<PAGE>
As filed with the Securities and Exchange Commission on April 16, 1999
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------------
JFAX.COM, INC.
(Exact name of registrant as specified in its charter)
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<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)
-------------------
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Copies to:
<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
================================================================================
Proposed Maximum
Title of Each Class Aggregate Amount of
of Securities to be Registered Offering Price(1) Registration Fee
- -------------------------------------------------------------------------------
Common Stock, $.01 par value.... $90,000,000 $25,020
================================================================================
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933.
-----------------------
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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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
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 - APRIL 16, 1999
================================================================================
Prospectus
, 1999
JFAX.COM, INC.
Shares of Common Stock
------
- -------------------------------------------------------------------------------
Our Company The Offering
. We are an Internet-based messaging . JFAX.COM is offering ______ of the
and communications services shares and existing stockholders
provider to individuals and are offering ______ of the shares.
businesses.
. The underwriters have an option to
. JFAX.COM, INC. purchase an additional ______
10960 Wilshire Boulevard, shares from JFAX.COM and selling
Suite 500 stockholders to cover over-
Los Angeles, California 90024 allotments.
(310) 966-1800
www.jfax.com . This is our initial public offering
and no public market currently
Proposed Symbol/Proposed Market: exists for our shares.
. "JFAX"/Nasdaq National Market . We plan to use the 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 not
receive any proceeds from the
shares sold by the selling
stockholders.
. Closing , 1999
-----------------------------------------------------------------------------
Per Share Total
-----------------------------------------------------------------------------
Public offering price (Estimated): $ $
Underwriting fees:
Proceeds to JFAX.COM:
Proceeds to selling stockholders:
--------------------------------
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
The undersigned is facilitating Internet distribution.
DLJdirectInc.
<PAGE>
[ARTWORK]
2
<PAGE>
Table of Contents
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Page
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Prospectus Summary.......................................... 4
Risk Factors................................................ 8
Use of Proceeds............................................. 18
Dividend Policy............................................. 18
Capitalization.............................................. 19
Dilution.................................................... 20
Selected Consolidated Financial Data........................ 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations............................................ 22
Business.................................................... 29
Management.................................................. 41
Security Ownership of Management
and Principal Stockholders............................... 47
Certain Transactions........................................ 49
Description of Capital Stock................................ 52
Shares Eligible for Future Sale............................. 56
Underwriting................................................ 58
Validity of Securities...................................... 60
Experts..................................................... 60
Available Information....................................... 61
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 the context otherwise requires, in this prospectus
"JFAX.COM," "we," "us" and "our" refer to JFAX.COM, Inc. Unless we indicate
otherwise, the information in this prospectus assumes that the underwriter will
not exercise their over-allotment option.
JFAX.COM
Our Company
We are an Internet-based messaging and communications services provider to
individuals and businesses throughout the world. Our services enable the user's
e-mail box to function as a single repository for all e-mail, fax and voice mail
and permit convenient message retrieval through e-mail or by phone. Customers
can sign-up for all of our services through our web site and can receive a
JFAX.COM phone number in minutes.
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 providing
comprehensive inbound and outbound faxing capability.
. E-mail by Phone: access and management of e-mail messages through a
touch tone phone, including the ability to listen to e-mai messages
with a text-to-speech engine.
. 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 message retrieval through e-mail or by phone.
In addition to our subscription services, we provide a variety of services,
including outbound fax, broadcast fax, outbound voice and broadcast voice, for
which we charge based on usage. To further enhance the value of our services to
our customers, we are developing additional Internet-based messaging and
communications services. See "Business."
We believe we are the world's largest provider of Internet-based unified
messaging services with over 27,000 paid subscriptions as of December 31, 1998.
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, Rome, Frankfurt, Zurich, Sydney and Tokyo.
Our Opportunity
4
<PAGE>
The market for our services represents a large and growing opportunity.
We consider every active e-mail, voice mail and fax user to be a potential
customer for our Internet-based messaging and communications services.
Electronic Mail & Messaging Systems estimates that there were approximately 325
million e-mail accounts worldwide in operation at the end of 1998. In addition,
International Data Corporation projects that in the United States alone there
will be over 12.9 million unified messaging mailboxes in operation by 2002, each
generating $20 in unified messaging revenue per month.
Our Strategic Alliances
We have grown our subscriber base directly by signing up members on our
web site, as well as indirectly through strategic alliances with key Internet
and telecommunications companies, including:
. Internet portals, such as Yahoo!,
. Internet/online service providers, such as America Online,
CompuServe and Prodigy,
. outsourced e-mail providers, such as Critical Path, mail.com and
CommTouch, and
. telecommunications companies, such as Ameritech.
Internationally, we have established strategic alliances with companies
such as:
. ACC Telecom in Canada,
. ESAT in Ireland,
. Kuni Research International in Japan, and
. Telecom New Zealand Limited in New Zealand.
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, 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
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THE OFFERING
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Common stock offered
By JFAX.COM..................... shares
By selling stockholders......... shares
Common stock to be outstanding after
the offering........................ 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 March 31, 1999 and exclude:
. 3,500,000 shares of common stock reserved for issuance under our stock
option plan of which 1,255,055 shares are subject to outstanding
options, and
. 3,610,333 shares of common stock issuable upon exercise of outstanding
warrants.
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
(Dollars 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 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 _______ shares of common stock by JFAX.COM in the offering,
assuming an initial public offering price of $______ per share, after deducting
estimated underwriting discounts and commissions and estimated offering
expenses.
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1996 1997 1998
<S> <C> <C> <C>
Statement of Operations Data:
Revenue............................................. $ 105 $ 685 $ 3,520
Gross profit (loss)................................. (45) (173) 122
Operating loss...................................... (768) (4,877) (10,975)
Net loss attributable to common shares.............. (769) (4,663) (12,404)
Loss per share:
Basic and diluted net loss per common share........ $(0.15) $(0.37) $(0.73)
Common shares used in determining net loss
per share (000s).................................. 5,125 12,591 16,954
Other Data (at year end):
Paid subscriptions.................................. 1,268 7,120 27,036
Available area codes................................ 15 45 68
</TABLE>
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<CAPTION>
As of December 31, 1998
------------------------
As
Actual Adjusted
------ --------
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................... $ 7,279 $
Working capital............................. 6,735
Total assets................................ 10,513
Long-term debt.............................. 6,137
Redeemable common and preferred stock*...... 9,003
Stockholders' equity (deficiency)........... (7,747)
</TABLE>
_________________
* 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. The risks described below are not the only ones
that we face. Additional risks that generally apply to publicly traded
companies, that are not yet identified or that we currently think are
immaterial, may also materially adversely affect us.
We Cannot Predict Our Success Because We Have a Limited Operating History
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
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 of $11.9 million and
negative cash flow from operating and investing activities of $10.6 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.
In addition, 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 Cannot Predict Our Success Because Our Business Model is Unproven and Our
Market is Developing
Our business strategy is unproven. While a number of our services have
been offered to the public since June 1996, we believe it is too early to
reliably gauge market penetration rates based on these initial offerings. With
respect to sales of our services, we intend to target broad market segments with
diverse messaging requirements. We will employ a variety of direct and indirect
distribution channels to market and sell our services. To date, we have not
established a definite demand or a reliable cost of capture 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 of capture is higher, our
business, prospects, financial condition and results of operations would be
materially and adversely affected.
8
<PAGE>
The Pricing for Our Services Is Uncertain
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. 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.
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.
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 up-sell additional
usage-based services to both free and paid customers of our subscription
services,
. the amount and timing of expenditures to enhance sales and marketing and
to expand our infrastructure, or other costs, as we expand our network,
. the announcement or introduction of new or enhanced services by our
competitors,
. technical difficulties or network downtime, 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.
We May Be Unable to Manage Growth Effectively
If we are successful in implementing our business plan, our operations will
expand rapidly. This rapid expansion could place a significant strain on our
management, financial and other resources. Our ability to manage future growth,
if it occurs, will depend upon the capacity, reliability and security of our
network infrastructure. 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. Any failure
9
<PAGE>
by us to expand our network infrastructure on a timely basis, or to adapt it to
changing customer requirements or evolving industry standards, could have a
material adverse effect on our business, prospects, financial condition and
results of operations.
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 such
expansion will be successfully completed. Our inability to promptly address and
respond to these circumstances could have a material adverse effect on our
business, prospects, financial condition and results of operations.
We Depend on Our Ability to Obtain Telephone Numbers
Our future success will depend upon our ability to procure large quantities
of telephone numbers in the United States and foreign countries, including
telephone numbers in area codes that our customers demand. Our ability to
procure telephone numbers depends on applicable regulations, the practices of
telecommunications carriers that provide telephone numbers and the level of
demand for new telephone numbers. Failure to obtain these numbers in a timely
and cost-effective manner may prevent us from entering some foreign markets or
hamper our growth in domestic markets, and may have a material adverse effect on
our business, prospects, financial condition and results of operations.
We Depend on the Internet as a Message Transmission Medium
Our future success will depend upon our ability to route our customers'
traffic through the Internet and through dedicated and/or partially dedicated
data network bandwidth. Our success is largely dependent upon the viability of
the Internet and other bandwidth 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 network bandwidth from our nodes by
dedicated and/or shared connections to third party service providers. In many
cases, we pay fixed monthly fees for such Internet and other bandwidth 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.
We Depend on the Continued Growth in the Use of the Internet
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.
10
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We Cannot Be Assured that the Market Will Switch to Our Services
Our ability to route existing customers' traffic through the Internet and
other data network bandwidth and to sell our services to new customers may be
inhibited by, among other factors, the reluctance of some customers to switch
from real-time fax delivery to "virtual real-time" delivery and by widespread
concerns over the adequacy of security in the exchange of information over the
Internet and other data network bandwidth. If our existing and potential
customers do not accept "virtual real-time" delivery through the Internet and
other data network bandwidth as a means of sending and receiving documents via
fax, our business, prospects, financial condition and results of operations
would be materially and adversely affected.
In addition, we face similar risks regarding the market acceptance of the
delivery of customers' voice mail messages through the Internet and other data
network bandwidth. As a result, our business, prospects, financial condition
and results of operations may be materially and adversely affected.
The Market In Which We Operate is Highly Competitive, and We May Face Increased
Competition From New Entrants and Established Industry Competitors With
Significantly Greater Financial Resources
Competition in the computer telephony segment of 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.
Currently, we are unaware of any competitors offering the full range of
unified messaging services that we provide. However, with respect to each of
the services that we provide, 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. 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.
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.
11
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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. Most of our current computer hardware and equipment, including our
processing equipment, is located at two redundantly configured sites. 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, businesses and financial
institutions utilizing our services, which may result in significant liability
to us and also may deter current and potential customers from using our
services. Any damage, failure or security breach that causes interruptions or
data loss in our operations or in the computer systems of our customers could
have a material adverse effect on our business, prospects, financial condition
and results of operations.
Our Software May Have Defects and We May Encounter Development Delays
Software-based services and equipment, such as our services, may contain
undetected errors or failures when introduced or when new versions are released.
There can be no assurance that, despite testing by us and by current and
potential customers, errors will not be found in our software after commercial
release, or that we will not experience development delays, resulting in delays
in market acceptance, any of which could have a material adverse effect on our
business, prospects, financial condition and results of operations.
We Depend on a Limited Number of Third Parties to Market Our Services
Currently, we rely on a limited number of third parties, including e-mail
providers, Internet service providers, online service providers,
telecommunications companies, systems integrators and value-added resellers as a
means of marketing our services. In the event of any prolonged technical
problems or failures experienced by these third parties or the termination of
these marketing agreements, our marketing capabilities would be significantly
hindered. As a result, we could experience periods of time in which we had
little to no marketing activity. Any such occurrence could have a detrimental
effect on our business, prospects, financial condition or results of operations.
Many of these relationships are terminable at will or upon short notice.
Furthermore, none of our relationships with these third parties includes long-
term contractual commitments to continue the relationship, and most of these
relationships are in the early stages of development. 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. 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, we have established and intend to continue to build an
international customer base by forming strategic sales and marketing alliances.
There can be no assurance that we will be able to
12
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form or maintain these strategic alliances. Our success in developing an
international customer base depends not only on the formation of such alliances
but also on the success of these companies and their ability to successfully
market our services. The failure to form and maintain these strategic alliances
or the failure of these companies to successfully develop and sustain a market
for our services could have a material adverse effect on our business,
prospects, financial condition and results of operations.
Our Success Depends on Our Retention of Our Executive Officers and Our Ability
to Hire and Retain Additional Key Personnel
Our future performance depends in significant part upon the continued
service of our executive officers and other key technical, sales and management
personnel. The loss of the services of one or more of our executive officers or
other key employees could have a material adverse effect on our business,
prospects, financial condition and results of operations. Our future success
also depends on our continuing ability to attract and retain highly qualified
technical, sales and managerial personnel. Competition for such personnel is
intense, and there can be no assurance that we can retain our key employees or
that we can attract, assimilate or retain other highly qualified technical,
sales and managerial personnel in the future.
Our International Operations Are Risky
At the end of 1998, international telephone numbers represented a
significant portion of our total telephone numbers. 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:
. recessions in economies outside the United States,
. limited protection of intellectual property rights in some countries,
. political instability,
. unexpected changes in regulatory requirements and tariffs,
. difficulties in staffing and managing foreign operations,
. the possibility of subsidization of our competitors and the
nationalization of business,
. longer payment cycles,
. greater difficulty in accounts receivable collection, 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 affect demand for our services.
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 _________ shares of common stock outstanding immediately after
the offering. The ____ shares sold in the offering, plus any shares issued or
sold upon exercise of the underwriters' over-allotment option, will be freely
tradeable, except for any such shares held at any time by an "affiliate," as
defined under Rule 144 under the Securities Act of 1933. Of the remaining
shares, ____________ are subject to lock-up agreements in which the holders of
the shares have agreed not to sell any shares for a period
13
<PAGE>
of 180 days after the date of this prospectus without the prior written consent
of Donaldson, Lufkin & Jenrette Securities Corporation. The shares not subject
to lock-up agreements are "restricted securities" as defined in Rule 144 under
the Securities Act. These shares may be sold in the future without registration
under the Securities Act to the extent permitted by Rule 144 or an exemption
under the Securities Act.
You Will Incur Immediate and Substantial Dilution
The initial public offering price will be substantially higher than the
deficit in net tangible book value per share of our common stock. Therefore,
you will incur immediate and substantial net tangible book value dilution. You
will incur additional dilution if holders of stock options, whether currently
outstanding or subsequently granted, exercise their options or if warrant
holders exercise their warrants to purchase common stock. See "Dilution" for
more information.
Our Principal Stockholders and Management Own a Significant Percentage of Our
Stock and Will Be Able to Exercise Significant Influence
Our executive officers and directors and principal stockholders together
will beneficially own ____% of our common stock 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 "Security Ownership of
Management and Principal Stockholders" for information about the ownership of
common stock by our executive officers, directors and principal stockholders.
Anti-Takeover Provisions Could Negatively Impact Our Stockholders
Provisions of Delaware law and of our certificate of incorporation and
bylaws could make it more difficult for a third party to acquire control of us,
even if a change in control would be beneficial to stockholders. See
"Description of Capital Stock" for more information.
Our Stock Price May Be Volatile
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
substantially due to factors such as:
. our historical and anticipated quarterly and annual operating results,
. variations between our actual results and analyst and investor
expectations,
. announcements by us or others and developments affecting our business and
our competitors' businesses,
. investor perceptions of our company and comparable public companies, and
. conditions and trends in the communications, messaging and Internet-
related industries.
14
<PAGE>
In particular, the stock market has from time to time experienced
significant price and volume fluctuations affecting the common stocks of
technology companies, which may include communications, messaging and Internet-
related companies. These fluctuations may result in a rapid and material decline
in the market price of our common stock.
We May Be Unable to Enforce or Defend Our Ownership and Use of 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. 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 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 condition and results of operations.
We May Have Difficulty in Retaining Our Customers
Our sales and marketing and other costs of acquiring new subscriptions are
substantial relative to the monthly fees derived from such subscriptions.
Accordingly, we believe that our long-term success depends largely on our
ability to retain our existing customers, while continuing to attract new ones.
We continue to invest significant resources in our network infrastructure and
customer and technical support capabilities to provide high levels of customer
service. We cannot be certain that these investments will maintain or improve
customer retention. We believe that intense competition from our competitors,
some of which offer free service or other enticements for new subscriptions, has
caused, and may continue to cause, some of our customers to switch to our
competitors' services. In addition, some new customers use the Internet only as
a novelty and do not become consistent users of Internet services and,
therefore, may be more likely to discontinue their service. These factors
adversely affect our customer retention rates. Any decline in customer
retention rates could have a material adverse effect on our business,
prospectus, financial condition and results of operations.
Our Services May Become Subject to Burdensome Government Regulation
We provide our services through data transmissions over public telephone
lines and other facilities provided by telecommunications companies. These
transmissions are subject to regulation by the Federal Communications
Commission, state public utility commissions and foreign governmental
authorities. These regulations affect the prices we pay for transmission
services, the competition we face from telecommunications services and other
aspects of our market. As an Internet messaging services provider, we are not
subject to direct regulation by the FCC or any other governmental agency, other
than regulations applicable to businesses generally. However, as Internet
services and telecommunications services converge or as the services we offer
expand, there may be increased
15
<PAGE>
regulation of our business. Therefore, in the future, we may become subject to
FCC or other regulatory agency regulation. There also may be changes in the
regulatory environment outside the United States. Changes in the regulatory
environment could decrease our revenues, increase our costs and affect our
service offerings.
There have been various regulations and court cases relating to the
liability of Internet service providers and other online service providers for
information carried on or through their services or equipment, including in the
areas of copyright, indecency, obscenity, defamation and fraud. For example,
federal and state statutes prohibit the online distribution of obscene
materials. The law in this area is unsettled, and there may be new legislation
and court decisions that expose companies such as ours to liabilities or affect
their services.
Additional laws and regulations may be adopted with respect to the
Internet, covering issues such as universal service fund support payments,
content, user privacy, pricing, libel, obscene material, indecency, gambling,
intellectual property protection and infringement and technology export and
other controls. Other federal Internet-related legislation has been introduced
which may limit commerce and discourse on the Internet. The FCC recently ruled
that Internet service providers are enhanced service providers, calls to
Internet service providers are jurisdictionally interstate and Internet service
providers should not pay access charges applicable to telecommunications
carriers. The FCC is examining inter-carrier compensation for calls to Internet
service providers, which could affect Internet service providers' costs.
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.
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. We have assessed our systems and believe
them to be year 2000 compliant. However, if 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. 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."
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.
16
<PAGE>
Forward-Looking Statements are Inherently Uncertain
Some statements under the captions "Prospectus Summary," "Risk Factors,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business" and elsewhere in this prospectus are
forward-looking statements. These forward-looking statements include, but are
not limited to, statements about our industry, plans, objectives, expectations,
intentions and assumptions and other statements contained in the prospectus that
are not historical facts. When used in this prospectus, the words "expect,"
"anticipate," "intend," "plan," "believe," "seek," "estimate" and similar
expressions are generally intended to identify forward-looking statements.
Because these forward-looking statements involve risks and uncertainties,
including those described in this "Risk Factors" section, actual results may
differ materially from those expressed or implied by these forward-looking
statements. We do not intend to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
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 do not guarantee the accuracy and completeness of historical data obtained
from these sources and we have not independently verified these data. Forecasts
and other forward-looking information obtained from these sources are subject to
the same qualifications and the additional uncertainties accompanying any
estimates of future market size.
17
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of common stock in the
offering will be approximately $__________ million, or $__________ if the
underwriters exercise their over-allotment option in full, at an assumed public
offering price per share of $___________ and after deducting estimated
underwriting discounts and commissions and estimated offering expenses.
We intend to 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. Other than the $____ million
that we expect to pay in order to repay indebtedness and redeem preferred stock,
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. Accordingly, our management will have broad discretion in the
application of the net proceeds. At December 31, 1998, the indebtedness to be
repaid accrued interest on principal at a per annum rate of 10% and the
preferred stock to be reacquired accumulated 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 such 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 marketable,
investment-grade securities.
DIVIDEND POLICY
We have never paid any dividends 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. The covenants in our current or future
financing agreements may prohibit or limit our ability to declare or pay cash
dividends.
18
<PAGE>
CAPITALIZATION
The following table sets forth (1) our capitalization as of December 31,
1998 and (2) our capitalization as adjusted to give effect to our sale of _____
million 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 $_____ 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 December 31, 1998
----------------------------------------
Actual As Adjusted
(dollars in thousands)
<S> <C> <C>
Cash and cash equivalents.............................................. $ 7,279 $
========== =========
Debt:
Capital lease obligations, including short-term
portion............................................................. 232
Long-term debt, including short-term portion.......................... 6,454
Put Warrants.......................................................... 1,062
---------- ---------
Total debt................................................ 7,748
Redeemable common stock; issued and outstanding
1,766,158 shares at December 31, 1998; no shares as adjusted*......... 4,932
Mandatorily redeemable Series A preferred stock;
authorized 1,000,000 shares; issued and outstanding 5,000
shares at December 31, 1998, liquidation
preference $5,387; no shares as adjusted*............................ 4,071
Stockholders' equity (deficiency):
Common stock; $0.01 par value; authorized
100,000,000 shares; issued and outstanding 17,679,997 shares
at December 31, 1998, excluding 1,766,158 shares issued
as redeemable at December 31, 1998; and _________ shares
issued and outstanding as adjusted................................. 176
Additional paid-in capital............................................ 11,939
Notes receivable from stockholders.................................... (2,499)
Accumulated deficit................................................... (17,363)
---------- ---------
Total stockholders' equity (deficiency).......................... (7,747)
---------- ---------
Total capitalization...................................... $ 9,004 $
========== =========
</TABLE>
____________________
* See Note 4 of the notes to our consolidated financial statements for the
conditions applicable to the redeemable securities.
19
<PAGE>
DILUTION
Our net tangible book value (deficit) at December 31, 1998 was a deficit of
approximately $7.7 million, or $0.44 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 $4.1 million and 1,766,158 redeemable
common shares with a carrying value of $4.9 million.
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 _____
shares of common stock at a price of $_____ per share in the offering and the
application of the estimated net proceeds from the offering, our pro forma net
tangible book value as of December 31, 1998 would have been approximately
$_____ million, or $_____ per share. This represents an immediate dilution in
net tangible book value per share of $_____ to investors who purchase shares of
common stock in the offering. The following table illustrates the dilution in
net tangible book value per share to such investors:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share........... $
--------
Net tangible book value (deficit) per share
as of December 31, 1998......................... $(0.44)
Increase per share attributable to new
investors....................................... ------
Pro forma net tangible book value per share as of
December 31, 1998 after giving effect to the
offering........................................ --------
Dilution per share to new investors.................. $
</TABLE>
The following table summarizes, as of December 31, 1998, 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 $_________ per share:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
--------------------- --------------------- Average Price
Number Percent Amount Percent per Share
------- --------- -------- --------- -------------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 19,446,155 % $17,555,297 % $0.90
New investors...........
---------- ---- ----------- ----
Total.............. 100% $ 100%
========== ==== =========== ====
</TABLE>
The foregoing table assumes no exercise of stock options or warrants.
As of March 31, 1999, there were options and warrants outstanding to purchase
4,865,388 shares of common stock at a weighted average exercise price of $2.57
per share. To the extent outstanding options and warrants are exercised, there
will be further dilution to new investors.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected historical financial 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.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------
1995 1996 1997 1998
(dollars in thousands, except per share data)
Statement of Operations Data:
<S> <C> <C> <C> <C>
Revenue...................................... $ -- $ 105 $ 685 $ 3,520
Cost of revenue.............................. 1 150 858 3,398
---------- ---------- ----------- -----------
Gross profit (loss)........................ (1) (45) (173) 122
Operating expenses:
Sales and marketing......................... -- 150 1,069 4,990
Research and development.................... -- 61 793 1,226
General and administrative.................. 20 512 2,842 4,881
---------- ---------- ----------- -----------
Total operating expenses................... 20 723 4,704 11,097
---------- ---------- ----------- -----------
Operating loss............................. (21) (768) (4,877) (10,975)
Interest expense (income) net................ -- -- (215) 933
Income tax expense........................... -- 1 1 2
---------- ---------- ----------- -----------
Net loss................................... $ (21) $ (769) $ (4,663) $ (11,910)
========== ========== =========== ===========
Net loss attributable to common
shares.................................. $ (21) $ (769) $ (4,663) $ (12,404)
========== ========== =========== ===========
Basic and diluted net loss per common
share...................................... $ (.01) $ (.15) $ (.37) $ (.73)
========== ========== =========== ===========
Weighted average common shares
used in determining net loss
per share.................................. 4,460,000 5,125,333 12,590,667 16,953,805
========== ========== =========== ===========
<CAPTION>
Years Ended December 31,
------------------------------------------------------------
1995 1996 1997 1998
(in thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.................... $ -- $ 656 $ 23 $ 7,279
Working capital (deficiency)................. (11) 479 58 6,735
Total assets................................ -- 896 2,613 10,513
Long-term debt............................... -- -- -- 6,137
Redeemable common and preferred
stock*...................................... -- -- -- 9,003
Total stockholders' equity (deficiency)...... (11) 677 1,618 (7,747)
</TABLE>
___________________
* See Note 4 of the notes to our consolidated financial statements for the
conditions applicable to the redeemable securities.
21
<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 are the leading provider of Internet-based unified messaging services
with a base of over 27,000 paid subscriptions as of December 31, 1998.
We currently derive substantially all of our revenues from subscription
fees, activation fees and charges for usage-based services. In the future, we
expect to derive a growing proportion of our revenues from up-selling our
subscription and usage-based services to our free subscribers. Our customers
are mostly pre-billed on a month-to-month basis. Revenues are recognized as the
service is performed.
We expect to increase our sales and marketing expenses following the
offering. In the past, we have allocated limited resources to marketing our
services, relying on our web site to generate subscriptions and our strategic
alliances to market and sell our services to their customer base. We intend to
increase our direct and indirect marketing efforts substantially in order to
grow our subscriber base and to generate up-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 December
31, 1998, we had an accumulated deficit of approximately $17.4 million. We
expect to incur substantial operating losses for the foreseeable future. See
"Risk Factors" for a discussion concerning the risks we face.
22
<PAGE>
Results of Operations
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........ 59 115 35
General and administrative...... 489 415 138
---- ---- ----
Total operating expenses.. 692 686 315
---- ---- ----
Operating loss............ (735) (711) (312)
Interest expense (income), net... -- (31) 26
---- ---- ----
Loss before income taxes.. (735) (680) (338)
Income tax expense............... 0 0 0
---- ---- ----
Net loss.................. (735)% (680)% (338)%
==== ==== ====
</TABLE>
Revenue. Revenue was $3.5 million, $685,000 and $105,000 in 1998, 1997,
and 1996. The absolute dollar increases in revenue from year to year were due
primarily to increases in the number of subscriptions from both our direct
marketing and our strategic alliances. Our number of subscriptions were 27,036,
7,120 and 1,268 as of December 31, 1998, 1997 and 1996. Revenue derived from
monthly fees from paid subscriptions accounted for substantially all of the
revenue in the years ended December 31, 1998, 1997 and 1996. Our subscription
services and usage-based services were launched in June 1996. Therefore,
revenue for 1997 and 1996 are not directly comparable.
Cost of revenue. Cost of revenue is primarily comprised of data and voice
transmission costs, telephone numbers, customer service, online processing fees
and equipment depreciation. Cost of revenue was $3.4 million or 97% of revenue,
$858,000 or 125% of revenue and $150,000 or 143% of revenue, for the years ended
December 31, 1998, 1997 and 1996. The absolute dollar increases in cost of
revenue reflect the cost of building and expanding our server and networking
infrastructure and customer services to accommodate the growth of our subscriber
base. Cost of revenue as a percentage of revenue decreased from year to year as
a result of the increases in revenue over the same periods.
Operating expenses
Sales and Marketing. Our sales and marketing costs consist primarily of
payments with respect to strategic alliances, sales and marketing personnel,
advertising, promotions, public relations, trade shows and business development.
Sales and marketing expenses were $5.0 million or 142% of revenue,
23
<PAGE>
$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 from year to year 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.
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, professional services, consulting expenses and
building and occupancy costs. General and administrative costs were $4.9
million or 138% of revenue, $2.8 million or 415% 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
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 from year to year as a result of
increases in revenue over the same periods.
Interest Expense (Income), Net. Our interest expense is primarily related
to capital lease obligations and long-term debt. Interest expense (income), net
was $933,000, $(215,000) and $0 for December 31, 1998, 1997 and 1996. The
increase in interest expense (income), net for 1998 resulted from the issuance
in July 1998 of $10 million principal amount of subordinated debt.
Income Taxes. As of December 31, 1998, we had federal and state net
operating loss carryforwards of approximately $17.1 million available to offset
income in the future. Such net operating loss carryforwards will begin expiring
in the year 2000. Under the Tax Reform Act of 1986, the amounts of and benefits
from such net operating loss carryforwards may be impaired or limited.
24
<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 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,
1997 1997 1997 1998 1998
----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenue.......................... 138,977 202,294 226,467 $ 490,427 $ 784,416
Cost of revenue.................. 88,165 207,388 541,364 626,217 682,814
----------- ------------- ------------- ------------- -------------
Gross profit (loss)............ 50,812 (5,094) (314,897) (135,790) 101,602
Operating expenses:
Sales and marketing............. 206,242 351,727 325,128 371,969 513,347
Research and development........ 48,696 114,706 163,293 261,482 287,462
General and administrative...... 741,221 975,057 1,173,820 917,320 1,105,454
----------- ------------- ------------- ------------- -------------
Total operating expenses....... 996,159 1,441,490 1,662,241 1,550,771 1,906,263
----------- ------------- ------------- ------------- -------------
Operating loss................. (945,347) (1,446,584) (1,977,138) (1,686,561) (1,804,661)
Interest expense (income), net.. (119,063) (72,019) (7,162) 154 (970)
----------- ------------- ------------- ------------- -------------
Loss before income taxes....... (826,284) (1,374,565) (1,969,976) (1,686,715) (1,803,691)
Income tax expense............... -- -- -- 1,500 --
----------- ------------- ------------- ------------- -------------
Net loss....................... (826,284) (1,374,565) (1,969,976) $ (1,688,215) $ (1,803,691)
=========== ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
Sept. 30, Dec. 31,
1998 1998
------------- -------------
<S> <C> <C>
Revenue................................$ 975,243 1,269,750
Cost of revenue........................ 915,962 1,173,250
------------- -------------
Gross profit (loss).................. 59,281 96,500
Operating expenses:
Sales and marketing................... 1,291,218 2,813,654
Research and development.............. 329,366 347,232
General and administrative............ 1,240,300 1,617,780
------------- -------------
Total operating expenses............. 2,860,884 4,778,666
------------- -------------
Operating loss....................... (2,801,603) (4,682,166)
Interest expense (income), net........ 433,449 500,692
------------- -------------
Loss before income taxes............. (3,235,052) (5,182,858)
Income tax expense..................... -- --
------------- -------------
Net loss.............................$ (3,235,052) $ (5,182,858)
============= =============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------------
June 30, Sept. 30, Dec. 31, March 31, June 30,
1997 1997 1997 1998 1998
<S> <C> <C> <C>
As a percentage of revenues:
Revenue.......................... 100% 100% 100% 100% 100%
Cost of revenue.................. 63 102 239 128 87
----------- ------------- ------------- ------------- -------------
Gross profit (loss)............ 37 (2) (139) (28) 13
Operating expenses:
Sales and marketing............. 149 174 144 76 65
Research and development........ 35 57 72 53 37
General and administrative...... 533 482 518 187 141
----------- ------------- ------------- ------------- -------------
Total operating expenses....... 717 713 734 316 243
----------- ------------- ------------- ------------- -------------
Operating loss................. (680) (715) (873) (344) (230)
Interest expense (income), net.. (86) (36) (3) 0 0
----------- ------------- ------------- ------------- -------------
Loss before income taxes....... (594) (679) (870) (344) (230)
Income tax expense............... -- -- -- -- --
----------- ------------- ------------- ------------- -------------
Net loss...................... (594)% (679)% (870)% (344)% (230)%
=========== ============= ============= ============ =============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
Sept. 30, Dec. 31,
1998 1998
<S> <C> <C>
As a percentage of revenues:
Revenue................................ 100% 100%
Cost of revenue........................ 94 92
------------- -------------
Gross profit (loss).................. 6 8
Operating expenses:
Sales and marketing................... 132 222
Research and development.............. 34 27
General and administrative............ 127 128
------------- -------------
Total operating expenses............. 293 377
------------- -------------
Operating loss....................... (287) (369)
Interest expense (income), net........ 45 39
------------- -------------
Loss before income taxes............. (332) (408)
Income tax expense..................... -- --
------------- -------------
Net loss............................ (332)% (408)%
============= =============
</TABLE>
25
<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 up-sell additional
usage-based services to both free and paid customers of our subscription
services,
. the amount and timing of expenditures to enhance sales and marketing and
to expand our infrastructure, or other costs, as we expand our network,
. the announcement or introduction of new or enhanced services by our
competitors,
. technical difficulties or network downtime,
. economic and competitive conditions specific to our industry, and
. general economic conditions.
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 December 31, 1998, we had approximately $7.3
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 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 provided by financing activities increased to $17.9 million
for 1998 from $5.5 million for 1997 resulting primarily from the issuance of $5
million liquidation preference of our redeemable preferred stock, $5 million of
subordinated debt net of issuance discount and $5 million of redeemable common
stock.
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.
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.
26
<PAGE>
We are a comparatively new company, and, accordingly, the software and
hardware we use to operate our business has 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. To date, we have only completed preliminary
testing of our internally developed systems. 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
extensive testing later in the year.
In addition to our internally developed software, we utilize software and
hardware developed by third parties both for our network as well as our internal
information systems. We have tested such third-party software and hardware to
determine Year 2000 compliance. In addition, we have obtained certifications
from our key suppliers of hardware and networking equipment for our data centers
that such hardware and networking equipment is 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.
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 could 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 such 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 such 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 December 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position 98-9 "Software Revenue Recognition with
Respect to Certain Transactions" (SOP 98-9). SOP 98-9 amends certain paragraphs
of SOP 97-2 to require recognition of revenue using the "residual method" with
respect to certain transactions. The "residual method" established by SOP 98-9
is effective for fiscal years beginning after March 15, 1999. We do not expect
SOP 98-9 to have any material impact on our results of operations.
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
27
<PAGE>
statement requires that all derivative instruments be recorded on the balance
sheet at fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and the type of hedge
transaction. The ineffective portion of all hedges will be recognized in
earnings. We are in the process of determining the impact that the adoption of
SFAS NO. 133 will have on our results of operations and financial position.
In February 1998, the FASB issued SFAS NO. 132, "Employees' Disclosures
About Pensions and Other Postretirement Benefit Plans." This statement is
effective for fiscal years beginning after December 15, 1997 and restatement of
disclosures for earlier periods is required. We adopted SFAS No. 132 in 1998.
In October 1997, the AICPA released Statement of Position 97-2,
"Software Revenue Recognition" (SOP 97-2). Among other things, SOP 97-2
eliminates the distinction between significant and insignificant vendor
obligations promulgated by SOP 91-1 and requires each element of a software
arrangement to meet certain criteria in order to recognize revenue allocated to
that element. Additionally, SOP 97-2 requires that total fees under an
arrangement be allocated to each element in the arrangement based upon vendor
specific objective evidence, as defined. SOP 97-2 was effective for software
transactions entered into by us in fiscal 1998 and subsequent periods.
Application of the statement requirements did not have a material impact on our
consolidated financial position, results of operations or loss per share data as
currently reported.
28
<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 receive a
JFAX.COM phone number in minutes.
We believe we are the world's largest provider of Internet-based unified
messaging services with over 27,000 paid subscriptions as of December 31, 1998.
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, Rome, Frankfurt, Zurich, Sydney and Tokyo.
Industry Background
Growth of the Internet and E-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 e-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
unified messaging.
29
<PAGE>
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 because telephone rates continue to decrease and computer based fax
facilitates broadcast fax and fax-enabled applications. IDC estimates that
worldwide fax transmissions will increase from 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 carriage costs 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, e-mail, voice mail or fax, with the telephone or personal computer or
through web access.
As e-mail continues to grow and a portion of fax traffic migrates to the
Internet, industry analysts are predicting rapid growth of services that unify
and simplify the messaging and communications needs of e-mail users. IDC defines
unified messaging as "a single 'in-box' for voice, e-mail and fax messages that
is accessible by both telephone and PC." IDC predicts that the market for
unified messaging will grow from approximately 90,000 unified messaging
mailboxes in 1998 to over 12.9 million boxes in 2002 in the United States alone
with each generating $20 in unified messaging revenue per month.
Need for Cost-Effective Solutions
Whether it is an individual avoiding the cost of maintaining a fax machine,
answering machine and dedicated fax line or a large corporation attempting to
cost-effectively manage expanding and increasingly sophisticated communications
systems, individuals and businesses alike are making use of third parties to
manage their messaging needs. In addition, businesses often find it difficult
to implement state-of-the-art technology in their own infrastructure and
individuals with the expertise to maintain a sophisticated messaging system can
be scarce and costly to hire, train and retain. As a result, we believe that
organizations seeking to lower their costs and to reduce time-to-market with
complex technologies will look to Internet-based solutions to outsource non-core
competencies, such as messaging systems, to maintain competitiveness.
30
<PAGE>
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 access to and 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 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, Rome, Frankfurt, Zurich, Sydney and Tokyo.
Additionally, our proprietary web access and e-commerce solution enables
a customer to activate service 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.
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 turn-key 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 following awards:
31
<PAGE>
. 1998 CommerceNet award for Electronic Commerce Excellence in the
United States Business-to-Consumer category,
. 1997-98 What Cellphone award for Best Accessory for the Mobile
Office, and
. 1996 British Telecom and Sunday Times Superhighway Technology
Award.
. Scaleability and Reliability. Our system architecture 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 to have redundant significant components and to
meet the stringent telecommunications company standards for reliability.
. 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 first-to-market advantage.
. 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 enhance usage-based services to both free and paid users.
. Build the JFAX.COM Brand. We intend to increase our focus on building the
JFAX.COM brand. Historically, our growth has been primarily by word of
mouth and the limited promotional efforts of our strategic alliances.
Following the offering, we intend to launch a new promotional campaign to
increase awareness of the JFAX.COM brand through our strategic alliances
and through traditional media, including print and radio.
. Expand Service Offerings. We continue to add features to make our
services more functional and convenient for end-users. Our goal is to
have sticky services, where each end-user discovers through use that our
services facilitate efficient messaging management and, as a result, the
end user increases his or her use of our services. For instance, we plan
to introduce notification, follow me services, cardless calling and
cardless conference calling.
. Further Develop Strategic Alliances. Our indirect marketing efforts use
key relationships with companies such as Ameritech, Yahoo!, CompuServe,
Critical Path, Prodigy and others. These allies 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.
32
<PAGE>
. 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, including area codes in 21 of the 25 most populous major
metropolitan areas. We also have over 15 area codes outside the United
States, including area codes in London, Paris, Rome, 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 e-mail box.
Our subscription services are summarized in the following table:
<TABLE>
<CAPTION>
SUBSCRIPTION SERVICES
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Services Description Attributes Pricing**
- -----------------------------------------------------------------------------------------------------------------------------------
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 of $15 and $12.50 per phone
send faxes Unlimited incoming faxes number per month plus additional
Broadcast fax-User can Annotation capability usage-based charges
send the same fax to
numerous recipients
E-mail by Phone Phone access-User can Access, manage and/or reply to Setup Fee of $15 plus $9.50 per month
call e-mail, plus additional usage-based charges
a toll-free number and voice mail and faxes by phone
access e-mail and voice
mail through a touch tone
telephone
Unified Messaging Combined suite of services All benefits of Business Fax and Setup fee of $15 plus $12.50 per month
E-mail by Phone plus additional usage-based charges
</TABLE>
(*) This service is not yet active.
(**) These are United States dollar prices for phone numbers in most countries.
Additional charges apply to toll-free inbound numbers.
33
<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:
<TABLE>
<CAPTION>
UP-SALE SERVICES
- ------------------------------------------------------------------------------------------------------------------------------------
Services Description Attributes
- ------------------------------------------------------------------------------------------------------------------------------------
Current Usage-Based Services
- -----------------------------
<S> <C> <C>
Outbound Fax User can fax document through his/her e-mail outbox via the Per minute fax rates
Internet by using the destination fax number "@jfaxsend.com" Paperless forwarding of received
faxes
as the e-mail destination address
Outbound Voice User can send a voice message through his/her e-mail outbox Respond to e-mails with a voice
via the Internet by using the destination phone number message
"@jfaxsend.com" as the e-mail destination address
Broadcast Faxing User can send the same outbound fax to multiple recipients Powerful broadcast faxing
via the Outbound Fax service capabilities
Broadcast Voice User can send the same voice message to multiple recipients Powerful broadcast voice messaging
via the Outbound Voice service capabilities
Telephone Access to E-mail User can call a toll-free number and access e-mail through a Access, manage and/or reply to
touch tone telephone e-mail by phone
Planned Services
- ----------------
Follow Me Services Will find user by routing incoming calls to any phone number User will be able to assign
or series of phone numbers. Callers will have option to telephone/cell phone numbers and
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 User will be able to choose to
will be able to apply rules to filter which messages he/she check messages immediately or do it
receives and through which media he/she is notified later
Cardless Calling User will be able to make outgoing calls through JFAX.COM User will be able to make calls
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>
There can be no assurance that we will be successful in the development or
offering of these planned services.
Strategic Alliances
In order to introduce our services to end-users, we have developed
strategic relationships with various online and offline service providers.
These service providers have pre-existing relationships with their customer
bases of e-mail-centric and telephone-centric users, thereby providing 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>
Critical Path America Online
CommTouch CompuServe
mail.com Prodigy
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Telecommunications Companies Systems Integrators,
Value Added Resellers,
and International Resellers
<S> <C>
Ameritech Telos
Telecom New Zealand Daimler-Benz IT Services
ESAT Telecom E.com Global Ltd.
ACC Telecom Kuni International Research/Eudora Japan
</TABLE>
The following is a summary of certain of these key relationships:
Critical Path
We are the exclusive unified messaging service offered by Critical Path, a
leading provider of outsourced e-mail platforms to corporate clients. Critical
Path's customers as of March 1999 included E*Trade, U.S. West, Network Solutions
and America Online, or AOL, which has selected Critical Path to provide e-mail
accounts to all of its ICQ (real-time Internet messaging service) users. As the
exclusive provider of unified messaging to Critical Path's customers, we expect
to participate in the deployment of e-mail and related value-added services to
Critical Path's rapidly growing base of users.
CompuServe
We provide the exclusive unified messaging service for CompuServe, a
leading online service provider. We are an active advertiser on the CompuServe
Network and CompuServe.com and also share revenue with CompuServe to the extent
that the advertising produces greater customer sign-ups than anticipated.
CommTouch
We are the exclusive unified messaging service offered by CommTouch, a
leader in providing outsourced e-mail platforms to corporate clients. CommTouch
co-brands our service as "powered by JFAX.COM" under a revenue-sharing
arrangement.
Prodigy
We are the exclusive unified messaging service offered by Prodigy, a
leading Internet service provider. Prodigy co-brands our services for sale to
its customers under a revenue-sharing arrangement.
Telecom New Zealand
We have a revenue sharing arrangement with Telecom New Zealand Limited,
which is the dominant telephone company and our exclusive reseller in New
Zealand.
35
<PAGE>
Kuni Research International
Kuni Research International is our exclusive reseller in Japan. Kuni is a
major reseller of Eudora's e-mail products and is Eudora's exclusive reseller in
Japan. We believe that Japan will be an important market, having the largest
number of e-mail users in the world outside of the United States. Kuni has a
revenue sharing arrangement with us.
Many of these relationships are terminable at will or upon short notice.
Furthermore, none of these relationships include long-term contractual
commitments to continue the relationship, and most of these relationships are in
the early stages of development. Although we believe that individually none of
these relationships is material to our business, we consider our strategic
alliances in their entirety to be important to our future success.
Sales and Marketing
Within the unified messaging market, we believe that we have a significant
level of brand recognition. This is despite the fact that we have spent little
on marketing and promotion. We believe that we have the largest market share in
the world-wide unified messaging market. We intend to enhance our market
position by implementing the following strategy.
Direct Marketing
Our direct marketing efforts have consisted of attracting visitors to our
web site and signing them up as customers. In the past, approximately 60% of our
new subscriptions have originated directly through our web site. We believe that
our free service offerings will result in a significant increase in traffic to
our web site. In the past, we have only engaged in modest advertising through
direct channels due to limited financial resources.
To fully capitalize on our business model, we intend to initiate a more
traditional marketing campaign, which will initially include targeted
advertising, direct mail, radio and outbound telemarketing.
Indirect Marketing
Online Advertising and Reselling. We have revenue sharing and commission
based arrangements with a large number of resellers that allow us to advertise
on their web sites and permit them to resell our service. We have implemented
our affiliates program, a tool for enabling companies and individuals to sign up
as JFAX.COM resellers online.
Integrated Services. With some of our strategic alliances, we co-brand our
service, allowing them to integrate their service with ours and sell a "powered
by JFAX.COM" service.
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 regional bell operating companies, competitive
local exchange carriers, long distance providers and wireless carriers.
Value-Added Resellers and Systems Integrators. We are in the early stages
of our relationship with value-added resellers and systems integrators. We
intend to build a network of value-added resellers
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<PAGE>
and system integrators. We intend to build a network of value-added resellers
and systems integrators that will offer our services as part of an overall
information technology solution for their corporate and government customers.
International Marketing. We believe that we benefit from local
representatives in our international markets, since they have the cultural
understanding and relationships necessary to sell our services. Our
international department in Los Angeles focuses on recruiting and supporting our
international marketing effort. We intend to move our European representative
recruitment and support activities to Europe by adding an office there,
maintaining our Pacific Rim and Latin American representative recruitment and
support activities in Los Angeles.
Up-Sale Marketing
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 modular
service approach and flexible billing systems, we can then engage in the
following two-step approach to up-sales:
. sell additional usage-based services to both free and paid subscribers,
and
. convert our free subscribers to paid subscriptions.
In order to effectively execute our up-sell 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 our up-sale 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.
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<PAGE>
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, Paris, Rome,
Frankfurt, Zurich, Sydney and Tokyo. We intend to take advantage of our
first-to-market position by creating a leading position in major cities as
quickly as possible. We have pursued two basic types of commercial relationships
in rolling out our network:
. International Strategic Alliances. To expand our international network
rapidly, we are pursuing strategic alliances with telecommunications
providers in a number of foreign markets. These alliances provide us with
local marketing, billing, customer support, co-location and phone
numbers.
. Co-location. Our co-location agreements require the contracting party to
provide space in its facility for our server, and a frame-relay network
to carry the server's traffic to major network hubs. Each server has
connections to at least two major hubs for redundancy purposes. Either
the local telephone company or an alternate provides direct inward dial
services for our use.
We have entered into major co-location agreements with two carriers. For
locations in the United States, we have a co-location agreement with
WorldCom/MFS, which is now MCI WorldCom. For international locations, our
co-location agreement is with a division of Telecom Italia. We have other
preexisting co-location agreements, in which we own the lines and
equipment. We pay a fixed fee per month for these co-locations.
Service Architecture and Information Systems
Our services are structured into service categories in a distributed and
modular fashion, for rapid deployment, reliability and scalability. The service
categories are as follows:
Inbound Services
Inbound servers accept incoming fax and voice mail messages, on trunk lines
from local telephone providers. The servers run on the Unix operating system,
known for reliability in telecom environments, with digital fax/voice cards and
T-1 trunk interface cards supplied by leading telephony card 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. Voice messages are
typically compressed by a factor of 5 to 1 in the GSM standard voice format,
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
38
<PAGE>
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 via any touch-tone phone. These servers
connect via the Internet to the user's e-mail servers, and retrieve all of the
user's messages, so that the user may listen to, reply, forward or delete the
messages (fax, voice or e-mail via a text-to-speech engine).
Web Access and Web Provisioning Services
Our web access and provisioning systems permit us to provision phone
numbers and manage account information in near real-time. These systems work on
a network of servers connected to a centralized database, and are built to
handle high volume traffic in a redundant and scalable fashion.
Customer Support Services
Our customer service department provides 24-hour support, seven days a
week. This department provides support primarily in English, although this
department also has French, Spanish and German speakers. The department handles
all account issues for our subscribers, ranging from initial sales and sign-up
to technical support and account administration. To provide this "one-stop
shop," we have installed a technology infrastructure for our customer service
representatives to leverage available data from our main enterprise database and
our customer database. These databases give our customer service
representatives the ability to track purchase history, payment history, caller
history, contact history, and report, analyze and solve technical issues in an
efficient and organized manner. We maintain a list of frequently asked
questions for use by customer service representatives in responding to common
queries and issues. This list of questions is updated to keep our customer
service representatives abreast of new issues.
Further, we offer web-based online self-help. This allows customers to
resolve simple issues on their own. We have found that most customer questions
come from new users, and with an online self-help guide we believe we are able
to address the majority of new users' questions efficiently.
Competition
We principally compete to provide Internet enabled e-mail users with
unified messaging and related communications services. Because unified
messaging is a new service that is designed to consolidate other methods of
messaging (e.g., voice mail, fax and e-mail) into a single repository, we
compete with worldwide providers of voice mail services and products and fax
services and products. Each of these markets on a stand-alone basis is highly
competitive and has numerous service and product providers.
Although we currently have direct competitors for some of our services, we
are not aware of any service provider currently offering an international
unified messaging suite of services directly competitive to our own. We believe
this lack of direct competition will change. To the extent our services face
competition, that competition is based on price, quality, brand recognition,
geography and customer support.
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<PAGE>
Future competition could come from a variety of companies both in the
Internet industry and the telecommunications industry. These industries include
major companies which have much greater resources than we have, have been in
operation for many years and have large subscriber bases. Such companies may be
able to develop and expand their communications and network infrastructures more
quickly, adapt more swiftly to new or emerging technologies and changes in
customer requirements, take advantage of acquisition and other opportunities
more readily, and devote greater resources to the marketing and sale of their
products and services than we can. There can be no assurance that additional
competitors will not enter markets that we plan to serve or that we will be able
to compete successfully. On the consumer side of our business, we face
competition from companies offering some of our services on a free basis through
an advertising-based model.
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.
Patents and Proprietary Rights
We developed substantially all of our software internally. We have
agreements with our programmers that provide for our ownership of all software
and intellectual property.
We have trademarked the JFAX and JFAX.COM tradenames and our JFAX logo, as
shown on the cover. We have multiple patents pending for proprietary aspects of
the major components of our technology.
We have licensed some components of our software for unlimited use for one-
time, upfront payments. Some of our license agreements provide for a modest
additional payment in the event of a subsequent major upgrade.
Facilities
We currently lease approximately 15,000 square feet of office space for our
headquarters in Los Angeles, California. Our Los Angeles lease 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 lease expires in 2000.
Employees
We currently employ or contract a total of 80 employees, including 11
consultants on a full or part-time basis. We have 63 full-time and 6 hourly
workers. Thirty of our employees are technical staff, reflecting our emphasis
on the development of new technologies.
Our future success will depend, in part, on our ability to continue to
attract, retain and motivate highly qualified technical, marketing and
management personnel. Our employees are not represented by any collective
bargaining unit. We have never experienced a work stoppage. We believe our
relationship with our employees is good.
40
<PAGE>
MANAGEMENT
Directors and Executive Officers
<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
Hemi Zucker 41 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, or Orchard, a consulting firm which provides investment,
operational, and financial consulting services to, among others, start-up and
turn-around companies. 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. Since
1995, Orchard has also acted as the manager of CIM Group, LLC, a real estate
investment, development and management company. Since 1996, Mr. Ressler has
also been a director and shareholder of Orchard Telecom, Inc., a
telecommunications consulting firm.
Jaye Muller is a co-founder and co-chairman of the board and has been a
director since 1995. From December 1995 until March 1997, he held various
offices with JFAX.COM. After March 1997, he has provided consulting services to
us under an agreement between us and Boardrush Media LLC, one of our principal
stockholders. He is a member and manager of Boardrush. Mr. Muller received his
technical education and began his electronics design work in East Germany. He
is a musician and the founder of one of the world's first Internet based
newsletters, Germany Alert.
Gary H. Hickox has been our president and chief operating officer since
1998. From 1996 to 1998 he was global marketing vice president for AT&T
Internet Services, where he was responsible for marketing and securing the
delivery of an array of Internet-related voice and call center services. From
1983 to 1996, Mr. Hickox held other executive positions within AT&T.
Dr. Anand Narasimhan has been our chief technology officer since 1996. Dr.
Narasimhan began his career with IBM in 1990 as a graduate fellow and conducted
research and design work in areas that included audio and speech coding
techniques. He developed technologies on five patented telecommunications,
digital cellular and network devices, and six additional patents are pending on
devices he helped develop in the areas of Internet telephony, voice and audio
data transfer and data network switching.
Hemi 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
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<PAGE>
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 DLJ 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 private companies.
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. 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.
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<PAGE>
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.
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. See "Certain Transactions."
Executive Compensation
The following table sets forth information concerning compensation of our
chief executive officer and the top four other highly compensated executive
officers whose salary and incentive compensation exceeded $100,000 for the year
ended December 31, 1998 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
------------------------- ----------------------------
Other Annual
Name And Principal Position Salary Bonus Compensation Shares Underlying Options
- ----------------------------- ------------ -------------- ------------ ----------------------------
<S> <C> <C> <C> <C>
Richard S. Ressler, $200,000 $0.00 $0.00 _____
Chief Executive Officer
Gary H. Hickox, $60,874/(1)/ $0.00 $40,542/(2)/ 300,000
President
Hemi Zucker, $150,000 $33,261 $0.00 10,000
Chief Financial Officer
Zohar Loshitzer, $140,000 $43,677 $0.00 40,000
Chief Information Officer
Anand Narasimhan, $137,453 $25,798 $0.00 90,000
Chief Technology Officer
</TABLE>
(1) Represents compensation for the period from September 1998 to December
1998.
(2) Consists of re-location expenses reimbursed to Mr. Hickox.
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<PAGE>
Option Grants and Exercises
The following table provides information concerning grants of options to
purchase our common stock made during the fiscal year ended December 31, 1998 to
the Named Executive Officers. They did not exercise any options during this
period.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable Value
Number of At Assumed Annual Rates
Securities % of Total of Stock Price Appreciation
Underlying Options Granted Exercise or For Option Term
Options to Employees in Base Price Expiration ---------------------------
Name Granted Fiscal Year ($/SH) Date 5% ($) 10% ($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Richard S. Ressler, 0 N/A N/A N/A N/A N/A
Chief Executive
Officer
Gary H. Hickox, 300,000 42.0% $3.00 9/17/08 $566,005 $1,434,368
President
Hemi Zucker, 10,000 1.4% $3.00 9/30/08 $18,867 $47,812
Chief Financial
Officer
Zohar Loshitzer, 40,000 5.6% $3.00 9/30/08 $75,467 $191,249
Chief Information
Officer
Anand Narasimhan, 90,000 12.6% $3.00 9/30/08 $169,082 $430,310
Chief Technology
Officer
</TABLE>
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.
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<PAGE>
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.
AGGREGATE OPTION EXERCISES AND FISCAL YEAR-END VALUES
<TABLE>
<CAPTION>
Number of Unexercised Options Value of Unexercised In-The-
Held at December 31, 1998 Money Options 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, 0/300,000 0/0
President
Hemi Zucker, 116,667/93,333 $238,000/169,999
Chief Financial Officer
Zohar Loshitzer, 180,000/40,000 $360,000/0
Chief Information Officer
Anand Narasimhan, 60,000/90,000 $122,400/0
Chief Technology Officer
</TABLE>
(1) The value of the unexercised in-the-money options is based on fair
market value at December 31, 1998, as determined by the Board of
Directors, and is net of the exercise price of such options.
1997 Stock Option Plan
Our 1997 Stock Option Plan (the "Plan") was adopted by the Board of
Directors and approved by the stockholders in November 1997. A total of
3,500,000 shares of common stock has been reserved for issuance under the Plan.
As of April 12, 1999, options to purchase 1,255,055 shares of common stock were
outstanding under the Plan, and 39,330 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" ("ISOs") within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"), and for
grants of nonstatutory stock options ("NSOs") 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 "Administrator"). The 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 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 shares subject
to the option vest on the one-year anniversary of the grant date and each of the
remaining one-third portions of the shares subject to the option 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 NSOs may be granted at
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<PAGE>
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 ISO 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 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 is
terminable at will by either party, but provides for 12 months' severance in the
event of termination by us without cause or by Mr. Hickox following a relocation
or change in position.
We have established an incentive compensation bonus plan designed to
recognize efforts required to achieve our annual objectives. A management
committee administers the plan. This committee is exclusively responsible for
determining and approving the following:
. financial planning and setting of corporate goals,
. eligibility of plan participants,
. bonus structure amounts, which are based on base salary, and
. individual assessment guidelines and goals.
Corporate attainment of goals drives the funding of the bonus plan.
Messrs. Hickox, Zucker, Loshitzer and Narasimhan each participates in the bonus
plan.
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<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
AND PRINCIPAL STOCKHOLDERS
The following table sets forth information as of April 15, 1999 with
respect to the beneficial ownership of our common stock by:
. each person known by us to own beneficially more than five percent, in
the aggregate, of the outstanding shares of our common stock,
. our directors and our Named Executive Offices, and
. all executive officers and directors as group.
Share ownership in each case includes shares issuable upon exercise of
outstanding options and warrants that are exercisable within 60 days of April
15, 1999 as described in the footnotes below. Percentage of ownership is
calculated pursuant to SEC Rule 13d-3(d)(1).
This table does not reflect ownership of the outstanding Series A Usable
Redeemable Preferred Stock, since we intend to redeem this at or shortly after
the closing of the offering.
<TABLE>
<CAPTION>
Shares of Common Stock Shares of Common Stock
Beneficially Owned to be Beneficially Owned
Before the Offering Shares to be Sold After the Offering
---------------------- --------------------- ------------------------
Name and Address of Beneficial Owner/(1)/ Number Percent Number Percent Number Percent
- ----------------------------------------- ---------- ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Orchard/JFAX Investors, LLC/(2)/ 10,762,622 54.64% -- -- -- --
Boardrush Media LLC
972 Putney Road, Suite 299
Brattleboro, VT 05301 4,025,000 20.70% -- -- -- --
Pecks Management Partners Ltd. /(3)/
One Rockefeller Plaza
New York, NY 10020 2,141,158 10.80% -- -- -- --
DLJ Entities/(4)/
277 Park Avenue
New York, NY 10172 1,592,500 7.57% -- -- -- --
Jaye Muller/(5)/ 4,025,000 20.70% -- -- -- --
Richard Ressler/(6)/ 10,762,622 54.64% -- -- -- --
John F. Rieley 140,000 * -- -- -- --
Gary Hickox 33,000 * -- -- -- --
Michael P. Schulhof/(7)/ 882,483 4.39% -- -- -- --
Dr. Anand Narasimhan/(8)/ 202,767 1.04% -- -- -- --
Hemi Zucker/(9)/ 326,058 1.67%
Zohar Loshitzer/(10)/ 180,000 * -- -- -- --
R. Scott Turicchi/(11)/ 115,000 * -- -- -- --
Robert Cresci/(12)/ 0 * -- -- -- --
All directors and executive officers
as a group (10 persons) 16,666,930 80.42% -- -- -- --
</TABLE>
(*) Designates less than 1%.
(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 10,512,622 shares of common stock and 250,000 vested warrants.
47
<PAGE>
(3) Consist of:
. 1,112,867 shares of common stock and 236,500 warrants held by Delaware
State Employees Retirement Fund,
. 306,383 shares of common stock and 65,000 warrants held by ICI American
Holdings, Inc. Defined Benefit Plan,
. 205,656 shares of common stock and 43,500 warrants held by Zeneca
Holdings Inc. Defined Benefit Plan, and
. 141,252 shares of common stock and 30,000 warrants held by the JW
McConnell Family Foundation.
(4) Consist of:
. 12,500 warrants held by DLJ Capital Corp.
. 945,500 warrants held by DLJ Private Equity Partners Fund, L.P.
. 368,500 warrants held by DLJ Fund Investment Partners II, L.P.
. 33,500 warrants held by DLJ Private Equity Employees Fund, L.P.
. 215,000 warrants held by DLJ Securities Corp.
. 17,500 warrants held by DLJ ESC II, L.P.
(5) Consist of holdings of Boardrush Media LLC.
(6) Consist of holdings of Orchard/JFAX Investors, LLC.
(7) Consist of 210,483 shares of common stock and 672,000 vested warrants. For
accounting purposes, these warrants are treated as options.
(8) Consist of 142,767 shares of common stock and 60,000 employee options that
are exercisable within 60 days of April 15, 1999.
(9) Consist of 209,391 shares of common stock and 116,667 employee options that
are exercisable within 60 days of April 15, 1999.
(10) Consist of 180,000 employee options that are exercisable within 60 days of
April 15, 1999.
(11) Mr. Turicchi was appointed as the board representative for the holders of
the Series A Usable Redeemable Preferred Stock and the 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
The following directors and officers are indebted to us. Hemi 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 into principal each September 30 and March
31. Anand Narasimhan is indebted to us in the amount $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 (provided, however, that 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) and 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 amount of $99,000. This loan was made to Mr. Hickox in
September 1998 when he joined us. Mr. Hickox used the proceeds of this loan to
purchase 33,000 shares of our common stock. The loan matures on October 7, 2001
and bears interest at 4.25% per annum, with accrued interest due at maturity.
We have employment agreements with Mr. Zucker and Mr. Narasimhan. Each of
the employment agreements 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 is
terminable at will by either party, but provides for 12 months' severance in the
event of termination by us without cause or by Mr. Hickox following a relocation
or change in position.
We are a party to a consulting agreement with Boardrush, a company
controlled by Mr. Muller, pursuant to which Boardrush provides the services of
Mr. Muller and Mr. Rieley to us for a maximum of two days each per month. The
term of the consulting agreement runs through the earlier of the date on which
the Boardrush loan is repaid in full as described above and March 17, 2004.
Therefore, there can be no assurance that upon the repayment of the Boardrush
loan, Mr. Muller and Mr. Rieley will continue to provide any consulting services
to us. Until March 17, 1999, we paid Boardrush $400,000 per year, payable in
equal monthly payments, pursuant to the consulting agreement. From and after
March 17, 1999, Boardrush's compensation under the consulting agreement consists
solely of forgiveness of interest and principal under the loan discussed above,
with principal reductions being made pro rata over the five-year period from
March 17, 1999 through March 17, 2004. Pursuant to the consulting agreement, we
also reimburse Boardrush for expenses it incurs on our behalf. Monthly
reimbursements to Boardrush are approximately $10,000 on average.
We are also a party to a consulting arrangement with Orchard Capital
Corporation, a company controlled by Richard S. Ressler, pursuant to which we
pay Orchard $200,000 per year, payable in equal monthly payments, for the
services of Mr. Ressler. We also reimburse Orchard for expenses it incurs on
our behalf. Monthly reimbursements to Orchard are approximately $3,500 on
average.
We occupy office space at 10960 Wilshire Blvd., Suite 500, Los Angeles,
California, which is contiguous to and under a common sublease with CIM Group,
LLC, a limited liability company in which Mr. Ressler is a member and manager.
The rent for our office space is paid by CIM and we reimburse CIM our
proportionate share which is approximately $15,000 per month.
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<PAGE>
Because we share office space, the services of our vice president,
administration, as well as a receptionist and an administrative assistant are
made available to Orchard and CIM and Orchard Telecom, Inc., a company in which
Mr. Ressler is a shareholder and director, and we are reimbursed for the
proportionate share of certain of their salaries. In addition, telephone
service, related telecommunications services, office equipment and other office
services, and employee health insurance coverage are provided to Orchard, CIM
and Orchard Telecom pursuant to our contracts with our vendors, and we are
reimbursed for the proportionate share of the associated expenses.
The services of our general counsel are made available to Orchard, CIM and
MAI Systems Corporation, a company in which Mr. Ressler has a significant
ownership interest, and we are reimbursed for the proportionate share of his
salary.
Monthly reimbursements from Orchard (including Orchard Telecom, Inc.), CIM
and MAI are currently approximately $12,500. This amount reflects our business
activity, vis a vis the other affiliated entities, as of March 31, 1999, and
could increase or decrease as we and/or these affiliated entities grow.
In June 1998, we issued $10 million of our 10% Senior Subordinated Notes
due 2004 together with 1,681,577 shares of our common stock to an investor group
advised by Pecks Management Partners Ltd., with which Mr. Cresci is associated.
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 2,500,000 shares of our common stock. Donaldson,
Lufkin & Jenrette Securities Corporation, the affiliate of DLJ Capital Corp.
that acted as placement agent for the offerings, received warrants to acquire
215,000 shares of our common stock on the same terms as the purchasers as
compensation for its services. The total purchase price was $5 million.
Orchard/JFAX Investors, LLC, a company in which Mr. Ressler is the managing
member, participated to the extent of $500,000 in the latter investment. In
addition, $3.5 million was purchased by DLJ Capital Corp. and its affiliates,
with which Mr. Turicchi is associated, and $750,000 was purchased by an investor
group advised by Pecks Management Partners, Ltd. The remaining $250,000 was
purchased by GMT Partners, LLC. The proceeds of the offering will be used in
part to repay the Senior Subordinated notes and the Series A Usable Redeemable
Preferred Stock for amounts estimated to be $10,750,000 and $6,600,000,
respectively, including accrued and unpaid interest and dividends. 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 "Security Ownership of Management and Principal Stockholders."
In March 1998, we issued a total of 3,000,000 shares of our common stock at
$1.00 per share pursuant to a rights offering that was made available to all of
our stockholders on the same terms.
In January 1998, Orchard/JFAX Investors, LLC, a company in which Richard
Ressler is the managing member, loaned us $1,400,000 in order to fund our
working capital requirements. The principal amount of this loan, together with
accrued interest at the rate of 15% per annum, was repaid in full in March 1998
with the proceeds of the rights offering described above.
In May and June 1998, Orchard/JFAX Investors, LLC loaned us an additional
$1,000,000 in order to fund our working capital requirements. The principal
amount of these loans, together with accrued interest at the rate of 15% per
annum, was repaid in full in July 1998 with the proceeds of the senior
subordinated notes and common stock and preferred stock and warrants offerings
described above.
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
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<PAGE>
warrant to purchase 336,000 shares of our common stock at an exercise price of
$0.88 per share and a second warrant to purchase 336,000 shares of our common
stock at an exercise price of $2.25 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.
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<PAGE>
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 April 15, 1999, 19,446,488 shares of common stock
were issued and outstanding, and there were 35 holders of record of common
stock. As of April 15, 1999, 5,000 shares of Series A Usable Redeemable
Preferred Stock were issued and outstanding, and there were 20 holders of record
of preferred stock. We also have warrants and stock options outstanding, as
described below.
Common Stock
Dividends
Subject to the prior rights of any outstanding preferred stock, the holders
of common stock are entitled to receive dividends out of assets legally
available for payment of dividends at such times and in such amounts as the
board of directors may from time to time determine. See "Dividend Policy."
Voting Rights
Each outstanding share of common stock entitles the holder to one vote on
all matters submitted to a vote of stockholders, including the election of our
directors, subject to any class or series voting rights granted to the preferred
stock. There is no cumulative voting. The board of directors is expressly
authorized to adopt, amend or repeal the by-laws in any manner not inconsistent
with Delaware law or the certificate of incorporation, subject to the power of
the stockholders to adopt, amend or repeal the by-laws. The certificate of
incorporation may be amended by an affirmative vote of the holders of a majority
of our outstanding capital stock entitled to vote on the matter, subject to any
class or series voting rights granted to the preferred stock.
Liquidation Rights and Other Matters
The shares of common stock are neither redeemable nor convertible, and the
holders of common stock have no preemptive or subscription rights to purchase
any of our securities. Upon our liquidation, dissolution or winding up, the
holders of common stock are entitled to receive pro rata any of our assets which
are legally available for distribution after payment of all debts and other
liabilities and subject to any preferential rights of the holders of preferred
stock.
The holders of 1,681,577 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 $4.00 per share, subject to
adjustment.
Preferred Stock
As of April 15, 1999, we have one series of preferred stock issued and
outstanding, consisting of 5,000 shares of Series A Usable Redeemable Preferred
Stock, which will be redeemed for approximately
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<PAGE>
$6.6 million using a portion of the proceeds of the offering. This redemption is
expected to occur no later than __________, 1999.
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. We have no current plans
to issue preferred stock for any purpose.
Warrants and Options
We have issued 2,715,000 warrants to purchase an aggregate of 2,715,000
shares of common stock at an exercise price of $3.00 per share, subject to
adjustment. These warrants expire in July 2005. Holders of unexercised
warrants are not entitled to receive dividends or other distributions or to
receive notice of any meeting of stockholders. Holders of unexercised warrants
also 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 $2.00 each, and
. to redeem the shares of common stock received on exercise of any warrants
at $5.00 each, in each case subject to adjustment.
We have also issued warrants to purchase 336,000 shares of common stock at
an exercise price of $0.88 per share, to purchase 336,000 shares of common stock
at $2.25 per share and to purchase 23,333 shares of common stock at $3.00 per
share, in each case subject to adjustment. The latter warrants expire in April
1, 2005, and the former two series of warrants expire in January 2007.
We also issued 200,000 warrants to America Online on October 15, 1997 to
purchase 200,000 shares of our common stock at $3.00 per share.
We also have options outstanding and available for grant under our stock
option plan. See "Management -- 1997 Stock Option Plan."
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Registration Rights
Pursuant to various registration rights agreements, commencing six months
after the effective date of the offering, the holders of 17,006,421 shares of
our common stock may make requests that we register their securities, or include
their shares in other registrations, under the Securities Act, subject to
conditions. These registration rights extend to other shares not yet issued,
for example shares issuable upon the exercise of warrants, for the benefit of
the persons having these rights. In the event of such requests, we will comply
with the registration rights agreements and cause the registrations to occur.
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. Many provisions in this agreement become inapplicable following
completion of the offering. Among the surviving provisions, however, are
provisions permitting the holders of the shares associated with the respective
placements each to elect a director (i.e., a total of two directors) to our
board of directors so long as they hold a specified minimum number of shares.
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, even though such an attempt might be beneficial to us and our
stockholders.
Our certificate of incorporation and by-laws also:
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. 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.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is .
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have ____ shares of common stock
issued and outstanding, ____ shares if the underwriters' over-allotment option
is exercised in full. All shares of common stock sold in the offering 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 ___________ 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 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. Of the
19,446,488 shares outstanding before the offering, affiliates beneficially own
over 85% 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 April 15, 1999, there were outstanding stock options to purchase an
aggregate of 1,255,055 shares of common stock, of which 321,217 are presently
exercisable or exercisable within 60 days. All 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 3,500,000 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 April 15, 1999, there were also outstanding warrants to purchase an
aggregate of 3,610,333 shares of common stock.
We have granted registration rights to many of our stockholders. See
"Description of Capital Stock -- Registration Rights."
We, our executive officers and directors, and certain 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: (1) 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
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for common stock; or (2) 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 (1) or (2) is to be settled by the delivery of common stock, or such
other securities, in cash or otherwise. In addition, during such period, we have
agreed not to file any registration statement with respect to, and each of our
executive officers, directors and certain of our stockholders have 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 shares.
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 will have on the market price of the common stock
prevailing from time to time. Sales of substantial amounts of common stock by
existing stockholders could adversely affect prevailing market prices.
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<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.
and CIBC Oppenheimer Corp. have severally and not jointly agreed to purchase
from us and the selling stockholders the number of shares set forth opposite
their names below.
<TABLE>
<CAPTION>
Underwriters Number of
Shares
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation...
BancBoston Robertson Stephens, Inc. .................
CIBC Oppenheimer Corp.................................
-----------
Total..............................................
===========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares 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 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 JFAX.COM Paid by Selling Stockholders
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
No Exercise Full Exercise No Exercise Full Exercise
Per share $ $ $ $
Total $ $ $ $
</TABLE>
We will pay the offering expenses, estimated to be $900,000.
DLJdirect Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation and a member of the selling group, is facilitating the distribution
of the shares sold in the offering over the Internet. The underwriters have
agreed to allocate a limited number of shares to DLJdirect Inc. for sale to its
brokerage account holders.
We and the selling stockholders have granted to the underwriters an option,
exercisable for 30 days from the date of the underwriting agreement, to purchase
up to ________ additional shares at the public offering price less the
underwriting fees. The underwriters may exercise such option solely to cover
over-allotments, if any, made in connection with the offering. To the extent
that the underwriters exercise such option, each underwriter will become
obligated, subject to certain conditions, to purchase a number of additional
shares approximately proportionate to such underwriter's initial purchase
commitment.
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We 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
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: (1) 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 (2) 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 (1) or (2) is
to be settled by the delivery of common stock, or such other securities, in cash
or otherwise. In addition, during such period, we have agreed not to file any
registration statement with respect to, and each of our executive officers,
directors and certain of our stockholders have 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 our common stock without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation.
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 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.
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Other than in the United States, no action has been taken by us 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 ______________ 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, 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. _______________________ 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 _______________________.
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
our shares of 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.
R. Scott Turicchi, a Managing Director of Donaldson, Lufkin & Jenrette
Securities Corporation, 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.
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
60
<PAGE>
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 portion 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.
61
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditor's Report.................................. F-2
Consolidated Balance Sheets................................... F-3
Consolidated Statements of Operations......................... F-4
Consolidated Statements of Stockholders' Equity (Deficiency).. F-5
Consolidated Statements of Cash Flows......................... F-6
Notes to Consolidated Financial Statements.................... F-7
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors
JFAX.COM, Inc.:
We have audited the accompanying consolidated balance sheets of JFAX.COM, Inc.
(formerly known as JFAX Communications, Inc.) and subsidiary as of December 31,
1997 and 1998 and the related consolidated statements of operations,
stockholders' equity (deficiency) and cash flows for each of the years in the
three-year period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of JFAX.COM, Inc. and
subsidiary as of December 31, 1997 and 1998 and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1998 in conformity with generally accepted accounting principles.
Los Angeles, California /s/ KPMG LLP
March 26, 1999, except for note 14
which is as of April 16, 1999
F-2
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1997 and 1998
<TABLE>
<CAPTION>
Assets 1997 1998
----------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 23,039 7,278,873
Accounts receivable 10,774 112,729
Due from related parties -- 128,578
Interest receivable 4,639 48,603
Prepaid marketing costs 1,000,000 1,000,000
Other current assets 14,100 81,888
----------------- -----------------
Total current assets 1,052,552 8,650,671
Furniture, fixtures and equipment, net 1,560,145 1,777,646
Other long-term assets -- 84,372
----------------- -----------------
$2,612,697 10,512,689
================= ================
<CAPTION>
Liabilities, Redeemable Securities and Stockholders' Equity (Deficiency)
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $945,164 1,100,544
Deferred revenue 49,184 328,740
Current portion of capital lease obligations -- 89,931
Current portion of long-term debt -- 317,402
Customer deposits -- 79,286
----------------- -----------------
Total current liabilities 994,348 1,915,903
Capital lease obligations -- 141,783
Long-term debt -- 6,137,004
Put warrants -- 1,062,331
Redeemable common stock; issued and outstanding 1,766,158 shares
at December 31, 1998 (redemption value of $7,065,000) -- 4,931,975
Mandatorily redeemable Series A preferred stock. Authorized
1,000,000 shares; issued and outstanding 5,000 shares at December 31,
1998 at par value of $1,000 (liquidation preference $5,386,915) -- 4,070,671
Stockholders' equity (deficiency):
Common stock, $0.01 par value. Authorized 100,000,000 shares;
total issued and outstanding 14,548,000 and 17,679,997 shares at
December 31, 1997 and 1998, respectively, excluding 1,766,158
issued as redeemable at December 31, 1998 145,480 176,215
Additional paid-in capital 9,326,074 11,938,828
Notes receivable from stockholders (2,400,000) (2,499,000)
Accumulated deficit (5,453,205) (17,363,021)
----------------- -----------------
Total stockholders' equity (deficiency) 1,618,349 (7,746,978)
Commitment and Contingencies (note 11)
Liquidity (note 13)
Subsequent Events (note 14) ----------------- -----------------
$2,612,697 10,512,689
================= ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
1996 1997 1998
--------------- ----------------- -----------------
<S> <C> <C> <C>
Revenue $ 104,531 685,465 3,519,836
Cost of revenue 149,651 857,924 3,398,243
--------------- ----------------- -----------------
Gross profit (loss) (45,120) (172,459) 121,593
Operating expenses:
Sales and marketing 150,218 1,068,523 4,990,188
Research and development 61,291 792,985 1,225,542
General and administrative 511,382 2,842,477 4,880,854
--------------- ----------------- -----------------
Total operating expenses 722,891 4,703,985 11,096,584
--------------- ----------------- -----------------
Operating loss (768,011) (4,876,444) (10,974,991)
Other:
Interest expense -- -- (1,353,751)
Interest income -- 214,663 420,426
--------------- ----------------- -----------------
Loss before income taxes (768,011) (4,661,781) (11,908,316)
Income tax expense 721 1,640 1,500
--------------- ----------------- -----------------
Net loss $ (768,732) (4,663,421) (11,909,816)
--------------- ----------------- -----------------
Cumulative preferred dividends, accretion of
discount attributable to preferred stock,
and amortization of preferred stock issuance costs -- -- (494,523)
--------------- ----------------- -----------------
Net loss attributable to common
shareholders $ (768,732) $ (4,663,421) $ (12,404,339)
=============== ================ ================
Net loss per common share:
Basic $ (0.15) (0.37) (0.73)
Diluted (0.15) (0.37) (0.73)
=============== ================ ================
Weighted average common shares used in
determining loss per share:
Basic and diluted 5,125,333 12,590,667 16,953,805
=============== ================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity (Deficiency)
Years ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
Notes
Common stock Additional receivable Stockholders'
------------------------------- paid-in Accumulated from equity
Shares Amount capital deficit stockholders (deficiency)
----------------- ------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 4,000,000 $ 10,000 -- (21,052) -- (11,052)
Issuance of common stock 1,962,000 49,620 1,316,860 -- -- 1,366,480
Common stock issued for
services 90,000 900 89,100 -- -- 90,000
Net loss -- -- -- (768,732) -- (768,732)
----------------- ------------- ----------------- ----------------- ----------------- -----------------
Balance, December 31, 1996 6,052,000 60,520 1,405,960 (789,784) -- 676,696
Exercise of stock options 296,000 74 -- -- -- 74
Repurchase of common stock (160,000) (1,600) (118,400) -- -- (120,000)
Issuance of common stock 8,360,000 86,486 8,038,514 -- -- 8,125,000
Issuance of notes receivable
from stockholders -- -- -- -- (2,400,000) (2,400,000)
Net loss -- -- -- (4,663,421) -- (4,663,421)
----------------- ------------- ----------------- ----------------- ----------------- -----------------
Balance, December 31, 1997 14,548,000 145,480 9,326,074 (5,453,205) (2,400,000) 1,618,349
Amortization of mandatorily
redeemable preferred
stock issuance costs -- -- (25,823) -- -- (25,823)
Dividends on mandatorily
redeemable Preferred Stock -- -- (386,915) -- -- (386,915)
Amortization of preferred
stock discount -- -- (81,785) -- -- (81,785)
Issuance of common stock 3,033,000 30,330 3,068,670 -- (99,000) 3,000,000
Exercise of stock options 98,997 405 38,607 -- -- 39,012
Net loss -- -- -- (11,909,816) -- (11,909,816)
----------------- ------------- ----------------- ----------------- ----------------- -----------------
Balance, December 31, 1998 17,679,997 $ 176,215 11,938,828 (17,363,021) (2,499,000) (7,746,978)
================ ============ ================ ================ ================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
1996 1997 1998
--------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (768,732) (4,663,421) (11,909,816)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 64,775 216,553 605,528
Common stock issued for services 90,000 -- --
Redeemable common stock issued in lieu of interest -- -- 251,999
Notes issued for payment of interest expense -- -- 499,665
Amortization of note payable discount -- -- 420,390
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable (34,592) 23,892 (101,955)
Due from related parties -- -- (128,578)
Interest receivable -- (4,639) (43,964)
Prepaid marketing costs -- (1,000,000) --
Other (8,000) (6,100) (152,160)
Increase in:
Accounts payable 107,086 838,078 155,380
Deferred revenue -- 49,184 279,556
Customer deposits -- -- 79,286
--------------- ----------------- -----------------
Net cash used in operating activities (549,463) (4,546,453) (10,044,669)
--------------- ----------------- -----------------
Cash flows from investing activities - purchase of furniture, fixtures
and equipment (265,848) (1,579,409) (543,170)
--------------- ----------------- -----------------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,366,480 8,125,000 3,099,000
Issuance of notes receivable from stockholders -- (2,400,000) (99,000)
Common stock repurchased -- (120,000) --
Exercise of stock options -- -- 39,012
Proceeds from issuance of mandatorily redeemable preferred stock
and put warrants, net -- -- 4,638,479
Proceeds from issuance of notes payable, net -- -- 4,596,981
Proceeds from issuance of redeemable common stock, net -- -- 4,679,976
Proceeds from loan payable -- -- 937,370
Repayments of capital lease obligations -- -- (48,145)
Net increase (decrease) in due to related parties 104,519 (111,787) --
--------------- ----------------- -----------------
Net cash provided by financing activities 1,470,999 5,493,213 17,843,673
------------- -- ---------------- -----------------
Net increase (decrease) in cash and cash equivalents 655,688 (632,649) 7,255,834
Cash and cash equivalents at beginning of year -- 655,688 23,039
--------------- ----------------- -----------------
Cash and cash equivalents at end of year $ 655,688 23,039 7,278,873
=============== ================= =================
Cash paid during the year for:
Income taxes $ -- 721 1,500
Interest -- -- 137,148
=============== ================= =================
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
(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.
(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.
In October 1997, the American Institute of Certified Public
Accountants (AICPA) released Statement of Position 97-2, "Software
Revenue Recognition" (SOP 97-2). Among other things, SOP 97-2
eliminates the distinction between significant and insignificant
vendor obligations promulgated by SOP 91-1 and requires each element
of a software arrangement to meet certain criteria in order to
recognize revenue allocated to that element. Additionally, SOP 97-2
requires that total fees under an arrangement be allocated to each
element in the arrangement based upon vendor specific objective
evidence, as defined. SOP 97-2 was effective for software transactions
entered into by the Company during fiscal 1998 and subsequent periods.
Application of this statement did not have a material impact on the
Company's consolidated financial position, results of operations or
loss per share.
On December 22, 1998, the AICPA issued Statement of Position 98-9
"Software Revenue Recognition with Respect to Certain Transactions"
(SOP 98-9). SOP 98-9 amends certain paragraphs of SOP 97-2 to require
recognition of revenue using the "residual method" with respect to
certain transactions. The "residual method" established by SOP 98-9 is
effective for fiscal years beginning after March 15, 1999.
(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.
(continued)
F-7
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1997 and 1998
(d) Prepaid Advertising Costs
Prepaid advertising costs are recorded for amounts paid to America
Online, Inc. (AOL) under the Company's arrangement with AOL (see note
6). The Company expenses advertising cost, as advertising is placed on
AOL.
(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.
(continued
)
F-8
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1997 and 1998
(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 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.
(continued)
F-9
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1997 and 1998
(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 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.
(continued)
F-10
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1997 and 1998
(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
2,500,000 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
1,681,577 Common Shares were issued for combined proceeds of
$10,000,000.
The Notes bear interest at 10% per annum of the principal amount.
Through June 30, 1999, the Company may pay interest through the
issuance of additional interest notes in the form of Senior
Subordinated Notes together with a proportionate number of additional
Shares. As of December 31, 1998, the Company issued approximately
$500,000 of interest notes and 84,581 additional shares in lieu of
interest payments.
The Notes are due at maturity on June 30, 2004, but half the Notes
must be paid one year earlier, in each case payable at 100% of the
principal amount plus accrued and unpaid interest.
The Notes and Shares were recorded at their relative 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.
(continued)
F-11
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1997 and 1998
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 $4 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.
Preferred Shares and Warrants
The Company issued $5,000,000 in stated value of Preferred Shares
consisting of 5,000 shares together with 2,500,000 Warrants to
acquire a like number of shares of the Company's common stock, for an
exercise price of $3 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. Until and including the dividend
payment date falling on June 30, 2001, it is not contemplated that
the Company will pay dividends 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.
Preferred Shares are subject to optional redemption by the Company
after July 1, 1999 at the following prices:
<TABLE>
<CAPTION>
Percent of
Until Date Stated Value
- -------------- -----------------------------
<S> <C>
07/01/2000 115.0%
07/01/2001 107.5
Thereafter 100.0 (in each case plus
accrued and unpaid dividends)
</TABLE>
The Preferred Shares and Warrants and/or warrant shares (if converted
to common stock) are subject to certain put rights by the holders,
upon a change of control or as an exit put if the Company has not
completed a qualified public offering by July 1, 2003. The warrants
are exercisable by the holders at $3 per share at any time until June
30, 2005 and may be "put" to the Company upon a change in control
and/or an exit put if the Company does not file a qualified public
offering prior to July 1, 2003 at $2.00 per share and at fair market
value thereafter. The warrants were recorded at their estimated fair
value of $1,145,000 as of the date of issuance, as determined using a
Black-Scholes model, and are reflected outside of stockholders'
equity as a reduction of the proceeds received from the issuance of
Preferred Shares in the accompanying consolidated balance sheets. Any
increase in
(continued)
F-12
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1997 and 1998
fair value of these put rights above the initially determined amount
of $.45 per warrant will be expensed by the Company in its Statements
of Operations as such values accrue. In the event of an underwritten
public offering of common stock by the Company, the fair value put
feature of the warrants will terminate. (see note 14)
In connection with the placement of Notes, Warrants and Preferred and
Common Shares, an additional 215,000 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 are being amortized to
additional paid-in capital, using the interest method and straight-line
method, respectively.
In addition, warrants to purchase 23,333 common shares at $3.00 per share
were issued in connection with issuance of long-term notes to a financial
institution and warrants to purchase 200,000 common shares at $3.00 per
share were issued to America Online (see note 6).
(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 2,340,000 shares of the Company's common
stock held by the stockholder; interest accrues at 6.32% and is
payable monthly, due in March 2004. It is anticipated that 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 176,000 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
</TABLE>
(continued)
F-13
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Loan receivable secured by 120,000 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 33,000 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 reimburses the related party for expenses incurred on the Company's
behalf of approximately $14,000 per month.
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 200,000 common shares at $3.00 per share.
Under the agreement, the Company pays amounts to AOL based on
advertising placed on the AOL site.
As of December 31, 1997 and 1998, the Company had $1,000,000 in
prepaid advertising costs included in the accompanying consolidated
balance sheets.
(continued)
F-14
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1997 and 1998
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 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.
(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>
1997 1998
------------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 2,088,997 6,863,361
Accrued expenses 70,900 127,350
----------- ----------
2,159,897 6,990,711
Less valuation allowance (2,159,897) (6,990,711)
----------- ----------
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 was $1,867,070 and $4,830,814, 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
(continued)
F-15
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1997 and 1998
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>
(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,
2,500,000 authorized shares of common stock are reserved for issuance of
options. An additional 772,000 shares were authorized for issuance of
options outside the 1997 Plan. 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, 272,552 options and 672,000 options were exercisable under and
outside of the 1997 Plan, respectively, and the weighted average exercise
price of these options were $.97 and $1.57. Stock options generally expire
after 10 years and vest over a three-year period.
At December 31, 1998, there were 847,615 additional shares available for
grant under the 1997 Plan and 100,000 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 $0.28 and $0.61,
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.
(continued)
F-16
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1997 and 1998
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 $4,663,421 12,404,339
Pro forma 4,748,421 12,614,339
Basic loss per common share As reported .37 .73
Pro forma .38 .74
Diluted loss per common share As reported .37 .73
Pro forma .38 .74
========== ==========
</TABLE>
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
Weighted-average
Number of shares exercise price
-------------------- --------------------
<S> <C> <C>
Options outstanding at December 31, 1996 -- --
Granted 1,833,000 $ 1.03
Exercised (296,000) 0.01
---------
Options outstanding at December 31, 1997 1,537,000 1.24
Granted 713,500 2.93
Exercised (98,997) 0.39
Canceled (222,115) 1.00
---------
Options outstanding at December 31, 1998 1,929,388 1.91
==========
</TABLE>
(continued)
F-17
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1997 and 1998
At December 31, 1998, the exercise prices of options ranged from $0.88 to
$3.00 with a weighted-average remaining contractual life of 8.9years.
<TABLE>
<CAPTION>
Options outstanding Options exercisable
---------------------------------------------------------------------- --------------------------------
Number Weighted- Number Weighted
Range of outstanding Weighted average average exercisable average
exercise December 31, remaining exercise December 31, exercise
prices 1998 contractual life price 1998 price
--------------- ------------------ -------------------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
$ .88 336,000 8.1 $ .88 336,000 $ .88
$ .96-1.00 543,888 8.5 $ .98 272,552 $ .97
$ 2.25 336,000 8.1 $ 2.25 336,000 $ 2.25
$ 2.00-3.00 713,500 9.7 $ 2.93 -- $ --
--------- --------- -------- -------------------- ---------------
1,929,388 8.9 $ 1.91 944,552 $ 1.39
========= ========= ======== ==================== ===============
</TABLE>
At December 31, 1997 and 1998, 347,764 and 944,552 options, respectively,
were exercisable.
(9) Long Term Debt
Long term debt consists of the following at December 31, 1998:
<TABLE>
<S> <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
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
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 and debt issuance costs of
$329,656. The Company also satisfied accrued interest of $499,665 as of July 1,
1998 through the issuance of additional notes payable 5,545,671
----------
6,454,406
Less current installments of long term debt (317,402)
----------
Long term debt, excluding current installments $ 6,137,004
============
</TABLE>
(continued)
F-18
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1997 and 1998
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.
(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 Operating leases
leases
-------------------- --------------------
Fiscal year:
<S> <C> <C>
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>
(continued)
F-19
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1997 and 1998
Rental expense was $18,175, $224,289 and $346,515 for the years ended
December 31, 1996, 1997 and 1998, respectively.
(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>
Year ended December 31
--------------------------------------------------------------------------
1996 1997 1998
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Numerator--numerator for basic and diluted loss
per common share:
Net loss $ (768,732) (4,663,421) (11,909,816)
Dividends on Preferred Stock -- -- (386,915)
Amortization of Preferred Stock issuance costs
and accretion of discount on preferred shares -- -- (107,608)
-------------------- -------------------- --------------------
Numerator for basic and diluted loss per
common share (768,732) (4,663,421) (12,404,339)
Denominator:
Denominator for basic loss per common
share--weighted average number of
common shares outstanding during the
period $ 5,125,333 12,590,667 16,953,805
-------------------- -------------------- --------------------
Denominator for diluted loss per common
share $ 5,125,333 12,590,667 16,953,805
==================== ==================== ====================
Basic loss per common share $ (.15) (.37) (.73)
Diluted loss per common share (.15) (.37) (.73)
==================== ==================== ====================
</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 1,929,388 outstanding common
stock options and 2,938,333 warrants because their effect would be
antidilutive (see notes 4 and 8). Redeemable common shares outstanding have
been excluded from the computation of both basic and diluted loss per share.
(continued)
F-20
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1997 and 1998
(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.
(14) Subsequent Events
Subsequent to December 31, 1998, holders of a majority of the put warrants
discussed in note 4 agreed to eliminate the fair market value put feature
associated with these warrants for nominal consideration, effective January
1, 1999.
<PAGE>
JFAX.COM, Inc.
___ Shares of Common Stock
_________________
PROSPECTUS
_________________
Donaldson, Lufkin & Jenrette
BancBoston Robertson Stephens
CIBC World Markets
------------------
DLJdirect Inc.
- --------------------------------------------------------------------------------
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 affect 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 in connection with the
distribution of the securities registered under this registration statement.
<TABLE>
<CAPTION>
Amount
to be paid
----------
<S> <C>
SEC registration fee...................................... $ 25,020
NASD fees and expenses.................................... $ 9,500
Legal fees and expenses................................... $350,000
Nasdaq National Market listing fees....................... $ 64,375
Accounting fees and expenses.............................. $125,000
Printing and engraving fees............................... $200,000
Registrar and transfer agent's fees....................... $ 10,000
Miscellaneous............................................. $116,105
----------
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
II-1
<PAGE>
the Corporation which imposes duties on, or involves services by, such director,
officer or employee with respect to an employee benefit plan, its participants
or beneficiaries; any excise taxes assessed on a person with respect to an
employee benefit plan shall be deemed to be indemnifiable expenses; and action
by a person with respect to an employee benefit plan which such person
reasonably believes to be in the interest of the participants and beneficiaries
of such plan shall be deemed to be action not opposed to the best interests of
the Corporation."
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.
II-2
<PAGE>
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 5,528,000 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 124,000 shares to The Regent
Trust Company Limited in September 1996 in exchange for a cash investment of
$412,500 and we issued 240,000 shares to Toxford Corporation in October 1996 in
exchange for a cash investment of $750,000.
In March 1997, we issued 4,300,000 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
8,048,000 shares of common stock to Orchard/JFAX Investors LLC in exchange for a
cash investment of $7,750,000 and 192,000 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 176,000 shares and 120,000 shares to Hemi
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 $0.025 per share.
In November 1997, we issued 120,000 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 $3.125 per share.
In March 1998, we issued a total of 3,000,000 shares of common stock at
$1.00 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 shareholders
who participated and the number of shares purchased were as follows:
Orchard/JFAX Investors LLC (2,464,622), Michael P. Schulhof (210,483),
Globetrans Ltd. (117,985), Toxford Corporation (112,759), Hemi Zucker (33,391),
Anand Narasihman (22,767), Geoff Goodfellow (18,793), Neil Seeman (12,000) and
Marc Seeman (7,200).
In April 1998, we granted Transamerica Business Credit Corporation a
warrant to purchase 23,333 shares of common stock for $3.00 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 200,000 warrants to America Online to purchase 200,000 shares of
our common stock at $3.00 per share.
In June 1998, we issued $10 million of our 10% Senior Subordinated Notes
due 2004 together with 1,681,577 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 2,500,000 shares of our common stock at $3.00 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 215,000
shares of our common stock on the same terms as purchasers, as compensation for
its services. The total purchase price was $5 million. Orchard/JFAX Investors
LLC, a company in which Richard S. Ressler is the managing member,
II-3
<PAGE>
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 $256,250 of our 10% Senior
Subordinated Notes due 2004 together with 84,581 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 33,000 shares of our common stock to Gary H.
Hickox in exchange for 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 60,000 shares to an
individual upon the exercise of an option granted in January 1996 and payment by
such individual of the option price of $15.00.
Between August 1998 and January 1999, we issued a total of 39,330 shares of
our common stock to various employees who exercised employee options to purchase
such stock at a price of $1.00 per share.
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
*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.
10.4 Employment Agreement for Dr. Anand Narasimhan, dated March 17,
1997.
10.5 Employment Agreement for Nehemia Zucker, dated March 21, 1997.
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.
*10.10 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.
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).
II-4
<PAGE>
24.1 Power of Attorney (included in Signature Page of this Registration
Statement).
27.1 Financial Data Schedule.
- -----------------
* To be filed by amendment
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted for directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) It will provide to the underwriters at the closing(s) specified in
the underwriting agreements certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on the 14th day of April, 1999.
JFAX.COM, Inc.
By: /s/ Richard S. Ressler
---------------------------------
Name: Richard S. Ressler
Title: Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that such person whose signature
appears below constitutes and appoints Richard S. Ressler, Zohar Loshitzer and
Nicholas V. Morosoff and each of them severally, his true and lawful attorneys-
in-fact with power of substitution and resubstitution to sign in his name, place
and stead, in any and all capacities, to do any and all things and execute any
and all instruments that such attorney may deem necessary or advisable under the
Securities Act of 1933, as amended (the "Securities Act"), and any rules,
regulations and requirements of the U.S. Securities and Exchange Commission, in
connection with the registration under the Securities Act of the Common Stock of
the Registrant, including specifically, but without limiting the generality of
the foregoing, the power and authority to sign his name in his respective
capacity as a member of the Board of Directors or officer of the Registrant, to
this Registration Statement and/or such other form or forms as may be
appropriate to be filed with the Commission as any of them may deem appropriate
in respect of the Common Stock of the Registrant, to any and all amendments
thereto (including post-effective amendments) to this Registration Statement, to
any related Rule 462(b) Registration Statement and to any documents filed as
part of or in connection with this Registration Statement and any and all
amendments thereto, including post-effective amendments.
II-6
<PAGE>
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 April 14th, 1999:
<TABLE>
<CAPTION>
Signature Title
<S> <C>
/s/ Richard S. Ressler
- ---------------------------- Co-Chairman of the Board and Chief
Richard S. Ressler Executive Officer
/s/ Hemi Zucker
- ---------------------------- Chief Financial Officer
Hemi Zucker
/s/ Jaye Muller
- ---------------------------- Director
Jaye Muller
/s/ Zohar Loshitzer
- ---------------------------- Director
Zohar Loshitzer
/s/ Jack Rieley
- ---------------------------- Director
Jack Rieley
/s/ Michael P. Schulhof
- ---------------------------- Director
Michael P. Schulhof
/s/ R. Scott Turicchi
- ---------------------------- Director
R. Scott Turicchi
/s/ Robert J. Cresci
- ---------------------------- Director
Robert J. Cresci
</TABLE>
II-7
<PAGE>
EXHIBIT 3.1
-----------
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
JFAX COMMUNICATIONS, INC.
JFAX Communications, Inc., a Delaware corporation (the "Corporation"),
hereby certifies as follows:
1. The name of the Corporation is JFAX Communications, Inc. The date
of filing of its original certificate of incorporation with the Secretary of
State was December 14, 1995 and the name under which it was originally
incorporated was JFAX Communications, Inc.
2. This restated certificate of incorporation amends, restates and
integrates the provisions of the certificate of incorporation of said
Corporation and has been duly adopted in accordance with the provisions of
Sections 242 and 245 of the General Corporation Law of the State of Delaware by
written consent of the holders of a majority of the outstanding stock entitled
to vote thereon in accordance with the provisions of Section 228 of the General
Corporation Law of the State of Delaware.
3. The text of the certificate of incorporation is hereby amended and
restated to read herein as set forth in full:
FIRST. The name of the Corporation is JFAX.COM, Inc.
SECOND. The address of the Corporation's registered office in the
State of Delaware is 1013 Centre Road in the City of Wilmington, County of New
Castle. The name of its registered agent at such address is Corporate Agents,
Inc.
THIRD. The purpose of the Corporation is to engage in any lawful act
or activity for which corporations
<PAGE>
may be organized under the General Corporation Law of Delaware.
FOURTH. (a) The total number of shares of all classes of stock which
the Corporation shall have authority to issue is 201,000,000, of which
200,000,000 shares of the par value of $0.01 per share shall be designated as
Common Stock and 1,000,000 shares of the par value of $0.01 per share shall be
designated as Preferred Stock. Shares of Preferred Stock may be issued in one
or more series from time to time by the board of directors, and the board of
directors is expressly authorized to fix by resolution or resolutions the
designations and the powers, preferences and rights, and the qualifications,
limitations and restrictions thereof, of the shares of each series of Preferred
Stock, including without limitation the following:
(i) the distinctive serial designation of such series which shall
distinguish it from other series;
(ii) the number of shares included in such series;
(iii) the dividend rate (or method of determining such rate) payable
to the holders of the shares of such series, any conditions upon which such
dividends shall be paid and the date or dates upon which such dividends
shall be payable;
(iv) whether dividends on the shares of such series shall be
cumulative and, in the case of shares of any series having cumulative
dividend rights, the date or dates or method of determining the date or
dates from which dividends on the shares of such series shall be
cumulative;
(v) the amount or amounts which shall be payable out of the assets of
the Corporation to the holders of the shares of such series upon voluntary
or involuntary liquidation, dissolution or winding up the Corporation, and
the relative rights of priority, if any, of payment of the shares of such
series;
-2-
<PAGE>
(vi) the price or prices at which, the period or periods within which
and the terms and conditions upon which the shares of such series may be
redeemed, in whole or in part, at the option of the Corporation or at the
option of the holder or holders thereof or upon the happening of a
specified event or events;
(vii) the obligation, if any, of the Corporation to purchase or
redeem shares of such series pursuant to a sinking fund or otherwise and
the price or prices at which, the period or periods within which and the
terms and conditions upon which the shares of such series shall be redeemed
or purchased, in whole or in part, pursuant to such obligation;
(viii) whether or not the shares of such series shall be convertible
or exchangeable, at any time or times at the option of the holder or
holders thereof or at the option of the Corporation or upon the happening
of a specified event or events, into shares of any other class or classes
or any other series of the same or any other class or classes of stock of
the Corporation, and the price or prices or rate or rates of exchange or
conversion and any adjustments applicable thereto; and
(ix) whether or not the holders of the shares of such series shall
have voting rights, in addition to the voting rights provided by law, and
if so the terms of such voting rights.
Subject to the rights of the holders of any series of Preferred Stock, the
number of authorized shares of any class or series of Preferred Stock may be
increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of the stock
of the Corporation entitled to vote thereon, irrespective of the provisions of
Section 242(b)(2) of the General Corporation Law of Delaware or any
corresponding provision hereafter enacted.
-3-
<PAGE>
(b) The Board of Directors has provided for the issuance of a series
of Preferred Stock of the Corporation consisting of 5,000 shares of Series A
Usable Redeemable Preferred Stock with the designations and the powers,
preferences and rights, and the qualifications, limitations and restrictions as
follows:
(i) Designation and Amount. The designation of the series of
----------------------
preferred stock shall be "Series A Usable Redeemable Preferred Stock," par
value $.01 per share (the "Series A Preferred Stock"). The number of
shares of Series A Preferred Stock shall be 5,000. The Series A Preferred
Stock shall be assigned a stated value of $1,000 per share (the "Stated
Value").
(ii) Dividends. (a) Rate, etc. The holders of the Series A
----------
Preferred Stock as of the related Dividend Record Date (as defined below)
shall be entitled to receive, when and if declared by the Board of
Directors out of funds legally available therefore, dividends from the date
of issue thereof at the rate of 15.0% per annum (calculated by reference to
the Stated Value and all accrued but unpaid dividends), payable quarterly
on the last day in December, March, June and September of each year (each a
"Dividend Payment Date"), commencing September 30, 1998 until such time as
the Series A Preferred Stock is redeemed or retired in full. Such
dividends shall accrue on a daily basis and shall be cumulative on each
share from the date of original issuance of the shares of Series A
Preferred Stock (the "Original Issue Date"). The "Dividend Record Date"
with respect to the next succeeding Dividend Payment Date shall be the date
ten (10) Business Days prior to such Dividend Payment Date. The term
"Business Day" shall mean a day other than a Saturday or Sunday, any
federal holiday or any day on which banks in the City of New York are
closed.
(b) Limitations on Dividends, etc. on Junior Stock. For so long as
----------------------------------------------
any Series A Preferred Stock remains outstanding, the Corporation shall not
(1) declare or pay any dividend or make any distribution on
-4-
<PAGE>
(A) the common stock, $.01 par value per share (the "Common Stock"), of the
Corporation or (B) on any other class or series of capital stock (together
with the Common Stock, the "Junior Stock"), other than a dividend or
distribution made in shares of Junior Stock or (2) make any purchase,
redemption, retirement or other acquisition of any share of Junior Stock,
or of any option, warrant or other right to acquire the Corporation's
capital stock, or make any payment on account of, or set apart money for, a
sinking or other analogous fund for the purchase, redemption, retirement or
acquisition thereof (each of the foregoing actions being referred to herein
as a "Restricted Payment"); provided, however, that this restriction shall
not apply (a) to the repurchase for an aggregate purchase price of up to
$1.0 million for all employees and directors after the Original Issue Date
of shares of Junior Stock or options to purchase Junior Stock held by
employees or directors of the Corporation upon the termination of
employment or office of such employee or director, or (b) the purchase,
redemption, retirement or other acquisition of Junior Stock in connection
with a Change of Control (as defined herein) in which clause (iv) is
complied with; and provided, further, that, so long as (i) there is no
outstanding amount that is due and payable on the Series A Preferred Stock
(whether by reason of optional redemption, mandatory redemption, change of
control redemption or otherwise), (ii) the Corporation is not in breach or
default of any of its obligations under the Certificate of Incorporation or
the Preferred Stock and Warrants Purchase Agreement dated on or about the
Original Issue Date between the Corporation and the investors signatories
thereto pursuant to which the Series A Preferred Stock was originally
issued (the "Preferred Stock and Warrants Purchase Agreement") and (iii)
all dividends on the Series A Preferred Stock accrued and unpaid shall have
been paid in full in cash, this restriction shall not apply to an aggregate
amount of dividends declared or paid during the period commencing on the
Original Issue Date and ending on the date of declaration or payment of
such dividend equal to 50% of Consolidated Net
-5-
<PAGE>
Income for a period commencing July 1, 1998 and ending on the date of
declaration or payment of such dividend (the "Consolidated Net Income
Period") (or minus 100% of Consolidated Net Income for such Consolidated
Net Income Period if Consolidated Net Income for such Consolidated Net
Income Period is a loss).
As used herein:
"Consolidated Net Income" means, with reference to any period, the net
-----------------------
income (or loss) of the Corporation and its Subsidiaries for such period
(taken as a cumulative whole), as determined in accordance with United
States generally accepted accounting principles consistently applied
("GAAP"), after eliminating all offsetting debits and credits between the
Corporation and its Subsidiaries and all other items required to be
eliminated in the course of the preparation of consolidated financial
statements of the Corporation and its Subsidiaries in accordance with GAAP,
provided that there shall be excluded:
(a) the income (or loss) of any Person accrued prior to the date it
becomes a Subsidiary or is merged into or consolidated with the
Corporation or a Subsidiary, and the income (or loss) of any
Person, substantially all of the assets of which have been
acquired in any manner, realized by such other Person prior to the
date of acquisition,
(b) the income (or loss) of any Person (other than a Subsidiary) in
which the Corporation or any Subsidiary has an ownership interest,
except to the extent that any such income has been actually
received by the Corporation or such Subsidiary in the form of cash
dividends or similar cash distributions,
(c) the undistributed earnings of any Subsidiary to the extent that
the declaration or payment of dividends or similar distributions
by such
-6-
<PAGE>
Subsidiary is not at the time permitted by the terms of its
charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to such
Subsidiary,
(d) any restoration to income of any contingency reserve, except to
the extent that provision for such reserve was made out of income
accrued during such period,
(e) any aggregate net gain (but not any aggregate net loss) during
such period arising from the sale, conversion, exchange or other
disposition of capital assets (such term to include, without
limitation, (i) all non-current assets and, without duplication,
(ii) the following, whether or not current: all fixed assets,
whether tangible or intangible, all inventory sold in conjunction
with the disposition of fixed assets, and all securities),
(f) any gains resulting from any write-up of any assets (but not any
loss resulting from any write-down of any assets),
(g) any net gain from the collection of the proceeds of life insurance
policies,
(i) any gain arising from the acquisition of any security, or the
extinguishment, under GAAP, of any indebtedness, of the
Corporation or any Subsidiary,
(j) any net income or gain (but not any net loss) during such period
from (i) any change in accounting principles in accordance with
GAAP, (ii) any prior period adjustments resulting from any change
in accounting principles in accordance with GAAP, (iii) any
-7-
<PAGE>
extraordinary items, or (iv) any discontinued operations or the
disposition thereof,
(k) any deferred credit representing the excess of equity in any
Subsidiary at the date of acquisition over the cost of the
investment in such Subsidiary,
(l) in the case of a successor to the Corporation by consolidation or
merger or as a transferee of its assets, any earnings of the
successor corporation prior to such consolidation, merger or
transfer of assets, and
(m) any portion of such net income that cannot be freely converted
into United States dollars.
"Subsidiary" as to any Person shall mean a corporation or other entity
----------
of which shares or similar stock having ordinary voting power to elect a
majority of the board of directors or other managers of such corporation or
entity are at the time owned, directly or indirectly, through one or more
intermediaries, by such Person. Except as otherwise expressly indicated
herein, references to Subsidiaries shall mean any Subsidiaries of the
Corporation.
"Person" shall mean an individual, partnership, corporation,
------
(including a business trust), a limited liability company, joint stock
company, trust, unincorporated association, joint venture, or other entity,
or a government, or any political subdivision or agency of any of the
foregoing
(iii) Liquidation. (a) Preference Upon Liquidation, Dissolution or
----------- -------------------------------------------
Winding Up. In the event of any liquidation, dissolution or winding up of
----------
the affairs of the Corporation (any and all such events, a "liquidation"),
whether voluntary or involuntary, the holders of shares of Series A
Preferred Stock then outstanding shall be entitled, before any distribution
or payment is made upon the shares of Junior Stock or
-8-
<PAGE>
any shares of any other class of stock of the Corporation, to be paid for
each share of Series A Preferred Stock an amount equal to the Stated Value
plus all accrued but unpaid dividends (the "Liquidation Preference Price").
Except as provided in this paragraph, the holders of Series A Preferred
Stock shall not be entitled to any other distribution in respect of shares
of Series A Preferred Stock in the event of liquidation, dissolution or
winding up of the affairs of the Corporation.
(b) Insufficient Assets. If, upon any liquidation of the
-------------------
Corporation, the assets of the Corporation, after payment or provision for
liabilities, are insufficient to pay the holders of shares of the Series A
Preferred Stock then outstanding the full amount to which they shall be
entitled, the entire net assets shall be distributed to the holders of the
Series A Preferred Stock, pro rata based on the number of shares of Series
A Preferred Stock held by each such holder.
(c) Rights of Other Holders. In the event of any liquidation, after
-----------------------
payment shall have been made to the holders of the Series A Preferred Stock
of all preferential amounts to which they shall be entitled, the holders of
shares of Junior Stock and other capital stock of the Corporation shall
receive out of any remaining net assets available for distribution such
amounts as to which they are entitled by the terms thereof.
(iv) Redemption. (a) Optional Redemption. The Series A Preferred
---------- -------------------
Stock shall be subject to redemption, at the option of the Corporation, in
whole or in part, at any time after July 1, 1999 and prior to July 1, 2005
(i) on or prior to July 1, 2000 at a per share redemption price payable in
cash out of funds legally available therefor equal to 115% of the amount
equal to the sum of the Stated Value plus accrued but unpaid dividends,
(ii) after July 1, 2000 and on or prior to July 1, 2001 at a per share
redemption price
-9-
<PAGE>
payable in cash out of funds legally available therefor equal to 107-1/2%
of the amount equal to the sum of the Stated Value plus accrued but unpaid
dividends and (iii) after July 1, 2001 at a per share redemption price
payable in cash out of funds legally available therefore equal to 100% of
the amount equal to the sum of the Stated Value plus accrued but unpaid
dividends (each, an "Optional Redemption").
(b) Mandatory Redemption. All outstanding shares of Series A
--------------------
Preferred Stock shall be redeemed by the Corporation on July 1, 2005 (the
"Mandatory Redemption Date"), at a per share redemption price equal to the
Liquidation Preference Price payable in cash out of funds legally available
therefor (the "Mandatory Redemption").
(c) Change of Control. Upon the occurrence of a Change of Control
-----------------
(as defined below), unless the holders of at least 66-2/3% of the Series A
Preferred Stock approve such Change of Control in writing, each holder of
Series A Preferred Stock has the option to require the Corporation to
redeem all of the outstanding shares of the Series A Preferred Stock (or
any portion thereof) held by such holder (i) in the case of a Change of
Control that occurs on or prior to July 1, 1999, at a per share redemption
price payable in cash out of funds legally available therefor equal to the
Stated Value, and (ii) in the case of a Change of Control that occurs after
July 1, 1999, at a per share redemption price payable in cash out of funds
legally available therefore equal to the sum of the Stated Value plus all
accrued but unpaid dividends from and after the Original Issue Date minus
the amount of all unpaid dividends that accrued on or before July 1, 1999.
"Acceptable Controlling Person" shall mean any of Orchard/JFAX
-----------------------------
Investors, L.L.C. or any other entity controlled by Richard Ressler.
-10-
<PAGE>
"Change of Control" shall mean the occurrence of any of the following:
-----------------
(i) the acquisition or holding by
(x) any person (as such term is used in section 13(d) and
section 14(d)(2) of the Exchange Act as in effect on the Closing
Date), other than an Acceptable Controlling Person or the
Investors, or
(y) related Persons constituting a group (as such term is
used in Rule 13d-5 under the Exchange Act as in effect on the
Closing Date), other than related Acceptable Controlling Persons
or Investors constituting such a group,
of legal and/or beneficial ownership of more than 35% of the Common Stock
or any securities convertible into more than 35% of the Common Stock of the
Corporation, outstanding at such time if at such time the owners of Common
Stock on the Original Issue Date and the Investors beneficially own in the
aggregate less than a majority of the Common Stock or any securities
convertible into less than a majority of the Common Stock (excluding for
such purpose persons who own shares through any employee benefit plan of
the Corporation in connection therewith);
(ii) all or substantially all of the assets of the Corporation
are sold or otherwise transferred, in a single transaction or in a series
of related transactions, to any other Person;
(iii) any merger, consolidation or other similar transaction of,
or in respect of, the Corporation which results in the failure by the
owners of Common Stock on the Original Issue Date and the Investors to,
directly or indirectly in the aggregate, maintain beneficial ownership and
voting control of at least fifty percent (50%) of the outstanding common
-11-
<PAGE>
stock of the surviving entity in such merger, consolidation or similar
transaction; or
(iv) any liquidation or dissolution of the Corporation, or action
taken by the Board of Directors of the Corporation to authorize any such
liquidation or dissolution.
Any sale of assets of the Corporation (or any of its Subsidiaries)
which generated 2/3 or more of the revenues of the Corporation (on a
consolidated basis) during the immediately preceding fiscal year shall
constitute a "Change of Control".
"Change of Control Event" shall mean the earlier of the occurrence of
-----------------------
a Change of Control or the Corporation acquiring knowledge of a pending
Change of Control.
"Investors" shall mean investors under the Securities Purchase
---------
Agreement dated on or about the Original Issue Date among the Corporation
and the investors signatories thereto and under the Preferred Stock and
Warrants Purchase Agreement.
(d) Notice of Redemption. The Corporation shall give each holder
--------------------
of Series A Preferred Stock written notice of any Optional Redemption not
less than thirty (30) days nor more than forty-five (45) days prior to the
proposed redemption date, specifying such redemption date (each, an
"Optional Redemption Date"), the per share redemption price and the number
of such holder's shares to be redeemed on such date. The Corporation shall
give each holder of Series A Preferred Stock written notice (a "Notice of
Change of Control Event") within five (5) days after the Corporation or any
of its executive officers or directors obtains knowledge of the occurrence
of a Change of Control Event, specifying that a Change of Control Event has
occurred, the material facts and circumstances of such Change of Control
Event, the per share redemption price, if applicable, and instructions
-12-
<PAGE>
that a holder of Series A Preferred Stock must follow in order to have his
shares redeemed. Within five (5) days after receipt of a Notice of Change
of Control Event, a holder of shares of Series A Preferred Stock may, at
his option, if applicable, give notice to the Corporation specifying the
number of shares of Series A Preferred Stock, if applicable, held by such
holder that such holder requires the Corporation to redeem. The redemption
date for any Change of Control Event (each, a "Change of Control Redemption
Date") shall be the twenty-fifth day following the occurrence of the Change
of Control. In the event some or all of the shares of Series A Preferred
Stock are not tendered for redemption, the holder of such shares not so
tendered shall be deemed to have consented to the redemption by the
Corporation of any Junior Stock being prepaid, retired or exchanged
pursuant to a Change of Control Event, notwithstanding any approval rights
of holders of Series A Preferred Stock pursuant to clause (v) hereof.
(e) Effect of Redemption. On the date established for redemption
--------------------
pursuant to clause (iv) hereof, all rights in respect of the shares of
Series A Preferred Stock to be redeemed, except the right to receive the
applicable redemption price, shall cease and terminate (unless default
shall be made by the Corporation in the payment of the applicable
redemption price, in which event such rights shall be exercisable until
such default is cured), and such shares shall no longer be deemed to be
outstanding, notwithstanding that any certificates representing such shares
shall not have been surrendered to the Corporation. All shares of Series A
Preferred Stock redeemed pursuant to this clause (iv) shall be retired and
shall be restored to the status of authorized and unissued shares of
preferred stock.
(f) Funds for Redemption. No shares of Series A Preferred Stock may
--------------------
be redeemed except with funds legally available therefor.
-13-
<PAGE>
(v) Voting Rights. (a) Voting as a Class with the Common Stock. The
------------- ---------------------------------------
holders of Series A Preferred Stock shall be entitled to vote together with
the holders of shares of Common Stock and any other class or series of
capital stock or other securities entitled to vote with the Common Stock as
a single class (with the holders of shares of Series A Preferred Stock, the
holders of shares of Common Stock and the holders of such other class or
series voting together as a single class), on all matters to be voted upon
by the Common Stock, and shall not have any additional voting rights other
than the rights specified below in this clause (v) or otherwise required by
law. Each share of Series A Preferred Stock shall be entitled to such
number (rounded to the nearest whole number) of votes at any time as equals
the number of shares of Common Stock issuable at such time upon exercise of
all unexercised Warrants (as defined in the Preferred Stock and Warrants
Purchase Agreement) divided by the number of outstanding shares of Series A
Preferred Stock.
(b) Voting as a Single Class. The Corporation shall not, without the
------------------------
affirmative consent or approval of the holders of shares representing 66-
2/3% of the shares of Series A Preferred Stock then outstanding, voting as
a single class (such consent or approval to be given by written consent in
lieu of a meeting if allowable under the Corporation's Certificate of
Incorporation or by vote at a meeting called for such purpose for which
notice shall have been given to the holders of the Series A Preferred
Stock): (i) take any action, including causing any amendment, alteration or
repeal of any of the provisions of the Corporation's Certificate of
Incorporation that may alter or change the powers, preferences or special
rights of the shares of Series A Preferred Stock so as to affect the
holders thereof adversely, (ii) reclassify any existing shares or create
any other class or series of stock having a preference over or ranking on a
parity with the Series A Preferred Stock as to dividends or upon
liquidation, (iii) effect any redemption or repurchase of any Junior Stock
other than in connection with the exercise by the
-14-
<PAGE>
Corporation of its repurchase rights for a maximum aggregate purchase price
of up to $1.0 million of shares of Junior Stock or options to purchase
Junior Stock issued to employees or directors of the Corporation upon a
termination of employment or office, or in connection with a Change of
Control in which clause (iv) above is complied with, (iv) file a voluntary
petition seeking liquidation, dissolution or winding up of the Corporation
or (v) consolidate or merge with or into any Person in a transaction that
does not constitute a Change of Control unless, after giving effect to such
merger or consolidation, the Consolidated Net Worth of the surviving Person
in such merger or consolidation would not be less than the Consolidated Net
Worth of the Corporation immediately prior to such merger or consolidation.
As used herein, "Consolidated Net Worth" of any Person shall mean the
consolidated total stockholders' equity of such Person and its
Subsidiaries, as determined in accordance with GAAP.
(vi) Additional Board Designation Rights Upon Exercise of Triggering
---------------------------------------------------------------
Event Option.
------------
(a) For purposes of this clause (vi), a "Triggering Event" shall
be deemed to occur upon the failure by the Corporation to redeem shares of
the Series A Preferred Stock and to pay the applicable redemption price
upon a Change of Control when requested by a holder of Series A Preferred
Stock or upon the Mandatory Redemption Date regardless of the reason for
such failure, including but not limited to an insufficient amount of
legally available funds.
(b) From and after the occurrence of a Triggering Event, and
during the continuation thereof, the holders of a majority of the shares of
Series A Preferred Stock shall be entitled to notify the Corporation of
their intention to exercise the right of the Series A Preferred Stock (and,
upon the giving of such notice, the holders of the Series A Preferred Stock
shall have the right), voting as a separate
-15-
<PAGE>
class, to appoint and to elect such additional number of directors as
constitutes a majority of the Board of Directors after giving effect to
such increase in the number of directors, and, upon receipt of such notice
by the Corporation, the number of directors constituting the Board of
Directors shall be accordingly increased. Upon termination of such right
upon payment in full of all outstanding obligations in respect of a Change
of Control redemption or Mandatory Redemption, the directors elected by the
holders of Series A Preferred Stock pursuant to this clause (vi) shall be
removed and the number of directors shall be reduced accordingly.
FIFTH. The board of directors of the Corporation is expressly
authorized to adopt, amend or repeal by-laws of the Corporation.
SIXTH. Elections of directors need not be by written ballot except
and to the extent provided in the by-laws of the Corporation.
SEVENTH. A director of the Corporation shall not be liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except to the extent that such exemption from liability or
limitation thereof is not permitted under the Delaware General Corporation Law
as currently in effect or as the same may hereafter be amended. No amendment,
modification or repeal of this Article SEVENTH shall adversely affect any right
or protection of a director that exists at the time of such amendment,
modification or repeal.
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<PAGE>
IN WITNESS WHEREOF, JFAX Communications, Inc. has caused this
certificate to be signed by Richard S. Ressler, its Chief Executive Officer, on
the 14th day of April, 1999.
JFAX Communications, Inc.
By: /s/ Richard S. Ressler
___________________________
Richard S. Ressler
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<PAGE>
EXHIBIT 3.2
-----------
BY-LAWS
OF
JFAX.COM, INC.
<PAGE>
ARTICLE I
Stockholders
------------
Section 1.1. Annual Meetings. An annual meeting of stockholders
---------------
shall be held within five months after the close of the fiscal year of the
Corporation for the election of directors at such date, time and place either
within or without the State of Delaware as may be designated by the Board of
Directors from time to time. Any other proper business may be transacted at the
annual meeting.
Section 1.2. Special Meetings. Special meetings of stockholders may
----------------
be called at any time by the Chairman of the Board, if any, the Vice Chairman of
the Board, if any, the President or the Board of Directors, to be held at such
date, time and place either within or without the State of Delaware as may be
stated in the notice of the meeting. A special meeting of stockholders shall be
called by the Secretary upon the written request, stating the purpose of the
meeting, of stockholders who together own of record a majority of the
outstanding shares of each class of stock entitled to vote at such meeting.
Section 1.3. Notice of Meetings. Whenever stockholders are required
------------------
or permitted to take any action at a meeting, a written notice of the meeting
shall be given which shall state the place, date and hour of the meeting, and,
in the case of a special meeting, the purpose or purposes for which the meeting
is called. Unless otherwise provided by law, the written notice of any meeting
shall be given not less than ten nor more than sixty days before the date of the
meeting to each stockholder entitled to vote at such meeting. If mailed, such
notice shall be deemed to be given when deposited in the United States mail,
postage prepaid, directed to the stockholder at such stockholder's address as it
appears on the records of the Corporation.
Section 1.4. Adjournments. Any meeting of stockholders, annual or
------------
special, may be adjourned from time to time, to reconvene at the same or some
other place, and
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<PAGE>
notice need not be given of any such adjourned meeting if the time and place
thereof are announced at the meeting at which the adjournment is taken. At the
adjourned meeting the Corporation may transact any business which might have
been transacted at the original meeting. If the adjournment is for more than
thirty days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
Section 1.5. Quorum. At each meeting of stockholders, except where
------
otherwise provided by law or the certificate of incorporation or these by-laws,
the holders of a majority of the outstanding shares of stock entitled to vote on
a matter at the meeting, present in person or represented by proxy, shall
constitute a quorum. For purposes of the foregoing, where a separate vote by
class or classes is required for any matter, the holders of a majority of the
outstanding shares of such class or classes, present in person or represented by
proxy, shall constitute a quorum to take action with respect to that vote on
that matter. Two or more classes or series of stock shall be considered a
single class if the holders thereof are entitled to vote together as a single
class at the meeting. In the absence of a quorum of the holders of any class of
stock entitled to vote on a matter, the holders of such class so present or
represented may, by majority vote, adjourn the meeting of such class from time
to time in the manner provided by Section 1.4 of these by-laws until a quorum of
such class shall be so present or represented. Shares of its own capital stock
belonging on the record date for the meeting to the Corporation or to another
corporation, if a majority of the shares entitled to vote in the election of
directors of such other corporation is held, directly or indirectly, by the
Corporation, shall neither be entitled to vote nor be counted for quorum
purposes; provided, however, that the foregoing shall not limit the right of the
Corporation to vote stock, including but not limited to its own stock, held by
it in a fiduciary capacity.
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<PAGE>
Section 1.6. Organization. Meetings of stockholders shall be
------------
presided over by the Chairman of the Board, if any, or in the absence of the
Chairman of the Board by the Vice Chairman or any Co-Chairman of the Board, if
any, or in the absence of the Vice Chairman or any Co-Chairman of the Board by
the President, or in the absence of the President by a Vice President, or in the
absence of the foregoing persons by a chairman designated by the Board of
Directors, or in the absence of such designation by a chairman chosen at the
meeting. The Secretary, or in the absence of the Secretary an Assistant
Secretary, shall act as secretary of the meeting, but in the absence of the
Secretary and any Assistant Secretary the chairman of the meeting may appoint
any person to act as secretary of the meeting.
The order of business at each such meeting shall be as determined by
the chairman of the meeting. The chairman of the meeting shall have the right
and authority to prescribe such rules, regulations and procedures and to do all
such acts and things as are necessary or desirable for the proper conduct of the
meeting, including, without limitation, the establishment of procedures for the
maintenance of order and safety, limitations on the time allotted to questions
or comments on the affairs of the Corporation, restrictions on entry to such
meeting after the time prescribed for the commencement thereof and the opening
and closing of the voting polls.
Section 1.7. Inspectors. Prior to any meeting of stockholders, the
----------
Board of Directors or the President shall appoint one or more inspectors to act
at such meeting and make a written report thereof and may designate one or more
persons as alternate inspectors to replace any inspector who fails to act. If
no inspector or alternate is able to act at the meeting of stockholders, the
person presiding at the meeting shall appoint one or more inspectors to act at
the meeting. Each inspector, before entering upon the discharge of his or her
duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his or her
ability. The inspectors shall ascertain the number of shares outstanding
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<PAGE>
and the voting power of each, determine the shares represented at the meeting
and the validity of proxies and ballots, count all votes and ballots, determine
and retain for a reasonable period a record of the disposition of any challenges
made to any determination by the inspectors and certify their determination of
the number of shares represented at the meeting and their count of all votes and
ballots. The inspectors may appoint or retain other persons to assist them in
the performance of their duties. The date and time of the opening and closing of
the polls for each matter upon which the stockholders will vote at a meeting
shall be announced at the meeting. No ballot, proxy or vote, nor any revocation
thereof or change thereto, shall be accepted by the inspectors after the closing
of the polls. In determining the validity and counting of proxies and ballots,
the inspectors shall be limited to an examination of the proxies, any envelopes
submitted therewith, any information provided by a stockholder who submits a
proxy by telegram, cablegram or other electronic transmission from which it can
be determined that the proxy was authorized by the stockholder, ballots and the
regular books and records of the corporation, and they may also consider other
reliable information for the limited purpose of reconciling proxies and ballots
submitted by or on behalf of banks, brokers, their nominees or similar persons
which represent more votes than the holder of a proxy is authorized by the
record owner to cast or more votes than the stockholder holds of record. If the
inspectors consider other reliable information for such purpose, they shall, at
the time they make their certification, specify the precise information
considered by them, including the person or persons from whom they obtained the
information, when the information was obtained, the means by which the
information was obtained and the basis for the inspectors' belief that such
information is accurate and reliable.
Section 1.8. Voting; Proxies. Unless otherwise provided in the
---------------
certificate of incorporation, each stockholder entitled to vote at any meeting
of stockholders shall be entitled to one vote for each share of stock held by
such stockholder which has voting power upon the matter in question. Each
stockholder entitled to vote at a meeting
-5-
<PAGE>
of stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for such
stockholder by proxy, but no such proxy shall be voted or acted upon after three
years from its date, unless the proxy provides for a longer period. A duly
executed proxy shall be irrevocable if it states that it is irrevocable and if,
and only as long as, it is coupled with an interest sufficient in law to support
an irrevocable power, regardless of whether the interest with which it is
coupled is an interest in the stock itself or an interest in the Corporation
generally. A stockholder may revoke any proxy which is not irrevocable by
attending the meeting and voting in person or by filing an instrument in writing
revoking the proxy or another duly executed proxy bearing a later date with the
Secretary of the Corporation. Voting at meetings of stockholders need not be by
written ballot unless the holders of a majority of the outstanding shares of all
classes of stock entitled to vote thereon present in person or represented by
proxy at such meeting shall so determine. Directors shall be elected by a
plurality of the votes of the shares present in person or represented by proxy
at the meeting and entitled to vote on the election of directors. In all other
matters, unless otherwise provided by law or by the certificate of incorporation
or these by-laws, the affirmative vote of the holders of a majority of the
shares present in person or represented by proxy at the meeting and entitled to
vote on the subject matter shall be the act of the stockholders. Where a
separate vote by class or classes is required, the affirmative vote of the
holders of a majority of the shares of such class or classes present in person
or represented by proxy at the meeting shall be the act of such class or
classes, except as otherwise provided by law or by the certificate of
incorporation or these by-laws.
Section 1.9. Fixing Date for Determination of Stockholders of Record.
-------------------------------------------------------
In order that the Corporation may determine the stockholders entitled to notice
of or to vote at any meeting of stockholders or any adjournment thereof, the
Board of Directors may fix a record date, which record date shall not precede
the date upon which the resolution fixing the record date is adopted by the
Board of Directors,
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<PAGE>
and which record date shall not be more than sixty nor less than ten days before
the date of such meeting. If no record date is fixed by the Board of Directors,
the record date for determining stockholders entitled to notice of or to vote at
a meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held. A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
In order that the Corporation may determine the stockholders entitled
to consent to corporate action in writing without a meeting, the Board of
Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors, and which date shall not be more than ten days after the date upon
which the resolution fixing the record date is adopted by the Board of
Directors. If no record date has been fixed by the Board of Directors, the
record date for determining stockholders entitled to consent to corporate action
in writing without a meeting, when no prior action by the Board of Directors is
required by law, shall be the first date on which a signed written consent
setting forth the action taken or proposed to be taken is delivered to the
Corporation by delivery to its registered office in the State of Delaware, its
principal place of business, or an officer or agent of the Corporation having
custody of the book in which proceedings of meetings of stockholders are
recorded. Delivery made to the Corporation's registered office shall be by hand
or by certified or registered mail, return receipt requested. If no record date
has been fixed by the Board of Directors and prior action by the Board of
Directors is required by law, the record date for determining stockholders
entitled to consent to corporate action in writing without a meeting shall be at
the close of business on the day on which the Board of Directors adopts the
resolution taking such prior action.
-7-
<PAGE>
In order that the Corporation may determine the stockholders entitled
to receive payment of any dividend or other distribution or allotment of any
rights or the stockholders entitled to exercise any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action, the Board of Directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is
adopted, and which record date shall be not more than sixty days prior to such
action. If no record date is fixed, the record date for determining
stockholders for any such purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating thereto.
Section 1.10. List of Stockholders Entitled to Vote. The Secretary
-------------------------------------
shall prepare and make, at least ten days before every meeting of stockholders,
a complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof and may be inspected by any stockholder who is present.
Section 1.11. Consent of Stockholders in Lieu of Meeting. Unless
------------------------------------------
otherwise provided in the certificate of incorporation or by law, any action
required by law to be taken at any annual or special meeting of stockholders of
the Corporation, or any action which may be taken at any annual or special
meeting of such stockholders, may be taken without a meeting, without prior
notice and without a vote, if a consent or consents in writing, setting forth
the action so taken, shall be signed by the holders of outstanding stock having
not less than the minimum number of
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<PAGE>
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted and shall be
delivered to the Corporation by delivery to (a) its registered office in the
State of Delaware by hand or by certified mail or registered mail, return
receipt requested, (b) its principal place of business, or (c) an officer or
agent of the Corporation having custody of the book in which proceedings of
meetings of stockholders are recorded. Every written consent shall bear the date
of signature of each stockholder who signs the consent and no written consent
shall be effective to take the corporate action referred to therein unless,
within sixty days of the earliest dated consent delivered in the manner required
by this by-law to the Corporation, written consents signed by a sufficient
number of holders to take action are delivered to the Corporation by delivery to
(a) its registered office in the State of Delaware by hand or by certified or
registered mail, return receipt requested, (b) its principal place of business,
or (c) an officer or agent of the Corporation having custody of the book in
which proceedings of meetings of stockholders are recorded. Prompt notice of the
taking of the corporate action without a meeting by less than unanimous written
consent shall be given to those stockholders who have not consented in writing
and who, if the action had been taken at a meeting, would have been entitled to
notice of the meeting if the record date for such meeting had been the date that
written consents signed by a sufficient number of stockholders to take the
action were delivered to the Corporation as provided in this Section 1.11.
Section 1.12. Advance Notice of Stockholder Proposals. At any annual
---------------------------------------
or special meeting of stockholders, proposals by stockholders and persons
nominated for election as directors by stockholders shall be considered only if
advance notice thereof has been timely given as provided herein and such
proposals or nominations are otherwise proper for consideration under applicable
law and the certificate of incorporation and by-laws of the Corporation. Notice
of any proposal to be presented by any stockholder or of the name of any person
to be nominated by any stockholder for election as a director of the
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<PAGE>
Corporation at any meeting of stockholders shall be delivered to the Secretary
of the Corporation at its principal executive office not less than 60 nor more
than 90 days prior to the date of the meeting; provided, however, that if the
date of the meeting is first publicly announced or disclosed (in a public filing
or otherwise) less than 70 days prior to the date of the meeting, such advance
notice shall be given not more than ten days after such date is first so
announced or disclosed. Public notice shall be deemed to have been given more
than 70 days in advance of the annual meeting if the Corporation shall have
previously disclosed, in these by-laws or otherwise, that the annual meeting in
each year is to be held on a determinable date, unless and until the Board
determines to hold the meeting on a different date. Any stockholder who gives
notice of any such proposal shall deliver therewith the text of the proposal to
be presented and a brief written statement of the reasons why such stockholder
favors the proposal and setting forth such stockholder's name and address, the
number and class of all shares of each class of stock of the Corporation
beneficially owned by such stockholder and any material interest of such
stockholder in the proposal (other than as a stockholder). Any stockholder
desiring to nominate any person for election as a director of the Corporation
shall deliver with such notice a statement in writing setting forth the name of
the person to be nominated, the number and class of all shares of each class of
stock of the Corporation beneficially owned by such person, the information
regarding such person required by paragraphs (a), (e) and (f) of Item 401 of
Regulation S-K adopted by the Securities and Exchange Commission (or the
corresponding provisions of any regulation subsequently adopted by the
Securities and Exchange Commission applicable to the Corporation), such person's
signed consent to serve as a director of the Corporation if elected, such
stockholder's name and address and the number and class of all shares of each
class of stock of the Corporation beneficially owned by such stockholder. As
used herein, shares "beneficially owned" shall mean all shares as to which such
person, together with such person's affiliates and associates (as defined in
Rule 12b-2 under the Securities Exchange Act of 1934), may be deemed to
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<PAGE>
beneficially own pursuant to Rules 13d-3 and 13d-5 under the Securities Exchange
Act of 1934, as well as all shares as to which such person, together with such
person's affiliates and associates, has the right to become the beneficial owner
pursuant to any agreement or understanding, or upon the exercise of warrants,
options or rights to convert or exchange (whether such rights are exercisable
immediately or only after the passage of time or the occurrence of conditions).
The person presiding at the meeting, in addition to making any other
determinations that may be appropriate to the conduct of the meeting, shall
determine whether such notice has been duly given and shall direct that
proposals and nominees not be considered if such notice has not been given.
ARTICLE II
Board of Directors
------------------
Section 2.1. Powers; Number; Qualifications. The business and
------------------------------
affairs of the Corporation shall be managed by or under the direction of the
Board of Directors, except as may be otherwise provided by law or in the
certificate of incorporation. The Board of Directors shall consist of one or
more members, the number thereof to be determined from time to time by the
Board. Directors need not be stockholders.
Section 2.2. Election; Term of Office; Resignation; Removal;
-----------------------------------------------
Vacancies. Each director shall hold office until his or her successor is
- ---------
elected and qualified or until his or her earlier resignation or removal. Any
director may resign at any time upon written notice to the Board of Directors or
to the President or the Secretary of the Corporation. Such resignation shall
take effect at the time specified therein, and unless otherwise specified
therein no acceptance of such resignation shall be necessary to make it
effective. Any director or the entire Board of Directors may be removed, with
or without cause, by the holders of a majority of the shares then entitled to
vote at an election of directors. Whenever the holders of any class
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<PAGE>
or series of stock, voting separately as a class, are entitled to elect one or
more directors by the certificate of incorporation, the provisions of the
preceding sentence shall apply, in respect to the removal without cause of a
director or directors so elected, to the vote of the holders of the outstanding
shares of that class or series and not to the vote of the outstanding shares as
a whole. Unless otherwise provided in the certificate of incorporation or these
by-laws, vacancies and newly created directorships resulting from any increase
in the authorized number of directors elected by all of the stockholders having
the right to vote as a single class or from any other cause may be filled by a
majority of the directors then in office, although less than a quorum, or by the
sole remaining director. Whenever the holders of any class or classes of stock
or series thereof are entitled to elect one or more directors by the certificate
of incorporation, vacancies and newly created directorships of such class or
classes or series may be filled by a majority of the directors elected by such
class or classes or series thereof then in office, or by the sole remaining
director so elected. Any director elected or appointed to fill a vacancy shall
hold office until the next annual meeting of the stockholders, and until his or
her successor is elected and qualified or until his or her earlier resignation
or removal.
Section 2.3. Regular Meetings. Regular meetings of the Board of
----------------
Directors may be held at such places within or without the State of Delaware and
at such times as the Board may from time to time determine, and if so determined
notice thereof need not be given.
Section 2.4. Special Meetings. Special meetings of the Board of
----------------
Directors may be held at any time or place within or without the State of
Delaware whenever called by the Chairman of the Board, if any, by the Vice
Chairman or any Co-Chairman of the Board, if any, by the President or by any two
directors. Reasonable notice thereof shall be given by the person or persons
calling the meeting.
Section 2.5. Participation in Meetings by Conference Telephone
-------------------------------------------------
Permitted. Unless otherwise restricted
- ---------
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<PAGE>
by the certificate of incorporation or these by-laws, members of the Board of
Directors, or any committee designated by the Board, may participate in a
meeting of the Board or of such committee, as the case may be, by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and participation in a
meeting pursuant to this by-law shall constitute presence in person at such
meeting.
Section 2.6. Quorum; Vote Required for Action. At all meetings of the
--------------------------------
Board of Directors one-third of the entire Board shall constitute a quorum for
the transaction of business. The vote of a majority of the directors present at
a meeting at which a quorum is present shall be the act of the Board unless the
certificate of incorporation or these by-laws shall require a vote of a greater
number. In case at any meeting of the Board a quorum shall not be present, the
members of the Board present may adjourn the meeting from time to time until a
quorum shall be present.
Section 2.7. Organization. Meetings of the Board of Directors shall
------------
be presided over by the Chairman of the Board, if any, or in the absence of the
Chairman of the Board by the Vice Chairman or any Co-Chairman of the Board, if
any, or in the absence of the Vice Chairman or any Co-Chairman of the Board by
the President, or in their absence by a chairman chosen at the meeting. The
Secretary, or in the absence of the Secretary an Assistant Secretary, shall act
as secretary of the meeting, but in the absence of the Secretary and any
Assistant Secretary the chairman of the meeting may appoint any person to act as
secretary of the meeting.
Section 2.8. Action by Directors Without a Meeting. Unless otherwise
-------------------------------------
restricted by the certificate of incorporation or these by-laws, any action
required or permitted to be taken at any meeting of the Board of Directors, or
of any committee thereof, may be taken without a meeting if all members of the
Board or of such committee, as the case may be, consent thereto in writing, and
the
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<PAGE>
writing or writings are filed with the minutes of proceedings of the Board or
committee.
Section 2.9. Compensation of Directors. Unless otherwise restricted
-------------------------
by the certificate of incorporation or these by-laws, the Board of Directors
shall have the authority to fix the compensation of directors.
ARTICLE III
Committees
----------
Section 3.1. Committees. The Board of Directors may designate one or
----------
more committees, each committee to consist of one or more of the directors of
the Corporation. The Board may designate one or more directors as alternate
members of any committee, who may replace any absent or disqualified member at
any meeting of the committee. In the absence or disqualification of a member of
a committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not such member or members constitute a
quorum, may unanimously appoint another member of the Board to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors or
in these by-laws, shall have and may exercise all the powers and authority of
the Board of Directors in the management of the business and affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to the following matters: (i) approving or adopting, or
recommending to the stockholders, any action or matter expressly required by law
to be submitted to stockholders for approval, (ii) adopting, amending or
repealing these By-Laws or (iii) removing or indemnifying directors.
Section 3.2. Committee Rules. Unless the Board of Directors
---------------
otherwise provides, each committee designated by the Board may adopt, amend and
repeal rules for the
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<PAGE>
conduct of its business. In the absence of a provision by the Board or a
provision in the rules of such committee to the contrary, a majority of the
entire authorized number of members of such committee shall constitute a quorum
for the transaction of business, the vote of a majority of the members present
at a meeting at the time of such vote if a quorum is then present shall be the
act of such committee, and in other respects each committee shall conduct its
business in the same manner as the Board conducts its business pursuant to
Article II of these by-laws.
ARTICLE IV
Officers
--------
Section 4.1. Officers; Election. As soon as practicable after the
------------------
annual meeting of stockholders in each year, the Board of Directors shall elect
a President and a Secretary, and it may, if it so determines, elect from among
its members a Chairman of the Board, or Co-Chairman of the Board, and a Vice
Chairman of the Board. The Board may also elect one or more Vice Presidents,
one or more Assistant Vice Presidents, one or more Assistant Secretaries, a
Treasurer and one or more Assistant Treasurers and such other officers as the
Board may deem desirable or appropriate and may give any of them such further
designations or alternate titles as it considers desirable. Any number of
offices may be held by the same person unless the certificate of incorporation
or these by-laws otherwise provide.
Section 4.2. Term of Office; Resignation; Removal; Vacancies. Unless
-----------------------------------------------
otherwise provided in the resolution of the Board of Directors electing any
officer, each officer shall hold office until his or her successor is elected
and qualified or until his or her earlier resignation or removal. Any officer
may resign at any time upon written notice to the Board or to the President or
the Secretary of the Corporation. Such resignation shall take effect at the
time specified therein, and unless otherwise specified therein no acceptance of
such resignation shall be
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<PAGE>
necessary to make it effective. The Board may remove any officer with or without
cause at any time. Any such removal shall be without prejudice to the
contractual rights of such officer, if any, with the Corporation, but the
election of an officer shall not of itself create contractual rights. Any
vacancy occurring in any office of the Corporation by death, resignation,
removal or otherwise may be filled by the Board at any regular or special
meeting.
Section 4.3. Powers and Duties. The officers of the Corporation
-----------------
shall have such powers and duties in the management of the Corporation as shall
be stated in these by-laws or in a resolution of the Board of Directors which is
not inconsistent with these by-laws and, to the extent not so stated, as
generally pertain to their respective offices, subject to the control of the
Board. The Secretary shall have the duty to record the proceedings of the
meetings of the stockholders, the Board of Directors and any committees in a
book to be kept for that purpose. The Board may require any officer, agent or
employee to give security for the faithful performance of his or her duties.
ARTICLE V
Stock
-----
Section 5.1. Certificates. Every holder of stock in the Corporation
------------
shall be entitled to have a certificate signed by or in the name of the
Corporation by the Chairman or Vice Chairman or a Co-Chairman of the Board of
Directors, if any, or the President or a Vice President, and by the Treasurer or
an Assistant Treasurer, or the Secretary or an Assistant Secretary, of the
Corporation, representing the number of shares of stock in the Corporation owned
by such holder. If such certificate is manually signed by one officer or
manually countersigned by a transfer agent or by a registrar, any other
signature on the certificate may be a facsimile. In case any officer, transfer
agent or registrar who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to be such officer, transfer agent or
registrar before such certificate is
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<PAGE>
issued, it may be issued by the Corporation with the same effect as if such
person were such officer, transfer agent or registrar at the date of issue.
If the Corporation is authorized to issue more than one class of stock
or more than one series of any class, the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications or restrictions of such preferences
and/or rights shall be set forth in full or summarized on the face or back of
the certificate which the Corporation shall issue to represent such class or
series of stock, provided that, except as otherwise provided by law, in lieu of
the foregoing requirements, there may be set forth on the face or back of the
certificate which the Corporation shall issue to represent such class or series
of stock a statement that the Corporation will furnish without charge to each
stockholder who so requests 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.
Section 5.2. Lost, Stolen or Destroyed Stock Certificates; Issuance
------------------------------------------------------
of New Certificates. The Corporation may issue a new certificate of stock in
- -------------------
the place of any certificate theretofore issued by it, alleged to have been
lost, stolen or destroyed, and the Corporation may require the owner of the
lost, stolen or destroyed certificate, or such owner's legal representative, to
give the Corporation a bond sufficient to indemnify it against any claim that
may be made against it on account of the alleged loss, theft or destruction of
any such certificate or the issuance of such new certificate.
-17-
<PAGE>
ARTICLE VI
Miscellaneous
-------------
Section 6.1. Fiscal Year. The fiscal year of the Corporation shall
-----------
be determined by the Board of Directors.
Section 6.2. Seal. The Corporation may have a corporate seal which
----
shall have the name of the Corporation inscribed thereon and shall be in such
form as may be approved from time to time by the Board of Directors. The
corporate seal may be used by causing it or a facsimile thereof to be impressed
or affixed or in any other manner reproduced.
Section 6.3. Waiver of Notice of Meetings of Stockholders, Directors
-------------------------------------------------------
and Committees. Whenever notice is required to be given by law or under any
- --------------
provision of the certificate of incorporation or these by-laws, a written waiver
thereof, signed by the person entitled to notice, whether before or after the
time stated therein, shall be deemed equivalent to notice. Attendance of a
person at a meeting shall constitute a waiver of notice of such meeting, except
when the person attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the stockholders,
directors or members of a committee of directors need be specified in any
written waiver of notice unless so required by the certificate of incorporation
or these by-laws.
Section 6.4. Indemnification of Directors, Officers and Employees.
----------------------------------------------------
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
-18-
<PAGE>
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, company, partnership, joint
venture, trust or employee benefit plan; service "at the request of the
Corporation" shall include service as a director, officer or employee of the
Corporation which imposes duties on, or involves services by, such director,
officer or employee with respect to an employee benefit plan, its participants
or beneficiaries; any excise taxes assessed on a person with respect to an
employee benefit plan shall be deemed to be indemnifiable expenses; and action
by a person with respect to an employee benefit plan which such person
reasonably believes to be in the interest of the participants and beneficiaries
of such plan shall be deemed to be action not opposed to the best interests of
the Corporation.
Section 6.5. Interested Directors; Quorum. No contract or
----------------------------
transaction between the Corporation and one or more of its directors or
officers, or between the Corporation and any other corporation, partnership,
association or other organization in which one or more of its directors or
officers are directors or officers, or have a financial interest, shall be void
or voidable solely for this reason, or solely because the director or officer is
present at or participates in the meeting of the Board of
-19-
<PAGE>
Directors or committee thereof which authorizes the contract or transaction, or
solely because his or her or their votes are counted for such purpose, if: (1)
the material facts as to his or her relationship or interest and as to the
contract or transaction are disclosed or are known to the Board or the
committee, and the Board or committee in good faith authorizes the contract or
transaction by the affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum; or (2)
the material facts as to his or her relationship or interest and as to the
contract or transaction are disclosed or are known to the stockholders entitled
to vote thereon, and the contract or transaction is specifically approved in
good faith by vote of the stockholders; or (3) the contract or transaction is
fair as to the Corporation as of the time it is authorized, approved or
ratified, by the Board, a committee thereof or the stockholders. Common or
interested directors may be counted in determining the presence of a quorum at a
meeting of the Board of Directors or of a committee which authorizes the
contract or transaction.
Section 6.6. Form of Records. Any records maintained by the
---------------
Corporation in the regular course of its business, including its stock ledger,
books of account and minute books, may be kept on, or be in the form of, punch
cards, magnetic tape, photographs, microphotographs or any other information
storage device, provided that the records so kept can be converted into clearly
legible form within a reasonable time. The Corporation shall so convert any
records so kept upon the request of any person entitled to inspect the same.
Section 6.7. Amendment of By-Laws. These by-laws may be amended or
--------------------
repealed, and new by-laws adopted, by the Board of Directors, but the
stockholders entitled to vote may adopt additional by-laws and may amend or
repeal any by-law whether or not adopted by them.
-20-
<PAGE>
EXHIBIT 9.1
-----------
SECURITYHOLDERS' AGREEMENT
AGREEMENT, dated as of June 30, 1998, among JFAX Communications, Inc.,
a Delaware corporation (the "Company"), the investors listed on Exhibit 1 hereto
(the "Investors") and the shareholders listed on Exhibit 2 hereto (the
"Shareholders").
RECITALS
--------
WHEREAS, the Company is concurrently herewith entering into a
Securities Purchase Agreement with the Investors named therein (the "Securities
Purchase Agreement"), authorizing the issuance and delivery of (i) $10,000,000
aggregate principal amount of Senior Subordinated Notes due 2004 (the "Notes")
and (ii) shares of the Company's Common Stock, par value $.01 ("Common Stock").
WHEREAS, the Company, on or about the date hereof, is entering into a
Preferred Stock Purchase Agreement with the Investors named therein (the
"Preferred Stock Purchase Agreement"), authorizing the issuance and delivery of
(i) 5,000 shares of the Company's Series A Usable Redeemable Preferred Stock
(the "Preferred Stock") and (ii) warrants to purchase shares of Common Stock
("Warrants");
WHEREAS, it is a condition to the execution of each of the Securities
Purchase Agreement and the Preferred Stock Purchase Agreement that the parties
hereto enter into this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and mutual
covenants and agreements contained herein, the parties hereto agree as follows:
ARTICLE I.
DEFINITIONS
Section 1.1. Definitions. Capitalized terms used but not defined
-----------
herein shall have the meaning ascribed to them in the Securities Purchase
Agreement. As used herein, the following terms shall have the following
meanings:
"Affiliate" shall mean, with respect to any Person, (i) any other
---------
Person which, directly or indirectly, through one or more intermediaries,
controls, is controlled by, or is under common control with such Person, (ii)
any other Person which, directly or indirectly, beneficially owns or holds 5% or
more of any class of voting stock of such Person, or (iii) any Person of which,
directly or indirectly, such Person owns or holds 5% or more of any equity
security (as defined in the Securities Act). The term "control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management
<PAGE>
and policies of a Person, whether by virtue of the ownership of voting stock, by
contract or otherwise.
"Common Stock" shall have the meaning set forth in the first recital.
------------
"Company" shall have the meaning set forth in the preamble.
-------
"Initiating Shareholders" shall have the meaning specified in Section
-----------------------
2.4(a).
"Investors" shall have the meaning set forth in the preamble.
---------
"Notes" shall have the meaning set forth in the first recital.
-----
"Owned" as to any Shares, shall mean all Shares as to which any Person
-----
would be deemed to be a beneficial owner, within the meaning of Rule 13d-3 of
the Exchange Act.
"Participating Offeree" shall have the meaning specified in Section
---------------------
2.4(a).
"Participation Notice" shall have the meaning specified in Section
--------------------
2.4(a).
"Participation Securities" shall have the meaning specified in Section
------------------------
2.4(a).
"Participation Transfer" shall have the meaning specified in Section
----------------------
2.4(a).
"Preferred Stock" shall have the meaning set forth in the second
---------------
recital.
"Securities" shall mean the Notes, Shares, shares of Preferred Stock
----------
and Warrants issued or issuable pursuant to the Securities Purchase Agreement or
Preferred Stock Purchase Agreement.
"Securities Purchase Agreement" shall have the meaning set forth in
-----------------------------
the first recital.
"Shareholders" shall have the meaning set forth in the preamble.
------------
"Shares" shall mean shares of Common Stock, any other shares of
------
capital stock of the Company and shares of Common Stock
2
<PAGE>
Issuable under the Warrants, excluding shares of the Preferred Stock.
"Third Party" or "Third Parties" shall mean any Person but, as to any
----------- -------------
Shareholder, shall not include the estate of such Shareholder.
"Transfer" shall have the meaning set forth in Section 2.1(b) hereof.
--------
"Transferee" shall mean any Person acquiring Shares from a Shareholder
----------
and any subsequent transferee of any such Person herein referred to as a
"Transferee" of such Person.
"Warrants" shall have the meaning set forth in the second recital
--------
thereof.
"Warrant Shares" shall mean Shares issued or issuable upon exercise of
--------------
any Warrants.
ARTICLE II.
RESTRICTIONS ON TRANSFER
Section 2.1. Transfer of Shares. During the term of this Agreement,
------------------
no Shareholder shall, directly or indirectly, offer, sell, assign, transfer,
grant a participation interest in, pledge, encumber or otherwise dispose of, or
place in trust (voting or otherwise) (each such transaction being herein called
a "Transfer") to any Third Party any Shares Owned by such Shareholder unless
such transfer is in accordance with the provisions of this Agreement.
Notwithstanding the foregoing, without compliance with Sections 2.2, 2.3 or 2.4,
any Shareholder signatory hereto as of the date hereof may Transfer to any Third
Party up to an aggregate of 10% of the Shares Owned by such Shareholder on the
date hereof.
Section 2.2. Agreement to be Bound. No Transfer of Shares by a
---------------------
Shareholder pursuant to Section 2.4, 2.5 or 2.6 shall be effective unless (i)
the certificates representing such Shares issued to the Transferee shall bear
the legend provided in Section 2.3 and (ii) the Transferee (if not already a
party hereto) shall have executed and delivered to each Investor and
Shareholder, as a condition precedent to such Transfer, an instrument or
instruments reasonably satisfactory to such parties confirming that the
Transferee agrees to be bound by the terms of this Agreement in the same manner
as such Transferee's transferor, except as otherwise provided in this Agreement.
Section 2.3. Restrictive Legend. Each certificate evidencing Shares
------------------
Owned by each Shareholder shall be conspicuously stamped or otherwise imprinted
with a legend in substantially the following form:
3
<PAGE>
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS
ON TRANSFER AND CAN BE TRANSFERRED ONLY PURSUANT TO THE TERMS OF A
SECURITYHOLDERS' AGREEMENT DATED AS OF JUNE 30, 1998, AMONG THE
COMPANY AND CERTAIN HOLDERS OF ITS SECURITIES. A COPY OF SUCH
AGREEMENT WILL BE FURNISHED WITHOUT CHARGE BY THE COMPANY TO THE
HOLDER HEREOF UPON WRITTEN REQUEST.
Section 2.4. Participation Rights. (A) If no Notes and no shares of
--------------------
Preferred Stock are then outstanding, any Shareholder may Transfer any Shares
Owned by such Shareholder, (B) if no Notes are then outstanding but any shares
of Preferred Stock are then outstanding, any Shareholder may Transfer, in the
aggregate, between 10% and 33-1/3% of the Shares Owned by such Shareholder on
the date hereof and, provided that Section 2.4(d) is complied with, any
Shareholder may Transfer, in the aggregate, more than 33-1/3% of the Shares
Owned by such Shareholder on the date hereof, and (C) if any Notes are then
outstanding, any Shareholder may Transfer, in the aggregate, between 10% and 25%
of the Shares Owned by such Shareholder on the date hereof and, provided that
Section 2.4(d) is complied with, any Shareholder may Transfer, in the aggregate,
more than 25% of the Shares Owned by such Shareholder on the date hereof, and
provided further, in each case described in clauses (A), (B) and (C) above, that
- -------- -------
the following terms and conditions have been satisfied:
(a) Any Shareholder hereto (the "Initiating Shareholder") shall give
notice of any intended Transfer (each, a "Participation Transfer") to each
Investor (each, a "Participating Offeree"). Such notice (the "Participation
Notice") shall set forth the terms and conditions of such proposed Participation
Transfer, including the name of the prospective transferee, the number of Shares
proposed to be Transferred (the "Participation Securities"), the purchase price
per share proposed to be paid therefor, the payment terms and type of
Participation Transfer to be effectuated, and any other material terms and
conditions of such proposed Participation Transfer. Within 20 days following
the delivery of the Participation Notice by the Initiating Shareholder, each
Participating Offeree shall have the right, but not the obligation, to
participate in such Participation Transfer by Transferring (up to the number of
Shares Owned by such Participating Offeree), that number of Shares equal to the
product obtained by multiplying (i) the total number of Shares proposed to be
Transferred in the Participation Transfer times (ii) a fraction, the numerator
of which shall be equal to the aggregate number of Shares Owned by such
Participating Offeree immediately prior to the Participation Transfer and the
denominator of which is equal to the sum of (x) the aggregate number of Shares
Owned by the Initiating Shareholder immediately prior to the Participation
Transfer plus (y) the aggregate number of Shares Owned by all other
Participating Offerees immediately prior to the Participation Transfer and (z)
the aggregate number
4
<PAGE>
of Shares comprising the numerator. In the event that a Participating Offeree
elects not to participate in the Participation Transfer, then the other
Participating Offerees and the Initiating Shareholder may sell additional Shares
pro rata to the extent of such Participating Offeree's non-participation. Any
- --- ----
such Participation Transfers shall be on the same terms and conditions as the
proposed Participation Transfer by the Initiating Shareholder.
(b) The closing of any proposed Participating Transfer in respect of
which a Participation Notice has been delivered shall occur not earlier than 30
days nor more than 90 days after the date the last Participation Notice has been
given. The closing shall be held at 10:00 a.m., local time, on the date of
closing at the principal office of the Company, or at such other time or place
as the parties to such transaction mutually agree. At the closing, the
Initiating Shareholder, together with all Participating Offerees electing to
transfer Shares, shall deliver to the proposed Transferee (i) certificates
evidencing the Shares to be transferred pursuant thereto, free and clear of any
lien, claim or encumbrance and (ii) such other documents, including, without
limitation, executed stock powers and evidence of ownership and authority, as
the Transferees shall reasonably request, and shall receive in exchange therefor
the consideration to be paid or delivered by the proposed Transferee in respect
of such Shares as described in the Participation Notice.
(c) Notwithstanding anything contained in this Section 2.4, the
Transfers permitted by this Section 2.4 shall not include pledges or
encumbrances of Shares.
(d) Any Transfer of Shares pursuant to Section 2.4(B) or 2.4(C)
requiring compliance with this Section 2.4(d) shall be deemed a Change of
Control for purposes of paragraph 4C of the Securities Purchase Agreement and
paragraph (iv)(c) of the Certificate of Designations relating to the Preferred
Stock, and, if any of the holders entitled to have their Notes repaid or their
shares of Preferred Stock redeemed, as the case may be, exercise such rights,
the consummation and validity of such Transfer of Shares shall be subject to the
prior or simultaneous payment in full of all amounts due to such holders
thereunder.
Section 2.5. Permitted Transfers. At any time prior to a Qualified
-------------------
Public Offering, notwithstanding any provision in this Article II to the
contrary, any Shareholder may Transfer, without compliance with the requirements
of Section 2.4, Shares to any Affiliate thereof, subject always to the terms and
provisions of this Agreement. Any such Transferee shall receive and hold the
Shares so transferred subject to the terms and provisions of this Agreement
(including the restrictions on Transfer in this Article II) and shall be deemed
a Shareholder for purposes hereof.
5
<PAGE>
Section 2.6. Sale of the Company.
-------------------
(a) Pull Along Right. Subject to Section 2.6(b), if any holder or
----------------
holders (the "Selling Shareholders") who own in the aggregate at least 66-2/3%
of the outstanding Shares have received a bona fide offer from any Person (other
than an Affiliate) to buy all the outstanding Shares and Warrants which would
directly or indirectly result in all Shareholders and Investors receiving cash
in exchange for their Shares or Warrants, as the case may be, equal to or
greater than the Fair Market Value for such Shares or Warrants (including,
without limitation, pursuant to a merger of the Company) (the "Offer"), the
Selling Shareholders shall have the right (the "Pull Along Right") to require
the other Shareholders and Investors to accept the Offer and shall give notice
(the "Pull Along Notice") to the other Shareholders and Investors stating that
such Selling Shareholders propose to effect such transaction and stating the
name and address of the offeror (the "Offeror") and the purchase price under the
Offer (the "Third Party Price"). If the Third Party Price is at least $2.00 per
Share, then any holder or holders who own in the aggregate at least 50% of the
outstanding Shares shall be entitled to the Pull Along Rights hereunder.
(b) Conditions. The Pull Along Notice shall not be effective (and
----------
the Selling Shareholder shall not be permitted to transfer its Shares to the
Offeror) unless all of the following conditions are met:
(i) The Offer shall (1) have been signed by the Offeror, which
may not be an Affiliate of any Selling Shareholder; (2) offer to consummate the
proposed transaction on or before a date ninety (90) days from the date of the
Offer; and (3) obligate the Offeror to enter into and complete the transactions
set forth in the Offer with all the Shareholders and Investors for the same
price per Share and on the same terms as those which the Selling Shareholders
have agreed to sell, provided that the price for the Warrants shall be reduced
--------
by the applicable exercise price per Share, and provided further that in no
-------- -------
event shall the Offer be subject to the delivery by the other Shareholders or
Investors to the Offeror of any more than (A) the Shares or Warrants Owned by
them to be purchased pursuant to the Offer, (B) customary representations and
warranties and (C) a customary legal opinion of counsel;
(ii) The Pull Along Notice shall propose a Third Party Price of
an equal amount per Share, in cash, provided that the price for the Warrants
shall be reduced by the applicable exercise price per Share; and
(iii) The Offeror shall furnish to the reasonable satisfaction of
the Selling Shareholders evidence as to the Offeror's financial ability to
consummate the proposed purchase.
6
<PAGE>
(c) Sale to Offeror. If the Selling Shareholders shall have
---------------
delivered a Pull Along Notice to all other Shareholders and Investors, then all
Shareholders and Investors shall sell all of their Shares and Warrants to the
Offeror upon the terms and conditions of the Offer (or otherwise take all
necessary action to cause the Company to consummate the proposed transaction) at
a closing to be held at the principal office of the Company at or prior to the
90th day from the date of the Offer. If such sale is not consummated within
such 90-day period, the restrictions provided for in this Section 2.6 shall
again become effective, and no Transfer of the Shares may be made thereafter
without complying with the provisions of this Agreement.
Section 2.7. Improper Transfer. Any attempt to Transfer any Shares
-----------------
not in compliance with this Agreement shall be null and void and neither the
Company nor any transfer agent shall give any effect in the Company's stock
records to such attempted Transfer.
Section 2.8. Adjustment of Time Periods. The closings referred to in
--------------------------
Sections 2.4(b) and 2.6(c), shall be extended for such amount of time as is
necessary for expiration of all regulatory holding periods and to obtain any
governmental and regulatory consents and approvals necessary in respect of the
purchase or sale of Shares to take place at such closing.
Section 2.9. Change of Control. Nothing in this Agreement shall
-----------------
vitiate the rights entitled by the Investors contained in any Related Documents
upon the occurrence of a Change of Control.
ARTICLE III.
MISCELLANEOUS
Section 3.1. Board of Directors. (a) As long as any of the
------------------
Investors signatory to the Securities Purchase Agreement hold (i) any Notes or
(ii) at least 25% of the Shares issued pursuant to the Securities Purchase
Agreement, the Company and the Shareholders shall take all action within their
respective power, including, but not limited to, the voting of capital stock of
the Company, required to cause the Board of Directors of the Company to at all
times consist of no more than seven members, one of whom shall be designated by
such Investors (the " Notes Designee"). Each of the Shareholders and the
Company agree to vote any of their Shares which are outstanding at all meetings
of stockholders of the Company (or any written consents in lieu thereof) in
which directors are elected in favor of the Notes Designee.
(b) As long as the Investors signatory to the Preferred Stock
Purchase Agreement (the "DLJ Investors") hold at least 25% of the Warrant
Shares, the Company and the Shareholders
7
<PAGE>
shall take all action within their respective power, including, but not limited
to, the voting of capital stock of the Company, required to cause the Board of
Directors of the Company to at all times consist of no more than seven members,
one of whom shall be designated by such Investors (the "Preferred Designee"). In
addition, if, prior to a Qualified Public Offering, the DLJ Investors hold at
least one Warrant Share but less than 25% of the Warrant Shares, then the
Preferred Designee may be designated by the holders of a majority of the Warrant
Shares. Each of the Shareholders and the Company agree to vote any of their
Shares which are outstanding at all meetings of stockholders of the Company (or
any written consents in lieu thereof) in which directors are elected in favor of
the Preferred Designee.
(c) In the event that the Notes Designee or the Preferred Designee (a
"Withdrawing Director") designated in the manner set forth in Section 3.1(a) or
(b) above is unable to serve, or once having commenced to serve, is removed or
withdraws from the Board of Directors of the Company, such Withdrawing
Director's replacement (the "Substitute Director") on the Board of Directors of
the Company will be designated by appropriate Investors. The Company and the
Shareholders agree to take all action within their respective power, including,
but not limited to, the voting of outstanding capital stock of the Company, to
cause the election of such Substitute Director as soon as practicable following
his designation.
(d) In the event the Investors entitled to designate Directors
pursuant to this Agreement cease to be so entitled, the vacancies resulting
therefrom shall be filled by the remaining directors or by the Stockholders in
the manner provided by applicable law or the number of directors constituting
the Board shall be reduced. In the event the Investors entitled to designate
any Director pursuant to this Agreement choose not to designate a Director, such
directorship shall remain vacant.
(e) Following a Qualified Public Offering, (i) the size of the Board
of Directors shall not be limited hereunder to seven directors and (ii) so long
as the Investors exercise their rights hereunder to designate a Notes Designee
or a Preferred Designee, the appropriate Investors shall vote their respective
outstanding Shares in favor of election of up to five directors designated by
the Shareholders.
(f) Nothing in this Section 3.1 shall be in limitation of the rights
of the holders of the Preferred Stock set forth in clause (vi) of the
Certificate of Designations of the Preferred Stock.
Section 3.2. Termination of Agreement. This Agreement shall
------------------------
terminate as follows:
(i) upon the written agreement of the Company, the Shareholders
and the Investors; or
8
<PAGE>
(ii) on such date as (A) there are no longer any Notes or
shares of Preferred Stock outstanding, (B) all rights of the Investors to
designate any directors under Section 3.1 have terminated pursuant to the terms
of such Section 3.1 and (C) a Qualified Public Offering shall have occurred.
Section 3.3. Termination of Restrictions on Transfer Agreement. The
-------------------------------------------------
restrictions on Transfer imposed by Article II (including, without limitation,
Section 2.6) shall terminate upon the consummation of a Qualified Public
Offering, provided that no Notes and no shares of Preferred Stock are then
outstanding.
Section 3.4. Representations. Each party hereto represents that (i)
---------------
the execution and delivery of this Agreement and the performance of such party's
obligations hereunder will not violate or conflict with any material agreement
to which such party is a party or any law, rule, license, regulation, judgment,
order, ruling or decree governing or affecting such party; (ii) no consents or
filings with any governmental authority or any other Person are required to be
obtained or made in connection with such party's execution, delivery and
performance of this Agreement; and (iii) this Agreement constitutes the valid
and binding obligation of such party, enforceable against such party in
accordance with its terms.
Section 3.5. Representations, Warranties and Covenants of the
------------------------------------------------
Shareholders. Each Shareholder represents and warrants to the Investors that
- ------------
all the shareholders of the Company who are Affiliates of such Shareholder are
parties to this Agreement. Each Shareholder represents and warrants that this
Agreement does not violate any material agreement, instrument, order, writ,
judgment or decree to which it is a party, or by which any of its properties or
assets are bound. Each Shareholder covenants that if after the date hereof any
Person who is or becomes a shareholder of the Company is or becomes an Affiliate
of any Shareholder, then such Shareholder shall cause such Person to become a
party to this Agreement.
Section 3.6. Successors and Assigns. All agreements contained herein
----------------------
by or on behalf of the parties hereto shall bind and inure to the benefit of the
respective successors and assigns of the parties hereto whether so expressed or
not, including, without limitation, any Person who acquires any Securities (or
any securities issued in exchange for any of the Notes or shares of Preferred
Stock) from any party.
Section 3.7. Notices. All communications provided for hereunder
-------
shall be sent by first class mail or overnight courier and, if to any Investor,
addressed to the Investor in the manner in which its address appears on Exhibit
-------
1 hereto, with a copy to William J. Grant, Jr., Esq., at Willkie Farr &
- -
Gallagher, 787 Seventh Avenue, New York, New York 10019; if to any Shareholder,
addressed to the Shareholder at the address set forth below such Shareholder's
name on Exhibit 2 hereto; and if to the Company,
---------
9
<PAGE>
addressed to it at 10960 Wilshire Blvd., Los Angeles, California 90024,
Attention: Office of the President, with a copy to Office of General Counsel of
the Company, or to such other address with respect to any party as such party
shall notify the other in writing.
Section 3.8. Descriptive Headings. The descriptive headings of the
--------------------
several paragraphs of this Agreement are inserted for convenience only and do
not constitute a part of this Agreement.
Section 3.9. Governing Law. The corporate law of the State of
-------------
Delaware will govern all issues concerning the relative rights of the Company,
on the one hand, and the Shareholders and the Investors, on the other hand. All
other questions concerning the construction, validity and interpretation of this
Agreement will be governed by, and construed and enforced in accordance with,
the law of the State of New York without regard to the conflicts of laws
principles thereof.
Section 3.10. Remedies. In case any one or more of the provisions
--------
set forth in this Agreement shall have been breached by the Company or any
Shareholder or Investor, the Company or the Shareholders or Investors (or any of
them), as applicable, may proceed to protect and enforce its or their rights
either by suit in equity and/or by action at law, including, but not limited to,
an action for damages as a result of any such breach and/or an action for
specific performance of any such provision contained in this Agreement. The
Company or any Shareholder or Investor acting pursuant to this Section 3.10
shall be indemnified by the breaching party or parties against all liability,
loss or damage, together with all reasonable costs and expenses related thereto
(including reasonable legal and accounting fees and expenses) in accordance with
provisions substantially equivalent to paragraph 14B of the Securities Purchase
Agreement.
Section 3.11. Entire Agreement. This Agreement, the Securities
----------------
Purchase Agreement, the Preferred Stock Purchase Agreement and the Registration
Rights Agreement and the other writings referred to herein or delivered pursuant
hereto contain the entire agreement among the parties with respect to the
subject matter hereof and supersede all prior and contemporaneous arrangements
or understandings with respect thereto.
Section 3.12. Severability. Any provision of this Agreement that is
------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
10
<PAGE>
Section 3.13. Amendments. This Agreement may not be changed orally,
----------
but only by an agreement in writing signed by the party against whom enforcement
of any waiver, change, modification or discharge is sought.
Section 3.14. Counterparts. This Agreement may be executed in any
------------
number of counterparts, each of which shall be deemed an original, but all such
counterparts shall together constitute one and the same instrument, and it shall
not be necessary in making proof of this Agreement to produce or account for
more than one such counterpart.
11
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered by their respective officers thereunto duly authorized as
of the date first above written.
JFAX COMMUNICATIONS, INC.
By: /s/ Hemi Zucker
------------------------------------
Name: Hemi Zucker
Title:
SHAREHOLDERS:
ORCHARD/JFAX INVESTORS, L.L.C.
By: /s/ Richard S. Ressler
------------------------------------
Richard S. Ressler
Manager
12
<PAGE>
INVESTORS:
DELAWARE STATE EMPLOYEES'
RETIREMENT FUND
By: PECKS MANAGEMENT PARTNERS LTD.
Its Investment Advisor
By: /s/ Robert J. Cresci
-------------------------------------
Robert J. Cresci
Managing Director
DECLARATION OF TRUST FOR
DEFINED BENEFIT PLANS OF ICI
AMERICAN HOLDING INC.
By: PECKS MANAGEMENT PARTNERS LTD.
Its Investment Advisor
By: /s/ Robert J. Cresci
-------------------------------------
Robert J. Cresci
Managing Director
DECLARATION OF TRUST FOR
DEFINED BENEFIT PLANS OF
ZENECA HOLDING INC.
By: PECKS MANAGEMENT PARTNERS LTD.
Its Investment Advisor
By: /s/ Robert J. Cresci
-------------------------------------
Robert J. Cresci
Managing Director
THE J.W. MCCONNELL FAMILY FOUNDATION
By: PECKS MANAGEMENT PARTNERS LTD.
Its Investment Advisor
By: /s/ Robert J. Cresci
-------------------------------------
Robert J. Cresci
Managing Director
13
<PAGE>
DLJ FUND INVESTMENT PARTNERS II, L.P.
By: DLJ LBO PLANS MANAGEMENT
CORPORATION
Its General Partner
By: /s/ Ivy Dodes
-------------------------------------
Name: Ivy Dodes
Title: Vice President
DLJ CAPITAL CORPORATION
By: /s/ Ivy Dodes
-------------------------------------
Name: Ivy Dodes
Title: Vice President
GMT PARTNERS, LLC
c/o Blue Capital Management
By: /s/ Chris Gagnon
-------------------------------------
Chris Gagnon
Managing Member
ORCHARD/JFAX INVESTORS, L.L.C.
By: /s/ Richard Ressler
-------------------------------------
Name: Richard Ressler
Title: Manager
14
<PAGE>
DLJ PRIVATE EQUITY EMPLOYEES FUND, L.P.
By: DLJ LBO PLANS MANAGEMENT CORPORATION
Its General Partner
By: /s/ Ivy Dodes
--------------------------------------
Name: Ivy Dodes
Title: Vice President
15
<PAGE>
EXHIBIT 1 (INVESTORS)
---------------------
DELAWARE STATE EMPLOYEES'
RETIREMENT FUND
c/o Pecks Management Partners Ltd.
One Rockefeller Plaza
New York, NY 10020
DELAWARE OF TRUST FOR
DEFINED BENEFIT PLANS OF ICI
AMERICAN HOLDING INC.
c/o Pecks Management Partners Ltd.
One Rockefeller Plaza
New York, NY 10020
DECLARATION OF TRUST FOR
DEFINED BENEFIT PLANS OF
ZENECA HOLDING INC.
c/o Pecks Management Partners Ltd.
One Rockefeller Plaza
New York, NY 10020
THE J.W. MCCONNELL FAMILY FOUNDATION
c/o Pecks Management Partners Ltd.
One Rockefeller Plaza
New York, NY 10020
DLJ FUND INVESTMENT PARTNERS II, L.P.
277 Park Avenue
New York, NY 10172
DLJ CAPITAL CORPORATION
277 Park Avenue
New York, NY 10172
GMT PARTNERS, LLC
c/o Blue Capital Management
152 West 57th Street, 11th Floor
New York, New York 10019
Attention: Chris Gagnon
ORCHARD/JFAX INVESTORS, L.L.C.
10960 Wilshire Blvd.
Los Angeles, California 90024
Attention: Office of the President
DLJ PRIVATE EQUITY EMPLOYEES FUND, L.P.
277 Park Avenue
New York, NY 10172
16
<PAGE>
EXHIBIT 2 (SHAREHOLDERS)
------------------------
Shares Owned
------------
Orchard/JFAX Investors, L.L.C. 10,512,622
10960 Wilshire Blvd.
Los Angeles, California 90024
Attention: Office of the President
17
<PAGE>
EXHIBIT 10.1
------------
JFAX.COM
--------
Incentive Compensation Bonus Plan
---------------------------------
January, 1999
-------------
Purpose
- -------
The Incentive Compensation Bonus Plan (`the Plan') is designed to recognize
efforts required in supporting JFAX.COM to achieve its annual objectives and
maintain its place as the leader in unified messaging.
Administration
- --------------
The Management Committee of JFAX.COM will administer the Plan. This committee
will be exclusively responsible for determining and approving the following:
. Financial planning and setting of corporate goals
. Eligibility of plan participants
. Bonus structure amounts (based on base salary)
. Individual assessment guidelines and goals
Target Award
- ------------
1. Funding: Corporate attainment of goals drives the funding of the bonus plan.
-------
If the company meets or exceeds its goals, the plan is funded accordingly.
Funding does not trigger below 85% attainment. If JFAX.COM's financial
-----------------------
performance does not reach the attainment level that has been set, no
---------------------------------------------------------------------
bonuses of any amount will be paid.
----------------------------------
2. Individual Attainment: Assuming the plan is funded, the individual funding
---------------------
is based on an individual's attainment of his or hers goals; either
quantitative (numerical) goals or qualitative goals. An individual's
supervisor determines his or her level of attainment against his or her
goals and recommends a bonus accordingly.
Eligibility
- -----------
To be eligible for participation in the Plan, you must be a full-time employee
for a minimum of 90 days during that year. In addition, if and when the semi-
annual payments are made, you must be employed by JFAX.COM on the date of
disbursement to receive actual payment.
Disbursements
- -------------
The January to June segment will be disbursed either the last pay period of
September or first pay period of October. The July to December segment will be
disbursed either the last pay period of March or first pay period of April. All
applicable taxes and withholdings shall be deducted from any bonus paid.
Termination of Employment
- -------------------------
If a participant's employment is terminated voluntarily, or by JFAX.COM for
unsatisfactory performance or cause, all unpaid bonus opportunities will be
forfeited.
<PAGE>
EXHIBIT 10.3
------------
September 2, 1998
PERSONAL & CONFIDENTIAL
-----------------------
Mr. Gary H. Hickox
P.O. Box 2244
Morristown, New Jersey 07962-2244
Re: Employment
----------
Dear Gary:
I write to confirm the terms under which you will become employed by JFAX
Communications, Inc. (the "Company").
You shall serve as the President and Chief Operating Officer of the Company
and will have the authority and responsibilities in such position as set forth
in the bylaws of the Company. The Company will provide you with facilities and
staff services sufficient and conducive to the discharge of your duties. The
Company will use its commercially reasonable best efforts to have you elected a
director by the stockholders of Company upon the earlier to occur of the initial
public offering of the shares in the Company Stock or the first anniversary of
your employment.
You will relocate your residence to the greater Los Angeles metropolitan area
on or before September 17, 1998. The Company shall reimburse you for all
reasonable and actual expenses incurred by you in connection with relocating to
the Los Angeles area except that the Company's total reimbursement obligation
shall in no event exceed $50,000.
Your employment will be for an initial one-year term commencing on September
17, 1998 or such earlier date as mutually agreed upon by you and Company (the
"Start Date"). This term shall automatically be extended for additional terms of
one year each, unless the Company no later than 60 days before the end of the
initial term or any additional term notifies you that the Company has elected
not to extend your employment effective at the end of the then current term. If
the Company elects not to extend your employment at the end of the initial term
or any additional term of this Agreement, the Company shall pay you severance
equal to 100 percent of your then current annual base salary in accordance with
Company's regular payroll practices. In the event the Company elects not to
extend the initial term or any additional term of this Agreement you shall have
one year from the date of expiration of this Agreement to exercise all stock
options granted to you and vested as of the date of such expiration. You shall
be entitled to twenty (20) business days of paid vacation in each consecutive
twelve-month period, which will vest pro-rata based on time employed in
accordance with the Company's regular benefits procedures; provided, that you
--------
will be entitled to take a two-week and two day paid vacation in October, 1998
(and vacation days shall be advanced to you for such purpose).
You shall receive an annual base salary during the initial term of your
employment of $220,000, payable in accordance with the Company's regular payroll
practices. For all additional one year terms of this Agreement, you shall
receive a raise in your annual base salary in an amount determined by Company's
Board of Directors, payable in reasonable periodic installments in accordance
with
<PAGE>
Company's regular payroll practices. In addition to the base salary the Company
shall pay you an annual bonus, as determined by the Board of Directors of the
Company based upon your performance and the Company's performance as measured by
written milestones agreed upon annually by you and the Company, of at least 50
percent of your annual salary if the milestones are met and up to 100 percent of
your annual salary if the milestones are exceeded.
Pursuant to the terms of the Company's 1997 Stock Option Plan (the "Plan") (to
the extent this Agreement conflicts with the provisions of the Plan this
Agreement shall control and be deemed a Stock Option Agreement as referred to in
the Plan) the Company shall grant you, subject to Board approval, the option to
acquire up to 300,000 shares of the Company's Common Stock at an exercise price
of $3.00 per share subject to adjustment as provided in the Plan. Unless
otherwise set forth herein, you will vest in one-third of the options on each of
the first three anniversaries of the Start Date.
In addition you will receive a further annual grant of stock options from the
Company. You and I will annually agree upon a recommended number of further
options and an exercise price for such options which will be presented to the
Board of Directors.
You shall be entitled to participate in and receive the benefits of any profit
sharing or retirement plans, and any health, dental, vision, life, accident or
disability insurance plans or programs and any other benefits made available to
other executive employees of Company. The Company's health, dental and vision
plans during the term of your employment will (to the extent such coverage can
be obtained on substantially similar commercial terms as the Company's current
coverage) provide coverage to same sex unmarried partners.
Subject to Board approval, the Company will sell you 33,000 shares of the
Company's Common Stock at a price of $3.00 per share. In order to purchase such
shares, the Company will loan you $99,000. This loan will be evidenced by a
promissory note (the "Note") providing for repayment of the loan in one balloon
payment of principle plus accrued interest due three years from execution of the
Note. The Note will bear interest at a fixed rate equal to the yield on U.S.
Treasury securities with a 3 year maturity date on the date the loan is made and
will be fully recourse to you. In the event that any of my affiliates or I
propose to sell shares of the Company's Common Stock, I will give you notice
(including the terms) of such proposed sale, and you will have the right to
participate in such sale, pro-rata, by selling up to a number of shares equal to
the number of shares proposed to be sold by me multiplied by a fraction, the
numerator of which is 33,000 and the denominator of which is the total number of
shares owned by my affiliates and me prior to such sale. (the "Co-sale Right").
The Co-Sale Right shall survive termination or non-renewal of your employment
for so long as any portion of the Note remains unpaid.
The Company may discharge you at any time for Cause upon delivery of written
notice to you, making reference to and specifying with particularity the actions
or inactions constituting such Cause. For purposes of this Agreement, "Cause"
shall mean (i) your breach of any material term of this Agreement or your
failure to follow any lawful directive of the Board of Directors of the Company
consistent with your duties hereunder, which event is not corrected within a
reasonable period after written notice is delivered by the Company to you
specifying said failure or breach; (ii) your engaging in a felony or a crime
involving moral turpitude; or (iii) your engaging in theft, larceny or
embezzlement of any of the Company's property; or (iv) your engaging in
harassment of the employees of the Company as defined in the California Fair
Employment and Housing Act Government Codes (S)(S) 12900, et seq. In the event
you are discharged for Cause, the Company shall have no further obligations or
liabilities hereunder after the date of such discharge. For purposes of the
stock options granted to you by the Company, the definition of Cause set forth
in this Agreement shall supercede and replace the definition
2
<PAGE>
in the Plan. In the event of a termination for Cause, any vested unexercised
stock options granted to you by the Company shall expire and cease to be
exercisable.
The Company may terminate your employment hereunder "for convenience" at any
time. Upon such termination "for convenience" you shall (i) receive severance in
an amount equal to 100 percent of your then current annual base salary in
accordance with the Company's regular payroll practices and (ii) vest in all
unvested stock options otherwise scheduled to vest within 90 days of such
termination. In the event of a termination for convenience you will have one
year from the date of such termination to exercise all stock options granted to
you and vested as of the date of such termination.
You may terminate this Agreement at any time upon 60 days prior written
notice, in which event you shall be entitled to the portion of your then current
annual base salary accrued to the date of termination and any options vested as
of the date of termination; provided, however, that if you terminate this
Agreement because (i) of a breach by the Company of the Company's duties and
obligations under this Agreement, (ii) there occurs a material change from the
date of this Agreement in the authorities, powers, functions or duties attached
to your position as President and Chief Operating Officer of the Company, or
(iii) the Company's principal executive offices are no longer located in the Los
Angeles metropolitan area, you shall (x) receive severance in an amount equal
to 100 percent of your then current annual base salary in accordance with the
Company's regular payroll practices and (y) vest in all unvested stock options
otherwise scheduled to vest within 90 days of such termination. In the event
you terminate this Agreement you shall have one year from the date of such
termination to exercise any vested unexercised stock options granted to you by
the Company.
If you become Disabled (as defined below), the Company will continue the
payment of your annual base salary at its then current rate until the sooner of
(a) 90 days following the date you are first unable to perform your duties due
to such disability or incapacity or (b) the date you are first eligible to
receive disability payments under any disability policy or other benefit plan in
which you are a beneficiary or participant. Thereafter, the Company shall have
no obligation for base salary or other compensation payments to you during the
continuance of such disability or incapacity other than such as may be available
under any disability policy or other benefit plan in which you are a beneficiary
or participant. Upon your disability the Company shall have the right to
terminate this Agreement. The terms "Disabled" and "Disability" mean for the
purposes of this Agreement, that either (i) as a result of your incapacity, you
have become eligible or would be eligible but for a waiting period for full
benefits under all of the Company's long-term disability policies applicable to
you, or (ii) if at any time no such long-term disability policies are in force
or cover the particular disability from which you suffer, pursuant to an
examination by a physician selected by the Company at the Company's sole
expense, it is determined that you are unable, due to a medically determinable
physical or mental condition, to substantially perform the duties of your
employment hereunder for a period of 90 days during any 180-day period. Upon a
termination of this Agreement due to your Disability you will have one year from
such termination to exercise all vested unexercised stock options granted to you
by the Company.
You agree that any of the Company's severance obligations set forth in this
Agreement shall, after a period of receiving severance for six months following
a termination or non-renewal, immediately terminate upon your securing
replacement employment (but shall continue to the extent that your total
compensation from the replacement employment is less than the Company's
severance obligations hereunder). However, you shall be under no obligation
whatsoever to seek or locate such replacement employment.
The Company agrees that it will obtain Board approval for the issuance to
you of the stock options and Common Stock contemplated by this Agreement within
one week of the date hereof, failing which you will have the right to terminate
this Agreement.
3
<PAGE>
The Company agrees to indemnify you and hold you harmless against all costs,
expenses (including, without limitation, reasonable attorneys' fees) and
liabilities (other than settlements to which the Company does not consent, which
consent shall not be unreasonably withheld)(collectively, "Losses") reasonably
incurred by you in connection with any claim, action, proceeding or
investigation brought against or involving you with respect to, arising out of
or in any way relating to your employment with the Company or your service as a
director of the Company; provided, however, that the Company shall not be
required to indemnify you for Losses incurred as a result of your intentional
misconduct or gross negligence (other than matters where you acted in good faith
and in a manner you reasonably believed to be in and not opposed to the
Company's best interests). The Company further agrees to advance any and all
expenses (including, without limitation, the fees and expenses of counsel)
reasonably incurred by you in connection with any such claim, action, proceeding
or investigation, provided you first enter into an appropriate agreement for
repayment of such advances if indemnification is found not to have been
available.
This Agreement contains the entire understanding among us with respect to the
subject matter hereof, and supersedes all prior and contemporaneous agreements
and understandings, inducements or conditions, express or implied, oral or
written, except as herein contained. This Agreement may not be modified or
amended other than by an agreement in writing signed by you and the Company.
To acknowledge your acceptance of this Agreement please sign and return this
letter to me as soon as possible.
Very truly yours,
/s/ Richard S. Ressler
Richard S. Ressler
Chief Executive Officer
READ AND AGREED
/s/ Gary H. Hickox
Gary H. Hickox
4
<PAGE>
EXHIBIT 10.4
------------
EMPLOYMENT AGREEMENT
This Employment Agreement is entered into as of March 17, 1997 between
JFAX Communications, Inc. (the "Company") and Dr. Anand Narasimhan ("Employee").
The parties agree as follows with respect to the employment by the
Company of the Employee:
1. Position of Employee. The Employee will continue as the Chief
--------------------
Technical Officer of the Company, until such time as the Board of Directors of
the Company determines otherwise.
2. Term of Employment. The Employee's employment with the Company
------------------
preceded the date of this Agreement and shall continue for an indefinite period
of time, but this Agreement and such employment may be terminated by either the
Company or the Employee at will, by notice to the other party, and whether or
not there shall be Cause (as defined below) or any other reason for such
termination. However, in case the Company shall terminate this Agreement and
the employment of Employee hereunder without Cause, then the Company will pay
severance to
- 1 -
<PAGE>
Employee, according to the schedule of regular salary amounts as set forth
below, for a period of three months after the date of such termination, or if
earlier, to the date Employee commences new employment (such severance pay shall
not, in any event, be less than one month's pay); provided that this sentence
shall not be applicable until such time as Employee has moved his residency to
California to take up his duties with the Company in California.
3. Salary. Employee's salary shall be at the annual rate of $60,000
------
currently, increasing to $90,000 on April 1, 1997, and increasing to $110,000
when he moves his residency to California for purposes of his employment
hereunder, payable bi-weekly or on such other basis as the Company establishes
for employees generally, subject to applicable withholdings.
4. Bonus. Employee shall be entitled each fiscal quarter to
-----
participate in the bonus plan established by the Company for management
personnel up to a maximum of 35% of his quarterly salary level. Each quarterly
bonus shall be determined by the Board of Directors of the Company, based on
meeting performance objectives for
- 2 -
<PAGE>
Employee as established from time to time between the Company and the Employee.
Employee shall further be entitled, commencing from the time he moves to
California as aforesaid, to a monthly bonus of $400 per month for twelve months
only.
5. Stock Options. Employee agrees with the Company that, except as
-------------
provided in the following provisions, he owns no shares of the Company's capital
stock and has no stock options or other rights to acquire any of such shares,
any prior ownership or entitlement of the Employee being embodied in the
following provisions. Employee is hereby granted options to purchase fifteen
(15) shares of the Company's common stock at an exercise price of $3,851.89 per
share. Such options shall vest one-sixth each fiscal quarter at the end of each
of the first 6 quarterly periods after the date hereof, the first such vesting
on June 30, 1997, and shall expire not later than the 10th anniversary of this
Agreement. Employee also has existing options (i.e., a prior award) to acquire
---
thirty (30) shares of the Company's common stock at the exercise price of $1.00
per share, 15 of which options are already vested and 15 of
- 3 -
<PAGE>
which option will vest when he moves to California as aforesaid, and such 30
options have a term of 10 years and may be exercised at any time until their
termination whether or not Employee ceases to be employed by the Company. All
stock options of Employee shall otherwise be subject to customary anti-dilution
adjustments and other provisions, including vesting upon a change of control,
and, if and when practicable, registration of the subject shares on Form S-8, as
established for employee stock options generally , it being agreed, however,
that with respect to the 15 above-mentioned options exercisable at $3,851.89 per
share, if such options, or any of them, shall become vested in the future, and
Employee ceases to be employed by the Company, at a time when the Company has
not yet gone public, then for purposes of the timing of any exercise of such
options, but not for purposes of vesting, Employee will be treated as if he had
left the employment of the Company thirty days after the date the Company goes
public.
[Paragraphs 6 and 7 intentionally omitted.]
8. Expenses. The Company will reimburse Employee for customary,
--------
ordinary and necessary business expenses incurred by Employee in performing his
duties and
- 4 -
<PAGE>
activities on behalf of the Company. The Company will also reimburse Employee
for his expenses of relocating to California up to a maximum amount of $10,000.
Such expenses will be reimbursed only upon presentation by Employee of
appropriate documentation to substantiate such expenses.
9. Benefits. Employee shall be entitled to vacation, holidays,
--------
health insurance and other employee benefits on the same terms and conditions as
similarly situated employees. The Company specifically reserves the
unrestricted right to amend, decrease or abolish any such benefits at any time
so long as Employee is not treated less favorably than similarly situated
employees. Employee shall be solely responsible for his own taxes in respect of
salary, bonus, stock options, expenses and benefits hereunder. The Company
shall be entitled to withhold from any thereof as and to the extent required by
law.
10. No Other Employment. During his employment with the Company,
-------------------
Employee shall devote all his professional efforts to enhance the business of
the Company, and the Employee shall not engage in any other activity in
competition with or that would be adverse to the Company.
- 5 -
<PAGE>
11. Inventions and Copyrights. The Employee hereby irrevocably
-------------------------
assigns to the Company and its successors and assigns his entire right, title
and interest in and to all Inventions (as defined below), copyrights and/or
designs which the Employee has made or may hereafter make, conceive, develop or
perfect, either alone or jointly with others, either: (i) during the term of his
employment by the Company (the "Term"), if such Invention, copyright and/or
design is related to the business of the Company or its affiliates or is related
to their research or development work; or (ii) with the use of any amount or
part of Trade Secrets (as defined below) of the Company or its affiliates; or
(iii) in any part whatsoever during the Company's regular working hours during
the Term of his employment or while the Employee was doing any work for the
Company or its affiliates.
12. No Disclosure of Confidential Information. The Employee
-----------------------------------------
recognizes, acknowledges and agrees that as a result of or in connection with
his employment he will have access to and obtain certain Confidential
Information, as defined below, relating to the Company's business and not
- 6 -
<PAGE>
generally known to the public or to the Company's competitors. The Employee
recognizes, acknowledges and agrees that the Confidential Information
constitutes a valuable, special and unique asset to the Company, access to and
knowledge of which is essential to the performance of the employee's duties.
The Employee specifically agrees that, except as directed by the Company's Board
of Directors or its Chief Executive Officer or as required by law, the Employee
will not at any time during or after the Term use or disclose any Confidential
Information to any person whomsoever or allow any Confidential Information to be
disclosed to any person whomsoever except in the good faith performance of his
duties.
13. Survival of Certain Provisions of this Agreement. Paragraphs 11,
------------------------------------------------
12 and 14 of this Agreement shall survive any termination of this Agreement and
Employee's employment, regardless of whether such termination was voluntary or
involuntary; for Cause or without Cause; by voluntary resignation or involuntary
discharge; by the Employee's death or disability; or otherwise.
- 7 -
<PAGE>
14. Definitions. As used in this Agreement, the following terms have
-----------
the following meanings:
"Cause" shall mean (i) any act or failure to act, done or omitted in
bad faith, (ii) persistent unavailability for service, habitual neglect,
material misconduct (after notice and a reasonable opportunity to cure) or
dishonesty, or (iii) conviction of a felony (other than ordinary traffic
violations or similar minor offenses).
"Inventions" means and refers to any process, computer software
(including all manifestations and variations thereof) technique, machine,
device, composition of matter, instrument, tool or formula which is new or which
the Employee has a reasonable basis to believe may be new, whether or not
patentable or reduced to practice by the Company, its parent or its affiliates
or any other person, corporation, or other entity, including, without
limitation, inventions, Trade Secrets as defined below, know-how and software.
"Proprietary Information" means and refers to any and all non-public
materials and information (which has not become known or available to the public
or within the
- 8 -
<PAGE>
Company's industry) of the Company and/or any of the Company's parents,
affiliates, owners, clients, customers, suppliers, agents, licensees or
licensors of a confidential, proprietary or secret nature including, but not
limited to, the Company's, its parents' and affiliates' customers and prospects,
employee lists, business and strategic plans, marketing programs and surveys,
pricing information, research and development plans and activities, software
source code and documentation, and financial results, reports and statements.
"Trade Secrets" means and refers to information, including a formula,
pattern, compilation, program, device, method, technique or process that: (i)
derives independent economic value, actual or potential, from not being
generally known to and not being readily ascertainable by proper means by other
persons who can obtain economic value from its disclosure or use; and (ii) is
the subject of efforts that are reasonable under the circumstances to maintain
its secrecy.
"Confidential Information" means and refers, collectively, to all
Inventions, Proprietary Information and
- 9 -
<PAGE>
Trade Secrets, and each of them, as those terms are respectively defined in this
Paragraph 14.
15. Notices. All notices required or permitted hereunder shall be
-------
given in writing to the respective party at the address or facsimile telephone
number set forth below and shall be deemed given seventy-two (72) hours after
deposit in the United States certified mail, return-receipt requested, first-
class, postage prepaid. Notices delivered by overnight service shall be deemed
to have been given upon delivery or refusal of the same, charges prepaid to the
United States Postal Service or private courier. If any notice is transmitted
by facsimile or similar means, the same shall be deemed served or delivered upon
confirmation of transmission thereof, provided that a hard copy of such notice
is delivered by overnight service on the next business day following such
facsimile transmission. Either party may, by notice to the other, specify a
different address for notice purposes.
- 10 -
<PAGE>
If to the Company:
JFAX Communications, Inc.
c/o Orchard Capital Corporation
10960 Wilshire Boulevard, Suite 500
Los Angeles, CA 90024
Fax: (310) 201-4351
If to Employee:
Dr. Anand Narasimhan
30 Christopher Street, Suite 1J
New York, NY 10014
Fax: (212) 253-4392
16. General Provisions. This Agreement shall not be assigned by
------------------
either party without the prior written consent of the other party, which consent
will not unreasonably be withheld. However, the obligations and benefits of the
Employee hereunder are personal and generally not assignable or delegable by
him. Any waiver of any provision or of any breach of any provision of this
Agreement shall be in writing and shall not be deemed to waive any other
provision or any other breach of this Agreement. This Agreement contains the
entire agreement between the Company and the Employee concerning the subject
matter hereof and supersedes any and or prior agreements or understandings, oral
or written, between the parties relating to the subject matter hereof and
Employee's
- 11 -
<PAGE>
employment by the Company. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement. THIS
AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF CALIFORNIA, WITHOUT REGARD TO ANY CONFLICTS OF LAW PRINCIPLES THEREOF.
- 12 -
<PAGE>
IN WITNESS WHEREOF, the Company and the Employee have each duly
executed this Agreement on the date first written above.
JFAX Communications, Inc.
By: /s/ Jens Muller
---------------------
Name: Jens Muller
Title: President
/s/ Anand Narasimhan
---------------------
Dr. Anand Narasimhan
- 13 -
<PAGE>
EXHIBIT 10.5
------------
EMPLOYMENT AGREEMENT
This Employment Agreement is entered into as of March 21, 1997 between
JFAX Communications, Inc. (the "Company") and Mr. Nehemia Zucker ("Employee").
The parties agree as follows with respect to the employment by the
Company of the Employee:
1. Position of Employee. The Employee will continue as the Chief
--------------------
Operating and Financial Officer of the Company, until such time as the Board of
Directors of the Company determines otherwise.
2. Term of Employment. The Employee's employment with the Company
------------------
preceded the date of this Agreement and shall continue for an indefinite period
of time, but this Agreement and such employment may be terminated by either the
Company or the Employee at will, by notice to the other party, and whether or
not there shall be Cause (as defined below) or any other reason for such
termination. However, in case the Company shall terminate this Agreement and
the employment of Employee hereunder without Cause, then the Company will pay
severance to
- 1 -
<PAGE>
Employee, according to the schedule of regular salary amounts as set forth
below, for a period of six months after the date of such termination, or if
earlier, to the date Employee commences new employment (such severance pay shall
not, in any event, be less than one month's pay); provided that this sentence
shall not be applicable until such time as Employee has moved his residency to
California to take up his duties with the Company in California.
3. Salary. Employee's salary shall be at the annual rate of
------
$150,000, payable bi-weekly or on such other basis as the Company establishes
for employees generally, subject to applicable withholdings.
4. Bonus. Employee shall be entitled each year to participate in
-----
the bonus plan established by the Company for management personnel up to a
maximum of 50% of his annual salary level. Each annual bonus shall be
determined by the Board of Directors of the Company, based on meeting
performance objectives for Employee as established from time to time between the
Company and the Employee. The next two sentences will only be applicable to the
current fiscal year of the Company, provided that the Company and Employee will
- 2 -
<PAGE>
jointly consider at a later date whether the same or a similar provision should
apply to subsequent fiscal years of the Company. Employee shall be entitled at
the end of each of the first three fiscal quarters of the current fiscal year of
the Company to draw against a portion of the potential annual bonus amount for
such fiscal year, in the amount of $16,667 per quarter or $50,000 in the
aggregate. The remaining portion of the potential annual bonus amount (i.e.,
$25,000) for the current fiscal year of the Company will only be available at
such time as the annual bonus is determined, and any prior draw as aforesaid
will be subject to refund by Employee if not earned, provided that, in lieu of
such refund, Employee may elect to have the refund amount be added to the loan
to Employee under Section 7 below.
5. Stock Options. Employee agrees with the Company that, except as
-------------
provided in the following provisions, he owns no shares of the Company's capital
stock and has no stock options or other rights to acquire any of such shares,
any prior ownership or entitlement of the Employee being embodied in the
following provisions. Employee also disclaims and/or waives any entitlement to
any
- 3 -
<PAGE>
brokers or finders fee or commission in connection with any fundings of or
investments in the Company. Employee is hereby granted options to purchase
fifty (50) shares of the Company's common stock at an exercise price of
$3,851.89 per share. Such options shall vest one-twelfth each fiscal quarter at
the end of each of the first 12 quarterly periods after the date hereof, the
first such vesting on June 30, 1997, and shall expire not later than the 10th
anniversary of this Agreement. Employee also has existing options (i.e., a
- -
prior award or awards) to acquire (a) four (4) shares and (b) forty (40) shares,
respectively, of the Company's common stock each at the exercise price of $1.00
per share, all of which options are already vested and such options have a term
of 10 years and may be exercised at any time until their termination whether or
not Employee ceases to be employed by the Company. All stock options of
Employee shall otherwise be subject to customary anti-dilution adjustments and
other provisions, including vesting upon a change of control, and, if and when
practicable, registration of the subject shares on Form S-8, as established for
employee stock options generally, it being
- 4 -
<PAGE>
agreed, however, that with respect to the 50 above-mentioned options exercisable
at $3,851.89 per share, if such options, or any of them, shall become vested in
the future, and Employee ceases to be employed by the Company, at a time when
the Company has not yet gone public, then for purposes of the timing of any
exercise of such options, but not for purposes of vesting, Employee will be
treated as if he had left the employment of the Company thirty days after the
date the Company goes public.
[Paragraph 6 intentionally omitted]
7. Loan by Company. Company agrees to loan $100,000 to Employee,
---------------
for a period of four years (subject to extension as provided below) with
interest at 6.32% per annum, which loan shall be recourse only against the 40
share stock option exercisable at $1.00 per share referred to in paragraph 6
above, or against the shares issuable upon exercise thereof, and which loan
shall be secured by a pledge of such options and/or shares by Employee to the
Company. In case Employee is still employed by the Company at the end of the
four-year original term of such loan, and the Company has not yet gone public,
then Employee shall
- 5 -
<PAGE>
have the right to extend the maturity date of the loan for a period ending at
the earliest to occur of: (a) the date of termination of Employee's employment
by the Company, (b) the date six months after the closing of Company's initial
public offering, or (c) the date Employee sells the shares, or the entitlement
to shares, that secures such loan, or otherwise sells a substantial portion of
his shares in the Company. The principal of such loan may be increased as
referred to in the final sentence of Section 4 above. Interest on such loan
shall not be payable currently, but shall be added to principal on a semi-annual
compounding basis, and be payable together with the principal at maturity. The
Company and Employee will sign appropriate loan documents to evidence and secure
this loan.
8. Expenses. The Company will reimburse Employee for customary,
--------
ordinary and necessary business expenses incurred by Employee in performing his
duties and activities on behalf of the Company. The Company will also reimburse
Employee for his expenses of relocating to California up to a maximum amount of
$20,000. Such expenses
- 6 -
<PAGE>
will be reimbursed only upon presentation by Employee of appropriate
documentation to substantiate such expenses.
9. Benefits. Employee shall be entitled to vacation, holidays,
--------
health insurance and other employee benefits on the same terms and conditions as
similarly situated employees. The Company specifically reserves the
unrestricted right to amend, decrease or abolish any such benefits at any time
so long as Employee is not treated less favorably than similarly situated
employees. Employee shall be solely responsible for his own taxes in respect of
salary, bonus, stock options, loan by Company, expenses and benefits hereunder.
The Company shall be entitled to withhold from any thereof as and to the extent
required by law.
10. No Other Employment. During his employment with the Company,
-------------------
Employee shall devote all his professional efforts to enhance the business of
the Company, and the Employee shall not engage in any other activity in
competition with or that would be adverse to the Company.
11. Inventions and Copyrights. The Employee hereby irrevocably
-------------------------
assigns to the Company and its successors
- 7 -
<PAGE>
and assigns his entire right, title and interest in and to all Inventions (as
defined below), copyrights and/or designs which the Employee has made or may
hereafter make, conceive, develop or perfect, either alone or jointly with
others, either: (i) during the term of his employment by the Company (the
"Term"), if such Invention, copyright and/or design is related to the business
of the Company or its affiliates or is related to their research or development
work; (ii) with the use of any amount or part of Trade Secrets (as defined
below) of the Company or its affiliates; or (iii) in any part whatsoever during
working hours during the Term of his employment or while the Employee was doing
any work for the Company or its affiliates.
12. No Disclosure of Confidential Information. The Employee
-----------------------------------------
recognizes, acknowledges and agrees that as a result of or in connection with
his employment he will have access to and obtain certain Confidential
Information, as defined below, relating to the Company's business and not
generally known to the public or to the Company's competitors. The Employee
recognizes, acknowledges and agrees that the Confidential Information
constitutes a
- 8 -
<PAGE>
valuable, special and unique asset to the Company, access to and knowledge of
which is essential to the performance of the employee's duties. The Employee
specifically agrees that, except as directed by the Company's Board of Directors
or its Chief Executive Officer or as required by law, the Employee will not at
any time during or after the Term use or disclose any Confidential Information
to any person whomsoever or allow any Confidential Information to be disclosed
to any person whomsoever except in the good faith performance of his duties.
13. Survival of Certain Provisions of this Agreement. Paragraphs 11,
------------------------------------------------
12 and 14 of this Agreement shall survive any termination of this Agreement and
Employee's employment, regardless of whether such termination was voluntary or
involuntary; for Cause or without Cause; by voluntary resignation or involuntary
discharge; by the Employee's death or disability; or otherwise.
14. Definitions. As used in this Agreement, the following terms have
-----------
the following meanings:
"Cause" shall mean (i) any act or failure to act, done or omitted in
bad faith, (ii) persistent unavailability
- 9 -
<PAGE>
for service, habitual neglect, material misconduct (after notice and a
reasonable opportunity to cure) or dishonesty, or (iii) conviction of a felony
(other than ordinary traffic violations or similar minor offenses).
"Inventions" means and refers to any process, computer software
(including all manifestations and variations thereof) technique, machine,
device, composition of matter, instrument, tool or formula which is new or which
the Employee has a reasonable basis to believe may be new, whether or not
patentable or reduced to practice by the Company, its parent or its affiliates
or any other person, corporation, or other entity, including, without
limitation, inventions, Trade Secrets as defined below, know-how and software.
"Proprietary Information" means and refers to any and all non-public
materials and information of the Company (which has not become known or
available to the public or within the Company's industry) and/or any of the
Company's parents, affiliates, owners, clients, customers, suppliers, agents,
licensees or licensors of a confidential, proprietary or secret nature
including, but not limited to,
- 10 -
<PAGE>
the Company's, its parents' and affiliates' customers and prospects, employee
lists, business and strategic plans, marketing programs and surveys, pricing
information, research and development plans and activities, software source code
and documentation, and financial results, reports and statements.
"Trade Secrets" means and refers to information, including a formula,
pattern, compilation, program, device, method, technique or process that: (i)
derives independent economic value, actual or potential, from not being
generally known to and not being readily ascertainable by proper means by other
persons who can obtain economic value from its disclosure or use; and (ii) is
the subject of efforts that are reasonable under the circumstances to maintain
its secrecy.
"Confidential Information" means and refers, collectively, to all
Inventions, Proprietary Information and Trade Secrets, and each of them, as
those terms are respectively defined in this Paragraph 14.
15. Notices. All notices required or permitted hereunder shall be
-------
given in writing to the respective party
- 11 -
<PAGE>
at the address or facsimile telephone number set forth below and shall be deemed
given seventy-two (72) hours after deposit in the United States certified mail,
return-receipt requested, first-class, postage prepaid. Notices delivered by
overnight service shall be deemed to have been given upon delivery or refusal of
the same, charges prepaid to the United States Postal Service or private
courier. If any notice is transmitted by facsimile or similar means, the same
shall be deemed served or delivered upon confirmation of transmission thereof,
provided that a hard copy of such notice is delivered by overnight service on
the next business day following such facsimile transmission. Either party may,
by notice to the other, specify a different address for notice purposes.
If to the Company:
JFAX Communications, Inc.
c/o Orchard Capital Corporation
10960 Wilshire Boulevard, Suite 500
Los Angeles, CA 90024
Fax: (310) 893-1651
If to Employee:
Mr. Nehemia Zucker
10935 Avenida Santa Ana
Boca Raton, FL 33495
Fax: (212) 208-2555
- 12 -
<PAGE>
16. General Provisions. This Agreement shall not be assigned by
------------------
either party without the prior written consent of the other party, which consent
will not unreasonably be withheld. However, the obligations and benefits of the
Employee hereunder are personal and generally not assignable or delegable by
him. Any waiver of any provision or of any breach of any provision of this
Agreement shall be in writing and shall not be deemed to waive any other
provision or any other breach of this Agreement. This Agreement contains the
entire agreement between the Company and the Employee concerning the subject
matter hereof and supersedes any and or prior agreements or understandings, oral
or written, between the parties relating to the subject matter hereof and
Employee's employment by the Company. This Agreement may be executed in one or
more counterparts, all of which shall be considered one and the same agreement.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF CALIFORNIA, WITHOUT REGARD TO ANY CONFLICTS OF LAW PRINCIPLES
THEREOF.
- 13 -
<PAGE>
IN WITNESS WHEREOF, the Company and the Employee have each duly
executed this Agreement on the date first written above.
JFAX Communications, Inc.
By: /s/ Jens Muller
---------------------
Name: Jens Muller
Title: President
/s/ Nehemia Zucker
-------------------------
Nehemia Zucker
- 14 -
<PAGE>
EXHIBIT 10.6
------------
[Note: This agreement has been assigned by Boardrush LLC
to Boardrush Media LLC.]
JFAX COMMUNICATIONS, INC.
March 17, 1997
Mr. Jaye Muller
Boardrush LLC
244 Madison Avenue
Suite 191
New York, New York 10016
Dear Jaye:
I am pleased to confirm the participation of the Boardrush LLC (the "LLC")
as a consultant, providing the consulting services, as described below, of Jaye
Muller and Jack Rieley (the "Consultants") to JFAX Communications, Inc. (the
"Company") commencing of the date hereof.
1. Engagement. The LLC will provide the services of the Consultants,
----------
each of whom shall serve as a consultant to the Company, on a non-exclusive
basis (subject, however, to the non-competition provisions set forth herein), to
provide support in connection with the strategic planning of the business of the
Company.
2. Term. The term of the LLC's consultancy shall, unless otherwise
----
terminated pursuant to this Agreement, be for a period commencing with the date
hereof and ending on March 17, 1999 ("Initial Term"). If during the period of
15 to 30 days prior to termination of the Initial Term, that certain Note issued
by the LLC in favor of the Company, dated even date hereof (the "Note", provided
that such term also includes any Note or Notes issued upon transfer of exchange
thereof), issued pursuant to the Note Agreement dated even date hereof between
LLC and the Company (the "Note Agreement"), has not been paid in full by the
LLC, the LLC shall have the right, provided that the other requirements of
Section 5.3 of the Note Agreement are complied with, to send a notice to the
Company requesting an extension of the term of this Agreement for an additional
period of five (5) years and ending on March 17, 2004, and this Agreement shall
be deemed to have been extended for an additional five (5) year term (the
"Extended Term").
In the performance of the foregoing services, the LLC agrees to make the
Consultants available at the reasonable convenience of each Consultant for
consultations with the Company estimated to average three (3) to four (4) days
each per week during the initial period of three (3) months, commencing on the
date hereof, and two (2) to three (3) days each per month during the remaining
months of the Initial Term and no more than two (2) days each per month during
any
<PAGE>
Mr. Jens Muller
Boardrush LLC
March 17, 1997
Page 2
month of the Extended Term. In no event shall either of the Consultants be
obligated to be available for more than four (4) days per week during the first
three (3) months of the Initial Term of this Agreement, no more than three (3)
days per month thereafter until the expiration of the Initial Term, and no more
than two (2) days per month during the Extended Term. For purposes of this
Article 2, a "day" shall be defined as a workday of no more than eight (8)
hours.
3. Compensation. In consideration of the services provided by the LLC
------------
hereunder during the Initial Term, the Company shall pay the LLC an annual
consulting fee of U.S. $400,000 plus $142,200, payable in twelve equal monthly
payments as of the last business day of each month; provided, however, that if
Richard Ressler ("Ressler"), Chief Executive Officer of the Company, receives
from the Company total annual compensation for any calendar year in excess of
U.S. $200,000, then the LLC shall have the right to an increase in its annual
consulting fee under this Agreement for such calendar year equal to twice the
difference between Ressler's total annual compensation and U.S. $200,000
("Additional Compensation"). All payments made by the Company shall be paid in
full by wire transfer of immediately available funds to a bank account
designated by the LLC, or as otherwise mutually agreed by the parties. In
consideration of the services provided by the LLC hereunder during the Extended
Term, the Company shall provide the LLC with compensation by means of the deemed
payment of interest and reductions in principal of the Note in accordance with
Section 5.3 of the Note Agreement, and the Company shall not otherwise be liable
to pay the LLC any further compensation with respect to the Extended Term.
4. Termination. The Company shall only be entitled to terminate this
-----------
Agreement for Cause (as defined below). Following any such permitted
termination by the Company it shall have no further liabilities under this
Agreement. Any other purported termination by the Company shall be void and the
Company shall remain liable for the compensation in the amounts, and at the
times, otherwise due hereunder, whether during the Initial Term or, if extended,
the Extended Term. The LLC shall only be entitled to terminate this Agreement
if the Company materially breaches this Agreement and such breach continues for
a period of 30 days after notice by the LLC to the Company. Following any such
termination by the LLC, the Company shall remain liable for the compensation in
the amounts, and at the times, otherwise due hereunder, whether during the
Initial Term or, if extended, the Extended Term. Otherwise, if the LLC is
unable to provide the services of either Jaye Muller or Jack Rieley (but not
both) to the Company, whether as a result of death, disability or other non-
fault reason, then the annual compensation to be provided by the Company during
the Initial Term shall be reduced (commencing three (3) months after the
commencement of such unavailability) by the sum of U.S. $200,000 and the
compensation to be provided by the Company during the Extended Term, if any,
shall not be reduced. If, following applicability of the preceding sentence,
the services of the remaining Consultant shall become unavailable for any such
reason then the annual compensation to be provided by the Company during the
Initial Term shall
<PAGE>
Mr. Jens Muller
Boardrush LLC
March 17, 1997
Page 3
further be reduced (commencing three (3) months after the commencement of such
unavailability) by the sum of U.S. $200,000 and the compensation to be provided
by the Company during the Extended Term, if any, shall not be reduced. Prior to
the end of the Initial Term, the events described in the two immediately
preceding sentences shall not effect any termination of this Agreement. During
the Extended Term such unavailability of either Muller or Rieley (but not both)
shall not effect any termination of this Agreement. However, during the Extended
Term, such availability of both Muller and Rieley shall effect a termination of
this Agreement and the compensation to be made by the Company hereunder during
such Extended Term shall be accelerated as provided in Section 5.3 of the Note
Agreement. The Company shall have the right to set off the amount owed to the
LLC under this Article 4 by any amount owed by the LLC to the Company under the
Note. For the purposes of this Article 4, "Cause" shall mean termination by the
Company of one or both of the Consultants or the LLC due to (i) willful
misconduct on the part of such Consultant or the LLC, which in either case is
materially injurious to the Company or (ii) a violation of Articles 5 or 7 of
this Agreement by either Consultant or the LLC, as determined for both (i) and
(ii) by a court of competent jurisdiction.
5. Confidentiality. As each Consultant is aware, all information
---------------
regarding (i) the Company's proprietary communications delivery system,
including without limitation all technical and operational information and data
concerning the Company's JFAX server communicator, all hardware and software
included therein, appurtenant thereto or utilized in connection therewith, (ii)
the Company's billing system, including without limitation all software
utilized in connection therewith, and the operation thereof, (iii) all marketing
data and information , (iv) all customer data and information, and (v) the
Company's policies (all such information hereinafter the "Confidential
Information"), is proprietary to the Company and is at all times to be treated
with strict confidentiality. Each Consultant and the LLC acknowledges and
agrees that all Confidential Information is valuable and intended to be
maintained in strict confidentiality, and each agrees that each will always
regard and preserve the Confidential Information as strictly confidential, and
each will not give, disclose, provide access to or otherwise make available to
any person not employed by the Company or its advisors or representatives any of
such Confidential Information. The restrictions herein on use and disclosure of
Confidential Information shall not apply to information that (a) was publicly
known at the time of the Company's communication thereof to the LLC or either
Consultant, (b) becomes publicly known through no action or failure to act of
the LLC or either Consultant subsequent to the time of the Company's
communication thereof to the LLC or either Consultant, (c) is rightfully
obtained by the LLC or either Consultant from third parties authorized to make
such disclosure without restriction, or (d) is identified by the Company as no
longer proprietary or confidential.
<PAGE>
Mr. Jens Muller
Boardrush LLC
March 17, 1997
Page 4
6. Indemnification. The Company hereby agrees to indemnify and hold the
---------------
LLC and each of the Consultants harmless from and against any and all losses,
payments, claims, damages, liabilities, obligations, fines, penalties,
judgments, awards, costs, expenses, interest and disbursements and any amounts
(whether in cash or kind), in settlement of any and all actions, suits,
proceedings, and investigations in respect thereof suffered or paid as a result
of or arising out of the performance by the LLC or either Consultant of the
LLC's or either Consultant's duties hereunder; provided, however, that this
provision shall not apply to any party thereof suffered or paid as a result of
or arising out of the willful misconduct or gross negligence of the LLC or
either Consultant. In the event of a dispute with respect to a breach or
alleged breach of this letter agreement, the prevailing party as determined in a
final, non-appealable judgment with respect to such dispute shall be entitled to
reimbursement by the other party for all of its reasonable and duly documented
costs and expenses incurred in connection with such dispute, including legal
fees.
7. Non-Competition. (i) Each of the Consultants and the LLC agrees that
---------------
for a period of three (3) years from the date hereof, he or it, as applicable,
shall not directly or indirectly, engage in or have any ownership interest in,
or participate in the financing, operation, management or control of, any
person, firm, corporation or business that engages in a Restricted Business in a
Restricted Territory.
(i) Non-Solicitation. Each of the Consultants and the LLC agrees that he
----------------
or it, as applicable, shall not, directly or indirectly, during such three-year
period, solicit any of the existing customers of the Company for purposes of
obtaining its custom or trade with respect to a Restricted Business, or (b) any
of the existing employees of Seller for purposes of obtaining their employment
services in a Restricted Business.
(ii) Separate Covenants. The parties intend that the covenants contained
------------------
in the preceding paragraphs of this Article 7 shall be construed as a series of
separate covenants, one for each county, city and state of the Restricted
Territory. Except for the geographic coverage, each such separate covenant shall
be deemed identical in terms to the covenants contained in the preceding
paragraphs. If, in any judicial proceeding, a court shall refuse to enforce any
of the separate covenants (or any part thereof) deemed included in said
paragraphs, then such unenforceable covenants (or such part) shall be deemed
eliminated from this Agreement for the purpose of those proceedings to the
extent necessary to permit the remaining separate covenants (or portions
thereof) to be enforced.
(iii) Reformation. In the event that the provisions of this Article 7
-----------
should ever be deemed to exceed the duration or geographic limitations or scope
permitted by applicable law, then such provisions shall be reformed to the
maximum time or geographic limitations or scope, as the case may be, permitted
by applicable laws.
<PAGE>
Mr. Jens Muller
Boardrush LLC
March 17, 1997
Page 5
(iv) Specific Performance. Each of the Consultants and the LLC
--------------------
acknowledges that it would be impossible to determine the amount of damages that
would result from any breach of any of the provisions of this Article 7 and that
the remedy at law for any breach, or threatened breach, of any of such
provisions would likely be inadequate and, accordingly, agrees that the Company
shall, in addition to any other rights or remedies which it may have, be
entitled to seek such equitable and injunctive relief as may be available from
any court of competent jurisdiction to restrain each of or all of the
Consultants and the LLC from violating any of such provisions of this Agreement.
In connection with any action or proceeding for injunctive relief, each of the
Consultants and the LLC hereby waives the claim or defense that a remedy at law
alone is adequate and agrees, to the maximum extent permitted by law, to have
each such provision of this Article 7 specifically enforced against him or it,
as applicable, without the necessity of posting bond or other security, and
consents to the entry of injunctive relief against him or it enjoining or
restraining any breach or threatened breach of such provisions of this Article
7.
(v) Definitions. For purposes of this Article 7:
-----------
"Restricted Business" shall mean the development or offering of any
products or services in direct competition with the products and services
currently offered or currently under development by the Company, including
products and services of or related to the transmission of or conversion of fax
to e-mail, voice-mail to e-mail or e-mail to fax; pager notification of fax, e-
mail or voice-mail messages or access to fax, voice-mail and e-mail through the
world wide web and through the public switched telephone network (PSTN). With
respect to the restrictions set forth in clause (i) of this Article 7, such
restrictions shall not apply to an investment in a partnership, joint venture,
corporation or other business entity (x) which derived during the prior fiscal
year or according to such entity's most recent internal projections expects to
derive in the future less than 5% of its revenues from a Restricted Business, or
(y) for which either of the Consultants or the LLC acquires less than 5% of the
issued and outstanding capital stock of such partnership, joint venture,
corporation or other business entity, provided in either case each of the
--------
Consultant's and/or LLC's involvement therewith shall not be in violation of any
of the other restrictions set forth in this Article.
"Restricted Territory" shall mean every county of every state of the
United States and every comparable subdivision of every foreign country in which
the Company does business now or at the relevant time in the future during such
three-year period.
8. Miscellaneous. This letter agreement may not be assigned by either
-------------
party hereto without the prior written consent of the other party. The
provisions of this letter agreement regarding
<PAGE>
Mr. Jens Muller
Boardrush LLC
March 17, 1997
Page 6
confidentiality and non-competition will survive the termination of the LLC's
engagement by the Company. If any provision of this letter agreement is held to
be void or unenforceable, it will not affect the validity of any other provision
hereof.
<PAGE>
Mr. Jens Muller
Boardrush LLC
March 17, 1997
Page 7
9. Set Off. The LLC and the Company agree that each shall have the right
-------
to set off any amounts due the other under this Agreement and Note.
10. Governing Law. This letter agreement will be governed by and
--------------
construed in accordance with the laws of the State of New York.
The LLC and the Company agree that this Agreement and the terms of the
LLC's engagement hereunder shall be and remain confidential and shall not be
disclosed, except as may be required by applicable law, to any third party,
other than the current financial advisors of and attorneys for the LLC and the
Company, without the express prior written consent of the other party.
Please acknowledge that LLC's acceptance of this offer and the LLC's and
each of the Consultant's agreement to the terms set forth herein by signing and
returning a copy of this letter to me.
Very truly yours,
JFAX Communications, Inc.
By: /s/ Jens Muller
-------------------------
Name: Jens Muller
Title: President
Agreed to this 17th day of March, 1977
Boardrush LLC
By: /s/ Jens Muller
----------------
Name: Jens Muller
Title: Manager
Acknowledged and agreed:
/s/ Jens Muller
- ---------------
Jens Muller
/s/ Jack Rieley
- ---------------
Jack Rieley
<PAGE>
EXHIBIT 10.7
------------
Following are the put rights that will be applicable after this
offering for the benefit of the stockholders and warrantholders identified in
these provisions:
PUT RIGHTS WITH RESPECT TO THE SHARES.
--------------------------------------
Option of Holders to Put Shares upon a Change of Control. Upon the
--------------------------------------------------------
occurrence of a Change of Control, any holder of Shares [i.e., 1,681,577 shares]
shall have the right upon written notice as hereinafter provided to require the
Company to purchase at the Option Closing, and the Company agrees to so
purchase, all or any of such Shares. The purchase price for such Shares shall
be paid by certified check at the Option Closing or by wire transfer of
immediately available funds denominated in U.S. dollars to one or more accounts
designated by the holders of such Shares to the Company prior to the Option
Closing in an amount equal to $4.00 per Share (as adjusted for stock splits,
recombinations, dividends and other similar events).
PUT RIGHTS WITH RESPECT TO THE WARRANTS
---------------------------------------
AND WARRANT SHARES.
------------------
Option of Holders Upon Change of Control. Upon the occurrence of a
----------------------------------------
Change of Control, unless the holders of at least 66-2/3% in interest of the
Warrants [i.e., 2,715,000 warrants] and Warrant Shares [i.e., shares issuable
upon exercise of such warrants] approve such Change of Control in writing, each
holder of Warrants and/or Warrant Shares ("Warrant Investor") has the option to
----------------
require the Company to redeem all of the outstanding Warrants and/or Warrant
Shares (or any portion thereof), and all shares of Common Stock issued pursuant
to stock splits, dividends or similar events in respect of such Warrants or
Warrant Shares ("Additional Warrant Shares"; the Warrants, Warrant Shares and
-------------------------
Additional Warrant Shares being referred to herein as "Warrant Securities") held
------------------
by such holder at a price equal to (i) for unexpected Warrants, $2.00 per
Warrant and (ii) for each of the Warrant Shares that were issued upon exercise
of a Warrant and for each of the Additional Warrant Shares, if any related to
such Warrant Share, an amount equal to 1.67 multiplied by the exercise price
paid for such Warrant Share being redeemed (such exercise price to be
appropriately adjusted for subsequent stock splits, dividends or similar events
occurring after such exercise to the extent that the holder of Warrant Shares
receive their proportionate benefit of such stock splits, dividends or similar
events on the form of Additional Warrant Shares which are included in the
package of securities which the Company must redeem).
<PAGE>
"Change of Control" shall mean the occurrence of any of the following:
-----------------
(a) the acquisition or holding by
(i) any person (as such term is used in section 13(d) and section
14(d)(2) of the Exchange Act as in effect on the Closing Date) other than
an Acceptance Controlling Person or the Investors, or
(ii) related Persons constituting a group (as such term is used in
Rule 13d-5 under the Exchange Act as in effect on the Closing Date) other
than related Acceptable Controlling Persons or Investors constituting such
a group,
of legal and/or beneficial ownership of more than 35% of the Common Stock or any
securities convertible into more than 35% of the Common Stock of the Company
outstanding at such time if at such time the owners of Common Stock on the
Closing Date, the Investors and the investors under the Securities Purchase
Agreement beneficially own in the aggregate less than a majority of the Common
Stock or any securities convertible into less than a majority of the Common
Stock of the Company (excluding for such purpose persons who own shares through
any employee benefit plan of the Company in connection therewith);
(b) all or substantially all of the assets of the Company are sold or
otherwise transferred, in a single transaction or in a series of related
transactions, to any other Person;
(c) any merger, consolidation or other similar transaction of, or in
respect of, the Company which results in the failure by the owners of Common
Stock on the Closing Date, the Investors and the investors under the Securities
Purchase Agreement to, directly or indirectly in the aggregate, maintain
beneficial ownership and voting control of at least fifty percent (50%) of the
outstanding common stock of the surviving entity in such merger, consolidation
or similar transaction; or
(d) any liquidations or dissolution of the Company, or action taken by the
Board of Directors of the Company to authorize any such liquidation or
dissolution.
Notwithstanding the foregoing, any transaction permitted under paragraph 7E
of the Securities Purchase Agreement shall not constitute a "Change of Control".
Any sale of assets of the Company (or any of its Subsidiaries) which generated
2/3 or more of the revenues of the Company (on a consolidated basis) during the
immediately preceding fiscal year shall constitute a "Change of Control".
<PAGE>
EXHIBIT 10.8
------------
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT, dated as of June 30, 1998, among JFAX
Communications, Inc., a Delaware corporation (the "Company") and the investors
whose names appear under the heading "Investors" on the signature page hereof.
1. Background. The Company is a party to (i) a securities purchase
----------
agreement, dated the date hereof (as amended from time to time, the "Note
Purchase Agreement"), entered into with the investors named therein, pursuant to
which the Company agreed to issue to such investors $10,000,000 aggregate
principal amount of 10% Senior Subordinated Notes due 2004 and shares of Common
Stock and (ii) a securities purchase agreement, dated on or about the date
hereof (the "Preferred Stock Purchase Agreement"), entered into with the
investors named therein, pursuant to which the Company agreed to issue to such
investors shares of Preferred Stock and warrants to purchase Common Stock.
In connection with each of the Note Purchase Agreement and the
Preferred Stock Purchase Agreement, the Company entered into this Registration
Rights Agreement, to which the respective investors who received securities
thereunder are parties.
2. Registration under Securities Act, etc.
---------------------------------------
2.1. Registration of Registrable Securities on Request. (a)
-------------------------------------------------
Request. At any time following the sixth month anniversary of the Company's
- -------
Initial Public Offering, (i) the holder or holders (collectively, the "Notes
Holders") of more than 50% (by number of shares) of the Notes Registrable
Securities shall twice have the right to request in writing that the Company
effect an underwritten registration under the Securities Act of all or part of
such holders' Registrable Securities (such requesting Notes Holders being
referred to hereinafter as the "Initiating Notes Holders") and (ii) the holder
or holders (collectively, the "Preferred Holders") of more than 50% (by number
of shares) of the Preferred Registrable Securities shall twice have the right to
request in writing that the Company effect an underwritten registration under
the Securities Act, of all or part of such holders' Registrable Securities (such
requesting Preferred Holders being referred to hereinafter as the "Initiating
Preferred Holders"), provided that, in the case of (i) or (ii) above, the
--------
aggregate Fair Market Value of the Registrable Securities to be so registered is
at least $1,000,000. It is hereby acknowledged that there may be both
Initiating Notes Holders and Initiating Preferred Holders in respect of any
particular registration in the event that each group elects to exercise one of
its requests referenced in this Section 2.1(a). The Company will promptly give
written notice of such requested registration to all other holders of
Registrable Securities, which holders shall be entitled to include their
<PAGE>
Registrable Securities in such registration subject to Sections 2.1(b) and
2.1(g). Thereupon the Company will use its reasonable best efforts to effect
the registrations under the Securities Act of:
(A) the Registrable Securities which the Company has been so
requested to register by such Initiating Notes Holders or Initiating
Preferred Holders, as the case may be; and
(B) subject to Sections 2.1(b) and 2.1(g), all other Registrable
Securities which the Company has been requested to register by the
holders thereof by written request given to the Company within 30 days
after the giving of such written notice by the Company (which request
shall specify the intended method of disposition of such Registrable
Securities) all to the extent requisite to permit the disposition of
the Registrable Securities so to be registered.
(b) Registration of Other Securities. Whenever the Company shall
--------------------------------
effect a registration pursuant to this Section 2.1, no securities other than
Registrable Securities shall be included among the securities covered by such
registration unless the managing underwriter of such offering shall have advised
in writing that the inclusion of such other securities would not in the
underwriter's reasonable judgment adversely affect the marketing or the selling
price of the Registrable Securities to be covered by such registration. The
Company will not grant to any Person at any time on or after the date hereof any
right to be included among the securities registered pursuant to this Section
2.1 that is inconsistent with this Section 2.1(b) or Section 2.1(g).
(c) Registration Statement Form. Registrations under this Section
---------------------------
2.1 shall be on such appropriate registration form or prospectus of the
Commission (i) as shall be selected by the Company and as shall be reasonably
acceptable to the Initiating Notes Holders or Initiating Preferred Holders, as
the case may be, holding more than 50% (by number of shares) of the Registrable
Securities so to be registered and (ii) as shall permit the disposition of such
Registrable Securities in accordance with the intended method or methods of
disposition specified in their request for such registration. The Company
agrees to include in any such registration statement all information which
holders of Registrable Securities being registered shall reasonably request.
(d) Expenses. The Company will pay all Registration Expenses in
--------
connection with the registration requests made pursuant to this Section 2.1.
2
<PAGE>
(e) Effective Registration Statement. A registration requested
--------------------------------
pursuant to this Section 2.1 shall not be deemed to have been effected and shall
not count as a requested registration pursuant to Section 2.1 (a) hereof (i)
unless a registration statement with respect thereto has become effective, (ii)
if after it has become effective, such registration is interfered with by any
stop order, injunction or other order or requirement of the Commission or other
governmental agency or court for any reason not the fault of an Initiating Notes
Holder or Initiating Preferred Holder, as the case may be, and the Note
Registrable Securities or Preferred Registrable Securities, as the case may be,
covered thereby have not been sold, or (iii) if the conditions to closing
specified in the selling agreement or underwriting agreement entered into in
connection with such registration are not satisfied or waived by the parties
thereto other than an Initiating Notes Holder or Initiating Preferred Holder, as
the case may be.
(f) Underwriters. Any registration effected pursuant to this Section
------------
2.1 shall at the election of the Initiating Notes Holders or Initiating
Preferred Holders, as the case may be, be an underwritten public offering on a
firm commitment basis or a reasonable best efforts basis. The managing
underwriter or underwriters thereof shall be selected by the Company, and such
underwriter as well as the price, terms and provisions of the offering shall be
subject to the approval of the Company and the Initiating Notes Holders or
Initiating Preferred Holders, as the case may be.
(g) Apportionment in Registrations Requested. If, in connection with
----------------------------------------
a registration requested pursuant to this Section 2.1, the managing underwriter
shall advise the Company in writing (with a copy to each Initiating Notes Holder
or Initiating Preferred Holder, as the case may be) that, in its opinion, the
number of securities requested to be included in such registration exceeds the
number which can be sold in such offering within a price range acceptable to the
Initiating Notes Holders or Initiating Preferred Holders, as the case may be,
the number of securities that are otherwise entitled to be included in such
registration shall be allocated in the following manner: (i) all securities
other than Registrable Securities of the Notes Holders or the Preferred Holders,
as the case may be, shall be reduced on a pro rata basis (based on the number of
securities requested to be included in such registration) and (ii) if, after the
exclusion of all such securities (if necessary), further reductions are still
required, Registrable Securities of the Notes Holders or the Preferred Holders,
as the case may be, shall be reduced on a pro rata basis (based on the number of
securities requested to be included in such registration). If the pro ration as
aforesaid results in the exclusion of in excess of 15% of the Registrable
Securities of the Notes Holders or the Preferred Holders, as the case may be,
originally sought to be registered, the request shall not be counted for
purposes of
3
<PAGE>
determining the number of registrations pursuant to Section 2.1 hereof.
2.2. Registrations on Form S-3. Following an Initial Public
-------------------------
Offering, the Company shall use its reasonable best efforts to qualify for
registration on Form S-3 promulgated under the Securities Act or any successor
form thereto ("Form S-3") for secondary sales. Anything contained in Section
2.1 to the contrary notwithstanding, at such time as the Company shall have
qualified for the use of Form S-3, (i) any holder or holders of Notes
Registrable Securities shall twice have the right to request in writing
registrations on Form S-3 of Registrable Securities and (ii) any holder or
holders of Preferred Registrable Securities shall twice have the right to
request in writing registrations on Form S-3 of Registrable Securities, provided
--------
that, in the case of (i) or (ii) above, the aggregate Fair Market Value of the
Registrable Securities to be so registered is at least $2,500,000, which request
or requests shall (A) specify the number of Registrable Securities intended to
be sold or disposed of and the holders thereof and (B) state the intended method
of disposition of such Registrable Securities. A requested registration on Form
S-3 in compliance with this Section 2.2 shall not count as a registration
statement initiated pursuant to Section 2.1 but shall otherwise be treated as a
registration initiated pursuant to, and shall, except as otherwise expressly
provided in this Section 2.2, be subject to Section 2.1.
2.3. "Piggyback" Registrations. (a) Right to Include Registrable
------------------------- ----------------------------
Securities. If the Company at any time proposes to register any of its
- ----------
securities under the Securities Act (other than by a registration on Form S-4 or
Form S-8 and other than in cases where Section 2.1 or 2.2 is applicable) whether
or not for sale for its own account, it will each such time give prompt written
notice to all holders of Registrable Securities of its intention to do so and of
such holders' rights under this Section 2.3. Upon the written request of any
such holder made within 10 days after the date of any such notice given in
accordance with Section 7 hereof, the Company will use its reasonable best
efforts to effect the registration under the Securities Act of all Registrable
Securities which the Company has been so requested to register by the holders
thereof, to the extent requisite to permit the disposition of the Registrable
Securities so to be registered, provided that if, at any time after giving
--------
written notice of its intention to register any securities and prior to the
effective date of the registration statement filed in connection with such
registration, the Company shall determine for any reason not to register or to
delay registration of such securities, the Company may, at its election, give
written notice of such determination to each holder of Registrable Securities
and, thereupon, (i) in the case of a determination not to register, shall be
relieved of its obligation to register any Registrable Securities in connection
with such registration (but not from its obligation to pay the Registration
Expenses in
4
<PAGE>
connection therewith), without prejudice, however, to the rights of any holder
or holders of Registrable Securities entitled to do so to request that such
registration be effected as a registration under Section 2.1 or Section 2.2, and
(ii) in the case of a determination to delay registering, shall be permitted to
delay registering any Registrable Securities for the same period as the delay in
registering such other securities. No registration effected under this Section
2.3 shall relieve the Company of its obligation to effect any registration upon
request under Section 2.1 or Section 2.2. The Company will pay all Registration
Expenses in connection with each registration of Registrable Securities
requested pursuant to this Section 2.3.
(b) Apportionment in "Piggyback" Registrations. If (i) a
------------------------------------------
registration pursuant to this Section 2.3 involves an underwritten offering of
the securities being registered, whether or not for sale for the account of the
Company, to be distributed (on a firm commitment basis) by or through one or
more underwriters of recognized national or regional standing under underwriting
terms appropriate for such a transaction, and (ii) the managing underwriter of
such underwritten offering shall inform in writing the Company and the holders
of the Registrable Securities requesting registration that marketing
considerations require a limitation on the number of securities that can be
included in such registration, then the Company may include all securities
proposed by the Company to be sold for its own account or the maximum amount
that the underwriter considers saleable and such limitation on any remaining
securities that may, in the opinion of the underwriter, be sold will be imposed
(x) first, pro rata among holders of securities that have no applicable
registration rights, (y) second, pro rata among holders of securities, including
Registrable Securities, other than the holders, if any, exercising demand
registration rights with respect thereto, in each case on the basis of the
respective percentages of securities sought to be registered held by such
holders. To the extent that any Registrable Securities or other securities are
excluded from the registration pursuant to this Section 2.3(b), no shares of
Common Stock issued to management of the Company pursuant to a stock option (or
any other type of benefit plan) ("Option Shares") shall be included in such
registration.
2.4. Registration Procedures. If and whenever the Company is
-----------------------
required to use its reasonable best efforts to effect the registration of any
Registrable Securities under the Securities Act as provided in Sections 2.1, 2.2
and 2.3, the Company will as expeditiously as possible:
(i) prepare and (as soon thereafter as practicable or in any
event no later than 45 days after the end of the period within which
requests for registration may be given to the Company) file with the
Commission the requisite registration statement to effect such
registration and thereafter use its
5
<PAGE>
reasonable best efforts to cause such registration statement to become
effective, provided that the Company may discontinue any registration
--------
of its securities which are not Registrable Securities (and, under the
circumstances specified in Section 2.3(a), its securities which are
Registrable Securities) at any time prior to the effective date of the
registration statement relating thereto;
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the
Securities Act with respect to the disposition of all securities
covered by such registration statement until such time as all of such
securities have been disposed of in accordance with the intended
methods of disposition by the seller or sellers thereof set forth in
such registration statement;
(iii) furnish to each seller of Registrable Securities covered
by such registration statement such number of conformed copies of such
registration statement and of each such amendment and supplement
thereto, such number of copies of the prospectus contained in such
registration statement (including each preliminary prospectus and any
summary prospectus) and any other prospectus filed under Rule 424 or
Rule 430A under the Securities Act, in conformity with the
requirements of the Securities Act, and such other documents, as such
seller may reasonably request;
(iv) use its reasonable best efforts to register or qualify all
Registrable Securities and other securities covered by such
registration statement under such other securities or blue sky laws of
such jurisdictions as each seller thereof shall reasonably request, to
keep such registration or qualification in effect for so long as such
registration statement remains in effect, and take any other action
which may be reasonably necessary to enable such seller to consummate
the disposition in such jurisdictions of the securities owned by such
seller, except that the Company shall not for any such purpose be
required to qualify generally to do business as a foreign corporation
in any jurisdiction wherein it would not but for the requirements of
this subdivision (iv) be obligated to be so qualified or to consent to
general service of process in any such jurisdiction or subject itself
to be required to pay any franchise or income taxes in any such
jurisdiction;
6
<PAGE>
(v) use its reasonable best efforts to cause all Registrable
Securities covered by such registration statement to be registered
with or approved by such other governmental agencies or authorities as
may be necessary to enable the seller or sellers thereof to consummate
the disposition of such Registrable Securities;
(vi) furnish to each seller of Registrable Securities a signed
counterpart, addressed to such seller, except as provided in (y) below
(and the underwriters, if any), of
(x) an opinion of counsel for the Company, dated the
effective date of such registration statement (and, if such
registration includes an underwritten public offering, dated the
date of the closing under the underwriting agreement), reasonably
satisfactory in form and substance to counsel for all such
sellers or, if such registration includes an underwritten public
offering, to such underwriter, and
(y) a "comfort" letter, dated the effective date of such
registration statement (and, if such registration includes an
underwritten public offering, dated the date of the closing under
the underwriting agreement), signed by the independent public
accountants who have certified the Company's financial statements
included in such registration statement, addressed to each
seller, to the extent the same can be reasonably obtained, and
addressed to the underwriters, if any, covering substantially the
same matters with respect to such registration statement (and the
prospectus included therein) and, in the case of the accountants'
letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in accountants'
letters delivered to the underwriters in underwritten public
offerings of securities and such other financial matters as such
seller or such holder (or the underwriters, if any) may
reasonably request;
(vii) notify each seller of Registrable Securities covered by
such registration statement, at any time when a prospectus relating
thereto is required to be delivered under the Securities Act, upon
discovery that, or upon the happening of any event as a result of
which, the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to
state any material fact required to be stated therein or
7
<PAGE>
necessary to make the statements therein not misleading in the light
of the circumstances under which they were made, and at the request of
any such seller or holder promptly prepare to furnish to such seller
or holder a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, as
thereafter delivered to the purchasers of such securities, such
prospectus shall not include 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 not misleading in the light
of the circumstances under which they were made;
(viii) otherwise use its reasonable best efforts to comply with
all applicable rules and regulations of the Commission, and make
available to its security holders, as soon as reasonably practicable,
an earnings statement covering the period of at least twelve months,
but not more than eighteen months, beginning after the effective date
of such registration statement, which earnings statement shall satisfy
the provisions of Section 11(a) of the Securities Act, and, in the
case of a registration requested pursuant to Section 2.1 or 2.2
hereof, will furnish to each such seller at least two business days
prior to the filing thereof a copy of any amendment or supplement to
such registration statement or prospectus and shall not file any
thereof to which any such seller shall have reasonably objected on the
grounds that such amendment or supplement does not comply in all
material respects with the requirements of the Securities Act or of
the rules or regulations thereunder;
(ix) provide and cause to be maintained a transfer agent and
registrar for all Registrable Securities covered by such registration
statement from and after a date not later than the effective date of
such registration statement; and
(x) use its reasonable best efforts to list all Registrable
Securities covered by such registration statement on any securities
exchange on which any of the Registrable Securities is then listed.
Notwithstanding the foregoing, the Company may defer its obligations
under Section 2.1 and Section 2.2 to file a registration statement, but not its
obligations to initiate the process of preparing the applicable registration
statement, for a period of no more than 90 days in any 365-day period, if the
Company's Board of Directors determines in good faith based upon a written
opinion of counsel that filing such a registration statement would require a
public disclosure by the Company, which disclosure would interfere with a
material transaction then under
8
<PAGE>
consideration by the Company, provided that once such information has been
--------
publicly disclosed, the Company shall promptly proceed to fulfill its
obligations under Section 2.1 or Section 2.2, as the case may be.
The Company may require each proposed seller of Registrable Securities
as to which any registration is being effected to promptly furnish the Company,
as a condition precedent to including such holder's Registrable Securities in
any registration, such information regarding such seller and the distribution of
such securities as the Company may from time to time reasonably request in
writing.
Each holder of Registrable Securities agrees by acquisition of such
Registrable Securities that upon receipt of any notice from the Company of the
happening of any event of the kind described in subdivision (vii) of this
Section 2.4, such holder will forthwith discontinue such holder's disposition of
Registrable Securities pursuant to the registration statement relating to such
Registrable Securities until such holder's receipt of the copies of the
supplemented or amended prospectus contemplated by subdivision (vii) of this
Section 2.4 and, if so directed by the Company, will deliver to the Company (at
the Company's expense) all copies, other than permanent file copies, then in
such holder's possession of the prospectus relating to such Registrable
Securities current at the time of receipt of such notice.
2.5. Underwritten Offerings. (a) Requested Underwritten Offerings.
---------------------- --------------------------------
If requested by the underwriters for any offering by the Initiating Notes
Holders or the Initiating Preferred Holders, as the case may be, in connection
with a registration requested under Section 2.1, the Company will enter into an
underwriting agreement with such underwriters for such offering, such agreement
to be satisfactory in substance and form to the Company, to the Initiating Notes
Holders or the Initiating Preferred Holders, as the case may be, and to the
underwriters and to contain such representations and warranties by the Company
and such other terms as are generally prevailing in agreements of this type,
including, without limitation, indemnities to the effect and to the extent
provided in Section 2.7. The Initiating Notes Holders or the Initiating
Preferred Holders, as the case may be, will cooperate with the Company in the
negotiation of the underwriting agreement and will give consideration to the
reasonable requests of the Company regarding the form thereof, provided that
--------
nothing herein contained shall diminish the foregoing obligations of the
Company. The holders of Registrable Securities to be distributed by such
underwriters shall be parties to such underwriting agreement and may, at their
option, require that any or all of the representations and warranties by, and
the other agreements on the part of, the Company to and for the benefit of such
underwriters shall also be made to and for the benefit of such holders of
Registrable Securities and that any or all of the conditions precedent to the
obligations of such
9
<PAGE>
underwriters under such underwriting agreement be conditions precedent to the
obligations of such holders of Registrable Securities. Any such holder of
Registrable Securities shall not be required to make any representations or
warranties to or agreements with the Company or the underwriters other than
representations, warranties or agreements typical in an offering of that type,
including those regarding such holder, such holder's Registrable Securities, and
such holder's intended method of distribution, any other information supplied by
such holder to the Company for use in the Registration Statement and any other
representation required by law.
(b) Incidental Underwritten Offerings. If the Company at any time
---------------------------------
proposes to register any of its securities under the Securities Act as
contemplated by Section 2.3 and such securities are to be distributed by or
through one or more underwriters, the Company will, if requested by any holder
of Registrable Securities as provided in Section 2.3 and subject to the
provisions of Sections 2.3(a), 2.3(b) and 2.4, arrange for such underwriters to
include all the Registrable Securities to be offered and sold by such holder
among the securities to be distributed by such underwriters. The holders of
Registrable Securities to be distributed by such underwriters shall be parties
to the underwriting agreement between the Company and such underwriters and may,
at their option, require that any or all of the representations and warranties
by, and the other agreements on the part of, the Company to and for the benefit
of such underwriters shall also be made to and for the benefit of such holders
of Registrable Securities and that any or all of the conditions precedent to the
obligations of such underwriters under such underwriting agreement be conditions
precedent to the obligations of such holders of Registrable Securities. Any
such holder of Registrable Securities shall not be required to make any
representations or warranties to or agreements with the Company or the
underwriters other than representations, warranties, or agreements typical in an
offering of this type, including those regarding such holder, such holder's
Registrable Securities and such holder's intended method of distribution, any
other information supplied by such holder to the Company for use in the
Registration Statement and any other representation required by law.
(c) Lock-up Agreements. In connection with any underwritten offering
------------------
of Common Stock, the holders of Registrable Securities will agree not to effect
any public sale or distribution of Registrable Securities, except for
Registrable Securities included in such registration statement, for such periods
of time before and after the effective date of such registration statement as
shall be mutually agreed between the managing underwriter and such holders.
2.6. Preparation; Reasonable Investigation. In connection with the
-------------------------------------
preparation and filing of each registration statement under the Securities Act
pursuant to this Agreement,
10
<PAGE>
the Company will give the holders of Registrable Securities registered under
such registration statement, the underwriters, if any, and their respective
counsel (such holders' counsel to be appointed by the holders of more than 50%
(by number of shares) of Registrable Securities so to be registered, the
opportunity to participate in the preparation of such registration statement,
each prospectus included therein or filed with the Commission, and each
amendment thereof or supplement thereto, and will give each of them such access
to its books and records and such opportunities to discuss the business of the
Company with its officers and the independent public accountants who have
certified its financial statements as shall be necessary, in the opinion of such
holders' and such underwriters' respective counsel, to conduct a reasonable
investigation within the meaning of the Securities Act.
2.7. Indemnification. (a) Indemnification by the Company. In the
--------------- ------------------------------
event of any registration of any securities of the Company under the Securities
Act or any other Federal or state law, the Company will, and hereby does,
indemnify and hold harmless the seller of any Registrable Securities covered by
such registration statement, its directors and officers, each other Person who
participates as an underwriter in the offering or sale of such securities and
such other Person, if any, who controls such seller or any such underwriter
within the meaning of the Securities Act, against any losses, claims, damages or
liabilities, joint or several, to which such seller or any such director or
officer or underwriter or controlling person may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions or proceedings, whether commenced or threatened, in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any registration statement
under which such securities were registered under the Securities Act, any
preliminary prospectus, final prospectus or summary prospectus contained
therein, or any amendment or supplement thereto, 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, and the Company will
reimburse such seller and each such director, officer, underwriter and
controlling person for any legal or any other expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim,
liability, action or proceeding; provided, however, that the Company will not be
-------- -------
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in such registration statement,
said preliminary or final prospectus or said amendment or supplement in reliance
upon and in conformity with written information furnished to the Company by such
seller or such underwriter, specifically for use in the preparation thereof.
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of such seller or any
11
<PAGE>
such director, officer, underwriter or controlling person and shall survive the
transfer of such securities by such seller.
(b) Indemnification by the Investors. The holders of Registrable
--------------------------------
Securities will, and hereby do, severally and not jointly, indemnify and hold
harmless (in the same manner and to the same extent as set forth in subdivision
(a) of this Section 2.7) the Company, each director of the Company, each officer
of the Company and each other Person, if any, who controls the Company within
the meaning of the Securities Act with respect to any statement or alleged
statement in or omission or alleged omission from such registration statement,
any preliminary prospectus, final prospectus or summary prospectus contained
therein, or any amendment or supplement thereto, if such statement or alleged
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such holder for
use in the preparation of such registration statement, preliminary prospectus,
final prospectus, summary prospectus, amendment or supplement. Such indemnity
shall remain in full force and effect, regardless of any investigation made by
or on behalf of the Company or any such director, officer or controlling Person
and shall survive the transfer of such securities by such Purchaser with respect
to information furnished by such Purchaser prior to such transfer.
(c) Notices of Claims, etc. Promptly after receipt by an indemnified
-----------------------
party of notice of the commencement of any action or proceeding involving a
claim referred to in the preceding subdivisions of this Section 2.7, such
indemnified party will, if a claim in respect thereof is to be made against an
indemnifying party, give written notice to the latter of the commencement of
such action, provided that the failure of any indemnified party to give notice
--------
as provided herein shall not relieve the indemnifying party of its obligations
under the preceding subdivisions of this Section 2.7, except to the extent that
the indemnifying party is prejudiced by such failure to give notice. In case
any such action is brought against an indemnified party, unless in such
indemnified party's reasonable judgment a conflict of interest between such
indemnified party and indemnifying parties may exist in respect of such claim,
the indemnifying party shall be entitled to participate in and to assume the
defense thereof, jointly with any other indemnifying party similarly notified to
the extent that it may wish, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party for any legal
or other expenses subsequently incurred by the latter in connection with the
defense thereof other than reasonable costs of investigation. No indemnifying
party shall, without the consent of the indemnified party, consent to entry of
any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or
12
<PAGE>
plaintiff to such indemnified party of a release from all liability in respect
to such claim or litigation.
(d) Indemnification Payments. The indemnification required by this
------------------------
Section 2.7 shall be made by periodic payments of the amount thereof during the
course of the investigation or defense, as and when bills are received or
expense, loss, damage or liability is incurred.
2.8. Adjustments Affecting Registrable Securities. The Company will
--------------------------------------------
not effect or permit to occur any combination or subdivision of shares which
would adversely affect the ability of the holders of Registrable Securities to
include such Registrable Securities in any registration of its securities
contemplated by this Section 2 or the marketability of such Registrable
Securities under any such registration.
3. Definitions. As used herein, unless the context otherwise
-----------
requires, the following terms have the following respective meanings:
Commission: The Securities and Exchange Commission or any other Federal
----------
agency at the time administering the Securities Act.
Common Stock: All shares now or hereafter authorized and designated as
------------
Common Stock of the Company and capital stock of any other class with which
such shares may hereafter have been exchanged or reclassified.
Exchange Act: The Securities Exchange Act of 1934, as amended.
------------
Fair Market Value: As defined in the Note Purchase Agreement.
-----------------
Initial Public Offering: As defined in the Note Purchase Agreement.
-----------------------
Person: A corporation, an association, a partnership, a limited liability
------
company, a business, an individual or a governmental authority.
Preferred Stock: The Company's Series A Usable Redeemable Preferred Stock,
---------------
par value $.01 per share.
Registrable Securities: The shares of Common Stock (i) issued or issuable
----------------------
pursuant to the Note Purchase Agreement and any additional shares of Common
Stock received in respect of such shares by way of stock dividend or stock
split or in connection with a combination of shares, recapitalization,
merger, consolidation or other reorganization or otherwise (collectively,
"Note Registrable Securities") or (ii) issued or issuable upon exercise of
13
<PAGE>
warrants issued pursuant to the Preferred Stock Purchase Agreement and any
additional shares of Common Stock received in respect of such shares by way
of stock dividend or stock split or in connection with a combination of
shares, recapitalization, merger, consolidation or other reorganization or
otherwise (collectively, "Preferred Registrable Securities").
As to any particular Registrable Securities, such securities shall cease to
be Registrable Securities when (a) a registration statement with respect to
the sale of such securities shall have become effective under the
Securities Act and such securities shall have been disposed of in
accordance with such registration statement, (b) they shall have been
distributed to the public pursuant to Rule 144 (or any successor provision)
under the Securities Act or (c) they shall have ceased to be outstanding.
Registration Expenses: All expenses incident to the Company's performance
---------------------
of or compliance with Section 2, including, without limitation, all
registration, filing and National Association of Securities Dealers, Inc.
fees, all fees and expenses of complying with securities or blue sky laws,
all word processing, duplicating and printing expenses, messenger and
delivery expenses, the reasonable fees and disbursements of counsel for the
Company and of its independent public accountants, including the expenses
of any special audits or "cold comfort" letters required by or incident to
such performance and compliance, the reasonable fees and disbursements of a
single counsel retained by the holder or holders of more than 50% (by
number of shares) of the Registrable Securities being registered, premiums
and other costs of policies of insurance, if any, obtained by the Company
against liabilities arising out of the public offering of the Registrable
Securities being registered and any fees and disbursements of underwriters
customarily paid by issuers or sellers of securities, including reasonable
fees of underwriters counsel incurred in the qualification of the
Securities under blue sky laws, but excluding all agency fees and
commissions, underwriting discounts and commissions and transfer taxes, if
any.
Securities Act: The Securities Act of 1933, as amended.
--------------
4. Rule 144. Following an Initial Public Offering, the Company will
--------
file the reports required to be filed by it, and in the manner required to be
filed by it, under the Securities Act and the Exchange Act (or, if the Company
is not required to file such reports, will, upon the request of any holder of
Registrable Securities, make publicly available other information) and will take
such further action as any holder of Registrable Securities may reasonably
request, all to the extent required from time to time to enable such holder to
sell Registrable Securities without registration under the Securities
14
<PAGE>
Act within the limitation of the exemptions provided by (a) Rule 144 under the
Securities Act, as such Rule may be amended from time to time, or (b) any
similar rule or regulation hereafter adopted by the Commission ("Rule 144").
Upon the request of any holder of Registrable Securities, the Company will
deliver to such holder a written statement as to whether it has complied with
such requirements.
5. Amendments and Waivers. This Agreement may be amended and the
----------------------
Company may take any action herein prohibited or omit to perform any act herein
required to be performed by it, only if the Company shall have obtained the
written consent to such amendment, action or omission to act, of the holder or
holders of 66-2/3% or more (by number of shares) of Registrable Securities.
Each holder of any Registrable Securities at the time or thereafter outstanding
shall be bound by any consent authorized by this Section 5, whether or not such
Registrable Securities shall have been marked to indicate such consent.
6. Nominees for Beneficial Owners. In the event that any Registrable
------------------------------
Securities are held by a nominee for the beneficial owner thereof, the
beneficial owner thereof may upon the giving of written notice to the Company,
at its election, be treated as the holder of such Registrable Securities for
purposes of any request or other action by any holder or holders of Registrable
Securities pursuant to this Agreement or any determination of any number or
percentage of shares of Registrable Securities held by any holder or holders of
Registrable Securities contemplated by this Agreement. The Company may require
assurances reasonably satisfactory to it of such owner's beneficial ownership of
such Registrable Securities.
7. Notices. All communications provided for hereunder shall be sent
-------
by first-class mail or overnight courier and (a) if addressed to a party other
than the Company, addressed to such party in the manner set forth in the Note
Purchase Agreement or the Preferred Stock Purchase Agreement, as the case may
be, or at such other address as such party shall have furnished to the Company
in writing, or (b) if addressed to any other holder of Registrable Securities,
at the address that such holder shall have furnished to the Company in writing,
or, until any such other holder so furnishes to the Company an address, then to
and at the address of the last holder of such Registrable Securities who has
furnished an address to the Company, or (c) if addressed to the Company, at JFAX
Communications, Inc., 10960 Wilshire Blvd., 5th Floor, Los Angeles, California
90024, to the attention of General Counsel, or at such other address, or to the
attention of such other officer, as the Company shall have furnished to each
holder of Registrable Securities at the time outstanding.
8. Assignment. This Agreement shall be binding upon and inure to the
----------
benefit of and be enforceable by the parties hereto and their respective
successors and permitted assigns. Whether or not any express assignment shall
have been made, the
15
<PAGE>
provisions of this Agreement which are for the benefit of the parties hereto
other than the Company shall also be for the benefit of and enforceable by any
subsequent holder of at least 100,000 Registrable Securities (with respect to
Registrable Securities), subject to the provisions respecting the minimum
numbers or percentages of shares of Registrable Securities required in order to
be entitled to certain rights, or take certain actions, contained herein;
provided, however, that the transfer of Registrable Securities to the
- -------- -------
transferor's equity holder, partner or officer will not be subject to any such
minimum shareholding.
9. Descriptive Headings. The descriptive headings of the several
--------------------
sections and paragraphs of this Agreement are inserted for reference only and
shall not limit or otherwise affect the meaning hereof.
10. Governing Law. This Agreement shall be construed and enforced in
-------------
accordance with, and the rights of the parties shall be governed by, the laws of
the State of New York.
11. Counterparts. This Agreement may be executed simultaneously in
------------
any number of counterparts, each of which shall be deemed an original, but all
such counterparts shall together constitute one and the same instrument.
16
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered by their respective officers thereunto duly authorized as
of the date first above written.
JFAX COMMUNICATIONS, INC.
By: /s/ Hemi Zucker
----------------------------
Name: Hemi Zucker
Title: Chief Financial Officer
17
<PAGE>
THE INVESTORS:
DELAWARE STATE EMPLOYEES'
RETIREMENT FUND
By: Pecks Management Partners Ltd.
Its Investment Advisor
By: /s/ Robert J. Cresci
---------------------
Robert J. Cresci
Managing Director
DECLARATION OF TRUST FOR DEFINED BENEFIT PLAN OF ICI
AMERICAN HOLDINGS INC.
By: Pecks Management Partners Ltd.
Its Investment Advisor
By: /s/ Robert J. Cresci
---------------------
Robert J. Cresci
Managing Director
DECLARATION OF TRUST FOR DEFINED BENEFIT PLAN OF
ZENECA HOLDINGS INC.
By: Pecks Management Partners Ltd.
Its Investment Advisor
By: /s/ Robert J. Cresci
---------------------
Robert J. Cresci
Managing Director
THE J.W. MCCONNELL FAMILY FOUNDATION
By: Pecks Management Partners Ltd.
Its Investment Advisor
By: /s/ Robert J. Cresci
---------------------
Robert J. Cresci
Managing Director
18
<PAGE>
DLJ FUND INVESTMENT PARTNERS II, L.P.
By: DLJ LBO PLANS MANAGEMENT CORPORATION
Its General Partner
By: /s/ Ivy Dodes
-------------------------------
Name: Ivy Dodes
Title: Vice President
DLJ CAPITAL CORPORATION
By: /s/ Ivy Dodes
-------------------------------
Name: Ivy Dodes
Title: Vice President
GMT PARTNERS, LLC
c/o Blue Capital Management
By: /s/ Chris Gagnon
-------------------------------
Chris Gagnon
Managing Member
ORCHARD/JFAX INVESTORS, L.L.C.
By: /s/ Richard Ressler
-------------------------------
Name: Richard Ressler
Title: Manager
19
<PAGE>
DLJ PRIVATE EQUITY EMPLOYEES FUND, L.P.
By: DLJ LBO PLANS MANAGEMENT CORPORATION
Its General Partner
By: /s/ Ivy Dodes
-------------------------------
Name: Ivy Dodes
Title: Vice President
20
<PAGE>
EXHIBIT 10.9
------------
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is made and entered
into as of March 17, 1997 by and among JFAX Communications, Inc., a Delaware
corporation (the "Company"), and the holders of Registrable Securities (the
"Holders") signatory to this Agreement.
This Agreement is made pursuant to the Investment Agreement (the
"Investment Agreement") dated as of March __, 1997 by and among the Company and
certain Persons including the Holders pursuant to which Orchard/JFAX Investors,
L.L.C. ("Orchard L.L.C.") is purchasing certain shares of Common Stock of the
Company, Boardrush LLC ("LLC") is making a secured borrowing from the Company
and certain related transactions are provided for. In order to induce the
Holders to enter into the Investment Agreement, the Company has agreed to
provide the registration rights set forth in this Agreement for the benefit of
the Holders. The execution and delivery of this Agreement is called for in the
Investment Agreement.
The parties hereby agree as follows:
1. Certain Definitions.
-------------------
As used in this Agreement, certain terms (not otherwise defined
herein) shall have the meanings set forth in the Investment Agreement, and the
following terms shall have the following respective meanings:
Affiliate of a specified Person means any other Person that directly,
---------
or indirectly through one or more intermediates, controls, is controlled by or
is under common control with the Person specified, or who holds or beneficially
owns 50% or more of the equity interest in the Person specified or 50% or more
of the voting securities of the Person specified. A managed account of a Person
is also an Affiliate of such Person. Notwithstanding the foregoing, solely for
the purposes of Section 8, John F. Rieley, Nehemia Zucker and Anand Narasimhan
shall be deemed an Affiliate of LLC.
Commission means the Securities and Exchange Commission.
----------
Company means JFAX Communications, Inc., a Delaware corporation or any
-------
successor to it or to its business.
Common Stock means (except where the context otherwise indicates) the
------------
Common Stock of the Company, par value $.01 per share, as constituted as of the
date hereof, and any capital stock into which such Common Stock may thereafter
be changed, and shall also include (i) capital stock of the Company of any other
class (regardless of how denominated) issued to the holders of shares of any
Common Stock upon any reclassification thereof which is also not preferred as to
dividends or liquidation over any other class of stock of the Company and which
is not subject to
<PAGE>
redemption and (ii) shares of common stock of any successor corporation or
acquiring corporation of the Company that may be acquired by holders of the
previous Common Stock.
Continuously Effective means, with respect to a specified registration
----------------------
statement, that it shall not cease to be effective and available for transfers
of Registrable Securities thereunder for longer than any forty-five (45)
consecutive Business Days prior to the Expiration Date.
Exchange Act means the Securities Exchange Act of 1934, as amended, or
------------
any successor statute thereto, and the rules and regulations of the Commission
promulgated thereunder.
Expiration Date means the earlier of (i) the tenth (10th) anniversary
---------------
of the date of this Agreement or (ii) the date on which no Holder holds any
Registrable Securities.
Holders shall have the meaning set forth in the first paragraph
-------
hereof, and as the context may require shall include their respective successors
and assigns provided that the registration rights hereunder shall only be
available to the initial Holders, their Affiliates and their Transferees.
Investment Agreement shall have the meaning set forth in the second
--------------------
paragraph hereof.
LLC shall have the meaning set forth in the second paragraph hereof.
---
Orchard L.L.C. shall have the meaning set forth in the second
--------------
paragraph hereof.
Person means any individual, corporation, partnership, joint venture,
------
association, joint-stock company, limited liability company, trust,
unincorporated organization or governmental or other agency or political
subdivision thereof.
Piggyback Registration shall have the meaning set forth in Section
----------------------
2(b).
Registrable Securities means any shares of Common Stock of the Company
----------------------
owned by a Holder. As to any particular Registrable Securities, such securities
shall cease to be Registrable Securities when (x) such securities shall have
been disposed of pursuant to an effective registration statement, (y) such
securities shall have been transferred to any Person other than the Holders
pursuant to Rule 144 (or any successor provision) or shall be transferable
pursuant to paragraph (k) thereof (or any successor provision) under the
Securities Act, or (z) they shall have ceased to be held by the Holders or any
Affiliate of the Holders or any Transferee of the Holders or their Affiliates.
Registration Expenses means all expenses incident to the performance
---------------------
of or compliance with the registration rights granted herein, including, without
limitation, all registration, filing, listing and NASD fees, all fees and
expenses of complying with securities or blue sky laws,
-2-
<PAGE>
all word processing, duplicating and printing expenses, messenger and delivery
expenses, the reasonable fees and expenses of the Company's counsel, the
reasonable fees and expenses of one counsel for the Selling Holders chosen by a
majority in interest of them, the fees and expenses of the Company's independent
public accountants, including the expenses of any special audits or "cold
comfort" letters required by or incident to such performance and compliance, and
any fees and disbursements of underwriters customarily paid by issuers and
sellers of securities; provided, however, that Registration Expenses shall not
-------- -------
include underwriting discounts, commissions and transfer taxes, if any,
applicable to the Registrable Securities all of which shall be borne by the
Selling Holders.
Securities Act means the Securities Act of 1933, as amended, or any
--------------
successor statute thereto, and the rules and regulations of the Securities and
Exchange Commission promulgated thereunder.
Selling Holders means those Holders who are participating in a
---------------
registration pursuant to Section 2 hereof and who are selling Registrable
Securities thereunder.
Shares means the Company's Common Stock.
------
Transferee shall mean the first holder of Registrable Securities by a
----------
transfer from a Holder or an Affiliate of a Holder provided, however, that a
Person acquiring such Registrable Securities pursuant to a transfer under an
effective registration statement or pursuant to a sale under Rule 144 (or any
successor provision) shall not be a Transferee.
Underwriters' Representative shall mean the managing underwriter, or,
----------------------------
in the case of a co-managed underwriting, the managing underwriter designated as
the Underwriters' Representative by the co-managers.
Violation shall have the meaning set forth in Section 6(a).
---------
2. Registration Rights.
-------------------
(a) Initial Registration. The Company shall have sole discretion to
--------------------
determine the timing for its initial public offering, if any, and shall further
have the sole discretion, in consultation with any underwriter or underwriters
for such offering, to determine the amount and allocation of Registrable
Securities of any Holder or Holders to be included in the registration for such
initial public offering. In making such determinations, the Company shall be
guided by its evaluation of the overall best interest of the Company and its
stockholders generally and the desirability of achieving a successful initial
public offering. Within these parameters, and without limiting its discretion
under this Section 2(a), the Company will give appropriate consideration to
inclusion of the Registrable Securities of the Holders in such initial public
offering.
-3-
<PAGE>
(b) Subsequent Registrations. In the event that, subsequent to its
------------------------
initial public offering as aforesaid and prior to the Expiration Date, the
Company intends to register shares of its Common Stock under the Securities Act,
on a registration form and pursuant to a plan of distribution that would
reasonably permit inclusion of the Registrable Securities of the Holders (any
such registration, a "Piggyback Registration"), the Company will promptly give
to each of the Holders written notice thereof and use its reasonable efforts to
include in such registration all of the Registrable Securities that are
specified in a written notice given to the Company by each such Holder within
ten (10) business days after the date the notice is given by the Company, unless
the Company reasonably determines that, or the managing underwriter or
underwriters advise the Company that, a limitation on the total number of
Registrable Securities to be included in such registration is advisable. In
such case, the Company will include in such registration such number of
Registrable Securities, together with such number of shares of Common Stock as
are proposed to be sold by the Company, allocated according to the following
priorities: (1) first, the shares of Common Stock that the Company proposes to
sell pursuant to such registration and (2) second, the number of Registrable
Securities that the Holders proposed to sell pursuant to such registration. As
to each Holder, if a reduction is required, the allocation shall be made pro
rata according to the number of Registrable Securities initially requested to be
included therein by the Holders. The Company shall have full discretion to
delay or postpone or to place in abeyance any registration pursuant to this
Agreement if the Company reasonably determines that it should not be made or
continued because it would materially interfere with any financing, acquisition,
corporate reorganization or merger or any other significant corporate
transaction involving the Company, and the Holders agree to comply and cooperate
with the Company's decisions in this regard, pending the Company's determination
to resume such registration.
(c) Registration Statement Form. The Company may, if permitted by
---------------------------
law, effect any registration requested hereunder by the filing of a registration
statement on Form S-3 (or any successor or similar short-form registration
statement).
(d) Expenses. The Company shall pay all Registration Expenses
--------
incurred in connection with the registration of Registrable Securities pursuant
to Section 2(a) or 2(b).
(e) Effective Registration Statement. Any registration pursuant to
--------------------------------
this Agreement shall not be deemed to have been effected unless it has become
effective with the Commission. Notwithstanding the foregoing, a registration
statement will not be deemed to have been effected if (i) after it has become
effective with the Commission, such registration is interfered with by any stop
order, injunction or other order or requirement of the Commission or other
governmental agency or any court proceeding for any reason or (ii) the
conditions to closing specified in the purchase agreement or underwriting
agreement entered into in connection with such registration are not satisfied.
(f) Conflicting Instructions from Holders. (i) The Company may rely
-------------------------------------
and shall be protected in relying upon any resolution, certificate, opinion,
request, communication, demand,
-4-
<PAGE>
receipt or other paper or document in good faith believed by it to be genuine
and to have been signed or presented by the proper party or parties. The Company
may act in reliance upon the advice of its counsel in reference to any matter in
connection with this Agreement and shall not incur any liability for any action
taken in good faith in accordance with such advice.
(ii) In the event the Company receives conflicting
instructions regarding any action to be taken or withheld hereunder, the Company
may suspend further action relating to such action until such time as the
conflicting instructions are resolved by the parties giving the same or until
the Company is instructed to take or withhold the requested action by a final
order from which no appeal may be taken issued by a court of competent
jurisdiction.
3. Registration Procedures.
-----------------------
(a) Whenever the Company effects the registration of any
Registrable Securities under the Securities Act as provided in Section 2, the
Company, as expeditiously as possible and subject to the terms and conditions
herein, will use its reasonable efforts to:
(i) prepare and file with the Commission the requisite
registration statement to effect such registration and to cause such
registration to become effective;
(ii) prepare and file with the Commission such amendments
and supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration statement
Continuously Effective and to comply with the provisions of the Securities Act
with respect to the disposition of all securities covered by such registration
statement until such time as all of such securities have been disposed of in
accordance with the intended methods of disposition by the Selling Holders
thereof set forth in such registration statement or, if earlier, until the
Expiration Date;
(iii) furnish to the Selling Holders such number of
conformed copies of such registration statement and of each such amendment and
supplement thereto (in each case including all exhibits), such number of copies
of the prospectus contained in such registration statement (including each
preliminary prospectus and any summary prospectus) and any other prospectus
filed under the Securities Act, in conformity with the requirements of the
Securities Act, and such other documents, in each case, as the Selling Holders
may reasonably request;
(iv) register or qualify all Registrable Securities
covered by such registration statement under such other United States state
securities or blue sky laws of such jurisdictions as the Selling Holders shall
reasonably request, to keep such registration statement qualification in effect
for so long as such registration remains in effect, and take any other action
which may be reasonably necessary or advisable to enable the Selling Holders to
consummate the disposition in such jurisdictions of the Registrable Securities
owned by the Selling Holders, except that the Company shall not for any such
purpose be required to (a) qualify generally to do business
-5-
<PAGE>
as a foreign corporation in any jurisdiction wherein it would not but for the
requirements of this subdivision (iv) be obligated to be so qualified, (b)
subject itself to taxation in any such jurisdiction or (c) consent to general
service of process in any such jurisdiction;
(v) in any underwritten offering, and if reasonable and
customary in the context of such offering, use its reasonable efforts to furnish
to the Selling Holders a signed counterpart, addressed to the Selling Holders as
seller of Registrable Securities (and the underwriters, if any), of
(x) an opinion of counsel for the Company, dated
the effective date of such registration statement (or, if such registration
includes an underwritten public offering, dated the date of the closing
under the underwriting agreement), reasonably satisfactory to the Selling
Holders in their reasonable judgment, and
(y) a "comfort" letter, reasonably satisfactory
to the Selling Holders dated the effective date of such registration
statement (or, if such registration includes an underwritten public
offering, dated the date of the closing under the underwriting agreement),
signed by the independent public accountants who have certified the
Company's financial statements included in such registration statement,
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) and, in the case of the
accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of issuer's counsel
and in accountants' letters delivered to the underwriters in underwritten public
offerings of securities and, in the case of the accountants' letter, such other
financial matters as such seller or such Holder (or the underwriters, if any)
may reasonably request;
(vi) immediately notify the Selling Holders at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
prospectus included in such registration statement, as then in effect, includes
an untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances under which they were made, and at
the request of the Selling Holders promptly prepare and furnish to the Selling
Holders a reasonable number of copies of a supplement to or an amendment of such
prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such securities, such prospectus shall not include 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 not misleading in the
light of the circumstances under which they were made;
-6-
<PAGE>
(vi) comply with all applicable rules and regulations of
the Commission, and make available to its security holders, as soon as
reasonably practicable, an earnings statement covering the period of at least
twelve months, but not more than eighteen months, beginning with the first full
calendar month after the effective date of such registration statement, which
earnings statement shall satisfy the provisions of Section 11(a) of the
Securities Act, and not file (or withdraw or correct) any amendment or
supplement to such registration statement or prospectus to which the Selling
Holders shall have reasonably objected in writing on the grounds that such
amendment or supplement does not comply in all material respects with the
requirements of the Securities Act or of the rules or regulations thereunder.
(vi) provide a transfer agent and registrar for all
Registrable Securities covered by such registration statement not later than the
effective date of such registration statement; and
(ix) list all Registrable Securities covered by such
registration statement on any securities exchange on which any of the
Registrable Securities are then listed.
(b) As a condition of these Registration Rights, the Company may
require the Selling Holders, at their own expense, to furnish the Company with
such information and undertakings regarding such Holders and the distribution of
such securities as the Company may from time to time reasonably request in
writing, and the Holders, by their execution hereof, agree to provide such
information and make such undertakings as are requested.
(c) The Selling Holders agree (A) that upon receipt of any notice
from the Company of the happening of any event of the kind described in
subdivision (vi) of Section 3(a), the Selling Holders will forthwith discontinue
their disposition of Registrable Securities pursuant to the registration
statement relating to such Registrable Securities until the Selling Holders'
receipt of the copies of the supplemented or amended prospectus contemplated by
subdivision (vi) of Section 3(a) and, if so directed by the Company, will
deliver to the Company all copies, other than permanent file copies, then in the
Selling Holders' possession of the prospectus relating to such Registrable
Securities current at the time of receipt of such notice and (B) that they will
immediately notify the Company, at any time when a prospectus relating to the
registration of such Registrable Securities is required to be delivered under
the Securities Act, of the happening of any event as a result of which
information previously furnished by the Selling Holders to the Company for
inclusion in such prospectus contains an untrue statement of a material fact or
omits to state any material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the circumstances
under which they were made.
-7-
<PAGE>
(d) Notwithstanding anything in this Agreement to the contrary, the
Company will not be required to file any registration statement hereunder if it
receives an opinion of counsel in form and substance reasonably satisfactory to
the Selling Holders, or counsel to the Selling Holders, to the effect that the
sale of the Registrable Securities in the manner contemplated by the Selling
Holders may be effected without registration regardless of the identity or
status of the buyer(s) of such Registrable Securities. Also, the Company will
not be required to file any registration statement to cover Registrable
Securities that are already registered pursuant to a previous registration
statement that is effective and available for use by the Holders of such
Registrable Securities to effect sales thereof at such time.
4. Underwritten Offerings.
----------------------
(a) Underwritten Offerings. If requested by the underwriters for
----------------------
any underwritten offering including the Selling Holders pursuant to a
registration under Section 2, the Company will enter into an underwriting
agreement with such underwriters for such offering, such agreement to be in form
and substance reasonably satisfactory to the Company, the Selling Holders and
the underwriters and to contain such representations and warranties by the
Company and such other terms as are customarily contained in agreements of this
type, including, without limitation, indemnities to the effect and to the extent
substantially as provided in Section 6. The Selling Holders shall be a party to
such underwriting agreement and may, at their option (reasonably exercised),
require that any or all of the representations and warranties by, and the other
agreements on the part of, the Company to and for the benefit of such
underwriters shall also be made to and for the benefit of the Selling Holders
and that any or all of the conditions precedent to the obligations of such
underwriters under such underwriting agreement be conditions precedent to the
obligations of the Selling Holders.
(b) Selection of Underwriters. If a registration pursuant to
-------------------------
Section 2 involves an underwritten offering, then the Company will be entitled
to select the underwriter or underwriters and the Underwriters' Representative
therefor.
(c) Holdback Agreements. (i) Each Holder agrees, if so required by
-------------------
the Company or the Underwriters' Representative, not to effect any public sale
or distribution of Registrable Securities or sales of such Registrable
Securities pursuant to Rule 144 or Rule 144A under the Securities Act, during a
reasonable period prior to and the 90 days after any firm commitment
underwritten registration pursuant to Section 2 has been priced (except as part
of such registration), whether or not the Holder participates in such
registration.
-8-
<PAGE>
5. Preparation, Reasonable Investigation.
-------------------------------------
In connection with the preparation and filing of each registration
statement under the Securities Act, the Company will give the Selling Holders,
the underwriters, if any, and their respective counsel and accountants, the
reasonable opportunity to participate in the preparation of such registration
statement, each prospectus included therein or filed with the Commission and
each amendment thereof or supplement thereto, and will give each of them such
reasonable access to its books and records and such reasonable opportunities to
discuss the business of the Company with its officers and the independent public
accountants who have certified its financial statements as shall be necessary to
conduct a reasonable investigation within the meaning of the Securities Act.
6. Indemnification; Contribution. If any Registrable Securities are
------------------------------
included in a registration statement under this Agreement:
(a) To the extent permitted by applicable law, the Company shall
indemnify and hold harmless each Selling Holder, each Person, if any, who
controls such Selling Holder within the meaning of the Securities Act, and each
officer, director, partner, and employee of such Selling Holder and such
controlling Person, against any and all losses, claims, damages, liabilities and
expenses (joint or several), including reasonable attorneys' fees and
disbursements and expenses of investigation, incurred by such party pursuant to
any actual or threatened action, suit, proceeding or investigation, or to which
any of the foregoing Persons may become subject under the Securities Act, the
Exchange Act or any other federal or state laws, insofar as such losses, claims,
damages, liabilities and expenses arise out of or are based upon any of the
following statements, omissions or violations (collectively a "Violation"):
(i) Any untrue statement or alleged untrue statement of a
material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein, or any amendments
or supplements thereto;
(ii) The 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
(iii) Any violation or alleged violation by the Company of
the Securities Act, the Exchange Act, any applicable state securities law or any
rule or regulation promulgated under the Securities Act, the Exchange Act or any
applicable state securities law; provided, however, that the indemnification
-------- -------
required by this Section 6(a) shall not apply to amounts paid in settlement of
any such loss, claim, damage, liability or expense if such settlement is
effected without the consent of the Company (which consent shall not be
unreasonably withheld), nor shall the Company be liable in any such case for any
such loss, claim, damage, liability or expense to the extent (and only to the
extent) that it arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished to the
Company by the indemnified party expressly for use in connection with such
registration; provided, further, that the indemnity
-------- -------
-9-
<PAGE>
agreement contained in this Section 6 shall not apply to any underwriter to the
extent that any such loss is based on or arises out of an untrue statement or
alleged untrue statement of a material fact, or an omission or alleged omission
to state a material fact, contained in or omitted from any preliminary
prospectus if the final prospectus shall correct such untrue statement or
alleged untrue statement, or such omission or alleged omission, and a copy of
the final prospectus has not been sent or given to such person at or prior to
the confirmation of sale to such person if such underwriter was under an
obligation to deliver such final prospectus and failed to do so. The Company
shall also indemnify underwriters, selling brokers, dealer managers and similar
securities industry professionals participating in the distribution, their
officers, directors, agents and employees and each person who controls such
persons (within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act) to the same extent as provided above with respect to the
indemnification of the Selling Holders.
(b) To the extent permitted by applicable law, each Selling Holder
shall indemnify and hold harmless the Company, each of its directors, each of
its officers who shall have signed the registration statement, each Person, if
any, who controls the Company within the meaning of the Securities Act, any
other Selling Holder, any controlling Person of any such other Selling Holder
and each officer, director, partner, and employee of such other Selling Holder
and such controlling Person, against any and all losses, claims, damages,
liabilities and expenses (joint and several), including reasonable attorneys'
fees and disbursements and expenses of investigation, incurred by such party
pursuant to any actual or threatened action, suit, proceeding or investigation,
or to which any of the foregoing Persons may otherwise become subject under the
Securities Act, the Exchange Act or any other federal or state laws, insofar as
such losses, claims, damages, liabilities and expenses arise out of or are based
upon any Violation, in each case to the extent (and only to the extent) that
such Violation occurs in reliance upon and in conformity with written
information furnished by such Selling Holder expressly for use in connection
with such registration; provided, however, that (x) the indemnification required
-------- -------
by this Section 6(b) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or expense if settlement is effected without the
consent of the relevant Selling Holder of Registrable Securities, which consent
shall not be unreasonably withheld, and (y) in no event shall the amount of any
indemnity under this Section 6(b) exceed the gross proceeds from the applicable
offering received by such Selling Holder.
(c) Promptly after receipt by an indemnified party under this
Section 6 of notice of the commencement of any action, suit, proceeding,
investigation or threat thereof made in writing for which such indemnified party
may make a claim under this Section 6, such indemnified party shall deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
-------- -------
have the right to retain its own counsel at its own expense except as provided
below. The failure to deliver written notice to the indemnifying party within a
reasonable time following the commencement of any such action, if and to the
extent prejudicial to its ability to defend such action,
-10-
<PAGE>
shall relieve such indemnifying party of any liability to the indemnified party
under this Section 6 but shall not relieve the indemnifying party of any
liability that it may have to any indemnified party otherwise than pursuant to
this Section 6. Any fees and expenses incurred by the indemnified party
(including any fees and expenses incurred in connection with investigating or
preparing to defend such action or proceeding) shall be paid to the indemnified
party, as incurred, within sixty (60) days of written notice thereof to the
indemnifying party (regardless of whether it is ultimately determined that an
indemnified party is not entitled to indemnification hereunder, but in such
event such amounts shall be refunded). Any such indemnified party shall have the
right to employ separate counsel in any such action, claim or proceeding and to
participate in the defense thereof, but the fees and expenses of such counsel
shall be the expenses of such indemnified party unless (i) the indemnifying
party has agreed to pay such fees and expenses or (ii) the indemnifying party
shall have failed to promptly assume the defense of such action, claim or
proceeding or (iii) the named parties to any such action, claim or proceeding
(including any impleaded parties) include both such indemnified party and the
indemnifying party, and such indemnified party shall have been advised by
counsel that there may be one or more legal defenses available to it which are
different from or in addition to those available to the indemnifying party and
that the assertion of such defenses would create a conflict of interest such
that counsel employed by the indemnifying party could not faithfully represent
the indemnified party (in which case, if such indemnified party notifies the
indemnifying party in writing that it elects to employ separate counsel at the
expense of the indemnifying party, the indemnifying party shall not have the
right to assume the defense of such action, claim or proceeding on behalf of
such indemnified party, it being understood, however, that the indemnifying
party shall not, in connection with any one such action, claim or proceeding or
separate but substantially similar or related actions, claims or proceedings in
the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of more than one
separate firm of attorneys (together with appropriate local counsel) at any time
for all such indemnified parties, unless in the reasonable judgment of such
indemnified party a conflict of interest may exist between such indemnified
party and any other of such indemnified parties with respect to such action,
claim or proceeding, in which event the indemnifying party shall be obligated to
pay the reasonable fees and expenses of such additional counsel or counsels). No
indemnifying party shall be liable to an indemnified party for any settlement of
any action, proceeding or claim without the written consent of the indemnifying
party, which consent shall not be unreasonably withheld.
(d) If the indemnification required by this Section 6 from the
indemnifying party is unavailable to an indemnified party hereunder in respect
of any losses, claims, damages, liabilities or expenses referred to in this
Section 6:
(i) The 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 or
expenses in such proportion as is appropriate to reflect the relative fault of
the indemnifying party and indemnified parties in connection with the actions
which resulted in such losses, claims, damages, liabilities or expenses, as well
as any other relevant
-11-
<PAGE>
equitable considerations. The relative fault of such indemnifying party and
indemnified parties shall be determined by reference to, among other things,
whether any Violation has been committed by, or relates to information supplied
by, such indemnifying party or indemnified parties, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such Violation. The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in Section 6(a) and Section 6(b),
any legal or other fees or expenses reasonably incurred by such party in
connection with any investigation or proceeding.
(ii) The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 6(d) were determined by pro
rata allocation or by any other method of allocation which does not take into
account the equitable considerations referred to in Section 6(d)(i). No Person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any Person who was
not guilty of such fraudulent misrepresentation.
(e) If indemnification is available under this Section 6, the
indemnifying parties shall indemnify each indemnified party to the full
extent provided in this Section 6 without regard to the relative fault of
such indemnifying party or indemnified party or any other equitable
consideration referred to in Section 6(d).
(f) The obligations of the Company and the Selling Holders of
Registrable Securities under this Section 6 shall survive the completion of any
offering of Registrable Securities pursuant to a registration statement under
this Agreement, and otherwise.
7. Covenants of the Company. The Company hereby agrees and covenants as
------------------------
follows:
The Company shall file as and when applicable, on a timely
basis, all reports required to be filed by it under the Exchange Act. If, after
the Company has first become a reporting company under the Exchange Act,
thereafter the Company is not required to file reports pursuant to the Exchange
Act, thereupon the request of any Holder of Registrable Securities, the Company
shall make publicly available the information specified in subparagraph (c)(2)
of Rule 144 of the Securities Act, and take such further action as may be
reasonably required from time to time and as may be within the reasonable
control of the Company, to enable the Holders to transfer Registrable Securities
to a Transferee without registration under the Securities Act within the
limitation of the exemptions provided by Rule 144 under the Securities Act or
any similar rule or regulation hereafter adopted by the Commission.
8. Tag-Along Rights. Orchard L.L.C. hereby agrees as follows, solely for
----------------
the benefit of LLC and its Affiliates, and without affecting the other
provisions of this Agreement with respect to registration rights. During the
period from the date hereof and until the Company effects its initial public
offering as referred to in Section 2(a) above, if Orchard L.L.C. shall intend to
dispose of any
-12-
<PAGE>
of its Registrable Securities, in a private transaction or transactions
involving negotiation with a discreet number of parties, then Orchard L.L.C.
shall use its reasonable efforts to include the Registrable Securities of LLC
and its Affiliates in such transaction, on the same or substantially the same
terms as are available to Orchard L.L.C., and so that, if the amount of
securities to be disposed of must be limited, LLC and its Affiliates shall be
permitted to dispose of the same proportion of their Registrable Securities as
the proportion being disposed of by Orchard L.L.C. In order to effectuate this
provision, Orchard L.L.C. shall give prior written notice thereof to LLC and its
Affiliates who are parties to this Agreement, and they (in coordination with
LLC) shall be given a period of ten (10) business days after such notice to
advise Orchard L.L.C. as to their interest in disposing of their Registrable
Securities on the terms proposed. This provision shall cease to be applicable
when the Company has effected its initial public offering and shall further not
be applicable to any disposition or dispositions by Orchard L.L.C. amounting
cumulatively to less than 15% of the total number of outstanding shares of the
Common Stock of the Company. This provision shall not give LLC or its Affiliates
any rights to participate in the negotiations by Orchard L.L.C. of any such
transaction, their sole rights being to participate on the same or substantially
the same terms, if they choose to do so, as negotiated by Orchard L.L.C. For
purposes of this provision, any disposition of Registrable Securities by Orchard
L.L.C. shall include dispositions by its Affiliates other than the Company and
its subsidiaries.
9. Miscellaneous.
-------------
9.1 Specific Performance. The parties hereto acknowledge that
--------------------
there may be no adequate remedy at law if any party fails to perform any of its
obligations hereunder and that each party may be irreparably harmed by any such
failure, and accordingly agree that each party, in addition to any other remedy
to which it may be entitled at law or in equity, may be entitled to compel
specific performance of the obligations of any other party under this Agreement
in accordance with the terms and conditions of this Agreement.
9.2 Notices. All notices, requests, claims, demands, waivers and
-------
other communications required or permitted hereunder shall be in writing and
shall be deemed to have been duly given when delivered by hand, if delivered
personally by courier, or three days after being deposited in the mail
(registered or certified mail, postage prepaid, return receipt requested) as
follows:
-13-
<PAGE>
(a) The Holders at the addresses indicated on the
signature page hereof.
-14-
<PAGE>
(b) The Company at:
JFAX Communications, Inc.
225 Lafayette Street, Suite 501
New York, NY 10012
Attention: Chief Executive Officer
Facsimile Number: (212) 253-4321
or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
9.3 Law Governing. THIS AGREEMENT SHALL BE GOVERNED BY AND
-------------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING
EFFECT TO PRINCIPLES OF CONFLICT OF LAWS.
9.4 Attorneys' Fees. In any action or proceeding brought to
---------------
enforce any provision of this Agreement, or where any provision hereof is
validly asserted as a defense, the successful party shall be entitled to recover
reasonable attorneys' fees (including any fees incurred in any appeal) in
addition to its costs and expenses and any other available remedy.
9.5 Headings. The descriptive headings of the several Sections and
--------
paragraphs of this Agreement are inserted for convenience only, and do not
constitute a part of this Agreement and shall not affect in any way the meaning
or interpretation of this Agreement.
9.6 Entire Agreement; Amendments. This Agreement and the other
----------------------------
writings referred to herein or delivered pursuant hereto which form a part
hereof contain the entire understanding of the parties with respect to its
subject matter. This Agreement supersedes all prior agreements and
understandings between the parties with respect to its subject matter. This
Agreement may be amended and the observance of any term of this Agreement may be
waived (either generally or in a particular instance and either retroactively or
prospectively) only by a written instrument duly executed by the Company and the
Holder or Holders concerned. Each holder of any Registrable Securities at the
time or thereafter outstanding shall be bound by an amendment or waiver
authorized by this Section 9.6, whether or not any such Registrable Securities
shall have been marked to indicate such consent.
9.7 Assignability. This Agreement shall be binding upon and inure
-------------
to the benefit of the respective successors and assigns of the parties hereto
provided, however, that the registration rights hereunder shall only be
available to the initial Holders, their Affiliates and to their Transferees.
9.8 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
-15-
<PAGE>
9.9 Validity, Due Authorization. By its execution hereof, the
---------------------------
Company represents and warrants that it has the corporate power to execute,
deliver and perform the terms and provisions of this Agreement and that it has
taken all appropriate and necessary corporate action to authorize the
transactions contemplated hereby and the execution, delivery and performance of
this Agreement.
JFAX COMMUNICATIONS, INC.
By: /s/ Jens Muller
-------------------
Name: Jens Muller
Title: President
HOLDERS:
Orchard/JFAX Investors, L.L.C. Address:
c/o Orchard Capital Corp.
By: /s/ Richard S. Ressler 10960 Wilshire Blvd., Suite 500
--------------------------------- Los Angeles, CA 90024
Name: Richard S. Ressler Fax: (310) 201-4351
Title: Manager
Boardrush LLC Address:
244 Madison Avenue, Suite 191
New York, NY 10016
By: /s/ Jens Muller Attn: Mr. Jaye Muller
--------------------------------- Fax: (212) 253-4123
Name: Jens Muller
Title: Manager
c/o Boardrush LLC
/s/ Jens Muller
- ---------------------------------------
Jens Muller
c/o Boardrush LLC
/s/ John F. Rieley
- ---------------------------------------
John F. Rieley
-16-
<PAGE>
c/o JFAX Communications, Inc
/s/ Nehemia Zucker
- ----------------------------------------
Nehemia Zucker
c/o JFAX Communications, Inc.
/s/ Anand Narasimhan
- -----------------------------------------
Anand Narasimhan
The address of JFAX Communications,
Inc. currently set forth in Section
9.2 hereof.
-17-
<PAGE>
EXHIBIT 21.1
------------
List of Subsidiaries
--------------------
JFAX.COM Europe, Ltd.
<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
April 16, 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> 145,480 176,215
<OTHER-SE> 1,472,869 (7,923,193)
<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> 5,561,909 14,494,827
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 1,353,751
<INCOME-PRETAX> (4,661,781) (11,908,316)
<INCOME-TAX> 1,640 1,500
<INCOME-CONTINUING> (4,663,421) (11,909,816)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,663,421) (11,909,816)
<EPS-PRIMARY> .37 .73
<EPS-DILUTED> .37 .73
</TABLE>
