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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington. D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-25965
JFAX.COM, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0371142
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
6922 Hollywood Boulevard
Suite 900
Hollywood, California 90028
(Address of principal executive offices)
(323) 860-9200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of December 31, 1999, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was approximately $76,397,540 based
upon the closing sales price of the Common Stock as reported on the Nasdaq
National Market on such date. Shares of Common Stock held by officers,
directors and holders of more than ten percent of the outstanding Common Stock
have been excluded from this calculation because such persons may be deemed to
be affiliates. The determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of March 15, 2000, the registrant had 36,096,962 common shares
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the following documents are incorporated by reference in this
report: Registrant's Proxy Statement for its 2000 Annual Meeting of
Stockholders which will be filed with the Securities and Exchange Commission
no later than 120 days after December 31, 1999. (Part III).
This Report on Form 10-K includes 62 pages with the Index to Exhibits
located on page 58.
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TABLE OF CONTENTS
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PART I.
Item 1. Business............................................... 1
Item 2. Properties............................................. 26
Item 3. Legal Proceedings...................................... 27
Item 4. Submission of Matters to a Vote of Security Holders.... 27
PART II. OTHER INFORMATION
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.................................... 28
Item 6. Selected Financial Data................................ 29
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 30
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk................................................... 35
Item 8. Financial Statements and Supplementary Data............ 35
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 57
PART III.
Item 10. Directors and Executive Officers of the Registrant..... 57
Item 11. Executive Compensation................................. 57
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................. 57
Item 13. Certain Relationships and Related Transactions......... 57
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K............................................... 58
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PART I.
Item 1. Business
BUSINESS
Disclosure Regarding Forward-looking Information
This report contains forward-looking statements that involve risks and
uncertainties. These statements relate to our future plans, objectives,
expectations and intentions, and the assumptions underlying or relating to any
of these statements. These statements may be identified by the use of words
such as "expect", "anticipate", "estimate", "believe", "intend" and "plan".
Our actual results may differ materially from those discussed in these
statements. Factors that could contribute to such differences include those
discussed in "Risk Factors" and elsewhere in this report.
Although we believe that the expectations reflected in our forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity or performance of achievements. Neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements.
We assume no duty to update any of the forward-looking statement after the
date of this report or to conform these statements to actual results.
Company Overview
We are an Internet-based messaging and communications services provider to
individuals and businesses throughout the world. Our services enable the
user's e-mail box to function as a single repository for all e-mail, fax and
voice mail and permit convenient message retrieval through e-mail or by phone.
Customers can sign-up for all of our services through our web site and can
promptly receive a JFAX.COM phone number.
We provide Internet-based unified messaging services with over 56,000 paid
subscriptions as of December 31, 1999. Since we started offering our services
on a commercial basis in June 1996, we have expanded our network to offer our
services in over 90 area codes in the United States and abroad, including area
codes in 22 of the 25 most populous major metropolitan areas in the United
States. We have over 15 area codes outside the United States, including area
codes in London, Paris, Frankfurt, Zurich, Milan, Sydney and Tokyo. We intend
to continue to increase the number of area codes and target new international
locations.
Industry Background
Growth of the Internet and Electronic Commerce
The Internet has experienced rapid growth and has developed into a
significant tool for global communications, commerce and media, enabling
millions of people to share information and transact business electronically.
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.
E-Mail
E-mail is the most widely adopted Internet application, ranging from a
personal messaging tool to a strategic business tool. E-mail messages have
increased in volume and functionality, and this trend is expected to continue.
For example, e-mail is expected to become a major vehicle for electronic
commerce transactions. The e-mail box as a locating and delivery device has
become the platform for additional applications such as directory services,
scheduling and document sharing. Furthermore, the e-mail box can function as a
central repository to receive, send, forward, organize and prioritize voice
mail, fax and e-mail messages, thus creating what is called unified messaging.
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Traditional Faxing
The fax machine is a valuable tool for communication for businesses and
individuals. Although e-mail traffic is growing rapidly, faxing continues to
grow due to decreasing telephone rates and the increasing availability of
software that allows faxes, including broadcast faxes, to be sent from
personal computers.
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, thereby growing less dependent on traditional fax
machines. Recent advances in technology allow users to send and receive faxes
from their computers using e-mail to transmit data over the Internet.
Trends in Internet Messaging
With continuing developments in modern technology, various message media
are currently in the process of converging. Communication channels are
becoming interchangeable as consumers can send the same message through e-
mail, voice mail and fax. With the unification of these functions, consumers
increasingly value messaging services that are "device-independent." Consumers
appreciate the ability to send and retrieve messages in any form and in the
most convenient manner, using e-mail, voice mail or fax, and accessing
messages with the telephone or personal computer or through the Internet.
Need for Cost-Effective Solutions
Whether it is an individual avoiding the cost of maintaining a fax machine,
answering machine and dedicated fax line or a large corporation attempting to
cost-effectively manage expanding and increasingly sophisticated
communications systems, individuals and businesses alike are making use of
third parties to manage their messaging needs. In addition, businesses often
find it difficult to implement state-of-the-art technology in their own
infrastructure, and individuals with the expertise to maintain a sophisticated
messaging system can be scarce and costly to hire, train and retain. As a
result, we believe that organizations seeking to lower their costs and to
reduce the amount of time and labor they invest in technological
infrastructure and support systems, such as messaging systems, will look to
Internet-based solutions provided by third parties to maintain
competitiveness.
Our Solution
We provide individual consumers, end-users and businesses with convenient,
cost-effective and reliable Internet-based messaging and communications
services.
Individual Consumers and End-Users
Our services are designed to provide the following key benefits to
individual consumers and end-users:
. Unified Messaging. We believe we were 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 permits convenient management of their messages
through e-mail or by phone.
. Anytime, Anywhere Accessibility. We have designed our services to allow
easy access by customers seven days a week, 24 hours a day from any
location. Our customers can listen to their e-mail and voice mail and
manage their e-mails, faxes and voice mails from any touch-tone phone. In
addition to these capabilities, our customers can listen to their voice
mail and view their faxes anytime they read their e-mail.
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. Access to International Network. We have built a network allowing our
customers to establish a local phone number in over 90 area codes in the
United States and abroad. Additionally, our proprietary Internet-based
solution enables a customer to activate service from our web site or over
the phone within minutes.
. Cost Effective Service. We believe that by using our service, customers
can achieve cost savings and efficiency when compared to traditional
telephone and fax communication.
. Customization. Our services allow customers to create their own messaging
solutions. They may elect to use our free services or our paid
subscription services, or they may add any of our usage-based features,
such as telephone access to e-mail, outbound voice, outbound faxing,
broadcast voice and broadcast faxing.
. Customer Support. We offer our customers various levels of support seven
days a week, 24 hours a day.
We believe a large percentage of our subscribers are professionals or are
employed in upper management positions and that another large percentage of
our subscribers are self-employed or small business owners.
Businesses
In addition to the benefits listed above, our service provides the
following key benefits to businesses:
. Cost Effective Service. With our service, businesses have a reduced need
for personnel, traditional fax machines, phone lines or other costly
hardware. In addition, we offer a simple solution priced to reflect our
economies of scale.
. Award-Winning Technology. We provide our customers with access to
advanced, award-winning Internet-based messaging technologies based on
open standards. In addition to being the first to market a unified
messaging service, our technology has earned the 1998 CommerceNet award
for Electronic Commerce Excellence in the United States Business-to-
Consumer category.
. Scaleability and Reliability. Our network of services is designed to be
highly scaleable, meaning that it allows us to easily add additional
locations to our network and additional users at each location. Our
system is also designed with back-up components, including back-up power
supplies in separate locations and multiple Internet connections, in the
event of a technological failure and is designed to provide reliable
service to our customers.
. Security. Our fax services provide a type of security not available with
traditional faxing since messages arrive directly into the customer's e-
mail box and do not remain in view on a traditional fax machine. In
addition, all of our message transmission services are merely a conduit
for electronic messaging and do not store copies of transmissions in any
format, electronic or otherwise.
Our Services
We provide a comprehensive range of Internet-based services to address the
messaging and communication needs of individuals and businesses. All of our
inbound services provide a unique telephone number assigned from available
area codes and digitally compress and route messages to the customer's e-mail
box.
We collect approximately 95% of our fees through billing customers' credit
cards provided at initiation.
If a credit card declines to pay a customer's balance, an e-mail notice is
sent to the customer. If the customer does not respond to that e-mail, a
disconnection warning is sent to the customer who is then allowed up to
60 days to resolve the outstanding bill before being disconnected.
Revenues are accrued upon billing of a customer's credit card. Uncollected
credit card amounts are written off after 30 days. We write-off 100% of all
amounts declined by credit cards on a monthly basis.
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Our subscription services are summarized in the following table:
SUBSCRIPTION SERVICES
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Services Description Attributes Pricing*
-------- ----------- ---------- --------
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Free Services
Free Fax Plus Fax/voice to e-mail Free telephone number Free
Unlimited number of incoming faxes/voice mails
Only incoming fax/voice capability
User cannot choose area code
Paid Services
Free Fax Plus Send Outbound faxing--User Cannot select area code Setup Fee of $5.00 and
can
send faxes for phone number $2.95 per month plus
Broadcast fax--User can Unlimited incoming additional usage-based
send the same fax to faxes Charges
numerous recipients Annotation capability
Business Fax Outbound faxing--User Can select area code for Setup Fee of $15.00 and
can
send faxes phone number $12.50 per phone
Broadcast fax--User can Unlimited incoming number per month plus
send the same fax to faxes additional usage-based
numerous recipients Annotation capability charges
E-mail by Phone Phone access--User Access, manage and/or reply to e-mail, Setup Fee of $15.00 plus
can call a toll-free voice mail and faxes by phone $9.50 per month plus
number and access e- additional usage-based
mail and voice mail and charges
fax headers through a
touch tone telephone
Personal Telecom Combined suite of All benefits of Business Fax and E-mail by Phone Setup fee of $15.00 plus
services $12.50 per month
plus additional
usage-based charges
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* These are United States dollar prices for phone numbers in most countries.
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:
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USAGE-BASED SERVICES
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Services Description Attributes
-------- ----------- ----------
Current Usage-Based Services
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Outbound Fax User can fax document Per minute fax rates
through his/her e-mail Paperless forwarding of received
outbox faxes
via the Internet by
using the intended
recipient's
destination fax number
followed by
"@jfaxsend.com"
as the e-mail
destination address
Outbound Voice User can send a voice Respond to e-mails with a voice
message through his/her message
e-mail
outbox via the Internet
by using the destination
phone
number "@jfaxsend.com"
as the e-mail
destination
address
Broadcast Faxing User can send the same Powerful broadcast faxing
outbound fax to multiple capabilities
recipients via the
Outbound Fax service
Broadcast Voice User can send the same Powerful broadcast voice messaging
voice message to capabilities
multiple
recipients via the
Outbound Voice service
Telephone Access to E-mail User can call a toll- Access, manage and/or reply to
free number and access e-mail by phone
e-mail
through a touch tone
telephone
Planned Services
Follow Me Services Will locate user by User will be able to assign
routing incoming calls telephone/cell phone numbers and
to any phone pager numbers at which user can be
number or series of located
phone numbers. Callers
will have
option to leave a voice
mail or to search for
the user
Service will try all numbers and
track down user
Notification Will keep user updated User will be able to choose to
regarding incoming check messages immediately or do it
messages. later
User will be able to
apply rules to filter
which
messages are received
and which media is used
for notification
Cardless Calling/Conference Calling User will be able to User will be able to make calls
make outgoing calls without having to hang up and
through reenter calling card number
JFAX.COM number by
entering a pin number.
User will be able to set
up conference calls and
speak to more than one
party at a time.
</TABLE>
Each of the above services listed under "Current Usage-Based Services" is
currently offered to our Unified Personal Telecom on per minute rates which
vary depending on the location of the destination fax/phone number. Pricing
for telephone access to e-mail is $0.25 per minute for access to e-mail via a
toll-free telephone number.
There can be no assurance that we will be successful in releasing of any of
the planned services. The planned services are expected to be offered sometime
during the second quarter of 2000. The introduction of the planned services
has required a significant upgrade to our international network, which is in
progress. The expansion of our network has included enhancements to our
operations centers in Los Angeles, New York and London. These centers will
allow enhanced data transmission over our network, including live phone
conversations, which will be necessary to support the launch of our future
services.
Sales and Marketing
We intend to enhance our market position through development of, and
integration with, online partners and the introduction of new communications
solutions into our suite of products. In April 2000, we intend to launch a new
lifecycle communication strategy focused on usage and delivering targeted
upsell messages to our rapidly expanding base of free subscribers.
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Indirect Marketing
We have recently implemented our new affiliate program, to further enable
companies and individuals to sign up as JFAX.COM resellers online.
In order to introduce our services to end-users, we have developed
strategic relationships with various online and offline service providers.
These service providers have pre-existing relationships with their customer
bases which consist of individuals and entities that are heavy users of e-mail
and phone services. Those relationships provide us with access to likely
consumers for our services.
On July 1, 1999, we entered into a new advertising and promotion agreement
with Yahoo. The new agreement calls for fixed, guaranteed quarterly payments,
in exchange for which we receive integration into, and exclusivity on, Yahoo's
e-mail service. We also receive guaranteed user page views in Yahoo's e-mail
service and certain other areas of Yahoo's network. The agreement does not
require any commission payments based on customer sign-ups. The agreement
expires on December 31, 2000.
Integrated Services
With some of our strategic relationships, we co-brand our service, allowing
them to integrate their service with ours and sell a "powered by JFAX.COM"
service.
Telecommunications Companies
We have contracted with Ameritech, Telecom New Zealand and ESAT Telecom in
Ireland to offer services to their customers. These agreements represent a
first step in executing a broad recruitment program targeting traditional
telephone companies, competitive telephone companies, long distance providers
and wireless carriers.
Systems Integrators
We are in the early stages of our relationship with systems integrators, by
which we mean businesses that take our services and bundle them with services
of other companies to be sold as a convenient package of services to the
customer. We intend to build a network of systems integrators that will offer
our services as part of an overall information technology solution for their
corporate and government customers.
International Marketing
We believe that we benefit from local representatives in our international
markets, since they have the cultural understanding and relationships
necessary to sell our services. Our international department in Los Angeles
focuses on recruiting and supporting our international marketing effort.
Marketing Our Services to Existing Subscribers
Our unified messaging resources allow us to execute this sales and
marketing strategy efficiently. As a unified messaging company, we have access
to our subscribers' e-mail and are able to customize our marketing efforts to
specific customers. As a result, we have a direct, low cost channel in which
to advertise our services by sending the customer a promotional fax, e-mail or
voice mail message.
International Network and Operations
We offer our services in over 90 area codes in the United States and
abroad, including in 22 of the 25 most populous major metropolitan areas in
the United States and such international business centers as London, Paris,
Milan, Frankfurt, Zurich, Sydney and Tokyo. We obtain phone numbers on an as-
needed basis from various local carriers throughout the United States and
internationally with whom we have relationships. As of March 15,
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2000, we have over 725,000 phone numbers in use by our subscribers and we have
an additional 200,000 phone numbers which we have already acquired from local
carriers and which are in our inventory. Our ability to continue to acquire
additional quantities of phone numbers in the future will depend on our
relationships with our local carriers and our ability to pay market prices for
such phone numbers. We 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 companies in a number
of foreign markets. These alliances provide us with local marketing,
billing, and customer support and, in some cases, co-location and phone
numbers. Our agreements with our international strategic alliance
resellers may provide that the reseller is granted a license as our
exclusive reseller in the particular country in question. The license
generally has an initial term of one-year following commercial launch and
is renewable by the reseller for additional one-year renewal terms,
provided that certain threshold requirements for JFAX.COM subscribers are
met at the expiration of each term. The reseller agreement provides for
the reseller to pay for local phone numbers and hardware, local marketing
expenses, billing and local help desk support. In exchange, the reseller
receives a commission based on the JFAX.COM revenues associated with the
reseller.
. Co-location. Our servers are housed in spaces owned by third parties,
frequently local telephone companies, from which they are connected to a
network of phone lines dedicated to JFAX.COM or connected to the
Internet. We refer to this service provided by third parties as "co-
location." We generally arrange independently for the connection of local
phone numbers for our customers and associated trunks to the servers.
Most servers have a direct connection to the Internet. In addition, in the
event that a direct connection is not functioning or a server has no
connection, each server is also connected to a dedicated network of phone
lines. By virtue of that network, each server is connected to at least two
of our hubs, or central servers, through which messages can be routed to
the Internet. Either the local telephone company or an alternate provides
us the ability to access our servers through the telephone lines for the
purposes of maintenance and repair. Given the simple nature of the services
provided by the co-locators, our co-location agreements are much simpler
arrangements than the agreements with our strategic alliances and provide
for a fixed monthly fee.
We have entered into co-location agreements primarily with three carriers.
For locations in the United States, we generally co-locate with
WorldCom/MFS, which is now MCI WorldCom, or AT&T Corp. For international
locations, our co-location agreements are for the most part with a U.S.
subsidiary of Telecom Italia. We have certain other co-location agreements,
in which we own both the lines and equipment. Our co-location agreements
generally provide for fixed monthly payments and a fixed term of at least
one year. Some are cancellable by us on either 60 or 90 days' notice.
We intend to enter additional markets and to expand our operations outside
the United States. International sales and our entry into additional foreign
markets are subject to a number of inherent risks. For example, we face a more
complex process to acquire telephone numbers outside the United States due to
regulatory constraints or bureaucratic systems that differ greatly from those
in the United States. In many countries, under local law, we may not acquire
telephone numbers directly, but must use a local company to procure telephone
numbers. This increases the importance of our international strategic
alliances, but also makes it more difficult to structure foreign strategic
alliances given the preferences the local companies enjoy. In addition, we
must depend to a greater extent on our foreign strategic alliances for day-to-
day management, including relying on those foreign strategic alliances to
provide help-desk support and other services.
Internationally, we may encounter different technology standards that
require us to expend time and resources on adapting our proprietary and other
technology to those foreign standards, as well as to ensuring that the
technology, as so adapted, remains compatible with the rest of our network.
This adaptation increases the cost of expanding abroad. Finally, in
international markets, we are subject to changes in regulatory requirements
and tariffs. Because we are not familiar with those international
environments, and because the systems of
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government and regulation that exist abroad are frequently different from what
we experience in the United States, it may be more difficult for us to
anticipate changes and how they will affect the provision of our services. As
a result, it may be more difficult for us to accommodate those changes.
Services and Information Systems
Inbound Services
Inbound servers accept incoming fax and voice mail messages on telephone
lines from local telephone providers. The servers run on the Unix operating
system, known for reliability in telecom environments, using equipment
supplied by leading hardware manufacturers, and software designed and written
by our programmers. After a fax transmission or a voice message is received by
the server, it is compressed into a standard form, and sent to the user's e-
mail address via the Internet. By using the Internet we are able to connect
efficiently with third parties on a worldwide basis. Voice messages are
typically compressed by a factor of 5 to 1 using the internationally-proven
Global Systems for Mobile Communications technology, which results in
telephone quality voice, with small file sizes. Faxes are compressed to the
TIF/F format, an Internet standard for multi-page fax documents, with an
average page requiring about 40 kilobytes of memory.
Outbound Services
The outbound system accepts e-mail messages via the Internet that are
addressed to fax machines anywhere in the world, or voice messages that are
addressed to telephones anywhere in the world. After a message is received by
the outbound system, it determines a least cost route for transmitting the
message to the final destination fax machine or telephone. The system
comprises servers in a distributed network with several scheduling,
prioritization and routing procedures designed and written by our programmers,
to ensure that the message is delivered in a timely and cost-effective manner
to the destination.
Telephone Access Services
Our telephone access system offers users the capability to call from any
touch-tone telephone and listen to their e-mails and voice mails and manage
their e-mails, faxes and voice mails. Our servers connect via the Internet to
the user's e-mail servers, and retrieve all of the user's messages, permitting
customers to listen to their e-mails via a text-to-speech conversion
technology and manage their e-mails, faxes and voicemails by phone.
Internet Access and Provisioning Services
Our Internet-based provisioning systems, by which customers can initiate
our services from our web site, permit us to provision phone numbers and
manage account information promptly and efficiently. These systems work on a
network of servers connected to a centralized database, and are built to
handle high volume traffic with back-up technology in the event of a failure
and the ability to add servers and users easily.
Reliability and Capacity Issues
While we intend to add new subscribers and expand our service offerings,
future growth in our subscriber base for both free and paid services, and
growth in the subscriber bases of competing companies, will increase the
demand for available network infrastructure and Internet data transmission
capacity. Growth in our business, and in that of our existing or future
competitors, could lead to shortages in the capacity required to operate our
business, or could cause capacity to become more expensive. In either case, we
may be unable to acquire the necessary capacity to accommodate future growth
or to acquire it on a timely basis, which could slow down or disrupt our
ability to transmit customers' messages.
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Additionally, these trends will increase the demand for large quantities of
telephone numbers and may lead to an inability on our part to acquire the
necessary phone numbers, particularly in desirable metropolitan areas, to
accommodate our future growth. If potential customers encounter difficulty
obtaining phone numbers from us, or obtaining those phone numbers on a timely
basis, they may turn to competitors' services. In addition, if the growth in
our subscriber base or our service offerings leads to a reduction in our
reliability or our perceived reliability, or results in problems for the
Internet in general that are beyond our control, customers or potential
customers may turn to our competitors' services including traditional faxing
services. Thus, while our growth is crucial to our future success, that very
same growth, when combined with that of our competitors, could lead to slow
delivery times or unreliable service levels, network failures, security
breaches, lack of capacity in our network, insufficient telephone numbers or a
slower Internet. Any of the above could have a material adverse effect on our
business, prospects, financial condition and results of operations.
Customer Support Services
Our customer service department provides various levels of 24-hour support,
seven days a week. This department provides support primarily in English,
although this department also has French, Spanish and German speakers. The
department handles all account issues for our subscribers, ranging from
initial sales and sign-up to technical support and account administration. To
provide this "one-stop shop," we have installed a technology infrastructure
for our customer service representatives to leverage available data from our
main enterprise database and our customer database. These databases give our
customer service representatives the ability to track purchase history,
payment history, caller history, contact history, and report, analyze and
solve technical issues in an efficient and organized manner. We maintain a
list of frequently asked questions for use by customer service representatives
in responding to common queries and issues. This list of questions is updated
to keep our customer service representatives abreast of new issues.
Further, we offer Internet-based online self-help. This allows customers to
resolve simple issues on their own. We have found that most customer questions
come from new users, and with an online self-help guide we believe we are able
to address the majority of new users' questions efficiently.
Competition
We principally compete to provide Internet enabled e-mail users with
unified messaging and related communications services. Because unified
messaging is a new service that is designed to consolidate other methods of
messaging (e.g., voice mail, fax and e-mail) into a single repository, we
compete with worldwide providers of voice mail services and products and fax
services and products. Each of these markets on a stand-alone basis is highly
competitive and has numerous service and product providers.
Although we currently have direct competitors for some of our services, we
are not aware of any service provider currently offering an international
unified messaging suite of services directly competitive to our own. We
believe this lack of direct competition will change. For example, GTE has
announced that it will begin offering in 50 United States markets a unified
messaging service. To the extent our services face competition, that
competition is based on price, quality, brand recognition, geography and
customer support.
Services similar to ours have been introduced free to users on an
advertising supported basis. Like many other services provided over the
Internet, such as news feeds and stock quotes, these services are provided
free of charge to attract traffic to the service provider's website. The
providers of free services attempt to recoup their expenses by selling
advertising based on the traffic generated from users of free services.
Examples of free services similar to ours include free voice mail products
that require users to listen to taped ads before they can access their
messages, and facsimile-to-email services free to users which require that
users view advertisements when they retrieve their faxes. We expect that as
these free services become popular, consumers will require our subscription
services to provide clear incremental benefits over free services to justify
paying for our services. In addition, to the extent free services of another
provider are used by a potential JFAX.COM customer, it may be
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harder for us to persuade that potential customer to try our services.
Providers of free services in addition to those listed above may enter the
market and thereby reduce the perceived value of our services to our potential
customers.
Further, although to date we have not experienced competition from any of
our strategic alliance resellers, there is a risk that, in the future, these
companies could develop their own competitive services and begin to compete
with us directly. This represents a particular risk for us as we rely to a
great extent on our strategic alliances to market, and provide a potential
customer base for, our services. As a result, competition from these entities
would have the doubly adverse effect of both subjecting our services to
competitive pressures and limiting our avenues for marketing.
Future competition could come from a variety of companies both in the
Internet industry and the telecommunications industry. These industries
include major companies which have much greater resources than we have, have
been in operation for many years and have large subscriber bases. Such
companies may be able to develop and expand their communications and network
infrastructures more quickly, adapt more swiftly to new or emerging
technologies and changes in customer requirements, take advantage of
acquisition and other opportunities more readily, and devote greater resources
to the marketing and sale of their products and services than we can. There
can be no assurance that additional competitors will not enter markets that we
plan to serve or that we will be able to compete successfully.
We believe that our solution competes favorably with that of other current
and potential providers with respect to the following:
. range and quality of service offerings,
. access to phone numbers in major metropolitan areas in the United States
and abroad,
. pricing and cost savings for customers,
. customer support, and
. brand recognition.
However, our solution competes unfavorably at least on price with those
companies who provide for free, i.e. on an advertising supported basis, one or
more of the services that we provide. In addition, we compete negatively with
many companies whose services compete with one or more of our services, and
which have greater efficiencies of scale or easier access to capital due to
their financial strength or size or their more well-established reputation.
Finally, one or more of the companies offering component portions of our
service may enhance their service offerings, and those service offerings might
be superior to ours. If this were to occur, and the company offering those
services were well-established, it would negatively impact our competitive
position.
We believe we can compete effectively in unified messaging because it is a
relatively new service and, as the first company offering unified messaging in
its complete form, we have a head start on our current and potential
competitors with respect to these factors. However, we face strong competition
in each of the component portions of our service (e.g., voice mail, fax and e-
mail) from larger, financially stronger and better established competitors.
Patents and Proprietary Rights
We rely on a combination of trademark, trade secret and copyright law and
contractual agreements to protect our proprietary technology and intellectual
property rights.
We have developed substantially all of our software internally. We have
entered into agreements with our software programmers that provide for our
ownership of all software and intellectual property.
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We have licensed from third parties some components of our end-user
software for unlimited use for one-time, up-front payments pursuant to written
license agreements. Some of our license agreements provide for a modest
additional payment in the event of a subsequent major upgrade.
We have multiple pending U.S. patent applications and one Patent and
Trademark Office application for proprietary aspects of the major components
of our technology, but we have no issued patents. Unless and until patents are
issued, no patent rights can be enforced. We have obtained U.S. copyright
registrations for certain proprietary software.
We own registrations in the United States for the service marks JFAX,
JFAX.COM and our logo, as well as a European Community registration and a
European Community application for registration of JFAX(R). We also own
registrations and applications for registration in the United States of other
service marks and slogans that we use.
We hold the Internet domain name "jfax.com." Under current domain name
registration practices, no one else can obtain an identical domain name, but
can obtain a similar name, or the identical name with a different suffix, such
as ".net" or ".org" or with a country designation. The relationship between
regulations governing domain names and the laws protecting trademarks and
similar proprietary rights is evolving. Domain names are regulated by Internet
regulatory bodies, while trademarks are enforceable under local national law.
In addition, the regulation of domain names in the United States and in
foreign countries is subject to change. There are plans to establish
additional top-level domains, appoint additional domain name registrars or
modify the requirements for holding domain names in all of the countries in
which we conduct business, and we could be unable to prevent third-parties
from acquiring domain names that infringe or otherwise decrease the value of
our domain names or trademarks.
Like other technology-based businesses, we face the risk that we will be
unable to protect our intellectual property and other proprietary rights, and
the risk that we will be found to have infringed the proprietary rights of
others.
On October 28, 1999, AudioFAX IP LLC filed a lawsuit against us in the
United States District Court for the Northern District of Georgia asserting
the ownership of certain United States and Canadian patents and claiming that
we are infringing these patents as a result of our sale of enhanced facsimile
services. The suit requests unspecified damages, treble damages due to willful
infringement, and preliminary and permanent injunctive relief. We have
reviewed the AudioFAX patents with our business and technical personnel and
outside patent counsel and have concluded that we do not infringe these
patents. As a result, we are confident of our position in this matter and are
defending the suit vigorously.
Government Regulation
There is currently only a small body of laws and regulations directly
applicable to access to or commerce on the Internet. However, due to the
increasing popularity and use of the Internet, it is possible that a number of
laws and regulations may be adopted at the international, federal, state and
local levels with respect to the Internet, covering issues such as user
privacy, freedom of expression, pricing, characteristics and quality of
products and services, taxation, advertising, intellectual property rights,
information security and the convergence of traditional telecommunications
services with Internet communications. Moreover, a number of laws and
regulations have been proposed and are currently being considered by federal,
state and foreign legislatures with respect to these issues. The nature of any
new laws and regulations and the manner in which existing and new laws and
regulations may be interpreted and enforced cannot be fully determined. For
example, recent laws affecting the Internet include:
. The Digital Millennium Copyright Act, which provides stronger copyright
protection for software, music and other works on the Internet. Under
this law, Internet service providers and web site operators must register
with the U.S. Copyright Office to avoid liability for infringement by
their subscribers.
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. Child Online Protection Act, which makes illegal the communication of
material that is harmful to minors on the Internet for commercial
purposes in such a manner as to be available to minors. This law also
contains a section that requires web sites to obtain parental consent
before collecting information from children 12 and younger.
. Child Protection and Sexual Predator Punishment Act, which imposes
stronger criminal penalties for using the Internet to solicit minors for
sexual purposes and criminalizes sending obscene material to persons
under the age of 16.
. The Internet Tax Freedom Act, which provides a three-year moratorium on
taxes deemed discriminatory in order to give state and federal lawmakers
time to develop a more comprehensive approach to Internet taxation.
In addition, there is substantial uncertainty as to the applicability to
the Internet of existing laws governing issues such as property ownership,
copyrights and other intellectual property, taxation, libel, obscenity and
personal privacy. The vast majority of these laws were adopted prior to the
advent of the Internet and, as a result, did not contemplate the unique issues
of the Internet. Future developments in the law might decrease the growth of
the Internet, impose taxes or other costly technical requirements, create
uncertainty in the market or in some other manner have an adverse effect on
the Internet. These developments could, in turn, have a material adverse
effect on our business, prospects, financial condition and results of
operations.
We provide our services through data transmissions over public telephone
lines and other facilities provided by telecommunications companies. These
transmissions are subject to regulation by the Federal Communications
Commission, state public utility commissions and foreign governmental
authorities. However, as an Internet messaging services provider, we are not
subject to direct regulation by the FCC or any other governmental agency,
other than regulations applicable to businesses generally. Nevertheless, as
Internet services and telecommunications services converge or the services we
offer expand, there may be increased regulation of our business including
regulation by agencies having jurisdiction over telecommunications services.
Additionally, existing telecommunications regulations affect our business
through regulation of the prices we pay for transmission services, and through
regulation of competition in the telecommunications industry.
The FCC has ruled that calls to Internet service providers are
jurisdictionally interstate and that Internet service providers should not pay
access charges applicable to telecommunications carriers. In that same ruling,
the FCC determined that in the event of continuing disputes between carriers
with respect to inter-carrier compensation, the states will be permitted by
the FCC to intervene and resolve the issue. An Appeals Court has recently
remanded the FCC's ruling concerning the jurisdictional issue for additional
justification. The outcome of this remand, as well as the results of the FCC's
continuing review of the issue of inter-carrier compensation for calls to
Internet service providers, could affect Internet service providers' costs and
consequently substantially increase the costs of communicating via the
Internet. This increase in costs could slow the growth of Internet use and
thereby decrease the demand for our services.
The United Kingdom and the European Union have adopted legislation which
has a direct impact on business conducted over the Internet and on the use of
the Internet. For example, the United Kingdom Defamation Act of 1996 protects
an Internet service provider, under certain circumstances, from liability for
defamatory materials stored on its servers. The European Directive on the
Protection of Consumers is expected to have a direct effect on the use of the
Internet for commercial transactions and will create an additional layer of
consumer protection legislation with respect to electronic commerce. In
addition, numerous other regulatory schemes are being contemplated by
governmental authorities in both the United Kingdom and the European Union. As
in the United States, there is uncertainty as to the enactment and impact of
foreign regulatory and legal developments. These developments may have a
material and adverse impact on our business, prospects, financial condition
and results of operations.
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Seasonality and Backlog
Our business is not seasonal to any significant extent. Due to sales almost
exclusively by credit card, we experience no material backlog.
Research and Development
The market for our services is characterized by rapid change and
technological advances requiring ongoing expenditures for research and
development and the timely introduction of new services and enhancements of
existing services. Our future success will depend, in part, upon our ability
to enhance our current services, to respond effectively to technological
changes, to sell additional services to our existing customer base and to
introduce new services and technologies that address the increasingly
sophisticated needs of our customers. We are devoting significant resources to
the development of enhancements to our existing services and the migration of
existing services to new software platforms. There can be no assurance that we
will successfully complete the development of new services or the migration of
services to new platforms or that current or future services will satisfy the
needs of the market for unified messaging and communications systems. Further,
there can be no assurance that products or technologies developed by others
will not adversely affect our competitive position or render our services or
technologies noncompetitive or obsolete
Our research and development expenditures were $1,829,000, $1,226,000 and
$793,000 for the fiscal years ended December 31, 1999, 1998, and 1997,
respectively.
Employees
As of March 15, 2000, we employed or contracted a total of 130 employees,
including 4 consultants on a full or part-time basis. We have 106 full-time
and 24 hourly workers. 32 of our employees are technical staff, reflecting our
emphasis on the development of new technologies.
Our future success will depend, in part, on our ability to continue to
attract, retain and motivate highly qualified technical, marketing and
management personnel. Our employees are not represented by any collective
bargaining unit. We have never experienced a work stoppage. We believe our
relationship with our employees is good.
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RISK FACTORS
The following discussion should be read in conjunction with the audited
consolidated financial statements contained herein. In addition to the factors
set forth below, there may be other factors, or factors which arise in the
future, which may affect our future performance and the market prices for our
securities.
Because We Have Limited Operating History, it is Difficult to Evaluate Our
Business
We have a limited operating history. We were formed in December 1995, and
our services became commercially available in 1996. Because of our limited
operating history, you have limited operating and financial data about us upon
which to base an evaluation of our performance and an investment in our common
stock or other securities. 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.
These risks include our ability to:
. Acquire businesses and technologies;
. Integrate the operations of the companies that we have recently acquired;
. Manage growing domestic and international operations;
. Create and maintain strategic relationships;
. Expand sales and marketing activities;
. Expand our customer base and retain key clients;
. Introduce new services;
. Compete in a highly competitive market;
. Upgrade our systems and infrastructure to handle any increases in
messaging traffic;
. Reduce service interruptions; and
. Recruit and retain key personnel.
If we are unable to execute our plans and grow our business, either as a
result of the risks identified in this section or for any other reason, this
failure would have a material adverse effect on our business, prospects,
financial condition and results of operations.
We Expect Our Losses and Negative Cash Flow to Continue, Which May Adversely
Impact Our Business and Our Stockholders
We have incurred substantial operating losses, net losses and negative cash
flow on both an annual and quarterly basis. For the year ended December 31,
1999, we had an operating loss of $13.2 million, a net loss attributable to
common shares of $19.0 million and negative cash flow from operating
activities of $12.1 million. We expect to continue to incur net losses for the
foreseeable future and cannot assure you that we will ever achieve
profitability or generate positive cash flow.
We Expect Our Expenses to Increase, and Our Expenses May Exceed Our Revenues
for a Significant Period, Which Could Delay or Prevent Altogether Our
Achieving Profitability, and Harm Our Stockholders
We expect our operating expenses and capital expenditures to increase
significantly, especially in the areas of sales and marketing expenses,
operating and infrastructure 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.
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We May Need and Be Unable to Obtain Additional Funding on Satisfactory Terms,
Which Could Dilute Our Stockholders or Impose Burdensome Financial
Restrictions on Our Business
If our capital requirements or revenue vary materially from our current
plans or if unforseen circumstances occur, we may require additional financing
sooner than we anticipate. This may not be available on a timely basis, in
sufficient amounts or on terms acceptable to us. This financing may also
dilute existing stockholders. Any debt financing or other financing of
securities senior to common stock will likely include financial and other
covenants that will restrict our flexibility. At a minimum, we expect these
covenants to include restrictions on our ability to pay dividends on our
common stock. Any failure to comply with these covenants would have a material
adverse effect on our business, prospects, financial condition and results of
operation.
Further Acquisitions Could Result In Dilution, Operating Difficulties And
Other Harmful Consequences.
We expect to acquire or invest in additional businesses, products, services
and technologies that complement or augment our service offerings and customer
base. Since January 2000, we have completed the acquisition of one company,
(SureTalk.com, Inc.) and certain assets of another company, (TimeShift,
Inc.,). We are currently engaged in discussions regarding further strategic
acquisitions or investments. Although these discussions are ongoing, we have
not signed any definitive agreements, and cannot assure you that any of these
discussions will result in actual acquisitions. To be successful, we will need
to identify suitable acquisition candidates, integrate disparate technologies
and corporate cultures and manage a geographically dispersed company. We
cannot assure you that we will be able to do this successfully. Acquisitions
could divert attention from other business concerns and could expose us to
unforeseen liabilities. In addition, we may lose key employees while
integrating any new companies. We expect to pay for some acquisitions by
issuing additional common stock, which would dilute current shareholders. We
may also use cash to make acquisitions. It may be necessary for us to raise
additional funds through public or private financings. We cannot assure you
that we will be able to raise additional funds at any particular point in the
future or on favorable terms. In addition, we may be required to amortize
significant amounts of goodwill and other intangible assets in connection with
future acquisitions, which would materially increase operating expenses.
We Will Face Technical, Operational and Strategic Challenges That May Prevent
Us from Successfully Integrating SureTalk.com, Inc. and TimeShift, Inc.
Acquisitions involve risks related to the integration and management of
acquired technology, operations and personnel. The integration of
SureTalk.com, Inc. and TimeShift, Inc. into our business has been and will be
a complex, time consuming and expensive process and may disrupt our business
if not completed in a timely and efficient manner. We must operate as a
combined organization utilizing common information and communication systems,
operating procedures, financial controls and human resources practices. We may
encounter substantial difficulties, costs and delays involved in integrating
the operations of our subsidiaries and businesses, including:
. potential incompatibility of business cultures;
. perceived adverse changes in business focus;
. potential conflicts in sponsor, advertising or strategic relationships;
and
. the loss of key employees and diversion of the attention of management
from other ongoing business concerns.
Consequently, we may not be successful in integrating acquired businesses or
technologies and may not achieve anticipated revenue and cost benefits. We
also cannot guarantee that these acquisitions will result in sufficient
revenues or earnings to justify our investment in, or expenses related to,
these acquisitions or that any synergies will develop. If we fail to execute
our acquisition strategy successfully for any reason, our business will suffer
significantly.
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We Have Experienced Rapid Growth Which Has Placed a Strain on Resources And
Our Failure To Manage Growth Could Cause Our Business To Suffer
We have expanded our operations rapidly and intend to continue this expansion.
The number of our employees increased from 68 on December 31, 1998 to 130 on
March 15, 2000. This expansion has placed, and is expected to continue to
place, a significant strain on managerial, operational and financial
resources. To manage any further growth, we will need to improve or replace
our existing operational, customer service and financial systems, procedures
and controls. Any failure to properly manage these systems and procedural
transitions could impair our ability to attract and service customers, and
could cause us to incur higher operating costs and delays in the execution of
our business plan. We will also need to continue the expansion of our
operations and employee base. Our management may not be able to hire, train,
retain, motivate and manage required personnel. In addition, our management
may not be able to successfully identify, manage and exploit existing and
potential market opportunities. If we cannot manage growth effectively, our
business and operating results could suffer.
We May Not Be Able to Respond to the Rapid Technological Change of the
Internet Messaging and Communications Industry
The Internet messaging and communications industry is characterized by
rapid technological change, changes in user and customer requirements and
preferences, and the emergence of new industry standards and practices that
could render our existing services, proprietary technology and systems
obsolete. We must continually improve the performance, features and
reliability of our services, particularly in response to competitive
offerings. Our success depends, in part, on our ability to enhance our
existing messaging and communications services and to develop new services,
functionality and technology that address the increasingly sophisticated and
varied needs of prospective subscribers. If we do not properly identify the
feature preferences of prospective subscribers, or if we fail to deliver
features which meet the standards of these subscribers, our ability to market
our service successfully and to increase revenues could be impaired. The
development of proprietary technology and necessary service enhancements
entail significant technical and business risks and require substantial
expenditures and lead-time. We may not be able to keep pace with the latest
technological developments. We may also be unable to use new technologies
effectively or adapt services to customer requirements or emerging industry
standards.
If We Do Not Successfully Address Service Design Risks, Our Reputation Could
Be Damaged And Our Business And Operating Results Could Suffer
We must accurately forecast the features and functionality required by
target subscribers. In addition, we must design and implement service
enhancements that meet customer requirements in a timely and efficient manner.
We may not successfully determine customer requirements and may be unable to
satisfy subscriber demands. Furthermore, we may not be able to design and
implement a service incorporating desired features in a timely and efficient
manner. In addition, if any new service we launch is not favorably received by
customers and end-users, our reputation could be damaged. If we fail to
accurately determine customer feature requirements or service enhancements or
to market services containing such features or enhancements in a timely and
efficient manner, our business and operating results could suffer materially.
We May Need Additional Capital And Raising Additional Capital May Dilute
Existing Shareholders
We believe that existing capital resources will enable us to maintain
current and planned operations for at least the next 12 months. However, we
may be required to raise additional funds due to unforeseen circumstances. If
capital requirements vary materially from those current planned, we may
require additional financing sooner than anticipated. Such financing may not
be available in sufficient amounts or on terms acceptable to us and may be
dilutive to existing shareholders.
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We Cannot Predict Whether We Will be Successful Because Our Business Model is
Unproven and Our Market is Developing
Our business strategy is unproven, and it is too early to reliably gauge
market penetration rates for our services. To date, we have not established a
definite demand or a reliable cost to add a subscriber for these services. In
addition, there can be no assurance that we will be successful in the offering
of any additional services that we are currently planning. If the demand is
lower than anticipated, or the cost to add a subscriber is higher, our
business, prospects, financial condition and results of operations would be
materially and adversely affected.
Other Companies are Offering Free Services Supported by Advertising, Which May
Cause Subscribers to Become Unwilling to Pay for Our Services
Many services provided over the Internet are provided free of charge to
attract traffic to the service provider's website. These free services include
free voice mail, free e-mail and free facsimile-to-email services, which are
being offered by other companies in competition to our services. The providers
of free services attempt to recover their expenses and make a profit by
selling advertising based on the traffic generated from users of free
services. For example, free voice mail may require users to listen to taped
ads before they can access their messages. We expect that as these free
services become popular with consumers, they will require our subscription
services to provide clear incremental benefits over free services to justify
paying for our services. In addition, to the extent free services of another
provider are used by a potential JFAX.COM customer, it may be harder for us to
persuade that potential customer to try our services.
Our Failure to Achieve or Sustain Market Acceptance at Desired Pricing
Levels Could Impair Our Ability to Achieve Profitability or Positive Cash Flow
The widespread availability of free services, including our own, may result
in consumers being unwilling to pay for messaging services. Even in cases
where customers are willing to pay for these services to avoid the advertising
associated with free services, or to obtain the benefits of unified messaging
in its complete form, we expect prices in our industry will continue to fall.
Therefore we may need to reduce prices for our existing and future services.
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, including free services.
Customers may be unwilling to pay our prices, either because they find free
services to be satisfactory, or because they find other paid services to offer
better value for the cost involved. The prices for our services are in some
cases higher than those charged by our competitors. Our failure to achieve or
sustain desired pricing levels would have a material adverse effect on our
business, prospects, financial condition and results of operations.
The Recent Introduction of Free Fax Services May Harm Our Business
In 1999 we 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 a limited track record from which to
predict levels of revenue to be achieved from customers who are attracted by
our free services. The availability of free services may cause some of our
paying customers to switch to our free services and discontinue their payments
to us.
We introduced our free services principally as a promotional tool, and
partially in response to the introductions by competing companies. We expect
the trend for free services will continue in our industry. There can be no
assurance that the recent introduction of these competing services will not
have a material adverse effect on our business, prospects, financial condition
and results of operations.
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Our Operating Results In One or More Future Periods Are Likely to Fluctuate
Significantly and May Negatively Impact Our Stock Price
Our annual and quarterly operating results may fluctuate significantly in
the future as a result of numerous factors, including:
. the rate at which we are able to add subscriptions and sell additional
usage-based services to both free and paid customers of our subscription
services,
. the amount and timing of expenditures to form strategic relationships, to
enhance sales and marketing and to expand our infrastructure,
. technical difficulties, system failures or network downtime,
. delays in implementing strategic alliances, or loss of strategic
alliances, and
. economic and competitive conditions specific to our industry.
As a result, it is likely that in some future periods our operating results
will be below the expectations of securities analysts and investors. If this
happens, the trading price of our common stock would likely be materially
adversely affected.
If We Fail to Expand and Adapt Our Network Infrastructure, Our Business May be
Harmed
We must continue to expand and adapt our network infrastructure, both
domestically and internationally, as the number of customers and the volume of
messages they wish to transmit increases. The expansion and adaptation of our
network infrastructure will require substantial financial, operational and
management resources, even if the expansion is primarily for our free service
offerings. There can be no assurance that we will be able to expand or adapt
our network infrastructure to meet any additional demand on a timely basis, at
a commercially reasonable cost or at all.
In addition, future growth in our subscriber base for both free and paid
services, together with growth in the subscriber bases of other companies who
have recently introduced free facsimile-to-email services and other Internet-
dependent services, will increase the demand for available network
infrastructure and Internet data transmission capacity. This could lead to
insufficient capacity and an inability on our part to accommodate our future
growth. Insufficient network capacity could lead to a reduction in our
services' reliability. Since customers will not tolerate a service hampered by
slow delivery times or unreliable service levels, insufficient network
capacity could have a material adverse effect on our business, prospects,
financial condition and results of operations.
Our Business Could Suffer if We Cannot Obtain Telephone Numbers
Our future success will depend upon our ability to procure large quantities
of telephone numbers in the United States and foreign countries. Our ability
to procure telephone numbers depends on applicable regulations, the practices
of telecommunications carriers that provide telephone numbers and the level of
demand for new telephone numbers. Failure to obtain these numbers in a timely
and cost-effective manner may prevent us from entering some foreign markets or
hamper our growth in domestic markets, and may have a material adverse effect
on our business, prospects, financial condition and results of operations.
Our ability to procure large quantities of phone numbers will be
particularly limited in area codes of large metropolitan areas, and we may at
some point be unable to provide our customers with phone numbers in the most
desirable area codes (e.g., 212 in Manhattan and 171 in London) in such areas,
having to rely instead on
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new area codes created for these areas. We do not allow customers of our free
services to choose the area code for the phone number we provide, and to some
extent this makes our free services less attractive, particularly in
comparison to our subscription services, or subscription services provided by
others where the customer may select an area code.
In addition, future growth in our subscriber base for both free and paid
services, together with growth in the subscriber bases of providers of free
fax to e-mail services, will increase the demand for large quantities of
telephone numbers, which could lead to insufficient capacity and an inability
on our part to acquire the necessary phone numbers to accommodate our future
growth.
Any Failure of the Internet as a Message Transmission Medium Could Harm Our
Business
Our future success will depend upon our ability to route our customers'
traffic through the Internet and through other data transmission media. For
our services, other data transmission media include fiber optic or copper
lines owned and operated by third parties, with portions of the capacity on
these media being dedicated for our use. Our success is largely dependent upon
the viability of the Internet as a medium for the transmission of documents.
We also depend on the continued operation of a user's e-mail system. To date,
we have transmitted a limited amount of customer traffic. There can be no
assurance that these will prove to be viable communications media, that
document transmission will be reliable or that capacity constraints which
inhibit efficient document transmission will not develop.
We access the Internet and other data transmission media through dedicated
or shared connections to third party service providers. In many cases, we pay
fixed monthly fees for Internet and other access, regardless of our usage or
the volume of our customers' traffic. There can be no assurance that the
current pricing structure for access to and use of these media will not change
unfavorably and, if the pricing structure changes unfavorably, our business,
prospects, financial condition and results of operations could be materially
and adversely affected.
If the Internet Stops Growing, Our Business Will Suffer
Our future success is substantially dependent upon continued growth in the
use of the Internet in order to support the sale of our services. There can be
no assurance that the number of Internet users will continue to grow. As is
typical in the case of a new and rapidly evolving industry, demand and market
acceptance for recently introduced services are subject to a high level of
uncertainty. The Internet may not prove to be a viable avenue to transmit
communications for a number of reasons, including lack of acceptable security
technologies, lack of access and ease of use, traffic congestion, inconsistent
quality or speed of service, potentially inadequate development of the
necessary infrastructure, excessive governmental regulation, uncertainty
regarding intellectual property ownership or lack of timely development and
commercialization of performance improvements, including high-speed modems.
The Market May Not Switch to Our Services Due to Concerns About the
Reliability of Internet Communications, Which May Significantly Impair Our
Business and Prevent the Execution of Our Business Plan
Our ability to route existing customers' traffic through the Internet and
to sell our services to new customers may be inhibited by, among other
factors, the reluctance of some customers to switch from traditional fax
delivery to delivery over the Internet, and by widespread concerns over the
adequacy of security in the exchange of information over the Internet.
Additionally, there may be delays in any transmission over the Internet which
may result in our service being regarded as less timely than a traditional fax
delivery. If our existing and potential customers do not accept delivery
through the Internet as a means of sending and receiving documents via fax,
our business, prospects, financial condition and results of operations would
be materially and adversely affected.
19
<PAGE>
In addition, we face similar risks regarding the market acceptance of the
delivery of customers' voice mail messages and "real time" voice
communications over the Internet. As a result, our business, prospects,
financial condition and results of operations may be materially and adversely
affected.
Our Business May be Constrained Because We Support a Limited Number of
Operating System Platforms
Our services can be utilized only by those users whose computers are run by
Windows 3.1, Windows 95, Windows 98, Windows NT, Macintosh, and UNIX operating
systems. Since there are other operating system platforms, we cannot provide
our services to all potential customers for our services. To the extent other
operating systems proliferate in the future, our ability to attract new
customers and keep existing customers could be significantly impaired.
The Market In Which We Operate is Highly Competitive, and We May Be Unable to
Compete Successfully Against New Entrants and Established Industry Competitors
With Significantly Greater Financial Resources
Competition in the converging Internet and telecommunications industries is
becoming increasingly intense. We face competition for our services from,
among others, voice mail providers, fax providers, paging companies, Internet
service providers, e-mail providers and telephone companies.
The recent trend of our competitors providing free services has increased
these competitive pressures. We have responded to this trend by introducing
our own free services. Competitive pressures may impair our ability to achieve
profitability. The increased competition may also make it more difficult for
us to successfully enter into strategic relationships with major companies,
particularly if our goal is to have an exclusive relationship with a
particular company.
We compete against other companies that provide one or more of the services
that we do. In addition, these competitors may add services to their offerings
to provide unified messaging services comparable to ours. Future competition
could come from a variety of companies both in the Internet industry and the
telecommunications industry, which could include some of our strategic
alliances. These industries include major companies which have much greater
resources than we do, have been in operation for many years and have large
subscriber bases. These companies may be able to develop and expand their
communications and network infrastructures more quickly, adapt more swiftly to
new or emerging technologies and changes in customer requirements, take
advantage of acquisition and other opportunities more readily and devote
greater resources to the marketing and sale of their products and services
than we can. There can be no assurance that additional competitors will not
enter markets that we plan to serve or that we will be able to compete
effectively.
We May Have Difficulty in Retaining Our Customers, Which May Prevent Our Long-
Term Success
Our sales and marketing and other costs of acquiring new subscriptions are
substantial relative to the monthly fees derived from subscriptions.
Accordingly, we believe that our 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, prospects, financial condition and results of operations.
20
<PAGE>
The Messaging and Communications Industry is Undergoing Rapid Technological
Changes and New Technologies May Be Superior to the Technologies We Use
The messaging and communications industry is subject to rapid and
significant technological change. We cannot predict the effect of
technological changes on our business. Additionally, widely accepted standards
have not yet developed for the technologies we use.
We expect that new services and technologies will emerge in the market in
which we compete. These new services and technologies may be superior to the
services and technologies that we use or these new services may render our
services and technologies obsolete. In addition, these services and
technologies may not be compatible or operate in a manner sufficient for us to
execute our business plan, which could have a material adverse effect on our
business, prospects, financial condition and results of operations.
A System Failure or Breach of Network Security Could Delay or Interrupt
Service to Our Customers
Our operations are dependent on our ability to protect our network from
interruption by damage from fire, earthquake, power loss, telecommunications
failure, unauthorized entry, computer viruses or other events beyond our
control. There can be no assurance that our existing and planned precautions
of backup systems, regular data backups and other procedures will be adequate
to prevent significant damage, system failure or data loss.
Despite the implementation of security measures, our infrastructure may
also be vulnerable to computer viruses, hackers or similar disruptive problems
caused by our customers or other Internet users. Persistent problems continue
to affect public and private data networks, including computer break-ins and
the misappropriation of confidential information. Computer break-ins and other
disruptions may jeopardize the security of information stored in and
transmitted through the computer systems of the individuals and businesses
utilizing our services, which may result in significant liability to us and
also may deter current and potential customers from using our services. Any
damage, failure or security breach that causes interruptions or data loss in
our operations or in the computer systems of our customers could have a
material adverse effect on our business, prospects, financial condition and
results of operations.
Our Software May Have Defects and We May Encounter Development Delays
Software-based services and equipment, such as our services, may contain
undetected errors or failures when introduced or when new versions are
released. There can be no assurance that, despite testing by us and by current
and potential customers, errors will not be found in our software after
commercial release, or that we will not experience development delays,
resulting in delays in market acceptance, any of which could have a material
adverse effect on our business, prospects, financial condition and results of
operations.
We Depend on Third Parties to Market Our Services, and the Failure by These
Third Parties to Market Our Services May Hinder Our Marketing Efforts
Currently, we rely on third parties, including e-mail providers, Internet
service providers, online service providers and telecommunications companies
as a means of marketing our services. We are also in the early stages of
marketing our services through systems integrators. Systems integrators are
businesses that bundle our services with services of other companies to be
sold as a convenient package of services to the customer. In the event of any
prolonged technical problems or failures experienced by these third parties or
the termination of these marketing agreements, our marketing capabilities
would be significantly hindered, which could have a detrimental effect on our
business, prospects, financial condition or results of operations. For
example, our failure to achieve technical integration with America Online's e-
mail system resulted in a renegotiation of our agreement with America Online,
and a suspension of our advertising on America Online in late 1998 through
December 1999. This resulted in a reduction in our America Online subscribers,
from over 4,000 net additions in 1998 to an approximately 1,400 net reduction
in 1999.
21
<PAGE>
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 many of these
relationships are in the early stages of development. Because many of our
strategic allies view unified messaging as important to their future, they may
elect to directly compete with us in the provision of unified messaging
services.
In addition, our success in developing an international customer base
depends on the formation of alliances with foreign companies and their ability
to successfully market our services. In any relationship with a third party,
particularly internationally, there may be difficulties in integrating or
coordinating our services and systems with those of the other party. The
failure to form and maintain these strategic alliances or the failure of these
companies to successfully develop and sustain a market for our services could
have a material adverse effect on our business, prospects, financial condition
and results of operations.
Our Success Depends on Our Retention of Our Executive Officers and Our Ability
to Hire and Retain Additional Key Personnel
Our success depends on the skills, experience and performance of senior
management and other key personnel, many of whom have worked together for only
a short period of time. For example, our President and Chief Executive Officer
and Chief Technology Officer have joined us within the past three months.
The loss of the services of one or more of our executive officers or other
key employees could have a material adverse effect on our business, prospects,
financial condition and results of operations. Our future success also depends
on our continuing ability to attract and retain highly qualified technical,
sales and managerial personnel. Competition for such personnel is intense, and
there can be no assurance that we can retain our key employees or that we can
attract, assimilate or retain other highly qualified technical, sales and
managerial personnel in the future.
Our International Operations are Exposed to Regulatory, Management, Credit
Card, Currency and Other Risks That May Prevent Us From Being Successful in
International Markets
At the end of 1999, foreign telephone numbers represented a significant
portion of our total telephone numbers. These foreign numbers were sold
through our U.S. web site. We intend to continue to expand into international
markets and to spend significant financial and managerial resources to do so.
If revenues from international operations do not exceed the expense of
establishing and maintaining these operations, our business, financial
condition and operating results will suffer. At present, we have international
operations in Australia, Canada, Finland, France, Germany, Ireland, Italy,
Japan, New Zealand, the Netherlands, Switzerland and the United Kingdom. We
have limited experience in international operations and may not be able to
compete effectively in international markets. International sales are subject
to inherent risks, including:
. unexpected changes in regulatory requirements and tariffs,
. a more complex process to acquire telephone numbers,
. difficulties in staffing and managing foreign operations,
. the possibility of subsidization of our competitors and the
nationalization of business,
. longer payment cycles, and greater difficulty in accounts receivable
collection,
. differing technology standards,
. potentially adverse tax consequences
. imposition of currency exchange controls, and
. greater exposure to credit card fraud due to weaker forms of verification
when compared to domestic credit card controls.
22
<PAGE>
To the extent the services we sell are priced and paid for in foreign
currencies, gains and losses on the conversion into U.S. dollars of
receivables and payables arising from international operations could in the
future contribute to fluctuations in our results of operations. Additionally,
fluctuations in exchange rates could adversely affect demand for our services
and have a material adverse effect on our business, prospects, financial
condition and results of operations.
The Price of Our Common Stock May Decline Due to Shares Eligible for Future
Sale
As of March 15, 2000, we had approximately 36.1 million shares of common
stock outstanding. Most of these shares are available for sale, subject to
compliance with Rule 144 in certain cases. Sales of a substantial number of
shares of common stock in the public market could cause the market price of
our common stock to decline. In the near future, approximately 1.8 million
shares will become eligible for sale under registration statements that we
will file to meet our registration rights obligations in connection with
recent acquisitions. Certain of our other shareholders and warrantholders have
registration rights with respect to the common stock and common stock issuable
under the warrants.
Anti-Takeover Provisions Could Negatively Impact Our Stockholders
Provisions of Delaware law and of our certificate of incorporation and
bylaws could make it more difficult for a third party to acquire control of
us. For example, we are subject to Section 203 of the Delaware General
Corporation Law which would make it more difficult for another party to
acquire our company without the approval of our board of directors.
Additionally, our certificate of incorporation authorizes our board of
directors to issue preferred stock without requiring any shareholder approval,
and preferred stock could be issued as a defensive measure in response to a
takeover proposal. These provisions could make it more difficult for a third
party to acquire our company even if an acquisition might be in the best
interest of our stockholders.
Our Stock Price May Be Volatile or May Decline
Our stock price and trading volumes have been highly volatile since our
initial public offering on July 23, 1999. We expect that this volatility will
continue in the future due to factors such as:
. assessments of our progress in adding paid subscriptions or free
customers, and comparisons of our results in these areas versus our
competitors;
. variations between our actual results and analyst and investor
expectations;
. new service or technology announcements by us or others, and regulatory
or competitive developments affecting our markets;
. investor perceptions of our company and comparable public companies;
. conditions and trends in the communications, messaging and Internet-
related industries;
. announcements of technological innovations and acquisitions;
. introduction of new services by us or our competitors;
. developments with respect to intellectual property rights;
. conditions and trends in the Internet and other technology industries;
and
. general market conditions.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have affected the market prices for the
common stocks of technology companies, particularly Internet companies. These
broad market fluctuations may result in a material decline in the market price
of our common stock. In the past, following periods of volatility in the
market price of a particular company's securities, securities class action
litigation has often been brought against that company. We may become involved
in this type of litigation in the future. Litigation is often expensive and
diverts management's attention and resources, which could have a material
adverse effect on our business and operating results.
23
<PAGE>
We May Have Liability for Internet Content and We May Not Have Adequate
Liability Insurance
As a provider of messaging and communications services, we face potential
liability for defamation, negligence, copyright, patent or trademark
infringement and other claims based on the nature and content of the materials
transmitted via our services. We do not and cannot screen all of the content
generated by our users, and we could be exposed to liability with respect to
this content. Furthermore, some foreign governments, such as Germany, have
enforced laws and regulations related to content distributed over the Internet
that are more strict than those currently in place in the United States.
Although we carry general liability and umbrella liability insurance, our
insurance may not cover claims of these types or may not be adequate to
indemnify us for all liability that may be imposed. There is a risk that a
single claim or multiple claims, if successfully asserted against us, could
exceed the total of our coverage limits. There is also a risk that single
claim or multiple claims asserted against us may not qualify for coverage
under our insurance policies as a result of coverage exclusions that are
contained within these policies. Should either of these risks occur, capital
contributed by our stockholders may need to be used to settle claims. Any
imposition of liability, particularly liability that is not covered by
insurance or is in excess of insurance coverage, could have a material adverse
effect on our reputation and business and operating results, or could result
in the imposition of criminal penalties.
Inadequate Intellectual Property Protections Could Prevent Us From Enforcing
or Defending Our Proprietary Technology
Our success depends to a significant degree upon our proprietary
technology. We rely on a combination of trademark, trade secret and copyright
law and contractual restrictions to protect our proprietary technology.
However, these measures provide only limited protection, and we may not be
able to detect unauthorized use or take appropriate steps to enforce our
intellectual property rights, particularly in foreign countries where the laws
may not protect our proprietary rights as fully as in the United States. In
addition, we may face challenges to the validity and enforceability of our
proprietary rights and may not prevail in any litigation regarding those
rights. Companies in the messaging industry have experienced substantial
litigation regarding intellectual property. Any litigation to enforce our
intellectual property rights would be expensive and time-consuming, would
divert management resources and may not be adequate to protect our business.
We May Be Found to Have Infringed the Intellectual Property Rights of Others
Which Could Expose Us to Substantial Damages or Restrict Our Operations
We could be subject to claims that we have infringed the intellectual
property rights of others. In addition, we may be required to indemnify our
resellers and users for similar claims made against them. Any claims against
us could require us to spend significant time and money in litigation, pay
damages, develop new intellectual property or acquire licenses to intellectual
property that is the subject of the infringement claims. These licenses, if
required, may not be available at all or on acceptable terms. As a result,
intellectual property claims against us could have a material adverse effect
on our business, prospects, financial conditions and results of operations.
For example, on October 28, 1999, AudioFAX IP LLC filed a lawsuit against the
company asserting infringement upon the ownership of certain United States and
Canadian patents. See Part 1 Item 3 "; Legal Proceedings" for additional
discussion.
Our Services May Become Subject to Burdensome Telecommunications Regulation
Which Could Increase Our Costs or Restrict Our Service Offerings
We provide our services through data transmissions over public telephone
lines and other facilities provided by telecommunications companies. These
transmissions are subject to regulation by the Federal Communications
Commission, state public utility commissions and foreign governmental
authorities. These regulations affect the prices we pay for transmission
services, the competition we face from telecommunications services and other
aspects of our market.
24
<PAGE>
As an Internet messaging services provider, we are not subject to direct
regulation by the FCC. However, as Internet services and telecommunications
services converge or as the services we offer expand, there may be increased
regulation of our business. Therefore, in the future, we may become subject to
FCC or other regulatory agency regulation. Changes in the regulatory
environment could decrease our revenues, increase our costs and restrict our
service offerings.
If Regulation of the Internet Increases, Our Business May be Adversely
Affected
There have been various regulations and court cases relating to the
liability of Internet service providers and other online service providers for
information carried on or through their services or equipment, including in
the areas of copyright, indecency, obscenity, defamation and fraud. For
example, federal and state statutes prohibit the online distribution of
obscene materials. The law in this area is unsettled, and there may be new
legislation and court decisions that expose companies such as ours to
liabilities or affect their services.
Additional laws and regulations may be adopted with respect to the
Internet, covering issues such as support payments to fund Internet
availability, content, user privacy, pricing, libel, obscene material,
indecency, gambling, intellectual property protection and infringement and
technology export and other controls. Other federal Internet-related
legislation has been introduced which may limit commerce and discourse on the
Internet.
Because our services relate principally to the Internet, but convert voice
and fax transmissions into e-mails, we are necessarily exposed to legal or
regulatory developments affecting either Internet services or
telecommunications services. Regulatory developments could cause our business,
prospects, financial condition and results of operations to be materially
adversely affected.
Our Failure and the Failure of Third Parties to Be Year 2000 Compliant Could
Negatively Impact Our Business
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. As a result, our
computer programs that have date-sensitive software and software of companies
with which our network is interconnected may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in system failures
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities. If our systems or the systems of other
companies on whose services we depend or with whom our systems interconnect
are not year 2000 compliant, it could have a material adverse effect on our
business, prospects, financial condition and results of operations.
As part of our overall assessment, we shut down all non-essential systems
just prior to January 1, 2000 and restored those systems on January 1, 2000.
Once restored, these systems were tested and monitored throughout the first
week of January 2000. All systems performed properly in the first week of
January 2000 and continue to perform properly up to and after February 29,
2000.
The year 2000 issue is discussed at greater length in "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Impact of Year 2000 Issue."
We Could Be Required to Register as an Investment Company and Become Subject
to Substantial Regulation That Would Interfere With Our Ability to Conduct Our
Business
As of December 31, 1999 we have significant cash on hand representing
proceeds from our July 23, 1999 initial public offering. We invest such cash
in short-term instruments consistent with prudent cash management and not
primarily for the purpose of achieving investment returns. Investment in
securities primarily for the purpose of achieving investment returns could
result in our being treated as an "investment company" under the Investment
Company Act of 1940. In addition, the Investment Company Act requires the
registration of companies that are primarily in the business of investing,
reinvesting or trading securities or that fail to meet certain statistical
tests regarding their composition of assets and sources of income even though
they consider themselves not to be primarily engaged in investing, reinvesting
or trading securities.
25
<PAGE>
If we are required to register as an investment company pursuant to the
Investment Company Act, we would become subject to substantial regulation with
respect to our capital structure, management, operations, transactions with
affiliated persons and other matters. Application of the provisions of the
Investment Company Act to us would materially and adversely affect our
business, prospects, financial condition and results of operations.
Our Principal Stockholders and Management Own a Significant Percentage of Our
Stock and Will Be Able to Exercise Significant Influence
As of March 15, 2000, our executive officers and directors and principal
stockholders together beneficially owned approximately 60% of our common
stock, including shares subject to options and warrants that confer beneficial
ownership of the underlying shares. 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.
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 has broad discretion in determining how to spend the
proceeds of our July 23, 1999 initial public 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.
We May Have a Contingent Liability Arising out of a Possible Violation of
Section 5 of the Securities Act of 1933 in Connection with E-mails Sent to
Subscribers
As part of a reserved share program in connection with our July 23, 1999
initial public offering, we reserved up to 300,000 shares at the initial
public offering price for offering to up to 3,000 U.S. residents who were
randomly selected from the pool of JFAX.COM subscribers as of June 30, 1999.
On or about July 6, 1999 we sent e-mails to approximately 150,000 of our
subscribers informing them of this program and briefly explaining the
procedures to be followed. On or about July 9, 1999 we sent e-mails to the
3,000 subscribers who had been randomly selected, explaining the procedures in
greater detail, and indicating that these subscribers would have the
opportunity to purchase shares through this subscriber program. As of the
applicable deadline, 181 of our subscribers had opened an account in
accordance with the procedures and indicated an interest, so as to qualify for
this reservation. No further subscribers were accepted in this reservation,
which therefore was reduced to a maximum of 18,100 shares. We may have a
contingent liability arising out of a possible violation of Section 5 of the
Securities Act of 1933 in connection with the e- mails sent to the
approximately 150,000 subscribers and later to the 3,000 subscribers selected
under this program. Any liability would depend upon the number of shares
purchased by the recipients of such e-mails. If any such liability is
asserted, we intend to contest the matter vigorously. We do not believe that
any such liability would be material to our financial condition.
Item 2. PROPERTIES
We currently lease approximately 28,000 square feet of office space for our
headquarters in Hollywood, California under a lease that expires in January
2010. We lease such space from CIM/Hollywood, LLC, a limited liability company
indirectly controlled by our co-chairman. Additionally we sublease
approximately 26% of the space back to CIM Group, LLC, another limited
liability company indirectly controlled by our co-chairman. This sublease is
cancelable by either party on six months' notice. Our share of the monthly
rent is approximately $36,000.
26
<PAGE>
We lease an additional 8,000 square feet of office space in Carlsbad,
California under a lease which expires in August 2000, 9,000 square feet of
technology development space in San Francisco, California under a lease which
expires in June 2004, and 1,000 square feet of office space in New York City
under a lease which expires in November 2000.
All of our network equipment is housed either at our Los Angeles or New
York leased space or at one of our 52 co-location facilities around the world.
Item 3. LEGAL PROCEEDINGS
The description below of the litigation contains forward-looking statements
with respect to possible events, outcomes or results that are, and are
expected to continue to be, subject to risks, uncertainties and contingencies,
including but not limited to the respective risks, uncertainties and
contingencies identified in such descriptions. See "Business--Disclosure
Regarding Forward-Looking Information".
On October 28, 1999, AudioFAX IP LLC filed a lawsuit against us in the
United States District Court for the Northern District of Georgia asserting
the ownership of certain United States and Canadian patents and claiming that
we are infringing these patents as a result of our sale of enhanced facsimile
services. The suit requests unspecified damages, treble damages due to willful
infringement, and preliminary and permanent injunctive relief. We filed an
answer to the complaint on December 2, 1999. We have reviewed the AudioFAX
patents with our business and technical personnel and outside patent counsel
and have concluded that we do not infringe these patents. As a result, we are
confident of our position in this matter and are vigorously defending the
suit. However, the outcome of complex litigation is uncertain and cannot be
predicted with certainty at this time. Any unanticipated adverse result could
have a material adverse effect on our financial condition and results of
operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the year ended December 31, 1999.
27
<PAGE>
Part II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information
The common stock is traded on the Nasdaq National Market under the symbol
"JFAX." The following table sets forth the high and low closing sale prices
for the common stock for the periods indicated, as reported by the Nasdaq
National Market.
<TABLE>
<CAPTION>
High Low
---- ----
<S> <C> <C>
Year December 31, 1999
Third Quarter (from July 23)..................................... 9.50 4.75
Fourth Quarter................................................... 7.68 4.06
</TABLE>
As of February 29, 2000 there were 105 stockholders of record of the common
stock, although there are a larger number of beneficial owners.
Dividends
We have never declared or paid cash dividends on our common stock. We
intend to retain all future earnings to finance future growth and, therefore,
do not anticipate paying any cash dividends in the foreseeable future.
Recent Sales of Unregistered Securities
In the three months ended December 31, 1999 we did not issue any
unregistered securities.
Sales of Registered Securities and Use of Proceeds
During July 1999, we completed our initial public offering ("the Offering")
of 8,500,000 shares of our common stock. The offering date was July 23, 1999.
Our stock is publicly traded on the NASDAQ National Market under the symbol
"JFAX."
The lead underwriters in the offering were Donaldson, Lukfin & Jenrette;
BancBoston Robertson Stephens; CIBC World Markets; and DLJdirect Inc. The
shares of common stock sold in the Offering were registered under the
Securities Act of 1933, as amended, on a Registration Statement on Form S-1
(the "Registration Statement") (File No. 333-76477) which was declared
effective by the SEC on July 22, 1999.
A total of 8,500,000 shares of common stock were registered for sale by the
Company under the Registration Statement for an aggregate amount of
$80,750,000 (based upon the offering price of $9.50 per share). 8,500,000
shares were sold by us for an aggregate amount of $80,750,000 (before
deduction of underwriting discounts, commissions and other expenses).
Additionally, the underwriters had an option to purchase an additional 473,000
shares from us and 802,000 shares from certain selling stockholders to cover
overallotments. None of these shares were sold in the Offering. If these
shares had been sold, the aggregate amount received for the optional shares on
the same basis as above would have been $4.5 million for us and $7.6 million
for the selling stockholders.
After deducting underwriting discounts and commissions of $5,652,500 and
expenses of $1,274,000 in connection with the Offering, we received net
proceeds from the Offering of $73.8 million.
Through December 31, 1999, we have used $28.3 million of proceeds from the
offering for the following purposes: (i) $17.4 million for repayment of long-
term debt in the amount of $10.6 million and redemption of preferred stock in
the amount of $6.8 million, (ii) $3.2 million for expansion of our worldwide
network, (iii) $4.6 million for funding advertising and marketing activities,
and (iv) $3.1 million for funding general corporate expenses.
28
<PAGE>
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and the notes thereto
and the information contained herein in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Historical results
are not necessarily indicative of future results.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ---------- ----------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $ 7,643 $ 3,520 $ 685 $ 105 $ --
Cost of revenue......... 4,641 3,398 858 150 1
----------- ----------- ----------- ---------- ----------
Gross profit
(loss)............. 3,002 122 (173) (45) (1)
----------- ----------- ----------- ---------- ----------
Operating expenses:
Sales and marketing... 6,355 4,990 1,069 150 --
Research and
development 1,829 1,226 793 61 --
General and
administrative....... 7,976 4,948 2,962 512 20
----------- ----------- ----------- ---------- ----------
Total operating
expenses........... 16,160 11,164 4,824 723 20
----------- ----------- ----------- ---------- ----------
Operating loss...... (13,158) (11,042) (4,997) (768) (21)
Other income (expense)
net.................... 230 (933) 215 -- --
Loss from Joint
Venture................ (82) -- -- -- --
Increase in market value
of put warrants -- 5,256 -- -- --
Income tax expense...... 2 2 2 1 --
----------- ----------- ----------- ---------- ----------
Net loss before
extraordinary Item... $ (13,012) $ (17,233) $ (4,784) $ (769) $ (21)
=========== =========== =========== ========== ==========
Extraordinary Item...... 4,428 -- -- -- --
Net Loss................ $ (17,440) $ (17,233) $ (4,784) $ (769) $ (21)
=========== =========== =========== ========== ==========
Net loss attributable
to common shares..... $ (19,012) $ (17,728) $ (4,784) $ (769) $ (21)
=========== =========== =========== ========== ==========
Basic and diluted net
loss per common share.. $ (0.68) $ (0.80) $ (0.30) $ (0.12) $ (0.00)
=========== =========== =========== ========== ==========
Weighted average common
shares used in
determining net loss
per share.............. 28,098,994 22,181,960 15,738,334 6,406,666 5,575,000
=========== =========== =========== ========== ==========
<CAPTION>
December 31
-------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents.......... $ 12,256 $ 7,279 $ 23 $ 656 $ --
Short term
investments.......... 23,511 -- -- -- --
Working capital
(deficiency)......... 36,555 6,735 58 479 (11)
Total assets.......... 58,625 10,513 2,613 896 --
Long-term debt and put
warrants............. 1,537 12,455 -- -- --
Redeemable common and
preferred stock(1)... 7,065 9,317 -- -- --
Total stockholders'
equity
(deficiency)......... 45,147 (13,317) 1,618 677 (11)
</TABLE>
- --------
(1) See Note 4 of the notes to our consolidated financial statements for the
conditions applicable to the redeemable securities.
29
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
We were founded in 1995 to provide Internet-based messaging and
communications services. We were initially conceived as a solution to
facilitate the receipt of faxes and voice messages via the Internet. As of
December 31, 1999, our unified messaging service had over 56,000 paid
subscriptions.
We currently derive substantially all revenues from subscription fees,
activation fees and charges for usage-based services. Activation fees account
for approximately 10% of total revenue. We recognize revenue for activation
fees when the customer's account is activated, at which time related direct
selling costs are incurred, which offset the activation fee. In the future, we
expect to derive a growing proportion of our revenues from selling our
subscription and usage-based services to our free subscribers. Our customers
are primarily pre-billed on a month-to-month basis. Revenues are recognized as
the service is performed.
Payments made to our strategic alliance resellers are typically made on a
commission basis. In our domestic alliances, we generally pay to the reseller
a portion of our activation fees, a percentage of monthly service fees during
the first year that the customer subscribes to the service, and a lesser
percentage of monthly service fees after the first year. We also pay a
percentage of customer usage fees. We record the commission expenses as the
related revenues are recognized.
For the years ended December 31, 1999, 1998, and 1997, our strategic
alliances contributed 22.2%, 41.2%, 11.2% and of our net subscriber additions,
respectively. The reduction in subscriptions through strategic alliances from
1998 to 1999 is due to the interruption of advertising with America Online. In
1999, in the absence of advertising, America Online did not produce net new
subscribers for us, and in fact produced a net reduction of approximately 1400
subscribers. Excluding America Online, net subscriber additions through
strategic alliances would have been 27.1% and 21.1% for 1999 and 1998
respectively.
Under our renegotiated agreement with America Online, America Online is
committed to deliver certain technological assistance so as to make our
services more compatible with America Online's e-mail service and to deliver
$920,000 in advertising owed to us as a result of payments made under our
previous agreement. Following the necessary technical integrations, we expect
to resume advertising with America Online and we anticipate that America
Online will again contribute to our net subscriber additions.
Revenues from subscriptions provided by our strategic alliances represented
approximately 28.1% and 29% of our total revenues in 1999 and 1998,
respectively. We believe that the generally increasing trend in strategic
alliance contributions to net subscriber additions, and to our revenues, will
continue in the future.
We expect to increase our sales and marketing expenses. 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 in order to grow our subscriber base and to
generate sales from our free and paying subscribers and businesses looking to
outsource their messaging requirements. These marketing efforts will require a
considerable investment on our part.
We also intend to continue to invest in the development of new services,
complete the development of our services currently under development and
extend and upgrade our network. In particular, we intend to invest in
additional infrastructure to increase our capacity and enable us to provide
additional Internet-based messaging and communications services.
We have incurred significant losses since our inception. As of December 31,
1999, we had an accumulated deficit of approximately $40.2 million. We expect
to incur substantial operating losses for the foreseeable future.
30
<PAGE>
Although we cannot guarantee the success of our business plan, we expect
the increases in sales and marketing expenses and in our investments in new
services and services under development, together with our free services, will
improve our ability to add new subscriptions including paid subscriptions. We
also expect that the increased subscriptions will result in increased revenues
and, we anticipate, an increased rate of growth of revenues, which will be
partially offset, or may be more than offset for some period, by the expenses
incurred. There are numerous factors, however, that may materially adversely
affect our business plans and the expectations noted above.
An increasing number of companies are offering services that compete with
our services, and some competitors have recently introduced free services that
are similar to our services. The providers of these free services attempt to
recoup their expenses by selling advertising based on the traffic generated
from users of free services. We also offer some of our services on a free
basis. We expect to generate revenues from free subscriptions not through
advertising, but by selling to those free subscriptions usage-based services
or by converting some free subscriptions to paid subscriptions for our unified
messaging services. However, we cannot guarantee that we will be able to sell
any usage-based services or to convert free subscriptions. In addition, there
is a risk that some of our paid subscriptions will convert to free
subscriptions or that they will choose to switch to the free services provided
by one of our competitors. We believe that the introduction of free services,
both by us and by our competitors, has occurred too recently for us to
accurately gauge whether and to what degree they will negatively impact our
revenues, our cost structure or our ability to add new subscriptions including
paid subscriptions.
Results of Operations
Years Ended December 31, 1999, 1998 and 1997
The following table sets forth, for the years ended December 31, 1999, 1998
and 1997, 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>
December 31,
------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenue.................................................... 100% 100% 100%
Cost of revenue............................................ 61 97 125
---- ---- ----
Gross profit (loss).................................... 39 3 (25)
Operating expenses:
Sales and marketing...................................... 83 142 156
Research and development................................. 24 35 116
General and administrative............................... 104 141 432
---- ---- ----
Total operating expenses............................... 211 318 704
---- ---- ----
Operating loss......................................... (172) (315) (729)
Interest expense (income), net............................. (3) 27 (31)
Loss in joint venture...................................... (1) -- --
Increase in market value of put warrants................... -- (149) --
---- ---- ----
Loss before income taxes and extraordinary item............ (170) (491) (698)
Extraordinary Item-early extinguishment of debt............ (58) -- --
---- ---- ----
Income tax expense......................................... -- -- --
---- ---- ----
Net loss............................................... (228)% (491)% (698)%
==== ==== ====
</TABLE>
Revenue Items
Revenue. Revenue was $7.6 million, $3.5 million, and $685,000 for the years
ended 1999, 1998, and 1997, respectively. The 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
31
<PAGE>
56,010, 27,063, and 7,125 as of December 31, 1999, 1998, and 1997,
respectively. Revenue derived from monthly fees from paid subscriptions
accounted for substantially all of the revenue in the years ended December 31,
1999, 1998 and 1997.
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 $4.6 million or 61% of
revenue, $3.4 million or 97% of revenue, and $858,000 or 125% of revenue for
the years ended December 31, 1999, 1998 and 1997, respectively. The 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, advertising, sales and marketing
personnel, public relations, promotions, trade shows and business development.
Sales and marketing expenses were $6.4 million or 83% of revenue, $5.0 million
or 142% of revenue, and $1.1 million or 156% of revenue for the years ended
December 31, 1999, 1998 and 1997 respectively. The year to year increases in
sales and marketing expenses primarily reflect an increase in marketing
payments as a result of entering into and expanding several key strategic
relationships with leading Internet and telecommunications companies, and an
increase in expenses with respect to sales and marketing personnel.
In October 1997, we entered into an interactive marketing relationship with
America Online. As of December 31, 1999, we had $920,000 in prepaid
advertising costs and such amount is expected to be consumed in fiscal 2000.
During 1999 and 1998, we incurred $80,000 and $1,250,000 respectively in
advertising expense for advertising activity through America Online. See Note
6(a) of the notes to our consolidated financial statements.
At year end, we were also the exclusive unified messaging provider for
CompuServe and Yahoo Mail under an interactive marketing agreement and an
advertising and promotion agreement, respectively. These agreements provide
for us to make certain fixed and revenue share payments based on advertising
amounts placed on the respective sites and customers acquired. See Note 6(b)
of the notes to our consolidated financial statements.
Amounts expensed under agreements with all on line service providers are
included in sales and marketing expense. For the years ended December 31,
1999, 1998, and 1997, total amounts of these expenses were $2,220,320,
$2,959,313, and $7,888 respectively. Future annual fixed payments associated
with all arrangements with on line service providers for future services
aggregate $3,156,278 and $658,312 for the years 2000 and 2001, respectively.
Research and Development. Our research and development costs consist
primarily of personnel related costs. Research and development costs were $1.8
million or 24% of revenue, $1.2 million or 35% of revenue, and $793,000 or
116% of revenue for the years ended December 31, 1999, 1998 and 1997,
respectively. The year to year increases in research and development costs
primarily reflects increases in personnel related expenses. Research and
development costs as a percentage of revenue decreased from year to year as a
result of increases in revenue over the same periods.
General and Administrative. Our general and administrative costs consist
primarily of personnel related expenses, professional services, and occupancy
costs. General and administrative costs were $8.0 million or 104% of revenues,
$4.9 million or 141% of revenues, and $3.0 million or 432% of revenues for the
years ended December 31, 1999, 1998 and 1997, respectively. The increases in
general and administrative costs from year to year were primarily due to
increases in personnel as well as increased professional fees. 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.
32
<PAGE>
Interest Income (Expense), Net. The change from 1998 to 1999 was primarily
due to investment earnings from our IPO proceeds. The change from 1997 to 1998
was due to borrowings of $10.0 million in senior subordinated debt in July
1998 which was repaid in July 1999. Interest income (expense), net was
$230,000, $(933,000), $215,000 for the years ended December 31, 1999, 1998 and
1997.
Increase in Value of Put Warrants. Warrants sold by the company in July
1998 included put rights until January 1, 1999. See note 4 to the consolidated
financial statements. These put rights gave the holders of the warrants the
right to require us to purchase the warrants at their fair market value if we
did not complete a public offering of our stock prior to July 1, 2003. In
accordance with AICPA Emerging Issues Task Force (EITF) 96-13, the warrants
were recorded at their fair value at the date of issuance ($1,145,000). In
addition, EITF 96-13 requires that any change in the fair value of the
warrants be reflected as a charge to earnings in the period of change. In
1998, expense associated with this increase in market value aggregated
$5,256,000 . This item will not recur in future periods because of the
expiration by agreement with the holders of the warrants of the put feature
effective January 1, 1999.
Income Taxes. As of December 31, 1999, we had federal and state net
operating loss carryforwards of approximately $34.6 million available to
offset income in the future. Such net operating loss carryforwards will begin
expiring in the year 2004. Under the Tax Reform Act of 1986, the amounts of
and benefits from such net operating loss carryforwards may be impaired or
limited following changes in the ownership of our common stock.
Liquidity and Capital Resources
In July 1999, we completed our initial public offering. 8,500,000 shares
were sold by us to the public at $9.50 per share for an aggregate amount of
$80,750,000 before deduction of underwriting discounts, commissions and other
expenses. No overallotment shares were sold in the offering. Net proceeds to
us from the IPO were approximately $73.9 million.
In July 1998 we received net proceeds of $13.9 million through the private
placement of $10,000,000 in Senior Subordinated Notes and $5,000,000 in
Preferred Stock.
Prior to the IPO and Senior Subordinated Note and Preferred Stock
Offerings, we financed our operations primarily through private placements of
Common Stock.
At December 31, 1999, our primary source of liquidity consisted of
$12,256,000 in cash and cash equivalents and $23,511,000 in short term
investments and long term investment of. Additionally, as of December 31, 1999
we had $13,559,000. Such investments consist primarily of corporate debt
securities with maturities ranging from 91 days to 18 months.
We finance the acquisition of substantial portions of our operating
technology equipment and office equipment through leasing and loan
arrangements. Amounts due under these arragements were $3,129,000 and
$1,686,000 at December 31, 1999 and 1998 respectively.
Net cash used in operating activities was $12,091,000, $10,000,000, and
$4,546,000 for the years ended December 31, 1999, 1998, and 1997 respectively.
The principal uses of cash for all periods were to fund our net losses from
operations, partially offset by increases in accounts payable, decreases in
payments to strategic alliances, and increases due to non-cash put warrant
charges.
Net cash used in investing activities was $39,446,000, $543,000, and
$1,579,000 for the years ended 1999, 1998, and 1997 respectively. The
principal uses in 1999 were for the purchases of current and non current
investments and the purchases of property and equipment. In 1998 and 1997 the
principal use was for property and equipment.
Net cash provided by financing activities was $56,514,000, $17,800,000, and
$5,500,000 for the years ended 1999, 1998 and 1997 respectively. The net
increase in 1999 was primarily due to the $73.9 million raised in our initial
public offering, reduced by repayments of senior subordinated debt and
preferred stock of of $10.6 million and $6.8 miillion respectively.
33
<PAGE>
The net increase in 1998 was primarily due to proceeds from senior
subordinated debt, preferred stock, and the private placement of common stock.
Net proceeds for 1997 were primarily due to proceeds from private placement of
common stock of $8.1 million reduced by the issuance of notes receivable to
shareholders of $2.4 million.
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 our existing cash balances and short and long term investments will be
sufficient to meet our anticipated needs for working capital and capital
expenditures for at least the next 12 months. Although operating activities
may provide cash in certain periods, to the extent we experience growth in the
future, we anticipate that our operating and investing activities will use
cash. Consequently, any such future growth may require us to obtain additional
equity or debt financing, which may not be available on attractive terms, or
at all, or may be dilutive.
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.
We are a comparatively new company, and, accordingly, the software and
hardware we use to operate our business have all been purchased or developed
in the last five 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.
Prior to January 1, 2000, we conducted ongoing tests of it's internal
information technology and non-information technology systems. As of December
31, 1999 we completed testing internally developed systems, and the subsequent
process of evaluating and compiling test results did not reveal any
information that would indicate any year 2000 exposure 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.
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. As of December 31, 1999 we tested this third-
party software and hardware to determine Year 2000 compliance. In addition, we
obtained certifications from our key suppliers of hardware and networking
equipment for our data centers, as well as from the providers of our Internet
access and of our dedicated data transmission media, that our hardware and
networking equipment are Year 2000 compliant. Additionally, we have received
assurances from the providers of key software applications for our internal
operations that their software is Year 2000 compliant. Based upon an
evaluation of our broader list of software and hardware providers, we are
aware that all of these providers reviewed and implementing their own Year
2000 compliance programs, and we continue to work with these providers to
address the Year 2000 issue and continue to seek assurances from them that
their products are Year 2000 compliant.
34
<PAGE>
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. Our estimate of costs incurred to date associated
with implementing our year 2000 compliance plan is approximately $100,000
which is consistent with our original estimates. The costs incurred to date
represent in the aggregate less than 5% of the amounts that we have budgeted
for research and development and network operations. However, if we, our
customers, our providers of hardware and software or other third parties with
whom we do business fail to remedy any Year 2000 issues, our services could be
interrupted and we could experience a material loss of revenues that could
have a material adverse effect on our business, prospects, results of
operations and financial condition. We consider such an interruption to be the
most reasonably likely unfavorable result of any failure by us, or failure by
the third parties upon whom we rely, to achieve Year 2000 compliance.
Presently, we are unable to reasonably estimate the duration and extent of any
interruption, or quantify the effect it may have on our future revenues.
As part of our overall assessment, we shut down all non-essential systems
just prior to January 1, 2000 and restored those systems on January 1, 2000.
Once restored, these systems were tested and monitored throughout the first
week of January 2000. All systems performed properly in the first week of
January 2000 and continue to perform properly up to and after February 29,
2000.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about our market risk disclosures contains
forward-looking statements. Forward-looking statements are subject to risks
and uncertainties. Actual results could differ materially from those discussed
in the forward-looking statements. We are exposed to market risk related to
changes in interest rates and foreign currency exchange rates. We do not have
derivative financial instruments for hedging, speculative, or trading
purposes.
During 1999, we had indebtedness outstanding that accrued interest at fixed
rates over the term of that indebtedness, and therefore we did not have
interest rate risk on that debt. As of July 30, 1999 we redeemed all of our
10% senior subordinated notes due 2004 which represented a substantial portion
of our long-term debt obligations.
At December 31, 1999, investment in short and long term debt securities
owned by us primarily consisted of corporate debt securities. Short term
maturities range from three months to one year and long term maturities range
from beyond one year up to 18 months. Such securities bear interest at fixed
rates ranging from 5.38% to 6.63% and are classified as held to maturity as we
have the ability and intent to do so. At December 31, 1999, cost approximated
fair market value, and we believe we have immaterial market rate risk.
We believe that our exposure on currency exchange fluctuation risk is
insignificant because our transactions with international vendors and
customers are generally denominated in US dollars.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the company follows hereafter,
beginning on page 41. See financial statement index at Item 14(a).
35
<PAGE>
Independent Auditors' Report
The Board of Directors
JFAX.COM, Inc.:
We have audited the accompanying consolidated balance sheets of JFAX.COM
and subsidiary as of December 31, 1999 and 1998 and the related consolidated
statements of operations, stockholders' equity (deficiency), comprehensive
loss, and cash flows for each of the years in the three-year period ended
December 31, 1999. 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, 1999 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, 1999 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Los Angeles, California
January 28, 2000
36
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents......................... $ 12,256,487 7,278,873
Short term investments............................ 23,510,623 --
Accounts receivable............................... 275,046 112,729
Due from related parties.......................... 95,151 128,578
Interest receivable............................... 600,569 48,603
Prepaid marketing costs........................... 2,725,234 1,000,000
Other current assets.............................. 784,760 81,888
------------ -----------
Total current assets............................ 40,247,870 8,650,671
Furniture, fixtures and equipment, net.............. 3,344,075 1,777,646
Long term investments............................... 13,558,615 --
Investment in Joint venture......................... 417,773 --
Other long-term assets.............................. 1,057,000 84,372
------------ -----------
$ 58,625,333 10,512,689
============ ===========
Liabilities, Redeemable Securities and Stockholders'
Equity (Deficiency)
Current liabilities:
Accounts payable and accrued expenses............. $ 1,781,088 1,100,544
Deferred revenue.................................. 438,722 328,740
Current portion of capital lease obligations...... 176,089 89,931
Current portion of long-term debt................. 1,239,650 317,402
Customer deposits................................. 57,267 79,286
------------ -----------
Total current liabilities....................... 3,692,816 1,915,903
Capital lease obligations........................... 185,762 141,783
Long-term debt...................................... 1,537,357 6,137,004
Put warrants........................................ -- 6,318,000
Redeemable common stock; issued and outstanding
2,207,698 shares at December 31, 1999 and 1998,
respectively (redemption value of $7,064,633 and
$9,074,000 at December 31, 1999 and 1998).......... 7,064,633 5,245,975
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
Common stock subject to put option (105,000 shares
at December 31, 1999).............................. 997,500 --
Stockholders' equity (deficiency):
Common stock, $0.01 par value. Authorized
100,000,000 shares; total issued and outstanding
30,542,620 and 22,099,996 shares at December 31,
1999 and 1998, respectively, excluding 2,207,698
issued as redeemable at December 31, 1999 and
1998 and 105,000 shares subject to a put option
at December 31, 1999............................. 305,372 221,000
Additional paid-in capital........................ 88,133,250 12,273,793
Notes receivable from stockholders................ (2,279,619) (2,499,000)
Unearned compensation............................. (1,415,443) (506,202)
Accumulated other comprehensive income............ 649,046 --
Accumulated deficit............................... (40,245,341) (22,806,238)
------------ -----------
Total stockholders' equity (deficiency)......... 45,147,265 (13,316,647)
------------ -----------
$ 58,625,333 10,512,689
============ ===========
Commitments and Contingencies (Note 11).............
Subsequent Events (Note 14).........................
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ----------
<S> <C> <C> <C>
Revenue................................ $ 7,643,442 3,519,836 685,465
Cost of revenue........................ 4,640,668 3,398,243 857,924
------------ ------------ ----------
Gross profit (loss)................ 3,002,774 121,593 (172,459)
Operating expenses:
Sales and marketing.................. 6,354,522 4,990,188 1,068,523
Research and development............. 1,828,873 1,225,542 792,985
General and administrative........... 7,976,221 4,948,402 2,962,477
------------ ------------ ----------
Total operating expenses........... 16,159,616 11,164,132 4,823,985
------------ ------------ ----------
Operating loss..................... (13,156,842) (11,042,539) (4,996,444)
Other expenses:
Interest expense..................... (1,348,667) (1,353,751) --
Interest income...................... 1,578,507 420,426 214,663
Equity loss in joint venture......... (82,227) -- --
Increase in market value of put
warrants............................ -- (5,255,669) --
------------ ------------ ----------
Loss before income taxes and
extraordinary item................ (13,009,229) (17,231,533) (4,781,781)
------------ ------------ ----------
Income tax expense..................... 1,500 1,500 1,640
------------ ------------ ----------
Loss before extraordinary item..... (13,010,729) (17,233,033) (4,783,421)
Extraordinary Item-Loss on
extinguishment of debt................ (4,428,374) -- --
------------ ------------ ----------
Net Loss........................... (17,439,103) (17,233,033) (4,783,421)
Premium on Preferred Stock redemption.. (877,721) -- --
Cumulative preferred dividends,
accretion of discount attributable to
preferred stock, and amortization of
preferred stock issuance costs........ (694,150) (494,523) --
------------ ------------ ----------
Net loss attributable to common
shareholders...................... $(19,010,974) $(17,727,556) (4,783,421)
============ ============ ==========
Net loss per common share:
Basic................................ $ (0.68) (0.80) (0.30)
Diluted.............................. $ (0.68) (0.80) (0.30)
============ ============ ==========
Weighted average common shares used in
determining loss per share:
Basic and diluted.................... 28,098,994 22,181,960 15,738,394
============ ============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) AND COMPREHENSIVE
INCOME
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated Notes
Common stock Additional Other receivable Stockholders'
-------------------- paid-in Accumulated Comprehensive from Unearned equity
Shares Amount capital deficit Income stockholders Compensation (deficiency)
---------- -------- ---------- ----------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1996............ 7,565,000 $ 75,650 1,390,830 (789,784) -- -- -- $ 676,696
Exercise of
stock options... 370,000 74 120,000 -- -- -- -- 120,074
Repurchase of
common stock.... (200,000) (2,000) (118,000) -- -- -- -- (120,000)
Issuance of
common stock.... 10,450,000 108,127 8,016,873 -- -- -- -- 8,125,000
Issuance of
notes receivable
from
stockholders.... -- -- -- -- -- (2,400,000) -- (2,400,000)
Net loss........ -- -- -- (4,783,421) -- -- -- (4,783,421)
---------- -------- ---------- ----------- ------- ---------- ---------- ------------
Balance,
December 31,
1997............ 18,185,000 181,851 9,409,703 (5,573,205) -- (2,400,000) -- 1,618,349
========== ======== ========== =========== ======= ========== ========== ============
Accretion to
common stock
redemption...... -- -- (314,000) -- -- -- -- (314,000)
Dividends on
mandatorily
redeemable
Preferred
Stock........... -- -- (386,915) -- -- -- -- (386,915)
Amortization of
preferred stock
discount........ -- -- (107,608) -- -- -- -- (107,608)
Issuance of
common stock.... 3,791,250 37,912 3,061,088 -- -- (99,000) -- 3,000,000
Exercise of
stock options... 123,746 1,237 37,775 -- -- -- -- 39,012
Unearned
Compensation.... -- -- 573,750 -- -- -- (573,750) --
Amortization of
unearned
compensation.... -- -- -- -- -- -- 67,548 67,548
Net loss........ -- -- -- (17,233,033) -- -- (17,233,033)
---------- -------- ---------- ----------- ------- ---------- ---------- ------------
Balance,
December 31,
1998............ 22,099,996 221,000 12,273,793 (22,806,238) -- (2,499,000) (506,202) (13,316,647)
========== ======== ========== =========== ======= ========== ========== ============
Accretion to
common stock
redemption...... -- -- (1,818,658) -- -- -- -- (1,818,658)
Dividends on
mandatorily
redeemable
Preferred
Stock........... -- -- (553,064) -- -- -- -- (553,064)
Amortization of
preferred stock
discount........ -- -- (134,994) -- -- -- -- (134,994)
Issuance of
common stock net
of issuance
costs........... 8,395,000 83,950 72,742,542 -- -- -- -- 72,826,492
Exercise of
stock options... 47,624 422 41,126 -- -- -- -- 41,548
Unearned
Compensation.... -- -- 1,323,476 -- -- -- (1,323,476) --
Amortization of
unearned
compensation.... -- -- -- -- -- -- 414,235 414,235
Compensation
Expense in
exchange for
Note reduction.. -- -- -- -- -- 219,381 -- 219,381
Unrealized Gain
on Investment... -- -- -- -- 649,046 -- -- 649,046
Retirement of
Preferred
Stock........... -- -- (2,058,971) -- -- -- -- (2,058,971)
Conversion of
put warrants.... -- -- 6,318,000 -- -- -- -- 6,318,000
Net loss........ -- -- -- (17,439,103) -- -- -- (17,439,103)
---------- -------- ---------- ----------- ------- ---------- ---------- ------------
Balance,
December 31,
1999............ 30,542,620 $305,372 88,133,250 (40,245,341) 649,046 (2,279,619) (1,415,443) $ 45,147,265
========== ======== ========== =========== ======= ========== ========== ============
<CAPTION>
Comprehensive
Loss
-------------
<S> <C>
Balance,
December 31,
1996............ --
Exercise of
stock options... --
Repurchase of
common stock.... --
Issuance of
common stock.... --
Issuance of
notes receivable
from
stockholders.... --
Net loss........ (4,783,421)
-------------
Balance,
December 31,
1997............ (4,783,421)
=============
Accretion to
common stock
redemption...... --
Dividends on
mandatorily
redeemable
Preferred
Stock........... --
Amortization of
preferred stock
discount........ --
Issuance of
common stock.... --
Exercise of
stock options... --
Unearned
Compensation.... --
Amortization of
unearned
compensation.... --
Net loss........ (17,233,033)
-------------
Balance,
December 31,
1998............ (17,233,033)
=============
Accretion to
common stock
redemption...... --
Dividends on
mandatorily
redeemable
Preferred
Stock........... --
Amortization of
preferred stock
discount........ --
Issuance of
common stock net
of issuance
costs........... --
Exercise of
stock options... --
Unearned
Compensation.... --
Amortization of
unearned
compensation.... --
Compensation
Expense in
exchange for
Note reduction.. --
Unrealized Gain
on Investment... 649,046
Retirement of
Preferred
Stock........... --
Conversion of
put warrants.... --
Net loss........ (17,439,103)
-------------
Balance,
December 31,
1999............ (16,790,057)
=============
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................... $(17,439,103) (17,233,033) (4,783,421)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization.......... 959,421 634,158 216,553
Stock option compensation expense...... -- -- 120,000
Extraordinary item-loss on early
extinguishment of debt................ 4,428,374 -- --
Redeemable common stock issued in lieu
of interest........................... -- 251,999 --
Notes issued for payment of interest
expense............................... -- 499,665 --
Increase in market value of put
warrants.............................. -- 5,255,669 --
Equity in loss of joint venture........ 82,227 -- --
Amortization of note payable discount.. 525,621 436,304 --
Amortization of unearned compensation.. 414,235 67,548 --
Compensation expense in exchange for
note reduction........................ 219,381 -- --
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable.................... (162,317) (101,955) 23,892
Due from related parties............... (33,427) (128,578)
Interest receivable.................... (551,966) (43,964) (4,639)
Prepaid marketing costs................ (1,725,234) -- (1,000,000)
Other.................................. (356,921) (152,160) (6,100)
(Decrease) increase in:
Accounts payable....................... 680,544 155,380 838,078
Deferred revenue....................... 109,982 279,556 49,184
Customer deposits...................... (22,019) 79,286 --
------------ ----------- ----------
Net cash used in operating activities.. (12,090,506) (10,000,125) (4,546,453)
Cash flows from investing activities:
Purchase of furniture, fixtures, and
equipment............................. (2,525,810) (543,170) (1,579,409)
Purchases of investments, net.......... (36,420,192) -- --
Investment in joint venture............ (500,000) -- --
------------ ----------- ----------
Net cash used in investing activities.. (39,446,042) (543,170) (1,579,409)
Cash flows from financing activities:
Proceeds from issuance of common
stock................................. 73,824,413 3,099,000 8,125,000
Issuance of notes receivable from
stockholders.......................... -- (99,000) (2,400,000)
Common stock repurchased............... -- -- (120,000)
Redemption of preferred stock.......... (6,817,700) --
Exercise of stock options.............. 41,126 39,012 --
Proceeds from issuance of mandatorily
redeemable preferred stock and put
warrants, net......................... -- 4,638,479 --
Proceeds from issuance of notes
payable............................... 703,667 --
Repayments of notes payable............ (11,367,481) (208,910)
Proceeds from issuance of redeemable
common stock, net..................... -- 4,679,976 --
Repayments of capital lease
obligations........................... 130,137 (48,145) --
Net decrease in due to related
parties............................... -- -- (111,787)
------------ ----------- ----------
Net cash provided by financing
activities............................ 56,514,162 17,799,129 5,493,213
------------ ----------- ----------
Net increase (decrease) in cash and
cash equivalents...................... 4,977,614 7,255,834 (632,649)
Cash and cash equivalents at beginning
of year............................... 7,278,873 23,039 655,688
------------ ----------- ----------
Cash and cash equivalents at end of
year.................................. $ 12,256,487 7,278,873 23,039
============ =========== ==========
Cash paid during the year for:
Income taxes........................... $ 1,500 1,500 721
Interest............................... 609,945 137,148 --
</TABLE>
Supplemental disclosure of noncash investing and financing activities (see
notes 3, 4, 9 and 11)
See accompanying notes to consolidated financial statements.
40
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(1) Organization
JFAX.COM, 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), and 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.
The Company recognizes revenue for activation fees when the customer's
account is activated at which time related direct selling costs are incurred,
which offset the activation fee.
(c) Research and Development
Research and development costs are expensed as incurred. Costs for software
development incurred subsequent to establishing technological feasibility, in
the form of a working model, are capitalized and amortized over their
estimated useful lives. To date, software development costs incurred after
technological feasibility has been established have not been material.
(d) Prepaid Advertising Costs
Prepaid advertising costs are recorded for amounts paid to online service
providers. The Company expenses advertising cost as advertising is placed on
the providers' respective sites.
(e) Cash Equivalents
The Company considers all highly liquid temporary cash investments with
original maturities of three months or less to be cash equivalents.
(f) Marketable Securities
Short term investments include highly liquid investments with original
maturities in excess of three months but less than one year. The Company's
noncurrent investments consist of investments with original maturities in
excess of one year to 18 months. All marketable securities except an equity
investment are classified as held to maturity and, accordingly, are carried at
cost which approximates market value.
41
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
An equity investment in a foreign publicly traded company is classified as
available for sale as of December 31, 1999 and had a gross unrealized gain of
$649,046 which is classified as accumulated other comprehensive income. As of
December 31, 1999 investments are summarized as follows:
<TABLE>
<S> <C>
Debt Securities:
Government Agencies.......................................... $ 8,700,000
Commercial Paper............................................. 12,541,200
Corporate Bonds.............................................. 21,642,623
Equity Investment.............................................. 976,046
Money Market Accounts.......................................... 5,465,856
------------
Total cash and investments..................................... 49,325,725
Less: Amounts classified as Cash and Cash Equivalents.......... (12,256,487)
Less: Short term investments................................... (23,510,623)
------------
Long term investments.......................................... $ 13,558,615
============
</TABLE>
(g) Investment in Joint Venture
As of December 31, 1999, the Company has a marketing related investment of
50% in JFAX Germany LLC, that is accounted for under the equity method of
accounting. Under the equity method, the Company's share of the investee's
earnings or loss is included in consolidated operating results and the
Company's basis in its equity investment is classified in the accompanying
consolidated balance sheet. To date, this investment has not materially
impacted the Company's results of operations or its financial position.
(h) 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.
(i) 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.
(j) 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
42
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
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.
The Company accounts for option grants to non-employees using the guidance
of SFAS No. 123 and Emerging Issues Task Force (EITF) No. 96-18, whereby the
fair value of such options is determined using the Black-Scholes option
pricing model at the earlier of the date at which the non-employee's
performance is complete or a performance commitment is reached.
(k) 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.
(l) 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.
(m) 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,
1999 and 1998, the carrying value of cash and cash equivalents, short and long
term investments, accounts receivable, interest receivable, accounts payable,
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.
(n) 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.
43
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
(o) Reclassifications
Certain reclassifications have been made to the 1998 and 1997 consolidated
financial statements to conform to the 1999 presentation.
(p) 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, in 1999 the Company had one element of other
comprehensive income, an unrealized gain on an available for sale investment
aggregating $649,046. Prior to 1999, the Company had no elements of other
comprehensive income or loss.
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 for the years ended December 31, 1999 and 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.
44
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
(3) Furniture, Fixtures and Equipment
Furniture, fixtures and equipment, stated at cost, at December 31, 1999 and
1998 consists of the following:
<TABLE>
<CAPTION>
1999 1998
----------- ---------
<S> <C> <C>
Computer and related equipment....................... $ 4,381,673 2,232,397
Furniture and equipment.............................. 47,779 39,729
Capital leases--computer and related equipment....... 529,926 279,859
Leasehold improvements............................... 235,118 116,661
----------- ---------
5,194,496 2,668,646
Less accumulated depreciation and amortization....... (1,850,421) (891,000)
----------- ---------
$ 3,344,075 1,777,646
=========== =========
</TABLE>
Included in accumulated amortization at December 31, 1999 and 1998 is
$209,865 and $58,791, respectively, related to capital leases.
(4) Redeemable Securities and Stockholders' Equity (Deficiency)
(a) Private Placement Offering
In June 1998, the Company completed a private placement offering of Senior
Subordinated Notes (Notes), Common Stock (Common Shares), and Series A Usable
Redeemable Preferred Stock (Preferred Shares) with 3,125,000 detachable
warrants (Warrants) for proceeds aggregating $15,000,000 before offering
expenses. The private placement offering consisted of the following
components:
Notes and Common Shares
$10,000,000 principal amount of Notes (see note 9) together with 2,101,971
Common Shares were issued for combined proceeds of $10,000,000.
The Notes bore interest at 10% per annum of the principal amount and were
due on June 30, 2004. As allowed under the terms of the note, the Company
issued additional interest notes together with a proportionate number of
additional Shares in lieu of interest payments for the period July through
December 1998. As of December 31, 1998, the Company had issued interest notes
aggregating $512,500, and as of December 31, 1999 and 1998, had issued 105,727
shares at a value of $251,999.
The Notes and Shares were recorded at their fair values at the date of
issuance of $4,955,269 and $5,044,731, respectively. The discount attributable
to the Notes was being amortized to interest expense until redemption
occurred, over the term of the Notes using the interest method.
The Common Shares issued in this transaction including shares issued in
connection with interest notes are subject to certain put rights by the
holders at $3.20 per share upon a change of control on or before July 1, 2003.
An additional fair market value put feature was eliminated upon the company's
IPO in July 1999. Accordingly, the Common Shares issued in the transaction are
shown as redeemable securities in the accompanying 1999 and 1998 consolidated
balance sheets. The Company records to the redemption amount through a charge
to additional paid-in capital.
On July, 30, 1999 the company redeemed all of the notes. Such redemption
aggregated $10,591,000 which included the $10,000,000 principal amount,
$511,000 in additional interest notes, and $85,000 in accrued interest. In
connection with this redemption, the company recognized an extraordinary item
loss of $4,428,000.
45
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
Preferred Shares and Warrants
The Company issued $5,000,000 in stated value of Preferred Shares
consisting of 5,000 shares together with 3,125,000 Warrants to acquire a like
number of shares of the Company's common stock, for an exercise price of $2.40
per share, for a combined purchase price of $5,000,000.
The Preferred Shares were entitled to cumulative dividends at 15% per annum
based on the stated value and accrued and unpaid dividends. Until and
including the dividend payment date falling on June 30, 2005, the Company had
the option of accruing dividends or paying in cash.
From date of issuance through August 1999 the company accreted to the
mandatory redemption amount through a charge to additional paid-in capital
using the straight line method.
In August 1999, the company redeemed all of the outstanding preferred
shares. Such amount aggregated $6,818,000 and included premiums of $878,000
(115% of stated value plus cumulative unpaid dividends) and accrued dividends
of $940,000.
The Warrants and/or warrant shares (if converted to common stock) were
subject to certain put rights by the holders, upon a change of control. The
warrants were exercisable by the holders at $2.40 per share at any time until
June 30, 2005 and may be "put" to the Company upon a change in control. Until
December 31, 1998 these warrants could also have been "put" to the Company at
fair market value in the event the Company had not completed a public offering
of its stock by July 2003.
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 as of
December 31, 1998 were reflected outside of stockholders' equity as a
reduction of the proceeds received from the issuance of Preferred Shares in
the accompanying consolidated balance sheets. The increase in fair value of
these put rights above the initially determined amount of $.36 per warrant was
expensed by the Company in its Statements of Operations for the year ended
ended December 31, 1998 and aggregated $5,255,669.
Effective January 1, 1999, holders of a majority of the put warrants
included in the accompanying December 31, 1998 consolidated balance sheet
agreed to eliminate the fair market value put feature of these warrants for
nominal consideration. As a result of the elimination of the put feature, the
Company reclassified the put warrant liability of $6,318,000 to additional
paid in capital in 1999.
In connection with the placement of Notes, Warrants and Preferred and
Common Shares, an additional 268,750 warrants were issued to the placement
agent. Such warrants carry the same exercise price and put features as those
issued in connection with the preferred shares.
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>
46
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
Capitalized offering fees and expenses allocated to the Notes and Warrants
are being amortized to interest expense; offering costs attributable to Common
Shares and Preferred Shares were recorded as a reduction of the proceeds
received at the date of issuance.
In addition, warrants to purchase 29,166 common shares at $2.40 per share
were issued in connection with issuance of long-term notes to a financial
institution and warrants to purchase 250,000 common shares at $2.40 per share
were issued to America Online (see note 6).
(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, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Loan receivable secured by 2,925,000 shares of the
Company's common stock held by the stockholder; interest
accrues at 6.32% and is payable monthly, due in March
2004. This amount will be repaid in services rendered by
the stockholder ratably over five years................. $2,030,619 2,250,000
Loan receivable secured by 220,000 shares of the
Company's common stock held by the stockholder; interest
accrues at 6.32% with all principal and accrued interest
due in March 2001....................................... 100,000 100,000
Loan receivable secured by 150,000 shares of the
Company's common stock held by the stockholder; interest
accrues at 8.00% and is payable monthly, due in
September 1999. This note is expected to be repaid in
the second quarter of fiscal 2000 ...................... $ 50,000 50,000
Loan receivable secured by 41,250 shares of the Company's
common stock held by the stockholder; interest accrues
at 4.25% and is payable monthly, due in October 2001.... $ 99,000 99,000
---------- ---------
$2,279,619 2,499,000
========== =========
</TABLE>
(5) Amounts Due to Related Parties, Principally Stockholders
As of December 31, 1999 and 1998, there were $95,151 and $128,578,
respectively of amounts due from related parties. Such amounts represent
salary advances.
As of December 31, 1999, the Company is involved in a consulting
arrangement with a related party, pursuant to which the Company pays $275,000
per year, for services provided by the related party. For 1998, this
consulting arrangement paid $200,000 per year.
During 1999, 1998, and 1997, Orchard Capital, Orchard Telecom and CIM (all
related parties) incurred approximately $320,000, $336,000, and $312,000,
respectively, in expenses (consisting of rent, telecommunications expenses,
routine office expenses and shared personnel expenses) on the Company's behalf
which were repaid in full. During 1998, the Company also reimbursed the
related party for expenses incurred on the Company's behalf of approximately
$19,000 per month relating to a subleasing arrangement with CIM Group, LLC for
office space to house our headquarters in Los Angeles, California.
47
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
During 1999 and 1998, the Company incurred approximately $210,000 and
$117,000 in expenses (consisting of telecommunications, shared personnel and
routine office expenses) on behalf of the same related parties and MAI Systems
Corporation, also a related party. As of December 31, 1999 and 1998 amounts
due from these related parties were approximately $80,000 and $117,000,
respectively. During 1997, the Company did not incur any expenses on behalf of
these entities.
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.
In connection with the private placement offering in June 1998, certain
related parties were directly associated with the investor groups that
provided the funding to the Company.
(6) Agreements with OnLine Service Providers
(a) America Online
In October 1997, the Company entered into an interactive marketing
relationship with AOL. In connection with this agreement, the Company issued
warrants to purchase 250,000 common shares at $2.40 per share. The fair value
of the warrants as of the date of issuance was de minimis. Under the
agreement, the Company pays amounts to AOL based on advertising placed on the
AOL site. During 1999 and 1998, the Company incurred $80,000 and $1,250,000,
respectively, in advertising expense for advertising activity placed on the
site. Such amount is included in sales and marketing expense in the
accompanying consolidated statement of operations.
As of December 31, 1999 and 1998, the Company had $920,000 and $1,000,000
respectively, in prepaid advertising costs included in the accompanying
consolidated balance sheets. The current agreement stipulates that AOL will
provide the Company with $920,000 in value of impressions on the AOL site
which were previously prepaid by the Company. During 1999, the company
expected to fully amortize the remaining $1,000,000 balance as of December 31,
1998, however, due to delays by AOL in completing certain functionality
adjustments required for a proper integration in AOL's browser, only $80,000
of the $1,000,000 was consumed in fiscal 1999. Under an amendment to the
agreement with AOL in January 2000, the required functionality changes are
expected to be completed during the second quarter of fiscal 2000. Based on
the AOL timetable, the company expects to amortize the remaining $920,000
during quarters two and three of fiscal 2000.
The prepaid expense is allocated evenly between impressions on AOL's Email,
Netmail and various service banners throughout the site. As the impressions
are utilized, the Company expenses the associated value of these impressions
in the period incurred at a predetermined value per impression.
(b) CompuServe and Yahoo
The Company is the exclusive unified messaging provider for CompuServe and
Yahoo Mail under an interactive marketing agreement and an advertising and
promotion agreement, respectively. These 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.
Specific terms of the CompuServe agreement are as follows:
From June 1997 through June 1998, the Company's agreement with
CompuServe provided for the payment of a per-sign-up commission or bounty
to CompuServe for each subscriber who was directed to the JFAX.COM website
via the CompuServe web site. This agreement was modified in June 1998. The
modified agreement required fixed, guaranteed quarterly payments and
further provided for commission payments, based on customer revenues, to
the extent such revenues exceeded the amount targeted.
48
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
Effective February 1, 1999, the agreement was again modified. The
current agreement calls for fixed, guaranteed quarterly payments through
January 31, 2000, as well as a per-sign-up commission or bounty for each
subscriber in excess of a targeted number of sign-ups. CompuServe agrees to
produce a certain number of subscribers each quarter and cumulatively over
the course of the contract. In the event that results are below target,
CompuServe will provide additional advertising to compensate for the
shortfall.
Specific terms of the Yahoo agreement are as follows:
The Company's original agreement with Yahoo was in effect from June 1,
1998 through December 1, 1998. The original agreement required fixed,
guaranteed monthly payments, together with commission payments, based on
customer revenues, to the extent such revenues exceeded targeted revenues.
The agreement was amended effective December 1, 1998 and provided for
fixed, guaranteed monthly payments through May 31, 1999 (later extended
through June 30, 1999), as well as a per-sign-up bounty for each subscriber
(in excess of a targeted number of sign-ups) who signed up in response to
e-mail solicitations, as well as a commission payment based on the customer
revenue received from all other subscribers.
On July 1, 1999, the Company entered into a new advertising and
promotion agreement with Yahoo. The new agreement calls for fixed,
guaranteed quarterly payments. The agreement does not require any
commission payments based on customer sign-ups. The agreement expires on
December 31, 2000.
The fixed guaranteed periodic payments are expensed as advertising
services are provided and are reflected in sales and marketing expense.
Additional sign-up bounty fees and commissions are expensed at the time of
customer subscription and recording of customer revenue.
Amounts expensed under agreements with all on line service providers are
included in sales and marketing expense. For the years ended December 31,
1999, 1998, and 1997, total amounts expensed were $2,220,320, $2,959,313,
and $7,888 respectively. Future annual fixed payments associated with all
arrangements with on line service providers for future services aggregate
$3,156,278 and $658,375 for the years 2000 and 2001, respectively.
(c) Infobeat
In July 1999 the company entered into a two year marketing agreement with
Infobeat LLC ("Infobeat") a wholly owned subsidiary of Sony Music
Entertainment Inc. ("Sony"). The agreement provides for Infobeat to
incorporate a certain number of JFAX ad impressions, as defined, in the
Infobeat e-mail service over the term of the contract and to guarantee a
certain number of customer sign-ups. In consideration for the services
provided by Infobeat, the company made a one year advance payment of $997,500.
Subject to termination rights by both parties, the agreement stipulates
additional fixed quarterly payments in year two. Concurrent with the company's
payment to Infobeat, the agreement provided for Sony to purchase an equal
amount of the company's common stock at the July 23, 1999 IPO date. Such
shares are subject to certain lockout provisions during the first twelve
months of the agreement.
Additionally, both Infobeat and the Company have termination options at
various dates during the contract. One of the early buyout provisions allows
Infobeat to buy out its customer sign-up guarantees by returning to the
Company, JFAX.com shares owned by Sony valued at the IPO price. As a result of
such a put feature associated with the shares, the Company classified the
$997,500 of common stock held by Sony outside of stockholders equity in the
accompanying December 31, 1999 balance sheet.
49
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
(7) Income Taxes
The income tax provision for all years presented is comprised of minimum
state tax expense.
Deferred tax assets and liabilities result from differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. The significant components of deferred income taxes are as
follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
------------ -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................ $ 13,846,020 $ 6,863,361
Accrued expenses................................ $ 70,194 127,350
------------ -----------
$ 13,916,214 6,990,711
Less valuation allowance........................ (13,916,214) (6,990,711)
------------ -----------
Net deferred 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 1999, 1998 and 1997 was $6,925,503, $4,830,814 and $1,867,070,
respectively.
As of December 31, 1999, the Company has Federal and state net operating
losses (NOL) carryforwards of approximately $34,615,000. These NOL
carryforwards will expire through year 2020 for Federal NOLs and 2004 for
state NOLs.
The Tax Reform Act of 1986 imposed substantial restrictions on the
utilization of net operating losses in the event of an "ownership change" of a
corporation. Accordingly, the Company's ability to utilize net operating
losses may be limited as a result of such an "ownership change," as defined in
the Internal Revenue Code.
Income tax expense differs from the amount computed by applying the Federal
corporate income tax rate of 34% to loss before income taxes as follows (in
percentages):
<TABLE>
<CAPTION>
Year ended
December 31,
---------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Statutory tax rate........ (34.0)% (34.0)% (34.0)%
Change in valuation
allowance................ 39.7 41.0 40.0
State income taxes, net... (6.0) (5.9) (5.7)
Other..................... .3 (.1) (.2)
----- ----- -----
Effective tax rate...... 0.0% 0.1% 0.1%
===== ===== =====
</TABLE>
50
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
(8) Stock Option Plan
In November 1997, the Board of Directors adopted the JFAX Communications,
Inc. 1997 Stock Option Plan (the 1997 Plan). Under the 1997 Plan, 4,375,000
authorized shares of common stock are reserved for issuance of options. An
additional 840,000 shares were authorized for issuance of options outside the
1997 Plan. In January, 1997 840,000 options were issued to Michael P.
Schulhof, then a consultant and currently a director, for services to be
provided to the Company under a consulting contract. 420,000 of these options
were immediately exercisable at an exercise price of $0.70; the remaining
420,000 options vested over a two year period from the date of grant at an
exercise price of $1.80. The Company recorded $120,000 in compensation expense
during 1997 relating to these options as services were provided under the
consulting contract. These options are treated by the Company as warrants.
Options under the 1997 Plan may be granted at exercise prices determined by
the Board of Directors, provided that the exercise prices shall not be less
than the fair market value of the Company's common stock on the date of grant
for incentive stock options and not less than 85% of the fair market value of
the Company's common stock on the date of grant for nonstatutory stock
options. At December 31, 1999 and 1998, 690,417 and 340,690 options were
exercisable under the 1997 Plan, at a weighted average exercise price of
$1.39. At December 31, 1999 and 1998, 840,000 options were exercisable outside
of the 1997 Plan at a weighted average exercise price of $1.26. Stock options
generally expire after 10 years and vest over a three-year period. In
connection with the grant of 762,000 and 846,875 options during 1999 and 1998,
the Company recorded $1,323,476 and $573,750, respectively, of deferred
compensation cost as these options were granted at exercise prices below the
respective market values at the dates of grant. The deferred compensation cost
is amortized to expense over the three year vesting period of such options
using the straight line method.
At December 31, 1999, there were 878,422 additional shares available for
grant under the 1997 Plan and no additional shares available for grant outside
of the 1997 Plan. The per share weighted-average fair value of stock options
granted during 1999, 1997, and 1998 was $2.98, $0.22, and $1.11, respectively,
on the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions: risk-free interest rate of 5.5%, 4.6%,
and 6.5% for 1999, 1998 and 1997, respectively, volatility rate of 50% for
1999, and an expected life of 5 years.
The Company applies APB Opinion No. 25 in accounting for its stock option
plan and, accordingly, no compensation cost using the intrinsic value method
has been recognized for its stock option grants to employees and members of
the Board of Directors in their Board capacities 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 1999, 1998
and 1997 would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Net loss attributable to common
stockholders
As reported.......................... $19,010,974 $17,727,556 $4,783,421
Pro forma............................ 20,686,600 17,896,556 4,868,421
Basic loss per common share............
As reported.......................... 0.68 0.80 0.30
Pro forma............................ 0.74 0.81 0.30
Diluted loss per common share..........
As reported.......................... 0.68 0.80 0.30
Pro forma............................ 0.74 0.81 0.30
=========== =========== ==========
</TABLE>
51
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
Weighted-
average
Number of exercise
shares price
--------- ---------
<S> <C> <C>
Options outstanding at December 31, 1996................ -- --
Granted............................................... 2,291,250 0.82
Exercised............................................. (370,000) 0.01
---------
Options outstanding at December 31, 1997................ 1,921,250 0.99
Granted............................................... 890,625 2.34
Exercised............................................. (123,746) 0.31
Canceled.............................................. (277,228) 0.80
---------
Options outstanding at December 31, 1998................ 2,410,901 1.53
--------- ----
Granted............................................... 1,516,500 6.14
Exercised............................................. (42,208) .96
Cancelled............................................. (99,943) 2.60
--------- ----
Options outstanding at December 31, 1999................ 3,785,250 3.37
========= ====
</TABLE>
At December 31, 1999, the exercise prices of options ranged from $.70 to
$8.00 with a weighted-average remaining contractual life of 8.5 years.
<TABLE>
<CAPTION>
Options outstanding Options exercisable
---------------------------------- ---------------------
Weighted
Number average Weighted- Number Weighted
outstanding remaining average exercisable average
December 31, contractual exercise December 31, exercise
Range of exercise prices 1999 life price 1999 price
- ------------------------ ------------ ----------- --------- ------------ --------
<S> <C> <C> <C> <C> <C>
$ 0.70-.80.............. 1,062,500 7.2 $0.76 848,333 $0.75
$1.60-2.40.............. 1,206,250 8.1 $2.16 682,084 $2.01
$4.28................... 754,500 10.0 $4.28 -- $ --
$8.00................... 762,000 9.6 $8.00 -- $ --
--------- ---- ----- --------- -----
3,785,250 8.5 $3.37 1,530,417 $1.32
========= ==== ===== ========= =====
</TABLE>
At December 31, 1999, 1998, 1997, 1,530,417, 1,180,690, and 434,705,
options, respectively, were exercisable.
52
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
(9) Long Term Debt
Long term debt consists of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Loan payable secured by certain computer equipment
bearing interest at 15%. Monthly principal and
interest payments of $26,086 from April 21, 1998 to
April 2001......................................... $ 421,247 716,155
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................................. 130,114 192,580
Loan payable secured by certain computer equipment
bearing interest at rates ranging from 17.17% to
17.74%. Monthly principal and interest payments
range from $2,867 to $31,077 from June 30, 1999 to
December 28, 2000.................................. 676,974 --
Unsecured Loan bearing interest at 5.92%. Monthly
principal and interest payments are $65,746 through
January 22, 2002................................... 1,548,672 --
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 at
December 31, 1998. The Company also satisfied
accrued interest of $499,664 as of July 1,1998
through the issuance of additional notes payable;
repaid in 1999..................................... -- 5,545,671
---------- ---------
2,777,007 6,454,406
Less current installments of long term debt.........
(1,239,650) (317,402)
---------- ---------
Long term debt, excluding current installments...... $1,537,357 6,137,004
========== =========
</TABLE>
<TABLE>
<S> <C> <C>
At December 31, 1999, annual maturities of long-term debt are as
follows:
</TABLE>
<TABLE>
<S> <C>
2000............................................................... $1,239,650
2001............................................................... 1,222,783
2002............................................................... 314,574
----------
$2,777,007
==========
</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.
53
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
(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 2010. The
Company sub-leases its corporate facilities to a related party. The sub-lease
expires 2010 and requires monthly payments of $12,682 plus a pro rata share of
common expenses.
Future minimum lease payments at December 31, 1999, 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
-------- ---------
<S> <C> <C>
Fiscal year:
2000................................................... $206,552 440,222
2001................................................... 138,216 433,159
2002................................................... 66,461 433,159
2003................................................... -- 513,974
2004................................................... -- 513,974
Thereafter............................................. -- 2,610,280
-------- ---------
Total minimum lease payments......................... 411,229 4,944,768
=========
Amounts representing interest............................ (49,378)
--------
Present value of net minimum lease payments............ 361,851
Less current maturities.................................. 176,089
--------
Long-term maturities................................... $185,762
========
</TABLE>
Rental expense for the years ended December 31, 1999, 1998, and 1997 was
$295,431, $346,515, and $224,289, respectively.
54
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
(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
-------------------------------------
1999 1998 1997
------------ ----------- ----------
<S> <C> <C> <C>
Numerator--numerator for basic and
diluted loss per common share:
Net loss........................... $(17,439,103) (17,233,033) (4,783,421)
Premium on Preferred Stock
Redemption........................ (877,721) -- --
Dividends on Preferred Stock....... (553,064) (386,915) --
Accretion to Preferred Stock
redemption........................ (141,086) (107,608) --
------------ ----------- ----------
Numerator for basic and diluted loss
per common share ................... $(19,010,974) (17,727,556) (4,783,421)
============ =========== ==========
Denominator:
Denominator for basic loss per common
share--weighted average number of
common shares outstanding during the
period ............................. 28,098,994 22,181,960 15,738,334
------------ ----------- ----------
Denominator for diluted loss per
common share........................ 28,098,994 22,181,960 15,738,334
============ =========== ==========
Basic loss per common share.......... $ (.68) (0.80) (0.30)
Diluted loss per common share........ $ (.68) (0.80) (0.30)
============ =========== ==========
</TABLE>
The computation of diluted loss per share for the year ended December 31,
1999 excludes the effects of incremental common shares attributable to the
assumed exercise of 7,458,166 outstanding common stock options and warrants
because their effect would be antidilutive (see notes 4 and 8). Redeemable
common shares outstanding have been included in the computation of both basic
and diluted loss per share.
(13) Litigation
On October 28, 1999, AudioFAX IP LLC filed a lawsuit against the Company in
the United States District Court for the Northern District of Georgia
asserting the ownership of certain United States and Canadian patents and
claiming that the Company is infringing these patents as a result of the
Company's sale of enhanced facsimile products. The suit requests unspecified
damages, treble damages due to willful infringement, and preliminary and
permanent injunctive relief. The Company filed an answer to the complaint on
December 2, 1999. The Company has reviewed the AudioFAX patents with our
business and technical personnel and outside patent counsel and has concluded
that it does not infringe these patents. As a result, the Company is confident
of its position in this matter and is vigorously defending the suit. However,
the outcome of complex litigation is uncertain and cannot be predicted with
certainty at this time. Any unanticipated adverse result could have a material
adverse effect on the Company's liquidity, financial condition, and results of
operations.
55
<PAGE>
JFAX.COM, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
(14) Subsequent Events
SureTalk.Com, Inc.
On January 26, 2000, the company acquired all of the outstanding stock of
SureTalk.Com, Inc. for $9.3 million in common stock. SureTalk.Com, Inc. was a
closely held Internet-based faxing, messaging and communications company based
in Carlsbad, California. The acquisition will be accounted for as a purchase
transaction with substantially all of the purchase price allocated to goodwill
and other purchased intangibles which will be amortized over 2 to 3 years.
TimeShift, Inc. (Unaudited)
On March 6, 2000 the Company acquired substantially all of the assets of
TimeShift, Inc. for common stock. TimeShift is a closely held internet
technology company based in San Francisco, California.
56
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item with respect to Directors may be found in
the section captioned "Proposal 1 -- Election of Directors" appearing in the
definitive Proxy Statement to be delivered to stockholders in connection with
the Annual Meeting of Stockholders to be held in 2000. Information required by
this Item with respect to executive officers may be found in the section
captioned "Proposal 1--Election of Directors,--Executive Officers" appearing
in the definitive Proxy Statement to be delivered to stockholders in
connection with the Annual Meeting of Stockholders to be held in 2000.
Information required by this Item with respect to compliance with Section
16(a) of the Securities Exchange Act may be found in the section captioned
"Compliance with Section 16(a) of the Exchange Act" appearing in the
definitive Proxy Statement to be delivered to stockholders in connection with
the Annual Meeting of Stockholders to be held in 2000. Such information is
incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
Information required by this Item may be found in the section captioned
"Executive Compensation" appearing in the definitive Proxy Statement to be
delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held in 2000. Such information is incorporated herein by
reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT)
Information with respect to this Item may be found in the section captioned
"Security Ownership of Management" appearing in the definitive Proxy Statement
to be delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held in 2000. Such information is incorporated herein by
reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this Item may be found in the section captioned
"Executive Compensation--Employment Contracts and Change of Control
Arrangements; --Certain Transactions with Management" appearing in the
definitive Proxy Statement to be delivered to stockholders in connection with
the Annual Meeting of Stockholders to be held in 2000. Such information is
incorporated herein by reference.
57
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
The following financial statements are filed as a part of this report:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity (Deficiency)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
All other schedules are omitted because they are not required or the
required information is shown in the financial statements or notes thereto.
3. Exhibits
The following exhibits are filed herewith or are incorporated by reference
to exhibits previously filed with the Commission. The Company shall furnish
copies of exhibits for a reasonable fee (covering the expense of furnishing
copies) upon request.
<TABLE>
<CAPTION>
Exhibit
No. Exhibit Title
------- -------------
<C> <S>
2.1 Stock Purchase Agreement, dated as of January 15, 2000, among
JFAX.COM, Inc., the stockholders of SureTalk.Com, Inc. listed therein,
and SureTalk.Com, Inc. Such agreement contains a listing of schedules
or similar attachments. Pursuant to the applicable instruction, such
schedules or attachments are not filed herewith. However, the
Registrant agrees to furnish supplementally to the Commission upon
request a copy of any omitted schedule or attachment.****
3.1 Certificate of Incorporation, as amended and restated.*
3.1.1 Certificate Of Designation Of Series B Convertible Preferred Stock of
JFAX.COM, Inc.
3.2 By-laws, as amended and restated.*
4.1 Specimen of common stock certificate.***
9.1 Securityholders' Agreement, dated as of June 30, 1998, with the
investors in the June and July 1998 private placements.*
10.1 JFAX.COM Incentive Compensation Bonus Plan.*
10.2 JFAX Communications, Inc. (JFAX.COM) 1997 Stock Option Plan.
10.3 Employment Agreement for Gary H. Hickox, dated September 2, 1998.*
10.3.1 Promissory Note issued by Gary H. Hickox to JFAX Communications, Inc.
on October 7, 1998, due October 7, 2001.**
10.4 Employment Agreement for Dr. Anand Narasimhan, dated March 17, 1997.*
10.4.1 Amended and Restated Interest Only Note issued by Anand Narasimhan to
JFAX Communications, Inc. on September 17, 1997, due September 17,
1998.**
10.5 Employment Agreement for Nehemia Zucker, dated March 21, 1997.*
10.5.1 Promissory Note issued by Nehemia Zucker to JFAX Communications, Inc.
on April 11, 1997, due March 31, 2001.**
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Exhibit Title
------- -------------
<C> <S>
10.6 Consulting Agreement for Boardrush Media LLC, dated as of March 17,
1997.*
10.7 Put Rights, for the benefit of the investors in the June and July 1998
private placements.*
10.8 Registration Rights Agreement, dated as of June 30, 1998, with the
investors in the June and July 1998 private placements.*
10.9 Registration Rights Agreement, dated as of March 17, 1997, with
Orchard/JFAX Investors, LLC, Boardrush LLC (Boardrush Media LLC), Jaye
Muller, John F. Rieley, Nehemia Zucker and Anand Narasimhan.*
10.9.1 Letter, dated as of June 30, 1998, to Boardrush LLC, Jens Muller, John
F. Rieley, Anand Narasimhan, and Nehemia Zucker from Richard S. Ressler
regarding the Registration Rights Agreement, dated as of March 17,
1997, among JFAX Communications, Inc., Boardrush LLC, Jens Muller, John
F. Rieley, Anand Narasimhan, and Nehemia Zucker.**
10.10 Stock Option Agreement, dated as of January 24, 1997, by and among JFAX
Communications, Inc. and Michael P. Schulhof.**
10.11 Letter, dated as of June 30, 1998, to Michael P. Schulhof from Richard
S. Ressler regarding the Stock Option Agreement, dated as of January
24, 1997, between JFAX Communications, Inc. and Michael P. Schulhof.**
10.12 Purchase Agreement, dated as of July 2, 1998, relating to $5 million of
preferred stock and warrants.**
10.13 Consent to Amendment of Purchase Agreement, dated as of April 16,
1999.**
10.14 Form of warrant pursuant to such Purchase Agreement.**
10.15 Master Loan and Security Agreement, dated as of March 10, 1998, by JFAX
Communications, Inc. in favor of Transamerica Business Credit
Corporation.**
10.16 Promissory Note issued by JFAX Communications, Inc. to Transamerica
Business Credit Corporation on April 21, 1998 due May 1, 2001.**
10.17 Promissory Note issued by JFAX Communications, Inc. to Transamerica
Business Credit Corporation on December 22, 1998 due January 1, 2002.**
10.18 Investment Agreement among JFAX Communications, Inc., Jens Muller, John
F.
Rieley and Boardrush LLC and Orchard/JFAX Investors, LLC and Richard S.
Ressler, dated as of March 14, 1997 and effective as of March 17,
1997.**
10.19 Promissory Note issued by Boardrush LLC to JFAX Communications, Inc.
dated March 17, 1997 due March 17, 2004.**
10.20 Employment Agreement, dated as of January 26, 2000, between JFAX.COM,
Inc. and Steven J. Hamerslag
10.21 Employment Agreement, dated February 17, 2000, between JFAX.COM, Inc.
and R. Scott Turicchi
10.22 Escrow Agreement, dated as of January 26, 2000, among City National
Bank, JFAX.COM, Inc. and Steven J. Hamerslag
10.23 Promissory Note, dated January 26, 2000, from Steven J. Hamerslag in
favor of JFAX.COM, Inc.
21.1 List of subsidiaries of the Company.
23.1 Consent of KPMG LLP.
27.1 Financial Data Schedule.
</TABLE>
- --------
* Incorporated by reference to the Company's Registration Statement on
Form S-1 filed with the Commission on April 16, 1999, Registration No.
333-76477.
** Incorporated by reference to the Company's Amendment No. 1 to
Registration Statement on Form S-1 filed with the Commission on May 26,
1999, Registration No. 333-76477.
*** Incorporated by reference to the Company's Amendment No. 2 to
Registration Statement on Form S-1 filed with the Commission on June 14,
1999, Registration No. 333-76477.
**** Incorporated by reference to the Company's Report on Form 8-K filed with
the Commission on February 10, 2000.
(b) Reports on Form 8-K during the fourth quarter of 1999: NONE
59
<PAGE>
SIGNATURE
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 March 27, 2000:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Steven J. Hamerslag President and Chief
____________________________________ Executive Officer
Steven J. Hamerslag (Principal Executive
Officer)
/s/ Richard S. Ressler Co-Chairman of the Board
____________________________________
Richard S. Ressler
/s/ Nehemia Zucker Chief Financial and
____________________________________ Accounting Officer
Nehemia Zucker (Principal Financial and
Accounting Officer)
/s/ Jaye Muller Co-Chairman of the Board
____________________________________
Jaye Muller
/s/ Zohar Loshitzer Director
____________________________________
Zohar Loshitzer
/s/ John F. Rieley Director
____________________________________
John F. Rieley
/s/ Michael P. Schulhof Director
____________________________________
Michael P. Schulhof
/s/ R. Scott Turicchi Director
____________________________________
R. Scott Turicchi
Director
____________________________________
Robert J. Cresci
</TABLE>
60
<PAGE>
EXHIBIT 3.1.1
CERTIFICATE OF DESIGNATION
OF
SERIES B CONVERTIBLE PREFERRED STOCK
OF
JFAX.COM, INC.
JFAX.COM, Inc., a Delaware corporation (the "Corporation"), certifies that
pursuant to the authority contained in Article Fourth of its Amended and
Restated Certificate of Incorporation (the "Certificate of Incorporation") and
in accordance with the provisions of Section 151 of the General Corporation Law
of the State of Delaware, the Board of Directors of the Corporation (the "Board
of Directors") by unanimous written consent dated January __, 2000, adopted the
following resolution, which resolution remains in full force and effect on the
date hereof:
RESOLVED, that there is hereby established a series of the Corporation's
authorized preferred stock, par value $.01 per share, which shall have the
following designation and voting powers, preferences and relative,
participating, optiona1 and other special rights, and qualifications,
limitations and restrictions thereof, as follows:
(1) Designation and Amount. The designation of the series of
----------------------
preferred stock shall be "Series B Convertible Preferred Stock," par value $.01
per share (the "Series B Preferred Stock"). The number of shares of Series B
Preferred Stock shall be limited to 205 shares. The Series B Preferred Stock
shall have a stated value of $1.00 per share (the "Stated Value").
(2) Dividends, Etc. (a) Participating Dividends. The holders of the
-------------- -----------------------
Series B Preferred Stock shall be entitled to receive, when and if declared by
the Board of Directors out of funds legally available therefor, non-cumulative
participating dividends in an amount, for each share of the Series B Preferred
Stock, equal to the product of (x) the amount of any dividend or distribution
payable on one share of the common stock of the Corporation (the "Common
Stock"), and (y) the then applicable Conversion Rate (as defined herein)
expressed as a number of shares of the Common Stock, and no more. The foregoing
shall apply to any dividend or distribution on the Common Stock which is payable
in cash, stock or other property, except that the foregoing shall not apply to
any dividend or distribution which results in an adjustment of the Conversion
Rate pursuant to paragraph 5(c) below.
(b) Limitation on Dividends on Common Stock. For so long as any
---------------------------------------
Series B Preferred Stock remains outstanding, the Corporation shall not declare
or pay any dividend or make any distribution on the Common Stock, if such
dividend or distribution would give rise to an entitlement to a participating
dividend on the Series B Preferred Stock, unless the Board of Directors shall
declare and the Corporation shall pay the dividend on the Series B Preferred
Stock called for by paragraph (a) above.
(3) Ranking. To the extent provided herein, the Series B Preferred
-------
Stock is granted a preference and priority in the payment of dividends and in
the distribution of assets on any liquidation,
<PAGE>
dissolution or winding up of the Corporation, over the Common Stock, but the
Series B Preferred Stock is not given any such preference or priority over any
other series of the preferred stock of the Corporation, and is not given any
preference or priority over any other stock of the Corporation of any other
class or series. The Series B Preferred Stock will be junior in priority of
payment of dividends and in the distribution of assets on any liquidation,
dissolution or winding up of the Corporation, with respect to any other series
of the preferred stock of the Corporation, unless it is otherwise expressly
provided in the certificate of designation creating such series.
(4) Liquidation Preference Upon Liquidation, Dissolution or Winding
---------------------------------------------------------------
Up. In the event of any liquidation, dissolution or winding up of the
Corporation (any and all such events, a "liquidation"), whether voluntary or
involuntary, the holders of shares of Series B Preferred Stock then outstanding
shall be entitled, after payment of all liabilities and all liquidation
preference amounts on other capital stock of the Corporation ranking prior to
the Series B Preferred Stock, but before any distribution or payment is made
upon the Common Stock, to be paid for each share of Series B Preferred Stock an
amount equal to the greater of (1) the Stated Value of such share of the Series
B Preferred Stock and accrued but unpaid dividends thereon and (2) an amount
equal to the product of (x) the amount of the liquidating distribution
available to be paid on one share of the Common Stock and (y) the then
applicable Conversion Rate, expressed as the number of shares of the Common
Stock; provided, however, such amount shall not be in excess of the amount
-------- -------
actually paid to the Corporation for such share of the Series B Preferred Stock.
Except as provided in this paragraph, the holders of Series B Preferred Stock
shall not be entitled to any other distribution in respect of shares of Series B
Preferred Stock in the event of liquidation of the Corporation.
(5) Conversion Rights. Each holder of shares of Series B Preferred
-----------------
Stock shall have the right, at such holder's option, to convert such shares into
shares of Common Stock at any time prior to the Expiration Date subject to the
following terms and conditions:
(a) Shares Fully Paid. Each share of the Series B Preferred
-----------------
Stock shall be convertible only after such share is fully paid and released from
escrow as referred to in paragraph (7) below.
(b) Expiration Date. The conversion right applicable to the
---------------
Series B Preferred Stock shall expire, unless previously exercised by the
holder, on January 31, 2006 (the "Expiration Date").
(c) Conversion Rate. Each share of Series B Preferred Stock
---------------
shall be convertible at the principal office of the Corporation into 10,000
fully paid and non-assessable shares of Common Stock (the "Conversion Rate"). In
case the Corporation shall pay a dividend on the Common Stock payable in shares
of the Common Stock, or in case the Corporation shall effect a stock split of or
a stock combination of the Common Stock, the Conversion Rate shall be
proportionately adjusted so as to preserve the relative proportionate interest
in the capital stock of the Corporation represented by the Series B Preferred
Stock on an "as converted" basis. No other adjustments shall be made to the
Conversion Rate.
(d) Surrender of Certificates. In order to convert shares of
-------------------------
Series B Preferred Stock into Common Stock the holder must surrender at the
office of the Corporation the certificate or certificates for the shares to be
converted, duly endorsed or assigned to the Corporation or in blank, and must
give written notice to the Corporation at such office that such holder elects to
convert such shares. No payment or adjustment shall be made upon any conversion
on account of any unpaid
<PAGE>
dividends on the shares of Series B Preferred Stock surrendered for conversion
or on account of any dividends on the Common Stock issued upon conversion.
Shares of Series B Preferred Stock shall be deemed to have been converted
immediately before the close of business on the day of surrender of the
certificates for such shares for conversion in accordance with the foregoing
provisions, and the person or persons entitled to receive the Common Stock
issuable upon such conversion shall be treated for all purposes as the record
holder or holders of such Common Stock at such time. As promptly as practicable
on or after the conversion date, the Corporation shall issue and deliver at such
office a certificate or certificates for the number of full shares of Common
Stock issuable upon such conversion.
(e) Reservation of Shares. The Corporation shall at all times
---------------------
reserve and keep available, free from preemptive rights, out of its authorized
but unissued shares of Common Stock, for the purpose of issuance upon conversion
of shares of Series B Preferred Stock, the full number of shares of Common Stock
then deliverable upon conversion of all shares of Series B Preferred Stock
outstanding.
(f) Transfer Taxes on Conversion. Any tax in respect of any
----------------------------
transfer involved in the issuance and delivery of shares of Common Stock in a
name other than that in which the shares of Series B Preferred Stock so
converted were registered shall be payable by the converting holder, and no such
issuance or delivery in a name other than that in which the shares of Series B
Preferred Stock were registered shall be made unless and until the person
requesting such issuance or delivery has paid to the Corporation the amount of
any such tax or has established to the satisfaction of the Corporation that such
tax has been paid.
(6) Voting Rights. The holders of Series B Preferred Stock shall have
-------------
no voting rights except as provided in the Delaware General Corporation Law.
(7) Partly Paid Shares. It is intended that each share of the Series
------------------
B Preferred Stock shall be issued initially as a partly paid share and until
fully paid such share (x) shall not be convertible and (y) shall be subject to
the limitations of Section 156 of the Delaware General Corporation Law and other
applicable limitations. The Corporation may issue the shares of Series B
Preferred Stock upon original issuance to officers of the Corporation in the
respective amounts set forth in their respective Employment Agreements with the
Corporation. The shares of Series B Preferred Stock shall be fully paid and
become convertible only when: (A) the respective Promissory Notes, issued by
such officers to the Corporation as payment for the shares of Series B Preferred
Stock, shall have been paid at least to the extent permitting the delivery out
of escrow, as referred to in clause (C), of the shares of Series B Preferred
Stock that are being fully paid; (B) the Repurchase Right of the Corporation
with respect to the Series B Preferred Stock as provided in the respective
Employment Agreements of such officers shall have expired, at least to the
extent permitting the delivery out of escrow, as referred to in clause (C), of
the shares of Series B Preferred Stock that have been fully paid and are
becoming convertible; and (C) such shares of Series B Preferred Stock shall have
been released from Escrow pursuant to the terms of the Escrow Agreement or
Agreements for such shares, among the Corporation, such officers and the
applicable Escrow Agent. When the foregoing steps (A) through (C) have been
completed with respect to all the shares of Series B Preferred Stock, this
paragraph (7) shall cease to be applicable to the Series B Preferred Stock.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designation to be signed by its Vice President and its Secretary on
January 24, 2000.
JFAX.COM, INC.
By: /s/ Nehemia Zucker
-----------------------------
Nehemia Zucker
Vice President
ATTEST:
By: /s/ Nicholas V. Morosoff
-----------------------------
Nicholas V. Morosoff
Secretary
<PAGE>
EXHIBIT 10.2
JFAX.COM, INC.
AMENDED AND RESTATED
1997 STOCK OPTION PLAN
----------------------
ARTICLE I
PURPOSES
--------
1.1. Purpose of Plan. The purpose of the JFAX Communications, Inc.
----------------
(JFAX.COM) 1997 Stock Option Plan (the "Plan") are to advance the interests of
JFAX.COM, Inc.(the "Company") and its shareholders by providing significant
incentives to selected officers, employees, and consultants of the Company who
contribute and are expected to contribute to the success of the Company, and to
enhance the interest of such officers and employees in the Company's success and
progress by providing them with an opportunity to become shareholders of the
Company. Further, the Plan is designed to enhance the Company's ability to
attract and retain qualified employees necessary for the success and progress of
the Company.
ARTICLE II
DEFINITIONS
-----------
2.1. Definitions. Certain terms used herein shall have the meaning
------------
below stated, subject to the provisions of Section 7.1 hereof.
(a) "Board" or "Board of Directors" means the Board of
Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as
amended.
(c) "Committee" means either (i) the Board of Directors or
(ii) the Compensation Committee of the Board of Directors or such
other committee of the Board as shall be appointed by the Board to
administer the Plan pursuant to Article VII hereof.
(d) "Common Stock" means, subject to the provisions of
Section 9.3, the authorized common stock of the Company, par value
$.01 per share.
(e) "Company" means JFAX.COM, Inc.
(f) "Effective Date" means the date on which the Company's
1997 Stock Option Plan is adopted by the Board or the date the Plan is
approved by the stockholders of the Company, whichever is earlier.
(g) "Employee" means (i) any individual who is a common-law
employee of the Company or of a Subsidiary, (ii) a member of the Board
of Directors, or (iii) any consultant or other persons to the extent
permitted by the instructions to Form S-8 under the Securities Act of
1933, as amended, who performs services for the Company or a
Subsidiary. Service as a member
<PAGE>
of the Board of Directors or as a consultant shall be considered
employment for all purposes under the Plan except the third sentence
of Section 4.1.
(h) "Fair Market Value" means, in respect of a share of
Common Stock on any date, the last reported sales price regular way on
such date or, in case no such reported sale takes place on such date,
the last reported sales price regular way on the day preceding such
date on which a reported sale occurred, in either case on the New York
Stock Exchange or, if at the time the Common Stock is not listed or
admitted to trading on such Exchange, on the principal national
securities exchange on which the Common Stock is listed or admitted to
trading or, if at the time the Common Stock is not listed or admitted
to trading on any national securities exchange, in the National
Association of Securities Dealers Automated Quotations National Market
System or, if at the time the Common Stock is not listed or admitted
to trading on any national securities exchange or quoted on such
National Market System, the average of the closing bid and asked
prices in the over-the-counter market as furnished by any New York
Stock Exchange member firm selected from time to time by the Company
for that purpose or, if the Common Stock is not traded over-the-
counter, as determined by the Committee using any reasonable valuation
method.
(i) "Incentive Stock Option" means an Option to purchase
Common Stock, granted by the Company to an Employee pursuant to
Section 5.1 hereof, which meets the requirements of Section 422 of the
Code.
(j) "Nonstatutory Stock Option" means an Option to purchase
Common Stock, granted by the Company to an Employee pursuant to
Section 5.1 hereof, which does not meet the requirements of Section
422 of the Code or which provides, as of the time the Option is
granted, that it will not be treated as an Incentive Stock Option.
(k) "Option" means an Incentive Stock Option or a
Nonstatutory Stock Option.
(l) "Option Agreement" means an agreement between the Company
and an Optionee evidencing the terms of an Option Granted under the
Plan.
(m) "Optionee" means an Employee to whom an Option has been
granted under the Plan.
(n) "Plan" means the JFAX.COM, Inc. 1997 Stock Option Plan,
as set forth herein and as from time to time amended.
(o) "Subsidiary" means a subsidiary of the Company within the
meaning of Section 424(f) of the Code.
ARTICLE III
EFFECTIVE DATE OF THE PLAN; RESERVATION OF SHARES
-------------------------------------------------
3.1. Effective Date. The Plan shall become effective as of the
---------------
Effective Date.
3.2. Shares Reserved Under Plan. The aggregate number of shares of
---------------------------
Common Stock which may be issued upon the exercise of Options granted under the
Plan shall not exceed 3,500,000 of the authorized shares of Common Stock on the
Effective Date, all or any part of which may be issued pursuant to Incentive
<PAGE>
Stock Options or Nonstatutory Stock Options or any combination thereof. Shares
of Common Stock issued upon the exercise of Options granted under the Plan may
consist of either authorized but unissued shares or shares which have been
issued and which shall have been reacquired by the Company. The total number of
shares authorized under the Plan shall be subject to increase or decrease in
order to give effect to the provisions of Section 9.3 and to give effect to any
amendment adopted pursuant to Article VIII. If any Option granted under the
Plan shall expire, terminate or be cancelled for any reason without having been
exercised in full, the number of shares as to which such Option was not
exercised shall again be available for purposes of the Plan. The Company shall
at all times while the Plan is in effect reserve such number of shares of Common
Stock as will be sufficient to satisfy the requirements of the Plan.
ARTICLE IV
PARTICIPATION IN PLAN
---------------------
4.1. Eligibility. Options under the Plan may be granted to any key
------------
Employee of the Company or a Subsidiary who performs services for the Company or
a Subsidiary that the Committee deems to be of special importance to the growth
and success of the Company. The Committee shall determine those Employees to
whom Options shall be granted, the type of Option to be granted to each such
person, and, subject to Sections 3.2 hereof, the number of shares of Common
Stock subject to each such Option. Only individuals who are employed as common-
law employees by the Company or a Subsidiary shall be eligible for the grant of
Incentive Stock Options.
4.2. Participation Not Guarantee of Employment or Retention. Nothing
-------------------------------------------------------
in this Plan or in any Option Agreement shall in any manner be construed to
limit in any way the right of the Company or any Subsidiary to terminate an
Employee's employment at any time, without regard to the effect of such
termination on any rights such Employee would otherwise have under this Plan, or
give any right to an Employee to remain employed by the Company or a Subsidiary
thereof in any particular position or at any particular rate of compensation.
ARTICLE V
GRANT AND EXERCISE OF OPTIONS
-----------------------------
5.1. Grant of Options. The Committee may from time to time in its
-----------------
discretion grant Incentive Stock Options and/or Nonstatutory Stock Options to
Employees at any time after the Effective Date. All Options under the Plan shall
be granted within ten (10) years from the date the Plan is adopted by the Board
or the date the Plan is approved by the stockholders of the Company, whichever
is earlier.
5.2. Option Terms. Options granted under the Plan shall be subject
-------------
to the following requirements:
(a) Option Price. The exercise price of each Incentive Stock
Option shall not be less than the higher of the par value or 100% of
the Fair Market Value of the shares of Common Stock subject to the
Option on the date the Option is granted. The exercise price of each
Nonstatutory Stock Option shall be the amount determined by the
Committee as set forth in the applicable Option Agreement, provided
that such amount shall not be less than the higher of the par value or
85% of the Fair Market Value of the shares of Common Stock subject to
the Option on the date the Option is granted, provided further that
options may only be granted at less than 100% of the Fair Market Value
of the shares of Common Stock subject to the Option on the date of
grant if the discount is
<PAGE>
expressly in lieu of a reasonable amount of salary or cash bonus, as
determined by the Board of Directors or the Committee in its sole
discretion. The exercise price of an Option may be subject to
adjustment pursuant to Section 9.3 hereof.
(b) Term of Option. The term during which an Option is
exercisable shall be that period determined by the Committee as set
forth in the applicable Option Agreement, provided that no Option
shall have a term that exceeds a period of 10 years from the date of
its grant.
(c) Nontransferability of Option. No Option granted under
the Plan shall be transferable by the Optionee otherwise than by will
or the laws of descent and distribution, and each such Option shall be
exercisable during the Optionee's lifetime only by him. No transfer of
an Option by an Optionee by will or by the laws of descent and
distribution shall be effective to bind the Company unless the Company
shall have been furnished with written notice thereof and a copy of
the will and/or such other evidence as the Committee may determine
necessary to establish the validity of the transfer.
(d) Exercise of Option. Unless the Option Agreement
pursuant to which an Option is granted provides otherwise, each Option
shall become exercisable, on a cumulative basis, with respect to 25%
of the aggregate number of the shares of Common Stock covered thereby
on the first anniversary of the date of grant and with respect to an
additional 25% of the shares of Common Stock covered thereby on each
of the next three (3) succeeding anniversaries of the date of grant;
provided, however, the Committee may establish a different vesting
--------
schedule for any optionee or group of optionees. Any portion of an
Option which has become exercisable shall remain exercisable until it
is exercised in full or terminates pursuant to the terms of the Plan
or the Option Agreement pursuant to which it is granted.
(e) Acceleration of Exercise on Change of Control.
Notwithstanding the provisions of paragraph (d) of this Section or any
other restrictions limiting the number of shares of Common Stock as to
which an Option may be exercised, each Option shall become immediately
exercisable in full upon and simultaneously with any "Change of
Control" of the Company unless the Board determines that the optionee
has been offered substantially identical replacement options and a
comparable position at any acquiring company. For purposes of this
Plan, a "Change of Control" shall be deemed to have occurred if:
(i) any "person," as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") (other than the Company, any
employee benefit plan sponsored by the Company, any trustee or
other fiduciary holding securities under an employee benefit
plan of the Company, or any corporation owned, directly or
indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock
of the Company), is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing 50% or
more of the combined voting power of the Company's then
outstanding securities;
(ii) during any period of two consecutive years
individuals who at the beginning of such period constitute the
Board, and any new director (other than a director designated
by a person who has entered into an agreement with the Company
to effect a transaction described in clause (i), (iii) or (iv)
of this Section) whose election by the Board or nomination for
election by the Company's stockholders was approved by a vote
of at least a
<PAGE>
majority of the directors then still in office who either were
directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for
any reason to constitute at least a majority thereof;
(iii) the stockholders of the Company approve a
merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would
result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting
securities of the surviving entity) more than 50% of the
combined voting power of the voting securities of the Company
or such surviving entity outstanding immediately after such
merger or consolidation; or
(iv) the stockholders of the Company approve a plan
of complete liquidation of the Company or an agreement for the
sale or disposition by the Company of all or substantially all
of the Company's assets. For the purposes of this subsection
(iv), "substantially all" of the Company's assets shall mean
assets for which the price or consideration upon sale or
disposition equals or exceeds seventy-five percent (75%) or
more of the fair market value of the Company.
(f) Incentive Stock Options Granted to Ten Percent Shareholders. No
Incentive Stock Options shall be granted to any Employee who owns, directly or
indirectly within the mean of Section 424(d) of the Code, stock possessing more
than 10% of the total combined voting power of all classes of stock of the
Company or any Subsidiary, unless at the time the Incentive Stock Option is
granted, the exercise price of the Incentive Stock Option is at least 110% of
the Fair Market Value of the Common Stock subject to such Incentive Stock Option
and such Incentive Stock Option, by its terms, is not exercisable after the
expiration of five years from the date such Incentive Stock Option is granted.
(g) Limitation on Incentive Stock Options. To the extent that the
aggregate Fair Market Value of the Common Stock with respect to which Incentive
Stock Options are exercisable for the first time by an Optionee during any
calendar year (under all plans of the Company and its parent and subsidiary
corporations) exceeds $100,000, such Options shall be treated as Nonstatutory
Stock Options. For this purpose, Options shall be taken into account in the
order in which they were granted and the Fair Market Value of the Common Stock
shall be determined as of the time the Option with respect to such Common Stock
is granted.
5.3. Payment of Exercise Price and Delivery of Shares.
-------------------------------------------------
(a) Notice and Payment for Shares. Each Option shall be exercised by
delivery of a written notice to the Company in such form as the Committee shall
approve stating the number of the whole shares of Common Stock as to which the
Option is being exercised and accompanied by payment therefor. No Option shall
be deemed exercised in the event that payment therefor is not received and
shares of Common Stock shall not be issued upon the exercise of an Option unless
the exercise price is paid in full. Payment for shares of Common Stock purchased
upon the exercise of an Option shall be made by (i) cash, (ii) certified check
payable to the order of the Company, (iii) outstanding shares of Common Stock
duly endorsed to the Company (which shares of Common Stock shall be valued at
their Fair Market Value as of the day preceding the date of such exercise), (iv)
any combination of the foregoing, or (v) such other method of payment as may be
provided in the applicable Option Agreement.
<PAGE>
(b) Rights of Optionee in Stock. Neither any Optionee nor the legal
representatives, heirs, legatees or distributees of any Optionee, shall be
deemed to be the holder of, or to have any of the rights of a holder with
respect to, any shares of Common Stock issuable upon exercise of an Option
granted hereunder unless and until such shares are issued to him or them and
such person or persons have received a certificate or certificates therefor.
Upon the issuance and receipt of such certificate or certificates, such Optionee
or the legal representatives, heirs, legatees or distributees of such Optionee
shall have absolute ownership of the shares of Common Stock evidenced thereby,
including the right to vote such shares, to the same extent as any other owner
of shares of Common Stock, and to receive dividends thereon, subject, however,
to the terms, conditions and restrictions of this Plan.
ARTICLE VI
TERMINATION AND DEATH
---------------------
6.1. Termination Other Than by Death or for Cause. If an Optionee's
---------------------------------------------
position as an Employee of the Company or a Subsidiary terminates for any reason
other than death or for Cause (as defined in Section 6.2) he may, unless the
applicable Option Agreement provides otherwise, exercise an Option previously
granted and vested within three months after the date of such termination, but
in no event later than the date on which the Option would have expired in
accordance with its terms. To the extent the Option is not so exercised, it
shall expire at the end of such three-month period.
6.2. Termination for Cause. If an Optionee's position as an Employee
----------------------
of the Company or a Subsidiary is terminated for Cause, any Option theretofore
granted to him shall expire and cease to be exercisable on the date notice of
such termination is delivered to the Optionee. "Cause" shall mean (a) the
willful and continued failure by an Optionee to substantially perform his duties
with the Company (other than any such failure resulting from his incapacity due
to physical or mental illness), after a written demand for substantial
performance is delivered to the Optionee by the Board, which demand specifically
identifies the manner in which the Board believes that the Optionee has not
substantially performed his duties, or (b) the willful engaging by the Optionee
in conduct which is demonstrably and materially injurious to the Company,
monetarily or otherwise. For purposes of this Section 6.2, no act, or failure to
act, shall be deemed "willful" unless done, or omitted to be done, not in good
faith and without reasonable belief that such action or omission was in the best
interest of the Company.
6.3. Death. If an Optionee dies (i) while he is an Employee of the
------
Company or a Subsidiary or (ii) during the three-month period after the
termination of his position as an Employee of the Company or a Subsidiary, and
at the time of his death the Optionee was entitled to exercise an Option
theretofore granted to him, such Option shall, unless the applicable Option
Agreement provides otherwise, expire one year after the date of his death, but
in no event later than the date on which the Option would have expired if the
Optionee had lived. During such one-year period the Option may be exercised by
the Optionee's executor or administrator or by any person or persons who shall
have acquired the Option directly from the Optionee by bequest or inheritance,
but only to the extent that the Optionee was entitled to exercise the Option at
the date of his death and, to the extent the Option is not so exercised, it
shall expire at the end of such one-year period.
ARTICLE VII
ADMINISTRATION OF PLAN
----------------------
<PAGE>
7.1. Administration. The Plan shall be administered by the
---------------
Compensation Committee of the Board of Directors or such other committee as may
be appointed by the Board of Directors of the Company, which Committee shall
consist of not less than two members, all of whom are members of the Board of
Directors. A majority of the Committee shall constitute a quorum thereof and the
actions of a majority of the Committee at a meeting at which a quorum is
present, or actions unanimously approved in writing by all members of the
Committee, shall be the actions of the Committee. Vacancies occurring on the
Committee shall be filled by the Board. The Committee shall have full and final
authority (i) to interpret the Plan and each of the Option Agreements, (ii) to
prescribe, amend and rescind rules and regulations, if any, relating to the
Plan, (iii) to make all determinations necessary or advisable for the
administration of the Plan and (iv) to correct any defect, supply any omission
and reconcile any inconsistency in the Plan and any Option Agreement. The
Committee's determination in all matters referred to herein shall be conclusive
and binding for all purposes and upon all persons including, but without
limitation, the Company, the shareholders of the Company, the Committee, and
each of the members thereof, Employees and their respective successors in
interest.
7.2. Liability. No member of the Committee shall be liable for
----------
anything done or omitted to be done by him or by any other member of the
Committee in connection with the Plan, except for his own willful misconduct or
gross negligence. The Committee shall have power to engage outside consultants,
auditors or other professional help to assist in the fulfillment of the
Committee's duties under the Plan at the Company's expense.
7.3. Determinations. In making its determinations concerning the key
---------------
Employees who shall receive Options as well as the number of shares to be
covered thereby and the time or times at which they shall be granted, the
Committee shall take into account the nature of the services rendered by such
key Employees, their past, present and potential contribution to the Company's
success and such other factors as the Committee may deem relevant. The
Committee shall determine the form of Option Agreements under the Plan and the
terms and conditions to be included therein, provided such terms and conditions
are not inconsistent with the terms of the Plan. The Committee may waive any
provisions of any Option Agreement, provided such waiver is not inconsistent
with the terms of the Plan as then in effect. The Committee's determinations
under the Plan need not be uniform and may be made by it selectively among
persons who receive, or are eligible to receive, Options under the Plan, whether
or not such persons are similarly situated.
ARTICLE VIII
AMENDMENT AND TERMINATION OF PLAN
---------------------------------
8.1. Amendment of Plan. (a) Generally. The Board of Directors may
------------------
amend the Plan at any time and from time to time. Rights and obligations under
any Option granted before amendment of the Plan shall not be materially altered,
or impaired adversely, by such amendment, except with consent of the Optionee.
An amendment of the Plan shall be subject to the approval of the Company's
stockholders only to the extent required by applicable laws, regulations or
rules.
(b) Amendments Relating to Incentive Stock Options. To the extent
applicable, the Plan is intended to permit the issuance of Incentive Stock
Options to Employees in accordance with the provisions of Section 422 of the
Code. Subject to paragraph 8.1(a) above, the Plan and Option Agreements may be
modified or amended at any time, both prospectively and retroactively, and in a
manner that may affect Incentive Stock Options previously granted, if such
amendment or modification is necessary for the Plan and Incentive Stock Options
granted hereunder to qualify under said provisions of the Code.
<PAGE>
8.2. Termination. The Board may at any time terminate the Plan as of
------------
any date specified in a resolution adopted by the Board. If not earlier
terminated, the Plan shall terminate on November 11, 2007. No Options may be
granted after the Plan has terminated, but the Committee shall continue to
supervise the administration of Options previously granted.
ARTICLE IX
MISCELLANEOUS PROVISIONS
------------------------
9.1. Restrictions upon Grant of Options. If the listing upon any
-----------------------------------
stock exchange or the registration or qualification under any federal or state
law of any shares of Common Stock to be issued on the exercise of Options
granted under this Plan (whether to permit the grant of Options or the resale or
other disposition of any such shares of Common Stock by or on behalf of
Optionees receiving such shares) should be or become necessary or desirable, the
Board in its sole discretion may determine that delivery of the certificates for
such shares of Common Stock shall not be made until such listing, registration
or qualification shall have been completed. The Company agrees that it will use
its best efforts to effect any such listing, registration or qualification,
provided, however, that the Company shall not be required to use its best
efforts to effect such registration under the Securities Act of 1933 other than
on Form S-8 or such other forms as may be in effect from time to time calling
for information comparable to that presently required to be furnished under
Form S-8.
9.2. Restrictions upon Resale of Unregistered Stock. Each Optionee
-----------------------------------------------
shall, if the Company deems it advisable, represent and agree in writing (i)
that any shares of Common Stock acquired by such Optionee pursuant to this Plan
will not be sold except pursuant to an effective registration statement under
the Securities Act of 1933 or pursuant to an exemption from registration under
said Act, (ii) that such Optionee is acquiring such shares of Common Stock for
his own account and not with a view to the distribution thereof, and (iii) to
such other customary matters as the Company may request. In such case, no shares
of Common Stock shall be issued to such Optionee unless such Optionee provides
such representations and agreements and the Company is reasonably satisfied that
such representations and agreements are correct.
9.3. Adjustments.
------------
(a) General. In the event of a subdivision of the outstanding Common
Stock, a declaration of a dividend payable in shares of Common Stock, a
declaration of a dividend payable in a form other than shares in an amount that
has a material effect on the value of shares of Common Stock, a combination or
consolidation of the outstanding Common Stock into a lesser number of shares of
Common Stock, a recapitalization, a reclassification or a similar occurrence,
the Committee shall make appropriate adjustments in one or more of (i) the
number of shares of Common Stock available for future grants of Options under
Section 3.2, (ii) the number of shares of Common Stock covered by each
outstanding Option, or (iii) the exercise price of each outstanding Option.
(b) Reorganizations. In the event that the Company is a party to a
merger or reorganization, outstanding Options shall be subject to the agreement
of merger or reorganization.
(c) Reservation of Rights. Except as provided in this Section 9.3,
an Optionee shall have no rights by reason of (i) any subdivision or
consolidation of shares of stock of any class, (ii) the payment of any dividend,
or (iii) any other increase or decrease in the number of shares of stock of any
class. Any
<PAGE>
issue by the Company of shares of stock of any class, or securities convertible
into shares of stock of any class, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number or exercise price of shares of
Common Stock subject to an Option. The grant of Option Shares pursuant to the
Plan shall not affect in any way the right or power of the Company to make
adjustments, reclassifications, reorganizations or changes of its capital or
business structure, to merge or consolidate or to dissolve, liquidate, sell or
transfer all or any part of its business or assets.
9.4. Withholding of Taxes.
---------------------
(a) Each Optionee who exercises a Nonstatutory Stock Option shall agree
that no later than the date of such exercise or receipt of shares of Common
Stock pursuant thereto he will pay to the Company, or make arrangements
satisfactory to the Committee regarding payment of, any Federal, state or local
taxes of any kind required by law to be withheld with respect to the transfer to
him of such shares of Common Stock.
(b) The applicable Option Agreement may provide that an Optionee may
satisfy, in whole or in part, the requirements of paragraph (a):
(i) by delivery of shares of Common Stock owned by the
Optionee for at least six months (or such shorter or longer period as
the Committee may approve) having a Fair Market Value (determined as
of the date of such delivery) equal to all or part of the amount to be
so withheld, or
(ii) by electing to have the Company withhold the requisite
number of shares from shares otherwise deliverable pursuant to the
exercise of the Option giving rise to the tax withholding obligation
provided, however, that
(A) the Optionee's election and the withholding
pursuant thereto take effect during the period beginning on
the third business day following the date of release for
publication of the quarterly and annual summary statements of
the Company's sales and earnings and ending on the twelfth
business day following such date, and six months have elapsed
since the date the Option was granted, or
(B) such election was irrevocably made by the Optionee
and filed with the Committee in writing at least six months in
advance of the date on which such withholding occurs.
The Committee may require, as a condition of accepting any such delivery of
Common Stock or any such election by the Optionee, that the Optionee furnish to
the Company an opinion of counsel to the effect that such delivery or election
will not result in the Optionee incurring any liability under Section 16(b) of
the Securities Exchange Act of 1934, as amended.
9.5. Use of Proceeds. The proceeds from the sale of Common Stock
----------------
pursuant to Options granted under the Plan shall constitute general funds of the
Company and may be used for such corporate purposes as the Company may
determine.
9.6. Substitution of Options.
------------------------
(a) The Committee may, with the consent of the holder of any Option
granted under the Plan, cancel such Option and grant a new Option in
substitution therefor, provided that the Option as so substituted shall satisfy
all of the requirements of the Plan as of the date such new Option is granted.
<PAGE>
(b) Options may be granted under this Plan in substitution for
options held by individuals who are employees of another corporation and who
become Employees of the Company or any Subsidiary of the Company eligible to
receive Options pursuant to the Plan as a result of a merger, consolidation,
reorganization or similar event. The terms and conditions of any Options so
granted may vary from those set forth in the Plan to the extent deemed
appropriate by the Committee in order to conform the provisions of Options
granted pursuant to the Plan to the provisions of the options in substitution
for which they are granted.
9.7. Notices. Any notice required or permitted hereunder shall be
--------
sufficiently given only if sent by registered or certified mail, return receipt
requested, postage prepaid, addressed to the Company at its principal place of
business, and to the Optionee at the address on file with the Company at the
time of grant hereunder, or to such other address as either party may hereafter
designate in writing by notice similarly given by one party to the other.
9.8. Governing Law. The Plan and all determinations made and actions
--------------
taken hereunder, to the extent not otherwise governed by the Code or the laws of
the Untied States of America, shall be governed by the laws of the State of
California and construed accordingly.
<PAGE>
EXHIBIT 10.20
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made and entered into as of January 26, 2000, by and
among JFAX.COM, Inc., a Delaware corporation (the "Company"), and Steven J.
Hamerslag ("Employee").
WHEREAS, the Company is purchasing all or substantially all the issued
and outstanding stock of Employee's previous employer, SureTalk.com, Inc.
("SureTalk.com"), of which Employee was Chief Executive Officer and a principal
owner, pursuant to the Stock Purchase Agreement, dated as of January 15, 2000
(the "Purchase Agreement"), among the Company, SureTalk.com and the stockholders
of SureTalk.com;
WHEREAS, it is a material term of such Purchase Agreement that
Employee shall be employed by the Company and that both parties shall agree to
the terms and conditions herein;
WHEREAS, the Company desires to secure the services of Employee, and
Employee is willing to provide such services, each upon the terms and subject to
the conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises, the parties agree as
follows:
1. CERTAIN DEFINITIONS. For the purposes of this Agreement, the parties
-------------------
hereby adopt the following definitions:
"Board" has the meaning set forth in Section 2(a).
"Cause" means:
(1) commission by Employee of any act or omission to perform
any act, including, but not limited to, any harassment of any employee of the
Company, which results in serious adverse consequences to the Company, subject
to the proviso at the end of this definition (but excluding the omission to
perform any act attributable to Employee's Total Disability);
(2) breach of any of Employee's agreements set forth in this
Agreement including, but not limited to, continual material failure to perform
his duties with the Company, excessive absenteeism and dishonesty, subject to
the proviso at the end of this definition;
(3) Employee's indictment for, or written confession of, or
commission of, a felony or any crime involving moral turpitude under the laws of
the United States or any state;
(4) death of Employee;
(5) declaration by a court that Employee is insane or
incompetent to manage his business affairs; or
(6) the filing of any petition or other proceeding seeking
to find Employee bankrupt or insolvent;
<PAGE>
Provided that any act or omission to act by Employee under clause (i) or (ii)
above was done or omitted willfully or through the gross negligence or bad faith
of Employee.
A "Change in Control" shall be deemed to have occurred if, at or
before the fourth anniversary of the Closing, any person or group of persons
(as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934,
as amended (the "1934 Act")) together with its affiliates, excluding employee
benefit plans of the Company, and excluding Richard S. Ressler and any
affiliates of Mr. Ressler, (A) is or becomes, directly or indirectly, the
"beneficial owner" (as defined in rule 13d-3 promulgated under the 1934 Act) of
securities of the Company representing more than 50% of the combined voting
power of the Company's then outstanding securities or (B) acquires, through
purchase, merger or otherwise, directly or indirectly, all or substantially all
of the Company's assets.
"Closing" has the meaning set forth in the Purchase Agreement and is
occurring on or about the date of this Agreement.
"Company" means JFAX.COM, Inc., a Delaware corporation.
"Confidential Information" has the meaning set forth in Section 7(a).
"Dollars", "$" and "US$" means United States dollars.
"Employee" means Steven J. Hamerslag.
"Escrow Agreement" means the Escrow Agreement, dated as of January 26,
2000, among the Company, Employee and City National Bank, as escrow agent (the
"Escrow Agent").
"Good Reason" means that Employee voluntarily terminates his
employment hereunder following (x) a change in the reporting relationship
between Employee and the Board, committees of the Board or the Company's
Chairman of the Board, i.e. if the Company interposes some other person between
Employee and the Board, a Board committee or the Chairman or (y) a requirement
by the Board that Employee must move from Carlsbad, California in order to carry
out his duties under this Agreement.
"Issued Shares" has the meaning set forth in Section 6(a).
"Market Price" is equal to $5.9375 per share.
"Promissory Note" has the meaning set forth in Section 6(b).
"Proprietary Information" has the meaning set forth in Section 7(b).
"Purchase Agreement" has the meaning set forth in the recitals above.
"Repurchase Price" is equal to the Market Price multiplied by 10,000,
or $59,375 per share of the Issued Shares.
<PAGE>
"Repurchase Right" has the meaning set forth in Section 6.
"SureTalk.com" has the meaning set forth in the recitals above.
"Termination" means, according to the context, the termination of this
Agreement or the cessation of rendering employment services by Employee.
"Total Disability" means Employee shall become disabled to an extent
which renders him unable to perform the essential functions of his job, with or
without reasonable accommodation, for a cumulative period of twenty-four (24)
weeks in any twelve (12) month period.
"Treasury Rate" means the annualized yield for United States
government securities with a maturity of one year, as published in the Wall
Street Journal on the business day immediately preceding the Closing and each
anniversary of the Closing during the term of this Agreement, and so that such
rate shall adjust on each such anniversary commencing in January 2001.
2. EMPLOYMENT.
----------
(1) Commencing on the date of this Agreement, the Company
hereby employs Employee and Employee hereby accepts employment by the Company to
serve as Chief Executive Officer of the Company. Employee shall perform services
of an executive nature consistent with the chief executive office of the Company
as may from time to time be reasonably assigned or delegated to him by the board
of directors of the Company (the "Board"). Nothing in this Agreement is intended
to ensure that Employee will continue as the Chief Executive Officer of the
Company, and he understands that he serves in that position at the pleasure of
the Board. Nevertheless, so long as Employee serves as the Chief Executive
Officer of the Company, the Company agrees that he will be nominated as one of
the management nominees for service on the Board, commencing at the first annual
meeting of stockholders occurring after the date of this Agreement.
(2) Employee will devote his full business time and
attention to his duties under this Agreement.
(3) Employee shall perform his duties under this Agreement
principally in or around Los Angeles, California. However, it is understood that
Employee will continue to reside in or around Carlsbad, California. He will
spend some of his working days in or around San Diego, California but will spend
approximately 80% of his working days in or around Los Angeles, California. He
will be responsible for his own travel arrangements in commuting to and from his
home and the Company's offices, but he will be reimbursed by the Company at the
rate of $100 per each round trip between his home and Los Angeles, plus
reasonable hotel room reimbursement in Los Angeles. The Company understands that
Employee may use his personal aircraft for commuting between his home and Los
Angeles and for business travel. If Employee uses his personal aircraft for
business travel he will be reimbursed by the Company at the coach fare rate. In
addition, it is contemplated Employee will frequently travel to carry out his
duties under this Agreement, and in these instances, other than as set
<PAGE>
forth in the immediately preceding sentence, air travel and other travel
arrangements will comply with current Company policies respecting class of
travel, etc.
(4) The Company will provide to Employee, his spouse and
children medical benefits which are provided to other similarly situated
employees of the Company.
(5) Employee shall have two (2) weeks paid vacation and one
(1) week of unpaid vacation during each year of this Agreement taken at such
times as are mutually convenient to Employee and the Company. For purposes of
vacation accrual, Employee will be given credit for service commencing from July
1, 1999.
3. TERM OF EMPLOYMENT.
------------------
(1) This Agreement and Employee's employment hereunder shall
commence on the date of this Agreement, and continue until the fourth
anniversary of such date, and shall thereafter be renewed annually at each
anniversary date (commencing with the anniversary falling in 2004) for an
additional one year period so that the term hereof at each renewal date shall be
a one year period, unless a party to this Agreement gives notice at least ninety
(90) days prior to such renewal date that this Agreement shall not be renewed,
in which case this Agreement shall terminate on the applicable anniversary date.
(2) Notwithstanding Paragraph (a) above, this Agreement may
be sooner terminated by the Company with or without Cause, by Employee with or
without Good Reason, or by the Company in the event of the Total Disability of
Employee.
(3) On termination of this Agreement pursuant to Paragraph
(a) or (b) above, all benefits and compensation shall cease as of the date of
such Termination, but nothing in this provision is intended to alter the
specific provisions contained in Section 6 relating to either a Termination by
the Company without Cause, or a Termination by Employee for Good Reason. Also,
nothing in this provision is intended to alter or limit the Company's
obligations under COBRA.
4. BUSINESS EXPENSE REIMBURSEMENT. Employee will be entitled to
------------------------------
reimbursement by the Company for the reasonable business expenses paid by him on
behalf of the Company in the course of his employment hereunder on presentation
to the Company of appropriate vouchers (accompanied by receipts or paid bills)
setting forth information sufficient to establish:
(1) the amount, date, and place of each such expense;
(2) the business reason for each such expense and the nature
of the business benefit derived or expected to be derived as a result thereof;
and
(3) the names, occupations, addresses, and other information
sufficient to establish the business relationship to the Company of any person
who was entertained by Employee.
<PAGE>
Employee will also be entitled to reimbursement by the Company for up
to $50,000.00 per year of discretionary expenses incurred by Employee. These
expenses are not subject to the foregoing requirements, but Employee will
provide appropriate documentation, and understands that the Company will treat
this amount as additional compensation to the extent Employee does not establish
the deductiblity of these expenses for tax purposes.
5. COMPENSATION AND BENEFITS. The Company agrees to pay Employee, and
-------------------------
Employee agrees to accept from the Company, during the first year after the date
hereof, for the services to be rendered by him hereunder a salary at the rate of
US$200,000 per annum payable in arrears in installments that are paid at least
monthly. Employee shall receive annual salary reviews by the Board to consider
increases for merit, cost of living, and the like.
If the Company has instituted or institutes a retirement, bonus or
other benefit plan which applies generally to U.S. executives of the Company,
Employee shall be entitled to participate therein, on terms determined by the
Board to be comparable to other U.S. executives of the Company, but not to the
extent such benefits would be duplicative of the benefits herein. The Company
will provide annual reviews by the Board of Employee's performance for
consideration of his participation in the Company's cash bonus plan. Since
Employee will have a significant ownership of shares of the common stock of the
Company, this participation shall not include stock option plans, or similar
plans, unless the Board determines otherwise. The Company agrees that if other
directors or senior officers are granted indemnification agreements, in addition
to the indemnification provisions in the Company's by-laws, Employee shall be
entitled to a similar indemnification agreement. The Company agrees to maintain
director's and officer's insurance, for the benefit of directors and officers,
including Employee, as per similarly situated companies.
6. ISSUANCE OF STOCK.
-----------------
(a) Stock Issuance. The Company shall issue Employee 120
--------------
partly paid shares of Series B convertible preferred stock of the Company
("Issued Shares") upon execution of this Agreement and Employee shall make
payment in cash to the Company equal to $1.00 per share (i.e., a total of $120).
The Issued Shares shall be delivered into escrow under the Escrow Agreement, and
are subject to repurchase by the Company pursuant to Subsection (c) of this
Section 6. Each Issued Share will be convertible at the option of the holder
into 10,000 shares of common stock of the Company (i.e., 1,200,000 shares in the
aggregate) but only after each such Issued Share is delivered out of escrow to
Employee, which will require at least proportionate payment of the Promissory
Note and expiration of the Repurchase Right of the Company with respect to the
Issued Shares to be delivered out of escrow, as more fully provided in the
Promissory Note and the Escrow Agreement. The Issued Shares will be entitled to
preferential dividends on a participating "as converted" basis with the common
stock, subject to Section 156 of the Delaware General Corporation Law ("DGCL"),
to a liquidation preference of $1.00 per share or (if greater) an amount
calculated on an "as converted" basis with the common stock but not in excess of
the amount per share actually paid to the Company for the Issued Shares
including payments of principal of the Promissory Note, and to no voting or
other rights except as provided in the DGCL.
<PAGE>
(b) Promissory Note. In further consideration for the
---------------
Issued Shares, Employee shall concurrently issue a promissory note ("Promissory
Note") to the Company in an amount equal to 1,200,000 multiplied by the Market
Price less the cash payment by Employee under Section 6(a). The Promissory Note
shall be non-recourse but secured by a pledge of the Issued Shares as
collateral. The Promissory Note shall accrue interest at the Treasury Rate, with
interest payable annually in arrears, and will mature five (5) years following
issuance.
(c) Stock Repurchase. In consideration for the employment
----------------
relationship, Employee hereby grants the Company the right to repurchase
("Repurchase Right") all or a portion of the Issued Shares, at a price equal to
the Repurchase Price, provided that in lieu of making such payment in cash the
Company shall be entitled to set off against amounts owing to the Company under
the Promissory Note, with a corresponding reduction in the Promissory Note,
according to the following terms:
(i) The Company may, following any Termination occurring
before the fourth anniversary of the Closing (except as otherwise
provided in clause (ii) below), whatever the reason for such
Termination, elect to repurchase up to the following number of Issued
Shares:
A. 120 Issued Shares, if the Termination occurs
before the first anniversary of the Closing, provided that
such Repurchase Right shall be limited to 90 Issued Shares if
such Termination is by the Company without Cause or if such
Termination is by Employee for Good Reason.
B. 90 Issued Shares, if the Termination occurs on
or after the first anniversary of the Closing but before the
second anniversary of the Closing, provided that such
Repurchase Right shall be limited to 60 Issued Shares if such
Termination is by the Company without Cause or if such
Termination is by Employee for Good Reason.
C. 60 Issued Shares, if the Termination occurs on
or after the second anniversary of the Closing but before the
third anniversary of the Closing, provided that such
Repurchase Right shall be limited to 30 Issued Shares if such
Termination is by the Company without Cause or if such
Termination is by Employee for Good Reason.
D. 30 Issued Shares, if the Termination occurs on
or after the third anniversary of the Closing but before the
fourth anniversary of the Closing, provided that such
Repurchase Right shall be limited to zero Issued Shares if
such Termination is by the Company without Cause or if such
Termination is by Employee for Good Reason.
E. Zero Issued Shares, if the Termination occurs
on or after the fourth anniversary of the Closing.
(ii) Notwithstanding the foregoing, immediately prior
to a Change in Control of the Company, the Repurchase Right of the
Company shall terminate, with respect to any Termination occurring
thereafter.
<PAGE>
(iii) The Company shall be entitled to exercise the
Repurchase Right at a price per share of the Issued Shares being
repurchased equal to the Repurchase Price.
(d) Anti-dilution. In order to accomplish an appropriate
--------------
anti-dilution protection for all parties, it is agreed that any distribution of
Issued Shares out of escrow under the Escrow Agreement will include the Other
Escrow Property (as defined in the Escrow Agreement) that derives from such
Issued Shares. In the case of any stock split, or stock combination, or
dividend payable on the Company's common stock in the form of shares of the
Company's common stock, appropriate adjustments to the conversion ratio of the
Issued Shares and to the Repurchase Right of the Company will be made.
(e) Exercise of Repurchase Right. Subject to the foregoing
-----------------------------
conditions, the Company may exercise the Repurchase Right by delivering notice
thereof to Employee of its election to do so, and setting forth the portion of
the Issued Shares to be repurchased, the price at which they will be
repurchased, and the anticipated date (which shall not be less than 15 days from
the date of such notice) on which the Repurchase Right will be executed. In
that connection, the Company shall comply with the applicable provisions of the
Escrow Agreement, including delivering the required Certified Notice (as defined
in the Escrow Agreement) to the Escrow Agent. Employee hereby consents to the
foregoing.
(f) Investment Representation, Etc. Employee understands and
-------------------------------
agrees that the Issued Shares shall not be transferrable (except by will or
intestacy or transfer into trust for the sole benefit of Employee or his spouse
or issue), and that the common stock issuable upon conversion of the Issued
Shares will be restricted as to transfer by the Company so as to ensure
compliance with applicable securities laws, provided that such common stock
shall have the benefit of the Registration Rights Agreement referred to in the
Purchase Agreement. Employee hereby makes to the Company the same
representations and warranties with respect to the Issued Shares and such common
stock as are contained in Section 2.19 of the Purchase Agreement with respect to
the Purchaser Stock (as defined in the Purchase Agreement).
7. CONFIDENTIALITY, ETC.
---------------------
(1) Employee understands and agrees that he has been exposed
to (or had access to), and may be further exposed to (or have access to),
confidential information, knowhow, knowledge, data, techniques, computer
software and hardware, and trade secrets of the Company or SureTalk.com,
including, without limitation, customer or supplier requirements, notes,
drawings, writings, designs, plans, specifications, records, charts, methods,
procedures, systems, price lists, financial data, records, and customer or
supplier lists (collectively "Confidential Information"). Accordingly, except as
permitted or required in the performance of his duties for the Company, Employee
agrees not to disclose, divulge, make public, utilize, communicate or use,
whether for his own benefit or for the benefit of others, either directly or
indirectly, any Confidential Information of or relating to the Company or
SureTalk.com unless specifically authorized in writing by the Company to do so.
<PAGE>
(2) Employee shall promptly communicate and disclose to the
Company all information, inventions, improvements, discoveries, knowhow,
methods, techniques, processes, observations and data ("Proprietary
Information") obtained, developed, invented or otherwise discovered by him in
the course of this employment. All written materials, records, computer programs
or data and documents made by Employee or coming into his possession during the
employment period concerning any Proprietary Information used or developed by
the Company, SureTalk.com or Employee shall be the sole exclusive property of
the Company. Employee shall have no right, title or interest therein
notwithstanding that he may have purchased the medium on which such Proprietary
Information is recorded.
(3) Upon Termination of employment, Employee shall not take
with him any of the Confidential Information or Proprietary Information. Upon
such Termination, or at any time upon the request of the Company, Employee shall
promptly deliver all Confidential Information and Proprietary Information, and
all copies thereof, to the Company with no cost or charge to it. Upon request by
the Company, Employee shall promptly execute and deliver any documents necessary
or convenient to evidence ownership of the Confidential Information and
Proprietary Information by the Company, or the transfer and assignment of the
Confidential Information and Proprietary Information to it without cost or
charge.
(4) Employee acknowledges that if he should violate any
provision of this Section 7, the Company will have no adequate remedy at law. In
such event, the Company shall have the right, in addition to any other rights it
may have, to specific performance of this Agreement.
(5) The provisions of this Section 7 shall survive any
Termination of this Agreement. The provisions of this Section 7 are not limited
as to duration or geographic scope.
(6) NOTWITHSTANDING THE FOREGOING PROVISIONS OF THIS
SECTION 7, EMPLOYEE IS HEREBY NOTIFIED BY THE COMPANY THAT SUCH PROVISIONS DO
NOT APPLY TO ANY INVENTION THAT QUALIFIES FULLY UNDER THE PROVISIONS OF SECTION
2870 OF THE CALIFORNIA LABOR CODE. BY HIS SIGNATURE BELOW, EMPLOYEE HEREBY
ACKNOWLEDGES RECEIPT OF SUCH NOTIFICATION.
8. BENEFIT AND BINDING EFFECT. This Agreement shall inure to the
---------------------------
benefit of and be binding upon the Company, its successors and assigns,
including but not limited to any corporation, person or other entity which may
acquire all or substantially all of the assets, shares or business of the
Company or any corporation with or into which it may be consolidated or merged.
The rights and obligations of Employee hereunder may not be delegated or
assigned.
9. COUNTERPARTS. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original but all of which shall constitute one and the
same instrument.
10. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
-------------
ACCORDANCE WITH THE LAW OF THE STATE OF CALIFORNIA WITHOUT REFERENCE TO THE
CHOICE OF LAW PRINCIPLES THEREOF.
<PAGE>
11. ENTIRE AGREEMENT. This Agreement (including the other agreements
-----------------
referred to herein) sets forth and is an integration of all of the promises,
agreements, conditions and understandings among the parties hereto with respect
to all matters contained or referred to herein, and all prior promises,
agreements, conditions, understandings, warranties or representations, oral,
written, express or implied, are hereby superseded and merged herein.
12. VALIDITY OF PROVISIONS. Should any provision(s) of this Agreement
-----------------------
be void or unenforceable in whole or in part, the remainder of this Agreement
shall not in any way be affected thereby, and such provision(s) shall be
modified or amended so as to provide for the accomplishment of the provision(s)
and intentions of this Agreement to the maximum extent possible.
13. MODIFICATIONS OR DISCHARGE. This Agreement shall not be deemed
---------------------------
waived, changed, modified, discharged or terminated in whole or in part, except
as expressly provided for herein or by written instrument signed by the party or
parties to be charged therewith.
14. NOTICES. Any notice which any party may wish to give to the other
--------
party hereunder shall be deemed to have been given when delivered to the party
to whom it is addressed. Notices hereunder may be sent by courier, mail, telefax
or telegram, to the following addresses, or to such other addresses as the
parties may from time to time furnish to each other by like notice:
To: JFAX.COM, Inc.
10960 Wilshire Boulevard, Ste. 500
Los Angeles, California 90024
Attention: Richard Ressler and Nicholas V. Morosoff
Telefax: (310) 966-1651
To: Employee:
Steven J. Hamerslag
P.O. Box 730
17501 Via de Fortuna
Rancho Santa Fe, California 92067
Telefax: (760) 688-1002
15. NUMBER; GENDER. In this Agreement, the masculine shall include the
---------------
feminine and neuter and vice versa, and the singular shall include the plural
and vice versa, as the context may reasonably require or permit.
16. EMPLOYMENT REGULATIONS. Applicable employment regulations require
-----------------------
that Employee complete a Form W-4 and Form I-9 upon employment providing
verification of his legal right to work in the United States, which Employee
agrees to complete.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
JFAX.COM, INC.
By: /s/ Richard S. Ressler
-------------------------
Name: Richard S. Ressler
Title: Chairman
STEVEN J. HAMERSLAG
/s/ Steven J. Hamerslag
-----------------------
<PAGE>
EXHIBIT 10.21
February 17, 2000
R. Scott Turicchi
2121 Avenue of the Stars
33rd Floor
Los Angeles, CA 90067
Dear Scott:
On behalf of JFAX.COM, I am pleased to offer you the position of Executive Vice
President. Your start date with JFAX.COM will be on or about February 29, 2000.
You will report directly to Steven J. Hamerslag, our Chief Executive Officer,
and will be based in our offices in Hollywood, California.
Your starting base salary will be $225,000 annually. You will be eligible for
an annual bonus of up to 50% of your base salary depending on your performance
as determined in accordance with JFAX.COM's Incentive Compensation Bonus Plan.
After the first year of employment, your base salary and incentive compensation
may be increased based on the achievement of milestones mutually agreed to with
the Board of Directors and me.
The company will issue you 85 shares of the company's newly created Series B
Convertible Preferred Stock (each share of which has de minimus priority and is
convertible at the option of the holder for no consideration into 10,000 shares
of JFAX.COM common stock). In exchange for these shares, you will issue a
promissory note to the company in an amount equal to the product of 85,
multiplied by 10,000, multiplied by $5.00, the closing price per share for
JFAX.COM common stock as reported on NASDAQ on the date prior to the date
hereof (the "Issue Price"), less the sum of $10,000, which shall be payable in
cash or check at the time of the stock issuance. The note will be secured by a
pledge of the 85 shares of Series B Convertible Preferred Stock, will accrue
interest at the one-year Treasury-note rate, with non-compounded interest
calculated annually on the anniversary date and payable in arrears at maturity,
and will mature 5 years following issuance. The note shall be recourse to you,
but we agree that your personal liability shall not exceed an aggregate total
equal to 20% of the sum of principal plus accrued interest on the note. You
will grant the company the right to repurchase all of your 85 shares of Series B
Convertible Preferred Stock (at a price per share equal to the product of 10,000
multiplied by the Issue Price) in the event that your employment with the
company terminates for any reason; provided, that this repurchase right will (1)
only apply to 63.75 shares following the first anniversary of your employment,
to 42.5 shares following the second anniversary of your employment, and to 21.25
shares following the third anniversary of your employment; (2) expire completely
following the fourth anniversary of your employment; and (3) expire completely
upon a change of control of the company (defined as a single party or affiliated
group, not currently affiliated with the company, acquiring a majority of the
outstanding shares of common stock of the company).
<PAGE>
Your shares of Series B Convertible Preferred Stock will be delivered into
escrow under an Escrow Agreement and will be convertible only after they have
been delivered out of escrow, which will require at least proportionate payment
of the note and expiration of the company's repurchase right with respect to the
shares to be delivered out of escrow.
In the event you are terminated without Cause (as defined below) within the
first 24 months from your start date, you will be entitled to salary and
benefits and the company's repurchase right with respect to your shares of
Series B Convertible Preferred Stock will terminate (in addition to any shares
with respect to which such right has already terminated) according to the
following schedule:
<TABLE>
<CAPTION>
(Additional) Shares
Unencumbered by
Termination Period Repurchase Right Salary / Benefits
- -------------------- ------------------- -----------------------
<S> <C> <C>
Months 1-12 21.25 Up to 12 months, but
only to the extent
comparable employment
is not secured
Months 13-24 10.625 Up to 6 months, but
only to the extent
comparable employment
is not secured
After 24 months None 3 months, but only to
the extent comparable
employment is not
secured
</TABLE>
Additionally, the company will include you in its D&O liability policy.
Currently, the company maintains $40 million of such coverage. In the future,
you will be included in any future D&O liability policy which the company
obtains.
In the event that I or the Board of Directors identifies Cause for termination
of your employment, you shall be provided with written notice of such cause and
given thirty (30) days to remedy the situation to my or the Board's reasonable
satisfaction (except that no such notice or right to cure shall be afforded in
the case of a Cause event described in the clauses (i), (ii), or (v) of the
following definition thereof). "Cause" is defined as any: (i) indictment for or
commission of a felony or of any other crime involving moral turpitude, fraud or
dishonesty (including without limitation theft, larceny or embezzlement of any
of the company's property); (ii) intentional material violation of any
confidentiality obligations to the company; (iii) material dereliction of duty;
(iv) breach of any material term of this agreement or failure
<PAGE>
to follow any lawful directive of the Board of Directors consistent with your
duties hereunder; or (v) engaging in harassment of other employees (provided
that it is understood that mere allegation of harassment shall not constitute
Cause unless supported by reasonably probative evidence). In addition,
constructive "without Cause" termination will be deemed to occur if: (i) your
place of employment is changed by more than 25 miles without your consent; or
(ii) there is a material change in your duties or responsibilities without your
consent, or (iii) there is a change in your reporting relationship directly to
the CEO or Board of Directors as provided herein, or (iv) you terminate your
employment for any reason upon or within 12 months after occurrence of a change-
in-control corporate transaction (as defined in the JFAX.COM Stock Option Plan).
Upon the occurrence of any termination without Cause or any constructive
"without Cause" termination, the company's repurchase right will terminate with
respect to the applicable number of your shares of Series B Convertible
Preferred Stock and the applicable severance payments will be due.
You will be eligible to participate in the benefit programs, including medical,
dental, vision, life, and 401(k) available to JFAX.COM employees on the first
day of the month after your 90-day orientation period (actual plan enrollment
dates are governed by the individual plan). The company participation is 50% of
the "HMO" cost of medical, dental, and vision. Your vacation will be 15 days
annually. We will attempt to have the 90-day eligibility period waived for such
purposes, but if we cannot legally do so, then we will reimburse you for the
cost of any COBRA medical insurance payments made by you with respect to the
first 90 days of your employment with the company.
You will also be responsible for reading, and following, our employee handbook
and expense guidelines, except to the extent otherwise provided herein or to the
extent that any such provisions (in particular, the Gifts & Gratuities and Work
Development & Review sections) are not appropriate for an executive-level
employee. In particular, the Work Development & Review and Employment At Will
Relationship sections will not apply to you, but only to the extent the
provisions of such sections are inconsistent with the company's severance
obligations hereunder. Among other things, we understand that you have
participated in other investments and business projects (such as film
production) and may do so in the future so long as they are not competitive with
and do not materially interfere with your employment by JFAX.COM.
You will also be provided with appropriate secretarial/assistant support (on at
least a one-half shared basis with another key executive) and be provided with a
notebook computer acceptable to you for business use.
The employment regulations requires that you complete a Form W-4 and Form I-9
upon employment providing verification of your legal right to work in the U.S.
To acknowledge your acceptance of this employment offer, please sign and return
this letter as soon as possible (prior to your first day of employment). A copy
is enclosed for your records.
This agreement is subject to approval by the Board of Directors of the company,
which the company agrees to obtain no later than March 3, 2000, and failing
which you will have the right to terminate this agreement.
<PAGE>
We look forward to you joining our team, and we are confident that you will
contribute to the continued growth and success of JFAX.COM.
Sincerely,
/s/ Richard S. Ressler
Richard S. Ressler
Chairman
ACCEPTED BY:
/s/ R. Scott Turicchi
- -------------------------
R. Scott Turicchi
DATE: March 6, 2000
<PAGE>
EXHIBIT 10.22
ESCROW AGREEMENT (this "Agreement"), dated as of January 26, 2000,
among JFAX.COM, Inc., a Delaware corporation (the "Company"), Steven J.
Hamerslag, Chief Executive Officer of the Company ("Mr. Hamerslag"), and City
National Bank, a national banking association.
RECITALS
WHEREAS, this Agreement is entered into in connection with the
Employment Agreement, dated as of January 26, 2000 (the "Employment Agreement"),
between the Company and Mr. Hamerslag, which provides for the issuance by the
Company to Mr. Hamerslag of an aggregate of 120 partly paid shares of Series B
Convertible Preferred Stock of the Company (the "Escrow Shares");
WHEREAS, in consideration for the Escrow Shares, Mr. Hamerslag has
issued a Promissory Note (the "Promissory Note") to the Company in the principal
amount of $7,124,880, the Promissory Note is non-recourse but is secured by a
pledge of the Escrow Shares of Mr. Hamerslag as collateral; and after the
Promissory Note is paid and after the Repurchase Right of the Company with
respect to the Escrow Shares (the "Repurchase Right") as provided for in the
Employment Agreement has expired, each of the Escrow Shares will be convertible
at the option of the holder into 10,000 shares of common stock of the Company
(i.e., the total of 120 Escrow Shares will be convertible into a total of
1,200,000 shares of common stock);
WHEREAS, the Employment Agreement provides for the Company to deliver
the Escrow Shares of Mr. Hamerslag to the Escrow Agent upon the execution of
this Agreement and the Employment Agreement of Mr. Hamerslag (each of such
dates, an "Employment Date"), such Escrow Shares to be held by the Escrow Agent
in escrow subject to the terms and conditions of this Agreement; and
WHEREAS, the Company and Mr. Hamerslag have agreed upon the conditions
upon which the Escrow Agent shall be instructed to deliver Escrow Shares and
Other Escrow Property out of escrow (the "Notice Procedures"), which are set
forth in Annex I attached hereto.
NOW, THEREFORE, in consideration of the premises, and of the
representations, warranties, covenants and agreements contained herein and in
the Employment Agreement and the Promissory Note, the parties hereto hereby
agree as follows:
ARTICLE I
Definitions
1.1 Definitions. As used in this Agreement, the following terms
-----------
shall have the following meanings:
<PAGE>
"Agreement" has the meaning set forth in the first paragraph of this
Agreement.
"Certified Notice" shall mean written notice to the Escrow Agent
certified by the Company.
"Company" has the meaning set forth in the first paragraph of this
Agreement.
"Dividend" has the meaning set forth in Section 2.1(b).
"Employment Agreement" has the meaning set forth in the recitals of
this Agreement.
"Employment Date" has the meaning set forth in the recitals of this
Agreement.
"Escrow Agent" has the meaning set forth in the first paragraph of
this Agreement.
"Escrow Shares" has the meaning set forth in the recitals of this
Agreement.
"Mr. Hamerslag" has the meaning set forth in the first paragraph of
this Agreement.
"Notice Procedures" has the meaning set forth in the third recital
hereto; the Notice Procedures are set forth in Annex I hereto.
"Other Escrow Property" has the meaning set forth in Section 2.1(b).
"Permitted Investments" means (i) U.S. Government Obligations with a
maturity of one year or less; or (ii) certificates of deposit or acceptances
with a maturity of one year or less of the Escrow Agent or any other financial
institution that is a member of the United States Federal Reserve System having
combined capital and surplus and undivided profits of not less than $500,000,000
or (iii) investment funds which invest primarily in U.S. Government Obligations
of which the Escrow Agent or any of its affiliates are a sponsor, investment
advisor, manager, custodian or agent and for which the Escrow Agent may be
separately compensated, provided that such investment or deposit is not
prohibited by Federal or state banking laws applicable to the Escrow Agent.
"Promissory Note" has the meaning set forth in the recitals of this
Agreement.
"Repurchase Right" has the meaning set forth in the recitals of this
Agreement.
"U.S. Government Obligations" means direct obligations (or
certificates representing an ownership interest in such obligation) of the
United States of America.
1.2 Other Definitions. All capitalized terms used herein and not
-----------------
otherwise defined shall have the respective meanings set forth in the Employment
Agreement.
<PAGE>
ARTICLE II
Escrow Arrangement
2.1 Delivery of Escrow Shares and Other Escrow Property to the Escrow
-----------------------------------------------------------------
Agent, Etc.
- -----------
(a) On the Employment Date, the Company will deliver the Escrow Shares
to the Escrow Agent pursuant to this Agreement and the Employment Agreement. The
Escrow Agent will hold the Escrow Shares in escrow and will not transfer any
interest in such Escrow Shares except pursuant to the terms of this Agreement.
(b) If the Company shall declare and pay any dividend on the Escrow
Shares, whether in the form of cash, common stock, other capital stock of the
Company or any other property, including any rights or anything else of value
which may be sold and reduced to a cash value, or whether as a stock split or
stock combination, or other subdivision or combination or reclassification of
the Escrow Shares (collectively, a "Dividend"), during the term of this
Agreement, the Company shall deliver such Dividend payable with respect to the
Escrow Shares to the Escrow Agent (the foregoing being called, collectively,
the "Other Escrow Property", which term shall also include any Permitted
Investments, any proceeds of the Escrow Shares, and any proceeds of any other
item of the Other Escrow Property). The Escrow Agent will hold the Other Escrow
Property in escrow and will not transfer any interest in the Other Escrow
Property except pursuant to the terms of this Agreement.
(c) Notwithstanding any other provision in this Agreement, the escrow
of the Escrow Shares and other Escrow Property of Mr. Hamerslag will be held
separate and apart from any other escrow, and the Escrow Agent agrees that it
will not commingle the escrow of the Escrow Shares and other Escrow Property of
Mr. Hamerslag with any other escrow.
2.2 Pledge and Grant of Security Interest. Mr. Hamerslag hereby
-------------------------------------
grants to the Escrow Agent, for the benefit of the Company, a security interest
in the Escrow Shares and the Other Escrow Property, and any proceeds thereof, of
Mr. Hamerslag hereunder, as collateral security for the prompt and complete
payment when due of principal, interest and any other amounts payable under the
Promissory Note of Mr. Hamerslag. It is understood and agreed, however, that
the pledge of collateral security by Mr. Hamerslag shall not secure the
promissory note of any other party, and any pledge of collateral security by any
other party shall not secure the Promissory Note of Mr. Hamerslag.
2.3 Delivery by Escrow Agent of Escrow Shares and Other Escrow
----------------------------------------------------------
Property. Upon receipt by the Escrow Agent of a Certified Notice in
- --------
compliance with the Notice Procedures for the delivery of Escrow Shares out of
escrow from the Company, the Escrow Agent shall deliver the number of Escrow
Shares and the related Other Escrow Property specified in such Certified Notice
to or upon the order of the persons specified in such Certified Notice, and the
shares and property so delivered shall no longer be considered Escrow Shares or
Other Escrow Property for purposes of this Agreement.
<PAGE>
2.4 Voting of Escrow Shares. Prior to the delivery by the Escrow
-----------------------
Agent of the Escrow Shares out of escrow pursuant to Section 2.3 above, Mr.
Hamerslag shall have the sole power to exercise any voting rights attendant to
the Escrow Shares and to any other shares that constitute Other Escrow Property
of Mr. Hamerslag hereunder.
2.5 Term of Escrow. The term of this Escrow Agreement will
--------------
commence upon receipt by the Escrow Agent of the Escrow Shares and will
terminate when the last of the Escrow Shares and any Other Escrow Property has
been delivered out of escrow pursuant to this Agreement, provided that Articles
III and IV shall survive any such termination.
2.6 Investment. The Escrow Agent agrees to invest all cash held by
----------
it pursuant to this Agreement in Permitted Investments according to Certified
Notice(s) delivered to the Escrow Agent by the Company, and agrees to hold such
investments until their maturity unless directed by Certified Notice to
liquidate such investments in order to make distributions of Other Escrow
Property pursuant to Section 2.3 above. The Escrow Agent shall not be liable
for any loss of principal or interest or for any penalty that may result from
following any investment instructions contained in any such Certified Notices.
Any investments will be made separately with respect to the Other Escrow
Property of Mr. Hamerslag hereunder.
2.7 Representations and Warranties.
------------------------------
(a) Each of the Company and Mr. Hamerslag represents and warrants, with respect
to itself or himself, that (i) such person has the requisite power and
authority, corporate or otherwise, and has taken all actions necessary in order
to execute and deliver this Agreement and to consummate the transactions
contemplated hereby, (ii) this Agreement is a valid and binding agreement of
such person enforceable against such person in accordance with its terms, (iii)
the execution and delivery of this Agreement by such person does not, and the
consummation of the transactions contemplated hereby by such person will not,
constitute or result in (A) a breach or violation of, or a default under, its
charter documents, if applicable, or (B) a breach or violation of, a default
under, the acceleration of or the creation of a lien, pledge, security interest
or other encumbrance on assets (with or without the giving of notice or the
lapse of time) pursuant to, any provision of any contract, agreement or other
commitment of such person or any law, ordinance, rule or regulation or judgment,
decree, order, award or governmental or non-governmental permit or license to
which such person is subject, except, in the case of clause (B) above, for such
breaches, violations, defaults or accelerations that, alone or in the aggregate,
could not prevent, materially delay or materially burden the transactions
contemplated by this Agreement and such liens, pledges, security interests or
other encumbrances as may be created pursuant to this Agreement.
(b) The Escrow Agent represents and warrants that (i) it has the
requisite corporate power and authority and has taken all corporate action
necessary in order to execute and deliver this Agreement and to consummate the
transactions contemplated hereby and (ii) this Agreement is a valid and binding
agreement of the Escrow Agent enforceable against the Escrow Agent in accordance
with its terms.
<PAGE>
ARTICLE III
The Escrow Agent
3.1 The Escrow Agent.
----------------
(a) City National Bank, a national banking association, is hereby
appointed as Escrow Agent in accordance with the terms and conditions set forth
herein, and the Escrow Agent hereby accepts such appointment.
(b) Subject to the other terms and conditions hereof, the Escrow Agent
hereby irrevocably declares that it will hold all right, title and interest in
and to the Escrow Shares and any Other Escrow Property in escrow for the use and
benefit of the Company and Mr. Hamerslag upon the terms set forth herein.
(c) The Escrow Agent shall not be concerned with, nor shall it have
any duties or obligations under the Notice Procedures or the Employment
Agreement, but instead its sole duties shall be to comply with this Escrow
Agreement and any instructions given pursuant hereto. Further, the Escrow Agent
shall not be deemed to have knowledge of any matter set forth in such agreements
that has not been set forth in this Escrow Agreement.
(d) Mr. Hamerslag agrees to provide to the Escrow Agent such stock
powers, with signatures appropriately guaranteed, and other instruments of
transfer as the Escrow Agent may from time to time reasonably request for
purposes of administering the escrows created hereunder. To that end, Mr.
Hamerslag further grants to the Escrow Agent the following power of attorney:
POWER OF ATTORNEY
Know all persons by these presents, that the grantor of this power of
attorney constitutes and appoints City National Bank his true and lawful
attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all instruments of transfer for the purposes of
the Escrow Agreement, dated as of January 26, 2000, among JFAX.COM, Inc.,
Steven J. Hamerslag and City National Bank, as Escrow Agent, with respect
to any of the Escrow Shares or Other Escrow Property (as defined in such
Escrow Agreement) of the grantor of this power of attorney, granting unto
said attorney-in-fact and agent, full power and authority to do and perform
to all intents and purposes as the grantor of this power of attorney might
do in person, hereby ratifying and confirming all that said attorney-in-
fact and agent, or its substitute or substitutes, may lawfully do or cause
to be done by virtue thereof.
3.2 Compensation and Indemnification of Escrow Agent.
------------------------------------------------
(a) The Company agrees to pay the Escrow Agent such fees as the
Company and the Escrow Agent shall from time to time agree for all services
rendered by the Escrow Agent hereunder and, from time to time, on demand of the
Escrow Agent, its reasonable expenses and counsel fees and other disbursements
incurred in the administration
<PAGE>
and execution of this Agreement and the exercise and performance
of its duties hereunder. The Company also agrees to indemnify the Escrow Agent
and its officers, directors and agents for, and to hold each of them harmless
against, any loss, liability or expense, incurred without gross negligence, bad
faith or willful misconduct on the part of the Escrow Agent, for anything done
or omitted by the Escrow Agent in connection with the acceptance and
administration of this Agreement, including the costs and expenses of defending
any claim of liability directly arising therefrom.
(b) The Escrow Agent shall be protected and shall incur no liability
for or in respect of any action taken, suffered, or omitted by it in connection
with its administration of this Agreement in reliance upon any Certified Notice
signed by the proper party or parties, and, at its discretion, may interplead
the property held in escrow with a court of competent jurisdiction.
3.3 Merger or Consolidation of Escrow Agent. Any corporation into
---------------------------------------
which the Escrow Agent or any successor escrow agent may be merged or with which
it may be consolidated, or any corporation resulting from any merger or
consolidation to which the Escrow Agent or any successor escrow agent shall be
party or any corporation succeeding to the corporate trust business of the
Escrow Agent or a successor escrow agent as a whole or substantially as a whole,
whether by sale or otherwise shall be the successor to the Escrow Agent under
this Agreement without any further act on the part of any of the parties hereto,
provided that such corporation would be eligible for appointment as a successor
- --------
escrow agent under the provisions of Section 3.5 hereof, and any Escrow Shares
or Other Escrow Property held by the Escrow Agent prior to such transaction
shall be deemed to be held by such successor thereafter.
3.4 Duties of Escrow Agent. The Escrow Agent undertakes the duties
----------------------
and obligations imposed by this Agreement upon the following terms and
conditions:
(a) The Escrow Agent may consult with legal counsel (who may be inside
legal counsel for the Escrow Agent or legal counsel for the Company or Mr.
Hamerslag), and the opinion of such counsel shall be full and complete
authorization and protection to the Escrow Agent as to any action taken or
omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement the
Escrow Agent deems it necessary or desirable that any fact or matter be proved
or established by the Company or Mr. Hamerslag prior to taking or suffering any
action hereunder, such fact or matter (unless other evidence in respect thereof
is herein specifically prescribed) may be deemed to be provided conclusively by
Certified Notice delivered to the Escrow Agent. Any such certificate shall be
full authorization to the Escrow Agent for any action taken or suffered in good
faith by it under the provisions of this Agreement in reliance upon such
certificate.
(c) The Escrow Agent shall be liable hereunder only for its own gross
negligence, bad faith or willful misconduct.
<PAGE>
(d) The Escrow Agent shall not be liable for or by reason of any of
the statements of fact or recitals contained in this Agreement or the Notice
Procedures or be required to verify the same. All such statements and recitals
shall be deemed to have been made by the Company and Mr. Hamerslag only.
(e) The Escrow Agent shall not be under any responsibility in respect
of the validity of this Agreement or the execution and delivery hereof (except
the due execution and delivery hereof by the Escrow Agent) or in respect of the
validity or execution of any stock certificate representing Escrow Shares; nor
shall it be responsible for any breach by the Company or Mr. Hamerslag of any
covenant or condition contained in this Agreement; nor shall it by any act
hereunder be deemed to make any representation or warranty as to whether any
Escrow Shares (or any Other Escrow Property) will be validly authorized and
issued, fully paid and nonassessable.
(f) Each of the Company and Mr. Hamerslag agrees that it will perform,
execute, acknowledge and deliver or cause to be performed, executed,
acknowledged and delivered all such further and other acts, instruments and
assurances as may reasonably be required by the Escrow Agent for the carrying
out or performing by the Escrow Agent of the provisions of this Agreement.
(g) The Escrow Agent is hereby authorized and directed to accept
Certified Notices, as provided for herein, with respect to the performance of
its duties hereunder and to apply to any officer of the Escrow Agent for advice
or instructions in connection with its duties, and it shall not be liable for
any action taken or suffered to be taken by it in good faith in accordance with
the instructions of any such officer.
(h) The Escrow Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents.
3.5 Change of Escrow Agent. The Escrow Agent may resign and be
----------------------
discharged from its duties under this Agreement upon 30 days' notice in writing
mailed to the Company by registered or certified mail, and to Mr. Hamerslag by
first-class mail. The Company may remove the Escrow Agent or any successor
escrow agent upon 30 days' notice in writing, mailed to the Escrow Agent or
successor escrow agent, as the case may be, by registered or certified mail, and
to Mr. Hamerslag by first class mail. If the Escrow Agent resigns or is removed
or otherwise becomes incapable of acting, the Company shall appoint a successor
to the Escrow Agent. If the Company fails to make such appointment within a
period of 30 days after such removal or after it has been notified in writing of
such resignation or incapacity by the resigning or incapacitated Escrow Agent or
by Mr. Hamerslag, then Mr. Hamerslag may apply to any court of competent
jurisdiction for the appointment of a new Escrow Agent. Any successor escrow
agent, whether appointed by the Company or by such a court, shall be a
corporation organized and doing business under the laws of the United States or
the laws of any state, in good standing, which is authorized under such laws to
exercise corporate trust powers and is subject to supervision or examination by
a federal or state authority and which has at the time of its appointment as
escrow agent a combined capital and surplus of at least $25,000,000. After
appointment, the successor escrow agent shall, without further action, be vested
with the same powers, rights, duties and responsibilities as if it had been
<PAGE>
originally named as Escrow Agent; but the predecessor Escrow Agent shall deliver
and transfer to the successor escrow agent any property at the time held by it
hereunder, and execute and deliver any further assurance, conveyance, act or
deed necessary for this purpose. Not later than the effective date of any such
appointment, the Company shall file notice thereof in writing with the
predecessor Escrow Agent and mail a notice thereof in writing to Mr. Hamerslag.
Failure to give any notice provided for in this Section 3.5, however, or any
defect therein, shall not affect the legality or validity of the resignation or
removal of the Escrow Agent or the appointment of the successor escrow agent, as
the case may be.
ARTICLE IV
Miscellaneous and General
4.1 Amendment; Waiver. This Agreement may not be modified or
-----------------
amended except by a written instrument signed by Mr. Hamerslag and authorized
representatives of the Company and the Escrow Agent and referring specifically
to this Agreement.
4.2 Successors. All the covenants and provisions of this Agreement
----------
by or for the benefit of the Company, Mr. Hamerslag or the Escrow Agent shall
bind and inure to the benefit of their respective successors and assigns
hereunder, subject to Sections 4.3 and 4.7 hereof.
4.3 Binding Effect, Etc. The agreements herein set forth shall be
-------------------
mutually binding upon, and inure to the mutual benefit of, the Company, Mr.
Hamerslag and the Escrow Agent, and their permitted successors, provided that
-------- ----
the Escrow Agent shall have no obligations under the Notice Procedures. The
parties do not intend that any third party shall enjoy any rights under this
Agreement and no such third party shall be entitled to make any claim, or bring
any action to enforce this Agreement against any party to this Agreement even if
the third party receives some benefit from this Agreement.
4.4 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
-------------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA WITHOUT
REFERENCE TO CHOICE OF LAW PRINCIPLES THEREOF.
4.5 Notices. Any notice, request, instruction or other document to
-------
be given hereunder by any party to the others shall be in writing and delivered
personally or sent by registered or certified mail, postage prepaid, next-day
air courier or facsimile to the following respective addresses (or to any
substitute address(es) which the parties shall establish by like notice):
<PAGE>
(a) if to the Company, at
JFAX.COM, Inc.
10960 Wilshire Boulevard, Suite 500
Los Angeles, CA 90024
Attention: Richard Ressler and Nicholas V. Morosoff
Facsimile No.: (310) 966-1800
Telephone No.: (310) 966-1801
with a copy to:
Sullivan & Cromwell
1888 Century Park East, Suite 2100
Los Angeles, California 90067
Attention: Frank H. Golay, Jr.
Facsimile No.: (310) 712-8800
Telephone No.: (310) 712-6600
(b) if to Mr. Hamerslag, at
Steven J. Hamerslag
P.O. Box 730
17501 Via de Fortuna
Rancho Santa Fe, California 92067
Facsimile No.: (760) 688-1002
Telephone No.: (760) 931-6618
(c) if to the Escrow Agent, at
City National Bank
400 North Roxbury Drive, Suite 600
Beverly Hills, California 90210
Attention: Sue Behning
Facsimile No.: (310) 888-6288
Telephone No.: (310) 888-6283
(d) if to the Transfer Agent, at
American Securities Transfer & Trust, Inc.
12039 W. Alameda Parkway
Lakewood, CO 80228
Facsimile No.: (303) 986-2444
Telephone No.: (303) 986-5400
<PAGE>
Attention: Jo Peterson
4.6 Counterparts. For the convenience of the parties hereto, this
------------
Agreement may be executed in any number of counterparts, each such counterpart
being deemed to be an original instrument, and all such counterparts shall
together constitute one and the same agreement.
4.7 Entire Agreement, Etc. This Agreement (including any Annexes
---------------------
or Schedules hereto and the other agreements referred to herein) (a) constitutes
the entire agreement, and supersedes all other prior agreements, understandings,
representations and warranties both written and oral, among the parties, with
respect to the subject matter hereof, and (b) shall not be transferable or
assignable by operation of law or otherwise (except as the other parties agree
in writing, except as provided in Sections 3.3 and 3.5, and except as provided
in the following sentence). The Company may assign this Agreement, with the
consent of the Escrow Agent, but without the consent of Mr. Hamerslag being
required, to any corporation, person or other entity which may acquire all or
substantially all of the assets, shares of business of the Company or any
corporation into which it may be consolidated or merged.
4.8 Captions. The Article, Section and paragraph captions herein
--------
are for convenience of reference only, do not constitute part of this Agreement
and shall not be deemed to limit or otherwise affect any of the provisions
hereof.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first written above.
JFAX.COM, INC.
By: /s/ Richard S. Ressler
----------------------
Name: Richard S. Ressler
Title: Chairman
STEVEN J. HAMERSLAG
/s/ Steven J. Hamerslag
-----------------------
CITY NATIONAL BANK, as Escrow Agent
By: /s/ Susan Behning
-----------------------
Name: Susan Behning
Title: Vice President
<PAGE>
EXHIBIT 10.23
PROMISSORY NOTE
Issued by Steven J. Hamerslag
to JFAX.COM, Inc.
$7,124,880.00 Los Angeles, CA, January 26, 2000
(In this Note the word "Borrower" means Steven J. Hamerslag, who agrees to
be responsible for all obligations of Borrower in this Note. The words "you"
and "your" mean JFAX.COM, Inc., or any other owner of this Note. The word
"Company" means JFAX.COM, Inc. or any successor.)
1. Promise to Pay.
You are making a nonrecourse loan to Borrower in the principal amount of
seven million one hundred twenty-four thousand eight hundred eighty dollars
($7,124,880.00). Simultaneously with and in evidence of that loan, Borrower is
signing this Note and delivering it to you. Borrower may repay this Note in
whole or in part at any time but amounts repaid may not be reborrowed. On the
fifth anniversary of the date of this Note (the "Maturity Date"), Borrower
promises to pay to your order at your office at 10960 Wilshire Boulevard, Suite
500, Los Angeles, CA 90024 (the "Office"), the unpaid principal balance of this
Note, plus accrued and unpaid interest on the outstanding principal balance of
this Note at the applicable rate per annum set forth below in the paragraph
headed Rate of Interest, from the date of this Note to, but excluding, the
business day when this Note is paid in full. The words "business day" mean any
day (other than a Saturday or Sunday) on which the Office is open to the public
for carrying on substantially all business functions. You may change the
location of the office by giving written notice of the change to Borrower. All
payments made on account of principal or interest shall be recorded by you and,
prior to any transfer of this Note, endorsed on a grid that will be attached to
this Note.
2. Rate of Interest.
Interest on the outstanding principal balance of this Note shall accrue at
a rate equal to the annualized yield for United States government securities
with a maturity of one year, as published in the Wall Street Journal on the
business day immediately preceding the date of this Note and each anniversary of
the date of this Note during the term of this Note, and so that such rate shall
adjust on each such anniversary commencing in January 2001. Nothing in this
paragraph shall obligate Borrower to pay, or allow you to receive, interest in
excess of the maximum rate permitted by applicable law.
3. Interest Payments.
Interest on the unpaid principal balance of this Note is payable annually
in arrears from the date of this Note, commencing with the anniversary date in
2001, and is also payable on the Maturity Date, and on any other date principal
is repaid. All payments will be applied first to accrued and unpaid interest
and second to repayment of principal.
<PAGE>
4. Non-Recourse Note.
Notwithstanding any other provision of this Note, Borrower shall not have
any personal liability for the payment of any principal of or interest on this
Note, and no monetary or deficiency judgment shall be sought or enforced against
Borrower with respect thereto, provided that a judgment may be sought against
Borrower to enforce your rights under this Note with respect to the Collateral,
as defined below, and you shall have full recourse to and the right to proceed
against the Collateral, until this Note is paid in full.
5. Pledge and Grant of Security Interest.
Borrower has rights in 120 shares (the "Escrow Shares") of the Series B
convertible preferred stock of the Company that are being held pursuant to an
Escrow Agreement, dated as of January 26, 2000 (the "Escrow Agreement"), among
the Company, Borrower, another employee of the Company and City National Bank,
as Escrow Agent. The rights of Borrower in the Escrow Shares also include
rights in "Other Escrow Property" as defined in the Escrow Agreement that
derives from the Escrow Shares. References herein to the Escrow Shares and the
Other Escrow Property shall not include the shares and other escrow property of
such other employee that are also being held under the Escrow Agreement.
To secure the obligations of Borrower to pay all amounts due pursuant to
this Note (the "Obligations"), Borrower hereby gives you a security interest in
the Escrow Shares and the Other Escrow Property, and any proceeds thereof
(collectively, the "Collateral"). Borrower agrees that, except as provided in
the paragraph headed Right of Partial Payment, he shall have no right to receive
the Escrow Shares or any Other Escrow Property until this Note has been paid in
full, and until the Company's Repurchase Right, as defined below, with respect
to the Escrow Shares has expired, and the Escrow Agent shall hold the Collateral
solely for your benefit.
You will take reasonable care of the property which you hold as Collateral.
Borrower agrees that reasonable care is the care you give similar property which
you may own, which includes any action you may take at Borrower's request in
dealing with the Collateral.
Borrower will sign upon request any financing statements, instruments,
documents or other papers as you may request in order to protect your
Collateral. Borrower authorizes you to file at Borrower's expense any financing
statements to perfect the security interest granted by this Note, without
Borrower's signature being required on any such financing statements. Borrower
hereby grants you a power of attorney to take all action, or sign, file and
deliver any document, which you deem necessary to protect your security
interest.
6. Right of Set Off.
Borrower has granted to the Company the right to repurchase ("Repurchase
Right") all or a portion of the Escrow Shares, at a price equal to the
Repurchase Price, as defined in the Notice Procedures attached to the Escrow
Agreement (the "Repurchase Price"), and Borrower hereby agrees and
<PAGE>
acknowledges that in lieu of making payment of the Repurchase Price in cash, so
long as the Company is the holder of this Note, the Company shall be entitled to
set off against amounts owing to the Company under this Note, with a
corresponding reduction in this Note, as and when the Company exercises its
Repurchase Right with respect to the Escrow Shares. Any such set off utilized by
the Company will be treated as a payment on account of principal of or interest
on this Note and shall be recorded by you on the grid that is attached to this
Note. The set off shall be applied first to accrued and unpaid interest and
second to repayment of principal as provided in paragraph 3 above.
7. Right of Partial Payment.
At any time when the Repurchase Right of the Company has expired with
respect to all or a portion of the Escrow Shares, and Borrower has made
repayment with respect to all or a portion of the principal amount of this Note,
and has made payment of the accrued and unpaid interest thereon, then Borrower
shall be entitled to receive out of escrow a number of the Escrow Shares,
including the Other Escrow Property that derives therefrom, so long as the
following three conditions are met:
(x) the number of Escrow Shares to be received by Borrower does not
exceed the number of Escrow Shares as to which the Repurchase Right of the
Company has expired,
(y) the number of Escrow Shares to be received by Borrower, as a
percentage of all of the Escrow Shares initially placed in escrow, does not
exceed the percentage of the principal of this Note that has been repaid by
Borrower, including the accrued and unpaid interest thereon, and
(z) no default under this Note shall have occurred and be continuing.
For purposes of this paragraph, any reference to the Repurchase Right of the
Company having expired means that it has expired unexercised and is no longer
capable of being exercised, to the extent referred to, and any reference to
payment by Borrower of principal of this Note means that the Borrower has paid
the same in cash, to the extent referred to, and not through set off.
8. Authorization.
Borrower represents and warrants that he has duly authorized, executed and
delivered this Note which is a valid, binding and enforceable obligation of
Borrower.
9. Default.
Borrower will be in default under this Note if any of the following should
happen:
a. Borrower fails to pay any amounts due under this Note to you when due;
b. Borrower fails to observe any other term or condition of this Note;
<PAGE>
c. Borrower becomes insolvent or any proceeding in bankruptcy or
insolvency is started by or against Borrower;
d. Borrower takes advantage of any bankruptcy or insolvency law;
e. Borrower makes an assignment for the benefit of creditors; or
f. Any property of Borrower that constitutes Collateral is attached or if
Borrower or any such property becomes subject to court order or other
legal process.
10. Consequences of Default.
If Borrower is in default, this Note will, upon notice to Borrower by you,
become and be immediately due and payable. Notwithstanding the preceding
sentence, if Borrower is in default of part c, d or e of the paragraph above
headed Default, this Note will become and be immediately due and payable without
your having to give Borrower any notice.
11. Remedies.
If Borrower is in default, you will have all rights and remedies
available to you under law, including the California Uniform Commercial Code,
including with respect to any Collateral provided by Borrower to you. Upon a
default, you shall have the right to obtain delivery of all the Collateral from
the Escrow Agent.
Recognizing that the Company is the issuer of the Escrow Shares, and that
the Collateral may not be readily marketable following any default by Borrower,
you shall be entitled to retain Escrow Shares following any default by Borrower
and to credit such shares against any Obligations of Borrower hereunder. The
Escrow Shares shall be credited for this purpose as at a price per share equal
to (x) the number of shares of the Company's common stock into which the Escrow
Shares are then convertible multiplied by (y) the average of the closing prices
per share for the Company's common stock on the Nasdaq National Market on the
last five trading days prior to your determination to implement such procedure,
provided that, in the case of any Escrow Shares that are still subject or
potentially subject to the Company's Repurchase Right, the price per share of
the Escrow Shares shall not exceed the Repurchase Price. If you implement this
procedure, you shall be entitled to retain only the number of shares needed to
pay the Obligations of Borrower under this Note in full. Any excess Escrow
Shares shall be returned to or remain in escrow under the Escrow Agreement,
until the Escrow Shares are otherwise deliverable out of escrow to the person or
persons entitled to the Escrow Shares.
If advance notice to Borrower is ever required, notice given to Borrower
three business days before you dispose of any of the Collateral will be
reasonable advance notice. This notice must be in writing and will be effective
when mailed or hand delivered to Borrower at the address given you on the
signature page of this Note. If you decide that it is practicable to do so, and
you determine to sell any of the Collateral, you may sell it on any terms you
choose. You will not be required to advertise, and you will not be liable for
any risk of selling on credit. After selling any of the Collateral, you may use
what you receive from the sale to first repay your expenses in taking and
keeping the Collateral, preparing it for
<PAGE>
sale and selling it (for example, commissions and your reasonable attorney's
fees and disbursements). Any excess proceeds and any remaining Collateral after
all of Borrower's Obligations to you are paid in full, shall be returned to
escrow under the Escrow Agreement, until the same is otherwise deliverable out
of escrow to the person or persons entitled thereto.
12. Waiver; Delay in Enforcement.
Borrower specifically waives any legal requirements of presentment for
payment, demand, protest, notice of dishonor and notice of protest of this Note.
You can delay enforcing any of your rights without losing them.
13. Applicable Law.
BORROWER AGREES THAT THIS NOTE SHALL BE GOVERNED BY THE LAWS OF THE STATE
OF CALIFORNIA WITHOUT REFERENCE TO THE CHOICE OF LAW PRINCIPLES THEREOF.
14. Collection and Enforcement Costs.
Borrower agrees to pay, on demand, all costs and expenses, if any, in
connection with the collection or enforcement of this Note (whether through
negotiations, legal proceedings or otherwise), including without limitation
reasonable attorneys' fees and disbursements, court costs and your disbursements
in connection with the enforcement of your rights under this Note or with
respect to the Collateral.
15. Changes.
The terms of this Note may not be changed unless the change is authorized
by you in writing. In addition, Borrower agrees to notify you of any change in
his name, address and/or employment. You will notify Borrower of any change in
location of the Office.
16. Successors.
Borrower's obligations under this Note will also be binding upon his heirs,
executors and administrators.
17. Transfer of Note.
You may transfer this Note and deliver to one or more third parties all or
any of the property then held by you as Collateral under this Note, and the
transferee(s) shall thereupon become vested with all the powers and rights given
to you with respect to this Note; and you shall thereafter be forever relieved
and fully discharged from any liability or responsibility in the matter, but you
shall retain all rights and powers given in this Note with respect to property
not so transferred.
<PAGE>
18. Submission to Jurisdiction.
Without limiting your right to bring any action or proceeding against
Borrower or against Borrower's property arising out of or relating to any
Obligations under this Note (an "Action") in the courts of other
jurisdiction(s), Borrower irrevocably submits to the jurisdiction of any State
or federal court sitting in the State of California, and Borrower irrevocably
agrees that any Action may be heard and determined in such State court or
federal court. Borrower irrevocably waives to the fullest extent that he may
effectively do so, the defense of an inconvenient forum to the maintenance of
any Action in any jurisdiction. Borrower irrevocably agrees that the summons
and complaint or any other process in any Action in any jurisdiction may be
served by mailing to the address Borrower has given you on this Note or by hand
delivery to a person of suitable age and discretion at that address. Such
service will be complete on the date such process is so mailed or delivered.
Borrower may also be served in any other manner permitted by law.
<PAGE>
19. Trial by Jury Waiver.
Both you and Borrower irrevocably waive all right to trial by jury in any
Action or counterclaim arising out of or relating to this Note.
Borrower acknowledges that he has received a completely filled-in copy of
this Note.
In witness whereof, this Note has been signed by Borrower as of the date
first above written:
/s/ Steven J. Hamerslag
-----------------------
Steven J. Hamerslag
Address: P.O. Box 730
17501 Via de Fortuna
Rancho Santa Fe, CA 92067
<PAGE>
GRID
- ----
Promissory Note
Issued by Steven J. Hamerslag
to JFAX.COM, Inc.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Interest Principal Principal
Date Payments Repayments Balance
---- -------- ---------- -------
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
January 26, 2000 $7,124,880
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 21.1
Subsidiaries of JFAX.COM, Inc.
The Company has the following subsidiaries:
Sure Talk.com, Inc.
JFAX.com Europe LTD.
JFAX.DE, Inc.
<PAGE>
Exhibit 23.1
Independent Auditors' Consent
The Board of Directors
JFAX.COM, Inc.:
We consent to incorporation by reference in the registration statement (No.
333-31064) on Form S-8 of JFAX.COM, Inc. of our report dated January 28, 2000
relating to the consolidated balance sheets of JFAX.COM, Inc. and subsidiary as
of December 31, 1999 and 1998, and the related consolidated statements of
operations, changes in stockholders' equity (deficiency) and cash flows for each
of the years in the three-year period ended December 31, 1999, which report
appears in the December 31, 1999 annual report on Form 10-K of JFAX.COM, Inc.
/S/ KMPG LLP
Los Angeles, California
March 30, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JFAX.COM
INC. FORM 10K FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 12,256
<SECURITIES> 23,511
<RECEIVABLES> 370
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 40,248
<PP&E> 5,194
<DEPRECIATION> 1,850
<TOTAL-ASSETS> 58,625
<CURRENT-LIABILITIES> 3,693
<BONDS> 0
0
0
<COMMON> 305
<OTHER-SE> 44,842
<TOTAL-LIABILITY-AND-EQUITY> 58,625
<SALES> 7,643
<TOTAL-REVENUES> 7,643
<CGS> 4,641
<TOTAL-COSTS> 4,641
<OTHER-EXPENSES> 16,160
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,349
<INCOME-PRETAX> (13,009)
<INCOME-TAX> 2
<INCOME-CONTINUING> (13,011)
<DISCONTINUED> 0
<EXTRAORDINARY> 4,428
<CHANGES> 0
<NET-INCOME> (17,439)
<EPS-BASIC> (0.68)
<EPS-DILUTED> (0.68)
</TABLE>
