to any Person, such Person's capital
stock or other equity interests or any options, warrants or other securities
that are directly or indirectly convertible into, or exercisable or exchangeable
for, such Person's capital stock or other equity interests.
"Securities Purchase Agreement" shall mean the Senior Subordinated Notes
-----------------------------
and Common Stock Purchase Agreement dated as of June 30, 1998 among the Company,
the Guarantors and the investors therein.
"Securities" shall have the meaning set forth in paragraph 1A.
----------
"Securities Act" shall mean the United States Securities Act of 1933, as
--------------
amended.
"Securityholders Agreement" shall mean the Securityholders Agreement
-------------------------
between the Company, certain shareholders thereof and the Investors in the form
of Exhibit E hereto.
"Senior Subordinated Notes" shall have the meaning ascribed to it in the
-------------------------
Securities Purchase Agreement.
"Series A Preferred Stock" shall have the meaning set forth in paragraph
------------------------
1A.
28
<PAGE>
"Subsidiary" as to any Person shall mean a corporation or other entity of
----------
which shares or similar stock having ordinary voting power to elect a majority
of the board of directors or other managers of such corporation or entity are at
the time owned, directly or indirectly, through one or more intermediaries, by
such Person. Except as otherwise expressly indicated herein, references to
Subsidiaries shall mean any Subsidiaries of the Company.
"Warrants" shall have the meaning set forth in paragraph 1A.
--------
"Warrant Securities" shall have the meaning set forth in paragraph 4A.
------------------
"Warrant Shares" shall mean the shares of Common Stock issued or issuable
--------------
upon exercise of the Warrants.
11. MISCELLANEOUS.
-------------- --
A. Expenses; Indemnification. (a) The Company agrees, whether or not
-------------------------
the transactions hereby contemplated shall be consummated, to pay the
Indemnitees all of their reasonable out-of-pocket expenses arising in connection
with the transactions and other agreements and instruments contemplated by this
Agreement, including reasonable fees, expenses and disbursement of counsel
incurred in connection with the preparation and negotiation of this Agreement,
and any other agreement or instrument to be executed and delivered in connection
with this Agreement, any subsequent modification hereof or thereof or consent
hereunder or thereunder (regardless of whether any such modifications or consent
becomes effective) or the execution, delivery or acquisition of Securities,
printing, reproduction and similar costs, and the reasonable cost and expenses,
including reasonable attorneys' fees, incurred by any Indemnitee in enforcing
any of its rights under any Related Document, including without limitation
reasonable costs and expenses incurred in any bankruptcy case (including
reasonable fees and expenses of the Indemnitee's counsel in connection with such
bankruptcy case). The fees of counsel to the Investors incurred in connection
with the preparation and negotiation of this Agreement shall be paid at the
Closing.
(b) The Company agrees to indemnify the Indemnitees and hold them
harmless from and against any and all liabilities, losses, damages, costs and
expenses of any kind (including, without limitation, the reasonable fees and
disbursements of the Indemnitees' counsel in connection with any investigative,
administrative or judicial proceeding, whether or not the Indemnitees be
designated a party thereto) which may be incurred by the Indemnitees (i) as a
result of any breach of any representation, warranty or covenant of the Company
contained in any Related Document or (ii) in connection with a claim, demand or
other proceeding by the Company or any third party relating to or arising out of
any Related Document (other than claims, demands or other proceedings among the
Investors or their investment adviser), provided that no Indemnitee shall have
the right to be indemnified hereunder for its own gross negligence or willful
misconduct as finally determined by a court of competent jurisdiction. The
obligations of the Company under this paragraph 11A shall survive the transfer
of any Security, the redemption of all of the shares of the Series A Preferred
Stock, the exercise of all of the Warrants and the issuance of all of the
Warrant Shares. The indemnification required by this paragraph 11A shall be made
by periodic payments of the amount thereof during the course of the
29
<PAGE>
investigation or defense, as and when bills are received or expense, loss,
damage or liabilities are incurred.
B. Consent to Amendments. This Agreement may be amended and the Company
---------------------
may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, or take action which by the express terms of
this Agreement requires the consent of the Investors, only if the Company shall
have obtained the prior written consent to such amendment, action or omission to
act after the Closing Date of the holders of a majority in interest of the
Series A Preferred Stock and a majority in interest of the Warrants. Each holder
of any Security at the time or thereafter outstanding shall be bound by any
consent authorized by this paragraph 11B, whether or not such Security shall
have been marked to indicate such consent, but any Security issued thereafter
shall contain a reference or bear a notation referring to any such consent. The
Company shall promptly send copies of any amendment, waiver or consent (and any
request for any such amendment, waiver or consent) relating to this Agreement or
the Securities to each holder of the Securities and shall consult with such
holders in connection with each such amendment, consent and waiver. No course of
dealing between the Company or any Subsidiary and the holder of any Security nor
any delay in exercising any rights hereunder or under any Security shall operate
as a waiver of any rights of any holder of such Security. As used herein and in
the Securities, the term "this Agreement" and references thereto shall mean this
Agreement as it may, from time to time, be amended or supplemented. Any
amendments to this Agreement shall also require the consent of the Company.
C. Form, Registration, Transfer and Exchange of Series A Preferred Stock
---------------------------------------------------------------------
and Warrants; Lost Series A Preferred Stock and Warrants. The Securities are
- --------------------------------------------------------
issuable as registered securities transferable by endorsement and delivery. The
Company shall keep at its principal office a register in which the Company shall
provide for the registration of the Securities. Upon surrender for registration
of transfer of any registered Security at such office, the Company shall, at its
expense, execute and deliver one or more replacement Securities of like tenor
and of a like aggregate principal amount which replacement Securities shall be
registered Securities. At the option of the holder of any Security such Security
may be exchanged for other Securities of any authorized denominations, of a like
tenor and of a like aggregate principal amount, upon surrender of the Security
to be exchanged at the office of the Company. Whenever any Securities are so
surrendered for exchange, the Company shall execute and deliver, at its expense,
the Securities which the holder thereof making the exchange is entitled to
receive. Every Security presented or surrendered for registration of transfer
shall be duly endorsed, or be accompanied by a written instrument of transfer
duly executed, by the holder of Security, or his attorney duly authorized in
writing. Upon receipt of written notice from a holder or other evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of any Security held by a holder and, in the case of any such loss,
theft or destruction, upon receipt of its unsecured indemnity agreement, or
other indemnity reasonably satisfactory to the Company, or in the case of any
such mutilation upon surrender and cancellation of such mutilated Security, the
Company will make and deliver a replacement Security of like tenor, in lieu of
such lost, stolen, destroyed or mutilated Security.
D. Provisions Applicable if any of the Securities are Sold. The parties
-------------------------------------------------------
acknowledge that, subject to compliance with the Related Documents and
applicable securities laws, the Investors shall be free to transfer the
Securities or Warrant Shares without restriction. In the
30
<PAGE>
event that the Investors should sell or otherwise transfer any of the Securities
or Warrant Shares or any part thereof to any Person other than the Company, if
any Security or Warrant Share shall have been transferred to another holder and
such holder shall have designated in writing the address to which communications
with respect to the Security or Warrant Share shall be mailed, all notices,
certificates, requests, statements and other documents required to be delivered
to the Investors by any provision hereof by reason of the holding of the
transferred Security or Warrant Share shall also be delivered to such holder at
such address.
E. Restrictive Legends. Each Security shall bear the following (or
-------------------
substantially equivalent) legend on the face or reverse side thereof:
"The securities represented hereby have not been registered under the
Securities Act of 1933, as amended, or applicable state securities laws, and the
securities may not be sold, transferred or otherwise disposed of in the absence
of such registration or an exemption therefrom under said Act and such laws and
the respective rules and regulations thereunder."
In addition, the Securities shall bear at the time of issuance any legend
required by the state securities or "blue sky" laws of any state in which a
registered holder thereof is resident.
F. Persons Deemed Owners. Prior to due presentment for registration of
---------------------
transfer, the Company may treat the Person in whose name any Security is
registered as the owner and holder of such Security for the purpose of receiving
payments in respect of such Security and for all other purposes whatsoever, and
the Company shall not be affected by notice to the contrary.
G. Survival of Representations and Warranties. All representations and
------------------------------------------
warranties contained herein or made in writing by or on behalf of any party to
this Agreement in connection herewith shall survive the execution and delivery
of this Agreement, regardless of any investigation made by the Investors or on
their behalf.
H. Successors and Assigns. Except as otherwise provided herein, all
----------------------
covenants and agreements in this Agreement contained by or on behalf of the
parties hereto shall bind and inure to the benefit of the respective successors,
transferees and assigns of the parties hereto whether so expressed or not and,
for greater certainty, a purchaser of Securities from any holder of Securities,
which transaction is effected prior to a Qualifying Public Offering or in a
private transaction following a Qualifying Public Offering, will be entitled to
the benefits of this Agreement and the Company shall be deemed to have received
express notice in writing of any such assignment by a request for registration
of Securities in the name of such a subsequent purchaser.
I. Notices. All communications provided for hereunder shall be sent by
-------
first class mail, overnight courier or by fax with hard copy by first class mail
or overnight courier and, if to the Investors, addressed to the Investors in the
manner in which its address appears on the signature page hereof, with a copy to
David W. Ambrosia, Esq., at Winthrop, Stimson, Putnam & Roberts, New York, NY
10004, telecopy number (212) 858-1500, if to the Company, addressed to it at
10960 Wilshire Boulevard, 5/th/ Floor, Los Angeles, California 90024, telecopy
number (310) 966-1651, with a copy to Sullivan & Cromwell, 1888 Century Park
East, Los Angeles, California 90067, telecopy number (310) 712-8800, Attention:
Frank Golay, Esq., or to
31
<PAGE>
such other address with respect to any party as such party shall notify the
other in writing, and (unless otherwise specified herein) shall be deemed
received 24 hours after it is sent if sent via facsimile (with receipt
confirmed) or overnight courier; provided, however, that any such communication
-------- -------
to the Company may also, at the option of the Investors, be either delivered to
the Company at its address set forth above or to any executive officer of the
Company.
J. Descriptive Headings. The descriptive headings of the several
--------------------
Sections and paragraphs of this Agreement are inserted for convenience only and
do not constitute a part of this Agreement.
K. GOVERNING LAW; CONSENT TO JURISDICTION. THIS AGREEMENT IS BEING
--------------------------------------
DELIVERED AND IS INTENDED TO BE PERFORMED IN THE STATE OF NEW YORK, AND SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL
BE GOVERNED BY, THE LAW OF SUCH STATE WITHOUT GIVING EFFECT TO THE CHOICE OF LAW
OR CONFLICTS OF LAW PRINCIPLES THEREOF. THIS AGREEMENT IS EFFECTIVE ONLY WHEN
DELIVERED AND ENTERED INTO BY THE INVESTORS IN NEW YORK. ANY LEGAL ACTION OR
PROCEEDING WITH RESPECT TO THIS AGREEMENT MAY BE BROUGHT IN THE COURTS OF THE
STATE OF NEW YORK OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT
OF NEW YORK, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE COMPANY
HEREBY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND
UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. THE COMPANY
IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED
COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY
REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE COMPANY AT ITS ADDRESS SET
FORTH IN PARAGRAPH 11I, SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER SUCH
MAILING. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE INVESTORS OR ANY HOLDER OF
A SECURITY TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE
LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE COMPANY IN ANY OTHER
JURISDICTION.
L. Delay Fees. If the Closing shall not actually occur on any date on
----------
which the Closing is scheduled to occur, and the Company shall have failed to
notify each Investor prior to 10:00 A.M. local time, in the place in which an
Investor is located, on the day prior to such scheduled Closing that such
Closing has been postponed, the Company shall pay to each Investor (as
compensation for such Investor's loss of fund and administrative costs) an
amount equal to interest on the purchase price for the Securities to have been
purchased by each such Investor on such scheduled date at such Closing, at the
rate per annum on the Senior Subordinated Notes as if the Senior Subordinated
Notes had been issued on the scheduled date of Closing, for each day from and
including such scheduled date of Closing to but not including the earlier of the
date on which such Closing actually occurs or the date on which the amount to be
paid by each such Investor as said purchase price is available to such Investor
for reinvestment, but in any case not less than one day's interest; provided,
--------
however, that the Company shall not owe any Investor any amount under this
- -------
32
<PAGE>
paragraph 11M if the Company has fulfilled all of its obligations under this
Agreement and such Investor is not willing or able to fulfill its obligations on
the scheduled date of Closing.
M. Allocation of Purchase Price. The Company and the Investors hereby
----------------------------
acknowledge and agree that, for all income tax purposes, (i) the Series A
Preferred Stock, together with the Warrants, constitute an investment unit and
(ii) the aggregate issue price of the investment units at Closing is $5,000,000,
and such amount will be allocated between the Series A Preferred Stock and the
Warrants based upon their relative fair market values in a manner consistent
with Treasury Regulation Section 1.1273-2(h) and such allocation shall be
determined within thirty days of the Closing Date by the Company in good faith
with the approval of a majority in interest of the holders of the Series A
Preferred Stock and the Warrants. The Company and the Investors further agree to
be bound by such allocation for all income tax purposes, to prepare and file all
income tax returns in a manner consistent with such allocation, and to take no
position inconsistent with such allocation in any income tax return, any
proceeding before any taxing authority or otherwise. In the event that such
allocation is disputed by any authority, the party receiving such notice of such
dispute shall promptly notify and consult with the other parties concerning
resolution of such dispute.
N. Remedies. In case any one or more of the covenants and/or agreements
--------
set forth in this Agreement shall have been breached by the Company or any
holder of Securities, the Company, or any holder of Securities (or any of them),
as applicable, may proceed to protect and enforce its or their rights either by
suit in equity and/or by action at law, including, but not limited to, an action
for damages as a result of any such breach and/or an action for specific
performance of any such covenant or agreement contained in this Agreement.
Without limitation of the foregoing, the Company agrees that failure to comply
with any of the covenants including, without limitation, those included in
Section 5 and those in respect of the Series A Preferred Stock and the Warrant
Securities will cause irreparable harm and that specific performance shall be
available in the event of any breach thereof. The Company, or a holder of
Securities acting pursuant to this paragraph 11N, shall be indemnified against
all liability, loss or damage, together with all reasonable costs and expenses
related thereto (including reasonable legal and accounting fees and expenses) in
accordance with paragraph 11A.
O. Entire Agreement. This Agreement, the other Related Documents and the
----------------
other writings referred to herein or delivered pursuant hereto contain the
entire agreement among the parties with respect to the subject matter hereof and
supersede all prior and contemporaneous arrangements or understandings with
respect thereto. This Agreement shall not constitute a valid and binding
agreement, enforceable in accordance with its terms, until it has been executed
and delivered by duly authorized representatives of each party hereto. No
discussions regarding or exchange of drafts or comments in connection with the
transactions contemplated herein shall constitute an agreement among the
parties.
P. Severability. Any provision of this Agreement that is prohibited or
------------
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
33
<PAGE>
Q. WAIVER OF TRIAL BY JURY. THE COMPANY HEREBY KNOWINGLY, VOLUNTARILY
-----------------------
AND INTENTIONALLY WAIVES (TO THE EXTENT PERMITTED BY APPLICABLE LAW) ANY RIGHT
IT MAY HAVE TO A TRIAL BY JURY OF ANY DISPUTE ARISING UNDER OR RELATING TO THIS
AGREEMENT OR ANY OTHER AGREEMENT OR DOCUMENT REFERRED TO HEREIN AND AGREES THAT
ANY SUCH DISPUTE SHALL, AT THE OPTION OF ANY INVESTOR AS THE CASE MAY BE, BE
TRIED BEFORE A JUDGE SITTING WITHOUT A JURY.
R. Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, and it shall not be necessary in making proof
of this Agreement to produce or account for more than one such counterpart.
S. Confidentiality. For the purposes of this paragraph 11S,
---------------
"Confidential Information" means information delivered to any holder of
------------ -----------
Securities by or on behalf of the Company or any Subsidiary pursuant to this
Agreement or any other Related Document that is proprietary in nature, provided
that such term does not include information that (a) was publicly known or
otherwise known to such holder prior to the time of such disclosure, (b)
subsequently becomes publicly known through no act or omission by such holder or
any Person acting on such holder's behalf or (c) constitutes financial
statements delivered to such holder under paragraph 5A that are otherwise
publicly available. Such holder will maintain the confidentiality of such
Confidential Information in accordance with procedures adopted by such holder in
good faith to protect confidential information of third parties delivered to
such holder, provide that such holder may deliver or disclose Confidential
Information to (i) such holder's directors, officers, trustees, employees,
agents, attorneys and Affiliates whose duties require them to hold confidential
the Confidential Information substantially in accordance with the terms of this
paragraph 11S, (ii) such holder's financial advisors and other professional
advisors whose duties require them to hold confidential the Confidential
Information substantially in accordance with the terms of this paragraph 11S,
(iii) any other holder of Securities, (iv) any prospective investor to which
such holder sells or offers to sell Securities or any participation therein (if
such Person agrees to be bound by the provisions of this paragraph 11S), or (v)
any other Person to which such delivery or disclosure may be necessary or
appropriate (x) to effect compliance with any law, rule, regulation or order
applicable to such holder, (y) in response to any subpoena or other legal
process or (z) if a breach or default under any of the Related Documents has
occurred and is continuing, to the extent such holder may reasonably determine
such delivery and disclosure to be necessary or appropriate in the enforcement
or for the protection of the rights and remedies under any of the Related
Documents.
34
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered by their respective officers thereunto duly authorized as of the
date first above written.
JFAX COMMUNICATIONS, INC.
By: /s/ N. Zucker
--------------------------------
Name: Hemi Zucker
Title: Chief Financial Officer
35
<PAGE>
INVESTOR:
The foregoing Agreement is
hereby accepted as of the
date first above written.
DLJ FUND INVESTMENT PARTNERS II, L.P.
277 Park Avenue
New York, NY 10172
By: DLJ LBO PLANS MANAGEMENT CORPORATION
Its General Partner
By: /s/ Ivy Dodes
------------------------ 629 Shares of
Name: Ivy Dodes Series A Preferred Stock:
Title: Vice President
314,500 Warrants to purchase
314,500 shares of
Common Stock
<PAGE>
INVESTOR:
The foregoing Agreement is
hereby accepted as of the
date first above written.
DLJ PRIVATE EQUITY EMPLOYEES FUND, L.P.
277 Park Avenue
New York, NY 10172
By: DLJ LBO PLANS MANAGEMENT CORPORATION
Its General Partner
By: /s/ Ivy Dodes
------------------------- 71 Shares of
Name: Ivy Dodes Series A Preferred Stock:
Title: Vice President
35,500 Warrants to purchase
35,500 shares of
Common Stock
<PAGE>
INVESTOR:
The foregoing Agreement is
hereby accepted as of the
date first above written.
DLJ CAPITAL CORPORATION
277 Park Avenue
New York, NY 10172
By: /s/ Ivy Dodes
------------------------- 2,800 Shares of
Name: Ivy Dodes Series A Preferred Stock:
Title: Vice President
1,400,000 Warrants to purchase
1,400,000 shares of
Common Stock
<PAGE>
INVESTOR:
The foregoing Agreement is
hereby accepted as of the
date first above written.
GMT PARTNERS, LLC
c/o Blue Capital Management
152 West 57/th/ Street, 11/th/ Floor
New York, New York 10019
Attention: Chris Gagnon
By: /s/ Chris Gagnon
------------------------- 250 Shares of
Name: Chris Gagnon Series A Preferred Stock:
Managing Member
125,000 Warrants to purchase
125,000 shares of
Common Stock
<PAGE>
INVESTOR:
The foregoing Agreement is
hereby accepted as of the
date first above written.
ORCHARD/JFAX INVESTORS, L.L.C.
10960 Wilshire Blvd., 5/th/ Floor
Los Angeles, California 90024
New York, New York 10019
Attention: Richard Ressler
By: /s/ Richard S. Ressler
------------------------------- 500 Shares of
Name: Richard S. Ressler Series A Preferred Stock:
Manager
250,000 Warrants to purchase
250,000 shares of
Common Stock
<PAGE>
INVESTOR:
The foregoing Agreement is
hereby accepted as of the
date first above written.
DECLARATION OF TRUST
FOR DEFINED BENEFIT PLANS
OF ZENECA HOLDINGS INC.
c/o Pecks Management Partners Ltd.
One Rockefeller Plaza
New York, New York 10020
Attention: Robert J. Cresci
By: Pecks Management Partners Ltd.,
Its Investment Adviser
By: /s/ Robert J. Cresci
------------------------- 87 Shares of
Robert J. Cresci Series A Preferred Stock:
Managing Director
43,500 Warrants to purchase
43,500 shares of
Common Stock
Tax ID Number: 042-809861
Nominee: FUELSHIP & COMPANY
Bank: State Street Bank & Trust Company
One Enterprise Drive-
Solomon Willard Building, 4A
North Quincy, MA 02171
ABA Routing Number: 0110-00028 for Master Trust/
(Wiring Dividend Payments) State Street Bank & Trust Company
Boston, MA 02101
BNF Zeneca Holdings
Acct. JG10
DDA: 34758508
Physical Delivery State Street Bank & Trust Company
Via Federal Express: 225 Franklin Street
Incoming Securities, Concourse Level
Boston, MA 02101
Attn: David Kay
Account: Zeneca Holdings
Account #JG10
<PAGE>
The foregoing Agreement is
hereby accepted as of the
date first above written.
DECLARATION OF TRUST
FOR DEFINED BENEFIT PLANS
OF ICI AMERICAN HOLDINGS INC.
c/o Pecks Management Partners Ltd.
One Rockefeller Plaza
New York, New York 10020
Attention: Robert J. Cresci
By: Pecks Management Partners Ltd.,
Its Investment Adviser
By: /s/ Robert J. Cresci
------------------------ 130 Shares of
Robert J. Cresci Series A Preferred Stock
Managing Director 65,000 Warrants to Purchase
65,000 shares of Common Stock
Tax ID Number: 043-171-204
Nominee: NORTHMAN & CO.
Bank: State Street Bank & Trust Company
One Enterprise Drive-
Solomon Willard Building, 4A
North Quincy, MA 02171
ABA Routing Number: 0110-00028 for Master Trust/
State Street Bank & Trust Company
Boston, MA 02101
BNF: ICI Americas
Account: I510
DDA: 34758649
Physical Delivery State Street Bank & Trust Company
Via Federal Express: 225 Franklin Street
Incoming Securities, Concourse Level
Boston, MA 02101
Attn: David Kay
Account Name: ICI Americas
Acct # I510
<PAGE>
The foregoing Agreement is
hereby accepted as of the
date first above written.
DELAWARE STATE EMPLOYEES'
RETIREMENT FUND
c/o Pecks Management Partners Ltd.
One Rockefeller Plaza
New York, New York 10020
Attention: Robert J. Cresci
By: Pecks Management Partners Ltd.,
Its Investment Adviser
By: /s/ Robert J. Cresci
----------------------------
Robert J. Cresci 473 Shares of
Managing Director Series A Preferred Stock
236,500 Warrants to Purchase
236,500 shares of Common Stock
Tax ID Number: 516-00-0279
Nominee: NAP & COMPANY
Bank: Mercantile Safe Deposit & Trust Company
2 Hopkins Plaza
Baltimore, MD 21201
Attn: Isabelle Corbett
ABA Routing Number: 052-000618 for State of
Delaware Account
Account #214380-8
Physical Delivery Mercantile Safe Deposit & Trust Company
2 Hopkins Plaza
Baltimore, MD 21201
Attn: Connie Philpot
<PAGE>
The foregoing Agreement is
hereby accepted as of the
date first above written.
THE J.W. MCCONNELL FAMILY FOUNDATION
c/o Pecks Management Partners Ltd.
One Rockefeller Plaza
New York, New York 10020
Attention: Robert J. Cresci
By: Pecks Management Partners Ltd.,
Its Investment Adviser
By: /s/ Robert J. Cresci
------------------------------
Robert J. Cresci 60 Shares of
Managing Director Series A Preferred Stock
30,000 Warrants to Purchase
30,000 shares of Common Stock
Tax ID Number: 015-7859-03
Nominee: HARE & CO.
Bank: Royal Trust Corporation of Canada
Royal Trust Tower, 10th Floor
777 King Street West
Toronto, Ontario M5W1P9
ABA Routing Number: 021000018
Bank of New York
BK of NY/CUST
Account: Royal Trust, #298324
Physical Delivery The Bank of New York
Via Federal Express 1 Wall Street, 5th Floor
New York, NY 10286
Attn: Special Processing Department
Re: Account #298324
<PAGE>
EXHIBIT A
[Form of Certificate of Designations]
<PAGE>
EXHIBIT B
[Form of Warrant]
<PAGE>
EXHIBIT C
[Forms of Opinions of Counsel to the Company]
<PAGE>
EXHIBIT D
[Form of Registration Rights Agreement]
<PAGE>
EXHIBIT E
[Form of Securityholders Agreement]
<PAGE>
Exhibit 10.13
-------------
CONSENT TO AMENDMENT
CONSENT TO AMENDMENT, dated as of April 16, 1999 and effective as of
January 1, 1999, acknowledged by JFAX.COM, Inc., a Delaware corporation (the
"Company") and executed by the undersigned (the "Investors").
RECITALS
--------
WHEREAS, the Investors and JFAX Communications, Inc. are parties to a
Preferred Stock and Warrants Purchase Agreement (the "Agreement"), dated as of
July 2, 1998;
WHEREAS, the Investors own 4,000 shares of Series A Usable Redeemable
Preferred Stock (the "Preferred Stock") of the Company and 2,000,000 Warrants to
purchase 2,000,000 shares of common stock of the Company (the "Warrants"), both
of which were issued pursuant to the Agreement; and
WHEREAS, the Investors are holders of a majority in interest of the
Preferred Stock and a majority in interest of the Warrants.
NOW, THEREFORE, the Investors hereby consent to amend the Agreement,
and the Company acknowledges such amendment, as follows:
Section 1. Amendment. Pursuant to Section 11.B. of the Agreement,
---------
which permits the Agreement to be amended by the holders of a majority in
interest of the Preferred Stock and a majority in interest of the Warrants, the
Investors hereby consent to amend the Agreement by deleting Section 4.C. and
Section 4.D. from the Agreement.
ACKNOWLEDGED BY:
JFAX.COM, INC.
By: /s/ Richard S. Ressler
----------------------------
Name: Richard S. Ressler
Title: Chief Executive Officer
<PAGE>
IN WITNESS WHEREOF, the Investors have caused this Consent to be
executed and delivered by their respective officers thereunto duly
authorized as of the effective date written above.
ORCHARD/JFAX INVESTORS, L.L.C.
10960 Wilshire Blvd., 5th Floor
Los Angeles, California 90024
New York, New York 10019
Attention: Richard Ressler
500 Shares of Stock:
Series A Preferred Stock:
By: /s/ Richard S. Ressler 250,000 Warrants to purchase
-------------------------- 250,000 shares of Common Stock
Name: Richard S. Ressler
Manager
DLJ CAPITAL CORPORATION
277 Park Avenue
New York, NY 10172
2,800 Shares of
Series A Preferred Stock:
By: /s/ Ivy Dodes 1,400,000 Warrants to purchase
------------------------- 1,400,000 shares of Common Stock
Name: Ivy Dodes
Title: Vice President
DLJ PRIVATE EQUITY EMPLOYEES FUND, L.P.
277 Park Avenue
New York, NY 10172
By: DLJ LBO PLANS MANAGEMENT CORPORATION
Its General Partner
71 Shares of
Series A Preferred Stock:
By: /s/ Ivy Dodes 35,500 Warrants to purchase
------------------------- 35,500 shares of Common Stock
Name: Ivy Dodes
Title: Vice President
DLJ FUND INVESTMENT PARTNERS II, L.P.
277 Park Avenue
New York, NY 10172
By: DLJ LBO PLANS MANAGEMENT CORPORATION
Its General Partner
629 Shares of
Series A Preferred Stock:
By: /s/ Ivy Dodes 314,500 Warrants to purchase
------------------------- 314,500 shares of Common Stock
Name: Ivy Dodes
Title: Vice President
<PAGE>
EXHIBIT 10.14
[FORM OF WARRANT]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF EXCEPT AS SPECIFIED IN THE PREFERRED STOCK PURCHASE
AGREEMENT. NEITHER THE RIGHTS REPRESENTED BY THIS CERTIFICATE NOR THE SHARES
ISSUABLE UPON THE EXERCISE OF THE RIGHTS GRANTED HEREIN HAVE BEEN REGISTERED FOR
OFFER OR SALE UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
LAW. SUCH RIGHTS AND SHARES MAY NOT BE SOLD OR OFFERED FOR SALE IN WHOLE OR IN
PART EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF THE PREFERRED STOCK PURCHASE
AGREEMENT.
JFAX COMMUNICATIONS, INC.
Warrants to Purchase Common Stock
---------------------------------
JFAX Communications, Inc., a Delaware corporation (the "Company"), hereby
certifies that, for value received and pursuant to that certain Preferred Stock
Purchase Agreement (as defined herein), [ ], the registered holder hereof, or
its registered assigns, is entitled, subject to the terms set forth below, to
purchase from the Company upon surrender of this certificate, at any time or
times on or after the date hereof but not after 5:00 P.M., New York City Time,
on the Expiration Date (as defined herein), [ ] [( )] fully paid,
nonassessable shares of Common Stock (as defined herein) of the Company (as
adjusted from time to time as provided in this certificate) at a purchase price
per share equal to the Warrant Exercise Price (as defined herein) in effect at
the time of exercise hereof in lawful money of the United States. The Warrant
Exercise Price may be paid in cash or by surrender of the number of shares of
Series A Preferred Stock (as defined herein) having an aggregate Stated Value
plus any accrued but unpaid dividends from and after the Original Issue Date (as
defined herein) equal to the aggregate Warrant Exercise Price of the Warrants
being exercised or a combination of cash and shares of Series A Preferred Stock,
all as contemplated by Section 3. Alternatively, the holder may, in lieu of
paying the Warrant Exercise Price in cash and/or shares of Series A Preferred
Stock, receive a "net issuance" of shares of Common Stock pursuant to Section 3.
SECTION 1. (a) Definitions. The following terms as used in this
------------
certificate shall have the following meanings:
"Common Stock", means (a) the Company's common stock, par value $.01 per
------------
share, and (b) any capital stock into which such "Common Stock" shall have been
changed or any capital stock resulting from a reclassification of such "Common
Stock".
"Expiration Date" means the date that is the later of (a) July 1, 2005 or
---------------
(b) the date on which all of the Series A Preferred Stock (as defined herein) is
redeemed.
<PAGE>
"Fair Market Value" means either (i) the Market Price, if any, of the
-----------------
Common Stock or (ii) if no Market Price exists, the value (which shall not take
into effect any minority discounts) of the Common Stock as determined by a
nationally recognized investment banking firm or accounting firm designated by
the Investors and reasonably acceptable to the Company; provided that if the
--------
parties cannot agree on such a firm, each party shall choose a nationally
recognized investment banking firm, which shall choose a third nationally
recognized firm and that third firm shall determine the Fair Market Value, which
determination shall be final and binding. The cost relating to retaining any
such firm(s) pursuant to this definition shall be borne by the Company.
"Market Price" of any security means the value determined in accordance
------------
with the following provisions:
(i) if such security is listed on a national securities exchange
registered under the Exchange Act, a price equal to the average of the closing
sales prices for such security on such exchange for each day during the 20
consecutive trading days immediately preceding the date in question; and
(ii) if not so listed, and such security is quoted on NASDAQ, a price
equal to the average of the closing bid and asked prices for such security
quoted on such system each day during the 20 consecutive trading days
immediately preceding the date in question.
"Original Issue Date" means the date of original issuance of the Series A
-------------------
Preferred Stock.
"Preferred Stock Purchase Agreement" means the Preferred Stock and Warrants
----------------------------------
Purchase Agreement dated as of July 1, 1998 among the Company and the investors
signatories thereto.
"Qualified IPO" shall mean the consummation of an initial public offering
-------------
pursuant to an effective registration statement under the Securities Act of
1933, as amended, in an amount at least equal to gross proceeds of $20.0
million.
"Series A Preferred Stock" means the Series A Usable Redeemable Preferred
------------------------
Stock issued pursuant to the Preferred Stock Purchase Agreement.
"Warrants" shall mean the warrants represented by a certificate in the form
--------
hereof and issued pursuant to the Preferred Stock Purchase Agreement.
"Warrant Exercise Price" shall initially be $3.00 per share and shall be
----------------------
adjusted and readjusted from time to time as provided in this certificate.
"Warrant Shares" means the shares of Common Stock issuable upon exercise of
--------------
the Warrants.
(b) Other Definitional Provisions. (i) Except as otherwise specified
-----------------------------
herein, all references herein (A) to any person other than the Company, shall be
deemed to include such person's successors and assigns, (B) to the Company shall
be deemed to include the Company's successors and (C) to any applicable law
defined or referred to herein, shall be deemed
-2-
<PAGE>
references to such applicable law as the same may have been or may be amended or
supplemented from time to time.
(ii) When used in this certificate, the words "herein", "hereof' and
"hereunder", and words of similar import, shall refer to this certificate as a
whole and not to any provision of this certificate, and the words "Section" and
"Exhibit" shall refer to Sections of, and Exhibits to, this certificate unless
otherwise specified.
(iii) Whenever the context so requires the neuter gender includes the
masculine or feminine, and the singular number includes the plural, and vice
versa.
(iv) Any capitalized term not otherwise defined in this certificate shall
have the meaning ascribed to such term in the Preferred Stock Purchase
Agreement.
SECTION 2. Detachable Warrants. The Warrants were originally issued as a
-------------------
unit together with shares of Series A Preferred Stock pursuant to the Preferred
Stock Purchase Agreement. The Preferred Stock Purchase Agreement, the
Securityholders Agreement and the Registration Rights Agreement contain terms
governing the rights of the holders of the Warrants and Warrant Shares.
SECTION 3. Exercise of Warrants. (a) Subject to the terms and conditions
--------------------
hereof, the Warrants may be exercised, in whole or in part, at any time during
normal business hours on or after the opening of business on the date hereof and
prior to the close of business on the Expiration Date. The rights represented
by this certificate may be exercised by the holder hereof then registered on the
books of the Company, in whole or from time to time in part (except that the
Warrants shall not be exercisable as to a fractional share) by (i) delivery of a
written notice, in the form of the Subscription Notice attached as Exhibit A
---------
hereto, of such holder's election to exercise Warrants, which notice shall
specify the number of Warrant Shares to be purchased, (ii) subject to Section
3(c), payment to the Company of an amount equal to the Warrant Exercise Price
multiplied by the number of Warrant Shares as to which Warrants are being
exercised in cash or by certified or official bank check or an equivalent amount
of Series A Preferred Stock having an aggregate Stated Value plus any accrued
but unpaid dividends from and after the Original Issue Date equal to the
aggregate Warrant Exercise Price or a combination of cash and such shares of
Series A Preferred Stock, for the number of Warrant Shares as to which Warrants
shall have been exercised, and (iii) the surrender of this certificate, properly
endorsed, at the principal office of the Company at 10960 Wilshire Boulevard,
5/th/ Floor, Los Angeles, California 90024 (or at such other agency or office of
the Company as the Company may designate by notice to the holder hereof);
provided, that if such Warrant Shares are to be issued in any name other than
that of the registered holder of this certificate, such issuance shall be deemed
a transfer and the provisions of Sections 9 and 11(D) of the Preferred Stock
Purchase Agreement shall be applicable. In the event of any exercise of the
rights represented by this certificate, a certificate or certificates for the
Warrant Shares so purchased, registered in the name of, or as directed by, the
holder, shall be delivered to, or as directed by such holder within a reasonable
time, not exceeding 15 days, after such rights shall have been so exercised.
(b) Unless the rights represented by this certificate shall have expired or
have been fully exercised, the Company shall issue a new certificate identical
in all respects to the
-3-
<PAGE>
certificate surrendered upon exercise except (x) it shall represent rights to
purchase the number of Warrant Shares purchasable immediately prior to such
exercise under the Warrants exercised, less the number of Warrant Shares with
respect to which such Warrants were exercised, and (y) the Warrant Exercise
Price thereof shall be the Warrant Exercise Price of the Warrants so exercised.
The person in whose name any certificate for Warrant Shares is issued upon
exercise of the Warrants shall for all purposes be deemed to have become the
holder of record of such Warrant Shares immediately prior to the close of
business on the date on which this certificate was surrendered and payment of
the amount due in respect of such, irrespective of the date of delivery of such
share certificate, except that, if the date of such surrender and payment is a
date when the stock transfer books of the Company are properly closed, such
person shall be deemed to have become the holder of such Warrant Shares at the
opening of business on the next succeeding date on which the stock transfer
books are open.
(c) In lieu of any holder of this certificate exercising the Warrants (or
any portion of the Warrants) evidenced hereby for cash or shares of Series A
Preferred Stock, such holder may, in connection with such exercise, elect to
satisfy the Warrant Exercise Price by exchanging solely the Warrants represented
by this certificate (or such portion thereof) for a number of Warrant Shares
equal to the product of (i) the number of shares of Common Stock issuable upon
such exercise of such Warrants (or, if only a portion of such Warrants are being
exercised, issuable upon the exercise of such portion) for cash or shares of
Series A Preferred Stock multiplied by (ii) a fraction, the numerator of which
is the Fair Market Value per share of the Common Stock at the time of such
exercise minus the Warrant Exercise Price per share of the Common Stock at the
time of such exercise, and the denominator of which is the Fair Market Value per
share of the Common Stock at the time of such exercise, such number of shares so
issuable upon such exercise to be rounded up or down to the nearest whole number
of Warrant Shares.
SECTION 4. Covenants as to Common Stock. (a) The Company covenants and
----------------------------
agrees that all Warrant Shares which may be issued upon the exercise of the
rights represented by this certificate will, upon issuance, be validly issued,
fully paid and nonassessable. The Company further covenants and agrees that
during the period within which the Warrants may be exercised, the Company will
at all times have authorized and reserved a sufficient number of shares of
Common Stock to provide for the exercise of the rights then represented by this
certificate and that the par value of said shares will at all times be less than
or equal to the applicable Warrant Exercise Price.
(b) If any shares of Common Stock reserved or to be reserved to provide for
the exercise of the Warrants require registration with or approval of any
governmental or self-regulatory authority under any federal or state law or
stock exchange or NASDAQ rule before such shares may be validly issued, then the
Company covenants that it will in good faith and as expeditiously as possible
endeavor to secure such registration or approval, as the case may be.
SECTION 5. Anti-Dilution Adjustments.
--------------
(a) Adjustments. The number of Warrant Shares and the Warrant Exercise
-----------
Price shall be subject to adjustment from time to time as hereinafter provided
in this Section 5.
-4-
<PAGE>
(b) Definitions. For the purposes of this Section 5:
-----------
(i) "Actual Consideration" shall mean the aggregate consideration
--------------------
received by the Company in respect of an Actual Issuance of Common Stock;
(ii) an "Actual Issuance of Common Stock" or "Actual Issuance" shall
------------------------------- ---------------
mean an issuance by the Company of any shares of Common Stock other than
pursuant to the Exercise of a Right or a Convertible;
(iii) "Aggregate Consideration" shall mean the Actual Consideration
-----------------------
received by the Company in respect of an Actual Issuance of Common Stock or
the Deemed Consideration received and/or deemed received by the Company in
respect of a Deemed Issuance of Common Stock;
(iv) "Consideration Per Share", with respect to any Issuance, shall
-----------------------
mean an amount equal to (x) the Actual Consideration with respect to any
Actual Issuance of Common Stock divided by the number of shares of Common
----------
Stock issued, or (y) the Deemed Consideration with respect to any Deemed
Issuance of Common Stock divided by the Shares Deemed Issued as a result of
----------
such Deemed Issuance;
(v) a "Convertible" shall mean any capital stock, note or other
-----------
security or instrument convertible into or exchangeable for Common Stock, a
Right or another Convertible without the payment of any consideration
(other than in respect of fractional shares), whether or not the right of
conversion or exchange is presently exercisable and whether or not the
right of conversion or exchange expires or terminates on any specific date
in the future;
(vi) "Deemed Consideration" shall mean the aggregate consideration
--------------------
received and deemed to be received by the Company in respect of a Deemed
Issuance of Common Stock, determined by adding (x) the aggregate amount, if
any, received or receivable by the Company as consideration in respect of
the Issuance of Rights or Convertibles constituting such Deemed Issuance of
Common Stock and (y) the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the Full Exercise of all
Rights or Convertibles necessary in order to obtain the Shares Deemed
Issued in such Deemed Issuance of Common Stock;
(vii) a "Deemed Issuance of Common Stock" or "Deemed Issuance" shall
------------------------------- ---------------
mean an issuance by the Company of a Right or a Convertible;
(viii) "Exercise" shall mean the (x) purchase of or subscription for
--------
Common Stock, a Convertible and/or another Right pursuant to the terms of a
Right or (y) the conversion or exchange of a Convertible for Common Stock,
a Right and/or another Convertible pursuant to the terms of a Convertible,
and "Full Exercise" shall mean the Exercise of each Right or Convertible
-------------
received in a Deemed Issuance of Common Stock and the Exercise of any
Rights or Convertibles purchased or received upon such Exercise so that the
maximum number of shares of Common Stock which may ultimately be obtained
as a result of such Deemed Issuance of Common Stock are issued;
-5-
<PAGE>
(ix) "Included in such Deemed Issuance of Common Stock" or
------------------------------------------------
"Included in such Deemed Issuance", with respect to any Right or
--------------------------------
Convertible, shall mean that the Exercise of such Right or Convertible is
required to be taken account of in determining the Shares Deemed Issued in
a Deemed Issuance of Common Stock (for example, in the case of a Deemed
Issuance which consists of the issuance of a Convertible which may be
exchanged for a Right which may, in turn, be exercised for Common Stock,
the issuance of the Convertible is a Deemed Issuance of Common Stock and
the Exercise of the Convertible and the Right are Included in such Deemed
Issuance);
(x) an "Issuance of Common Stock" or "Issuance" shall mean an
------------------------ --------
Actual Issuance of Common Stock or a Deemed Issuance of Common Stock;
(xi) a "Right" shall mean any right to purchase or subscribe for,
-----
or any option, warrant or other security or instrument (other than a
Convertible) conferring on the holder thereof a right to purchase or
subscribe for, Common Stock, another Right or a Convertible, in one
transaction or in a series of transactions, whether or not such right is
presently exercisable and whether or not such right expires or terminates
on any specific date in the future;
(xii) "Shares" shall mean the shares of Common Stock issued pursuant
------
to the Securities Purchase Agreement, including the shares of Common Stock
issuable in connection with the issuance, if any, by the Company of
interest notes, pursuant to the Securities Purchase Agreement (as all of
the foregoing shares of Common Stock shall be appropriately adjusted for
any stock split, dividend or combination or any similar event) and
"Securities Purchase Agreement" shall mean the Securities Purchase
------------------------------
Agreement dated as of June 30, 1998 among the Company and the Investors
signatory thereto;
(xiii) "Shares Deemed Issued", with respect to a Deemed Issuance of
--------------------
Common Stock, shall mean the maximum aggregate number of shares of Common
Stock issuable upon the Full Exercise of the Rights or Convertibles the
issuance of which constitutes such Deemed Issuance of Common Stock; and
(xiv) "Shares of Common Stock Deemed Outstanding" and "Shares Deemed
----------------------------------------- -------------
Outstanding" shall mean, at any time, the sum of (x) the number of shares
-----------
of Common Stock actually issued and outstanding at such time and (y) the
aggregate number of Shares Deemed Issued in all Deemed Issuances of Common
Stock effected after the Closing Date until such time.
(c) Adjustments Upon Stock Splits, Dividends, Distributions and
-----------------------------------------------------------
Combinations. In case the Company shall at any time subdivide its outstanding
- ------------
shares of Common Stock into a greater number of shares or issue a stock dividend
or make a distribution in shares of Common Stock with respect to outstanding
shares of Common Stock or other securities or in case the outstanding shares of
Common Stock of the Company shall be combined into a smaller number of shares,
then in each such case the holder hereof shall thereafter be entitled to
purchase, at the Warrant Exercise Price resulting from such adjustment as
described below, the number of Warrant Shares determined by multiplying the
number of Warrant Shares purchasable pursuant hereto immediately prior to such
adjustment by a fraction of which (i) the numerator shall be the
-6-
<PAGE>
Shares of Common Stock Deemed Outstanding immediately after and giving effect to
such Issuance and (ii) the denominator shall be the Shares of Common Stock
Deemed Outstanding immediately prior to such adjustment;
Upon each adjustment of the number of Warrant Shares as provided above in
this Section 5(c), the Warrant Exercise Price in effect immediately prior to
such combination shall be proportionately increased or reduced to a price
determined by multiplying the Warrant Exercise Price in effect immediately prior
to such adjustment by a fraction of which the (i) the numerator shall be the
number of Warrant Shares purchasable pursuant hereto immediately prior to such
adjustment and (ii) the denominator shall be the number of Warrant Shares
purchasable pursuant hereto immediately after such adjustment.
(d) Certain Issuances of Common Stock. In the event that the Company
---------------------------------
shall, at any time or from time to time prior to or upon a Qualified IPO, effect
any Issuance of Common Stock for a Consideration Per Share less than the Warrant
Exercise Price in effect immediately prior to such Issuance, then in each such
case the holder hereof shall thereafter be entitled to purchase, at the Warrant
Exercise Price resulting from such adjustment as described below, the number of
Warrant Shares determined by multiplying the number of Warrant Shares
purchasable pursuant hereto immediately prior to such adjustment by a fraction
of which (i) the numerator shall be the Shares of Common Stock Deemed
Outstanding immediately after and giving effect to such adjustment less the
number of Shares and (ii) the denominator shall be the sum of (A) the Shares of
Common Stock Deemed Outstanding immediately prior to such adjustment less the
number of Shares and (B) the number of shares of Common Stock which the
Aggregate Consideration for such Issuance would purchase at the Warrant Exercise
Price in effect immediately prior to such adjustment;
Upon each adjustment of the number of Warrant Shares as provided above in
this Section 5(d), the Warrant Exercise Price shall be reduced (but not
increased) to a price determined by multiplying the Warrant Exercise Price in
effect immediately prior to such adjustment by a fraction of which (i) the
numerator shall be the number of Warrant Shares purchasable pursuant hereto
immediately prior to such adjustment and (ii) the denominator shall be the
number of Warrant Shares purchasable pursuant hereto immediately after such
adjustment.
Notwithstanding the foregoing, no adjustment in the number of Warrant
Shares or the Warrant Exercise Price shall be made pursuant to this Section 5(d)
(i) upon the Issuance of Common Stock in connection with Rights issued to
directors, officers, employees or consultants of the Company in an aggregate
amount not to exceed 6% of the Fully Diluted Outstanding Shares on the Closing
Date (after giving effect to the issuance of the Warrant Shares and the Shares)
or (ii) upon the Issuance of Common Stock in connection with Rights issued to
directors, officers or employees of the Company for Consideration Per Share at
or above the greater of (A) $3.00 (as such amount shall be appropriately
adjusted for any stock split, dividend or combination or any similar event) and
(B) the Fair Market Value of a share of Common Stock at the time of issuance of
such Rights; provided, in each case that such Issuance was approved by the Board
of Directors of the Company. This Section 5(d) shall apply to any Issuance
irrespective of whether the Investors exercised their option to purchase New
Securities pursuant to Section 5(O) of the Preferred Stock Purchase Agreement in
connection with such Issuance. "Fully Diluted Outstanding Shares" shall mean, on
any date of determination, all shares of
-7-
<PAGE>
Common Stock or any other capital stock of the Company Outstanding at such date,
including all shares of Common Stock issuable upon exercise or conversion of any
outstanding warrants, options or convertible securities that are then "in the
money" (excluding that portion of the warrants of American Online, Inc. that are
performance based). "Outstanding" shall mean at any date as of which the number
of shares thereof is to be determined, all issued and outstanding shares of
Common Stock.
(e) Principles in Applying Anti-Dilution Adjustments. The following
------------------------------------------------
provisions shall be applicable for the purpose of calculations utilizing the
formula set forth in Section 5(d) hereof and otherwise, as appropriate, for the
purposes of this Section 5:
(i) Deemed Issuances of Common Stock. Notwithstanding the
--------------------------------
provisions of Section 5(d), whenever additional shares of Common Stock
shall be issuable pursuant to Section 5(d) based upon a Deemed Issuance
of Common Stock, no additional adjustment in the number of Warrant Shares
or the Warrant Exercise Price shall be made upon the subsequent Actual
Issuance of Common Stock which were Shares Deemed Issued in such Deemed
Issuance, nor shall the Exercise of any Right or Convertible included in
such Deemed Issuance constitute an Issuance.
(ii) Consideration for Shares, Rights and Convertibles. In case at
-------------------------------------------------
any time any shares of Common Stock, Rights or Convertibles shall be
issued or sold for cash, the consideration received therefor shall be
deemed to be the amount received by the Company therefor in the form of
such cash, without deduction of any expenses incurred or any underwriting
commissions, discounts or concessions paid or allowed by the Company in
connection therewith. In case at any time any shares of Common Stock,
Rights or Convertibles shall be issued or sold for a consideration other
than cash, the amount of the consideration other than cash received by
the Company shall be deemed to be the fair value of such consideration at
the time of such issuance as determined reasonably and in good faith by
the Board of Directors of the Company, without deduction of any expenses
incurred or any underwriting commissions, discounts or concessions paid
or allowed by the Company in connection therewith. In case at any time
any shares of Common Stock, Rights or Convertibles shall be issued in
connection with any merger or consolidation in which the Company is the
surviving corporation, the amount of consideration received therefor
shall be deemed to be the fair value as determined reasonably and in good
faith by the Board of Directors of the Company of such portion of the
assets and business of the non-surviving entity as the Board of Directors
of the Company may determine to be attributable to such shares of Common
Stock, Rights or Convertibles, as the case may be. In case at any time
any Rights or Convertibles shall be issued in connection with the issue
and sale of other securities of the Company, together comprising one
integral transaction in which no allocation of consideration is made
between such Rights or Convertibles and such other securities by the
parties thereto, such Rights or Convertibles shall be deemed to have been
issued for an amount of consideration equal to the fair value thereof as
determined reasonably and in good faith by the Board of Directors of the
Company. Notwithstanding any other provisions of this Section 5(e), in
case any shares of Common Stock, Rights or Convertibles shall be issued
or sold to an Affiliate for consideration other than cash and fifty
percent (50%) or more of the shares of Common Stock to be issued or sold
-8-
<PAGE>
(including for this purpose any shares of Common Stock issuable upon
exercise of any Rights to be issued or sold and/or any shares of Common
Stock issuable upon conversion of any Convertibles to be issued or sold)
are to be issued or sold to an Affiliate, then the holders of greater than
50% of the outstanding Warrants shall have the right to demand, upon
written notice to the Company given within ten (10) days after receipt of
the determination of fair value pursuant to this Section 5(e)(ii) by the
Board of Directors of the Company, and in lieu thereof, a determination of
fair value of such consideration to be made by appraisal, by investment
banks or accounting firms as described in the definition of Fair Market
Value.
(iii) Change in Aggregate Consideration or Conversion/Exercise Rate.
-------------------------------------------------------------
If the Aggregate Consideration or number of shares purchasable under any
Right or Convertible, or the rate at which any Convertible is convertible
into or exchangeable for Common Stock, shall change at any time (other than
under or by reason of provisions designed to protect against dilution for
which provision for adjustments in the number of Warrant Shares and the
Warrant Exercise Price are provided for pursuant to this certificate), the
number of Warrant Shares and the Warrant Exercise Price then in effect
hereunder shall forthwith be readjusted to such number of Warrant Shares
and Warrant Exercise Price as would have obtained had the adjustments made
upon the issuance of such Right, Convertible been made upon the basis of
the changed terms; and on the expiration of any such Right or the
termination of any such right to convert or exchange such Convertible, the
number of Warrant Shares and the Warrant Exercise Price then in effect
hereunder shall forthwith be readjusted to such number of Warrant Shares
and Warrant Exercise Price as would have obtained had the adjustments made
upon the issuance of such Right or Convertible been made upon the basis of
the issuance of only the number of shares of Common Stock, if any,
theretofore actually delivered upon the exercise of such Right or upon the
conversion or exchange of such Convertible;
(iv) Treasury Shares. The number of Shares of Common Stock Deemed
---------------
Outstanding at any given time shall not include shares of Common Stock
owned or held by or for the account of the Company or any Subsidiary. The
disposition of any such shares shall be considered an Issuance of Common
Stock for the purpose of determining any issuance of additional shares of
Common Stock to Investors required pursuant to Section 5, unless such
shares are issued upon the Exercise of any Right or Convertible which was
outstanding on the date hereof or the grant or sale of which constituted a
Deemed Issuance of Common Stock.
(f) Certain Dividends and Distributions. If the Company shall
-----------------------------------
distribute to all holders of its Common Stock evidences of its indebtedness or
assets (including cash) in the form of an Extraordinary Dividend, then in such
case (i) the Warrant Exercise Price shall be reduced by an amount equal to the
amount of such indebtedness and/or assets distributed per share of Common Stock
until the Warrant Exercise price equals $.01 and (ii) if the amount of such
indebtedness or assets distributed per share of Common Stock exceeds the Warrant
Exercise Price, an amount of such indebtedness and assets equal to such excess
amount multiplied by the number of Warrant Shares issuable upon exercise of a
Warrant shall be distributed to the holder of Warrants for each outstanding
Warrant held by such holder. Such adjustment and distribution to the holders, if
applicable, shall be made whenever any such distribution to holders of Common
-9-
<PAGE>
Stock is made and such adjustment shall be retroactively effective as of
immediately after the record date for the determination of stockholders entitled
to receive such distribution. The amount of any such distribution to holders of
Common Stock for purposes of calculating a reduction in the Warrant Exercise
Price under this Section 5(f) shall be based upon the "fair market value" of
such indebtedness and assets distributed per share of Common Stock as determined
reasonably and in good faith by the Board of Directors of the Company.
"Extraordinary Dividend" shall mean any dividend or distribution other than a
regularly scheduled dividend paid out of cumulative consolidated net income
(including all losses) after July 1, 1998 pursuant to an announced Company
dividend policy.
(g) Computation of Adjustments. Upon each computation of an adjustment
--------------------------
in the Warrant Exercise Price and the number of Warrant Shares, the Warrant
Exercise Price shall be computed to the nearest cent (i.e., fractions of .5 of a
----
cent, or greater, shall be rounded to the next highest cent) and the number of
Warrant Shares shall be calculated to the nearest whole share (i.e., fractions
----
of less than one half of a share shall be disregarded and fractions of one half
of a share, or greater, shall be treated as being a whole share). No such
adjustment shall be made, however, if the change in the Warrant Exercise Price
would be less than $.01 per share, but any such lesser adjustment shall be made
(i) at the time and together with the next subsequent adjustment which, together
with any adjustments carried forward, shall amount to $.01 per share or more, or
(ii) if earlier, upon the third anniversary of the event for which such
adjustment is required.
(h) Notice of Additional Adjustments. Upon any event requiring an
--------------------------------
adjustment in the number of Warrant Shares or the Warrant Exercise Price
pursuant to Section 5, then and in each such case the Company promptly shall
give written notice thereof to each holder of Warrants, which notice shall state
the number of Warrant Shares and the Warrant Exercise Price after giving effect
to such adjustment and shall set forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
(i) Issuance Tax. The issuance of certificates for shares of Common Stock
------------
pursuant to Section 5 shall be made without charge to the holders of Shares for
any issuance tax in respect thereto, provided that the Company shall not be
--------
required to pay any tax which may be payable in respect of any transfer involved
in the issuance and delivery of any certificate in a name other than that of the
holder of the Shares.
(j) Closing of Books. The Company will not close its books against the
----------------
issuance or transfer of any shares of Common Stock issuable pursuant to Section
5.
(k) Record Date. in case the Company shall take a record of the holders of
-----------
its Common Stock (or Convertible Securities) for the purpose of entitling them
(x) to receive a dividend or other distribution, or (y) to receive Rights, then
such record date shall be deemed to be the date of the issue or sale of the
shares of Common Stock deemed to have been issued or sold upon the declaration
of such dividend or the making of such other distribution or the date of the
granting of such right or option of subscription or purchase.
SECTION 6. Reorganization, Reclassification, Etc. In case of any
-------------------------------------
capital reorganization, or of any reclassification of the capital stock, of the
Company (other than a
-10-
<PAGE>
change in par value or from par value to no par value or from no par value to
par value or as a result of a split-up or combination) or in case of the
consolidation or merger of the Company with or into any other person (other than
a consolidation or merger in which the Company is the continuing corporation and
which does not result in the Common Stock being changed into or exchanged for
stock or other securities or property of any other person), or of the sale of
all or substantially all of the properties and assets of the Company to any
other person, the Warrants shall, after such capital reorganization,
reclassification of capital stock, consolidation, merger or sale, entitle the
registered holder hereof to purchase the kind and number of shares of stock or
other securities or property of the Company, or of the person resulting from
such consolidation or surviving such merger or to which such sale shall be made,
as the case may be, to which the holder hereof would have been entitled if such
holder had held the Common Stock issuable upon the exercise hereof immediately
prior to such capital reorganization, reclassification of capital stock,
consolidation, merger or sale, and in any such case appropriate provision shall
be made with respect to the rights and interests of the holder of this
certificate to the end that the provisions hereof (including without limitation
provisions for adjustment of the Warrant Exercise Price and of the number of
shares purchasable upon the exercise of the Warrants) shall thereafter be
applicable, as nearly as may be in relation to any shares of stock, securities
or assets thereafter deliverable upon the exercise of the Warrants. The Company
shall not effect any such consolidation, merger or sale, unless prior to or
simultaneously with the consummation thereof the successor (if other than the
Company) resulting from such consolidation or merger or the person purchasing
such assets shall assume by written instrument executed and mailed or delivered
to the registered holder hereof at the address of such holder appearing on the
books of the Company, the obligation to deliver to such holder such shares of
stock, securities or assets as, in accordance with the foregoing provisions,
such holder may be entitled to purchase.
SECTION 7. Notice of Certain Events. In case at any time:
-------------------------
(a) the Company shall pay any dividend upon, or make any distribution in
respect of, its Common Stock;
(b) the Company shall propose to register any of its Common Stock under the
1933 Act, in connection with a public offering of such Common Stock (other than
with respect to a registration statement filed on Form S-8 or such other similar
form then in effect under the 1933 Act);
(c) the Company shall offer for subscription pro rata to the holders of its
Common Stock any additional shares of stock of any class or other rights;
(d) there shall be any capital reorganization, or reclassification of the
capital stock, of the Company, or consolidation or merger of the Company with,
or sale of all or substantially all of its assets to, another person; or
(e) there shall be a voluntary or involuntary dissolution, liquidation or
winding up of the Company;
then, in any one or more of said cases, the Company shall give notice to each
registered holder of the Warrants hereof of the date on which (i) the books of
the Company shall close or a record
-11-
<PAGE>
shall be taken for such dividend, distribution or subscription rights, or (ii)
such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up shall take place, as the case may be. Such notice
shall be given not less than ten (10) days prior to the record date or the date
on which the transfer books of the Company are to be closed in respect thereto
in the case of an action specified in clause (i) and at least twenty (20) days
prior to the action in question in the case of an action specified in clause
(ii).
SECTION 8. No Change in Warrant Terms on Adjustment. Irrespective of
----------------------------------------
any adjustment in the Warrant Exercise Price or the number of the number of
Warrant Shares, this certificate, whether theretofore or thereafter issued or
reissued, may continue to express the same price and number of Warrant Shares as
are stated herein and the Warrant Exercise Price and such number of Warrant
Shares specified herein shall be deemed to have been so adjusted.
SECTION 9. Transfer Taxes. The Company shall not be required to pay
--------------
any tax or taxes attributable to the initial issuance of the Warrant Shares or
any transfer involved in the issue or delivery of any certificates for Warrant
Shares in each case in a name other than that of the registered holder hereof or
upon any transfer of the Warrants.
SECTION 10. Exchange of Warrants. This certificate is exchangeable upon
--------------------
the surrender hereof by the holder at such office or agency of the Company, for
a new certificate of like tenor representing in the aggregate the right to
subscribe for and purchase the number of shares which may be subscribed for and
purchased hereunder from time to time after giving effect to all the provisions
hereof, each of such new certificates to represent the right to subscribe for
and purchase such number of shares as shall be designated by said holder hereof
at the time of such surrender.
SECTION 11. Lost, Stolen, Mutilated or Destroyed Warrant. If this
--------------------------------------------
Certificate is lost, stolen, mutilated or destroyed, the Company shall, on such
terms as to indemnity or otherwise as it may in its discretion impose (which
shall, in the case of a mutilated Certificate, include the surrender thereof),
issue a new Certificate of like denomination and tenor as the Certificate so
lost, stolen, mutilated or destroyed. Any such new certificate shall constitute
an original contractual obligation of the Company, whether or not the allegedly
lost, stolen, mutilated or destroyed certificate shall be at any time
enforceable by anyone.
SECTION 12. Notice. All notices and other communications under this
------
Warrant shall (a) be in writing (which shall include communications by telex and
telecopy), (b) be (i) sent by registered or certified mail, postage prepaid,
return receipt requested, by prepaid telex or telecopier, or (ii) delivered by
hand, (c) be given at the following respective addresses and telex, telecopier
and telephone numbers and to the attention of the following persons:
(i) if to the Company, to it at:
JFAX Communications, Inc.
10960 Wilshire Boulevard, 5/th/ Floor
Los Angeles, California 90024
Telephone No.: (310) 966-1833
-12-
<PAGE>
Telecopier No.: (310) 966-1651
Attention: General Counsel
with a copy to:
Sullivan & Cromwell
1888 Century Park East
Los Angeles, California 90067
Telephone No.: (310) 712-6600
Telecopier No.: (310) 712-8800
Attention: Frank Golay, Esq.
(ii) if to the holder, to it at the address specified in the
Preferred Stock Purchase Agreement;
or at such other address or telex, telecopier or telephone number or to the
attention of such other person as the party to whom such information pertains
may hereafter specify for the purpose in a notice to the other specifically
captioned "Notice of Change of Address", and (d) be effective or deemed
delivered or furnished (i) if given by mail, on the fifth Business Day after
such communication is deposited in the mail, addressed as above provided, (ii)
if given by telex or telecopier, when such communication is transmitted to the
appropriate number determined as above provided in this Section 12 and the
appropriate answerback is received or receipt is otherwise acknowledged, (iii)
if given by hand delivery, when left at the address of the addressee addressed
as above provided, and (iv) if given by telephone, when communicated to the
person or to the holder of the office specified as the person or officeholder to
whose attention communications are to be given, except that notices of a change
of address, telex, telecopier or telephone number, shall not be deemed
furnished, until received.
SECTION 13. Miscellaneous. All certificates evidencing outstanding
-------------
Warrants and any term hereof or thereof may be amended or waived only by an
instrument in writing signed by the Company and the holders of a majority of the
outstanding Warrants, provided that such amendment or waiver shall amend or
waive each Warrant certificate in the same manner. The headings in this
certificate are for purposes of reference only and shall not limit or otherwise
affect the meaning hereof.
SECTION 14. Date. The date of this certificate is July 1, 1998. This
----
certificate, in all events, shall be wholly void and of no effect after the
close of business on the Expiration Date.
-13-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this certificate to be
executed by its duly authorized officers and its corporate seal to be hereunto
affixed as of the 2/nd/ day of July, 1998.
JFAX COMMUNICATIONS, INC.
By: _____________________________
Name:
Title:
ATTEST:
By: ________________________
Secretary
-14-
<PAGE>
EXHIBIT A TO
WARRANT CERTIFICATE
-------------------
SUBSCRIPTION FORM
TO BE EXECUTED BY THE REGISTERED HOLDER IF
SUCH REGISTERED HOLDER DESIRES TO EXERCISE WARRANTS
JFAX COMMUNICATIONS, INC.
The undersigned hereby exercises the right to purchase Warrant Shares
covered by this certificate according to the conditions thereof and herewith
[makes payment of $__________ , the aggregate Warrant Exercise Price for
________ Warrant Shares.] [tenders _______ shares of Series A Preferred Stock
having an aggregate Stated Value plus accrued and unpaid dividends equal to the
aggregate Warrant Exercise Price for ____ Warrant Shares] [tenders solely the
Warrants evidenced by this certificate, or applicable portion hereof, in full
satisfaction of the Warrant Exercise Price for _____ Warrant Shares upon the
terms and conditions set forth herein.]
HOLDER:
_________________________________
By: _____________________________
Name:
Title:
[Net] Number of
Warrant Shares Being
Purchased_____________________
Dated: _____________, ______
<PAGE>
EXHIBIT 10.15
MASTER LOAN AND SECURITY AGREEMENT
THIS AGREEMENT dated as of March 10, 1998, is made by JFAX
Communications, Inc. (the "Borrower"), a Delaware corporation having its
principal place of business and chief executive office at 10960 Wilshire
Boulevard, Los Angeles, CA, 90024 in favor of Transamerica Business Credit
Corporation, a Delaware corporation (the "Lender"), having its principal office
at Riverway II, West Office Tower, 9399 West Higgins Road, Rosemont, Illinois
60018.
WHEREAS, the Borrower has requested that the Lender make Loans to it
from time to time; and
WHEREAS, the Lender has agreed to make such Loans on the terms and
conditions of this Agreement.
NOW, THEREFORE, in consideration of the premises and to induce the
Lender to extend credit, the Borrower hereby agrees with the Lender as follows:
SECTION 1. DEFINITIONS.
-----------
As used herein, the following terms shall have the following meanings,
and shall be equally applicable to both the singular and plural forms of the
terms defined:
Agreement shall mean this Master Loan and Security Agreement together with all
- ---------
schedules and exhibits hereto, as amended, supplemented, or otherwise modified
from time to time.
Applicable Law shall mean the laws of the State of Illinois (or any other
- --------------
jurisdiction whose laws are mandatorily applicable notwithstanding the parties'
choice of Illinois law) or the laws of the United States of America, whichever
laws allow the greater interest, as such laws now exist or may be changed or
amended or come into effect in the future.
Business Day shall mean any day other than a Saturday, Sunday, or public holiday
- ------------
or the equivalent for banks in New York City.
Code shall have the meaning specified in Section 8(d).
- ----
Collateral shall have the meaning specified in Section 2.
- ----------
Effective Date shall mean the date on which all of the conditions specified in
- --------------
Section 3.3 shall have been satisfied.
Equipment shall have the meaning specified in Section 2.
- ---------
Event of Default shall mean any event specified in Section 7.
- ----------------
Financial Statements shall have the meaning specified in Section 6.1.
- --------------------
GAAP shall mean generally accepted accounting principles in the United States of
- ----
America, as in effect from time to time.
<PAGE>
Loans shall mean the loans and financial accommodations made by the Lender to
- -----
the Borrower in accordance with the terms of this Agreement and the Notes.
Loan Documents shall mean, collectively, this Agreement, the Notes, and all
- --------------
other documents, agreements, certificates, instruments, and opinions executed
and delivered in connection herewith and therewith, as the same may be modified,
extended, restated, or supplemented from time to time.
Material Adverse Change shall mean, with respect to any Person, a material
- -----------------------
adverse change, as compared to the date hereof, in the business, prospects,
operations, results of operations, assets, liabilities or condition (financial
or otherwise) of such Person taken as a whole.
Material Adverse Effect shall mean, with respect to any Person, a material
- -----------------------
adverse effect on the business, prospects, operations, results of operations,
assets, liabilities, or condition (financial or otherwise) of such Person taken
as a whole.
Note shall mean each Promissory Note made by the Borrower in favor of the
- ----
Lender, as amended, supplemented, or otherwise modified from time to time, in
each case substantially in the form of Exhibit B.
Obligations shall mean all indebtedness, obligations, and liabilities of the
- -----------
Borrower under the Notes and under this Agreement, whether on account of
principal, interest, indemnities, fees (including, without limitation,
attorneys' fees, remarketing fees, origination fees, collection fees, and all
other professionals' fees), costs, expenses, taxes, or otherwise.
Permitted Liens shall mean the following: (a) liens for taxes, assessments, and
- ---------------
other governmental charges or levies or the claims or demands of landlords,
carriers, warehousemen, mechanics, laborers, materialmen, and other like Persons
arising by operation of law in the ordinary course of business for sums which
are not yet due and payable, or which are being contested in good faith by
appropriate proceedings diligently conducted and with respect to which adequate
reserves are maintained to the extent required by GAAP; (b) deposits or pledgees
to secure the payment of worker's compensation, unemployment insurance, or other
social security benefits or obligations, public or statutory obligations, surety
or appeal bonds, bid or performance bonds, or other obligations of a like nature
incurred in the ordinary course of business; (c) licenses, restrictions, or
covenants for or on the use of the Equipment which do not materially impair
either the use of the Equipment in the operation of the business of the Borrower
or the value of the Equipment; and (d) attachment or judgment liens that do not
constitute an Event of Default.
Person shall mean any individual, sole proprietorship, partnership, limited
- ------
liability partnership, joint venture, trust, unincorporated organization,
association, corporation, limited liability company, institution, entity, party,
or government (including any division, agency, or department thereof), and the
successors, heirs , and assigns of each.
Schedule shall mean each Schedule in the form of Schedule A hereto delivered by
- --------
the Borrower to the Lender from time to time.
Solvent means, with respect to any Person, that as of the date as to which such
- -------
Person's solvency is measured:
(a) the fair saleable value of its assets is in excess of the total
amount of its liabilities (including contingent liabilities as valued in
accordance with GAAP) as they become absolute and matured;
(b) it has sufficient capital to conduct its business; and
2
<PAGE>
(c) it is able generally to meet is debts as they mature.
Taxes shall have meaning specified in Section 5.5
- -----
SECTION 2. CREATION OF SECURITY INTEREST; COLLATERAL. The Borrower
-----------------------------------------
hereby assigns and grants to the Lender a continuing general, first priority
lien on, and security interest in, all the Borrower's right, title, and interest
in and to the collateral described in the next sentence (the "Collateral") to
secure the payment and performance of all the Obligations. The Collateral
consists of all equipment set forth on all the Schedules delivered from time to
time under the terms of this Agreement (the "Equipment"), together with all
present and future additions, parts, accessories, attachments, substitutions,
repairs, improvements, and replacements thereof or thereto, and any and all
proceeds thereof, including, without limitation, proceeds of insurance and all
manuals, blueprints, know-how, warranties, and records in connection therewith,
all rights against suppliers, warrantors, manufacturers, sellers, or others in
connection therewith, and together with all substitutes for any of the
foregoing.
SECTION 3. THE CREDIT FACILITY.
-------------------
SECTION 3.1 Borrowings. Each Loan shall be in an amount not
less than $50,000, and in no event shall the sum of the aggregate Loans made
exceed the amount of the Lender's written commitment to the Borrower in effect
from time to time. Notwithstanding anything herein to the contrary, the Lender
shall be obligated to make the initial Loan and each other Loan only after the
Lender, in its sole discretion, determines that the applicable conditions for
borrowing contained in Sections 3.3 and 3.4 are satisfied. The timing and
financial scope of Lender's obligation to make Loans hereunder are limited as
set forth in a commitment letter executed by Lender and Borrower, dated as of
March 6, 1998 and attached hereto as Exhibit A (the "Commitment Letter").
SECTION 3.2 Application of Proceeds. The Borrower shall not
directly or indirectly use any proceeds of the Loans, or cause, assist, suffer,
or permit the use of any proceeds of the Loans, for any purpose other than for
the purchase, acquisition, installation, or upgrading of Equipment or the
reimbursement of the Borrower for its purchase, acquisition, installation, or
upgrading of Equipment.
SECTION 3.3 Conditions to Initial Loan.
(a) The obligation of the Lender to make the initial Loan is subject
to the Lender's receipt of the following, each dated the date of the initial
Loan or as of an earlier date acceptable to the Lender, in form and substance
satisfactory to the Lender and its counsel:
(i) completed requests for information (Form UCC-11) listing
all effective Uniform Commercial Code financing statements naming the
Borrower as debtor and all tax lien, judgment, and litigation searches for
the Borrower as the Lender shall deem necessary or desirable;
(ii) Uniform Commercial Code financing statements (Form UCC-1)
duly executed by the Borrower (naming the Lender as secured party and the
Borrower as debtor and in form acceptable for filing in all jurisdictions
that the Lender deems necessary or desirable to perfect the security
interests granted to it hereunder) and, if applicable, termination
statements or other releases duly filed in all jurisdictions that the
Lender deems necessary or desirable to perfect and protect the priority of
the security interests granted to it hereunder in the Equipment related to
such initial Loan;
(iii) a Note duly executed by the Borrower evidencing the amount
of such Loan;
3
<PAGE>
(iv) certificates of insurance required under Section 5.4 of
this Agreement together with loss payee endorsements for all such policies
naming the Lender as lender loss payee and as an additional insured;
(v) a copy of the resolutions of the Board of Directors of the
Borrower (or a unanimous consent of directors in lieu thereof) authorizing
the execution, delivery, and performance of this Agreement, the other Loan
Documents, and the transactions contemplated hereby and thereby, attached
to which is a certificate of the Secretary or an Assistant Secretary of the
Borrower certifying (A) that the copy of the resolutions is true, complete,
and accurate, and that such resolutions have not been amended or modified
since the date of such certification and are in full force and effect and
(B) the incumbency, names, and true signatures of the officers of the
Borrower authorized to sign the Loan Documents to which it is a party;
(vi) evidence satisfactory to Lender that Borrower has received
at least $2,400,000 cash in the form of a loan or an equity investment from
one or more shareholders of the Borrower;
(vii) such other agreements and instruments as the Lender deems
necessary in its good faith discretion in connection with the transactions
contemplated hereby.
(b) There shall be no pending or, to the knowledge of the Borrower
after due inquiry, threatened litigation, proceeding, inquiry, or other action
(i) seeking an injunction or other restraining order, damages, or other relief
with respect to the transactions contemplated by this Agreement or the other
Loan Documents or thereby or (ii) which affects or could affect the business,
prospects, operations, assets, liabilities, or condition (financial or
otherwise) of the Borrower, except, in the case of clause (ii), where such
litigation, proceeding, inquiry, or other action could not be expected to have a
Material Adverse Effect in the judgment of the Lender.
(c) The Borrower shall have paid all fees and expenses required to be
paid by it to the Lender as of such date.
(d) The security interests in the Equipment related to the initial
Loan granted in favor of the Lender under this Agreement shall have been duly
perfected and shall constitute first priority liens.
(e) Lender shall have completed a satisfactory due diligence
discussion with America On-Line.
SECTION 3.4 Conditions Precedent to Each Loan. The obligation
of the Lender to make each Loan is subject to the satisfaction of the following
conditions precedent:
(a) the Lender shall have received the documents, agreements, and
instruments set forth in Section 3.3(a)(i) through (v) applicable to such Loan,
each in form and substance satisfactory to the Lender and its counsel and each
dated the date of such Loan or as of an earlier date acceptable to the Lender;
(b) the Lender shall have received a Schedule of the Equipment
related to such Loan, in form and substance satisfactory to the Lender and its
counsel, and the security interests in such Equipment related to such Loan
granted in favor of the Lender under this Agreement shall have been duly
perfected and shall constitute first priority liens;
(c) all representations and warranties contained in this Agreement
and the other Loan Documents shall be true and correct on and as of the date of
such Loan as if then made, other than representations
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and warranties that expressly relate solely to an earlier date, in which case
they shall have been true and correct as of such earlier date;
(d) no Event of Default or event which with the giving of notice or
the passage of time, or both, would constitute an Event of Default shall have
occurred and be continuing or would result from the making of the requested Loan
as of the date of such request; and
(e) the Borrower shall be deemed to have hereby reaffirmed and
ratified all security interests, liens, and other encumbrances heretofore
granted by the Borrower to the Lender.
SECTION 4. THE BORROWER'S REPRESENTATIONS AND WARRANTIES
---------------------------------------------
SECTION 4.1 Good Standing; Qualified to do Business. The
Borrower (a) is duly organized, validly existing, and in good standing under the
laws of the State of its organization, (b) has the power and authority to own
its properties and assets and to transact the businesses in which it is
presently, or proposes to be, engaged, and (c) is duly qualified and authorized
to do business and is in good standing in every jurisdiction in which the
failure to be so qualified could have a Material Adverse Effect on (i) the
Borrower, (ii) the Borrower's ability to perform its obligations under the Loan
Documents, or (iii) the rights of the Lender hereunder.
SECTION 4.2 Due Execution, etc. The execution, delivery, and
performance by the Borrower of each of the Loan Documents to which it is a party
are within the powers of the Borrower, do not contravene the organizational
documents, if any, of the Borrower, and do not (a) violate any law or
regulation, or any order or decree of any court or governmental authority, (b)
conflict with or result in a breach of, or constitute a default under, any
material indenture, mortgage, or deed of trust or any material lease, agreement,
or other instrument binding on the Borrower or any of its properties, or (c)
require the consent, authorization by, or approval of or notice to or filing or
registration with any governmental authority or other Person. This Agreement
is, and each of the other Loan Documents to which the Borrower is or will be a
party, when delivered hereunder or thereunder, will be, the legal, valid, and
binding obligation of the Borrower enforceable against the Borrower in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, or similar laws affecting creditors' rights generally
and by general principles of equity.
SECTION 4.3 Solvency; No Liens. The Borrower is Solvent and
will be Solvent upon the completion of all transactions contemplated to occur
hereunder (including, without limitation, the Loan to be made on the Effective
Date); the security interests granted herein constitute and shall at all times
constitute the first and only liens on the Collateral other than Permitted
Liens; and the Borrower is, or will be at the time additional Collateral is
acquired by it, the absolute owner of the Collateral with full right to pledge,
sell, consign, transfer, and create a security interest therein, free and clear
of any and all claims or liens in favor of any other Person other than Permitted
Liens.
SECTION 4.4 No Judgments, Litigation. No judgments are
outstanding against the Borrower nor is there now pending or, to the best of the
Borrower's knowledge after diligent inquiry, threatened any litigation,
contested claim, or governmental proceeding by or against the Borrower except
judgments and pending or threatened litigation, contested claims, and
governmental proceedings which would not, in the aggregate, have a Material
Adverse Effect on the Borrower.
SECTION 4.5 No Defaults. The Borrower is not in default or has
not received a notice of default under any material contract, lease, or
commitment to which it is a party or by which it is bound. The
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Borrower knows of no dispute regarding any contract, lease, or commitment which
could have a Material Adverse Effect on the Borrower.
SECTION 4.6 Collateral Locations. On the date the applicable
Loan is made, each item of the Collateral is located at the place of business
specified in the applicable Schedule.
SECTION 4.7 No Events of Default. No Event of Default has
occurred and is continuing nor has any event occurred which, with the giving of
notice or the passage of time, or both, would constitute an Event of Default.
SECTION 4.8 No Limitation on Lender's Rights. Except as
permitted herein, none of the Collateral is subject to contractual obligations
that may restrict or inhibit the Lender's rights or abilities to sell or dispose
of the Collateral or any part thereof after the occurrence of an Event of
Default.
SECTION 4.9 Perfection and Priority of Security Interest. This
Agreement creates a valid and, upon completion of all required filings of
financing statements, perfected first priority and exclusive security interest
in the Collateral, securing the payment of all the Obligations.
SECTION 4.10 Model and Serial Numbers. The Schedules set forth
the true and correct model number and serial number of each item of Equipment
that constitutes Collateral.
SECTION 4.11 Accuracy and Completeness of Information. All data,
reports, and information heretofore, contemporaneously, or hereafter furnished
by or on behalf of the Borrower in writing to the Lender or for purposes of or
in connection with this Agreement or any other Loan Document, or any transaction
contemplated hereby or thereby, are or will be true and accurate in all material
respects on the date as of which such data, reports, and information are dated
or certified and not incomplete by omitting to state any material fact necessary
to make such data, reports, and information not misleading at such time. There
are no facts now known to the Borrower which individually or in the aggregate
would reasonably be expected to have a Material Adverse Effect and which have
not been specified herein, in the Financial Statements, or in any certificate,
opinion, or other written information previously furnished by the Borrower to
the Lender.
SECTION 4.12 Price of Equipment. The cost of each item of
Equipment does not exceed the fair and usual price for such type of equipment
purchased in like quantity and reflects all discounts, rebates and allowances
for the Equipment (including, without limitation, discounts for advertising,
prompt payment, testing, or other services), given to the Borrower by the
manufacturer, supplier, or any other person.
SECTION 5. COVENANTS OF THE BORROWER.
--------------------------
SECTION 5.1 Existence, etc. The Borrower shall: (a) retain its
existence and its current yearly accounting cycle, (b) maintain in full force
and effect all licenses, bonds, franchises, leases, trademarks, patents,
contracts, and other rights necessary or desirable to the profitable conduct of
its business unless the failure to do so could not reasonably be expected to
have a Material Adverse Effect on the Borrower, (c) continue in, and limit its
operations to, the same general lines of business as those presently conducted
by it, and (d) comply with all applicable laws and regulations of any federal,
state, or local governmental authority, except for such laws and regulations the
violations of which would not, in the aggregate, have a Material Adverse Effect
on the Borrower.
SECTION 5.2 Notice to the Lender. As soon as possible, and in
any event within five days after the Borrower learns of the following, the
Borrower will give written notice to the Lender of (a) any
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proceeding instituted or threatened to be instituted by or against the Borrower
in any federal, state, local, or foreign court or before any commission or other
regulatory body (federal, state, local, or foreign) involving a sum, together
with the sum involved in all other similar proceedings, in excess of $100,000 in
the aggregate, (b) any contract that is terminated or amended and which has had
or could reasonably be expected to have a Material Adverse Effect on the
Borrower, (c) the occurrence of any Material Adverse Change with respect to the
Borrower, and (d) the occurrence of any Event of Default or event or condition
which, with notice or lapse of time or both, would constitute an Event of
Default, together with a statement of the action which the Borrower has taken or
proposes to take with respect thereto.
SECTION 5.3 Maintenance of Books and Records. The Borrower will
maintain books and records pertaining to the Collateral in such detail, form,
and scope as the Lender shall require in its commercially reasonable judgment.
The Borrower agrees that the Lender or its agents may enter upon the Borrower's
premises at any time and from time to time during normal business hours, and at
any time upon the occurrence and continuance of an Event of Default, for the
purpose of inspecting the Collateral and any and all records pertaining thereto.
SECTION 5.4 Insurance. The Borrower will maintain insurance on
the Collateral under such policies of insurance, with such insurance companies,
in such amounts, and covering such risks as are at all times satisfactory to the
Lender. All such policies shall be made payable to the Lender, in case of loss,
under a standard non-contributory "lender" or "secured party" clause and are to
contain such other provisions as the Lender may reasonably require to protect
the Lender's interests in the Collateral and to any payments to be made under
such policies. Certificates of insurance policies are to be delivered to the
Lender, premium prepaid, with the loss payable endorsement in the Lender's
favor, and shall provide for not less than thirty days' prior written notice to
the Lender, of any alteration or cancellation of coverage. If the Borrower
fails to maintain such insurance, the Lender may arrange for (at the Borrower's
expense and without any responsibility on the Lender's part for) obtaining the
insurance. Unless the Lender shall otherwise agree with the Borrower in
writing, the Lender shall have the sole right, in the name of the Lender or the
Borrower, to file claims under any insurance policies, to receive and give
acquittance for any payments that may be payable thereunder, and to execute any
endorsements, receipts, releases, assignments, reassignments, or other documents
that may be necessary to effect the collection, compromise, or settlement of any
claims under any such insurance policies.
SECTION 5.5 Taxes. The Borrower will pay, when due, all taxes,
assessments, claims, and other charges ("Taxes") lawfully levied or assessed
against the Borrower or the Collateral other than taxes that are being
diligently contested in good faith by the Borrower by appropriate proceedings
promptly instituted and for which an adequate reserve is being maintained by the
Borrower in accordance with GAAP. If any Taxes remain unpaid after the date
fixed for the payment thereof, or if any lien shall be claimed therefor, then,
without notice to the Borrower, but on the Borrower's behalf, the Lender may pay
such Taxes, and the amount thereof shall be included in the Obligations.
SECTION 5.6 Borrower to Defend Collateral Against Claims; Fees
on Collateral. The Borrower will defend the Collateral against all claims and
demands of all Persons at any time claiming the same or any interest therein.
The Borrower will not permit any notice creating or otherwise relating to liens
on the Collateral or any portion thereof to exist or be on file in any public
office other than Permitted Liens. The Borrower shall promptly pay, when
payable, all transportation, storage, and warehousing charges and license fees,
registration fees, assessments, charges, permit fees, and taxes (municipal,
state, and federal) which may now or hereafter be imposed upon the ownership,
leasing, renting, possession, sale, or use of the Collateral, other than taxes
on or measured by the Lender's income and fees, assessments, charges, and taxes
which are being contested in good faith by appropriate proceedings diligently
conducted and with respect to which adequate reserves are maintained to the
extent required by GAAP.
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SECTION 5.7 No Change of Location, Structure, or Identity. The
Borrower will not (a) change the location of its chief executive office or
establish any place of business other than those specified herein or (b) move or
permit the movement of any item of Collateral from the location specified in the
applicable Schedule, except that the Borrower may change its chief executive
office and keep Collateral at other locations within the United States provided
that the Borrower has delivered to the Lender (i) prior written notice thereof
and (ii) duly executed financing statements and other agreements and instruments
(all in form and substance satisfactory to the Lender) necessary or, in the
opinion of the Lender, desirable to perfect and maintain in favor of the Lender
a first priority security interest in the Collateral. Notwithstanding anything
to the contrary in the immediately preceding sentence, the Borrower may keep any
Collateral consisting of motor vehicles or rolling stock at any location in the
United States provided that the Lender's security interest in any such
Collateral is conspicuously marked on the certificate of title thereof and the
Borrower has complied with the provisions of Section 5.9.
SECTION 5.8 Use of Collateral; Licenses; Repair. The Collateral
shall be operated by competent, qualified personnel in connection with the
Borrower's business purposes, for the purpose for which the Collateral was
designed and in accordance with applicable operating instructions, laws, and
government regulations, and the Borrower shall use every reasonable precaution
to prevent loss or damage to the Collateral from fire and other hazards. The
Collateral shall not be used or operated for personal, family, or household
purposes. The Borrower shall procure and maintain in effect all orders,
licenses, certificates, permits, approvals, and consents required by federal,
state, or local laws or by any governmental body, agency, or authority in
connection with the delivery, installation, use, and operation of the
Collateral. The Borrower shall keep all of the Equipment in a satisfactory
state of repair and satisfactory operating condition in accordance with industry
standards, and will make all repairs and replacements when and where necessary
and practical. The Borrower will not waste or destroy the Equipment or any part
thereof, and will not be negligent in the care or use thereof. The Equipment
shall not be annexed or affixed to or become part of any realty without the
Lender's prior written consent.
SECTION 5.9 Further Assurances. The Borrower will, promptly
upon request by the Lender, execute and deliver or use its reasonable efforts to
obtain any document required by the Lender (including, without limitation,
warehouseman or processor disclaimers, mortgagee waivers, landlord disclaimers,
or subordination agreements with respect to the Obligations and the Collateral),
give any notices, execute and file any financing statements, mortgages, or other
documents (all in form and substance satisfactory to the Lender), mark any
chattel paper, deliver any chattel paper or instruments to the Lender, and take
any other actions that are necessary or, in the opinion of the Lender, desirable
to perfect or continue the perfection and the first priority of the Lender's
security interest in the Collateral, to protect the Collateral against the
rights, claims, or interests of any Persons, or to effect the purposes of this
Agreement. The Borrower hereby authorizes the Lender to file one or more
financing or continuation statements, and amendments thereto, relating to all or
any part of the Collateral without the signature of the Borrower where permitted
by law. A carbon, photographic, or other reproduction of this Agreement or any
financing statement covering the Collateral or any part thereof shall be
sufficient as a financing statement where permitted by law. To the extent
required under this Agreement, the Borrower will pay all costs incurred in
connection with any of the foregoing.
SECTION 5.10 No Disposition of Collateral. The Borrower will not
in any way hypothecate or create or permit to exist any lien, security interest,
charge, or encumbrance on or other interest in any of the Collateral, except for
the lien and security interest granted hereby and Permitted Liens, and the
Borrower will not sell, transfer, assign, pledge, collaterally assign, exchange,
or otherwise dispose of any of the Collateral. In the event the Collateral, or
any part thereof, is sold, transferred, assigned, exchanged, or otherwise
disposed of in violation of these provisions, the security interest of the
Lender shall continue in such Collateral or part thereof notwithstanding such
sale, transfer, assignment, exchange, or other disposition, and the Borrower
will hold the
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proceeds thereof in a separate account for the benefit of the Lender. Following
such a sale, the Borrower will transfer such proceeds to the Lender in kind.
SECTION 5.11 No Limitation on Lender's Rights. The Borrower will
not enter into any contractual obligations which may restrict or inhibit the
Lender's rights or ability to sell or otherwise dispose of the Collateral or any
part thereof.
SECTION 5.12 Protection of Collateral. Upon notice to the
Borrower (provided that if an Event of Default has occurred and is continuing
the Lender need not give any notice), the Lender shall have the right at any
time to make any payments and do any other acts the Lender may deem necessary
to protect its security interests in the Collateral, including, without
limitation, the rights to satisfy, purchase, contest, or compromise any
encumbrance, charge, or lien which, in the reasonable judgment of the Lender,
appears to be prior to or superior to the security interests granted hereunder,
and appear in, and defend any action or proceeding purporting to affect is
security interests in, or the value of, any of the Collateral. The Borrower
hereby agrees to reimburse the Lender for all such payments made and expenses
incurred under this Agreement including fees, expenses, and disbursements of
attorneys and paralegals acting for the Lender, which amounts shall be secured
under this Agreement, and agrees it shall be bound by any payment made or act
taken by the Lender hereunder absent the Lender's gross negligence or willful
misconduct. The Lender shall no obligation to make any of the foregoing
payments or perform any of the foregoing acts.
SECTION 5.13 Delivery of Items. The Borrower will (a) promptly
(but in no event later than one Business Day) after its receipt thereof, deliver
to the Lender any documents or certificates of title issued with respect to any
property included in the Collateral, and any promissory notes, letters of credit
or instruments related to or otherwise in connection with any property included
in the Collateral, which in any such case come into the possession of the
Borrower, or shall cause the issuer thereof to deliver any of the same directly
to the Lender, in each case with any necessary endorsements in favor of the
Lender and (b) deliver to the Lender as soon as available copies of any and all
press releases and other similar communications issued by the Borrower.
SECTION 5.14 Solvency. The Borrower shall be and remain Solvent
at all times.
SECTION 5.15 Fundamental Changes. The Borrower shall not (a)
amend or modify its name, unless the Borrower delivers to the Lender thirty days
prior to any such proposed amendment or modification written notice of such
amendment or modification and within ten days before such amendment or
modification delivers executed Uniform Commercial Code financing statements (in
form and substance satisfactory to the Lender) or (b) merge or consolidate with
any other entity, in each case without the Lender's prior written consent which
shall not be unreasonably withheld.
SECTION 5.16 Right of First Refusal. The Borrower shall notify
the Lender when it seeks additional equipment financing in an amount up to
$9,000,000, and shall select Lender to provide such equipment financing,
provided that Lender offers to provide such financing on terms competitive with
any other bona fide offer received by Borrower from an arm's-length third party
financing source.
SECTION 5.17 Additional Requirements. The Borrower shall take
all such further actions and execute all such further documents and instruments
as the Lender may reasonably request.
SECTION 6. FINANCIAL STATEMENTS. Until the payment and satisfaction
--------------------
in full of all Obligations, the Borrower shall deliver to the Lender the
following financial information:
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SECTION 6.1 Annual Financial Statements. As soon as available,
but not later than 120 days after the end of each fiscal year of the Borrower
and its consolidated subsidiaries, the consolidated balance sheet, income
statement, and statements of cash flows and shareholders equity for the Borrower
and its consolidated subsidiaries (the "Financial Statements") for such year,
reported on by independent certified public accountants without an adverse
qualification; and
SECTION 6.2 Quarterly Financial Statements. As soon as
available, but not later than 60 days after the end of each of the first three
fiscal quarters in any fiscal year of the Borrower and its consolidated
subsidiaries, the Financial Statements for such fiscal quarter, together with a
certification duly executed by a responsible officer of the Borrower that such
Financial Statements have been prepared in accordance with GAAP and are fairly
stated in all material respects (subject to normal year-end audit adjustments).
SECTION 7. EVENTS OF DEFAULT. The occurrence of any of the following
-----------------
events shall constitute an Event of Default hereunder:
(a) the Borrower shall fail to pay within two business days after
notice of failure to pay when due any amount required to be paid by the Borrower
under or in connection with any Note and this Agreement;
(b) any representation or warranty made or deemed made by the Borrower
under or in connection with any Loan Document or any Financial Statement shall
prove to have been false or incorrect in any material respect when made;
(c) the Borrower shall fail to perform or observe (i) any of the
terms, covenants or agreements contained in Sections 5.4, 5.7, 5.10, 5.14, or
5.15 hereof or (ii) any other term, covenant, or agreement contained in any Loan
Document (other than the other Events of Default specified in this Section 7)
and such failure remains unremedied for the earlier of fifteen days from (A) the
date on which the Lender has given the Borrower written notice of such failure
and (B) the date on which the Borrower knew or should have known of such
failure;
(d) any provision of any Loan Document to which the Borrower is a
party shall for any reason cease to be valid and binding on the Borrower, or the
Borrower shall so state;
(e) dissolution, liquidation, winding up, or cessation of the
Borrower's business, failure of the Borrower generally to pay its debts as they
mature, admission in writing by the Borrower of its inability generally to pay
its debts as they mature, or calling of a meeting of the Borrower's creditors
for purposes of compromising any of the Borrower's debts;
(f) the commencement by or against the Borrower of any bankruptcy,
insolvency, arrangement, reorganization, receivership, or similar proceedings
under any federal or state law and, in the case of any such involuntary
proceeding, such proceeding remains undismissed or unstayed for forty-five days
following the commencement thereof, or any action by the Borrower is taken
authorizing any such proceedings;
(g) an assignment for the benefit of creditors is made by the
Borrower, whether voluntary or involuntary, the appointment of a trustee,
custodian, receiver or similar official for the Borrower or for any substantial
property of the Borrower, or any action by the Borrower authorizing any such
proceeding;
(h) the borrower shall default in (i) the payment of principal or
interest on any secured indebtedness in excess of $50,000 (other than the
Obligations) beyond the period of grace, if any, provided in the instrument or
agreement under which such indebtedness was created; or (ii) the observance or
performance of any
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other agreement or condition relating to any such indebtedness or contained in
any instrument or agreement relating thereto, or any other event shall occur or
condition exist, the effect of which default or other event or condition is to
cause, or to permit the holder or holders of such indebtedness to cause, with
the giving of notice if required, such indebtedness to become due prior to it
stated maturity; or (iii) any loan or other agreement under which the Borrower
has received financing from Transamerica Corporation or any of its affiliates;
(i) the Borrower suffers or sustains a Material Adverse Change;
(j) any tax lien, other than a Permitted Lien, is filed of record
against the Borrower and is not bonded or discharged within five Business Days;
(k) any judgment which has had or could reasonably be expected to have
a Material Adverse Effect on the Borrower and such judgment shall not be stayed,
vacated, bonded, or discharged within sixty days;
(l) any material covenant, agreement, or obligation, as determined in
the sole discretion of the Lender, made by the Borrower and contained in or
evidenced by any of the Loan Documents shall cease to be enforceable, or shall
be determined to be unenforceable, in accordance with its terms; the Borrower
shall deny or disaffirm the Obligations under any of the Loan Documents or any
liens granted in connection therewith; or any liens granted on any of the
Collateral in favor of the Lender shall be determined to be void, voidable, or
invalid, or shall not be given the priority contemplated by this Agreement; or
(m) there is a change, other than a change which results from the sale
of newly issued securities to investors, in more than 35% of the ownership of
any equity interests of the Borrower on the date hereof or more than 35% of such
interests become subject to any contractual, judicial, or statutory lien,
charge, security interest, or encumbrance.
SECTION 8. REMEDIES. If any Event of Default shall have occurred and
--------
be continuing:
(a) The Lender may, without prejudice to any of its other rights under
any Loan Document or Applicable Law, declare all Obligations to be immediately
due and payable (except with respect to any Event of Default set forth in
Section 7(f) hereof, in which case all Obligations shall automatically become
immediately due and payable without necessity of any declaration) without
presentment, representation, demand of payment or protest, which are hereby
expressly waived.
(b) The Lender may take possession of the Collateral and, for that
purpose may enter, with the aid and assistance of any person or persons, any
premises where the Collateral or any part hereof is, or may be placed, and
remove the same.
(c) The obligation of the Lender, if any, to make additional Loans or
financial accommodations of any kind to the Borrower shall immediately
terminate.
(d) The Lender may exercise in respect of the Collateral, in addition
to other rights and remedies provided for herein (or in any Loan Document) or
otherwise available to it, all the rights and remedies of a secured party under
the applicable Uniform Commercial Code (the "Code") whether or not the Code
applies to the affected Collateral and also may (i) require the Borrower to, and
the Borrower hereby agrees that it will at its expense and upon request of the
Lender forthwith, assemble all or part of the Collateral as directed by the
Lender and make it available to the Lender at a place to be designated by the
Lender that is reasonably convenient to both parties and (ii) without notice
except as specified below, sell the Collateral or any part thereof in one or
more parcels at public
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or private sale, at any of the Lender's offices or elsewhere, for cash, on
credit, or for future delivery, and upon such other terms as the Lender may deem
commercially reasonable. The Borrower agrees that, to the extent notice of sale
shall be required by law, at least ten days' notice to the Borrower of the time
and place of any public sale or that time after which any private sale is to be
made shall constitute reasonable notification. The Lender shall not be obligated
to make any sale of Collateral regardless of notice of sale having been given.
The Lender may adjourn any public or private sale from time to time by
announcement at the time and place fixed therefor, and such sale may, without
future notice, be made at the time and place to which it was so adjourned.
(e) All cash proceeds received by the Lender in respect of any sale
of, collection from, or other realization upon all or any part of the Collateral
may, in the discretion of the Lender, be held by the Lender as collateral for,
or then or at any time thereafter applied in whole or in part by the Lender
against, all or any part of the Obligations in such order as the Lender shall
elect. Any surplus of such cash or cash proceeds held by the Lender and
remaining after the full and final payment of all the Obligations shall be paid
over the Borrower or to such other Person to which the Lender may be required
under applicable law, or directed by a court of competent jurisdiction, to make
payment of such surplus.
SECTION 9. MISCELLANEOUS PROVISIONS.
------------------------
SECTION 9.1 Notices. Except as otherwise provide herein, all
notices, approvals, consents, correspondence, or other communications required
or desired to be given hereunder shall be given in writing and shall be
delivered by overnight courier, hand delivery, or certified or registered mail,
postage prepaid, if to the Lender, then to Transamerica Technology Finance
Division, 76 Batterson Park Road, Farmington, Connecticut 06032, Attention:
Assistant Vice President, Lease Administration, with a copy to the Lender at
Riverway II, West Office Tower, 9399 West Higgins Road, Rosemont, Illinois
60018, Attention: Legal Department, and if to the Borrower, then to JFAX
Communications, Inc. 10960 Wilshire Boulevard, Suite 500, Los Angeles, CA 90024,
Attention: Chief Financial Officer or such other address as shall be designated
by the Borrower or the Lender to the other party in accordance herewith. All
such notices and correspondence shall be effective when received.
SECTION 9.2 Headings. The headings in this Agreement are for
purposes of reference only and shall not affect the meaning or construction of
any provision of this Agreement.
SECTION 9.3 Assignments. The Borrower shall not have the right
to assign any Note or this Agreement or any interest therein unless the Lender
shall have given the Borrower prior written consent and the Borrower and its
assignee shall have delivered assignment documentation in form and substance
satisfactory to the Lender in its sole discretion. The Lender may assign its
rights and delegate its obligations under any Note or this Agreement.
SECTION 9.4 Amendments, Waivers, and Consents. Any amendment or
waiver of any provision of this Agreement and any consent to any departure by
the Borrower from any provision of this Agreement shall be effective only by a
writing signed by the Lender and shall bind and benefit the Borrower and the
Lender and their respective successors and assigns, subject, in the case of the
Borrower, to the first sentence of Section 9.3.
SECTION 9.5 Interpretation of Agreement. Time is of the essence
in each provision of this Agreement of which time is an element. All terms not
defined herein or in a Note shall have the meaning set forth in the applicable
Code, except where the context otherwise requires. To the extent a term or
provision of this Agreement conflicts with any Note, or any term or provision
thereof, and is not dealt with herein with more specificity, this Agreement
shall control with respect to the subject matter of such term or provision.
Acceptance
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of or acquiescence in a course of performance rendered under this
Agreement shall not be relevant in determining the meaning of this Agreement
even though the accepting or acquiescing party had knowledge of the nature of
the performance and opportunity for objection.
SECTION 9.6 Continuing Security Interest. This Agreement shall
create a continuing security interest in the Collateral and shall (i) remain in
full force and effect until the indefeasible payment in full of the Obligations,
(ii) be binding upon the Borrower and its successors and assigns and (iii)
inure, together with the rights and remedies of the Lender hereunder, to the
benefit of the Lender and its successors, transferees, and assigns.
SECTION 9.7 Reinstatement. To the extent permitted by law, this
Agreement and the rights and powers granted to the Lender hereunder and under
the Loan Documents shall continue to be effective or be reinstated if at any
time any amount received by the Lender in respect of the Obligations is
rescinded or must otherwise be restored or returned by the Lender upon the
insolvency, bankruptcy, dissolution, liquidation, or reorganization of the
Borrower or upon the appointment of any receiver, intervenor, conservator,
trustee, or similar official for the Borrower or any substantial part of its
assets, or otherwise, all as though such payments had not been made.
SECTION 9.8 Survival of Provisions. All representations,
warranties, and covenants of the Borrower contained herein shall survive the
execution and delivery of this Agreement, and shall terminate only upon the full
and final payment and performance by the Borrower of the Obligations secured
hereby.
SECTION 9.9 Indemnification. The Borrower agrees to indemnify
and hold harmless the Lender and its directors, officers, agents, employees, and
counsel from and against any and all costs, expenses, claims, or liability
incurred by the Lender or such Person hereunder and under any other Loan
Document or in connection herewith or therewith, unless such claim or liability
shall be due to willful misconduct or gross negligence on the part of the Lender
or such Person.
SECTION 9.10 Counterparts; Telecopied Signatures. This Agreement
may be executed in counterparts, each of which when so executed and delivered
shall be an original, but both of which shall together constitute one and the
same instrument. This Agreement and each of the other Loan Documents and any
notices given in connection herewith or therewith may be executed and delivered
by telecopier or other facsimile transmission all with the same force and effect
as if the same was a fully executed and delivered original manual counterpart.
SECTION 9.11 Severability. In case any provision in or obligation
under this Agreement or any Note or any other Loan Document shall be invalid,
illegal, or unenforceable in any jurisdiction, the validity, legality, and
enforceability of the remaining provisions or obligations, or of such provision
or obligation in any other jurisdiction, shall not in any way be affected or
impaired thereby.
SECTION 9.12 Delays; Partial Exercise of Remedies. No delay or
omission of the Lender to exercise any right or remedy hereunder, whether before
or after the happening of any Event of Default shall impair any such right or
shall operate as a waiver thereof or as a waiver of any such Event of Default.
No single or partial exercise by the Lender of any right or remedy shall
preclude any other or further exercise thereof or preclude any other right or
remedy.
SECTION 9.13 Entire Agreement. The Borrower and the Lender agree
that this Agreement, the Schedule hereto, and the Commitment Letter are the
complete and exclusive statement and agreement between the parties with respect
to the subject matter hereof, superseding all proposals and prior agreements,
oral
13
<PAGE>
or written, and all other communications between the parties with respect to the
subject matter hereof. Should there exist any inconsistency between the terms of
the Commitment Letter and this Agreement, the terms of this Agreement shall
prevail.
SECTION 9.14 Setoff. In addition to and not in limitation of all
rights of offset that the Lender may have under Applicable Law, and whether or
not the Lender has made any demand or the Obligations of the Borrower have
matured, the Lender shall have the right to appropriate and apply to the payment
of the Obligations of the Borrower all deposits and other obligations then or
thereafter owing by the Lender to or for the credit or the account of the
Borrower.
SECTION 9.15 WAIVER OF JURY TRIAL. THE BORROWER AND THE LENDER
IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR
COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN
DOCUMENT, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
SECTION 9.16 GOVERNING LAW. THE VALIDITY, INTERPRETATION, AND
ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO THE CONFLICT OF
LAW PRINCIPLES THEREOF.
SECTION 9.17 Venue; Service of Process. ANY LEGAL ACTION OR
PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE
BROUGHT IN THE COURTS OF THE STATE OF ILLINOIS SITUATED IN COOK COUNTY, OR OF
THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF ILLINOIS, AND, BY
EXECUTION AND DELIVERY OF THIS AGREEMENT, THE BORROWER HEREBY ACCEPTS FOR ITSELF
AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION
OF THE AFORESAID COURTS. THE BORROWER HEREBY IRREVOCABLY WAIVES, IN CONNECTION
WITH ANY SUCH ACTION OR PROCEEDING, (a) ANY OBJECTION, INCLUDING, WITHOUT
LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF
FORUM NON CONVENIENS, THAT IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY
SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS AND (b) THE RIGHT TO
INTERPOSE ANY NONCOMPULSORY SETOFF, COUNTERCLAIM, OR CROSS-CLAIM. THE BORROWER
IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED
COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY
REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE BORROWER AT THE ADDRESS
FOR IT SPECIFIED IN SECTION 9.1 HEREOF. NOTHING HEREIN SHALL AFFECT THE RIGHT
OF THE LENDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO
COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE BORROWER IN ANY
OTHER JURISDICTION, SUBJECT IN EACH INSTANCE TO THE PROVISIONS HEREOF WITH
RESPECT TO RIGHTS AND REMEDIES.
14
<PAGE>
IN WITNESS WHEREOF, the undersigned Borrower has caused this Agreement
to be duly executed and delivered by its proper and duly authorized officer as
of the date first set forth above.
JFAX COMMUNICATIONS, INC.
By: /s/ N. Zucker
--------------------------------------------
Name: Hemi Zucker
Title: CFO
Federal Tax ID: 510371142
Accepted as of the
10th day of March, 1998
TRANSAMERICA BUSINESS CREDIT CORPORATION
By:____________________________________________
Name:
Title:
15
<PAGE>
EXHIBIT 10.16
PROMISSORY NOTE
---------------
Date: April 21, 1998
FOR VALUE RECEIVED, the undersigned promises to pay to the order of
Transamerica Business Credit Corporation or its assigns (the "Payee") at its
office located at Riverway II, West Office Tower, 9399 West Higgins Road,
Rosemont, Illinois 60018, or at such other place as the Payee or the holder
hereof may designate in writing, the principal amount of Eight Hundred Eighteen
Thousand Four Hundred Twelve and 60/100 Dollars ($818,412.60) received by the
undersigned, plus interest, in lawful money of the United States and in
immediately available funds. This Note shall be payable commencing with a first
installment of Sixty Thousand Eight Hundred Sixty Nine and 43/100 ($60,869.43)
payable on April 21, 1998 and thereafter in 34 consecutive equal monthly
installments of Twenty-Six Thousand Eighty-Six and 90/100 Dollars ($26,086.90)
commencing June 1, 1998 and a final installment payable on May 1, 2001 of
Eighty-One Thousand Eight Hundred Forty-One and 26/100 ($81,841.26) together
with the unpaid balance of the Note, if any (it being agreed that if all of the
foregoing payments are timely made, there will be no unpaid balance). Each
installment shall be applied first to the payment of interest on the unpaid
principal of this Note and the balance on account of the principal of this Note.
No amount of principal paid or prepaid hereunder may be reborrowed.
This Note is one of the Notes referred to in the Master Loan and
Security Agreement dated as of March 10, 1998 (as amended, supplemented or
otherwise modified from time to time, the "Agreement"), between the undersigned
and the Payee and is subject and entitled to all provisions and benefits
thereof. Capitalized terms used but not defined herein shall have the meanings
set forth in the Agreement.
If any installment of this Note is not paid within five days after its
due date, the undersigned agrees to pay on demand, in addition to the amount of
such installment, an amount equal to 5% of such installment, but only to the
extent permitted by Applicable Law.
The undersigned shall have the right to prepay this Note at any time
on or after March 1, 1999, on thirty days' prior written notice to the Payee.
On the date of any such prepayment, the undersigned shall pay an amount equal to
the present value of the remaining payments (principal and interest) due
hereunder discounted at 6% simple interest per annum, together with all
--- -----
interest, fees and other amounts, if any, payable on the amount so prepaid or in
connection therewith to the date of such prepayment. Any prepayments shall be
applied to the installments hereof in the inverse order of maturity.
Upon the maturity of this Note or the acceleration of the maturity of
this Note in accordance with the terms of the Agreement, the entire unpaid
principal amount on this Note, together with all interest, fees and other
amounts payable hereon or in connection herewith, shall be immediately due and
payable without further notice or demand, with interest on all such amounts at a
rate not to exceed the lawful limit, from the date of such maturity or
acceleration, as the case may be, until all such amounts have been paid.
If any payment on this Note becomes payable on a day other than a
Business Day, the maturity thereof shall be extended to the next succeeding
Business Day.
<PAGE>
The undersigned hereby waives diligence, demand, presentment, protest
and notice of any kind, and assents to extensions of the time of payment,
release, surrender or substitution of security, or forbearance or other
indulgence, without notice. The undersigned agrees to pay all amounts under
this Note without offset, deduction, claim, counterclaim, defense or recoupment,
all of which are hereby waived.
The Payee, the undersigned and any other parties to the Loan Documents
intend to contract in strict compliance with applicable usury law from time to
time in effect. In furtherance thereof such Persons stipulate and agree that
none of the terms and provisions contained in the Loan Documents shall ever be
construed to create a contract to pay, for the use, forbearance or detention of
money, interest in excess of the maximum amount of interest permitted to be
charged by Applicable Law from time to time in effect. Neither the undersigned
nor any present or future guarantors, endorsers, or other Persons hereafter
becoming liable for payment of any Obligation shall ever be liable for unearned
interest thereon or shall ever be required to pay interest thereon in excess of
the maximum amount that may be lawfully charged under Applicable Law from time
to time in effect, and the provisions of this paragraph shall control over all
other provisions of the Loan Documents which may be in conflict or apparent
conflict herewith. The Payee expressly disavows any intention to charge or
collect excessive unearned interest or finance charges in the event the maturity
of any Obligation is accelerated. If (a) the maturity of any Obligation is
accelerated for any reason, (b) any Obligation is prepaid and as a result any
amounts held to constitute interest are determined to be in excess of the legal
maximum, or (c) the Payee or any other holder of any or all of the Obligations
shall otherwise collect amounts which are determined to constitute interest
which would otherwise increase the interest on any or all of the Obligations to
an amount in excess of that permitted to be charged by Applicable Law then in
effect, then all sums determined to constitute interest in excess of such legal
limit shall, without penalty, be promptly applied to reduce the then outstanding
principal of the related Obligations or, at the Payee's or such holder's option,
promptly returned to the undersigned upon such determination. In determining
whether or not the interest paid or payable, under any specific circumstance,
exceeds the maximum amount permitted under Applicable Law, (i) characterize any
non-principal payment as an expense, fee or premium rather than as interest,
(ii) exclude voluntary prepayments and the effects thereof, and (iii) amortize,
prorate, allocate, and spread the total amount of interest through the entire
contemplated term of this Note in accordance with the amount outstanding from
time to time thereunder and the maximum legal rate of interest from time to time
in effect under Applicable Law in order to lawfully charge the maximum amount of
interest permitted under Applicable Law.
This Note may not be changed, modified or terminated orally, but only
by an agreement in writing signed by the undersigned and the Payee or any holder
thereof.
The undersigned shall, upon demand, pay to the Payee all costs and
expenses (including the fees and disbursements of counsel and other
professionals) paid or incurred by the Payee in (A) enforcing or defending its
rights under or in respect of this Note or any of the other Loan Documents, (B)
collecting any of the liabilities by the undersigned to the Payee or otherwise
administering the Loan Documents, (C) foreclosing or otherwise collecting upon
any collateral and (D) obtaining any legal, accounting or other advice in
connection with any of the foregoing.
This Note shall be binding upon the successors and assigns of the
undersigned and inure to the benefit of the Payee and its successors, endorsees
and assigns. If any term or provision of this Note shall be held invalid,
illegal or unenforceable, the validity of all other terms and provisions hereof
shall in no way be affected thereby.
<PAGE>
EACH OF THE UNDERSIGNED AND, BY ITS ACCEPTANCE HEREOF, THE PAYEE
HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES (TO THE FULLEST EXTENT
PERMITTED BY APPLICABLE LAW) ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY OF ANY
DISPUTE ARISING UNDER OR RELATING TO THIS NOTE AND AGREES THAT ANY SUCH DISPUTE
SHALL BE TRIED BEFORE A JUDGE SITTING WITHOUT A JURY.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS
OF LAW.
JFAX COMMUNICATIONS, INC.
By: /s/ N. Zucker
----------------------------------------
Name: Zucker
Title: CFO
<PAGE>
EXHIBIT 10.17
PROMISSORY NOTE
---------------
Date: December 22, 1998
FOR VALUE RECEIVED, the undersigned promises to pay to the order of
Transamerica Business Credit Corporation or its assigns (the "Payee") at its
office located at Riverway II, West Office Tower, 9399 West Higgins Road,
Rosemont, Illinois 60018, or at such other place as the Payee or the holder
hereof may designate in writing, the principal amount of One Hundred Eighty Four
Thousand Four Hundred Forty One and 24/100 Dollars ($184,441.24) received by the
undersigned, plus interest, in lawful money of the United States and in
immediately available funds. This Note shall be payable commencing with a first
installment of Thirteen Thousand Six Hundred Fifty Four and 70/100 ($13,654.70)
payable on December 22, 1998 and thereafter in 34 consecutive equal monthly
installments of Five Thousand Eight Hundred Seventy Nine and 10/100 Dollars
($5,879.10) commencing February 1, 1999 and a final installment payable on
January 1, 2002 of Eighteen Thousand Four Hundred Forty Four and 12/100
($18,444.12) together with the unpaid balance of the Note, if any (it being
agreed that if all of the foregoing payments are timely made, there will be no
unpaid balance). Each installment shall be applied first to the payment of
interest on the unpaid principal of this Note and the balance on account of the
principal of this Note. No amount of principal paid or prepaid hereunder may be
reborrowed.
This Note is one of the Notes referred to in the Master Loan and
Security Agreement dated as of March 10, 1998 (as amended, supplemented or
otherwise modified from time to time, the "Agreement"), between the undersigned
and the Payee and is subject and entitled to all provisions and benefits
thereof. Capitalized terms used but not defined herein shall have the meanings
set forth in the Agreement.
If any installment of this Note is not paid within five days after its
due date, the undersigned agrees to pay on demand, in addition to the amount of
such installment, an amount equal to 5% of such installment, but only to the
extent permitted by Applicable Law.
The undersigned shall have the right to prepay this Note at any time
on or after November 1, 1999, on thirty days' prior written notice to the Payee.
On the date of any such prepayment, the undersigned shall pay an amount equal to
the present value of the remaining payments (principal and interest) due
hereunder discounted at 6% simple interest per annum, together with all
--- -----
interest, fees and other amounts, if any, payable on the amount so prepaid or in
connection therewith to the date of such prepayment. Any prepayments shall be
applied to the installments hereof in the inverse order of maturity.
Upon the maturity of this Note or the acceleration of the maturity of
this Note in accordance with the terms of the Agreement, the entire unpaid
principal amount on this Note, together with all interest, fees and other
amounts payable hereon or in connection herewith, shall be immediately due and
payable without further notice or demand, with interest on all such amounts at a
rate not to exceed the lawful limit, from the date of such maturity or
acceleration, as the case may be, until all such amounts have been paid.
If any payment on this Note becomes payable on a day other than a
Business Day, the maturity thereof shall be extended to the next succeeding
Business Day.
<PAGE>
The undersigned hereby waives diligence, demand, presentment, protest
and notice of any kind, and assents to extensions of the time of payment,
release, surrender or substitution of security, or forbearance or other
indulgence, without notice. The undersigned agrees to pay all amounts under
this Note without offset, deduction, claim, counterclaim, defense or recoupment,
all of which are hereby waived.
The Payee, the undersigned and any other parties to the Loan Documents
intend to contract in strict compliance with applicable usury law from time to
time in effect. In furtherance thereof such Persons stipulate and agree that
none of the terms and provisions contained in the Loan Documents shall ever be
construed to create a contract to pay, for the use, forbearance or detention of
money, interest in excess of the maximum amount of interest permitted to be
charged by Applicable Law from time to time in effect. Neither the undersigned
nor any present or future guarantors, endorsers, or other Persons hereafter
becoming liable for payment of any Obligation shall ever be liable for unearned
interest thereon or shall ever be required to pay interest thereon in excess of
the maximum amount that may be lawfully charged under Applicable Law from time
to time in effect, and the provisions of this paragraph shall control over all
other provisions of the Loan Documents which may be in conflict or apparent
conflict herewith. The Payee expressly disavows any intention to charge or
collect excessive unearned interest or finance charges in the event the maturity
of any Obligation is accelerated. If (a) the maturity of any Obligation is
accelerated for any reason, (b) any Obligation is prepaid and as a result any
amounts held to constitute interest are determined to be in excess of the legal
maximum, or (c) the Payee or any other holder of any or all of the Obligations
shall otherwise collect amounts which are determined to constitute interest
which would otherwise increase the interest on any or all of the Obligations to
an amount in excess of that permitted to be charged by Applicable Law then in
effect, then all sums determined to constitute interest in excess of such legal
limit shall, without penalty, be promptly applied to reduce the then outstanding
principal of the related Obligations or, at the Payee's or such holder's option,
promptly returned to the undersigned upon such determination. In determining
whether or not the interest paid or payable, under any specific circumstance,
exceeds the maximum amount permitted under Applicable Law, (i) characterize any
non-principal payment as an expense, fee or premium rather than as interest,
(ii) exclude voluntary prepayments and the effects thereof, and (iii) amortize,
prorate, allocate, and spread the total amount of interest through the entire
contemplated term of this Note in accordance with the amount outstanding from
time to time thereunder and the maximum legal rate of interest from time to time
in effect under Applicable Law in order to lawfully charge the maximum amount of
interest permitted under Applicable Law.
This Note may not be changed, modified or terminated orally, but only
by an agreement in writing signed by the undersigned and the Payee or any holder
thereof.
The undersigned shall, upon demand, pay to the Payee all costs and
expenses (including the fees and disbursements of counsel and other
professionals) paid or incurred by the Payee in (A) enforcing or defending its
rights under or in respect of this Note or any of the other Loan Documents, (B)
collecting any of the liabilities by the undersigned to the Payee or otherwise
administering the Loan Documents, (C) foreclosing or otherwise collecting upon
any collateral and (D) obtaining any legal, accounting or other advice in
connection with any of the foregoing.
This Note shall be binding upon the successors and assigns of the
undersigned and inure to the benefit of the Payee and its successors, endorsees
and assigns. If any term or provision of this Note shall be held invalid,
illegal or unenforceable, the validity of all other terms and provisions hereof
shall in no way be affected thereby.
<PAGE>
EACH OF THE UNDERSIGNED AND, BY ITS ACCEPTANCE HEREOF, THE PAYEE
HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES (TO THE FULLEST EXTENT
PERMITTED BY APPLICABLE LAW) ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY OF ANY
DISPUTE ARISING UNDER OR RELATING TO THIS NOTE AND AGREES THAT ANY SUCH DISPUTE
SHALL BE TRIED BEFORE A JUDGE SITTING WITHOUT A JURY.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS
OF LAW.
JFAX COMMUNICATIONS, INC.
By: /s/ N. Zucker
---------------------------------------
Name: Hemi Zucker
Title: CFO
<PAGE>
EXHIBIT 10.18
______________________________________________________
INVESTMENT AGREEMENT
Among
JFAX COMMUNICATIONS, INC.
JENS MULLER
and
JOHN F. RIELEY
(collectively, Seller)
and
BOARDRUSH LLC
("Borrower")
and
ORCHARD/JFAX INVESTORS, L.L.C.
and
RICHARD S. RESSLER
(collectively, Buyer)
______________________________________________________
March 14, 1997
______________________________________________________
<PAGE>
INVESTMENT AGREEMENT
This Investment Agreement (the "Agreement") is entered into as of March 14,
1997, and is effective as of March 17, 1997 (the "Effective Date"), by and
between JFAX Communications, Inc., a Delaware corporation ("JFAX"), Jens Muller
("Muller") and John F. Rieley ("Rieley") (unless the context otherwise
requires, JFAX, Muller and Rieley are collectively referred to herein as
"Seller"), Boardrush LLC , a New York limited liability company ("Borrower"),
and Orchard/JFAX Investors, L.L.C., a Delaware limited liability company
("Orchard L.L.C.") and Richard S. Ressler ("Ressler") (unless the context
otherwise requires, Orchard L.L.C. and Ressler are collectively referred to
herein as "Buyer"). Certain capitalized terms used herein are defined in
Section 10.1 and the locations of the definitions of certain other capitalized
terms are set forth in Section 10.2. As used in this Agreement, except as the
context may otherwise require, references to JFAX or to Orchard L.L.C. shall
include their respective Subsidiaries (as defined in Section 10.1).
BACKGROUND
Buyer wishes to subscribe to shares of the common stock of JFAX in an
amount that will represent a majority of the common stock of JFAX on a fully
diluted basis. Borrower wishes to make a secured non-recourse borrowing from
JFAX. JFAX, Muller and Rieley wish to facilitate Buyer's investment in JFAX
and to achieve the other benefits of this Agreement.
The parties acknowledge that this Agreement and the agreements attached as
exhibits hereto collectively constitute the agreements necessary to accomplish
the transactions contemplated by this Agreement and are parts of an integrated
arrangement between the parties with respect to the transactions and certain
other relationships between the parties.
In consideration of the premises and of the mutual agreements,
representations, warranties and covenants hereinafter set forth, the parties
hereto agree as follows:
ARTICLE I
INVESTMENT TRANSACTIONS
SECTION 1.1 Purchase and Sale of Shares Subject to the terms and
---------------------------
conditions herein set forth, JFAX shall issue and sell, and Orchard L.L.C. shall
purchase, an aggregate of two thousand-twelve (2,012) shares (the "Shares") of
the common stock of JFAX, at a purchase price of $3,851.89 per share, for a
total consideration of $7,750,000 payable in immediately available funds by
Orchard L.L.C. to JFAX.
SECTION 1.2 Loan by JFAX to Borrower. Subject to the terms and conditions
------------------------
herein set forth, JFAX shall purchase from Borrower a promissory note issued by
Borrower, in the initial principal amount of $2,250,000, for the purchase price
of $2,250,000 payable by JFAX to Borrower. Such note is herein called the "Note"
or the "Notes". The Notes will be issued pursuant to the Note Agreement (as
hereinafter defined) and will mature on March ___, 2004, and will bear interest
at the rate of 6.32% per annum, payable monthly as provided in the Notes. The
Notes will be available in denominations of $100,000 and integral multiples of
$1,000 in excess thereof. The Notes will be
<PAGE>
non-recourse to Borrower, but the performance of the Notes will be secured by a
pledge by Borrower of not less than five hundred-eighty-five (585) shares of
JFAX common stock, such number to be subject to customary anti-dilution
adjustments, owned by Borrower, to be pledged and delivered to Sullivan &
Cromwell as the initial pledge agent, pursuant to a pledge and security
agreement (the "Pledge Agreement") in the form previously negotiated by the
parties. The Notes will be subject to mandatory prepayment by Borrower at such
time as the common stock of JFAX becomes publicly traded and Borrower, Muller
and their Affiliates sell, whether in an initial public offering or otherwise,
at least $4,000,000 of the JFAX common stock. In case the JFAX common stock does
not become publicly traded, Borrower may elect to effect repayment of the Notes
by extending the Consulting Agreement (as defined below) for an additional 5-
year term, subject to certain conditions as provided therein and in the Note
Agreement.
SECTION 1.3 Consultancy Arrangements. At the Closing, Borrower shall
------------------------
enter into a Consulting Agreement (as defined below) with JFAX, in which
Borrower will agree to provide the consulting services of Rieley and Muller to
JFAX. The initial term of each such Consulting Agreement shall be for two years
and, subject to certain conditions as provided therein and in the Note
Agreement, may be extended by Borrower for an additional five years.
SECTION 1.4 Other Agreements. At the Closing, Seller, Borrower and Buyer
----------------
(or certain of them, as applicable) shall enter into the note agreement, which
includes the form of Note ("Note Agreement"), the Pledge Agreement, the
consulting agreement ("Consulting Agreement") and the registration rights
agreement ("Registration Rights Agreement") in the form previously negotiated by
the parties.
SECTION 1.5 Closing. Subject to the terms and conditions of this
-------
Agreement, the consummation of the transactions contemplated by Section 1.1 and
Section 1.2 (the "Closing") shall take place simultaneously with the execution
and delivery of this Agreement (the "Closing Date"). The Closing shall take
place at the offices of Sullivan & Cromwell in Los Angeles (or at such other
place as the parties mutually agree).
SECTION 1.6 Actions at the Closing. At the Closing, (i) JFAX shall
----------------------
deliver the Shares to Orchard L.L.C. and Orchard L.L.C. deliver the purchase
price thereof to JFAX in accordance with the provisions of Section 1.1, (ii)
Borrower shall deliver the Note issued by it to JFAX and JFAX shall deliver the
purchase price thereof to Borrower, and (iii) Buyer, Borrower and Seller shall
take such actions and execute and deliver such agreements, receipts and other
instruments and documents as are necessary or appropriate to effect the
transactions contemplated by this Agreement in accordance with its terms,
including without limitation the following:
(a) At the Closing, Seller shall deliver to Buyer the documents set
forth in Article VI of this Agreement.
(b) At the Closing, Buyer shall deliver to Seller the documents set
forth in Article VII of this Agreement.
-2-
<PAGE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLER
Each representation and warranty set forth below is qualified by the
exceptions or disclosures applicable thereto and set forth in the Seller
Disclosure Schedule, a copy of which is attached hereto (collectively, the
"Seller Disclosure Schedule"). Each Seller represents and warrants to each
Buyer as follows:
SECTION 2.1 Organization of JFAX. JFAX is a corporation duly formed and
--------------------
validly existing under the laws of the State of Delaware and has full corporate
power and authority and legal right to own and operate its assets (herein
sometimes called the "Assets") and to carry on its business (herein sometimes
called the "Business") as presently conducted, to execute and deliver this
Agreement and all of the other agreements and instruments to be executed and
delivered by JFAX pursuant hereto, and to consummate the transactions
contemplated hereby and thereby. JFAX has no subsidiaries. JFAX has been duly
qualified as a foreign corporation for the transaction of business and is in
good standing under the laws of each other jurisdiction in which it owns or
leases properties or conducts any business so as to require such qualification,
or is subject to no material liability or disability by reason of a failure to
be so qualified in any such jurisdiction. Attached hereto as Schedule 2.1 are
true, correct and complete copies of the certificate of incorporation and by-
laws of JFAX, as amended and currently in effect, and any other agreements or
instruments defining the rights of JFAX shareholders.
SECTION 2.2 Authority of JFAX. The execution and delivery of this
-----------------
Agreement (and all other agreements and instruments contemplated hereunder) by
JFAX, the performance by JFAX of its obligations hereunder and thereunder, and
the consummation by JFAX of the transactions contemplated hereby and thereby
have been duly authorized by all necessary action by the Board of Directors of
JFAX, and no other act or proceeding on the part of or on behalf of JFAX or any
of JFAX's shareholders is necessary to approve the execution and delivery of
this Agreement and such other agreements and instruments by JFAX, the
performance by JFAX of its obligations hereunder and thereunder and the
consummation of the transactions contemplated hereby and thereby by JFAX. The
signatory officers of JFAX have the power and authority to execute and deliver
this Agreement and all of the other agreements and instruments to be executed
and delivered by JFAX pursuant hereto, to consummate the transactions hereby and
thereby contemplated and to take all other actions required to be taken by JFAX
pursuant to the provisions hereof and thereof.
SECTION 2.3 Execution and Binding Effect. This Agreement has been duly
----------------------------
and validly executed and delivered by Seller and constitutes, and the other
agreements and instruments to be executed and delivered by Seller pursuant
hereto, upon their execution and delivery by Seller will constitute (assuming,
in each case, the due and valid authorization, execution and delivery thereof by
Buyer), legal, valid and binding agreements of Seller, enforceable against
Seller in accordance with their respective terms, except as enforceability may
be limited by bankruptcy, insolvency, moratorium, or other laws affecting the
enforcement of creditors' rights generally or provisions limiting competition,
and by equitable principles.
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<PAGE>
SECTION 2.4 Consents and Approvals of Governmental Entities. There is no
-----------------------------------------------
requirement applicable to Seller to make any filing, declaration or registration
with, or to obtain any permit, authorization, consent or approval of, any
Governmental Entity (as defined in Section 10.1) as a condition to the lawful
consummation by Seller of the transactions contemplated by this Agreement and
the other agreements and instruments to be executed and delivered by Seller,
except for such filings the failure of which to make would not have a material
adverse effect on the business of JFAX or on the transactions contemplated
hereby.
SECTION 2.5 No Violation. Neither the execution, delivery and performance
------------
of this Agreement and all of the other agreements and instruments to be executed
and delivered pursuant hereto, nor the consummation of the transactions
contemplated hereby or thereby, will, with or without the passage of time or the
delivery of notice or both, (a) conflict with, violate or result in any breach
of the terms, conditions or provisions of the certificate of incorporation or
bylaws of JFAX, (b) conflict with or result in a violation or breach of, or
constitute a default or require consent of any Person (or give rise to any right
of termination, cancellation or acceleration) under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, license,
franchise, permit, agreement, lease or other instrument or obligation to which
Seller is a party or by which Seller or any of the properties or assets of
Seller may be bound, where such conflict, violation, breach, default or consent
would have a material adverse effect on the business of JFAX or on the
transactions contemplated hereby or (c) violate any statute, ordinance or law or
any rule, regulation, order, writ, injunction or decree of any Governmental
Entity applicable to Seller or by which any properties or assets of Seller may
be bound, where such violation would have a material adverse effect on the
business of JFAX or on the transactions contemplated hereby.
SECTION 2.6 Software, Etc..
--------------
(a) The software listed on Schedule 2.6(a) contains all of the
software (the "Software" or "software") that comprises the JFAX products or that
supports the services provided by JFAX to its customers. Such services include
principally the e-mail accessing of phone mail and fax messages, and the
provision of other computer telephony services to individuals or businesses (the
"Services"). Such listing includes each of the software modules ("Modules") of
JFAX, and such listing is subdivided by the software components that comprise
the JFAX software..
(b) To Seller's knowledge, JFAX holds valid title, license to or
leasehold interest in all of the Software, Products, Tools and Intellectual
Property, free and clear of any mortgages, pledges, liens, security interests,
encumbrances, charges or other claims of third parties of any kind
(collectively, "Liens"), other than non-exclusive licenses to use the Products
granted by Seller to end-users in the ordinary course of business; provided,
however, with respect to Software written by or at the direction of JFAX, this
representation and warranty shall not be limited to knowledge. For purposes of
this Agreement, the terms Products, Tools and Intellectual Property shall be
defined in Section 10.1.
(c) Except for end-user, nonexclusive licenses listed in the Seller
Disclosure Schedule, Seller has not granted to any Person or entity, and to
Seller's knowledge, no Person or entity, other than Seller, holds any rights in,
or licenses, or rights to acquire licenses, to produce, distribute, license,
sublicense, sell, use in development or otherwise use, any of the Software,
-4-
<PAGE>
Products, Tools or Intellectual Property. Schedule 2.6(c), together with
Schedule 2.6(a), lists all the Software, Products, Tools and Intellectual
Property of JFAX.
(d) To the knowledge of Seller, the software of JFAX as listed on
Schedule 2.6(a) includes software that is sufficient, in all material respects,
to run the products/services of JFAX as currently conducted by the existing
management of JFAX.
SECTION 2.7 Capitalization of JFAX.
----------------------
(a) As of the date hereof, JFAX has 100,000 shares of capital stock
authorized, consisting of 100,000 shares of common stock, par value $.01 per
share (the "JFAX common stock"), of which 1,513 shares are issued, including
1,513 shares outstanding and no shares held as treasury stock (no other class of
capital stock being authorized).
(b) As of the date hereof, except as set forth on the Seller
Disclosure Schedule, JFAX does not have any shares of its capital stock reserved
for issuance, any outstanding option, call or commitment relating to shares of
its capital stock or any outstanding securities, obligations or agreements
convertible into or exchangeable for, or giving any person any right (including,
without limitation, pre-emptive rights) to subscribe for or acquire from it, any
shares of its capital stock (collectively, "Rights"), except for the Rights
granted herein to Buyer.
(c) Schedule 2.7(c) sets forth a listing of all the shareholders and
all the holders of Rights of JFAX together with the number of shares held by
each of them, or the number of shares subject to Rights held by each of them, as
of the date hereof.
SECTION 2.8 Intellectual Property. To Seller's knowledge, JFAX does not
---------------------
infringe any United States or foreign trade name, trademark, copyright, trade
secret, patent (including any process patent) or any other intellectual property
right of any Person. To Seller's knowledge, there is no pending or threatened
claim by Seller against any Person, or by any Person against Seller, for
infringement, misuse or misappropriation of any Intellectual Property. To
Seller's knowledge, Seller is not obligated or under any liability whatsoever to
make any payments by way of royalties, fees or otherwise to any owner of,
licensor of, or other claimant to, any patent, trademark, trade name, copyright,
trade secret or other intellectual property rights, with respect to the use
thereof or in connection with the business of JFAX. To Seller's knowledge, all
of the Intellectual Property is owned by JFAX free and clear of any rights or
claims of any present or former employees, consultants, officers and directors
of JFAX or other Persons.
SECTION 2.9 Litigation; Other Claims.
------------------------
(a) There are no claims, actions, suits, inquiries, proceedings or
investigations against Seller which are currently pending or, to Seller's
knowledge, threatened, at law or in equity or before or by any Governmental
Entity which could materially affect the Business of JFAX or Seller's ability to
consummate the transactions contemplated hereby.
(b) There are no pending claims or, to Seller's knowledge, material
liabilities under any product liability, breach of warranty or maintenance
claim, express or implied, arising out
-5-
<PAGE>
of or relating to any defect or damage, or alleged defect or damage, in
engineering, development, design, programming, tooling, manufacturing,
installation, packaging, shipping or provision of any Service, Product, Software
or Intellectual Property of the Business.
SECTION 2.10 Validity of Securities, Etc.
---------------------------
(a) All of the outstanding shares of capital stock of JFAX have been
duly authorized and are duly issued and fully paid and non-assessable, and were
not issued in violation of any pre-emptive or similar rights.
(b) The Shares have been duly authorized and are duly issued and fully
paid and non-assessable, and are not issued in violation of any pre-emptive or
similar rights.
(c) Neither Seller, nor any person acting on its behalf (other than
Buyer, as to which Seller makes no representation), has offered or sold the any
of the above-mentioned securities (collectively, the "Securities") by means of
any general solicitation or general advertising within the meaning of Rule
502(c) under the Securities Act of 1933, as amended (the "Securities Act").
(d) Borrower is a limited liability company duly formed and validly
existing under the laws of New York, and has full power and authority and the
legal right to execute and deliver this Agreement and all of the other
agreements and instruments to be executed and delivered by it pursuant hereto,
and to consummate the transactions contemplated hereby and thereby. This
Agreement, the Note Agreement, the Notes and the Pledge Agreement have been duly
authorized, executed and delivered by Borrower and constitute valid and binding
obligations of Borrower enforceable in accordance with their terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors' rights
and to general equity principles.
SECTION 2.11 Brokers and Finders. Except as set forth in Schedule 2.11,
-------------------
neither Seller nor any of Seller's officers, directors or employees has employed
any broker or finder or incurred any liability for any brokerage fee, commission
or finders fee in connection with the transactions contemplated by this
Agreement.
SECTION 2.12 Certain Disclosures. Seller has reviewed the disclosures set
-------------------
forth in the Seller Disclosure Schedule relating to subsections (a) through (f)
below and, based on that review, to the knowledge of Seller, such disclosures
provide a complete listing or a fair summary of the items called for, in all
material respects:
(a) Insurance. Schedule 2.12(a) sets forth a current listing of the
---------
insurance policies of the JFAX business.
(b) Chronology. Schedule 2.12(b) sets forth a chronology of the
----------
development of the JFAX business since its inception including current plans for
the business.
(c) Enhancements. Schedule 2.12(c) sets forth a listing of all
------------
current enhancements that are planned or being worked on for the Software of the
JFAX product.
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<PAGE>
(d) Cash Balance and Liabilities. Schedule 2.12(d) sets forth the
----------------------------
cash balance of JFAX in its bank account as of March 13, 1997, and there has
been no material reduction in such cash balance through the date hereof, and
further sets forth all the liabilities of JFAX, whether absolute, contingent,
accrued or otherwise, as of the date hereof ; provided, however, that such
schedule may omit liabilities up to $50,000 in the aggregate and may further
omit liabilities arising under the provisions of, and ascertainable by a review
of, the contracts listed on Schedule 2.12(e) below or the other contracts listed
elsewhere on the Seller Disclosure Schedule.
(e) Contracts and Negotiations. Schedule 2.12(e) sets forth a listing
--------------------------
of all the material agreements, commitments, licenses and other contracts of
JFAX, whether written or oral, including forms of such contracts in cases where
no individual contract is material but the aggregate of all similar contracts is
material. Such schedule further lists all pending negotiations of JFAX which,
if consummated, would lead to such a material contract. Seller has provided to
buyer correct and complete copies of each of such contracts or summaries thereof
in the case of oral contracts.
(f) Notarized Documents. Schedule 2.12(f) sets forth copies of three
-------------------
notarized documents prepared by JFAX that describe "fields of invention,"
"summary of invention" and "brief description of drawings" of the JFAX
services/products.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BUYER
Each Buyer represents and warrants to each Seller as follows:
SECTION 3.1 Organization of Orchard L.L.C.. Orchard L.L.C. is a limited
------------------------------
liability company duly formed and validly existing under the laws of Delaware,
and has full power and authority and the legal right to execute and deliver this
Agreement and all of the other agreements and instruments to be executed and
delivered by Orchard L.L.C. pursuant hereto, and to consummate the transactions
contemplated hereby and thereby.
SECTION 3.2 Authority of Orchard L.L.C.. The execution and delivery of
---------------------------
this Agreement (and all other agreements and instruments contemplated hereunder)
by Orchard L.L.C., the performance by Orchard L.L.C. of its obligations
hereunder and thereunder, and the consummation by Orchard L.L.C. of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary action by the Manager of Orchard L.L.C., and no other act or
proceeding on the part of Orchard L.L.C. or its Members is necessary to approve
the execution and delivery of this Agreement and such other agreements and
instruments by Orchard L.L.C., the performance by Orchard L.L.C. of its
obligations hereunder and thereunder and the consummation of the transactions
contemplated hereby and thereby by Orchard L.L.C.. The signatory officers of
the Manager of Orchard L.L.C. have the power and authority to execute and
deliver this Agreement and all of the other agreements and instruments to be
executed and delivered by Orchard L.L.C. pursuant hereto, to consummate the
transactions hereby and thereby contemplated and to take all other actions
required to be taken by Orchard L.L.C. pursuant to the provisions hereof and
thereof.
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<PAGE>
SECTION 3.3 Execution and Binding Effect. This Agreement has been duly
----------------------------
and validly executed and delivered by Buyer and constitutes, and the other
agreements and instruments to be executed and delivered by Buyer pursuant
hereto, upon their execution and delivery by Buyer, will constitute (assuming,
in each case, the due and valid authorization, execution and delivery thereof by
Seller), legal, valid and binding agreements of Buyer, enforceable against Buyer
in accordance with their respective terms, except as enforceability may be
limited by bankruptcy, insolvency, moratorium, or other laws affecting the
enforcement of creditors' rights generally or provisions limiting competition,
and by equitable principles.
SECTION 3.4 Consent and Approvals. There is no requirement applicable to
---------------------
Buyer to make any filing, declaration or registration with, or to obtain any
permit, authorization, consent or approval of, any Governmental Entity as a
condition to the lawful consummation by Buyer of the transactions contemplated
by this Agreement and the other agreements and instruments to be executed and
delivered by Buyer pursuant hereto, except for such filings referred to in the
Seller Disclosure Schedule and such filings the failure of which to make would
not have a material adverse effect on the transactions contemplated hereby.
SECTION 3.5 No Violation. Neither the execution, delivery and performance
------------
of this Agreement and all of the other agreements and instruments to be executed
and delivered pursuant hereto, nor the consummation of the transactions
contemplated hereby or thereby, will, with or without the passage of time or the
delivery of notice or both, (a) conflict with, violate or result in any breach
of the terms, conditions or provisions of the Certificate of Formation or the
Limited Liability Company Agreement of Orchard L.L.C., (b) conflict with or
result in a violation or breach of, or constitute a default or require consent
of any Person (or give rise to any right of termination, cancellation or
acceleration) under, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, license, franchise, permit, agreement, lease or other
instrument or obligation to which Buyer is a party or by which Buyer or any of
its properties or assets may be bound, where such conflict, violation, breach,
default or consent would have a material adverse effect on the business of Buyer
or on the transactions contemplated hereby, or (c) violate any statute,
ordinance or law or any rule, regulation, order, writ, injunction or decree of
any Governmental Entity applicable to Buyer or by which any of its properties or
assets may be bound, where such violation would have a material adverse effect
on the business of Buyer or on the transactions contemplated hereby.
SECTION 3.6 Brokers and Finders. Neither Buyer nor any of Buyer's
-------------------
officers, directors or employees has employed any broker or finder or incurred
any liability for any brokerage fee, commission or finders fee in connection
with the transactions contemplated by this Agreement.
SECTION 3.7 Litigation; Other Claims. There are no claims, actions, suits,
------------------------
inquiries, proceedings or investigations against Buyer which are currently
pending or, to Buyer's knowledge, threatened, at law or in equity or before or
by any Governmental Entity which could materially affect Buyer's ability to
consummate the transactions contemplated hereby.
SECTION 3.8 Financing. Orchard L.L.C. has available to it sufficient cash
---------
necessary to pay the purchase price of the transactions contemplated in Section
1.1 and such funds are not necessary to operate the business of Orchard L.L.C.
in the ordinary course of business.
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<PAGE>
SECTION 3.9 Securities Laws. Buyer represents and warrants to, and agrees
---------------
with, Seller that:
(a) The Shares are not, as of the date of this Agreement, registered
under the Securities Act or any state securities laws; it understands that the
offering and sale of the Shares are intended to be exempt from registration
under the Securities Act, by virtue of Section 4(2) and the provisions of
Regulation D promulgated thereunder, based, in part, upon the representations,
warranties and agreements contained in this Agreement; and it understands that
the Shares will bear a legend to that effect.
(b) With respect to this transaction, it is an accredited investor
within the meaning of Regulation D under the Securities Act, and it has such
knowledge and experience in financial, tax and business matters so as to enable
it to utilize the information made available to it by Seller and other sources
including this Agreement to evaluate the merits and risks of an investment in
the Shares and to make an informed investment decision with respect thereto.
(c) It is acquiring the Shares solely for its own account for
investment and not with a view to resale or distribution thereof except pursuant
to registration under the Securities Act or pursuant to an applicable exemption
therefrom.
ARTICLE IV
COVENANTS
SECTION 4.1 Access to Information, Etc. At all times following the
---------------------------
Closing, each party shall provide the other party (at such other party's
expense) with such reasonable assistance, including the provision of available
relevant records or other information and reasonable access to and cooperation
of any personnel within their employ, as may be reasonable requested by either
of them in connection with the preparation of any financial statement or tax
return, or any audit or examination by any taxing authority, or any judicial or
administrative proceeding.
SECTION 4.2 Third Party Consents. Seller and Buyer shall use commercially
--------------------
reasonable efforts to obtain, within the applicable time periods required, all
waivers, permits, consents and approvals and to effect all registrations,
filings and notices with or to third parties or Governmental Entities which are
necessary to consummate the transactions contemplated by this Agreement. Seller
and Buyer agree that obtaining any or all of such consents shall not be a
condition to either Seller or Buyer's obligations under this Agreement, except
in the case of consents required from Governmental Entities. Seller and Buyer
agree to cooperate to resolve any objections raised by any third party. Seller
and Buyer also agree that any costs or liabilities arising out of the failure to
obtain any such consent shall be shared equally by Buyer and Seller.
SECTION 4.3 Reasonable Efforts. The parties shall use commercially
------------------
reasonable efforts to cause to be performed all of the matters required of each
of them at the Closing, or subsequent thereto pursuant to the provisions of this
Agreement.
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<PAGE>
SECTION 4.4 Shares to Represent Majority of JFAX Common Stock. It is the
-------------------------------------------------
intention of the parties that upon the purchase of the Shares pursuant to
Section 1.1 hereof, and based on the representation and warranty of the Seller
in Section 2.7, Buyer will acquire, on a fully-diluted basis, a majority of the
shares of the JFAX common stock, effective as of the Closing Date, and after
giving effect to such transaction. If the Shares should fail to represent such
majority, due to, for example, certain shares of the JFAX common stock or
certain Rights being overlooked, resulting in Buyer failing to achieve at the
Closing a majority ownership position, on a fully-diluted basis, in JFAX, then
Buyer shall be entitled to delivery by JFAX of additional shares of JFAX common
stock, without further consideration, in a number sufficient to remedy any such
shortfall.
SECTION 4.5 Public Announcements. The parties shall keep the proposed
--------------------
transactions and agreements (including drafts of such agreements) strictly
secret and confidential until such time as they mutually agree that a public
announcement shall be made, provided that if in the written opinion of counsel
for either of Buyer or Seller public disclosure is required under the federal
securities laws, then the consent of the other party shall not be required. The
parties shall consult with each other and use all reasonable efforts to agree on
the content and manner of any disclosure permitted or required under this
section.
ARTICLE V
RIGHT OF FIRST NEGOTIATION, ETC.
SECTION 5.1 Right of First Negotiation. During the period from the
--------------------------
date hereof and until the common stock of JFAX is publicly traded, if either
Rieley or Muller wishes to sell any of his JFAX shares, he shall first give
written notice, stating the number of shares proposed to be sold and indicating
generally the desired terms for their sale, to JFAX, and during the next 10
business days JFAX shall have the exclusive right of first negotiation with
Rieley or Muller (as the case may be) (the "Transferor"). If Transferor and
JFAX reach an agreement as to the proposed disposition of any of Transferor's
shares in JFAX within such 10 business days period, then the transaction will
proceed according to their agreement. If however, they are unable to reach such
an agreement within such period, then Transferor shall be free to dispose of the
shares that were the subject of such negotiation on terms, including price, that
are more favorable to Transferor than the most favorable offer (if any) made by
JFAX and available for acceptance by Transferor at the completion of the
exclusive period of negotiations. Such right of disposition on the part of
Transferor shall expire 45 business days after the end of the exclusive
negotiation period. The shares not disposed of by Transferor during such 45
business day period, in a manner consistent with the foregoing requirements
(i.e., terms more favorable), shall not thereafter be available for sale or
- -
other disposition by Transferor except by complying again with the provisions of
this Section 5.1. However, the foregoing right of first negotiation shall not be
applicable to up to seventy (70) shares of the JFAX common stock that may be
disposed of by Reiley and Muller without complying with these provisions. Also,
the shares of JFAX common stock owned by Reiley or Muller for purposes of this
Section 5.1 shall consist of the JFAX shares that are beneficially owned by
Reiley or Muller, respectively, within the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934, as amended.
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<PAGE>
SECTION 5.2 Certain Voting Provisions. So long as the JFAX common
-------------------------
stock is not publicly traded, and Rieley and Muller jointly hold directly or
indirectly 10% or more of the common stock of JFAX, Buyer shall designate or
vote for each of Rieley and Muller, or a designee of Rieley and/or Muller
reasonably acceptable to Buyer, as board members of JFAX, and Rieley and/or
Muller (either jointly, or separately so long as each person exercising the veto
himself owns directly or indirectly 10% or more of the common stock of JFAX)
shall have the right to veto (1) any transaction (other than ordinary course
reimbursement of the pass-through of third-party expenses) between JFAX or any
affiliate thereof on the one hand, and Buyer and any direct or indirect
affiliate thereof on the other hand, (2) any merger, acquisition, sale or pledge
(except in connection with the bonafide extension of credit for the benefit of
JFAX) of substantially all of JFAX's assets, and (3) any other transaction the
effect of which would be to dilute the direct or indirect ownership of Rieley
and/or Muller in JFAX in a manner disproportionate to any dilution of Buyer (or
any affiliates of Buyer holding JFAX stock). For purposes of this provision,
any entity, 10% or more of the equity ownership interests of which is directly
or indirectly owned or controlled by, or under common control with, Buyer shall
be deemed to be an affiliate of Buyer, and otherwise the term affiliate shall
have the meaning set forth in Section 10.1.
ARTICLE VI
CONDITIONS TO BUYER'S OBLIGATIONS; CLOSING DOCUMENTS
SECTION 6.1 Buyer's Closing Condition: Representations and Warranties
---------------------------------------------------------
True; Performance; Certificate. The obligations of Buyer are subject to the
- -------------------------------
fulfillment, prior to or on the date hereof, of each of the following
conditions, all or any of which may be waived by Buyer in writing, except as
otherwise provided by law:
(a) The representations and warranties of Seller contained in this
Agreement shall be true and correct in all material respects as of the date
hereof.
(b) Seller shall have performed and complied with all of its
agreements, covenants and conditions required by this Agreement to be
performed or complied with by it prior to or at the date hereof.
(c) No preliminary or permanent injunction or other order shall have
been issued by any Governmental Entity, nor shall any statute, rule,
regulation or executive order be promulgated or enacted by any Governmental
Entity which prevents the consummation of the transactions contemplated by
this Agreement.
(d) Seller shall have delivered a certificate, dated as of the date
hereof, signed and verified by Seller, or in the case of JFAX, by an
officer of JFAX on behalf of JFAX and solely in his or her capacity as an
officer of JFAX, certifying to the matters set forth in Section 6.1(a)-(c).
-11-
<PAGE>
(e) Each of JFAX, Borrower, Rieley and Muller shall have executed and
delivered each of the agreements to which he or it is intended to be a
party, as contemplated herein, and such agreements shall remain in full
force and effect.
(f) Seller shall have delivered to Buyer an opinion, dated the date
hereof, of Curtis, Mallet-Prevost, Colt & Mosle, counsel to Seller.
(g) The persons designated by Buyer (up to three in number), being Mr.
Richard S. Ressler, Mr. David Robb and Mr. Zohar Loshitzer, shall have been
elected to the Board of Directors of JFAX and shall represent a majority
of the Directors of JFAX.
ARTICLE VII
CONDITIONS TO SELLER'S OBLIGATIONS; CLOSING DOCUMENTS
SECTION 7.1 Seller's Closing Condition: Representations and
-----------------------------------------------
Warranties True; Performance; Certificate. The obligations of Seller are
- ------------------------------------------
subject to the fulfillment, prior to or on the date hereof, of each of the
following conditions, all or any of which may be waived by Seller in writing,
except as otherwise provided by law:
(a) The representations and warranties of Buyer contained in this
Agreement shall be true and correct in all material respects as of the date
hereof.
(b) Buyer shall have performed and complied with all of its
agreements, covenants and conditions required by this Agreement to be
performed or complied with by it prior to or at the date hereof.
(c) No preliminary or permanent injunction or other order shall have
been issued by any Governmental Entity, nor shall any statute, rule,
regulation or executive order be promulgated or enacted by any Governmental
Entity which prevents the consummation of the transactions contemplated by
this Agreement.
(d) Buyer shall have delivered a certificate, dated as of the date
hereof, signed and verified by Buyer, or in the case of Orchard L.L.C., by
an officer of the Manager of Orchard L.L.C. on behalf of Orchard L.L.C. and
solely in his or her capacity as an officer of the Manager of Orchard
L.L.C., certifying to the matters set forth in Sections 7.1(a)-(c).
(e) Buyer shall have executed and delivered each of the agreements to
which he or it is intended to be a party as contemplated herein, and such
agreements shall remain in full force and effect.
(f) Buyer shall have delivered to Seller an opinion, dated the date
hereof, of Sullivan & Cromwell, counsel to Buyer.
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<PAGE>
(g) Loans from Muller and Rieley to JFAX in the amount of $138,424.19
shall have been repaid at the Closing.
ARTICLE VIII
INDEMNIFICATION
SECTION 8.1 Survival of Representations and Warranties. The
------------------------------------------
representations and warranties of Seller in Article II and Buyer in Article III
shall survive until April 30, 1998, and shall thereafter automatically expire,
except with respect to any prior breaches thereof as to which a Claim (as
defined below) has been given, specifying the nature and basis of the Claim in
reasonable detail, on or prior to such date. However, this provision shall not
apply to the representations and warranties in Sections 2.3, 2.7, 2.10, 3.3 and
3.9 which shall survive without contractual time limit.
SECTION 8.2 Indemnification by Seller. Seller shall indemnify and hold
-------------------------
harmless Buyer and its affiliates and each of their officers, directors,
employees, agents, successors and assigns ("Buyer Indemnitees") for any and all
liabilities, losses, damages, claims, costs and expenses, interest, awards,
judgments and penalties (including, without limitation, reasonable legal costs
and expenses and interest on the amount of any Loss from the date suffered or
incurred) (a "Loss") arising out of, resulting from or caused by any inaccuracy
or misrepresentation in or breach of any of the representations or warranties
made by or covenants or agreements of Seller contained in this Agreement.
However, for purposes of such indemnification by Seller, the liability of Muller
and Rieley, taken together, shall be limited to 62% of any aggregate liability
of Seller pursuant to this provision, and such liability of Muller and Rieley
when taken together shall be further limited so as not to exceed the sum of
$1.395 million. The liability of JFAX as a Seller shall be limited to $7.75
million, the purchase price paid for the Shares.
SECTION 8.3 Indemnification by Buyer. Buyer shall indemnify and hold
------------------------
harmless Seller and its affiliates and each of their officers, directors,
employees, agents, successors and assigns ("Seller Indemnitees") for any and all
Losses arising out of or resulting from any inaccuracy or misrepresentation in
or breach of any of the representations or warranties made by or covenants or
agreements of Buyer contained in this Agreement.
SECTION 8.4 Indemnification Procedure.
-------------------------
(a) Whenever any Loss shall be asserted against or incurred by a Buyer
Indemnitee or Seller Indemnitee (the "Indemnified Party"), the Indemnified Party
shall with reasonable promptness give written notice thereof (a "Claim") to
Seller or Buyer, respectively (the "Indemnifying Party"). The Indemnified Party
shall furnish to the Indemnifying Party in reasonable detail such information as
the Indemnified Party may have with respect to the Claim (including in any case
copies of any summons, complaint or other pleading which may have been served on
it and any written claim, demand, invoice, billing or other document evidencing
or asserting the same). The failure to give such notice with reasonable
promptness shall not relieve the Indemnifying Party of its indemnification
obligations under this Agreement, unless the Indemnifying Party is irreparably
harmed by such failure.
-13-
<PAGE>
(b) If the Claim is based on a claim of a third party, the
Indemnifying Party shall, at its expense, undertake the defense of such Claim
with attorneys of its own choosing reasonably satisfactory to the Indemnified
Party. In the event the Indemnifying Party, within a reasonable time after
receiving notice of a Claim from the Indemnified Party, fails to defend the
Claim, the Indemnified Party may, at the Indemnifying Party's expense, undertake
the defense of the Claim and may compromise or settle the Claim, all for the
account of the Indemnifying Party. After notice from the Indemnifying Party to
the Indemnified Party of its election to assume the defense of such Claim, the
Indemnifying Party shall not be liable to the Indemnified Party under this
Section 8.4 for any legal expenses subsequently incurred by the Indemnified
Party in connection with the defense thereof, except for such expenses incurred
in connection with cooperation with, or at the request of, the Indemnifying
Party; provided, however, that the Indemnified Party shall have the right to
employ counsel to represent it if, in the Indemnified Party's reasonable
judgment, based upon the advice of counsel, it is advisable, in light of the
separate interests of the Indemnified Party and the Indemnifying Party, for the
Indemnified Party to be represented by separate counsel, and in that event the
reasonable fees and expenses of such separate counsel shall be paid by the
Indemnifying Party.
(c) The Indemnifying Party shall not consent to entry of any judgment,
except with the consent of the Indemnified Party given in its sole discretion,
or enter into any settlement, except with the consent of the Indemnified Party,
which such consent shall not be unreasonably withheld or delayed. In the event
the Indemnified Party refuses to consent to the entry of a judgment or a
settlement for which Indemnifying Party is solely and entirely responsible and
has indicated its sole and entire responsibility in writing to the Indemnified
Party, following such refusal, the liability of the Indemnifying Party to the
Indemnified Party will be fixed at the amount of any money damages provided in
the proposed judgment or settlement.
ARTICLE IX
[This Article Intentionally Omitted.]
ARTICLE X
DEFINITIONS
SECTION 10.1 Certain Definitions. As used in this Agreement, the
-------------------
following terms shall have the following respective meanings:
"Affiliate" or "affiliate" shall mean any Person controlling, controlled by
or under common control, with the relevant Person.
-14-
<PAGE>
"Governmental Entity" shall mean any court, or any Federal, state,
municipal or other governmental authority, department, commission, board, agency
or other instrumentality (domestic or foreign).
"Intellectual Property" shall mean:
(i) The copyright registrations, trademarks, service marks, and trade
names of JFAX, together with all associated goodwill; and
(ii) Any and all design and code documentation, methodologies,
processes, trade secrets, copyrights, design information, product
information, technology, formulae, routines, engineering specifications,
technical manuals and data, drawings, inventions, know-how, techniques,
engineering work papers, and programmer's notes, which are necessary to,
used in, or derived from the Business of JFAX.
"Person" shall mean an individual, corporation, partnership, trust or
unincorporated organization or Governmental Entity.
"Products" shall mean the software products owned, licensed, or under
development by JFAX, including without limitation any and all source and object
codes, binaries, interfaces for third party databases, supplements,
modifications, ports to hardware platforms, updates, corrections and
enhancements to past and current versions of such products, shipping versions of
such products and versions of such products currently under development, in each
case as existing as of the date hereof or the Closing Date; and any and all
English and foreign language versions of past and current versions of such
products, shipping versions of such products and versions of such products
currently under development, and any and all related back-up tapes and archived
tapes.
"publicly traded" shall mean that the common stock of JFAX is publicly
traded on a national securities exchange or on NASDAQ and that JFAX is a
reporting company under the Securities Exchange Act of 1934, as amended.
"Subsidiary" or "subsidiary" shall mean those direct and indirect majority-
owned subsidiary corporations or other entities of the referenced Person.
"Tools" shall mean the software design and development tools and scripts,
and modifications and additions to such tools and scripts of JFAX which were or
are used in the development, operation or maintenance of its Business, including
without limitation any and all source and object codes, binaries, supplements,
modifications, updates, corrections and enhancements to past and current
versions of such tools and scripts and versions of such tools and scripts under
development, and any and all related back-up tapes and archived tapes, in each
case as existing as of the date hereof or the Closing Date.
SECTION 10.2 Certain Other Defined Terms.
---------------------------
-15-
<PAGE>
Term Defined in Section
- ---- ------------------
Agreement Preamble
Assets Section 2.1
Borrower Preamble
Business Section 2.1
Buyer Preamble
Buyer Indemnitees Section 8.2
Closing Section 1.5
Closing Date Section 1.5
Consulting Agreement Section 1.4, Exhibit B
Effective Date Preamble
Indemnified Party Section 8.4(a)
Indemnifying Party Section 8.4(a)
JFAX Preamble
JFAX common stock Section 2.7(a)
Liens Section 2.6(b)
Loss Section 8.2
Modules Section 2.6(a)
Muller Preamble
Note Section 1.2
Note Agreement Section 1.4, Exhibit A
Orchard L.L.C. Preamble
Registration Rights Agreement Section 1.2
Rieley Preamble
Ressler Preamble
Rights Section 2.7(b)
Securities Section 2.10(c)
Securities Act Section 2.10(c)
Seller Preamble
Seller Disclosure Schedule Article II
Seller Indemnitees Section 8.3
Services Section 2.6(a)
Shares Section 1.1
Software or software Section 2.6(a)
Transferor Section 5.1
-16-
<PAGE>
ARTICLE XI
GENERAL TERMS AND CONDITIONS
SECTION 11.1 Notices. Every notice or other communication required or
-------
contemplated by this Agreement by either party shall be delivered by (i)
personal delivery, (ii) postage prepaid, return receipt requested, registered or
certified mail (airmail if available), or the equivalent of registered or
certified mail under the laws of the country where mailed, (iii) internationally
recognized express courier, such as Federal Express, UPS or DHL, (iv) "tested"
telex (a telex for which the proper answer back has been received), or (v)
facsimile with a confirmation copy sent simultaneously in the manner
contemplated by clauses (i), (ii) or (iii) of this Section 11.1, in each case
addressed to the party for whom intended at the following address:
(1) If to JFAX, Borrower, Muller or Rieley:
Mr. Jens Muller
Mr. John F. Rieley
Boardrush LLC
JFAX Communications, Inc.
225 Lafayette Street, Suite 501
New York, NY 10012
Facsimile Number: (212) 253-4321
With a copy to:
Curtis, Mallet-Prevost, Colt & Mosle
101 Park Avenue
New York, NY 10178
Attention: Yves Le Page
Facsimile Number: (212) 697-1559
(2) If to Buyer:
Mr. Richard S. Ressler
Orchard/JFAX Investors, L.L.C.
c/o Orchard Capital Corp.
10960 Wilshire Blvd., Suite 500
Los Angeles, CA 90024
Facsimile Number: (310) 201-4351
-17-
<PAGE>
With a copy to:
Sullivan & Cromwell
444 S. Flower Street
Los Angeles, California 90071
Attention: Frank H. Golay, Jr.
Facsimile Number: (213) 683-0457
or at such other address as the intended recipient previously shall have
designated by written notice to the other party. Notice by registered or
certified mail shall be effective on the date it is officially recorded as
delivered to the intended recipient by return receipt or equivalent, and in the
absence of such record of delivery, the effective date shall be presumed to have
been the sixth (6th) business day after it was deposited in the mail. All
notices and other communications required or contemplated by this Agreement to
be delivered in person or sent by courier shall be deemed to have been delivered
to and received by the addressee and shall be effective on the date of personal
delivery; notices delivered by "tested" telex or by facsimile with simultaneous
confirmation copy by registered or certified or equivalent mail or courier shall
be deemed delivered to and received by the addressee and effective on the date
sent. Notice not given in writing shall be effective only if acknowledged in
writing by a duly authorized representative of the party to whom it was given.
SECTION 11.2 Force Majeure. No party hereto shall be liable for failure
-------------
to perform, in whole or in material part, its obligations under this Agreement
if such failure is caused by any event or condition not existing as of the date
of this Agreement (unless reasonably foreseeable by such party) and not
reasonably within the control of the affected party, including without
limitation, by fire, flood, typhoon, earthquake, explosion, strikes, labor
troubles or other industrial disturbances, unavoidable accidents, war (declared
or undeclared), acts of terrorism, sabotage, embargoes, blockage, acts of
Governmental Entities, riots, insurrections, or any other cause beyond the
control of the parties; provided, only, that the affected party promptly
notifies the other party of the occurrence of the event of force majeure and
takes all reasonable steps necessary to resume performance of its obligations so
interfered with.
SECTION 11.3 No Agency. This Agreement shall not constitute an
---------
appointment of any of the parties hereto as the legal representative or agent of
any other party hereto nor shall any party hereto have any right or authority to
assume, create or incur in any manner any obligation or other liability of any
kind, express or implied, against, or in the name or on behalf of, the other
party hereto.
SECTION 11.4 Severability. In the event any provision of this Agreement
------------
shall be determined to be invalid or unenforceable under applicable law, all
other provisions of this Agreement shall continue in full force and effect
unless such invalidity or unenforceability causes substantial deviation from the
underlying intent of the parties expressed in this Agreement or unless the
invalid or unenforceable provisions comprise an integral part of, or are
inseparable from, the remainder of this Agreement. If this Agreement continues
in full force and effect as provided above, the parties shall replace the
invalid provision with a valid provision which corresponds as far as possible to
the spirit and purpose of the invalid provision.
-18-
<PAGE>
SECTION 11.5 Assignment and Succession. Except as expressly permitted
-------------------------
herein, no party may assign or otherwise transfer any rights, interests or
obligations under this Agreement without the prior written consent of the other
party, which consent may be withheld in the sole and absolute discretion of such
party for any reason whatsoever or for no reason and any attempted assignment in
violation of this provision shall be void and of no effect.
SECTION 11.6 Amendments and Waivers. No amendment, modification,
----------------------
termination or waiver of any provision of this Agreement or consent to any
departure by any party therefrom, shall in any event be effective without the
written concurrence of the other party hereto. Any waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
it is given. No notice to or demand on any party in any case shall entitle any
other party to any other or further notice or demand in similar or other
circumstances.
SECTION 11.7 Further Assurances. Each of the parties hereto agrees that,
------------------
from and after the Closing, upon the reasonable request of the other party
hereto and without further consideration, such party will execute and deliver to
such other party such documents and further assurances and will take such other
actions (without cost to such party) as such other party may reasonably request
in order to carry out the purpose and intention of this Agreement including but
not limited to the effective consummation of the transactions contemplated under
the provisions of Article I of this Agreement, and the correction of errors and
defects in any such documents.
SECTION 11.8 Absence of Third-Party Beneficiaries. No provisions of this
------------------------------------
Agreement, express or implied, are intended or shall be construed to confer upon
or give to any Person other than the parties hereto, any rights, remedies or
other benefits under or by reason of this Agreement unless specifically provided
otherwise herein, and except as so provided, all provisions hereof shall be
personal solely between the parties to this Agreement.
SECTION 11.9 Governing Law. THE VALIDITY, CONSTRUCTION, PERFORMANCE AND
-------------
ENFORCEABILITY OF THIS AGREEMENT SHALL BE GOVERNED IN ALL RESPECTS BY THE LAWS
OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO THE CHOICE-OF-LAW PRINCIPLES
THEREOF.
SECTION 11.10 Interpretation. This Agreement, including any exhibits,
--------------
addenda, schedules and amendments, has been negotiated at arm's length and
between persons sophisticated and knowledgeable in the matters dealt with in
this Agreement. Each party has been represented by experienced and
knowledgeable legal counsel. Accordingly, any rule of law or legal decision
that would require interpretation of any ambiguities in this Agreement against
the party that has drafted it is not applicable and is waived. The provisions
of this Agreement shall be interpreted in a reasonable manner to effect the
purposes of the parties and this Agreement. THIS AGREEMENT CONTAINS NO IMPLIED
REPRESENTATIONS OR WARRANTIES AND, IN PARTICULAR, NEITHER BUYER NOR BORROWER NOR
SELLER MAKES ANY REPRESENTATION OR WARRANTY TO THE OTHERS AS TO THE TAX
TREATMENT OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, INCLUDING WITHOUT
LIMITATION UNDER THE CODE OR UNDER APPLICABLE STATE TAX STATUTES. EACH PARTY IS
LOOKING SOLELY TO HIS OR ITS OWN FINANCIAL, ACCOUNTING AND LEGAL ADVISERS WITH
RESPECT TO THE STRUCTURING OF
-19-
<PAGE>
THE TRANSACTIONS CONTEMPLATED HEREBY. NOTHING IN THIS PROVISION, HOWEVER, SHALL
LIMIT THE EXPRESS REPRESENTATIONS AND WARRANTIES IN THIS AGREEMENT.
SECTION 11.11 Entire Agreement. The terms of this Agreement and the other
----------------
writings referred to herein and delivered by the parties hereto are intended by
the parties to be the final expression of their agreement with respect to the
subject matter hereof and may not be contradicted by evidence of any prior or
contemporaneous agreement; provided, however, that the terms of a certain
confidentiality letter agreement, dated January 9, 1997, by and between Seller
and Buyer shall survive the execution and, if terminated, the termination of
this Agreement. The parties acknowledge and agree that this Agreement and
exhibits and schedules hereto constitute the agreements necessary to accomplish
the transactions contemplated by this Agreement and are parts of an integrated
arrangement between the parties with respect to such transactions, and that
separate agreements have been used for the sake of convenience.
SECTION 11.12 Counterparts. This Agreement may be executed simultaneously
------------
in multiple counterparts, each of which shall be deemed an original, but all of
which taken together shall constitute one and the same instrument. Execution
and delivery of this Agreement by exchange of facsimile copies bearing the
facsimile signature of a party hereto shall constitute a valid and binding
execution and delivery of this Agreement by such party. Such facsimile copies
shall constitute enforceable original documents.
SECTION 11.13 Expenses. Each of the parties agrees to pay its own
--------
expenses in connection with the transactions contemplated by this Agreement,
including without limitation legal, consulting, accounting and investment
banking fees, whether or not such transactions are consummated; provided,
however, that JFAX shall reimburse all costs of Buyer, Muller and Rieley that
are directly related to the transactions contemplated by this Agreement, subject
to completion of the Closing hereunder.
SECTION 11.14 Consents. Whenever this Agreement requires or permits
--------
consent by or on behalf of any party hereto, such consent shall be given in
writing.
SECTION 11.15 Headings. The article and section headings contained in
--------
this Agreement are for reference purposes only and will not affect in any way
the meaning or interpretation of this Agreement.
-20-
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
individually or by the duly authorized officers of Seller and Buyer as of the
date first above written.
JFAX COMMUNICATIONS, INC.
By: /s/ Jens Muller
-----------------------------------
Name: Jens Muller
Title: President
/s/ Jens Muller
---------------------------------------
JENS MULLER
/s/ John F. Rieley
---------------------------------------
JOHN F. RIELEY
BOARDRUSH LLC
By: /s/ Jens Muller
___________________________________
Name: Jens Muller
Title: Manager
ORCHARD/JFAX INVESTORS, L.L.C.
By: /s/ R.S. Ressler
___________________________________
Name: R.S. Ressler
Title: Manager
/s/ Richard Ressler
---------------------------------------
RICHARD S. RESSLER
-21-
<PAGE>
SCHEDULES
---------
Seller Disclosure Schedule
Schedule 2.1 Certificate of Incorporation and By-laws
Schedule 2.6(a) Software
Schedule 2.6(c) Products, Tools, Intellectual Property
Schedule 2.7(b) Rights
Schedule 2.7(c) Shareholders and Rightsholders
Schedule 2.11 Brokers and Finders
Schedule 2.12 Certain Disclosures
-22-
<PAGE>
Exhibit 10.19
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFER AS SET FORTH ON THE
REVERSE.
PROMISSORY NOTE
ISSUED BY
BOARDRUSH LLC
6.32% Secured Non-Recourse Note due 2004
No. 1 $2,250,000
Boardrush LLC, a limited liability company formed under the laws of
the State of New York ("Issuer"), for value received, hereby promises to pay to
JFAX Communications, Inc., or registered assigns (the "holder"), the principal
sum of two million two hundred fifty thousand dollars ($2,250,000) on March 17,
2004, and to pay interest thereon from March 17, 1997 (the "Funding Date") or
from the most recent Interest Payment Date to which interest has been paid or
duly provided for, payable monthly on the last Business Day of each month,
commencing in April 1997, at a rate of 6.32% per annum. Interest shall be
computed on the basis of a 360-day year of twelve 30-day months. The interest
so payable, and punctually paid or duly provided for, on any Interest Payment
Date will be paid to the person in whose name this Note (or a predecessor note)
is registered at the close of business on the fifth Business Day next preceding
such Interest Payment Date. Any such interest not so punctually paid or duly
provided for will forthwith cease to be payable to the Holder on such regular
record date and may either be paid to the person in whose name this Note is
registered at the close of business on a special record date for the payment of
such defaulted interest, to be fixed by the Issuer, or be paid at any time in
any other lawful manner.
This Note is issued pursuant to a Note Agreement, dated as of the
Funding Date, between the Issuer and JFAX Communications, Inc., as the initial
Investor named therein (the "Note Agreement") and is subject to the provisions
thereof, including the restrictions on transfer contained therein. The Notes
shall be issuable solely in denominations of $100,000 and integral multiples of
$1,000 in excess thereof. Terms used herein and not otherwise defined shall
have the meanings set forth in the Note Agreement.
The indebtedness evidenced by this Note is, to the extent provided in
the Note Agreement, subject to the provisions stating that this Note is a non-
-1-
<PAGE>
recourse obligation of the Issuer, with recourse solely against the Collateral,
as provided in Section 5.2 of the Note Agreement, and provisions permitting
payment of this Note by the Issuer through the provision of consulting services
to JFAX Communications, Inc., as provided in Section 5.3 of the Note Agreement,
and this Note is issued subject to the provisions of the Note Agreement with
respect thereto, including Section 5.4 of the Note Agreement. The holder of
this Note, by accepting the same, agrees to and shall be bound by such
provisions.
Payment of this Note will be made by wire transfer to the address or
account specified by the holder or, in the absence of such specification, by
check mailed to the holder at his address appearing in the Notes register.
Upon the occurrence of any Event of Default under the Note Agreement,
this Note (including principal, interest, and all other amounts) shall be
immediately due and payable. This Note is subject to redemption, either (a)
mandatorily, in whole, at such time as the common stock of JFAX Communications,
Inc. has become publicly traded (as defined for purposes of the Note Agreement)
and the Issuer, Mr. Jens Muller and their Affiliates have sold at least $4
million in value of such common stock, or (b) optionally, in whole or in part,
at the option of the Issuer after the second anniversary of the Funding Date, in
either case at 100% of the principal amount hereof (or the portion to be
redeemed) together with accrued interest to the redemption date, as set forth in
the Note Agreement.
The Notes are issuable only in registered form without coupons and
transfers will be effected only on the Notes register maintained as provided in
Section 7.5 of the Note Agreement.
The undersigned Issuer hereby waives presentment, demand, notice of
dishonor, protest and all other demands and notices in connection with the
delivery, acceptance, performance and enforcement of this Note.
-2-
<PAGE>
IN WITNESS WHEREOF, the Issuer has caused this Note to be duly executed.
Dated: March 17, 1997
BOARDRUSH LLC
By: /s/ Jens Muller
-----------------------------------
Name: Jens Muller
Title: Manager
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED EXCEPT IN ACCORDANCE THEREWITH.
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFER CONTAINED IN THE NOTE
AGREEMENT, DATED AS OF MARCH ___, 1997, BETWEEN BOARDRUSH LLC, AS ISSUER, AND
JFAX COMMUNICATIONS, INC., AS THE INVESTOR NAMED THEREIN, A COPY OF WHICH IS ON
FILE AT THE PRINCIPAL EXECUTIVE OFFICES OF JFAX COMMUNICATIONS, INC., AND WHICH
RESTRICTIONS REQUIRE, AS A CONDITION TO ANY TRANSFER, APPROPRIATE DOCUMENTATION
TO EVIDENCE COMPLIANCE WITH APPLICABLE SECURITIES LAWS, INCLUDING AN OPINION OF
COUNSEL WITH RESPECT THERETO.
NO REGISTRATION OF TRANSFER OF THIS SECURITY WILL BE EFFECTED ON THE NOTES
REGISTER UNLESS AND UNTIL SUCH RESTRICTIONS ARE COMPLIED WITH.
-3-
<PAGE>
EXHIBIT 23.1
ACCOUNTANT'S CONSENT
The Board of Directors
JFAX.COM, Inc.
We consent to the use of our report included herein and to the reference to our
firm under the headings "Selected Consolidated Financial Data" and "Experts" in
the prospectus.
Los Angeles, California
/s/ KPMG LLP
May 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 DEC-31-1998
<CASH> 23,039 7,278,873
<SECURITIES> 0 0
<RECEIVABLES> 15,413 289,910
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,052,552 8,650,671
<PP&E> 1,845,618 2,668,646
<DEPRECIATION> 285,473 891,000
<TOTAL-ASSETS> 2,612,697 10,512,689
<CURRENT-LIABILITIES> 994,348 1,915,903
<BONDS> 0 0
0 4,070,671
0 0
<COMMON> 181,851 221,000
<OTHER-SE> 1,436,498 (8,006,978)
<TOTAL-LIABILITY-AND-EQUITY> 2,612,697 10,512,689
<SALES> 685,465 3,519,836
<TOTAL-REVENUES> 685,465 3,519,836
<CGS> 857,924 3,398,243
<TOTAL-COSTS> 5,681,909 14,494,827
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 1,353,751
<INCOME-PRETAX> (4,781,781) (11,908,316)
<INCOME-TAX> 1,640 1,500
<INCOME-CONTINUING> (4,783,421) (11,909,816)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,783,421) (11,909,816)
<EPS-BASIC> (.30) (.56)
<EPS-DILUTED> (.30) (.56)
</TABLE>
