<PAGE>
As filed with the Securities and Exchange Commission on June 14, 1999
Registration No. 333-76477
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
Amendment No. 2
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) The registration fee 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.
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- --------------------------------------------------------------------------------
<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 - June 14, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Prospectus
, 1999
[JFAX LOGO APPEARS HERE]
JFAX.COM, INC.
7,500,000 Shares of Common Stock
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
JFAX.COM, Inc.: The Offering:
. We are an Internet-based messaging . JFAX.COM is offering 7,500,000
and communications services provider. shares.
. JFAX.COM, Inc. . The underwriters have an option
10960 Wilshire Boulevard,- to purchase an additional 325,500
Suite 500 shares from JFAX.COM and 799,500
Los Angeles, California 90024 shares from selling stockholders
(310) 966-1800 to cover over-allotments.
www.jfax.com
. This is our initial public
Proposed Symbol/Proposed Market: offering.
. "JFAX"/Nasdaq National Market . Closing: , 1999.
</TABLE>
<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>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary.................. 4
Risk Factors........................ 8
Use of Proceeds..................... 22
Dividend Policy..................... 22
Capitalization...................... 23
Dilution............................ 24
Selected Consolidated Financial
Data............................... 26
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 28
Business............................ 40
Management.......................... 60
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Principal and Selling
Stockholders...................... 67
Certain Transactions............... 70
Description of Capital Stock....... 76
Shares Eligible for Future Sale.... 81
Certain United States Federal Tax
Consequences to Non-U.S. Holders
of Common Stock................... 83
Underwriting....................... 86
Validity of Securities............. 89
Experts............................ 89
Available Information.............. 89
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. 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.
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 provide 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. 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................... 325,500 shares
By selling stockholders....... 799,500 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 31, 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) (11,043) (1,686) (2,356)
Net loss attributable to common
shares.......................... (769) (4,783) (17,728) (1,688) (3,042)
Loss per share:
Basic and diluted net loss per
common share................... $(0.12) $ (0.30) $ (0.80) $ (0.09) $ (0.13)
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:(/1/)
Pro forma net loss attributable to common
shares.................................. $(16,527) $(2,407)
Pro forma net loss per common share...... $ (0.53) $ (0.08)
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
(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/)............... 10,435 --
Stockholders' equity (deficiency)........................ (10,834) 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 $17.7 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 $2.4 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
for a Significant Period, Which Could Delay or Prevent Altogether Our Achieving
Profitability, and Harm Our Stockholders
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 on Satisfactory Terms,
Which Could Dilute Our Stockholders or Impose Burdensome Financial Restrictions
on Our Business
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
8
<PAGE>
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, and it is too early to reliably gauge
market penetration rates for our services. 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.
Other Companies are Offering Free Services Supported by Advertising, Which 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. For example,
free voice mail may require users to listen to taped ads before they can access
their messages. 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
9
<PAGE>
are used by a potential JFAX.COM customer, it may be harder for us to persuade
that potential customer to try our services.
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.
We introduced our free services principally as a promotional tool, and
partially in response to the introductions by competing 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,
. technical difficulties, system failures or network downtime,
. delays in implementing strategic alliances, or loss of strategic
alliances, 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
10
<PAGE>
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 accommodate our future
growth. 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. 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 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
11
<PAGE>
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. For our
services, other data transmission media include fiber optic or copper lines
owned and operated by third parties, with portions of the capacity on these
media being dedicated for our use. 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.
The Market May Not Switch to Our Services Due to Concerns About the Reliability
of Internet Communications, Which May Significantly Impair Our Business and
Prevent the Execution of Our Business Plan
Our ability to route existing customers' traffic through the Internet 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.
12
<PAGE>
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.
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 Be Unable to
Compete Successfully Against 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.
The recent trend of our competitors providing free services has increased
these competitive pressures. We have responded to this trend by introducing our
own free services. Competitive pressures may impair our ability to achieve
profitability. The increased competition may also make it more difficult for us
to successfully enter into strategic relationships with major companies,
particularly if our goal is to have an exclusive relationship with a particular
company.
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.
We May Have Difficulty in Retaining Our Customers, Which May Prevent Our Long-
Term Success
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
13
<PAGE>
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
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. Based on a survey of those customers who provided a reason for
canceling our service, we estimate that in the first five months of 1999, about
10% to 15% of cancellations were due to customers switching to competing
services. The actual figures could be higher but we lack the data to make a
more exact determination. 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
14
<PAGE>
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 and telecommunications companies as
a means of marketing our services. We are also in the early stages of marketing
our services through systems integrators. Systems integrators are businesses
that bundle our services with services of other companies to be sold as a
convenient package of services to the customer. 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. For example, our
failure to achieve technical integration with America Online's e-mail system
resulted in a renegotiation of our agreement with America Online, and a
suspension of our advertising on America Online in late 1998. This resulted in
a reduction in our America Online subscribers, from over 4,000 net additions in
1998 to an approximately 700 net reduction in the first quarter of 1999.
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.
15
<PAGE>
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 60
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 Exposed to Regulatory, Management, Currency
and Other Risks That May Prevent Us From Being Successful in International
Markets
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.
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 31, 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
16
<PAGE>
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, 23,762,862
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.
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 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
17
<PAGE>
. 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.
Inadequate Intellectual Property Protections Could Prevent Us From Enforcing or
Defending 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
Which Could Expose Us to Substantial Damages or Restrict Our Operations
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. For
example, AudioFAX IP LLC has asserted the ownership of certain United States
and Canadian patents and demanded that we cease and desist from infringement of
these patents. See "Business--Patents and Proprietary Rights."
Our Services May Become Subject to Burdensome Telecommunications Regulation
Which Could Increase Our Costs or Restrict Our Service Offerings
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 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. However, as Internet services and telecommunications
services converge or as the
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<PAGE>
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. Changes in the regulatory environment could decrease our
revenues, increase our costs and restrict our service offerings.
If Regulation of the Internet Increases, Our Business May be Adversely Affected
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.
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."
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
We plan to invest the proceeds of this offering in short-term instruments
consistent with prudent cash management and not primarily for the purpose of
achieving investment
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<PAGE>
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. In addition, 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.
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.
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
20
<PAGE>
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, and Therefore Actual
Results May Differ Materially From Those Expressed or Implied by Forward-
Looking Statements
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.
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<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of common stock in the
offering will be approximately $68.9 million, or $71.9 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 expansion of our
network will include operations centers in Los Angeles, New York and London.
These centers will allow enhanced data transmission over our network, including
live phone conversations, which will be necessary to support the launch of a
number of our future services. We intend to invest much of the $25 million
expansion plan for our network in the equipment and software for these centers.
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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<PAGE>
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/).... 6,106 --
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.............................. 17,474 90,108
Notes receivable from stockholders...................... (2,499) (2,499)
Unearned compensation................................... (440) (440)
Accumulated deficit(/4/)................................ (25,590) (30,419)
-------- --------
Total stockholders' equity (deficiency)................ (10,834) 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 $0.20 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 $6.1 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 $2.00. 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...................................................... (0.20)
Increase per share attributable to new investors........... 2.00
-----
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 31, 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
------------------ -------------------
Number Percent Amount Percent Average Price
---------- ------- ----------- ------- 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 31, 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
24
<PAGE>
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."
25
<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 4,948 917 1,489
---------- ---------- ----------- ----------- ----------- -----------
Total operating
expenses........... 20 723 4,824 11,164 1,550 2,713
---------- ---------- ----------- ----------- ----------- -----------
Operating loss...... (21) (768) (4,997) (11,042) (1,686) (2,356)
Interest expense
(income) net........... -- -- (215) 933 -- 426
Increase in market value
of put warrants........ -- -- -- 5,256 -- --
Income tax expense...... -- 1 2 2 2 2
---------- ---------- ----------- ----------- ----------- -----------
Net loss............ $ (21) $ (769) $ (4,784) $ (17,233) $ (1,688) $ (2,784)
========== ========== =========== =========== =========== ===========
Net loss
attributable to
common shares...... $ (21) $ (769) $ (4,784) $ (17,728) $ (1,688) $ (3,042)
========== ========== =========== =========== =========== ===========
Basic and diluted net
loss per common share.. $ (0.00) $ (0.12) $ (0.30) $ (0.80) $ (0.09) $ (0.13)
========== ========== =========== =========== =========== ===========
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>
26
<PAGE>
<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.................................. $(16,527) $(2,407)
Pro forma net loss per common share...... $ (0.53) $ (0.08)
Common shares used in determining pro
forma per share data ................... 30,900 31,808
</TABLE>
<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 and put warrants......... -- -- -- 12,455 6,285
Redeemable common and preferred
stock(/2/)............................. -- -- -- 9,317 10,435
Total stockholders' equity
(deficiency)........................... (11) 677 1,618 (13,317) (10,834)
</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.
27
<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 provide 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. Activation fees
account for approximately 10% of total revenue. We recognize revenue for
activation fees when the customer's account is activated, at which time related
direct selling costs are incurred, which offset the activation fee. 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.
Payments made to our strategic alliance resellers are typically made on a
commission basis. In our domestic alliances, we generally pay to the reseller a
portion of our activation fees, a percentage of monthly service fees during the
first year that the customer subscribes to the service, and a lesser percentage
of monthly service fees after the first year. We also pay a percentage of
customer usage fees. We record the commission expenses as the related revenues
are recognized.
During 1997, our strategic alliances contributed 11.2% of our net subscriber
additions. In 1998, our strategic alliances contributed 41.3% of our net
subscriber additions. During the first quarter of 1999, our strategic alliances
contributed 4.3% of our net subscriber additions. The reduction in
subscriptions through strategic alliances is due to the interruption of
advertising with America Online. Excluding America Online, net subscriber
additions through strategic alliances would have been 23.7% for 1998 and 26.7%
for the first quarter in 1999.
28
<PAGE>
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 $25.6 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 may materially adversely
affect our business plans and the expectations noted above.
Our competitors have recently introduced free services that are similar to
our services. The providers of these free services attempt to recoup their
expenses by selling advertising based on the traffic generated from users of
free services. We have also recently begun to offer some of our services on a
free basis. We expect to generate revenues from free subscriptions not through
advertising, but by selling to those free subscriptions usage-based services or
by converting some free subscriptions to paid subscriptions for our unified
messaging services. However, we cannot guarantee that we will be able to sell
any usage-based services or to convert free subscriptions. In addition, there
is a risk that some of our paid subscriptions will convert to free
subscriptions or that they will choose to switch to the free services provided
by one of our competitors. 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.
29
<PAGE>
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................................... 187 105
---- ----
Total operating expenses................................... 316 192
---- ----
Operating loss............................................. (344) (167)
Interest expense (income), net................................. -- 30
---- ----
Loss before income taxes................................... (344) (197)
Income tax expense............................................. -- --
---- ----
Net loss................................................... (344)% (197)%
==== ====
</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.
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
30
<PAGE>
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 $1.5
million or 105% 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
31
<PAGE>
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.
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........... 489 432 141
---- ---- ----
Total operating
expenses............... 692 704 318
---- ---- ----
Operating loss.......... (735) (729) (315)
Interest expense (income),
net........................ -- (31) 27
Increase in market value of
past warrants.............. -- -- (149)
---- ---- ----
Loss before income
taxes.................. (735) (698) (491)
Income tax expense.......... -- -- --
---- ---- ----
Net loss................ (735)% (698)% (491)%
==== ==== ====
</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.
32
<PAGE>
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.
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 141% 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.
33
<PAGE>
Increase in Value of Put Warrants. Warrants sold by us in July 1998 included
put rights until January 1, 1999. See notes 4 and 14 to our consolidated
financial statements. These put rights gave the holders of the warrants the
right to require us to purchase the warrants at their fair market value if we
did not complete a public offering of our stock prior to July 1, 2003. In
accordance with AICPA Emerging Issues Task Force (EITF) 96-13, the warrants
were recorded at their fair value at the date of issuance ($1,145,000). In
addition, EITF 96-13 requires that any change in the fair value of the warrants
be reflected as a charge to earnings in the period of change. Expense
associated with this increase in market value aggregated $1,862,669 in the
third quarter and $3,393,000 in the fourth quarter of 1998. This item will not
recur in future periods because of the expiration by agreement with the holders
of the warrants of the put feature effective January 1, 1999.
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.
34
<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 1,105,935 1,241,165 1,683,982 1,488,534
---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating
expenses........ 1,026,159 1,471,490 1,692,241 1,550,771 1,906,744 2,861,749 4,844,868 2,713,199
---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating loss... (975,347) (1,476,584) (2,007,138) (1,686,561) (1,805,142) (2,802,468) (4,748,368) (2,355,799)
Interest expense
(income), net... (119,063) (72,019) (7,162) 154 (970) 433,449 500,692 426,432
Increase in
market value of
put warrants.... -- -- -- -- -- 1,862,669 3,393,000 --
---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss before
income taxes.... (856,284) (1,404,565) (1,999,976) (1,686,715) (1,804,172) (5,098,586) (8,642,060) (2,782,231)
Income tax
expense.......... -- -- -- 1,500 -- -- -- 1,500
---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss......... $ (856,284) $(1,404,565) $(1,999,976) $(1,688,215) $(1,804,172) $(5,098,586) $(8,642,060) $(2,783,731)
========== =========== =========== =========== =========== =========== =========== ===========
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.. 555 497 531 187 141 127 133 105
---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating
expenses........ 739 728 747 316 243 293 382 192
---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating loss... (702) (730) (886) (344) (230) (287) (374) (167)
Interest expense
(income), net... (86) (36) (3) -- -- 45 39 30
Increase in
market value of
put warrants.... -- -- -- -- -- 191 267 --
---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss before
income taxes.... (616) (694) (883) (344) (230) (523) (680) (197)
Income tax
expense.......... -- -- -- -- -- -- -- --
---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss......... (616)% (694)% (883)% (344)% (230)% (523)% (680)% (197)%
========== =========== =========== =========== =========== =========== =========== ===========
</TABLE>
35
<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, and in fact produced a net reduction of approximately 700
subscribers. This compared to an addition of over 4,000 net America Online
subscribers in 1998. 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 primarily due to a decrease in advertising/strategic alliance
payments of $1,150,000, an increase in accounts payable of $490,000, an
increase in discount amortization of $210,000 and an increase in interest
payable of $265,000, offset by an increase in net loss of $1,115,000.
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
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<PAGE>
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 $17.8 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, $5 million of redeemable common
stock and $937,000 from loan payable proceeds. 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 was
primarily due to issuance of common stock of $3,000,000 and proceeds from a
loan made by a related party of $571,000 for the quarter ending March 31,
1998. There were no comparable financings in the quarter ended March 31, 1999.
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 expansion of our network will
include operations centers in Los Angeles, New York and London. These centers
will allow enhanced data transmission over our network, including live phone
conversations, which will be necessary to support the launch of a number of
our future services. We intend to invest much of the
37
<PAGE>
$25 million expansion plan for our network in the equipment and software for
these centers. Our timetable for this expansion contemplates that the
operations centers and related enhancements will be completed by the first
quarter of 2000.
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 $265,000 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 have financed the acquisition of approximately $230,000, at original
cost, of equipment through equipment lease financing. The lease terms each
provide for repayment of the original cost of the equipment, plus interest at
between 15% and 20%, through level payments of principal and interest over a 36
month term.
We have indebtedness outstanding that accrues interest at fixed rates over
the term of that indebtedness, and therefore we have no interest rate risk on
that currently outstanding debt.
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.
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
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<PAGE>
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, as well as
from the providers of our Internet access and of our dedicated data
transmission media, that our 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 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.
39
<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 provide 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.
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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.
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
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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 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.
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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 back-up power
supplies in separate locations 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.
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.
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. 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 46.
. 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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Our subscription services are summarized in the following table:
SUBSCRIPTION SERVICES
<TABLE>
<CAPTION>
Services Description Attributes Pricing**
-------- ----------- ---------- ---------
<S> <C> <C> <C>
Free Services
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 Can select area code for phone number Setup Fee
send faxes Unlimited incoming faxes of $15 and
Broadcast fax--User can Annotation capability $12.50 per
send the same fax to phone
numerous recipients number per
month plus
additional
usage-
based
charges
E-mail by Phone Phone access--User can call a Access, manage Setup Fee
toll-free number and access and/or reply to of $15
e-mail and voice mail through e-mail,voice mail plus $9.50
a touch tone telephone and faxes by phone per month
plus
additional
usage-
based
charges
Unified Messaging Combined suite of services All benefits of Business Setup fee
Fax and E-mail by Phone of $15
plus
$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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<PAGE>
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 first
quarter of 2000.
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Strategic Relationships
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>
Telecommunications
Companies Systems Integrators 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. 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. Revenues from
subscriptions provided by our strategic relationships represented 29% of our
total revenues in 1998 and 31% of our total revenues in the first quarter of
1999.
America Online
Under our current agreement with America Online, America Online is committed
to deliver certain technological assistance so as to make our services more
compatible with America Online's e-mail service and to deliver on $1 million in
advertising still owing as a result of payments made under a previous agreement
with America Online.
Ameritech
We have sold to and are maintaining for Ameritech Communications of
Illinois, Inc., a subsidiary of Ameritech Corp., a platform which Ameritech
uses to provide its "e-Listen(TM)" messaging service. E-listen is a service
which permits the user to dial a toll-free access number and listen to e-mail
messages, provide a response to e-mail messages, and print e-mail messages to a
fax machine. Under our agreement with Ameritech, Ameritech identifies its
service as "powered by JFAX.COM" and shares with us a portion of the revenues
received from e-Listen customers.
Critical Path
We are the only 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
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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 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 base of users. Under our
agreement with Critical Path, Critical Path has made certain marketing
commitments to us, in exchange for which we make payments to Critical Path on a
commission basis. We pay a portion of the activation fees received from
customers referred to us by or through Critical Path, as well as a percentage
of both the monthly service fees and usage fees received from these customers.
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. From June 1997
through June 1998, our agreement with CompuServe provided for the payment of a
per-sign-up commission 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 for each subscriber in excess of a targeted number of
sign-ups. CompuServe agrees to provide a certain number of subscribers each
quarter and cumulatively over the course of the contract. In the event that the
results are below target, CompuServe will provide additional advertising to
compensate for the shortfall.
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. Under
our agreement with CommTouch, CommTouch provides us with exclusivity and
marketing commitments, in exchange for which we make payments to CommTouch on a
commission basis. We pay a portion of the activation fees received from
customers referred to us by or through CommTouch, as well as a percentage of
both the monthly service fees and usage fees received from these customers.
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. Under our agreement with
Prodigy, Prodigy provides us with exclusivity and marketing commitments, in
exchange for which we make payments to Prodigy on a commission basis. We pay a
portion of the activation fees received from customers referred to us by or
through Prodigy, as well as a percentage of both the monthly service fees and
usage fees received from these customers.
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Telecom New Zealand
We have a revenue sharing arrangement with Telecom New Zealand Limited. Our
agreement with Telecom New Zealand provides that Telecom New Zealand is granted
a license as our exclusive reseller in New Zealand. The license has an initial
term of one-year following commercial launch and is renewable by Telecom New
Zealand for additional one-year renewal terms, provided that threshold
requirements for JFAX.COM subscribers are met at the expiration of each term.
The reseller agreement provides that Telecom New Zealand pays for local phone
numbers and hardware, local marketing expenses, and local help desk support,
and Telecom New Zealand receives a commission based on the JFAX.COM revenues
from New Zealand phone numbers.
Kuni Research International
Kuni Research International is our reseller in Japan, which has the largest
number of e-mail users in the world outside of the United States. Our agreement
with Kuni provides that Kuni is granted a license as our exclusive reseller in
Japan. The license has an initial term of one-year following commercial launch
and is renewable by Kuni for additional one-year renewal terms, provided that
threshold requirements for JFAX.COM subscribers are met at the expiration of
each term. The reseller agreement provides that Kuni pays for local phone
numbers and hardware, local marketing expenses, and local help desk support,
and Kuni receives a commission based on the JFAX.COM revenues from Japanese
phone numbers.
Yahoo!
Our original agreement with Yahoo was in effect from June 1, 1998 through
December 1, 1999. The original agreement required fixed, guaranteed monthly
payments, together with commission payments, based on customer revenues, to the
extent the revenues exceeded targeted levels. The agreement was amended
effective December 1, 1999 and now calls for fixed, guaranteed monthly payments
through June 30, 1999, as well as a per-sign-up commission for each subscriber
(in excess of a targeted number) who signs up in response to e-mail
solicitations, as well as a separate commission payment based on the customer
revenue received from subscribers who sign up other than in response to e-mail
solicitations.
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 intend to enhance our market position by
implementing the following strategy.
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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 relationships, we co-brand
our service, allowing them to integrate their service with ours and sell a
"powered by JFAX.COM" service.
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.
Systems Integrators. We are in the early stages of our relationship with
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 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
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. 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.
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
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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, 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. By virtue of that network, each server is connected 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. Our co-location agreements
generally provide for fixed monthly payments and a fixed term of at
least one year. Some are cancellable by us on either 60 or 90 days'
notice.
We intend to enter additional markets and to expand our operations outside
the United States. International sales and our entry into additional foreign
markets are subject to a number of inherent risks. For example, we face a more
complex process to acquire telephone numbers outside the United States due to
regulatory constraints or bureaucratic systems that differ greatly from those
in the United States. In many countries, under local law, we may not acquire
telephone numbers directly, but must use a local company to procure telephone
numbers. This increases the importance of our international strategic
alliances, but also makes it more difficult to structure foreign strategic
alliances given the preferences the local companies enjoy. In addition, we
must depend to a greater extent on our foreign strategic alliances for day-to-
day management, including relying on those foreign strategic alliances to
provide help-desk support and other services.
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Internationally, we may encounter different technology standards that
require us to expend time and resources on adapting our proprietary and other
technology to those foreign standards, as well as to ensuring that the
technology, as so adapted, remains compatible with the rest of our network.
This adaptation increases the cost of expanding abroad. Finally, in
international markets, we are subject to changes in regulatory requirements and
tariffs. Because we are not familiar with those international environments, and
because the systems of government and regulation that exist abroad are
frequently different from what we experience in the United States, it may be
more difficult for us to anticipate changes and how they will affect the
provision of our services. As a result, it may be more difficult for us to
accommodate those changes.
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 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.
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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.
Reliability and Capacity Issues
While we intend to add new subscribers and expand our service offerings,
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.
Growth in our business, and in that of our existing or future competitors,
could lead to shortages in the capacity required to operate our business, or
could cause capacity to become more expensive. In either case, we may be unable
to acquire the necessary capacity to accommodate future growth or to acquire it
on a timely basis, which could slow down or disrupt our ability to transmit
customers' messages.
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. If potential customers encounter difficulty
obtaining phone numbers from us, or obtaining those phone numbers on a timely
basis, they may turn to competitors' services. In addition, if the growth in
our subscriber base or our service offerings leads to a reduction in our
reliability or our perceived reliability, or results in problems for the
Internet in general that are beyond our control, customers or potential
customers may turn to our competitors' services including traditional faxing
services. Thus, while our growth is crucial to our future success, that very
same growth, when combined with that of our competitors', could lead to slow
delivery times or unreliable service levels, network failures, security
breaches, lack of capacity in our network, insufficient telephone numbers or a
slower Internet. Any of the above 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.
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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. For example, GTE recently
announced that it will begin offering in 50 United States markets a unified
messaging service. To the extent our services face competition, that
competition is based on price, quality, brand recognition, geography and
customer support.
Recently, services similar to ours have been introduced free to users on an
advertising supported basis. Like many other services provided over the
Internet, such as news feeds and stock quotes, these services are provided free
of charge to attract traffic to the service provider's website. The providers
of free services attempt to recoup their expenses by selling advertising based
on the traffic generated from users of free services. Examples of free services
similar to ours include a free voice mail product provided by Echobuzz. These
services require users 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 facsimile-to-
email services free to users, and their users view advertisements when they
retrieve their faxes. We expect that as these free services become popular,
consumers 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. Providers of free services in addition to those listed above may
enter the market and thereby reduce the perceived value of our services to our
potential customers.
Further, although to date we have not experienced competition from any of
our strategic alliance resellers, there is a risk that, in the future, these
companies could develop their own competitive services and begin to compete
with us directly. This represents a particular risk for us as we rely to a
great extent on our strategic alliances to market, and provide a potential
customer base for, our services. As a result, competition from these entities
would have the doubly adverse effect of both subjecting our services to
competitive pressures and limiting our avenues for marketing.
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
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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.
However, our solution competes unfavorably at least on price with those
companies who provide for free, i.e. on an advertising supported basis, one or
more of the services that we provide. In addition, we compete negatively with
many companies whose services compete with one or more of our services, and
which have greater efficiencies of scale or easier access to capital due to
their financial strength or size or their more well-established reputation.
Finally, one or more of the companies offering component portions of our
service may enhance their service offerings, and those service offerings might
be superior to ours. If this were to occur, and the company offering those
services were well-established, it would negatively impact our competitive
position.
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.
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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 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.
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--
Inadequate Intellectual Property Protections Could Prevent Us From Enforcing or
Defending Our Proprietary Technology" and "--We May Be Found to Have Infringed
the Intellectual Property Rights of Others Which Could Expose Us to Substantial
Damages or Restrict Our Operations."
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.
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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.
. 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.
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. However, 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. Nevertheless, as Internet
services and telecommunications services converge or the services we offer
expand, there may be increased regulation of our business including regulation
by agencies having jurisdiction over telecommunications services. Additionally,
existing telecommunications regulations affect our business through regulation
of the prices we pay for transmission services, and through regulation of
competition in the telecommunications industry.
The FCC has ruled that calls to Internet service providers are
jurisdictionally interstate and that 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
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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.
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 May 31, 1999, we employed or contracted a total of 84 employees,
including 11 consultants on a full or part-time basis. We have 62 full-time and
11 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
60
<PAGE>
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 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
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<PAGE>
stock and Mr. Cresci was appointed to the board of directors as the
representative of the holders of the notes. The provisions in this agreement
providing for designations of directors will survive the closing of this
offering. See "Certain Transactions."
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.
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").
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Annual
Name And Principal Compensation Other Annual Shares
Position --------------------- Compensation Underlying
------------------ Salary Bonus ------------ 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.
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
Potential Realizable Value at a
Number of Value At Assumed Stock Price
Securities % of Total Annual Rates of Stock Equal to the
Underlying Options Granted Exercise or Price Appreciation Assumed
Options to Employees in Base Price Expiration For Option Term Initial Public
Name Granted Fiscal Year ($/SH) Date ----------------------Offering Price
---- ---------- --------------- ----------- ---------- 5% ($) 10% ($) --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard S. Ressler...... 0 N/A 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 $ 366,501 $ 583,592 $2,850,000
President
Nehemia Zucker.......... 12,500 1.4% $2.40 9/30/08 $ 12,217 $ 19,453 $ 95,000
Chief Financial Officer
Zohar Loshitzer......... 50,000 5.6% $2.40 9/30/08 $ 48,867 $ 77,812 $ 380,000
Chief Information
Officer
Anand Narasimhan........ 112,500 12.6% $2.40 9/30/08 $109,950 $ 175,078 $ 855,000
Chief Technology
Officer
</TABLE>
63
<PAGE>
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. For the right hand column, we have
assumed an initial public offering price of $10.00 per share.
Some of the Named Executive Officers will receive stock options in
connection with this offering at an exercise price of $9.00 per share. See
"Certain Transactions".
AGGREGATE OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table provides information concerning unexercised options held
as of December 31, 1998 by the Named Executive Officers. They did not exercise
any options during this period.
<TABLE>
<CAPTION>
Number of Unexercised Options Value of Unexercised
Held In-The-Money Options
at December 31, 1998 at December 31, 1998(1)
--------------------------------- ---------------------------------
Name
---- Exercisable (#)/Unexercisable (#) Exercisable ($)/Unexercisable ($)
<S> <C> <C>
Richard S. Ressler...... 0/0 $0/0
Chief Executive Officer
Gary H. Hickox.......... 0/375,000 $0/$2,850,000
President
Nehemia Zucker.......... 145,834/116,666 $1,346,337/$1,056,663
Chief Financial Officer
Zohar Loshitzer......... 75,000/200,000 $690,000/$1,760,000
Chief Information
Officer
Anand Narasimhan........ 75,000/112,500 $692,400/$855,000
Chief Technology
Officer
</TABLE>
- --------
(1) The value of the unexercised in-the-money options is based on an assumed
initial public offering price of $10.00 per share, 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 31, 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
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<PAGE>
Code of 1986, as amended, 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.
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 provides 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.
65
<PAGE>
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 consisting of Richard S. Ressler, Gary H. Hickox, Anand Narasimhan,
Nehemia Zucker and Zohar Loshitzer 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 of a
targeted bonus pool is funded. The fixed percentage is either 75%, 100% or
110%, depending on the extent to which the goals are met or exceeded, and in
1999 the total targeted bonus pool is $921,350. 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 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.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information as of May 31, 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 31, 1999
and 31,812,276 outstanding immediately following the completion of the
offering. The 31,812,276 shares that we expect to be outstanding immediately
following the completion of the offering 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 31, 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.
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<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
Name and Address of Beneficial Offering Number of After the Offering
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% 200,000 4,831,250 15.18%
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% 200,000 4,831,250 15.18%
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% 200,000 20,600,330 61.95%
Other Selling Stockholders:
Steve M. Aaronson ............ 17,360 * 4,500 12,860 *
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 *
Toxford Corporation S.A....... 590,949 2.43% 295,500 295,449 *
</TABLE>
- -------
(*) Designates less than 1%.
68
<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 May 31, 1999.
(9) Consist of 261,739 shares of common stock and 187,500 employee options
that are exercisable within 60 days of May 31, 1999.
(10) Consist of 150,000 employee options that are exercisable within 60 days of
May 31, 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.
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<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.
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<PAGE>
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.
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 $8,000 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. 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 administrative costs with other
entities that are controlled by our chief executive officer. The other
administrative costs include the costs of a shared receptionist and routine
office and telephone expenses. We also make available the services
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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.
The rent for our office space and related routine office expenses and parking
charges are paid by CIM and we reimburse CIM our proportionate share which is
approximately $19,000 per month. In addition, Zohar Loshitzer is a managing
director of Orchard Telecom and a director of MAI.
Monthly reimbursements from Orchard Capital, Orchard Telecom, CIM and MAI to
us are currently approximately $3,000. 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.
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.
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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, the lead underwriter in this
offering, acted as placement agent for the offerings of notes and preferred
stock and received warrants to acquire 268,750 shares of our common stock and a
cash payment of $870,000, 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;
. 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.
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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 approximately $10,878,000 and $6,554,000, respectively,
including accrued and unpaid interest of $265,000 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.
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
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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 of $9.00 per share. 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 in the event that interpretations or
modifications to existing interpretations of accounting principles would
require the fair value of unvested options granted to directors to be
determined quarterly which would require us to recognize a quarterly charge to
our earnings. 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.
We will recognize an aggregate compensation expense of $760,000 in
connection with the issuance of these options, based on an assumed initial
public offering price of $10.00 per share.
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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 31, 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 31, 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.
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Preferred Stock
As of May 31, 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, 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 1998, 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.
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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 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."
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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.
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.
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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 32,137,776 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 31, 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 31, 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 31, 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.
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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.
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 23,762,862 shares, and an
additional 5,941,735 shares issuable upon exercise of outstanding options and
warrants. Of the 636,287 outstanding shares and shares issuable upon exercise
of outstanding options and warrants not subject to lock-up agreements, only
438,750 of such shares will be freely tradable immediately following the
offering under Rule 144 as discussed above. Under Rule 144, the remaining
197,537 shares will be available for resale subject to the limitations of Rule
144 beginning 90 days following the offering.
Donaldson, Lufkin & Jenrette Securities Corporation has advised us that they
have no intention to waive any of the agreements described in the immediately
preceding paragraph. Donaldson, Lufkin & Jenrette Securities Corporation has
further advised us that in determining whether to grant any requested waiver,
they would consider the market prices and trading volumes for our common stock
at that time, market conditions generally, the size and timing of the requested
waiver and any special circumstances of the requesting person.
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.
82
<PAGE>
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.These include non-U.S. holders subject
to special tax rules such as financial institutions, insurance companies,
broker-dealers, and tax-exempt organizations. These also include 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. These taxpayers 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.
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 partnership must provide certain information, including a
United States taxpayer identification number. These regulations also provide
look-through rules for tiered partnerships.
83
<PAGE>
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.
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.
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 as discussed in the
"Dividends" section above. If
84
<PAGE>
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. 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
under penalties of perjury that you are a non-U.S. person 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.
85
<PAGE>
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.,
CIBC World Markets Corp. and DLJdirectInc., 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. ..........................................
DLJdirectInc.......................................................
---------
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.
86
<PAGE>
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.
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 23,762,862 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.
87
<PAGE>
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
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
88
<PAGE>
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 received compensation for these services. 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."
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.
89
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' 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........................... -- 6,318,000 --
Redeemable common stock; issued and
outstanding 2,207,698 shares at
December 31, 1998 and March 31, 1999
(unaudited) (redemption value of
$9,074,000 at December 31, 1998 and
$19,869,000 at March 31, 1999
(unaudited), respectively)............ -- 5,245,975 6,105,975
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 12,273,793 17,473,773
Notes receivable from stockholders.... (2,400,000) (2,499,000) (2,499,000)
Unearned compensation................. -- (506,202) (440,000)
Accumulated deficit................... (5,573,205) (22,806,238) (25,589,969)
----------- ----------- -----------
Total stockholders' equity
(deficiency)....................... 1,618,349 (13,316,647) (10,834,192)
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 4,948,402 917,320 1,488,534
--------- ---------- ----------- ---------- ----------
Total operating
expenses........... 722,891 4,823,985 11,164,132 1,550,771 2,713,199
--------- ---------- ----------- ---------- ----------
Operating loss...... (768,011) (4,996,444) (11,042,539) (1,686,561) (2,355,799)
Other:
Interest expense...... -- -- (1,353,751) (154) (535,421)
Interest income....... -- 214,663 420,426 -- 108,989
Increase in market
value of put warrants
(note 4)............. -- -- (5,255,669) -- --
--------- ---------- ----------- ---------- ----------
Loss before income
taxes.............. (768,011) (4,781,781) (17,231,533) (1,686,715) (2,782,231)
Income tax expense...... 721 1,640 1,500 1,500 1,500
--------- ---------- ----------- ---------- ----------
Net loss.............. (768,732) (4,783,421) (17,233,033) (1,688,215) (2,783,731)
--------- ---------- ----------- ---------- ----------
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) (17,727,556) (1,688,215) (3,042,080)
========= ========== =========== ========== ==========
Net loss per common
share:
Basic................. $ (0.12) (0.30) (0.80) (0.09) (0.13)
Diluted............... (0.12) (0.30) (0.80) (0.09) (0.13)
========= ========== =========== ========== ==========
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 Unearned equity
Shares Amount capital deficit stockholders compensation (deficiency)
---------- -------- ---------- ----------- ------------ ------------ -------------
<S> <C> <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....... -- -- (314,000) -- -- -- (314,000)
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
Unearned compensation... -- -- 573,750 -- -- (573,750) --
Amortization of unearned
compensation........... -- -- -- -- -- 67,548 67,548
Net loss................ -- -- -- (17,233,033) -- -- (17,233,033)
---------- -------- ---------- ----------- ---------- -------- -----------
Balance, December 31,
1998................... 22,099,996 $221,000 12,273,793 (22,806,238) (2,499,000) (506,202) (13,316,647)
Exercise of stock
options (unaudited).... 416 4 329 -- -- -- 333
Accretion to common
stock redemption
(unaudited)............ -- -- (860,000) -- -- -- (860,000)
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)... -- -- 6,318,000 -- -- -- 6,318,000
Amortization of unearned
compensation........... -- -- -- -- -- 66,202 66,202
Net loss (unaudited).... -- -- -- (2,783,731) -- -- (2,783,731)
---------- -------- ---------- ----------- ---------- -------- -----------
Balance, March 31, 1999
(unaudited)............ 22,100,412 $221,004 17,473,773 (25,589,969) (2,499,000) (440,000) (10,834,192)
========== ======== ========== =========== ========== ======== ===========
</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) (17,233,033) (1,688,215) (2,783,731)
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 -- --
Increase in market
value of put
warrants............. -- -- 5,255,669 -- --
Amortization of note
payable discount..... -- -- 436,304 -- 210,197
Amortization of
unearned
compensation......... -- -- 67,548 -- 66,202
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.
The financial information presented as of March 31, 1999 and for the three
months ended March 31, 1998 and 1999 is unaudited. In the opinion of the
Company's management, this unaudited financial information includes 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. Operating results for the three months ended
March 31, 1999 are not necessarily indicative of results that may be expected
for the full year.
(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 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.
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)
The Company accounts for option grants to non-employees using the guidance
of SFAS No. 123 and Emerging Issues Task Force (EITF) No. 96-18, whereby the
fair value of such options is determined using the Black-Scholes option pricing
model at the earlier of the date at which the non-employee's performance is
complete or a performance commitment is reached.
(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 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
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)
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 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
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)
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.
(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 $512,500 of interest notes and 105,727 additional shares
(at a value of $251,999) in lieu of interest payments.
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 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.
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>
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)
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. Until December 31, 1998 these warrants could also have been "put" to
the Company at fair market value in the event the Company had not completed a
public offering of its stock by July 2003. (see note 14). 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.
The increase in fair value of these put rights above the initially determined
amount of $.36 per warrant was expensed by the Company in its Statements of
Operations for the year ended ended December 31, 1998 and aggregated
$5,255,669. Effective January 1, 1999 the fair market value put feature of
these warrants was eliminated.
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-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)
(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 $19,000 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. During 1998, these expenses consisted of the salaries of our
Vice President, Administration and an administrative assistant and computer
services
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)
technician (these employees are now on the Company's payroll and work
exclusively for the Company, so reimbursement is no longer required) and the
costs for office food charges, office supplies, postage, and parking. These
expenses were each allocated based on the total number of persons employed by
the respective entities which benefited from them.
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.
(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 $1,000,000
in value of impressions on the AOL site which were previously prepaid by the
Company. The prepaid expense 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.
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)
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.
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.
The fixed guaranteed monthly payments are expensed as advertising services
are provided and are reflected in sales and marketing expense. Additional sign-
up bounty fees and commissions are expensed at the time of customer
subscription and recording of customer revenue.
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)
(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.
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>
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)
(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. In January, 1997 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. 420,000 of these options were immediately
exercisable at an exercise price of $0.70; the remaining 420,000 options vested
over a two year period from the date of grant at an exercise price of $1.80.
The Company recorded $120,000 in compensation expense during 1997 relating to
these options as services were provided under the consulting contract. 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. In connection with the grant of 846,875 options
during 1998, the Company recorded $573,750 of deferred compensation cost as
these options were granted at exercise prices below the respective market
values at the dates of grant. The deferred compensation cost is amortized to
expense over the three year vesting period of such options using the straight
line method.
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 $1.11, 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.
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 $17,727,556
Pro forma 4,868,421 17,896,556
Basic loss per common share................ As reported 0.30 0.80
Pro forma 0.30 0.81
Diluted loss per common share.............. As reported 0.30 0.80
Pro forma 0.30 0.81
========== ===========
</TABLE>
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)
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-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)
(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-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)
(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-21
<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) (17,233,033) (1,688,215) (2,783,731)
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) (17,727,556) (1,688,215) (3,042,080)
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................. (0.12) (0.30) (0.80) (0.09) (0.13)
Diluted loss per common
share................. (0.12) (0.30) (0.80) (0.09) (0.13)
========= ========== =========== ========== ==========
</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-22
<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 $6,318,000 at December 31, 1998 to
additional paid in capital effective 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-23
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
June , 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>
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
II-1
<PAGE>
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."
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 January 1997, we granted Michael P. Schulhof two warrants to purchase a
total of 840,000 shares of our common stock pursuant to a consulting agreement.
The first warrant provides Mr. Schulhof with the right to purchase 420,000
shares of our common stock at an exercise price of $0.70 per share. The second
warrant provides Mr. Schulhof with the right to purchase another 420,000 shares
of our common stock at an exercise price of $1.80 per share. Both warrants are
currently exercisable and expire in January 2007.
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 October 1997, we entered into an interactive marketing relationship with
AOL and granted them a warrant to purchase 250,000 shares of our common stock
at an exercise price of $2.40 per share. These warrants are currently
exercisable and expire on October 15, 2004.
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.
II-2
<PAGE>
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., 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 approximately $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 $512,250 of our 10% Senior
Subordinated Notes due 2004 together with 105,727 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 May 1999, we issued a total of 53,329 shares of our
common stock to various employees who exercised employee options to purchase
such stock at a price of $0.80 and $1.65 per share for a total purchase price
of $46,195.97.
II-3
<PAGE>
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.
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.
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
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.
+99.1 Consent of International Data Corporation for use of the quote on the
inside cover page.
</TABLE>
- --------
+ 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
II-5
<PAGE>
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-6
<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 10th day of June, 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 June 10, 1999:
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C> <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
</TABLE>
*By: /s/ Richard S. Ressler
___________________________________
Richard S. Ressler
Attorney-in-fact
II-7
<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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<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.
+99.1 Consent of International Data Corporation for use of the quote on the
inside cover page.
</TABLE>
- --------
+ Filed herewith
All other exhibits were previously filed
<PAGE>
EXHIBIT 1.1
[__________] Shares
JFAX.COM, Inc.
Common Stock
UNDERWRITING AGREEMENT
----------------------
[__________] [__], 1999
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BANCBOSTON ROBERTSON STEPHENS INC.
CIBC OPPENHEIMER CORP.
As representatives of the several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
JFAX.COM, Inc., a Delaware corporation (the "Company"), proposes to issue
-------
and sell to the several underwriters named in Schedule I hereto (the
"Underwriters"), an aggregate of [__________] shares (the "Firm Shares") of the
- ------------- -----------
common stock, par value $0.01 per share, of the Company, of which [__________]
shares (the "Firm Shares") are to be issued and sold by the Company. The
-----------
Company also proposes to issue and sell to the several Underwriters not more
than an additional [__________] shares (the "Company Additional Shares") of
-------------------------
common stock, par value $0.01 per share, of the Company if requested by the
Underwriters as provided in Section 2 hereof, and the stockholders of the
Company named in Schedule II hereto (the "Selling Stockholders") propose to sell
--------------------
to the several Underwriters not more than an aggregate of an additional
[__________] shares (the "Selling Stockholders Additional Shares" and together
--------------------------------------
with the Company Additional Shares, the "Additional Shares") of common stock,
-----------------
par value $0.01 per share, of the Company if requested by the Underwriters as
provided in Section 2 hereof. The Firm Shares and the Additional Shares are
hereinafter referred to collectively as the "Shares". The shares of common
------
stock of the Company to be outstanding after giving effect to the sales
contemplated hereby are hereinafter referred to as the "Common Stock". The
------------
Company and the Selling Stockholders are hereinafter sometimes referred to
collectively as the "Sellers."
-------
SECTION 1. Registration Statement and Prospectus. The Company has
prepared and filed with the Securities and Exchange Commission (the
"Commission") in accordance with the provisions of the Securities Act of 1933,
----------
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "Act"), a registration statement on Form S-1, including a
---
prospectus, relating to the Shares. The registration statement, as amended at
the time it became effective, including the information (if any) deemed to be
part of the registration statement at the time of effectiveness pursuant to Rule
430A under the Act, is hereinafter referred to as the "Registration Statement,"
----------------------
and the prospectus in the form first used to confirm sales of Shares is
hereinafter referred to as the "Prospectus". If the Company has filed or is
----------
required pursuant to the
<PAGE>
terms hereof to file a registration statement pursuant to Rule 462(b) under the
Act registering additional shares of Common Stock (a "Rule 462(b) Registration
------------------------
Statement"), then, unless otherwise specified, any reference herein to the term
- ---------
"Registration Statement" shall be deemed to include such Rule 462(b)
Registration Statement.
SECTION 2. Agreements to Sell and Purchase; Lock-Ups; QIU; and Reserved
Shares. On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, (i) the Company agrees to
issue and sell the Firm Shares, and (ii) each Underwriter agrees, severally and
not jointly, to purchase from the Company at a price per Share of $[______] (the
"Purchase Price") the number of Firm Shares (subject to such adjustments to
--------------
eliminate fractional shares as you may determine) that bears the same proportion
to the total number of Firm Shares to be sold by the Company as the number of
Firm Shares set forth opposite the name of such Underwriter in Schedules I
hereto bears to the total number of Firm Shares.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, (i) the Company agrees to
issue and sell the Company Additional Shares, and the Underwriters shall have
the right to purchase, severally and not jointly, up to all the Company
Additional Shares from the Company at the Purchase Price and (ii) each Selling
Stockholder agrees, severally and not jointly, to sell the number of Selling
Stockholders Additional Shares set forth opposite such Selling Stockholder's
name in Schedule II hereto, and the Underwriters shall have the right to
purchase, severally and not jointly, up to all the Selling Stockholders
Additional Shares from the Selling Stockholders at the Purchase Price.
The Additional Shares may be purchased solely for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. The
Underwriters may exercise their right to purchase Company Additional Shares and
their right to purchase Selling Stockholders Additional Shares only
simultaneously and may exercise such rights in whole or in part from time to
time by giving written notice (an "Option Exercise Notice") thereof to the
----------------------
Company and to the Selling Stockholders within 30 days after the date of this
Agreement; provided, however, that the Company shall have the right, if less
than all of the Additional Shares are to be purchased, to designate the priority
in which Additional Shares are to be purchased from the Company or from any
Selling Stockholder (so that the Company may designate a disproportionate
allocation), but in the absence of such designation by the Company, then the
ratio of (i) the number of Company Additional Shares actually purchased from the
Company to (ii) the total number of Company Additional Shares set forth in the
first paragraph hereof, shall be equal to the ratio of (i) the number of Selling
Stockholders Additional Shares actually purchased from the Selling Stockholders
to (ii) the total number of Selling Stockholders Additional Shares set forth on
Schedule II hereto; provided, further, that if any Selling Stockholder refuses
or fails to deliver any Selling Stockholders Additional Shares in accordance
with the provisions hereof, the Company shall be obligated to issue and sell to
the Underwriters an additional number of Shares equal to the number of Selling
Stockholders Additional Shares that such Selling Stockholder refused or failed
to deliver. Only Donaldson, Lufkin & Jenrette Securities Corporation shall be
entitled to give Option Exercise Notices on behalf of the Underwriters and each
such notice shall specify the aggregate number of Company Additional Shares and
the aggregate number of Selling Stockholders Additional Shares to be purchased
pursuant to such exercise and the date for payment and delivery thereof, which
date shall be a business day (i) no earlier than two business days after such
notice has been given (and, in any event, no earlier than the Closing Date (as
hereinafter defined)) and (ii) no later than ten business days after such notice
has been given.
2
<PAGE>
If any Additional Shares are to be purchased, each Underwriter, severally
and not jointly, agrees to purchase from the Company the number of Company
Additional Shares (subject to such adjustments to eliminate fractional shares as
you may determine) that bears the same proportion to the total number of Company
Additional Shares to be purchased from the Company as the number of Firm Shares
set forth opposite the name of such Underwriter in Schedule I bears to the total
number of Firm Shares. Similarly if any Additional Shares are to be purchased,
each Underwriter, severally and not jointly, agrees to purchase from the Selling
Stockholders the number of Selling Stockholder Additional Shares (subject to
such adjustments to eliminate fractional shares as you may determine) that bears
the same proportion to the total number of Selling Stockholder Additional Shares
to be purchased from the Selling Stockholders as the number of Firm Shares set
forth opposite the name of such Underwriter in Schedule I bears to the total
number of Firm Shares.
Each Seller hereby agrees, except as set forth in the last sentence of this
paragraph, not to (i) 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 (ii) 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
the transactions described in clause (i) or (ii) is to be settled by the
delivery of Common Stock, or such other securities, in cash or otherwise) (each
of the actions specified in such clauses (i) and (ii), a "Transfer"), except to
the Underwriters pursuant to this Agreement, for a period of 180 days after the
date of the Prospectus without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation. Notwithstanding the foregoing, during such
period (i) the Company may grant stock options pursuant to the Company's
existing stock option plan and (ii) the Company may issue shares of Common Stock
upon the exercise of an option or warrant or the conversion of a security
outstanding on the date hereof. The Company also agrees not to file any
registration statement (other than a registration statement on Form S-8) with
respect to any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock for a period of 180 days after the
date of the Prospectus without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation. In addition, each Selling Stockholder agrees
that, for a period of 180 days after the date of the Prospectus without the
prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation, it
will not make any demand for, or exercise any right with respect to, the
registration of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock. The Company shall, prior to or
concurrently with the execution of this Agreement, deliver an agreement executed
by (i) each Selling Stockholder, (ii) each of the directors and officers of the
Company who is not a Selling Stockholder and (iii) each stockholder listed on
Annex I hereto to the effect that such person will not, during the period
commencing on the date such person signs such agreement and ending 180 days
after the date of the Prospectus, without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation, (A) engage in any of the
transactions described in the first sentence of this paragraph or (B) make any
demand for, or exercise any right with respect to, the registration of any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock. Notwithstanding the first sentence of this
paragraph, any of the following Transfers shall be permitted, without requiring
the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation, and each letter delivered by the Company pursuant to the
immediately preceding sentence may contain a provision permitting any of the
following Transfers, without requiring the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation: (i) any Transfer of shares of Common
Stock by a corporation, limited liability company or partnership solely to its
shareholders, members or partners; provided that each transferee executes and
delivers a lock-up letter agreeing to the foregoing restrictions during the
remainder of the 180-day period referenced above; (ii) any Transfer of shares of
Common Stock to any family member of the transferor or to any charitable trust
or
3
<PAGE>
foundation or similar charitable entity; provided that each transferee (other
than a private charitable foundation if the existence of the lock-up letter
would cause the contribution to be non-deductible) executes and delivers a lock-
up letter agreeing to the foregoing restrictions during the remainder of the
180-day period referenced above; and (iii) any Transfer of shares of Common
Stock to the Company in payment of debts or other obligations owed by the
transferor to the Company.
The Company hereby confirms its engagement of BancBoston Robertson Stephens
Inc. ("BBRS") as, and BBRS hereby confirms its agreement with the Company to
----
render services as, a "qualified independent underwriter", within the meaning of
Section (b)(15) of Rule 2720 of the National Association of Securities Dealers,
Inc. with respect to the offering and sale of the Shares. BBRS, solely in its
capacity as the qualified independent underwriter and not otherwise, is referred
to herein as the "QIU." The price at which the Shares will be sold to the public
---
shall not be higher than the maximum price recommended by the QIU.
The Sellers and the Underwriters agree that up to [_______] of the Firm
Shares to be purchased by the Underwriters (the "Reserved Shares") shall be
---------------
reserved for sale by the Underwriters to certain eligible directors, officers,
employees and persons having business relationships with the Company, as part of
the distribution of the Shares by the Underwriters, subject to the terms of this
Agreement, the applicable rules, regulations and interpretations of the National
Association of Securities Dealers, Inc. and all other applicable laws, rules and
regulations. To the extent that such Reserved Shares are not orally confirmed
for purchase by such eligible employees and persons having business
relationships with the Company by the end of the first business day after the
date of this Agreement, such Reserved Shares may be offered to the public as
part of the public offering contemplated hereby.
SECTION 3. Terms of Public Offering. The Sellers are advised by you that
the Underwriters propose (i) to make a public offering of their respective
portions of the Shares as soon after the execution and delivery of this
Agreement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.
SECTION 4. Delivery and Payment. The Shares shall be represented by
definitive certificates and shall be issued in such authorized denominations and
registered in such names as Donaldson, Lufkin & Jenrette Securities Corporation
shall request no later than two business days prior to the Closing Date or the
applicable Option Closing Date (as defined below), as the case may be. The
Shares shall be delivered by or on behalf of the Sellers, with any transfer
taxes thereon duly paid by the respective Sellers, to Donaldson, Lufkin &
Jenrette Securities Corporation through the facilities of The Depository Trust
Company ("DTC"), for the respective accounts of the several Underwriters,
---
against payment to the Sellers of the Purchase Price therefor by wire transfer
of Federal funds immediately available in New York City to the accounts
specified by the Company and to a single custodian bank on behalf of all of the
Selling Stockholders. The certificates representing the Shares shall be made
available for inspection not later than 9:30 a.m., New York City time, on the
business day prior to the Closing Date or the applicable Option Closing Date, as
the case may be, at the office of DTC or its designated custodian (the
"Designated Office"). The time and date of delivery and payment for the Firm
-----------------
Shares shall be 9:00 a.m., New York City time, on [________] [__], 1999 or such
other time on the same or such other date as Donaldson, Lufkin & Jenrette
Securities Corporation and the Company shall agree in writing. The time and
date of delivery and payment for the Firm Shares are hereinafter referred to as
the "Closing Date." The time and date of delivery and payment for any
------------
Additional Shares to be purchased by the Underwriters shall be 9:00 a.m., New
York City time, on the date specified in the applicable exercise notice given by
you pursuant to and in accordance with Section 2 or such other time on the same
or such other date as Donaldson, Lufkin & Jenrette Securities Corporation and
the Company shall agree in
4
<PAGE>
writing. The time and date of delivery and payment for any Additional Shares are
hereinafter referred to as an "Option Closing Date."
-------------------
The documents to be delivered on the Closing Date or any Option Closing
Date on behalf of the parties hereto pursuant to Section 10 hereof shall be
delivered at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 300 South
Grand Avenue, Suite 3400, Los Angeles, California 90071, and the Shares shall be
delivered at the Designated Office, all on the Closing Date or such Option
Closing Date, as the case may be.
SECTION 5. Agreements of the Company. The Company agrees with you:
(a) To advise you promptly and, if requested by you, to confirm such
advice in writing,
(i) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus
or for additional information,
(ii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the
suspension of qualification of any of the Shares for offering or sale
in any jurisdiction, or the initiation of any proceeding for such
purposes,
(iii) when any amendment to the Registration Statement becomes
effective,
(iv) if the Company is required to file a Rule 462(b)
Registration Statement after the effectiveness of this Agreement, when
the Rule 462(b) Registration Statement has become effective and
(v) of the happening of any event during the period referred to
in Section 5(d) below which makes any statement of a material fact
made in the Registration Statement or the Prospectus untrue or which
requires any additions to or changes in the Registration Statement or
the Prospectus in order to make the statements therein not misleading.
If at any time the Commission shall issue any stop order suspending the
effectiveness of the Registration Statement, the Company will use its best
efforts to obtain the withdrawal or lifting of such order at the earliest
possible time.
(b) To furnish to you four signed copies of the Registration
Statement as first filed with the Commission and of each amendment to it,
including all exhibits, and to furnish to you and each Underwriter
designated by you such number of conformed copies of the Registration
Statement as so filed and of each amendment to it, without exhibits, as you
may reasonably request.
(c) To prepare the Prospectus, the form and substance of which shall
be satisfactory to you, and to file the Prospectus in such form with the
Commission within the applicable period specified in Rule 424(b) under the
Act; and during the period specified in Section 5(d) below, not to file any
further amendment to the Registration Statement and not to make any
amendment or supplement to the Prospectus of which you shall not previously
have been advised or to which you shall reasonably object after being so
advised.
5
<PAGE>
(d) Prior to 10:00 a.m., New York City time, on the first business day
after the date of this Agreement and from time to time thereafter for such
period as in the opinion of counsel for the Underwriters a prospectus is
required by law to be delivered in connection with sales by an Underwriter
or a dealer, to furnish in New York City to each Underwriter and any dealer
as many copies of the Prospectus (and of any amendment or supplement to the
Prospectus) as you may reasonably request; provided, however, that in case
any Underwriter or dealer is so required to deliver a prospectus in
connection with sales of any of the Shares at any time nine months or more
after the time of issue of the Prospectus, the preparation and delivery of
such copies of the Prospectus (and of any amendment or supplement to the
Prospectus) as you so request shall be at the expense of such Underwriter
or dealer.
(e) If during the period specified in Section 5(d), any event shall
occur or condition shall exist as a result of which, in the opinion of
counsel for the Underwriters, it becomes necessary to amend or supplement
the Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not
misleading, or if, in the opinion of counsel for the Underwriters, it is
necessary to amend or supplement the Prospectus to comply with applicable
law, upon your request forthwith to prepare and file with the Commission an
appropriate amendment or supplement to the Prospectus so that the
statements in the Prospectus, as so amended or supplemented, will not, in
the light of the circumstances when it is so delivered, be misleading, or
so that the Prospectus will comply with applicable law, and to furnish to
each Underwriter and to any dealer as many copies thereof as you may
reasonably request; provided, however, that in case any Underwriter or
dealer is required to deliver a prospectus in connection with the sale of
any of the Shares at any time nine months or more after the time of issue
of the Prospectus, the preparation and delivery of such copies of the
Prospectus (and of any amendment or supplement to the Prospectus) as you so
request shall be at the expense of such Underwriter or dealer.
(f) Prior to any public offering of the Shares, to cooperate with you
and counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters
and by dealers under the state securities or Blue Sky laws of such
jurisdictions as you may request, to continue such registration or
qualification in effect so long as required for distribution of the Shares
and to file such consents to service of process or other documents as may
be necessary in order to effect such registration or qualification;
provided, however, that the Company shall not be required in connection
therewith to qualify as a foreign corporation in any jurisdiction in which
it is not now so qualified or to take any action that would subject it to
general consent to service of process or taxation other than as to matters
and transactions relating to the Prospectus, the Registration Statement,
any preliminary prospectus or the offering or sale of the Shares, in any
jurisdiction in which it is not now so subject.
(g) To make generally available to its stockholders as soon as
practicable but in any event not later than eighteen months after the
"effective date of the Registration Statement" (as defined in Rule 158(c)
under the Act), an earnings statement (which need not be audited) that
shall satisfy the provisions of Section 11(a) of the Act (including, at the
option of the Company, Rule 158 under the Act), and to advise you in
writing when such statement has been so made available.
(h) During the period of five years after the date of this Agreement,
to furnish to you as soon as available copies of all reports or other
communications furnished to the record holders of Common Stock generally or
non-confidential reports, financial statements and other communications
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<PAGE>
furnished to or filed with the Commission or any national securities
exchange on which any class of securities of the Company is listed and such
other publicly available information concerning the Company and its
subsidiaries as you may reasonably request.
(i) Regardless of whether the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, and except as
otherwise provided herein, to pay or cause to be paid all expenses incident
to the performance of the Sellers' obligations under this Agreement,
including:
(i) the fees, disbursements and expenses of the Company's
counsel, the Company's accountants and any Selling Stockholder's
counsel (in addition to the Company's counsel) in connection with the
registration and delivery of the Shares under the Act and all other
fees and expenses in connection with the preparation, printing, filing
and distribution of the Registration Statement (including financial
statements and exhibits), any preliminary prospectus, the Prospectus
and all amendments and supplements to any of the foregoing, including
the mailing and delivering of copies thereof to the Underwriters and
dealers in the quantities specified herein,
(ii) all costs and expenses related to the transfer and
delivery of the Shares to the Underwriters, including any transfer or
other taxes payable thereon,
(iii) all costs of printing or producing this Agreement and any
other agreements or documents in connection with the offering,
purchase, sale or delivery of the Shares,
(iv) all expenses in connection with the registration or
qualification of the Shares for offer and sale under the securities or
Blue Sky laws of the several states and all costs of printing or
producing any Preliminary and Supplemental Blue Sky Memoranda in
connection therewith (including the filing fees, and the reasonable
fees, charges and disbursements of counsel for the Underwriters in
connection with such registration or qualification and memoranda
relating thereto),
(v) the filing fees, fees, charges and disbursements of
counsel for the Underwriters in connection with the review and
clearance of the offering of the Shares by the National Association of
Securities Dealers, Inc.,
(vi) all fees and expenses in connection with the preparation
and filing of the registration statement on Form 8-A relating to the
Common Stock and all costs and expenses incident to the listing of the
Shares on the Nasdaq National Market,
(vii) the cost of printing certificates representing the Shares,
(viii) the costs and charges of any transfer agent, registrar
and/or depositary, and (ix) the fees, if any, and expenses, if any, of
the QIU (including the fees, charges and disbursements of counsel to
the QIU), and
(ix) all other costs and expenses incident to the performance
of the obligations of the Company and the Selling Stockholders
hereunder for which provision is not otherwise made in this Section.
The provisions of this Section shall not supersede or otherwise affect
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<PAGE>
any agreement that the Company and the Selling Stockholders may
otherwise have for allocation of such expenses among themselves.
It is understood, however, that, except as provided in this Section 5 and
Sections 8, 9 and 13 hereof, the Underwriters will pay all of their own
costs and expenses, including the fees of their counsel, stock transfer
taxes on resale of any of the Shares by them, and any advertising expenses
connected with any offers they may make.
(j) To list for quotation the Shares on the Nasdaq National Market and
to use its best efforts to maintain the listing of the Shares on the Nasdaq
National Market for a period of three years after the date of this
Agreement.
(k) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company on
or prior to the Closing Date or any Option Closing Date, as the case may
be, and to satisfy all conditions precedent to the delivery of the Shares.
(l) If the Registration Statement at the time of the effectiveness of
this Agreement does not cover all of the Shares, to file a Rule 462(b)
Registration Statement with the Commission registering the Shares not so
covered in compliance with Rule 462(b) by 10:00 p.m., New York City time,
on the date of this Agreement and to pay to the Commission the filing fee
for such Rule 462(b) Registration Statement at the time of the filing
thereof or to give irrevocable instructions for the payment of such fee
pursuant to Rule 111(b) under the Act.
SECTION 6. Representations and Warranties of the Company. The Company
represents and warrants the following to each of the Underwriters:
(a) The Registration Statement has become effective (other than any
Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement); any Rule 462(b) Registration Statement
filed after the effectiveness of this Agreement will become effective no
later than 10:00 p.m., New York City time, on the date of this Agreement;
and no stop order suspending the effectiveness of the Registration
Statement is in effect, and no proceedings for such purpose are pending
before or, to the knowledge of the Company, threatened by the Commission.
(b) The Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness
of this Agreement) (i) when it became effective, did not contain and, as
amended, if applicable, will not, as of the effective date of any such
amendment, contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading and (ii) and the Prospectus comply and,
as amended or supplemented, if applicable, will comply in all material
respects with the Act. If the Company is required to file a Rule 462(b)
Registration Statement after the effectiveness of this Agreement, such Rule
462(b) Registration Statement and any amendments thereto, when they become
effective, (A) will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading and (B) will comply in all
material respects with the Act. The Prospectus will not contain as of its
filing date and, as amended or supplemented, if applicable, will not
contain as of the filing date of such amendment or supplement any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements therein, in the light of the circumstances under which
they were
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<PAGE>
made, not misleading, except that the representations and warranties set
forth in this paragraph do not apply to statements or omissions in the
Registration Statement or the Prospectus based upon information furnished
to the Company in writing by any Underwriter through you expressly for use
therein. The parties hereto acknowledge that for purposes of this
Agreement, including this Section 6(b), Section 6(c) and Section 9(b)
hereof, the only information furnished to the Company in writing by the
Underwriters expressly for use in the Registration Statement or the
Prospectus (or any amendment or supplement to any of them) is (i) the list
of Underwriters and the number of Shares to be purchased by each of them,
set forth in the first table under the caption "Underwriting" in the
Prospectus and (ii) the information set forth in the third, the eleventh,
the fifteenth, the sixteenth and the seventeenth paragraphs under the
caption "Underwriting" in the Prospectus. Furthermore, the parties hereto
acknowledge that for purposes of this Agreement, including this Section
6(b), Section 6(c) and Section 9(b) hereof, the Underwriters shall not be
deemed to have provided any information (and therefore are not responsible
for any statements or omissions) pertaining to any arrangement or agreement
with respect to any party other than the Underwriters.
(c) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, complied when so filed in all material
respects with the Act, and did not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except that the
representations and warranties set forth in this paragraph do not apply to
statements or omissions in any preliminary prospectus based upon
information furnished to the Company in writing by any Underwriter through
you expressly for use therein.
(d) Each of the Company and its sole subsidiary, JFAX.COM, Europe,
Ltd., has been duly incorporated, is validly existing as a corporation in
good standing under the laws of its jurisdiction of incorporation and has
the corporate power and authority to carry on its business as described in
the Prospectus and to own, lease and operate its properties as described in
the Prospectus, and each is duly qualified and is in good standing as a
foreign corporation authorized to do business in each jurisdiction in which
the nature of its business or its ownership or leasing of property requires
such qualification, except where the failure to be so qualified would not
have a material adverse effect on the business, prospects, financial
condition or results of operations of the Company and its subsidiary, taken
as a whole (a "Material Adverse Effect"). The only subsidiary of the
-----------------------
Company is JFAX.COM, Europe, Ltd., a company organized and existing under
the laws of the United Kingdom, and such subsidiary is not a "significant
subsidiary" (as defined in Section 1-02 of Regulation S-X) of the Company.
(e) There are no outstanding subscriptions, rights, warrants, options,
calls, convertible securities, commitments of sale or liens granted or
issued by the Company or its subsidiary relating to or entitling any person
to purchase or otherwise to acquire any shares of the capital stock of the
Company or its subsidiary, except as otherwise disclosed in the
Registration Statement.
(f) All the outstanding shares of capital stock of the Company
(including the Shares to be sold by the Selling Stockholders) have been
duly authorized and validly issued and are fully paid, non-assessable and
not subject to any preemptive or similar rights; and the Shares to be
issued and sold by the Company have been duly authorized and, when issued
and delivered to the Underwriters against payment therefor as provided by
this Agreement, will be validly issued, fully paid and
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<PAGE>
non-assessable, and the issuance of such Shares will not be subject to any
preemptive or similar rights.
(g) All of the outstanding shares of capital stock of the Company's
subsidiary have been duly authorized and validly issued and are fully paid
and non-assessable, and are owned directly by the Company, free and clear
of any security interest, claim, lien, encumbrance or adverse interest of
any nature.
(h) The authorized capital stock of the Company conforms in all
material respects as to legal matters to the description thereof contained
in the Prospectus.
(i) Neither the Company nor its subsidiary is (i) in violation of its
respective charter or by-laws or (ii) in default in the performance of any
material obligation, agreement, covenant or condition contained in any
indenture, loan agreement, mortgage, lease or other agreement or instrument
to which the Company or its subsidiary is a party or by which the Company
or its subsidiary or their respective property is bound, other than such
defaults which, individually or in the aggregate, would not have a Material
Adverse Effect.
(j) The execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and
the consummation of the transactions contemplated hereby will not (i)
require any consent, approval, authorization or other order of, or
qualification with, any court or governmental body or agency (except the
registration under the Act of the Shares, such as have been already
obtained or such as may be required under the securities or Blue Sky laws
of the various states) or (ii)(A) conflict with or constitute a breach of
any of the terms or provisions of, or a default under, (x) the charter or
by-laws of the Company or its subsidiary or (y) any indenture, loan
agreement, mortgage, lease or other agreement or instrument that is
material to the Company and its subsidiary, taken as a whole, to which the
Company or its subsidiary is a party or by which the Company or its
subsidiary or their respective property is bound, (B) violate or conflict
with any applicable law or any rule, regulation, judgment, order or decree
of any court or any governmental body or agency having jurisdiction over
the Company, its subsidiary or their respective property or (C) result in
the suspension, termination or revocation of any Authorization (as defined
below) of the Company or its subsidiary or any other impairment of the
rights of the holder of any such Authorization, other than, in the case of
clauses (A)(y), (B) and (C), such conflicts, breaches, defaults,
violations, suspensions, terminations, revocations or impairments which,
individually or in the aggregate, would not have a Material Adverse Effect
and would not have an adverse effect on the validity or enforceablity of
this Agreement or on the transactions contemplated hereby.
(k) There are no legal or governmental proceedings pending or, to the
knowledge of the Company, threatened to which the Company or its subsidiary
is or could be a party or to which any of their respective property is or
could be subject that are required to be described in the Registration
Statement or the Prospectus and are not so described; nor are there any
statutes, regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not so described or filed
as required.
(l) Neither the Company nor its subsidiary has violated any foreign,
federal, state or local law or regulation relating to the protection of
human health and safety, the environment or hazardous or toxic substances
or wastes, pollutants or contaminants ("Environmental Laws"), any
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provisions of the Employee Retirement Income Security Act of 1974, as
amended, or any provisions
10
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of the Foreign Corrupt Practices Act or the rules and regulations
promulgated thereunder, except for such violations which, singly or in the
aggregate, would not have a Material Adverse Effect.
(m) Each of the Company and its subsidiary has such permits, licenses,
consents, exemptions, franchises, authorizations and other approvals (each,
an "Authorization") of, and has made all filings with and notices to, all
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governmental or regulatory authorities and self-regulatory organizations
and all courts and other tribunals, including, without limitation, under
any applicable Environmental Laws and any applicable laws pertaining to
telecommunications or Internet related activities, as are necessary to own,
lease, license and operate its respective properties and to conduct its
business, except where the failure to have any such Authorization or to
make any such filing or notice would not, singly or in the aggregate, have
a Material Adverse Effect. Each such Authorization is valid and in full
force and effect and each of the Company and its subsidiary is in
compliance with all the terms and conditions thereof and with the rules and
regulations of the authorities and governing bodies having jurisdiction
with respect thereto; no event has occurred (including, without limitation,
the receipt of any notice from any authority or governing body) which
allows or, after notice or lapse of time or both, would allow, revocation,
suspension or termination of any such Authorization or results or, after
notice or lapse of time or both, would result in any other impairment of
the rights of the holder of any such Authorization; and such Authorizations
contain no restrictions that are burdensome to the Company or its
subsidiary; except where such failure to be valid and in full force and
effect or to be in compliance, the occurrence of any such event or the
presence of any such restriction would not, singly or in the aggregate,
have a Material Adverse Effect.
(n) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with
Environmental Laws or any Authorization, any related constraints on
operating activities and any potential liabilities to third parties) which
would, singly or in the aggregate, have a Material Adverse Effect.
(o) This Agreement has been duly authorized, executed and delivered by
the Company.
(p) KPMG LLP are independent public accountants with respect to the
Company and its subsidiary as required by the Act.
(q) The consolidated financial statements included in the Registration
Statement and the Prospectus (and any amendment or supplement thereto),
together with related schedules and notes, present fairly the consolidated
financial position, results of operations and changes in financial position
of the Company and its subsidiary on the basis stated therein at the
respective dates or for the respective periods to which they apply; such
statements and related schedules and notes have been prepared in accordance
with generally accepted accounting principles consistently applied
throughout the periods involved, except as disclosed therein (subject to
normal year-end adjustments and the lack of complete footnote disclosure in
the case of interim statements); the supporting schedules, if any, included
in the Registration Statement present fairly in accordance with generally
accepted accounting principles the information required to be stated
therein; and the other financial and statistical information and data set
forth in the Registration Statement and the Prospectus (and any amendment
or supplement thereto) are, in all material respects, accurately presented
and prepared on a basis not inconsistent with such financial statements and
the books and records of the Company. The pro forma financial information
and the related notes thereto included in the
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Registration Statement and the Prospectus (and any amendment or supplement
thereto) present fairly the information shown therein, have been prepared
in accordance with the Commission's rules and guidelines with respect to
pro forma financial statements and have been properly compiled on the bases
described therein, and the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give effect
to the transactions and circumstances referred to therein.
(r) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described
in the Prospectus, will not be, an "investment company" as such term is
defined in the Investment Company Act of 1940, as amended.
(s) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person granting
such person the right to require the Company to file a registration
statement under the Act with respect to any securities of the Company or to
require the Company to include such securities with the Shares registered
pursuant to the Registration Statement.
(t) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this
Agreement), (i) there has not occurred any material adverse change or any
development involving a prospective material adverse change in the
condition, financial or otherwise, or the earnings, business, management or
operations of the Company and its subsidiary, taken as a whole, (ii) there
has not been any material adverse change or any development involving a
prospective material adverse change in the capital stock or in the long-
term debt of the Company or its subsidiary and (iii) neither the Company
nor its subsidiary has incurred any material liability or obligation,
direct or contingent.
(u) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters shall be
deemed to be a representation and warranty by the Company to the
Underwriters as to the matters covered thereby.
(v) The Company and its subsidiary have good and marketable title in
fee simple to all real property and good and marketable title to all
personal property owned by them which is material to the business of the
Company and its subsidiary, taken as a whole, in each case free and clear
of all liens, encumbrances and defects except such as do not materially
affect the value of such property and do not interfere with the use made
and proposed to be made of such property by the Company and its subsidiary;
and except as disclosed in the Prospectus, any real property and buildings
held under lease by the Company or its subsidiary are held by it under
valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of
such property and buildings by the Company or its subsidiary.
(w) The Company and its subsidiary own or have sufficient rights to
use all patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks and trade names ("Intellectual Property")
---------------------
currently employed by them in connection with the business now operated by
them, except where the failure to own or possess or otherwise be able to
acquire such Intellectual Property would not, singly or in the aggregate,
have a Material Adverse Effect; and neither the Company nor its subsidiary
has received any notice of
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infringement of or conflict with asserted rights of others with respect to
any of such Intellectual Property which, singly or in the aggregate, if the
subject of a decision, ruling or finding, could reasonably be expected to
have a Material Adverse Effect.
(x) The Company and its subsidiary are insured by insurers of
recognized financial responsibility against such losses and risks and in
such amounts as are prudent and customary in the businesses in which they
are engaged; and neither the Company nor its subsidiary (i) has received
notice from any insurer or agent of such insurer that substantial capital
improvements or other material expenditures will have to be made in order
to continue such insurance or (ii) has any reason to believe that it will
not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers at a
cost that would not have a Material Adverse Effect.
(y) No relationship, direct or indirect, exists between or among the
Company or its subsidiary on the one hand, and the directors, officers,
stockholders, customers or suppliers of the Company or its subsidiary on
the other hand, which is required by the Act to be described in the
Registration Statement or the Prospectus which is not so described.
(z) There is no (i) significant unfair labor practice complaint,
grievance or arbitration proceeding pending or, to the knowledge of the
Company, threatened against the Company or its subsidiary before the
National Labor Relations Board or any state or local labor relations board,
(ii) strike, material labor dispute, slowdown or stoppage pending or, to
the knowledge of the Company, threatened against the Company or its
subsidiary or (iii) union representation question existing with respect to
the employees of the Company and its subsidiary, except for such actions
specified in clause (i), (ii) or (iii) above, which, singly or in the
aggregate, would not have a Material Adverse Effect. To the best of the
Company's knowledge, no collective bargaining organizing activities are
taking place with respect to the employees of the Company or its
subsidiary.
(aa) The Company and its subsidiary maintain a system of internal
accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (iii)
access to assets is permitted only in accordance with management's general
or specific authorization; and (iv) the recorded accountability for assets
is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(bb) The Company and its subsidiary have filed all material United
States federal, state, local, and foreign tax returns, reports, and
statements required to be filed and all such tax returns, reports, and
statements are true, correct, and complete in all material respects. The
Company and its subsidiary have paid all material taxes, assessments, fees,
and levies, together with any interest, penalties or additions thereto,
required to be paid, other than those being contested in good faith by
appropriate proceedings and for which adequate reserves have been provided
on the books and records of the Company in accordance with generally
accepted accounting principles and practices.
(cc) The Company has reviewed its operations and that of its
subsidiary to evaluate the extent to which the business or operations of
the Company or its subsidiary will be affected by the Year 2000 Problem.
In addition, the Company has received certifications from its key suppliers
of
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hardware and networking equipment for its data centers to the effect that
such hardware and networking equipment are Year 2000 compliant. As a result
of such review and such certifications, the Company has no reason to
believe, and does not believe, that the Year 2000 Problem will have a
Material Adverse Effect. The Prospectus includes in all material respects
all required disclosure relating to the Company's Year 2000 disclosure
obligations and the Year 2000 Problem, including without limitation the
disclosure described in the Commission's interpretive releases entitled (i)
"Statement of the Commission Regarding Disclosure of Year 2000 Issues and
Consequence by Public Companies, Investment Advisers, Investment Companies,
and Municipal Securities Issuers" (SEC Release No. 33-7558, July 29, 1998)
and (ii) "Frequently Asked Questions About the Statement of the Commission
Regarding Disclosure of Year 2000 Issues and Consequences by Public
Companies" (SEC Release 33-7609, November 9, 1998). As used herein, the
"Year 2000 Problem" means any significant risk that computer hardware or
-----------------
software used in the receipt, transmission, processing, manipulation,
storage, retrieval, retransmission or other utilization of data or in the
operation of mechanical or electrical systems of any kind will not, in the
case of dates or time periods occurring after December 31, 1999, function
at least as effectively as in the case of dates or time periods occurring
prior to January 1, 2000.
(dd) Neither the Company nor its subsidiary has at any time (i) made
any unlawful contribution to any candidate for foreign office or failed to
disclose fully any contribution in violation of law, or (ii) made any
payment to any federal or state governmental officer or official, or other
person charged with similar public or quasi-public duties, other than
payments required or permitted by the laws of the United States of America
or any jurisdiction thereof.
(ee) The Company has not taken and will not take, directly or
indirectly, any action designed to cause or to result in, or that has
constituted or that might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the Shares. Since the filing of the
Registration Statement, the Company has not (i) sold, bid for, purchased,
or paid anyone any compensation for soliciting purchases of, the Shares or
(ii) paid or agreed to pay to any person any compensation for soliciting
another to purchase any other securities of the Company.
(ff) The Company has not taken any action that would violate Rule 102
of Regulation M of the Exchange Act.
(gg) Except as set forth in the Prospectus, neither the Company nor
its subsidiary owns any shares of stock or any other equity securities of
any corporation or has any equity interest in any firm, partnership,
company, association or other entity that is material to the Company and
its subsidiary, taken as a whole.
SECTION 7. Representations and Warranties of the Selling Stockholders.
(a) Each of the Selling Stockholders represents and warrants the
following to each of the Underwriters:
(i) Such Selling Stockholder is the lawful owner of the Shares to
be sold by such Selling Stockholder pursuant to this Agreement and has
good and clear title to the Shares, free of all restrictions on
transfer, liens, encumbrances, security interests, equities and claims
whatsoever.
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(ii) Such Selling Stockholder has full legal right, power and
authority, and all authorization and approval required by law, to
enter into this Agreement, the Custody Agreement signed by such
Selling Stockholder and [INSERT NAME OF CUSTODIAN], as Custodian,
relating to the deposit of the Shares to be sold by such Selling
Stockholder (the "Custody Agreement") and the Power of Attorney of
-----------------
such Selling Stockholder appointing certain individuals as such
Selling Stockholder's attorneys-in-fact (the "Attorneys") to the
---------
extent set forth therein, relating to the transactions contemplated
hereby and by the Registration Statement and the Custody Agreement
(the "Power of Attorney") and to sell, assign, transfer and deliver
-----------------
the Shares to be sold by such Selling Stockholder in the manner
provided herein and therein.
(iii) This Agreement has been duly authorized, executed and
delivered by or on behalf of such Selling Stockholder.
(iv) The Custody Agreement of such Selling Stockholder has been
duly authorized, executed and delivered by such Selling Stockholder
and is a valid and binding agreement of such Selling Stockholder,
enforceable in accordance with its 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.
(v) The Power of Attorney of such Selling Stockholder has been
duly authorized, executed and delivered by such Selling Stockholder
and is a valid and binding instrument of such Selling Stockholder,
enforceable in accordance with its terms, and, pursuant to such Power
of Attorney, such Selling Stockholder has, among other things,
authorized the Attorneys, or any one of them, to execute and deliver
on such Selling Stockholder's behalf this Agreement and any other
document that they, or any one of them, may deem necessary or
desirable in connection with the transactions contemplated hereby and
thereby and to deliver the Shares to be sold by such Selling
Stockholder pursuant to this Agreement.
(vi) Upon delivery of and payment for the Shares to be sold by
such Selling Stockholder pursuant to this Agreement, good and clear
title to such Shares will pass to the Underwriters, free of all
restrictions on transfer, liens, encumbrances, security interests,
equities and claims whatsoever, other than pursuant to this Agreement,
and, provided that the Underwriters do not have notice of any "adverse
claim" (within the meaning given to such term in Article 8 of the
Uniform Commercial Code of the State of New York), each of the
Underwriters will be a "protected purchaser" (within the meaning given
to such term in Article 8 of the Uniform Commercial Code of the State
of New York) with respect to such Shares and will acquire such Shares
free of any "adverse claim" (within the meaning given to such term in
Article 8 of the Uniform Commercial Code of the State of New York).
(vii) On the Closing Date (and, if any Additional Shares are
sold by such Selling Stockholder pursuant to the terms hereof, on the
applicable Option Closing Date), the certificates representing all of
the Shares to be sold by such Selling Stockholder on such date
pursuant to this Agreement will be in suitable form for transfer by
delivery or will be accompanied by duly executed instruments of
transfer or assignment in blank with signatures guaranteed.
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(viii) The execution, delivery and performance of this Agreement
and the Custody Agreement and Power of Attorney of such Selling
Stockholder by or on behalf of such Selling Stockholder, the
compliance by such Selling Stockholder with all the provisions hereof
and thereof and the consummation of the transactions contemplated
hereby and thereby will not (i) require any consent, approval,
authorization or other order of, or qualification with, any court or
governmental body or agency (except the registration under the Act of
the Shares, such as have been already obtained or such as may be
required under the securities or Blue Sky laws of the various states)
or (ii)(A) conflict with or constitute a breach of any of the terms or
provisions of, or a default under, (x) the organizational documents of
such Selling Stockholder, if such Selling Stockholder is not an
individual, or (y) any indenture, loan agreement, mortgage, lease or
other agreement or instrument to which such Selling Stockholder is a
party or by which such Selling Stockholder or any property of such
Selling Stockholder is bound or (B) violate or conflict with any
applicable law or any rule, regulation, judgment, order or decree of
any court or any governmental body or agency having jurisdiction over
such Selling Stockholder or any property of such Selling Stockholder,
other than, in the case of clauses (A)(y) and (B), such conflicts,
breaches, defaults or violations which, individually or in the
aggregate would not have an adverse effect on the validity or
enforceablity of this Agreement or on the transactions contemplated
hereby and in the case of any Selling Stockholder that is not an
individual, would not have a material adverse effect on the business,
financial condition or results of such Selling Stockholder and its
subsidiaries, taken as a whole, or , in the case of any Selling
Stockholder that is an individual, would not have a material adverse
effect on such Selling Stockholder.
(ix) The information in the Registration Statement under the
caption "Principal and Selling Stockholders" which specifically
relates to such Selling Stockholder did not, as of the effective date
of the Registration Statement, contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
(x) At any time during the period described in Section 5(d),
if there is any change in the information referred to in Section
7(a)(x), such Selling Stockholder will immediately notify you of such
change.
(xi) Each certificate signed by or on behalf of such Selling
Stockholder and delivered to the Underwriters or counsel for the
Underwriters shall be deemed to be a representation and warranty by
such Selling Stockholder to the Underwriters as to the matters covered
thereby.
(xii) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to or which has
constituted or which might reasonably be expected to cause or result
under the Exchange Act or otherwise, in stabilization or manipulation
of the price of any security of the Company to facilitate the sale or
resale of the Securities.
(xiii) Such Selling Stockholder has not taken any action that
would violate Rule 102 of Regulation M of the Exchange Act.
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(xiv) Neither such Selling Stockholder nor any of its affiliates
directly, or indirectly through one or more intermediaries, controls,
or is controlled by, or is under common control with a member, or is a
"person associated with a member" (within the meaning given to such
phrase in Article I, Section 1(ee) of the By-laws of the National
Association of Securities Dealers, Inc.), of the National Association
of Securities Dealers, Inc.
(xv) Such Selling Stockholder shall deliver to you prior to or
at the Closing Date a properly completed and executed United States
Treasury Department Form W-9 (or other applicable form or statement
specified by Treasury Department regulations in lieu thereof).
(b) Each of the Selling Stockholders who controls (within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act) the Company or
is controlled (within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act) by the Company or who is a director or officer of the
Company or any equity securities of which are held by a director or officer
of the Company or that is controlled (within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act) by a director or officer of the
Company, represents and warrants to each of the Underwriters, that such
Selling Stockholder has no knowledge of any material fact or condition that
is not set forth in the Registration Statement or the Prospectus and has
adversely affected, or may adversely affect, the business, properties,
business prospects, condition (financial or otherwise) or results of
operations of the Company, and the sale of the Shares proposed to be sold
by such Selling Stockholder is not prompted by any such knowledge.
SECTION 8. Indemnification of QIU.
(a) The Company agrees to indemnify and hold harmless the QIU, its
directors, its officers and each person, if any, who controls the QIU
within the meaning of Section 15 of the Act or Section 20 of the Exchange
Act, from and against any and all losses, claims, damages, liabilities and
judgments (including, without limitation, any reasonable legal or other
expenses incurred in connection with investigating or defending any matter,
including any action, that could give rise to any such losses, claims,
damages, liabilities or judgments) related to, based upon or arising out of
(i) any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement (or any amendment thereto), the
Prospectus (or any amendment or supplement thereto) or any preliminary
prospectus, or 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 or (ii) the QIU's activities as QIU under its
engagement pursuant to Section 2 hereof, except in the case of this clause
(ii) insofar as any such losses, claims, damages, liabilities or judgments
are found in a final judgment by a court of competent jurisdiction, not
subject to further appeal, to have resulted solely from the willful
misconduct or gross negligence of the QIU.
(b) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to Section 8(a) hereof
(the "QIU Indemnified Party"), the QIU Indemnified Party shall promptly
---------------------
notify the Company in writing and the Company shall assume the defense of
such action, including the employment of counsel reasonably satisfactory to
the QIU Indemnified Party and the payment of all fees and expenses of such
counsel, as incurred. Any QIU Indemnified Party shall have the right to
employ separate counsel in any such action and participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense
of the QIU Indemnified Party unless (i) the employment of such counsel
shall have been specifically authorized
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in writing by the Company, (ii) the Company shall have failed to assume the
defense of such action or employ counsel reasonably satisfactory to the QIU
Indemnified Party or (iii) the named parties to any such action (including
any impleaded parties) include both the QIU Indemnified Party and the
Company, and the QIU Indemnified Party shall have been advised by such
counsel that there may be one or more legal defenses available to it which
are different from or additional to those available to the Company (in
which case the Company shall not have the right to assume the defense of
such action on behalf of the QIU Indemnified Party). In any such case, the
Company shall not, in connection with any one action or separate but
substantially similar or related actions arising out of the same general
allegations or circumstances, be liable for the fees and expenses of more
than one separate firm of attorneys (in addition to any local counsel) for
all QIU Indemnified Parties, which firm shall be designated by the QIU, and
all such fees and expenses shall be reimbursed as they are incurred. The
Company shall indemnify and hold harmless the QIU Indemnified Party from
and against any and all losses, claims, damages, liabilities and judgments
by reason of any settlement of any action (i) effected with its written
consent or (ii) effected without its written consent if the settlement is
entered into more than twenty business days after the Company shall have
received a request from the QIU Indemnified Party for reimbursement for the
fees and expenses of counsel (in any case where such fees and expenses are
at the expense of the Company) and, prior to the date of such settlement,
the Company shall have failed to comply with such reimbursement request.
The Company shall not, without the prior written consent of the QIU
Indemnified Party, effect any settlement or compromise of, or consent to
the entry of judgment with respect to, any pending or threatened action in
respect of which the QIU Indemnified Party is or could have been a party
and indemnity or contribution may be or could have been sought hereunder by
the QIU Indemnified Party, unless such settlement, compromise or judgment
(i) includes an unconditional release of the QIU Indemnified Party from all
liability on claims that are or could have been the subject matter of such
action and (ii) does not include a statement as to or an admission of
fault, culpability or a failure to act, by or on behalf of the QIU
Indemnified Party.
(c) To the extent the indemnification provided for in this Section 8
is unavailable to a QIU Indemnified Party or insufficient in respect of any
losses, claims, damages, liabilities or judgments referred to therein, then
the Company, in lieu of indemnifying such QIU Indemnified Party, shall
contribute to the amount paid or payable by such QIU Indemnified Party as a
result of such losses, claims, damages, liabilities and judgments (i) in
such proportion as is appropriate to reflect the relative benefits received
by the Company on the one hand and the QIU on the other hand from the
offering of the Shares or (ii) if the allocation provided by clause 8(c)(i)
above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause
8(c)(i) above but also the relative fault of the Company on the one hand
and the QIU on the other hand in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
judgments, as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the QIU on
the other hand shall be deemed to be in the same proportion as the total
net proceeds from the offering (before deducting expenses, but after
deducting underwriting commissions and discounts) received by the Company
as set forth in the table on the cover page of the Prospectus, and the fee,
if any, received by the QIU pursuant to Section 2 hereof, bear to the sum
of such total net proceeds and such fee. The relative fault of the Company
on the one hand and the QIU on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company or the QIU and
the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission and whether
the QIU's
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activities as QIU under its engagement pursuant to Section 2 hereof
involved any willful misconduct or gross negligence on the part of the QIU.
The Company and the QIU agree that it would not be just and equitable
if contribution pursuant to this Section 8(c) were determined by pro rata
allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by a QIU Indemnified Party as a
result of the losses, claims, damages, liabilities or judgments referred to
in the immediately preceding paragraph shall be deemed to include, subject
to the limitations set forth above, any legal or other expenses incurred by
such QIU Indemnified Party in connection with investigating or defending
any matter, including any action, that could have given rise to such
losses, claims, damages, liabilities or judgments. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation.
(d) The remedies provided for in this Section 8 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to
any QIU Indemnified Party at law or in equity.
SECTION 9. Indemnification.
(a) The Company, jointly and severally with each of the Selling
Stockholders, and each of the Selling Stockholders, severally and not
jointly according to the number of Shares sold hereunder, agree to
indemnify and hold harmless each Underwriter, its directors, its officers
and each person, if any, who controls any Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), from and against any and all losses,
------------
claims, damages, liabilities and judgments (including, without limitation,
any reasonable legal or other expenses incurred in connection with
investigating or defending any matter, including any action, that could
give rise to any such losses, claims, damages, liabilities or judgments)
caused by any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement (or any amendment thereto),
the Prospectus (or any amendment or supplement thereto) or any preliminary
prospectus, 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 judgments are caused by any such untrue statement
or omission or alleged untrue statement or omission based upon information
furnished in writing to the Company by any Underwriter through you
expressly for use therein; provided, however, that the foregoing indemnity
agreement with respect to any preliminary prospectus shall not inure to the
benefit of any Underwriter who failed to deliver a Prospectus, as then
amended or supplemented, (so long as the Prospectus and any amendment or
supplement thereto was provided by the Company to the several Underwriters
in the requisite quantity and on a timely basis to permit proper delivery
on or prior to the Closing Date) to the person asserting any losses,
claims, damages, liabilities or judgments caused by any untrue statement or
alleged untrue statement of a material fact contained in such preliminary
prospectus, 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, if such material misstatement or
omission or alleged material misstatement or omission was cured in the
Prospectus, as so amended or supplemented, and such Prospectus was required
by law to be delivered at or prior to the written confirmation of sale to
such person. Notwithstanding the foregoing, the aggregate liability of any
Selling Stockholder pursuant
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<PAGE>
to this Section 9(a) shall be limited to an amount equal to the total net
proceeds (after deducting underwriting discounts and commissions and
expenses) received by such Selling Stockholder from the Underwriters for
the sale of the Shares sold by such Selling Stockholder hereunder. In
addition to the foregoing, in connection with the offer and sale of the
Reserved Shares, the Company agrees, promptly upon a request in writing, to
indemnify and hold harmless the Underwriters from and against any and all
losses, liabilities, claims, damages and expenses incurred by them as a
result of the failure of purchasers of the Reserved Shares (including
eligible directors, officers, employees and persons having business
relationships with the Company) to pay for and accept delivery of the
Reserved Shares which, by the end of the first business day following the
date of this Agreement, were subject to a properly confirmed application to
purchase.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement, each person, if any, who controls the Company
within the meaning of Section 15 of the Act or Section 20 of the Exchange
Act, each Selling Stockholder and each person, if any, who controls such
Selling Stockholder within the meaning of Section 15 of the Act or Section
20 of the Exchange Act to the same extent as the foregoing indemnity from
the Company and the Selling Stockholders to such Underwriter but only with
reference to information furnished in writing to the Company by such
Underwriter through you expressly for use in the Registration Statement (or
any amendment thereto), the Prospectus (or any amendment or supplement
thereto) or any preliminary prospectus.
(c) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to Section 9(a) or 9(b)
(the "indemnified party"), the indemnified party shall promptly notify the
-----------------
person against whom such indemnity may be sought (the "indemnifying party")
------------------
in writing and the indemnifying party shall assume the defense of such
action, including the employment of counsel reasonably satisfactory to the
indemnified party and the payment of all fees and expenses of such counsel,
as incurred (except that in the case of any action in respect of which
indemnity may be sought pursuant to both Sections 9(a) and 9(b), the
Underwriter shall not be required to assume the defense of such action
pursuant to this Section 9(c), but may employ separate counsel and
participate in the defense thereof, but the fees and expenses of such
counsel, except as provided below, shall be at the expense of such
Underwriter). Any indemnified party shall have the right to employ
separate counsel in any such action and participate in the defense thereof,
but the fees and expenses of such counsel shall be at the expense of the
indemnified party unless (i) the employment of such counsel shall have been
specifically authorized in writing by the indemnifying party, (ii) the
indemnifying party shall have failed to assume within a reasonable time the
defense of such action or employ counsel reasonably satisfactory to the
indemnified party or (iii) the named parties to any such action (including
any impleaded parties) include both the indemnified party and the
indemnifying party, and the indemnified party shall have been advised by
such counsel that there may be one or more legal defenses available to it
which are different from or additional to those available to the
indemnifying party (in which case the indemnifying party shall not have the
right to assume the defense of such action on behalf of the indemnified
party). In any such case, the indemnifying party shall not, in connection
with any one action or separate but substantially similar or related
actions arising out of the same general allegations or circumstances, be
liable for (i) the fees and expenses of more than one separate firm of
attorneys (in addition to any local counsel) for all Underwriters, their
officers and directors and all persons, if any, who control any Underwriter
within the meaning of either Section 15 of the Act or Section 20 of the
Exchange Act, (ii) the fees and expenses of more than one separate firm of
attorneys (in addition to any local counsel) for the Company, its
directors, its officers who sign the
20
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Registration Statement and all persons, if any, who control the Company
within the meaning of either such Section and (iii) the fees and expenses
of more than one separate firm of attorneys (in addition to any local
counsel) for all Selling Stockholders and all persons, if any, who control
any Selling Stockholder within the meaning of either such Section, and all
such fees and expenses shall be reimbursed as they are incurred. In the
case of any such separate firm for the Underwriters, their officers and
directors and such control persons of any Underwriters, such firm shall be
designated in writing by Donaldson, Lufkin & Jenrette Securities
Corporation. In the case of any such separate firm for the Company and such
directors, officers and control persons of the Company, such firm shall be
designated in writing by the Company. In the case of any such separate firm
for the Selling Stockholders and such control persons of any Selling
Stockholders, such firm shall be designated in writing by a majority in
interest of the Selling Stockholders. The indemnifying party shall
indemnify and hold harmless the indemnified party from and against any and
all losses, claims, damages, liabilities and judgments by reason of any
settlement of any action (i) effected with its written consent or (ii)
effected without its written consent if the settlement is entered into more
than twenty business days after the indemnifying party shall have received
a request from the indemnified party for reimbursement for the fees and
expenses of counsel (in any case where such fees and expenses are at the
expense of the indemnifying party) and, prior to the date of such
settlement, the indemnifying party shall have failed to comply with such
reimbursement request. No indemnifying party shall, without the prior
written consent of the indemnified party, effect any settlement or
compromise of, or consent to the entry of judgment with respect to, any
pending or threatened action in respect of which the indemnified party is
or could have been a party and indemnity or contribution may be or could
have been sought hereunder by the indemnified party, unless such
settlement, compromise or judgment (i) includes an unconditional release of
the indemnified party from all liability on claims that are or could have
been the subject matter of such action and (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act,
by or on behalf of the indemnified party.
(d) To the extent the indemnification provided for in this Section 9
is unavailable to an indemnified party or insufficient in respect of any
losses, claims, damages, liabilities or judgments referred to therein, then
each indemnifying party, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such indemnified party as
a result of such losses, claims, damages, liabilities and judgments (i) in
such proportion as is appropriate to reflect the relative benefits received
by the Sellers on the one hand and the Underwriters on the other hand from
the offering of the Shares or (ii) if the allocation provided by clause
9(d)(i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause
9(d)(i) above but also the relative fault of the Sellers on the one hand
and the Underwriters on the other hand in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
judgments, as well as any other relevant equitable considerations. The
relative benefits received by the Sellers on the one hand and the
Underwriters on the other hand shall be deemed to be in the same proportion
as the total net proceeds from the offering (after deducting underwriting
discounts and commissions, but before deducting expenses) received by the
Sellers, and the total underwriting discounts and commissions received by
the Underwriters, bear to the total price to the public of the Shares, in
each case as set forth in the table on the cover page of the Prospectus.
The relative fault of the Sellers on the one hand and the Underwriters on
the other hand shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to
information supplied by the Company or the Selling Stockholders on the one
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hand or the Underwriters on the other hand and the parties' relative
intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Sellers and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 9(d) were determined by
pro rata allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to in the immediately
preceding paragraph. The amount paid or payable by an indemnified party as
a result of the losses, claims, damages, liabilities or judgments referred
to in the immediately preceding paragraph shall be deemed to include,
subject to the limitations set forth above, any legal or other expenses
incurred by such indemnified party in connection with investigating or
defending any matter, including any action, that could have given rise to
such losses, claims, damages, liabilities or judgments. Notwithstanding
the provisions of this Section 9, (i) no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at
which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission and (ii) no
Selling Stockholder shall be required to contribute any amount in excess of
the amount equal to the total net proceeds (after deducting underwriting
discounts and commissions and expenses) received by such Selling
Stockholder from the Underwriters for the sale of the Shares sold by such
Selling Stockholder hereunder. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 9(d) are several in proportion to the respective
number of Shares purchased by each of the Underwriters hereunder and not
joint.
(e) The remedies provided for in this Section 9 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to
any indemnified party at law or in equity.
(f) Each Selling Stockholder hereby designates JFAX.COM, Inc., 10960
Wilshire Blvd., Fifth Floor, Los Angeles, California 90024, as its
authorized agent, upon which process may be served in any action which may
be instituted in any state or federal court in the State of New York by any
Underwriter, any director or officer of any Underwriter or any person
controlling any Underwriter asserting a claim for indemnification or
contribution under or pursuant to this Section 9, and each Selling
Stockholder will accept the jurisdiction of such court in such action, and
waives, to the fullest extent permitted by applicable law, any defense
based upon lack of personal jurisdiction or venue. A copy of any such
process shall be sent or given to such Selling Stockholder, at the address
for notices specified in Section 13 hereof.
SECTION 10. Conditions of Underwriters Obligations. The several
obligations of the Underwriters to purchase the Firm Shares under this Agreement
are subject to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company contained in
this Agreement shall be true and correct on the date hereof and on the
Closing Date with the same force and effect as if made on and as of the
Closing Date.
(b) (i) If the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, such Rule 462(b)
Registration Statement shall have become
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effective by 10:00 p.m., New York City time, on the date of this Agreement;
and (ii) no stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall
have been commenced or shall be pending before or threatened by the
Commission.
(c) You shall have received on the Closing Date a certificate dated
the Closing Date, signed by Richard S. Ressler and Nehemia Zucker in their
capacities as the Chief Executive Officer and the Chief Financial Officer,
respectively, of the Company, confirming the matters set forth in Sections
6(t), 10(a) and 10(b) and that the Company has complied with all of the
agreements and satisfied all of the conditions herein contained and
required to be complied with or satisfied by the Company on or prior to the
Closing Date.
(d) Since the respective dates as of which information is given in
the Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement,
except for any amendments or supplements of which you had notice and to
which you do not object prior to their filing with the Commission),
(i) there shall not have occurred any change or any development
involving a prospective change in the condition, financial or
otherwise, or the earnings, business, management or operations of the
Company and its subsidiary, taken as a whole,
(ii) there shall not have been any change or any development
involving a prospective change in the capital stock or in the long-
term debt of the Company or its subsidiary, and
(iii) neither the Company nor its subsidiary shall have incurred
any liability or obligation, direct or contingent, the effect of
which, in any such case described in clause 10(d)(i), 10(d)(ii) or
10(d)(iii), in your judgment, is material and adverse and, in your
judgment, makes it impracticable to market the Shares on the terms and
in the manner contemplated in the Prospectus.
(e) All the representations and warranties of each Selling
Stockholder contained in this Agreement shall be true and correct on the
date hereof and on the Closing Date with the same force and effect as if
made on and as of the Closing Date and you shall have received on the
Closing Date a certificate dated the Closing Date from or on behalf of each
Selling Stockholder to such effect and to the effect that such Selling
Stockholder has complied with all of the agreements and satisfied all of
the conditions herein contained and required to be complied with or
satisfied by such Selling Stockholder on or prior to the Closing Date.
(f) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the Closing
Date, of Sullivan & Cromwell, counsel for the Company and the Selling
Stockholders, to the effect that:
(i) the Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware
and has the corporate power and authority to conduct its business as
described in the Prospectus;
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(ii) the Company has been duly qualified as a foreign
corporation for the transaction of business in, and is in good
standing under the laws of, the States of California and New York;
(iii) all the outstanding shares of capital stock of the Company
(including the Shares to be sold by the Selling Stockholders) have
been duly authorized and validly issued and are fully paid and non-
assessable, and none of the outstanding shares of capital stock of the
Company was issued in violation of the preemptive rights, rights of
first refusal or other similar rights arising under the Delaware
General Corporation Law, the certificate of incorporation or bylaws of
the Company.
(iv) the Shares to be issued and sold by the Company under this
Agreement have been duly authorized and, when issued and delivered to
the Underwriters against payment therefor as provided by this
Agreement, will be validly issued and fully paid and non-assessable;
(v) this Agreement has been duly authorized, executed and
delivered by the Company and by or on behalf of each Selling
Stockholder;
(vi) the authorized capital stock of the Company consists of
200,000,000 shares of Common Stock and 1,000,000 shares of preferred
stock, and such stock conforms in all material respects to the
description thereof contained in the Prospectus;
(vii) the Registration Statement has become effective under the
Act, no stop order suspending its effectiveness has been issued and no
proceedings for that purpose are, to the best of such counsel's
knowledge after due inquiry, pending before the Commission;
(viii) the issuance and sale of the Shares to be sold by the
Company and the execution and delivery by the Company of this
Agreement do not (i) violate the Company's certificate of
incorporation or by-laws, (ii) result in a default under or breach of
any indenture, loan agreement, mortgage, lease or other agreement or
instrument filed as an exhibit to the Registration Statement or any
of the agreements with Ameritech, Critical Path, CompuServe,
CommTouch, Prodigy, Telecom New Zealand or Kuni Research that are
described in the Prospectus, (iii) violate any preemptive rights,
rights of first refusal or similar rights contained in any agreement
or instrument referred to in the preceding clause (ii), (iv) violate
any judgments, orders or decrees, if any, of any governmental
authorities specifically identified to such counsel in an officer's
certificate from the Company or (v) violate any federal law of the
United States or law of the State of New York or the State of
California applicable to the Company or the Delaware General
Corporation Law; provided, however, that counsel need express no
opinion with respect to federal or state securities laws or other
antifraud laws;
(ix) all regulatory consents, authorizations, approvals and
filings required to be obtained or made by the Company under the
Federal laws of the United States and the General Corporation Law of
the State of Delaware for the issuance, sale and delivery of the
Shares to be issued and sold by the Company to the Underwriters under
this Agreement and for the sale of the Shares to be sold by the
Selling Stockholders to the Underwriters under this Agreement have
been obtained or made;
24
<PAGE>
(x) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the proceeds
thereof as described in the Prospectus, will not be, an "investment
company" as such term is defined in the Investment Company Act of
1940, as amended, or an "investment adviser" as such term is defined
in the Investment Company Act of 1940, as amended;
(xi) to the best of such counsel's knowledge after due inquiry,
each Selling Stockholder has the applicable power and authority to
enter into this Agreement and the Custody Agreement and the Power of
Attorney of such Selling Stockholder and to sell, assign, transfer and
deliver the Shares to be sold by such Selling Stockholder in the
manner provided herein and therein;
(xii) the Custody Agreement of each Selling Stockholder has been
duly authorized, executed and delivered by such Selling Stockholder
and constitutes a valid and binding agreement of such Selling
Stockholder, enforceable against such Selling Stockholder in
accordance with its 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;
(xiii) the Power of Attorney of each Selling Stockholder has
been duly authorized, executed and delivered by such Selling
Stockholder and constitutes a valid and binding instrument of such
Selling Stockholder, enforceable against such Selling Stockholder in
accordance with its term, 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; and
(xiv) assuming that the Underwriters do not have notice of any
"adverse claim" (within the meaning given to such term in Article 8 of
the Uniform Commercial Code of the State of New York), upon physical
delivery in the State of New York of a certificate or certificates
representing the Shares to be sold by each Selling Stockholder
pursuant to this Agreement, each of the Underwriters will be a
"protected purchaser" (within the meaning given to such term in
Article 8 of the Uniform Commercial Code of the State of New York)
with respect to such Shares and will acquire such Shares free of any
"adverse claim" (within the meaning given to such term in Article 8 of
the Uniform Commercial Code of the State of New York).
The opinion of Sullivan & Cromwell described in this Section 10(f)
shall be rendered to you at the request of the Company and the Selling
Stockholders and shall so state therein. Such opinion may be limited to
the laws of the States of New York and California, the Federal law of the
United States of America and the General Corporation Law of the State of
Delaware. Such counsel shall also deliver a letter to the Underwriters to
the effect that the Registration Statement, as of the effective date of the
Registration Statement, and the Prospectus, as of the date of the
Prospectus, appeared on their face to be appropriately responsive in all
material respects to the requirements of the Securities Act and the
applicable rules and regulations of the Commission thereunder; nothing that
came to such counsel's attention in the course of their review has caused
such counsel to believe that the Registration Statement, as of its
effective date, contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading or that the
Prospectus, as of the date of the Prospectus, or as of the
25
<PAGE>
date of such opinion, contained any untrue statement of a material fact or
omitted to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. Such counsel may state that they do not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus, except for those
made under the captions caption "Description of Capital Stock" and
"Underwriting" in the Prospectus. Such counsel shall further state that (i)
they do not know of any litigation or any governmental proceeding
instituted or threatened against the Company or its subsidiary that would
be required to be disclosed in the Prospectus and is not so disclosed and
that they do not know of any documents that are required to be filed as
exhibits to the Registration Statement and are not so filed or of any
documents that are required to be summarized in the Prospectus and are not
so summarized and (ii) they have advised the Company with respect to the
disclosure set forth in the Prospectus under the caption "Certain United
States Federal Tax Consequences to Non-U.S. Holders of Common Stock," to
the extent that it relates to matters of United States Federal income tax
law, and in their opinion such disclosure is accurate in all material
respects. Such counsel may also state that they do not express any opinion
or belief as to the financial statements or other financial data contained
in the Registration Statement or the Prospectus.
(g) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the
Underwriters, as to such matters as you may reasonably request.
(h) You shall have received, on each of the date hereof and the
Closing Date, a letter dated the date hereof or the Closing Date, as the
case may be, in form and substance satisfactory to you, from KPMG LLP,
independent public accountants, containing the information and statements
of the type ordinarily included in accountants' "comfort letters" to
Underwriters with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectus.
(i) The Company shall have delivered to you the agreements specified
in Section 2 hereof which agreements shall be in full force and effect on
the Closing Date.
(j) The Shares shall have been duly listed for quotation on the Nasdaq
National Market.
(k) The Company and the Selling Stockholders shall not have failed on
or prior to the Closing Date to perform or comply with any of the
agreements herein contained and required to be performed or complied with
by the Company or the Selling Stockholders, as the case may be, on or prior
to the Closing Date.
(l) You shall have received on the Closing Date a certificate of each
Selling Stockholder who is not a U.S. Person (as defined under applicable
U.S. federal tax legislation) to the effect that such Selling Stockholder
is not a U.S. Person, which certificate may be in the form of a properly
completed and executed United States Treasury Department Form W-8 (or other
applicable form or statement specified by Treasury Department regulations
in lieu thereof).
(m) You shall have received on the Closing Date such additional
documents and certificates as you or your counsel may reasonably request.
26
<PAGE>
The several obligations of the Underwriters to purchase any Additional
Shares under this Agreement are subject to the satisfaction on the applicable
Option Closing Date of each of the conditions set forth above in this Section
10; provided, however, that for the purpose of determining whether each of such
conditions has been satisfied, all references to the "Closing Date" set forth
above in this Section 10 shall be deemed to be references to the applicable
Option Closing Date.
SECTION 11. Effectiveness of Agreement and Termination.
(a) This Agreement shall become effective upon the execution and
delivery of this Agreement by the parties hereto.
(b) This Agreement may be terminated at any time on or prior to the
Closing Date by you by written notice to the Sellers if any of the
following has occurred:
(i) any outbreak or escalation of hostilities or other national
or international calamity or crisis or change in economic conditions
or in the financial markets of the United States of America or
elsewhere that, in your judgment, is material and adverse and, in your
judgment, makes it impracticable to market the Shares on the terms and
in the manner contemplated in the Prospectus,
(ii) the suspension or material limitation of trading in
securities or other instruments on the New York Stock Exchange, the
American Stock Exchange, the Chicago Board of Options Exchange, the
Chicago Mercantile Exchange, the Chicago Board of Trade or the Nasdaq
National Market or limitation on prices for securities or other
instruments on any such exchange or the Nasdaq National Market,
(iii) the suspension of trading of any securities of the Company
on any exchange or in the over-the-counter market,
(iv) the enactment, publication, decree or other promulgation of
any federal or state statute, regulation, rule or order of any court
or other governmental authority which in your opinion materially and
adversely affects, or will materially and adversely affect, the
business, prospects, financial condition or results of operations of
the Company and its subsidiary, taken as a whole,
(v) the declaration of a banking moratorium by either federal
or New York State authorities or
(vi) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs
which in your opinion has a material adverse effect on the financial
markets in the United States of America.
(c) If on the Closing Date or on an Option Closing Date, as the case
may be, any one or more of the Underwriters shall fail or refuse to
purchase the Firm Shares or Additional Shares, as the case may be, which it
has or they have agreed to purchase hereunder on such date and the
aggregate number of Firm Shares or Additional Shares, as the case may be,
which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase is not more than one-tenth of the total number of Firm
Shares or Additional Shares, as the case may be, to be purchased on such
27
<PAGE>
date by all Underwriters, each non-defaulting Underwriter shall be
obligated severally, in the proportion which the number of Firm Shares set
forth opposite its name in Schedule I bears to the total number of Firm
Shares which all the non-defaulting Underwriters have agreed to purchase,
or in such other proportion as you may specify, to purchase the Firm Shares
or Additional Shares, as the case may be, which such defaulting Underwriter
or Underwriters agreed but failed or refused to purchase on such date;
provided that in no event shall the number of Firm Shares or Additional
Shares, as the case may be, which any Underwriter has agreed to purchase
pursuant to Section 2 hereof be increased pursuant to this Section 11 by an
amount in excess of one-ninth of such number of Firm Shares or Additional
Shares, as the case may be, without the written consent of such
Underwriter. If on the Closing Date any Underwriter or Underwriters shall
fail or refuse to purchase Firm Shares and the aggregate number of Firm
Shares with respect to which such default occurs is more than one-tenth of
the aggregate number of Firm Shares to be purchased by all Underwriters and
arrangements satisfactory to you, the Company and the Selling Stockholders
for purchase of such Firm Shares are not made within 48 hours after such
default, this Agreement will terminate without liability on the part of any
non-defaulting Underwriter, the Company or the Selling Stockholders. In any
such case which does not result in termination of this Agreement, either
you or the Sellers shall have the right to postpone the Closing Date, but
in no event for longer than seven days, in order that the required changes,
if any, in the Registration Statement and the Prospectus or any other
documents or arrangements may be effected. If, on an Option Closing Date,
any Underwriter or Underwriters shall fail or refuse to purchase Additional
Shares and the aggregate number of Additional Shares with respect to which
such default occurs is more than one-tenth of the aggregate number of
Additional Shares to be purchased on such date, the non-defaulting
Underwriters shall have the option to (i) terminate their obligation
hereunder to purchase such Additional Shares or (ii) purchase not less than
the number of Additional Shares that such non-defaulting Underwriters would
have been obligated to purchase on such date in the absence of such
default. Any action taken under this paragraph shall not relieve any
defaulting Underwriter from liability in respect of any default of any such
Underwriter under this Agreement.
SECTION 12. Agreements of the Selling Stockholders. Each Selling
Stockholder agrees with you and the Company:
(a) To pay or to cause to be paid all transfer taxes payable in
connection with the transfer of the Shares to be sold by such Selling
Stockholder to the Underwriters.
(b) To do and perform all things to be done and performed by such
Selling Stockholder under this Agreement prior to the Closing Date and to
satisfy all conditions precedent to the delivery of the Shares to be sold
by such Selling Stockholder pursuant to this Agreement.
SECTION 13. Miscellaneous.
(a) Notices given pursuant to any provision of this Agreement shall
be addressed as follows:
(i) if to the Company, to JFAX.COM, Inc., 10960 Wilshire
Boulevard, Suite 500, Los Angeles, California 90024, Facsimile No.:
(310) 966-1801, Attention: General Counsel, with a copy to Sullivan &
Cromwell, 1888 Century Park East, Los Angeles, California 90067,
Facsimile No.: (310) 712-8800, Attention: Frank H. Golay, Jr.,
28
<PAGE>
(ii) if to the Selling Stockholders, to Richard S. Ressler and
Nicholas V. Morosoff, the Attorneys-in-Fact, c/o the Company at is
address specified in clause (i) above, and
(iii) if to any Underwriter or to you, to you c/o Donaldson,
Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York,
New York 10172; Facsimile No. (212) 892-7272, Attention: Syndicate
Department, with a copy to Skadden, Arps, Slate, Meagher & Flom LLP,
300 South Grand Avenue, Los Angeles, California 90071, Facsimile No.
(213) 687-5600, Attention: Nick P. Saggese,
or in any case to such other address as the person to be notified may have
requested in writing.
(b) The respective indemnities, contribution agreements,
representations, warranties and other statements of the Company, the
Selling Stockholders and the several Underwriters set forth in or made
pursuant to this Agreement shall remain operative and in full force and
effect, and will survive delivery of and payment for the Shares, regardless
of (i) any investigation, or statement as to the results thereof, made by
or on behalf of any Underwriter, the officers or directors of any
Underwriter, any person controlling any Underwriter, any QIU Indemnified
Party, the Company, the officers or directors of the Company, any person
controlling the Company, any Selling Stockholder or any person controlling
such Selling Stockholder, (ii) acceptance of the Shares and payment for
them hereunder and (iii) termination of this Agreement.
(c) If for any reason the Shares are not delivered by or on behalf of
any Seller as provided herein (other than as a result of any termination of
this Agreement pursuant to Section 11), the Sellers agree, jointly and
severally, to reimburse the several Underwriters for all out-of-pocket
expenses (including the fees, charges and disbursements of counsel)
incurred by them. Notwithstanding any termination of this Agreement, the
Company shall be liable for all expenses which it has agreed to pay
pursuant to Section 5(i) hereof. The Sellers also agree, jointly and
severally, to reimburse the several Underwriters, their directors and
officers, any persons controlling any of the Underwriters and the QIU
Indemnified Parties for any and all fees and expenses (including, without
limitation, the reasonable fees, charges and disbursements of counsel)
incurred by them in connection with enforcing their rights hereunder
(including, without limitation, pursuant to Sections 8 and 9 hereof).
(d) Except as otherwise provided, this Agreement has been and is made
solely for the benefit of and shall be binding upon the Company, the
Selling Stockholders, the Underwriters, the Underwriters' directors and
officers, any controlling persons referred to herein, the QIU Indemnified
Parties, the Company's directors and the Company's officers who sign the
Registration Statement and their respective successors and assigns, all as
and to the extent provided in this Agreement, and no other person shall
acquire or have any right under or by virtue of this Agreement. The term
"successors and assigns" shall not include a purchaser of any of the Shares
from any of the several Underwriters merely because of such purchase.
(e) THIS AGREEMENT SHALL BE CONSTRUED, INTERPRETED AND THE RIGHTS OF
THE PARTIES DETERMINED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW EXCEPT SECTION 5-
1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW. THE COMPANY HEREBY
IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY NEW
29
<PAGE>
YORK STATE COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW
YORK OR ANY FEDERAL COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY
OF NEW YORK IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT, AND IRREVOCABLY ACCEPTS FOR ITSELF AND IN
RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, JURISDICTION OF THE
AFORESAID COURTS. THE COMPANY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT
MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, TRIAL BY JURY AND ANY OBJECTION
THAT IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH
SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY
SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT
IN AN INCONVENIENT FORUM. THE COMPANY IRREVOCABLY CONSENTS, TO THE FULLEST
EXTENT IT MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, 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 COMPANY AT ITS ADDRESS SET FORTH HEREIN, SUCH
SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER SUCH MAILING. NOTHING HEREIN
SHALL AFFECT THE RIGHT OF ANY OF THE UNDERWRITERS 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.
(f) The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
(g) If any term, provision, covenant or restriction of this Agreement
is held by a court of competent jurisdiction to be invalid, illegal, void
or unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth herein shall remain in full force and effect and
shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their best efforts to find and employ an alternative means
to achieve the same or substantially the same result as that contemplated
by such term, provision, covenant or restriction. It is hereby stipulated
and declared to be the intention of the parties that they would have
executed the remaining terms, provisions, covenants and restrictions
without including any of such that may be hereafter declared invalid,
illegal, void or unenforceable.
(h) This Agreement may be signed in various counterparts which
together shall constitute one and the same instrument.
(Signatures Follow)
30
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement among
the Company, the Selling Stockholders and the several Underwriters.
Very truly yours,
JFAX.COM, INC.
By:______________________________________
Name:____________________________________
Title:___________________________________
THE SELLING STOCKHOLDERS NAMED IN
SCHEDULE II HERETO, ACTING SEVERALLY
By:______________________________________
Name:____________________________________
Attorney-in-fact
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BANCBOSTON ROBERTSON STEPHENS INC.
CIBC OPPENHEIMER CORP.
Acting severally on behalf of themselves
and the several Underwriters named in
Schedule I hereto
By: DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:______________________________________
Name:____________________________________
Title:___________________________________
31
<PAGE>
SCHEDULE I
----------
<TABLE>
<CAPTION>
Number of Firm Shares
Underwriters to be Purchased
- ------------ ---------------------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.....
BancBoston Robertson Stephens Inc.......................
CIBC Oppenheimer Corp...................................
[Names of other Underwriters]...........................
-----------
Total................................................
===========
</TABLE>
1
<PAGE>
SCHEDULE II
-----------
Selling Stockholders
--------------------
<TABLE>
<CAPTION>
Number of Option
Selling Stockholders Shares Being Sold
- -------------------- -----------------
<S> <C>
Steve M. Aaronson............................. [to come]
William D. Brown.............................. [to come]
Arlene Brown.................................. [to come]
The Regent Trust Company Ltd. R165 Account.... [to come]
Geoffrey S. Goodfellow........................ [to come]
Greg James.................................... [to come]
Boardrush Media LLC........................... [to come]
Toxford Corporation S.A....................... [to come]
Total...................................... [to come]
</TABLE>
2
<PAGE>
Annex I
-------
Stockholders Subject to Lock-Ups
--------------------------------
John Bell
Mark Cohen
Tiffany Devitt
Aron Gibson
Angela Hakimipour
Gary Hickox
Mark Jensen
Gregg Kalvin
Amit Kumar
Yves LaPage
Enrico Lelina
Jinghong Li
Mark Lopez
Zohar Loshitzer
Nicholas Morosoff
Sonia Nanda
Anand Narasimhan
Aaron Price
James Reed
John Rieley
Michael Schulhof
Jacob Shemesh
Quang Than
Raymond Thu
Nehemia Zucker
Boardrush Media LLC
Delaware State Employees Retirement Fund
GMT Partners
ICI American Holdings Inc. Defined Benefit Plan
JW McConnell Family Foundation
Orchard/JFAX Investors LLC
Zeneca Holdings Inc. Defined Benefit Plan
A-1
<PAGE>
EXHIBIT 4.1
================================================================================
COMMON STOCK COMMON STOCK
------------ ------------
NUMBER [LOGO] JFAX.COM(R) SHARES
J(Certificate number)
------------ ------------
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
PAR VALUE $0.01 PAR VALUE $0.01
SEE REVERSE FOR CERTAIN DEFINITIONS CUSIP 477366 10 8
This certifies that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
_______________________ ________________________
_____________________________ JFAX.COM, INC. ______________________________
_______________________ ________________________
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed.
This Certificate is not valid unless duly countersigned by the Transfer
Agent and registered by the Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized Officers.
Dated:
/s/ Gary H. Hickox [SEAL APPEARS HERE] /s/ Nicholas V. Morosoff
PRESIDENT SECRETARY
Countersigned and Registered:
AMERICAN SECURITIES TRANSFER & TRUST, INC.
P.O. BOX 1596, DENVER CO 80201
Transfer Agent and Registrar
By:
AUTHORIZED SIGNATURE
================================================================================
<PAGE>
JFAX.COM, INC.
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO
REQUESTS A STATEMENT OF THE POWERS, DESIGNATIONS, PREFERENCES, AND RELATIVE,
PARTICIPATING, OPTIONAL, OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR
SERIES THEREOF AND THE QUALIFICATIONS, LIMITATIONS, OR RESTRICTIONS OF SUCH
PREFERENCES AND/OR RIGHTS. SUCH REQUEST MAY BE DIRECTED TO THE SECRETARY OF THE
CORPORATION, 10960 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA 90024
The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - ------------Custodian-------------
(cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform Gifts to Minors Act
JT TEN - as joint tenants with right ___________________________________
of survivorship and not as (State)
tenants in common
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
________________________________________________________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Stock represented by the within Certificate, and do hereby irrevocably
constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said Stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated:________________________
___________________________________
Notice: THE SIGNATURE TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER
SIGNATURE(S) GUARANTEED
BY________________________________
THE SIGNATURE(S) MUST BE GUARANTEED
BY AN ELIGIBLE guarantor institution,
(Banks, Stockbrokers, Savings and Loans
Associations and Credit Unions with
membership in an approved signature
guarantee Medallion Program), PURSUANT
TO S.E.C. RULE 17Ad-15.
<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
June 11, 1999 /s/ KPMG LLP
<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 13,537,647
<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 14,562,375
<OTHER-EXPENSES> 0 5,255,669
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 1,353,751
<INCOME-PRETAX> (4,781,781) (17,231,533)
<INCOME-TAX> 1,640 1,500
<INCOME-CONTINUING> (4,783,421) (17,233,033)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,783,421) (17,233,033)
<EPS-BASIC> (.30) (.80)
<EPS-DILUTED> (.30) (.80)
</TABLE>
<PAGE>
EXHIBIT 99.1
[Consent of International Data Corporation
for use of the quote on the inside cover page]
June 10, 1999
JFAX.COM, Inc.
10960 Wilshire Boulevard
Suite 500
Los Angeles, CA 90024
Re: Registration Statement on Form S-1,
File No. 333-76477
Ladies and Gentlemen:
We refer to the quotation attributed to International Data Corporation, or
IDC, on the inside front cover page of the prospectus included in the above
registration statement. This quotation reads: "[Unified Messaging is a] single
'in box' for voice, fax, and email accessible by both telephone and PC." We
hereby consent to the use of such quotation in your prospectus and to the
reference to us on such page. We further consent to the filing of this letter
as an exhibit to your registration statement. 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 Securities Act of 1933, as amended.
Very truly yours,
International Data Corporation
By: /s/ Mark Winther
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