-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IGx1m4N21lUaPoECJpIRd9bn+fHBP9dikGhNN6ASrlGKm6D1Vqk3j/hR24SDOrBZ rEbyRL4KDFBbxC+dwzTyCw== 0000944209-99-000896.txt : 19990624 0000944209-99-000896.hdr.sgml : 19990624 ACCESSION NUMBER: 0000944209-99-000896 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 19 FILED AS OF DATE: 19990526 FILER: COMPANY DATA: COMPANY CONFORMED NAME: JFAX COM INC CENTRAL INDEX KEY: 0001084048 STANDARD INDUSTRIAL CLASSIFICATION: TELEGRAPH & OTHER MESSAGE COMMUNICATIONS [4822] IRS NUMBER: 510371142 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-76477 FILM NUMBER: 99634940 BUSINESS ADDRESS: STREET 1: 10960 WILSHIRE BOULEVARD STREET 2: SUITE 500 CITY: LOS ANGELES STATE: CA ZIP: 90024 MAIL ADDRESS: STREET 1: 10960 WILSHIRE BOULEVARD STREET 2: SUITE 500 CITY: LOS ANGELES STATE: CA ZIP: 90024 S-1/A 1 AMENDMENT #1 TO FORM S-1 As filed with the Securities and Exchange Commission on May 26, 1999 Registration No. 333-76477 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------- Amendment No. 1 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------- JFAX.COM, INC. (Exact name of registrant as specified in its charter) -------------- Delaware 4822 51-0371142 (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification Number)
-------------- 10960 Wilshire Boulevard Suite 500 Los Angeles, California 90024 (310) 966-1800 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Richard S. Ressler Chief Executive Officer JFAX.COM, INC. 10960 Wilshire Boulevard Suite 500 Los Angeles, California 90024 (310) 966-1800 (Name, address, including zip code, and telephone number, including area code, of agent for service) -------------- Copies to: Frank H. Golay, Jr., Esq. Nicholas P. Saggese, Esq. Sullivan & Cromwell Skadden, Arps, Slate, Meagher & Flom LLP 1888 Century Park East 300 S. Grand Avenue Los Angeles, California 90067 Los Angeles, California 90071 Telephone: (310) 712-6600 Telephone: (213) 687-5000 Fax: (310) 712-8800 Fax: (213) 687-5600
-------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. -------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 464(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] -------------- CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Title of each class of Proposed maximum Proposed maximum Amount of securities to be Amount to be offering price aggregate registration registered registered per unit(1) offering price(1) fee(2) - --------------------------------------------------------------------------------------------- Common Stock, $.01 par value................. 8,625,000 shares $11.00 $94,875,000 $26,376 - --------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) under the Securities Act of 1933. (2) A registration fee of $25,020 was paid previously. -------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +We will amend and complete the information in this prospectus. Although we + +are permitted by US federal securities laws to offer these securities using + +this prospectus, we may not sell them or accept your offer to buy them until + +the documentation filed with the SEC relating to these securities has been + +declared effective by the SEC. This prospectus is not an offer to sell these + +securities or our solicitation of your offer to buy these securities in an + +jurisdiction where that would not be permitted or legal. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION - May 26, 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Prospectus , 1999 [LOGO OF JFAX.COM, INC.] JFAX.COM, INC. 7,500,000 Shares of Common Stock - -------------------------------------------------------------------------------- Our Company: The Offering: . JFAX.COM, INC. . JFAX.COM is 10960 Wilshire offering 7,500,000 Boulevard, shares. The selling Suite 500 stockholders will Los Angeles, not participate in California 90024 this part of the (310) 966-1800 offering. www.jfax.com . The underwriters have an option to purchase an additional 655,200 shares from JFAX.COM and 469,800 shares from selling stockholders to cover over- Proposed Symbol/Proposed allotments. Market: . "JFAX"/Nasdaq National Market . This is our initial public offering. . Closing: , 1999.
- -------------------------------------------------------------- Per Share Total - -------------------------------------------------------------- Estimated public offering price: $9.00 - $11.00 $ Underwriting fees: Proceeds to JFAX.COM: Proceeds to selling stockholders: - --------------------------------------------------------------
This investment involves risk. See "Risk Factors" beginning on Page 8. - -------------------------------------------------------------------------------- Neither the SEC nor any state securities commission has determined whether this prospectus is truthful or complete. Nor have they made, nor will they make, any determination as to whether anyone should buy these securities. Any representation to the contrary is a criminal offense. - -------------------------------------------------------------------------------- Donaldson, Lufkin & Jenrette BancBoston Robertson Stephens CIBC World Markets DLJdirectInc. [ARTWORK] In connection with this offering, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may overallot in connection with the offering and may bid for and purchase shares of the common stock in the open market. For a description of these activities, see "Underwriting." You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. This prospectus includes statistical data regarding our company, the Internet and the business areas in which we operate and compete. Data regarding our company are based on our records and data regarding the Internet and the business areas in which we operate and compete are taken or derived from information published or prepared by various independent industry sources, including International Data Corporation, a provider of market and strategic information for the information technology industry. Although we believe that these independent industry sources are reliable, we have not independently verified these data. Unless otherwise indicated, all information in this prospectus reflects a 1.25 for one common stock split that we effected by means of a stock dividend on May 21, 1999. Information contained in our web site does not constitute part of this prospectus. TABLE OF CONTENTS
Page Prospectus Summary....................................................... 4 Risk Factors............................................................. 8 Use of Proceeds.......................................................... 19 Dividend Policy.......................................................... 19 Capitalization........................................................... 20 Dilution................................................................. 21 Selected Consolidated Financial Data..................................... 22 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 24 Business................................................................. 34 Management............................................................... 49
Page Principal and Selling Stockholders....................................... 55 Certain Transactions..................................................... 58 Description of Capital Stock............................................. 63 Shares Eligible for Future Sale.......................................... 67 Certain United States Federal Tax Consequences to Non-U.S. Holders of Common Stock............................................................ 69 Underwriting............................................................. 72 Validity of Securities................................................... 75 Experts.................................................................. 75 Available Information.................................................... 75 Index to Financial Statements............................................ F-1
3 PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus, including "Risk Factors" beginning on page 8, carefully. Unless we indicate otherwise, the information in this prospectus assumes that the underwriters will not exercise their over-allotment option. JFAX.COM Our Company We are an Internet-based messaging and communications services provider to individuals and businesses throughout the world. Our services enable the user's e-mail box to function as a single repository for all e-mail, fax and voice mail and permit convenient e-mail and voice mail message retrieval through e- mail or by phone. Customers can sign up for all of our services through our web site and can promptly receive a JFAX.COM phone number. Our subscription services are as follows: . Free Fax: free phone number enabling receipt of faxes in e-mail. . Free Voice: free phone number enabling receipt of voice mail in e-mail. . Business Fax: phone number in area code of customer's choice enabling faxes to be sent and received in e-mail. . E-mail by Phone: access and management of e-mail messages through a touch tone phone, including the ability to listen to e-mail messages. . Unified Messaging: phone number enabling the end-user's e-mail box to function as a single repository for all e-mails, faxes and voice mails and permitting convenient management of e-mails and faxes by phone, management and retrieval of faxes and voice mails by e-mail, and retrieval of e-mail by phone. In addition to our subscription services, we provide a variety of services for which we charge based on usage, including: . Outbound fax: user can fax documents through e-mail. . Broadcast fax: user can send the same outbound fax to multiple recipients. . Outbound voice: user can send a voice message through e-mail to a telephone. . Broadcast voice: user can send the same voice message to multiple recipients. To further enhance the value of our services to our customers, we are developing additional Internet-based messaging and communications services. See "Business." We believe we are the world's largest provider of Internet-based unified messaging services with over 30,000 paid subscriptions as of March 31, 1999. Since we started offering our services on a commercial basis in June 1996, we have expanded our network to offer services in over 60 area codes in the United States and abroad, including in 21 of the 25 most populous metropolitan areas in the United States and such international business centers as London, Paris, Milan, Frankfurt, Zurich, Sydney and Tokyo. However, we have incurred operating and net losses since our inception. See Summary Consolidated Financial and Other Data at page 7. 4 Our Strategy Our objective is to be the leading global provider of Internet-based unified messaging and related services to individuals and businesses. International Data Corporation projects that there will be over 12.9 million unified messaging mailboxes in operation in the United States by 2002, each generating $20 in unified messaging revenue per month. To achieve our objective, we intend to grow our traditional subscriber base, capitalize on our free services, build the JFAX.COM brand, expand our service offerings, further develop strategic alliances and expand our international network. We believe that our experience in meeting the evolving needs of the unified messaging market positions us well to capitalize on the rapidly growing demand for Internet-based unified messaging services. We are a Delaware corporation. The address of our principal executive office is 10960 Wilshire Boulevard, Suite 500, Los Angeles, California 90024, and our telephone number is (310)966-1800. Our web site address is http://www.jfax.com. The information on our web site is not part of this prospectus. 5 The Offering Common stock offered: By JFAX.COM................... 7,500,000 shares Over-allotment option: By JFAX.COM................... 655,200 shares By selling stockholders....... 469,800 shares Total..................... 1,125,000 shares Common stock to be outstanding after the offering.............. 31,812,276 shares Use of proceeds.................. We will use the net proceeds from the offering to expand our network around the world, to repay indebtedness and redeem preferred stock and to fund marketing and advertising activities. We will use any remaining proceeds for working capital and general corporate purposes. See "Use of Proceeds." Dividend policy.................. We intend to retain all future earnings to fund the development and growth of our business. Therefore, at this time we do not anticipate paying cash dividends. Nasdaq National Market Symbol.... "JFAX"
The shares of common stock to be outstanding after the offering are stated as of May 15, 1999 in this prospectus and exclude: . 4,375,000 shares of common stock reserved for issuance under our stock option plan of which 1,515,693 shares are subject to outstanding options, and . 4,512,916 shares of common stock issuable upon exercise of outstanding warrants. In connection with this offering, we intend to grant options under our stock option plan to our directors and certain officers and employees. We expect these grants will consist of options to purchase an aggregate of approximately 760,000 shares of our common stock at an exercise price of $9.00 per share. These options will begin vesting at the first anniversary of the grant date. For additional information, see "Certain Transactions." JFAX.COM is our service mark. This prospectus contains other product names, trade names, trademarks and service marks of JFAX.COM and of other organizations. Risk Factors An investment in our common stock involves a high degree of risk. See "Risk Factors" beginning on page 8 to read about risks you should consider before buying shares of our common stock, including financial, developmental, operational, technological, regulatory, competitive and other risks associated with our emerging business. 6 Summary Consolidated Financial And Other Data (In thousands, except per share and other data) Below is summary historical consolidated financial and other data of JFAX.COM. We derived the statement of operations and balance sheet financial data from our audited and unaudited consolidated financial statements. You should read this summary data together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes appearing elsewhere in this prospectus. The as adjusted balance sheet data below gives effect to the application of the net proceeds from the sale of 7,500,000 shares of common stock by JFAX.COM in the offering, assuming an initial public offering price of $10.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses.
Three Months Year Ended December 31, Ended March 31, ------------------------- ---------------- 1996 1997 1998 1998 1999 (unaudited) Statement of Operations Data: Revenue.......................... $ 105 $ 685 $ 3,520 $ 490 $ 1,411 Gross profit (loss).............. (45) (173) 122 (136) 357 Operating loss................... (768) (4,996) (10,975) (1,686) (2,290) Net loss attributable to common shares.......................... (769) (4,783) (12,404) (1,688) (2,976) Loss per share: Basic and diluted net loss per common share................... $(0.12) $ (0.30) $ (0.56) $ (0.09) $ (0.12) Common shares used in determining net loss per share.......................... 6,407 15,738 22,182 19,435 24,308 Other Data (at period end) (unaudited): Paid subscriptions............... 1,269 7,125 27,063 30,982 Available area codes............. 15 45 68 70
Year ended Three Months Ended December 31, 1998 March 31, 1999 ----------------- ------------------ (unaudited) Pro Forma Statement of Operations Data: Pro forma net loss attributable to common shares.................................. $(10,709) $(2,083) Pro forma net loss per common share...... $ (0.35) $ (0.07) Common shares used in determining pro forma per share data.................... 30,900 31,808
As of March 31, 1999 ------------------------ Actual As Adjusted(1) (unaudited) Balance Sheet Data: Cash and cash equivalents............................. $ 5,510 $56,928 Working capital....................................... 4,229 55,912 Total assets.......................................... 8,960 60,378 Long-term debt........................................ 6,285 888 Redeemable common and preferred stock(/2/)............ 10,104 -- Stockholders' equity (deficiency)..................... (10,503) 57,068
- ------- (1) For purposes of the pro forma statements of operations data, it is assumed that the extinguishment of our Senior Subordinated Notes due 2004, as described under "Use of Proceeds," occurred at the beginning of each of the financial periods presented, and that the additional shares being issued in this offering were outstanding throughout the respective periods. The pro forma statement of operations data does not include an extraordinary charge of approximately $4.8 million for the early extinguishment of the Senior Subordinated Notes due 2004. (2) See Note 4 of the notes to our consolidated financial statements for the conditions applicable to the redeemable securities. 7 RISK FACTORS An investment in our common stock involves a high degree of risk. You should consider the following factors carefully before deciding to purchase shares of our common stock. Because We Have Limited Operating History, it is Difficult to Evaluate Our Business We have a limited operating history. We were formed in December 1995, and our services became commercially available in 1996. Because of our limited operating history, you have limited operating and financial data about us upon which to base an evaluation of our performance and an investment in our common stock. You should consider our prospects in light of the risks, expenses and difficulties we may encounter, including those frequently encountered by new companies competing in rapidly evolving markets. If we are unable to execute our plans and grow our business, either as a result of the risks identified in this section or for any other reason, this failure would have a material adverse effect on our business, prospects, financial condition and results of operations. We Expect Our Losses and Negative Cash Flow to Continue, Which May Adversely Impact our Business and Our Stockholders We have incurred substantial operating losses, net losses and negative cash flow on both an annual and quarterly basis. For the year ended December 31, 1998, we had an operating loss of $11.0 million, a net loss attributable to common shares of $12.4 million and negative cash flow from operating and investing activities of $10.5 million. For the quarter ended March 31, 1999, we had an operating loss of $2.3 million, a net loss attributable to common shares of $3.0 million and negative cash flow from operating and investing activities of $1.7 million. We expect to continue to incur net losses for the foreseeable future and cannot assure you that we will ever achieve profitability or generate positive cash flow. We Expect Our Expenses to Increase, and our Expenses May Exceed Our Revenues We expect our operating expenses and capital expenditures to increase significantly, especially in the areas of sales and marketing expenses and general and administrative expenses, as we develop and expand our business. As a result, we will need to increase our revenue significantly to become profitable. In order to grow our revenue, we need to add customers for our services and increase the usage of our services by our customers, thereby increasing the fees and usage charges that we collect. If our revenue does not increase as much as we expect or if increases in our expenses are not in line with our plans, there could be a material adverse effect on our business, prospects, financial condition and results of operations. We May Need and Be Unable to Obtain Additional Funding We believe that, following the offering, our cash reserves should be adequate to fund our operations and capital expenditures for at least the next 12 months. If our capital requirements or revenue vary materially from our current plans or if unforseen circumstances occur, we may require additional financing sooner than we anticipate. This may not be available on a timely basis, in sufficient amounts or on terms acceptable to us. This financing may also dilute existing stockholders. Any debt financing or other financing of securities senior to common stock will likely include financial and other covenants that will restrict our flexibility. At a minimum, we expect these covenants to include restrictions on our ability to pay dividends on our common stock. Any failure to comply with these covenants would have a material adverse effect on our business, prospects, financial condition and results of operation. We Cannot Predict Whether We Will be Successful Because Our Business Model is Unproven and Our Market is Developing Our business strategy is unproven. A number of our services have been offered to the public since June 1996. However, it is too early to reliably gauge market penetration rates for our services. 8 To date, we have not established a definite demand or a reliable cost to add a subscriber for these services. In addition, there can be no assurance that we will be successful in the offering of any additional services that we are currently planning. If the demand is lower than anticipated, or the cost to add a subscriber is higher, our business, prospects, financial condition and results of operations would be materially and adversely affected. Our Failure to Achieve or Sustain Market Acceptance at Desired Pricing Levels Could Impair Our Ability to Achieve Profitability or Positive Cash Flow Prices for messaging services have fallen historically. We expect prices in our industry in general to continue to fall, and prices for our existing and future services may fall correspondingly. Accordingly, we cannot predict whether our pricing schedule will prove to be viable, whether demand for our services will materialize at the prices we would like to charge or whether we will be able to sustain adequate future pricing levels as competitors introduce competing services. In addition, the prices for our services are in some cases higher than those charged by our competitors. Customers may be unwilling to pay our prices. Furthermore, the widespread availability of free services, including our own, may result in consumers being unwilling to pay for our services. Our failure to achieve or sustain desired pricing levels would have a material adverse effect on our business, prospects, financial condition and results of operations. The Recent Introduction of Free Fax Services May Harm Our Business We recently introduced free services. We expect to generate revenues from our free service customers by selling them additional services for which charges are usage-based. We will also encourage free service customers to convert to paid subscriptions. We have no track record from which to predict levels of revenue to be achieved from customers who are attracted by our free services. Our introduction of free services may cause some of our paying customers to switch to our free services and discontinue their payments to us. Certain companies such as Efax and CallWave have recently introduced free fax to e-mail services. We introduced our free services principally as a promotional tool, and partially in response to the introductions by these other companies. These companies provide banner advertising instead of charging subscription fees. We do not intend to adopt a banner advertising method for our free services. We expect the trend for free services will continue in our industry. There can be no assurance that the recent introduction of these competing services will not have a material adverse effect on our business, prospects, financial condition and results of operations. Our Operating Results In One or More Future Periods Are Likely to Fluctuate Significantly and May Negatively Impact Our Stock Price Our annual and quarterly operating results may fluctuate significantly in the future as a result of numerous factors, including: . the rate at which we are able to add subscriptions and sell additional usage-based services to both free and paid customers of our subscription services, . the amount and timing of expenditures to form strategic relationships, to enhance sales and marketing and to expand our infrastructure, or other costs, as we expand our network, . the announcement or introduction of new or enhanced services by our competitors, . technical difficulties, system failures or network downtime, . loss of strategic alliances, 9 . changes in the growth rate of Internet usage and acceptance by consumers of electronic commerce, and . economic and competitive conditions specific to our industry. As a result, it is likely that in some future periods our operating results will be below the expectations of securities analysts and investors. If this happens, the trading price of our common stock would likely be materially adversely affected. Our Failure to Manage Growth Effectively Could Impair Our Business Any expansion of our business could place a significant strain on our management, financial and other resources. Our ability to manage future growth, if it occurs, will also depend upon the capacity, reliability and security of our network infrastructure. We anticipate significantly increasing the size of our sales and marketing efforts following the completion of the offering. We also will be required to increase our customer support staff. There can be no assurance that these expansions will be successfully completed. Our inability to promptly address and respond to these circumstances could have a material adverse effect on our business, prospects, financial condition and results of operations. If We Fail to Expand and Adapt Our Network Infrastructure, Our Business May be Harmed We must continue to expand and adapt our network infrastructure, both domestically and internationally, as the number of customers and the volume of messages they wish to transmit increases. The expansion and adaptation of our network infrastructure will require substantial financial, operational and management resources, even if the expansion is primarily for our free service offerings. There can be no assurance that we will be able to expand or adapt our network infrastructure to meet any additional demand on a timely basis, at a commercially reasonable cost or at all. In addition, future growth in our subscriber base for both free and paid services, together with growth in the subscriber bases of other companies who have recently introduced free facsimile-to-email services and other Internet- dependent services, will increase the demand for available network infrastructure and Internet data transmission capacity. This could lead to insufficient capacity and an inability on our part to acquire the necessary network infrastructure and transmission capacity to accommodate our future growth. In particular, insufficient network capacity could lead to a reduction in our services' reliability. Since customers will not tolerate a service hampered by slow delivery times or unreliable service levels, insufficient network capacity could have a material adverse effect on our business, prospects, financial condition and results of operations. Our Business Could Suffer if We Cannot Obtain Telephone Numbers Our future success will depend upon our ability to procure large quantities of telephone numbers in the United States and foreign countries, including telephone numbers in area codes that our customers demand. Our ability to procure telephone numbers depends on applicable regulations, the practices of telecommunications carriers that provide telephone numbers and the level of demand for new telephone numbers. Failure to obtain these numbers in a timely and cost-effective manner may prevent us from entering some foreign markets or hamper our growth in domestic markets, and may have a material adverse effect on our business, prospects, financial condition and results of operations. Our ability to procure large quantities of phone numbers will be particularly limited in area codes of large metropolitan areas, and we may at some point be unable to provide our customers 10 with phone numbers in the most desirable area codes (e.g., 212 in Manhattan and 171 in London) in such areas, having to rely instead on new area codes created for these areas. We do not allow customers of our free services to choose the area code for the phone number we provide, and to some extent this makes our free services less attractive, particularly in comparison to our subscription services, or subscription services provided by others where the customer may select an area code. In addition, future growth in our subscriber base for both free and paid services, together with growth in the subscriber bases of providers of free fax to e-mail services, will increase the demand for large quantities of telephone numbers, which could lead to insufficient capacity and an inability on our part to acquire the necessary phone numbers to accommodate our future growth. Any Failure of the Internet as a Message Transmission Medium Could Harm Our Business Our future success will depend upon our ability to route our customers' traffic through the Internet and through other data transmission media. Our success is largely dependent upon the viability of the Internet as a medium for the transmission of documents. We also depend on the continued operation of a user's e-mail system. To date, we have transmitted a limited amount of customer traffic. There can be no assurance that these will prove to be viable communications media, that document transmission will be reliable or that capacity constraints which inhibit efficient document transmission will not develop. We access the Internet and other data transmission media through dedicated or shared connections to third party service providers. In many cases, we pay fixed monthly fees for Internet and other access, regardless of our usage or the volume of our customers' traffic. There can be no assurance that the current pricing structure for access to and use of these media will not change unfavorably and, if the pricing structure changes unfavorably, our business, prospects, financial condition and results of operations could be materially and adversely affected. If the Internet Stops Growing, Our Business will Suffer. Our future success is substantially dependent upon continued growth in the use of the Internet in order to support the sale of our services. There can be no assurance that the number of Internet users will continue to grow. As is typical in the case of a new and rapidly evolving industry, demand and market acceptance for recently introduced services are subject to a high level of uncertainty. The Internet may not prove to be a viable avenue to transmit communications for a number of reasons, including lack of acceptable security technologies, lack of access and ease of use, traffic congestion, inconsistent quality or speed of service, potentially inadequate development of the necessary infrastructure, excessive governmental regulation, uncertainty regarding intellectual property ownership or lack of timely development and commercialization of performance improvements, including high-speed modems. We Cannot Be Assured that the Market Will Switch to Our Services Our ability to route existing customers' traffic through the Internet and other data transmission media and to sell our services to new customers may be inhibited by, among other factors, the reluctance of some customers to switch from traditional fax delivery to delivery over the Internet, and by widespread concerns over the adequacy of security in the exchange of information over the Internet. Additionally, there may be delays in any transmission over the Internet which may result in our service being regarded as less timely than a traditional fax delivery. If our existing and potential customers do not accept delivery through the Internet as a means of sending and receiving documents via fax, our business, prospects, financial condition and results of operations would be materially and adversely affected. In addition, we face similar risks regarding the market acceptance of the delivery of customers' voice mail messages through the Internet. As a result, our business, prospects, financial condition and results of operations may be materially and adversely affected. 11 Our Business May be Constrained Because We Support a Limited Number of Operating System Platforms Our services can be utilized only by those users whose computers are run by Windows 3.1, Windows 95, Windows 98, Windows NT, Macintosh, and UNIX operating systems. Since there are other operating system platforms, we cannot provide our services to all potential customers for our services. To the extent other operating systems proliferate in the future, our ability to attract new customers and keep existing customers could be significantly impaired. The Market In Which We Operate is Highly Competitive, and We May Face Increased Competition From New Entrants and Established Industry Competitors With Significantly Greater Financial Resources Competition in the converging Internet and telecommunications industries is becoming increasingly intense. We face competition for our services from, among others, voice mail providers, fax providers, paging companies, Internet service providers, e-mail providers and telephone companies. We compete against other companies that provide one or more of the services that we do. In addition, these competitors may add services to their offerings to provide unified messaging services comparable to ours. Future competition could come from a variety of companies both in the Internet industry and the telecommunications industry, which could include some of our strategic alliances. These industries include major companies which have much greater resources than we do, have been in operation for many years and have large subscriber bases. These companies may be able to develop and expand their communications and network infrastructures more quickly, adapt more swiftly to new or emerging technologies and changes in customer requirements, take advantage of acquisition and other opportunities more readily and devote greater resources to the marketing and sale of their products and services than we can. There can be no assurance that additional competitors will not enter markets that we plan to serve or that we will be able to compete effectively. Free Services Supported by Advertising May Cause Subscribers to Become Unwilling to Pay for Our Services Many services provided over the Internet are provided free of charge to attract traffic to the service provider's website. These free services include e-mail, news feeds and stock quotes along with many others. The providers of free services attempt to recover their expenses by selling advertising based on the traffic generated from users of free services. Services similar to ours are being provided free to users on an advertising supported basis. Examples include a free voice mail product provided by Echobuzz. These services require the user to listen to taped ads before they can access their messages. Fax-4- Free offers free faxing services to users with each outbound fax containing ads in the margins. Efax and CallWave each offer fax to e-mail services free to users, and their users view advertisements when they receive their faxes. We expect that as these free services become popular with consumers, they will require our subscription services to provide clear incremental benefits over free services to justify paying for our services. In addition, to the extent free services of another provider are used by a potential JFAX.COM customer, it may be harder for us to persuade that potential customer to try our services. We May Have Difficulty in Retaining Our Customers Our sales and marketing and other costs of acquiring new subscriptions are substantial relative to the monthly fees derived from subscriptions. Accordingly, we believe that our long-term success depends largely on our ability to retain our existing customers, while continuing to attract new ones. We continue to invest significant resources in our network infrastructure and customer and technical 12 support capabilities to provide high levels of customer service. We cannot be certain that these investments will maintain or improve customer retention. We believe that intense competition from our competitors, some of which offer free service or other enticements for new subscriptions, has caused, and may continue to cause, some of our customers to switch to our competitors' services. In addition, some new customers use the Internet only as a novelty and do not become consistent users of Internet services and, therefore, may be more likely to discontinue their service. These factors adversely affect our customer retention rates. Any decline in customer retention rates could have a material adverse effect on our business, prospects, financial condition and results of operations. The Messaging and Communications Industry is Undergoing Rapid Technological Changes and New Technologies May Be Superior to the Technologies We Use The messaging and communications industry is subject to rapid and significant technological change. We cannot predict the effect of technological changes on our business. Additionally, widely accepted standards have not yet developed for the technologies we use. We expect that new services and technologies will emerge in the market in which we compete. These new services and technologies may be superior to the services and technologies that we use or these new services may render our services and technologies obsolete. In addition, these services and technologies may not be compatible or operate in a manner sufficient for us to execute our business plan, which could have a material adverse effect on our business, prospects, financial condition and results of operations. A System Failure or Breach of Network Security Could Delay or Interrupt Service to Our Customers Our operations are dependent on our ability to protect our network from interruption by damage from fire, earthquake, power loss, telecommunications failure, unauthorized entry, computer viruses or other events beyond our control. There can be no assurance that our existing and planned precautions of backup systems, regular data backups and other procedures will be adequate to prevent significant damage, system failure or data loss. Despite the implementation of security measures, our infrastructure may also be vulnerable to computer viruses, hackers or similar disruptive problems caused by our customers or other Internet users. Persistent problems continue to affect public and private data networks, including computer break-ins and the misappropriation of confidential information. Computer break-ins and other disruptions may jeopardize the security of information stored in and transmitted through the computer systems of the individuals and businesses utilizing our services, which may result in significant liability to us and also may deter current and potential customers from using our services. Any damage, failure or security breach that causes interruptions or data loss in our operations or in the computer systems of our customers could have a material adverse effect on our business, prospects, financial condition and results of operations. Our Software May Have Defects and We May Encounter Development Delays Software-based services and equipment, such as our services, may contain undetected errors or failures when introduced or when new versions are released. There can be no assurance that, despite testing by us and by current and potential customers, errors will not be found in our software after commercial release, or that we will not experience development delays, resulting in delays in market acceptance, any of which could have a material adverse effect on our business, prospects, financial condition and results of operations. We Depend on Third Parties to Market Our Services, and the Failure by These Third Parties to Market Our Services May Hinder Our Marketing Efforts Currently, we rely on third parties, including e-mail providers, Internet service providers, online service providers, telecommunications companies, systems integrators and value-added resellers as a 13 means of marketing our services. In the event of any prolonged technical problems or failures experienced by these third parties or the termination of these marketing agreements, our marketing capabilities would be significantly hindered, which could have a detrimental effect on our business, prospects, financial condition or results of operations. Many of these relationships are terminable at will or upon short notice. Furthermore, none of our relationships with these third parties includes long-term contractual commitments to continue the relationship, and most of these relationships are in the early stages of development. Because many of our strategic allies view unified messaging as important to their future, they may elect to directly compete with us in the provision of unified messaging services. In addition, our success in developing an international customer base depends on the formation of alliances with foreign companies and their ability to successfully market our services. In any relationship with a third party, particularly internationally, there may be difficulties in integrating or coordinating our services and systems with those of the other party. The failure to form and maintain these strategic alliances or the failure of these companies to successfully develop and sustain a market for our services could have a material adverse effect on our business, prospects, financial condition and results of operations. Our Success Depends on Our Retention of Our Executive Officers and Our Ability to Hire and Retain Additional Key Personnel Our future performance depends in significant part upon the continued service of our executive officers named in the "Management" section at page 49 and other key technical, sales and management personnel. The loss of the services of one or more of our executive officers or other key employees could have a material adverse effect on our business, prospects, financial condition and results of operations. Our future success also depends on our continuing ability to attract and retain highly qualified technical, sales and managerial personnel. Competition for such personnel is intense, and there can be no assurance that we can retain our key employees or that we can attract, assimilate or retain other highly qualified technical, sales and managerial personnel in the future. Our International Operations Are Risky At the end of 1998, foreign telephone numbers represented a significant portion of our total telephone numbers. These foreign numbers were sold through our U.S. web site. We intend to continue to enter additional markets and to expand our operations outside the United States. International sales are subject to inherent risks, including: . unexpected changes in regulatory requirements and tariffs, . a more complex process to acquire telephone numbers, . difficulties in staffing and managing foreign operations, . the possibility of subsidization of our competitors and the nationalization of business, . longer payment cycles, and greater difficulty in accounts receivable collection, . differing technology standards, . imposition of currency exchange controls, and . potentially adverse tax consequences. To the extent the services we sell are priced and paid for in foreign currencies, gains and losses on the conversion of U.S. dollars of receivables and payables arising from international operations could in the future contribute to fluctuations in our results of operations. Additionally, fluctuations in exchange rates could adversely affect demand for our services and have a material adverse effect on our business, prospects, financial condition and results of operations. 14 The Price of Our Common Stock May Decline Due to Shares Eligible for Future Sale Sales of a large number of shares of our common stock in the market after the offering or the perception that sales may occur could cause the market price of our common stock to drop. We will have 31,812,276 shares of common stock outstanding immediately after the offering and 6,028,609 shares issuable upon the exercise of outstanding warrants and options, in each case as of May 15, 1999 and as adjusted for the issuance of shares in this offering. The 7,500,000 shares sold in the offering, plus any shares issued or sold upon exercise of the underwriters' over- allotment option, will be freely tradeable, except for any shares held at any time by an "affiliate," as defined under Rule 144 under the Securities Act of 1933. Of the remaining shares, 23,171,913 shares, and an additional 5,941,735 shares issuable upon exercise of outstanding options and warrants, are subject to lock-up agreements in which the holders of the shares have agreed not to sell any shares for a period of 180 days after the date of this prospectus without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation. There will be a large number of shares available for sale after the end of the lock-up period. The shares not subject to lock-up agreements may be sold without registration under the Securities Act to the extent permitted by Rule 144 or another exemption under the Securities Act. You Will Incur Immediate and Substantial Dilution The initial public offering price, which we have assumed to be $10.00 per share, will be substantially higher than the book value per share of our common stock after this offering, which is calculated to be $1.80 per share. Therefore, you will incur immediate and substantial book value dilution. You will incur additional dilution if holders of stock options, whether currently outstanding or subsequently granted, exercise their options or if warrant holders exercise their warrants to purchase common stock. See "Dilution" for more information. Our Principal Stockholders and Management Own a Significant Percentage of Our Stock and Will Be Able to Exercise Significant Influence Our executive officers and directors and principal stockholders together will beneficially own approximately 71% of our common stock, including shares subject to options and warrants that confer beneficial ownership of the underlying shares, after completion of the offering. Accordingly, these stockholders will be able to determine the composition of our board of directors, will retain the voting power to approve all matters requiring stockholder approval and will continue to have significant influence over our affairs. This concentration of ownership could have the effect of delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could have a material and adverse effect on the market price of the common stock or prevent our stockholders from realizing a premium over the market prices for their shares of common stock. See "Principal and Selling Stockholders" for information about the ownership of common stock by our executive officers, directors and principal stockholders. Anti-Takeover Provisions Could Negatively Impact Our Stockholders Provisions of Delaware law and of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire control of us. For example, we are subject to Section 203 of the Delaware General Corporation Law which would make it more difficult for another party to acquire our company without the approval of our board of directors. Additionally, our certificate of incorporation authorizes our board of directors to issue preferred stock without requiring any shareholder approval, and preferred stock could be issued as a defensive measure in response to a takeover proposal. These provisions could make it more difficult for a third party to acquire 15 JFAX.COM even if an acquisition might be in the best interest of our stockholders. See "Description of Capital Stock" for more information. Our Stock Price May Be Volatile or May Decline An active trading market for our common stock may not develop or be sustained after the offering. We will determine the initial public offering price in consultation with the underwriters. The price at which our common stock will trade after the offering is likely to be volatile and may fluctuate or decline substantially due to factors such as: . assessments of our progress in adding paid subscriptions or free customers, and comparisons of our results in these areas versus our competitors, . variations between our actual results and analyst and investor expectations, . new service or technology announcements by us or others, and regulatory or competitive developments affecting our markets, . investor perceptions of our company and comparable public companies, and . conditions and trends in the communications, messaging and Internet- related industries. In particular, the stock market has from time to time experienced significant price and volume fluctuations affecting the common stocks of technology companies, which may include communications, messaging and Internet- related companies. These fluctuations may result in a rapid and material decline in the market price of our common stock. We May Be Unable to Enforce or Defend Our Proprietary Technology Our success depends to a significant degree upon our proprietary technology. We rely on a combination of trademark, trade secret and copyright law and contractual restrictions to protect our proprietary technology. However, these measures provide only limited protection, and we may not be able to detect unauthorized use or take appropriate steps to enforce our intellectual property rights, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. In addition, we may face challenges to the validity and enforceability of our proprietary rights and may not prevail in any litigation regarding those rights. Companies in the messaging industry have experienced substantial litigation regarding intellectual property. Any litigation to enforce our intellectual property rights would be expensive and time-consuming, would divert management resources and may not be adequate to protect our business. We May Be Found to Have Infringed the Intellectual Property Rights of Others We could be subject to claims that we have infringed the intellectual property rights of others. In addition, we may be required to indemnify our resellers and users for similar claims made against them. Any claims against us could require us to spend significant time and money in litigation, pay damages, develop new intellectual property or acquire licenses to intellectual property that is the subject of the infringement claims. These licenses, if required, may not be available at all or on acceptable terms. As a result, intellectual property claims against us could have a material adverse effect on our business, prospects, financial conditions and results of operations. See "Business--Patents and Proprietary Rights." Our Services May Become Subject to Burdensome Government Regulation We provide our services through data transmissions over public telephone lines and other facilities provided by telecommunications companies. These transmissions are subject to regulation by the Federal Communications Commission, state public utility commissions and foreign governmental authorities. These regulations affect the prices we pay for transmission services, the 16 competition we face from telecommunications services and other aspects of our market. As an Internet messaging services provider, we are not subject to direct regulation by the FCC or any other governmental agency, other than regulations applicable to businesses generally. However, as Internet services and telecommunications services converge or as the services we offer expand, there may be increased regulation of our business. Therefore, in the future, we may become subject to FCC or other regulatory agency regulation. There also may be changes in the regulatory environment outside the United States. Changes in the regulatory environment could decrease our revenues, increase our costs and affect our service offerings. There have been various regulations and court cases relating to the liability of Internet service providers and other online service providers for information carried on or through their services or equipment, including in the areas of copyright, indecency, obscenity, defamation and fraud. For example, federal and state statutes prohibit the online distribution of obscene materials. The law in this area is unsettled, and there may be new legislation and court decisions that expose companies such as ours to liabilities or affect their services. Additional laws and regulations may be adopted with respect to the Internet, covering issues such as support payments to fund Internet availability, content, user privacy, pricing, libel, obscene material, indecency, gambling, intellectual property protection and infringement and technology export and other controls. Other federal Internet-related legislation has been introduced which may limit commerce and discourse on the Internet. The FCC recently ruled that calls to Internet service providers are jurisdictionally interstate and Internet service providers should not pay access charges applicable to telecommunications carriers. Several telecommunications carriers are advocating that the FCC regulate the Internet in the same manner as other telecommunications services by imposing access fees on Internet service providers. The FCC is examining inter-carrier compensation for calls to Internet service providers, which could affect Internet service providers' costs and consequently substantially increase the costs of communicating via the Internet. This increase in costs could slow the growth of Internet use and thereby decrease the demand for our services. Because our services relate principally to the Internet, but convert voice and fax transmissions into e-mails, we are necessarily exposed to legal or regulatory developments affecting either Internet services or telecommunications services. Regulatory developments could cause our business, prospects, financial condition and results of operations to be materially adversely affected. Our Failure and the Failure of Third Parties to Be Year 2000 Compliant Could Negatively Impact Our Business The year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. As a result, our computer programs that have date-sensitive software and software of companies with which our network is interconnected may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. If our systems or the systems of other companies on whose services we depend or with whom our systems interconnect are not year 2000 compliant, it could have a material adverse effect on our business, prospects, financial condition and results of operations. We have yet to develop a comprehensive contingency plan to address the issues which could result from such an event. The year 2000 issue is discussed at greater length in "Management's Discussion and Analysis of Financial Condition and Results of Operations--Impact of Year 2000 Issue." Because of Our High Degree of Cash and Cash Equivalents, We Could Be Required to Register as an Investment Company and Become Subject to Substantial Regulation That Would Interfere With Our Ability to Conduct Our Business As a result of this offering, we will have substantial cash and short-term investments. We plan to invest the proceeds in short-term instruments consistent with prudent cash management and not 17 primarily for the purpose of achieving investment returns. Investment in securities primarily for the purpose of achieving investment returns could result in our being treated as an "investment company" under the Investment Company Act of 1940. The Investment Company Act requires the registration of companies that are primarily in the business of investing, reinvesting or trading securities or that fail to meet certain statistical tests regarding their composition of assets and sources of income even though they consider themselves not to be primarily engaged in investing, reinvesting or trading securities. If we are required to register as an investment company pursuant to the Investment Company Act, we would become subject to substantial regulation with respect to our capital structure, management, operations, transactions with affiliated persons and other matters. Application of the provisions of the Investment Company Act to us would materially and adversely affect our business, prospects, financial condition and results of operations. Since We Share Office Space, Administrative Items and the Services of Our General Counsel with Other Entities Controlled by Our Chief Executive Officer, We Face Potential Conflicts of Interest that Could Adversely Affect Our Company We share contiguous office space and we pro-rate the cost of office space and facilities, the cost of insurance and other related administrative costs with other entities that are controlled by our chief executive officer. We also make the services of our general counsel available to these other entities and charge them for the proportionate cost of the services of our general counsel that they incur. These arrangements are not pursuant to written agreements and are adjusted from time to time according to the relative benefits given and received. For example, one of the other entities is the named sublessee on the lease of our office space, but we are named as an occupant. As a result, our business, prospects, financial condition and results of operations could be adversely affected if our chief executive officer implemented policies with respect to these other entities which do not benefit us. Furthermore, either the positive or negative operating results of these other entities could require that our chief executive officer or general counsel spend a disproportionate amount of their time on work for these entities. While we attempt to share business expenses with the other entities on an equitable basis, it is possible that we could pay less for office space or other shared administrative items if we obtained these services on an independent basis. See "Certain Transactions." Our Management has Broad Discretion in the Application of Proceeds, Which May Increase the Risk that the Proceeds Will Not Be Applied Effectively Our management will have broad discretion in determining how to spend the proceeds of the offering. Accordingly, we can spend the proceeds from the offering in ways which turn out to be ineffective or with which the stockholders may not agree. Forward-Looking Statements are Inherently Uncertain Some statements under the captions "Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" and elsewhere in this prospectus are forward-looking statements. These forward-looking statements include, but are not limited to, statements about our industry, plans, objectives, expectations, intentions and assumptions and other statements contained in the prospectus that are not historical facts. When used in this prospectus, the words "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" and similar expressions are generally intended to identify forward-looking statements. Because these forward-looking statements involve risks and uncertainties, including those described in this "Risk Factors" section, actual results may differ materially from those expressed or implied by these forward- looking statements. Market data and forecasts used in this prospectus, including, for example, estimates of growth in unified messaging mailboxes, have been obtained from independent industry sources. Although we believe these sources are reliable, we have not independently verified these data. 18 USE OF PROCEEDS We estimate that our net proceeds from the sale of common stock in the offering will be approximately $68.8 million, or $74.9 million if the underwriters exercise their over-allotment option in full, at an assumed public offering price per share of $10.00 and after deducting estimated underwriting discounts and commissions and estimated offering expenses. We intend to use the net proceeds from the offering according to the following approximate allocations: . $25 million to expand our network around the world, . $18 million to repay indebtedness and redeem preferred stock, . $20 million to fund marketing and advertising activities, and . any remaining proceeds for working capital and general corporate purposes. Except as indicated, we cannot specify with certainty the particular uses for the net proceeds to be received from the offering or the amount to be used specifically with respect to any use. Accordingly, our management will have broad discretion in the application of the net proceeds. The indebtedness to be repaid accrues interest on principal at a per annum rate of 10%, and half of such indebtedness is due on June 30, 2003 and the other half is due on June 30, 2004, and the preferred stock to be redeemed accumulates dividends on stated amount and unpaid dividends at a per annum rate of 15%. The indebtedness consists of all our 10% Senior Subordinated Notes due 2004, which we issued in June 1998, and the preferred stock is all our Series A Usable Redeemable Preferred Stock, which we issued in July 1998. We issued this indebtedness and preferred stock to fund capital expenditures, to upgrade our network, to fund marketing and advertising expenses and to expand our user base. Prior to the application of the net proceeds from the offering as described above, the net proceeds from the offering will be invested in short-term marketable securities. DIVIDEND POLICY We have never paid any dividends on our common stock and do not anticipate declaring or paying cash dividends in the foreseeable future. We intend to retain future earnings, if any, to reinvest in our business. We expect that covenants in our future financing agreements will prohibit or limit our ability to declare or pay cash dividends. Currently we are not permitted to pay cash dividends pursuant to restrictions in our 10% Senior Subordinated Notes due 2004, which will be repaid with a portion of the proceeds of this offering. 19 CAPITALIZATION The following table sets forth: . our cash position and capitalization as of March 31, 1999, and . our cash position and capitalization as adjusted to give effect to our sale of 7,500,000 shares of common stock in the offering and receipt and application of the estimated net proceeds from the offering, assuming an initial public offering price of $10.00 per share. The information set forth below should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus. See "Use of Proceeds."
As of March 31, 1999 --------------------- Actual As Adjusted (Dollars in thousands) Cash and cash equivalents................................ $ 5,510 $ 56,928 ========= ======== Debt: Capital lease obligations, including short-term portion................................................ 210 210 Long-term debt, including short-term portion............ 6,672 888 --------- -------- Total debt............................................. 6,882 1,098 Redeemable common stock; issued and outstanding 2,207,698 shares at March 31, 1999; no shares as adjusted(/1/).... 5,775 -- Mandatorily redeemable Series A preferred stock; authorized 1,000,000 shares; issued and outstanding 5,000 shares at March 31, 1999, liquidation preference $5,591; no shares as adjusted(/2/)...................... 4,329 -- Stockholders' equity (deficiency): Common stock; $0.01 par value; authorized 100,000,000 shares (subsequently increased to 200,000,000 authorized shares); issued and outstanding 22,100,412 shares at March 31, 1999, excluding 2,207,698 shares issued as redeemable at March 31, 1999; and 31,808,110 shares issued and outstanding as adjusted(/3/)......... 221 318 Additional paid-in capital.............................. 11,975 84,279 Notes receivable from stockholders...................... (2,499) (2,499) Accumulated deficit(/4/)................................ (20,200) (25,030) --------- -------- Total stockholders' equity (deficiency)................ (10,503) 57,068 --------- -------- Total capitalization................................. $ 6,483 $ 58,166 ========= ========
- -------- (1) See Note 4 of the notes to our consolidated financial statements for the conditions applicable to the redeemable securities. (2) The foregoing information reflects the redemption of our Series A Preferred Stock and our 10% Senior Subordinated Notes due 2004 using a portion of the proceeds of this offering. (3) The number of shares of our common stock in the table exclude shares of common stock that are issuable upon the exercise of outstanding options and warrants. See notes 4 and 9 of our consolidated financial statements. (4) The as adjusted accumulated deficit includes the effect of a $4.8 million extraordinary charge for the early extinguishment of the Senior Subordinated Notes as discussed under "Use of Proceeds." 20 DILUTION Our net tangible book value (deficit) at March 31, 1999 was a deficit of approximately $4.7 million, or $0.19 per share of common stock. Net tangible book value (deficit) per share of common stock represents the amount of total tangible assets less total liabilities, divided by the total number of shares of common stock outstanding. Net tangible book value excludes 5,000 redeemable preferred shares with a carrying value of $4.3 million and includes the carrying value of $5.8 million relating to 2,207,698 shares of redeemable common stock. Dilution per share represents the difference between the amount per share paid by purchasers of shares of common stock in the offering and the pro forma net tangible book value per share of common stock immediately after the completion of the offering. After giving effect to the assumed sale of 7,500,000 shares of common stock at a price of $10.00 per share in the offering and the application of the estimated net proceeds from the offering, including the redemption of Series A preferred stock and the conversion of the redeemable common shares, our pro forma net tangible book value as of March 31, 1999 would have been approximately $57.1 million, or $1.80 per share. This represents an immediate dilution in net tangible book value per share of $8.20 to investors who purchase shares of common stock in the offering and an immediate increase in net tangible book value per share to existing shareholders of $1.99. The following table illustrates the dilution in net tangible book value per share to such investors: Assumed initial public offering price per share............. $10.00 ------ Net tangible book value (deficit) per share as of March 31, 1999................................................. $(0.19) Increase per share attributable to new investors.......... $ 1.99 ------ Pro forma net tangible book value per share as of March 31, 1999 after giving effect to the offering............. 1.80 ------ Dilution per share to new investors....................... $ 8.20
The following table summarizes, as of May 15, 1999, the difference between the existing stockholders and new investors with respect to the number of shares of common stock purchased from us, including redeemable common shares, the total consideration paid and the average price per share paid at an assumed initial public offering price of $10.00 per share:
Shares Purchased Total Consideration ------------------ ------------------- Average Price Number Percent Amount Percent per Share Existing stockholders.. 24,312,276 76.4% $17,562,496 19.0% $ 0.72 New investors.......... 7,500,000 23.6 75,000,000 81.0 $10.00 ---------- ----- ----------- ----- Total.............. 31,812,276 100.0% $92,562,496 100.0% ========== ===== =========== =====
The foregoing table assumes no exercise of stock options or warrants. As of May 15, 1999, there were options and warrants outstanding to purchase 6,028,609 shares of common stock at a weighted average exercise price of $2.05 per share. If these outstanding options and warrants were exercised, the shares issued upon those exercises would represent approximately 15.9% of the outstanding common stock after giving effect to the exercises. To the extent outstanding options and warrants are exercised, there will be further dilution to new investors. If these outstanding options and warrants were exercised, the additional dilution would be approximately $(0.03) per share to new investors, based on receipt of the monetary consideration for the shares and the increase in the number of shares outstanding resulting from those exercises. The above information does not give effect to options which we expect to grant in connection with this offering. We expect these grants will consist of options to purchase an aggregate of approximately 760,000 shares of common stock at an exercise price of $9.00 per share. These options will begin vesting at the first anniversary of the grant date. For additional information, see "Certain Transactions." 21 SELECTED CONSOLIDATED FINANCIAL DATA The following selected historical financial data and pro forma statement of operations data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements, related notes and other financial information included elsewhere in this prospectus. The statement of operations data for each of the years in the three year period ended December 31, 1998, and the selected balance sheet data as of December 31, 1998 and 1997, are derived from our consolidated financial statements which have been audited by KPMG LLP and are included in this prospectus. The consolidated financial data for the period from December 14, 1995 (the date of our inception) to December 31, 1995 and as of December 31, 1995 and 1996, are derived from our consolidated financial statements, which have been audited by KPMG LLP and are not included in this prospectus.The statement of operations data for the quarters ended March 31, 1998 and 1999, and the balance sheet data as of March 31, 1999, are derived from our unaudited consolidated financial statements for such interim periods and as of such date, which are included in this prospectus. In the opinion of management, these unaudited interim data include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of operations for such periods and the financial position at such date. Historical results are not necessarily indicative of future results, and results for any interim period are not necessarily indicative of results for a full year.
Three Months Ended Years Ended December 31, March 31, ------------------------------------------------ ------------------------ 1995 1996 1997 1998 1998 1999 (Dollars in thousands, except per share data) Statement of Operations Data: Revenue................. $ -- $ 105 $ 685 $ 3,520 $ 490 $ 1,411 Cost of revenue......... 1 150 858 3,398 626 1,054 ---------- ---------- ----------- ----------- ----------- ----------- Gross profit (loss)............. (1) (45) (173) 122 (136) 357 Operating expenses: Sales and marketing... -- 150 1,069 4,990 372 708 Research and development.......... -- 61 793 1,226 261 517 General and administrative....... 20 512 2,962 4,881 917 1,422 ---------- ---------- ----------- ----------- ----------- ----------- Total operating expenses........... 20 723 4,824 11,097 1,550 2,647 ---------- ---------- ----------- ----------- ----------- ----------- Operating loss...... (21) (768) (4,997) (10,975) (1,686) (2,290) Interest expense (income) net........... -- -- (215) 933 -- 426 Income tax expense...... -- 1 2 2 2 2 ---------- ---------- ----------- ----------- ----------- ----------- Net loss............ $ (21) $ (769) $ (4,784) $ (11,910) $ (1,688) $ (2,718) ========== ========== =========== =========== =========== =========== Net loss attributable to common shares...... $ (21) $ (769) $ (4,784) $ (12,404) $ (1,688) $ (2,976) ========== ========== =========== =========== =========== =========== Basic and diluted net loss per common share.. $ (0.00) $ (0.12) $ (0.30) $ (0.56) $ (0.09) $ (0.12) ========== ========== =========== =========== =========== =========== Weighted average common shares used in determining net loss per share.............. 5,575,000 6,406,666 15,738,334 22,181,960 19,435,000 24,308,111 ========== ========== =========== =========== =========== ===========
Year ended Three Months Ended December 31, 1998 March 31, 1999 ----------------- ------------------ (In thousands, except per share data) Pro Forma Statement of Operations Data:(/1/) Pro forma net loss attributable to common shares.................................. $(10,709) $(2,083) Pro forma net loss per common share...... $ (0.35) $ (0.07) Common shares used in determining pro forma per share data ................... 30,900 31,808
22
As of As of December 31, March 31, ------------------------- --------- 1995 1996 1997 1998 1999 (In thousands) Balance Sheet Data: Cash and cash equivalents............... $ -- $656 $ 23 $ 7,279 $ 5,510 Working capital (deficiency)............ (11) 479 58 6,735 4,229 Total assets............................ -- 896 2,613 10,513 8,960 Long-term debt.......................... -- -- -- 6,137 6,285 Redeemable common and preferred stock(/2/)............................. -- -- -- 9,042 10,104 Total stockholders' equity (deficiency)........................... (11) 677 1,618 (7,786) (10,503)
- -------- (1) For purposes of the pro forma statements of operations data, it is assumed that the extinguishment of our Senior Subordinated Notes due 2004 described under "Use of Proceeds" occurred at the beginning of each of the financial periods presented, and that the additional shares being issued in this offering were outstanding throughout the respective periods. The pro forma statement of operations data does not include an extraordinary charge of approximately $4.8 million for the early extinguishment of the Senior Subordinated Notes due 2004. (2) See Note 4 of the notes to our consolidated financial statements for the conditions applicable to the redeemable securities. 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with "Selected Consolidated Financial Data" and our financial statements and related notes included elsewhere in this prospectus. Overview We were founded in 1995 to provide Internet-based messaging and communications services. Our company was initially conceived as a solution to facilitate the receipt of faxes and voice messages via the Internet. Since inception, our primary activities have included: . developing our business model, . hiring management and other key personnel, . building our infrastructure, . introducing our initial services, . expanding geographic coverage and scope of services, . entering into strategic alliances, and . developing new services including our usage-based services and free services. We believe we are the world's largest provider of Internet-based unified messaging services with over 30,000 paid subscriptions as of March 31, 1999. We currently derive substantially all of our revenues from subscription fees, activation fees and charges for usage-based services. In the future, we expect to derive a growing proportion of our revenues from selling our subscription and usage-based services to our free subscribers. Our customers are mostly pre-billed on a month-to-month basis. Revenues are recognized as the service is performed. We expect to increase our sales and marketing expenses following the offering. In the past, we have allocated limited resources to marketing our services, relying on our web site to generate subscriptions and our strategic alliances to market and sell our services to their customer base. We intend to increase our direct and indirect marketing efforts substantially in order to grow our subscriber base and to generate sales from our free and paying subscribers and businesses looking to outsource their messaging requirements. These marketing efforts will require a considerable investment on our part. We also intend to continue to invest in the development of new services, complete the development of our services currently under development and extend and upgrade our network. In particular, we intend to invest in additional infrastructure to increase our capacity and enable us to provide additional Internet-based messaging and communications services. We have incurred significant losses since our inception. As of March 31, 1999, we had an accumulated deficit of approximately $20.2 million. We expect to incur substantial operating losses for the foreseeable future. See "Risk Factors" for a discussion concerning the risks we face. Although we cannot guarantee the success of our business plan, we expect the increases in sales and marketing expenses and in our investments in new services and services under development, together with our free services, will improve our ability to add new subscriptions including paid subscriptions. We also expect that the increased subscriptions will result in increased revenues and, we anticipate, an increased rate of growth of revenues, which will be partially offset, or may be more than offset for some period, by the expenses incurred. There are numerous factors, however, that 24 may materially adversely affect our business plans and the expectations noted above. Finally, we believe that the introduction of free services, both by us and by our competitors, has occurred too recently for us to accurately gauge whether and to what degree they will negatively impact our revenues, our cost structure or our ability to add new subscriptions including paid subscriptions. Results of Operations Three Months Ended March 31, 1999 and 1998 The following table sets forth, for the quarters ended March 31, 1998 and 1999, information derived from our statements of operations as a percentage of revenues. This information should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this prospectus.
Three Months Ended March 31, ----------- 1998 1999 Revenue........................................................ 100% 100% Cost of revenue................................................ 128 75 ---- ---- Gross profit (loss)........................................ (28) 25 Operating expenses: Sales and marketing.......................................... 76 50 Research and development..................................... 53 37 General and administrative................................... 187 101 ---- ---- Total operating expenses................................... 316 188 ---- ---- Operating loss............................................. (344) (163) Interest expense (income), net................................. -- 30 ---- ---- Loss before income taxes................................... (344) (193) Income tax expense............................................. -- -- ---- ---- Net loss................................................... (344)% (193)% ==== ====
Revenue. Revenue was $1.4 million and $490,000 in the quarters ended March 31, 1999 and 1998. The absolute dollar increase in revenue was primarily due to an increased number of subscriptions from both our direct marketing and our strategic alliances. Our number of subscriptions were 30,982 and 11,102 as of March 31, 1999 and 1998. Revenue derived from activation and monthly fees from paid subscriptions accounted for substantially all revenues for the quarters ended March 31, 1999 and 1998. During the quarter ended March 31, 1999, several free fax services were introduced by some of our competitors. See "Risk Factors--The Recent Introduction of Free Fax Services May Harm Our Business." We do not believe that the introduction of these free services impacted the growth of revenues in the quarter ended March 31, 1999 over the quarter ended March 31, 1998, nor have we experienced a drop in our paid subscription sign-up rate. In April 1999, we introduced our own free fax services principally as a promotional tool to attract customers we can target for selling our paid services. 25 Cost of Revenue. Cost of revenue is primarily comprised of data and voice transmission costs, telephone numbers, customer service, online processing fees and equipment depreciation. Cost of revenue was $1.1 million or 75% of revenue and $626,000 or 128% of revenue for the quarters ended March 31, 1999 and 1998. The absolute dollar increase in cost of revenue reflects the cost of building and expanding our server and networking infrastructure and customer service to accommodate growth of our subscriber base. Cost of revenue as a percentage of revenue decreased as a result of the increases in revenue over the same period last year. We anticipate that our data and voice transmission costs, telephone numbers and related operating costs will continue to grow in absolute dollars for the foreseeable future. Operating Expenses Sales and Marketing. Our sales and marketing costs consist primarily of payments with respect to strategic alliances, sales and marketing personnel, advertising, promotions, public relations, trade shows and business development. Sales and marketing expenses were $708,000 or 50% of revenue and $372,000 or 76% of revenue for the quarters ended March 31, 1999 and 1998. The absolute dollar increases in sales and marketing expense from period to period primarily reflect an increase in marketing payments as we have entered into several key strategic relationships with leading Internet and telecommunications companies, and the increase in sales and marketing personnel. Sales and marketing as a percentage of revenue decreased as a result of the increases in revenue over the same period last year. We anticipate that our sales and marketing costs will grow significantly in absolute dollars for the foreseeable future as we pursue our marketing strategy and hire additional sales and marketing personnel. Research and Development. Our research and development costs consist primarily of personnel and consulting costs. Research and development costs were $517,000 or 37% of revenue and $261,000 or 53% of revenue for the quarters ended March 31, 1999 and 1998. The absolute dollar increase in research and development costs from period to period primarily reflects increases in personnel. Research and development as a percentage of revenue decreased as a result of increases in revenue over the same period last year. We believe that significant investments in research and development are required to remain competitive. Therefore, we expect that our research and development costs will continue to increase in absolute dollars for the foreseeable future. General and Administrative. Our general and administrative costs consist primarily of personnel costs, professional services, consulting expenses and building and occupancy costs. General and administrative costs were $1.4 million or 101% of revenue and $917,000 or 187% or revenue for the quarters ended March 31, 1999 and 1998. The absolute dollar increases in general and administrative costs from period to period were primarily due to increases in the number of general and administrative personnel as well as increased costs associated with professional services and facility expenses to support the growth of our operations. General and administrative costs as a percentage of revenue decreased as a result of increases in revenue over the same period last year. We expect that we will incur additional general and administrative costs in absolute dollars as we hire additional personnel and incur additional expenses related to the growth of our business and our operations as a public company. Interest Expense (Income) Net. Our interest expense is primarily related to capital lease obligations and long-term debt. Interest expense (income), net was $426,000 and $154 for the quarters ended March 31, 1999 and 1998. The increase in interest expense (income), net in the first quarter of 1999 primarily resulted from the issuance in July 1998 of $10 million principal amount of subordinated debt. We expect our interest expense (income), net to decline going forward, both in absolute terms and as a percentage of revenues, as a result of the intended use of a portion of the proceeds from this offering to repay indebtedness and to redeem outstanding preferred stock. In addition, we expect interest income to increase as a result of the investment of higher cash balances in short-term marketable securities. 26 Years Ended December 31, 1998, 1997 and 1996 The following table sets forth, for the years ended December 31, 1998, 1997 and 1996, information derived from our statements of operations as a percentage of revenues. This information should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this prospectus.
Years Ended December 31, ------------------ 1996 1997 1998 Revenue..................... 100% 100% 100% Cost of revenue............. 143 125 97 ---- ---- ---- Gross profit (loss)..... (43) (25) 3 Operating expenses: Sales and marketing....... 144 156 142 Research and development.. 59 116 35 General and administrative........... 489 432 138 ---- ---- ---- Total operating expenses............... 692 704 315 ---- ---- ---- Operating loss.......... (735) (729) (312) Interest expense (income), net........................ -- (31) 26 ---- ---- ---- Loss before income taxes.................. (735) (698) (338) Income tax expense.......... -- -- -- ---- ---- ---- Net loss................ (735)% (698)% (338)% ==== ==== ====
Revenue. Revenue was $3.5 million, $685,000 and $105,000 in 1998, 1997, and 1996. The absolute dollar increases in revenue from year to year were due primarily to increases in the number of subscriptions from both our direct marketing and our strategic alliances. Our number of subscriptions were 27,063, 7,125 and 1,269 as of December 31, 1998, 1997 and 1996. Revenue derived from monthly fees from paid subscriptions accounted for substantially all of the revenue in the years ended December 31, 1998, 1997 and 1996. Our subscription services and usage-based services were launched in June 1996. Therefore, revenue for 1997 and 1996 are not directly comparable. Cost of revenue. Cost of revenue is primarily comprised of data and voice transmission costs, telephone numbers, customer service, online processing fees and equipment depreciation. Cost of revenue was $3.4 million or 97% of revenue, $858,000 or 125% of revenue and $150,000 or 143% of revenue, for the years ended December 31, 1998, 1997 and 1996. The absolute dollar increases in cost of revenue reflect the cost of building and expanding our server and networking infrastructure and customer services to accommodate the growth of our subscriber base. Cost of revenue as a percentage of revenue decreased from year to year as a result of the increases in revenue over the same periods. Operating Expenses Sales and Marketing. Our sales and marketing costs consist primarily of payments with respect to strategic alliances, sales and marketing personnel, advertising, promotions, public relations, trade shows and business development. Sales and marketing expenses were $5.0 million or 142% of revenue, $1.1 million or 156% of revenue and $150,000 or 144% of revenue, for the years ended December 31, 1998, 1997 and 1996. The absolute dollar increases in sales and marketing expense primarily reflect an increase in marketing payments which increased by $3.9 million from 1997 to 1998 and $919,000 from 1996 to 1997 as we have entered into several key strategic relationships with leading Internet and telecommunications companies, and the increase in expenses with respect to sales and marketing personnel which increased by $900,000 from 1997 to 1998. 27 In October 1997, we entered into an interactive marketing relationship with America Online. In 1999, we expect to expense the $1 million in advertising costs associated with America Online which is included in prepaid marketing costs as of December 31, 1998. During 1998, we incurred $1,250,000 in advertising expense for advertising activity through America Online. See Note 6(a) of the notes to our consolidated financial statements included in this prospectus. Research and Development. Our research and development costs consist primarily of personnel and consulting costs. Research and development costs were $1.2 million or 35% of revenue, $793,000 or 115% of revenue and $61,000 or 59% of revenue, for the years ended December 31, 1998, 1997 and 1996. The absolute dollar increase in research and development costs from 1997 to 1998 primarily reflects increases in personnel. Prior to 1997, a significant portion of our research and development activity was outsourced. Research and development costs as a percentage of revenue decreased from 1997 to 1998 as a result of increases in revenue over the same period. General and Administrative. Our general and administrative costs consist primarily of personnel costs, travel and professional services, consulting expenses and building and occupancy costs. General and administrative costs were $4.9 million or 138% of revenue, $3.0 million or 432% of revenue and $512,000 or 489% of revenue, for the years ended December 31, 1998, 1997 and 1996. The absolute dollar increases in general and administrative costs from year to year were primarily due to increases in the number of general and administrative personnel which resulted in an increase of $1,531,000 from 1997 to 1998 and an increase of $596,000 from 1996 to 1997 in personnel costs, as well as an increase of $158,000 from 1997 to 1998 and an increase of $206,000 from 1996 to 1997 in costs associated with facility expense to support the growth of our operations. General and administrative costs as a percentage of revenue decreased from year to year as a result of increases in revenue over the same periods. Interest Expense (Income), Net. Our interest expense is primarily related to capital lease obligations and long-term debt. Interest expense (income), net was $933,000, $(215,000) and $0 for December 31, 1998, 1997 and 1996. The increase in interest expense (income), net for 1998 resulted from the issuance in July 1998 of $10 million principal amount of subordinated debt. Income Taxes. As of December 31, 1998, we had federal and state net operating loss carryforwards of approximately $17.1 million available to offset income in the future. Such net operating loss carryforwards will begin expiring in the year 2000. Under the Tax Reform Act of 1986, the amounts of and benefits from such net operating loss carryforwards may be impaired or limited following changes in the ownership of our common stock. 28 Quarterly Financial Information The following table sets forth statement of operations data and such statement of operations data as a percentage of revenues for the three months ended March 31, 1999, December 31, September 30, June 30 and March 31, 1998, and December 31, September 30 and June 30, 1997. The information for each of these quarters has been prepared on substantially the same basis as the audited financial statements included elsewhere in this prospectus and, in the opinion of our management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of operations for such periods. Historical results are not necessarily indicative of the results to be expected in the future, and results of interim periods are not necessarily indicative of results for the entire year.
Three Months Ended ----------------------------------------------------------------------------------------------------------- June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31, 1997 1997 1997 1998 1998 1998 1998 1999 Revenue............ $ 138,977 $ 202,294 $ 226,467 $ 490,427 $ 784,416 $ 975,243 $ 1,269,750 1,411,343 Cost of revenue.... 88,165 207,388 541,364 626,217 682,814 915,962 1,173,250 1,053,943 --------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Gross profit (loss).......... 50,812 (5,094) (314,897) (135,790) 101,602 59,281 96,500 357,400 Operating expenses: Sales and marketing........ 206,242 351,727 325,128 371,969 513,347 1,291,218 2,813,654 707,594 Research and development...... 48,696 114,706 163,293 261,482 287,462 329,366 347,232 517,071 General and administrative... 771,221 1,005,057 1,203,820 917,320 1,105,454 1,240,300 1,617,780 1,422,332 --------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total operating expenses........ 1,026,159 1,471,490 1,692,241 1,550,771 1,906,263 2,860,884 4,778,666 2,646,997 --------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Operating loss... (975,347) (1,476,584) (2,007,138) (1,686,561) (1,804,661) (2,801,603) (4,682,166) (2,289,597) Interest expense (income), net.... (119,063) (72,019) (7,162) 154 (970) 433,449 500,692 426,432 --------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Loss before income taxes.... (856,284) (1,404,565) (1,999,976) (1,686,715) (1,803,691) (3,235,052) (5,182,858) (2,716,029) Income tax expense........... -- -- -- 1,500 -- -- -- 1,500 --------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net loss......... $(856,284) $(1,404,565) $(1,999,976) $(1,688,215) $(1,803,691) $(3,235,052) $(5,182,858) $(2,717,529) ========= =========== =========== =========== =========== =========== =========== =========== As a percentage of revenues: Revenue.......... 100% 100% 100% 100% 100% 100% 100% 100% Cost of revenue.. 63 102 239 128 87 94 92 75 --------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Gross profit (loss).......... 37 (2) (139) (28) 13 6 8 25 Operating expenses: Sales and marketing........ 149 174 144 76 65 132 222 50 Research and development...... 35 57 72 53 37 34 27 37 General and administrative... 555 497 531 187 141 127 128 101 --------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total operating expenses........ 739 728 747 316 243 293 377 188 --------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Operating loss... (702) (730) (886) (344) (230) (287) (369) (163) Interest expense (income), net.... (86) (36) (3) -- -- 45 39 30 --------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Loss before income taxes.... (616) (694) (883) (344) (230) (332) (408) (193) Income tax expense........... -- -- -- -- -- -- -- -- --------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net loss......... (616)% (694)% (883)% (344)% (230)% (332)% (408)% (193)% ========= =========== =========== =========== =========== =========== =========== ===========
29 Fluctuations in Annual and Quarterly Results Our annual and quarterly operating results may fluctuate significantly in the future as a result of numerous factors, including: . the rate at which we are able to add subscriptions and sell additional usage-based services to both free and paid customers of our subscription services, . the amount and timing of expenditures to form strategic relationships, to enhance sales and marketing and to expand our infrastructure, or other costs, as we expand our network, and . changes in the growth rate of Internet usage and acceptance by consumers of electronic commerce. In addition, historically, our quarterly as well as our annual results have fluctuated as a result of the time it takes for a particular strategic alliance to go from the negotiation stage to full project implementation. This development cycle varies from strategic alliance to strategic alliance based on the size, service requirements and capabilities of the reseller. The varying nature of each development cycle has necessarily impacted the timing of revenue and cost recognition. We expect this trend to continue to affect our quarterly and annual results. In addition, we have in the past invested heavily in our network infrastructure and in personnel in anticipation of future growth. We believe that we will continue from time to time to make similar heavy investments in anticipation of further growth. For example, our interactive marketing relationship with America Online produced significant new subscribers for us in 1998. But later in that year we suspended our advertising on America Online largely because technical integrations were not implemented. Our relationship with America Online was significantly renegotiated and amended by the end of 1998. In the first quarter of 1999, in the absence of advertising, America Online did not produce net new subscribers for us. We expect to advertise with America Online and to achieve the needed technical integrations in 1999. Liquidity and Capital Resources Since our inception, we have financed our operations through the private placement of common stock, preferred stock and long-term debt and through equipment lease financing. At March 31, 1999, we had approximately $5.5 million in cash and cash equivalents. Net cash used in operating activities increased to $10.0 million for 1998 from $4.5 million for 1997. The increase in net cash used in operating activities from year to year primarily resulted from increasing net losses. Net cash used in operating activities decreased to $1.6 million for the quarter ended March 31, 1999 from $2.8 million for the quarter ended March 31, 1998. The decrease in net cash used in operating activities for the respective quarters was due to decreases in advertising/strategic alliance payments and increases in accounts payable, partially offset by increasing net losses. Net cash used in investing activities decreased to $543,000 for 1998 from $1.6 million for 1997 primarily due to the completion of the initial build-out of our network, resulting in decreased purchases of furniture, fixtures and equipment in 1998. Net cash used in investing activities decreased to $107,000 for the quarter ended March 31, 1999 from $124,000 for the quarter ended March 31, 1998 due to decreased purchases of furniture, fixtures and equipment. Net cash provided by financing activities increased to $17.9 million for 1998 from $5.5 million for 1997 resulting primarily from the issuance of $5 million liquidation preference of our redeemable preferred stock, $5 million of subordinated debt net of issuance discount and $5 million of redeemable common stock. Net cash used in financing activities was $111,000 for the quarter ended March 31, 1999 as compared to cash provided by financing activities of $3.6 million for the quarter ended March 31, 1998. The decrease in net cash from financing activities resulted primarily from the fact that we did not issue any common stock or incur debt during the quarter ended March 31, 1999. 30 Following the offering, we expect net cash provided by financing activities to increase due to higher cash balances which will be invested in marketable securities. At least initially, this will be partly offset by the intended repayment of indebtedness and redemption of our outstanding preferred stock contemplated in connection with the offering. Since these are relatively expensive sources of funds, however, we expect to benefit from this repayment and redemption. Our capital requirements depend on numerous factors, including market acceptance of our services, the amount of resources we devote to investments in our network and services development, the resources we devote to the sales and marketing of our services and our brand promotions and other factors. We have experienced a substantial increase in our capital expenditures and operating lease arrangements since our inception consistent with the growth in our operations and staffing, and anticipate that this will continue for the foreseeable future. Additionally, we expect to make additional investments in technologies and our network, and plan to expand our sales and marketing programs and conduct more aggressive brand promotions. We currently anticipate that the net proceeds of the offering will be sufficient to meet our anticipated needs for working capital and capital expenditures for at least the next 12 months. Although operating activities may provide cash in certain periods, to the extent we experience growth in the future, we anticipate that our operating and investing activities may use cash. Consequently, any such future growth may require us to obtain additional equity or debt financing, which may not be available on attractive terms, or at all, or may be dilutive. We intend to use the net proceeds from the offering according to the following approximate allocations: .$25 million to expand our network around the world, .$18 million to repay indebtedness and redeem preferred stock, .$20 million to fund marketing and advertising activities, and .any remaining proceeds for working capital and general corporate purposes. Except as indicated, we cannot specify with certainty the particular uses for the net proceeds to be received from the offering or the amount to be used specifically with respect to any such use. The indebtedness to be repaid accrues interest on principal at a per annum rate of 10%, and half of such indebtedness is due on June 30, 2003 and the other half is due on June 30, 2004, and the preferred stock to be redeemed accumulates dividends on stated amount and unpaid dividends at a per annum rate of 15%. The repayment or redemption price of the indebtedness to be repaid is estimated to be $10.9 million (including $763,000 of accrued interest) and of the preferred stock to be redeemed is estimated to be $6.6 million (including $804,000 of accrued dividends). The indebtedness consists of all our 10% Senior Subordinated Notes due 2004, which we issued in June 1998, and the preferred stock is all our Series A Usable Redeemable Preferred Stock, which we issued in July 1998. We believe that we have minimal interest rate risk with respect to our cash equivalents due to the short term nature of the underlying instruments. We have a borrowing arrangement which is subject to interest rate risk due to the fixed interest rate of the debt instrument. Impact of Year 2000 Issue The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations causing disruptions of operations for any company using computer programs or hardware, including, among other things, a temporary inability to process transactions, send invoices or engage in normal business activities. As a result, many companies' computer systems may need to be upgraded or replaced in order to avoid Year 2000 issues. 31 We are a comparatively new company, and, accordingly, the software and hardware we use to operate our business have all been purchased or developed in the last three years. While this does not protect us against Year 2000 exposure, we believe we gain some mitigation from the fact that the information technology we use to operate our business is of recent origin. All of the software code we have internally developed to operate our business is written with four digits to define the applicable year. We are in the process of testing our internal information technology and non-information technology systems. We have completed the majority of testing of our internally developed systems, and are in the process of evaluating and compiling test results and determining what remaining issues need to be addressed. All of the testing we have completed has been performed by our own personnel. To date, we have not retained any outside service or consultants to test or review our systems for Year 2000 compliance. Based on the testing we have performed, we believe that such software is Year 2000 compliant. However, we intend to complete more testing later in the year. In addition to our internally developed software, we utilize software and hardware developed by third parties both for our network as well as our internal information systems. We have tested this third-party software and hardware to determine Year 2000 compliance. In addition, we have obtained certifications from our key suppliers of hardware and networking equipment for our data centers that such hardware and networking equipment are Year 2000 compliant. Additionally, we have received assurances from the providers of key software applications for our internal operations that their software is Year 2000 compliant. Based upon an initial evaluation of our broader list of software and hardware providers, we are aware that all of these providers are in the process of reviewing and implementing their own Year 2000 compliance programs, and we will work with these providers to address the Year 2000 issue and continue to seek assurances from them that their products are Year 2000 compliant. We have not incurred any significant expenses to date, and we do not anticipate that any future costs associated with our Year 2000 remediation efforts will be material. We estimate that the costs associated with implementing our year 2000 compliance plan to be approximately $100,000. The approximate expenses incurred for testing have been as follows: $5,000 for the year ended December 31, 1997, $40,000 for the year ended December 31, 1998 and $25,000 for the quarter ended March 31, 1999. The costs incurred to date, together with our estimate of remaining costs, represent in the aggregate less than 5% of the amounts that we have budgeted for research and development and network operations. However, if we, our customers, our providers of hardware and software or other third parties with whom we do business fail to remedy any Year 2000 issues, our services could be interrupted and we could experience a material loss of revenues that could have a material adverse effect on our business, prospects, results of operations and financial condition. We consider such an interruption to be the most reasonably likely unfavorable result of any failure by us, or failure by the third parties upon whom we rely, to achieve Year 2000 compliance. Presently, we are unable to reasonably estimate the duration and extent of any interruption, or quantify the effect it may have on our future revenues. We have yet to develop a comprehensive contingency plan to address the issues which could result from such an event. We are prepared to develop a plan if our ongoing assessment leads us to conclude we have significant exposure based upon the likelihood of such an event. See "Risk Factors--Our Failure and the Failure of Third Parties to Be Year 2000 Compliant Could Negatively Impact Our Business." Recently Issued Accounting Pronouncements In June 1998, the FASB issued SFAS NO. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is effective for transactions entered into after January 1, 2000. This 32 statement requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and the type of hedge transaction. The ineffective portion of all hedges will be recognized in earnings. We are in the process of determining the impact that the adoption of SFAS NO. 133 will have on our results of operations and financial position. In February 1998, the FASB issued SFAS NO. 132, "Employees' Disclosures About Pensions and Other Postretirement Benefit Plans." This statement is effective for fiscal years beginning after December 15, 1997 and restatement of disclosures for earlier periods is required. We adopted SFAS No. 132 in 1998. 33 BUSINESS Company Overview We are an Internet-based messaging and communications services provider to individuals and businesses throughout the world. Our services enable the user's e-mail box to function as a single repository for all e-mail, fax and voice mail and permit convenient message retrieval through e-mail or by phone. Customers can sign-up for all of our services through our web site and can promptly receive a JFAX.COM phone number. We believe we are the world's largest provider of Internet-based unified messaging services with over 30,000 paid subscriptions as of March 31, 1999. Since we started offering our services on a commercial basis in June 1996, we have expanded our network to offer our services in over 60 area codes in the United States and abroad, including in 21 of the 25 most populous metropolitan areas in the United States and such international business centers as London, Paris, Milan, Frankfurt, Zurich, Sydney and Tokyo. Industry Background Growth of the Internet and Electronic Commerce The Internet has experienced rapid growth and has developed into a significant tool for global communications, commerce and media, enabling millions of people to share information and transact business electronically. International Data Corporation, or IDC, estimates that there were over 51 million web users in the United States and over 97 million worldwide at the end of 1998. IDC projects these numbers to increase to over 135 million web users in the United States and over 319 million worldwide by the end of 2002. Internet-based businesses have emerged to offer a variety of products and services over the Internet. Advances in online security and payment mechanisms have also prompted more businesses and consumers to engage in electronic commerce. IDC estimates that the value of purchases of goods and services, excluding fund transfers and stock transfers, on the Internet will grow from $32.4 billion worldwide in 1998 to $425.7 billion worldwide in 2002. E-Mail E-mail is the most widely adopted Internet application, ranging from a personal messaging tool to a strategic business tool. According to Electronic Mail & Messaging Systems, there were approximately 325 million e-mail accounts in operation at the end of 1998. E-mail messages have increased in volume and functionality, and this trend is expected to continue. For example, e-mail is expected to become a major vehicle for electronic commerce transactions. Forrester Research predicts that the typical online consumer will participate in eight to ten commerce-related exchanges via e-mail per week by 2001. The e- mail box as a locating and delivery device has become the platform for additional applications such as directory services, scheduling and document sharing. Furthermore, the e-mail box can function as a central repository to receive, send, forward, organize and prioritize voice mail, fax and e-mail messages, thus creating what the IDC calls unified messaging. Traditional Faxing The fax machine is a valuable tool for communication for businesses and individuals. Although e-mail traffic is growing rapidly, faxing continues to grow due to decreasing telephone rates and the increasing availability of software that allows faxes, including broadcast faxes, to be sent from personal computers. IDC has projected that worldwide fax transmissions will increase from an estimated 395 billion minutes in 1998 to 647 billion minutes in 2002. According to IDC, fax transmissions generated estimated revenues of $92 billion in 1998 and are projected to generate $103 billion in 2002. 34 Trends in Faxing The transmission of faxes over the Internet has become an increasingly popular tool and provides a low cost method to send and receive faxes. In addition to Internet faxing, users are increasingly faxing documents directly from their computers over traditional phone lines, thereby growing less dependent on traditional fax machines. IDC estimates that the share of faxes sent using a fax machine in the United States was 82% in 1997 and is projected to be 58% in 2002. Recent advances in technology allow users to send and receive faxes from their computers using e-mail to transmit data over the Internet. Internet faxing using e-mail reduces labor costs associated with traditional faxing by allowing users to send, receive and manage faxes from their computers, and reduces the cost of sending messages because of the use of the Internet rather than telephone lines as the transmission medium. Trends in Internet Messaging With continuing developments in modern technology, the various message media are currently in the process of converging. Communication channels are becoming interchangeable as consumers can send the same message through e-mail, voice mail and fax. With the unification of these functions, consumers increasingly value messaging services that are "device-independent." Consumers appreciate the ability to send and retrieve messages in any form and in the most convenient manner, using e-mail, voice mail or fax, and accessing messages with the telephone or personal computer or through the Internet. As e-mail continues to grow and a portion of fax traffic migrates to the Internet, industry analysts are predicting rapid growth of services that unify and simplify the messaging and communications needs of e-mail users. IDC defines unified messaging as "a single 'in-box' for voice, e-mail and fax messages that is accessible by both telephone and PC." IDC predicts that the market for unified messaging will grow from approximately 90,000 unified messaging mailboxes in 1998 to over 12.9 million boxes in 2002 in the United States alone with each generating $20 in unified messaging revenue per month. Need for Cost-Effective Solutions Whether it is an individual avoiding the cost of maintaining a fax machine, answering machine and dedicated fax line or a large corporation attempting to cost-effectively manage expanding and increasingly sophisticated communications systems, individuals and businesses alike are making use of third parties to manage their messaging needs. In addition, businesses often find it difficult to implement state-of-the-art technology in their own infrastructure, and individuals with the expertise to maintain a sophisticated messaging system can be scarce and costly to hire, train and retain. As a result, we believe that organizations seeking to lower their costs and to reduce the amount of time and labor they invest in technological infrastructure and support systems, such as messaging systems, will look to Internet-based solutions provided by third parties to maintain competitiveness. Our Solution We provide individual consumers, end-users and businesses with convenient, cost-effective and reliable Internet-based messaging and communications services. Individual Consumers and End-Users Our services are designed to provide the following key benefits to individual consumers and end-users: .. Unified Messaging. We believe we are the first company to provide a commercially available Internet-based messaging service that enables the end-user's e-mail box to function 35 as a single repository for all e-mail, fax and voice mail and permit convenient management of their messages through e-mail or by phone. . Anytime, Anywhere Accessibility. We have designed our services to allow easy access by customers seven days a week, 24 hours a day from any location. Our customers can listen to their e-mail and voice mail and manage their e-mails, faxes and voice mails from any touch-tone phone. In addition to these capabilities, our customers can listen to their voice mail and view their faxes anytime they read their e-mail. . Access to International Network. We have built a network allowing our customers to establish a local phone number in over 60 area codes in the United States and abroad including in 21 of the 25 most populous metropolitan areas in the United States and such international business centers as London, Paris, Milan, Frankfurt, Zurich, Sydney and Tokyo. Additionally, our proprietary Internet-based solution enables a customer to activate service from our web site or over the phone within minutes. . Cost Effective Service. We believe that by using our service, customers can achieve cost savings and efficiency when compared to traditional telephone and fax communication. . Customization. Our services allow customers to create their own messaging solutions. They may elect to use our free services or our paid subscription services, or they may add any of our usage-based features, such as telephone access to e-mail, outbound voice, outbound faxing, broadcast voice and broadcast faxing. . Customer Support. We offer our customers various levels of support seven days a week, 24 hours a day. We believe a large percentage of our subscribers are professionals or are employed in upper management positions and that another large percentage of our subscribers are self-employed or small business owners. Businesses In addition to the benefits listed above, our service provides the following key benefits to businesses: . Cost Effective Service. With our service, businesses have a reduced need for personnel, traditional fax machines, phone lines or other costly hardware. In addition, we offer a simple solution priced to reflect our economies of scale. . Award-Winning Technology. We provide our customers with access to advanced, award-winning Internet-based messaging technologies based on open standards. In addition to being the first to market a unified messaging service, our technology has earned the 1998 CommerceNet award for Electronic Commerce Excellence in the United States Business-to- Consumer category. . Scaleability and Reliability. Our network of services is designed to be highly scaleable, meaning that it allows us to easily add additional locations to our network and additional users at each location. Our system is also designed with back-up components (including redundant power supplies and multiple Internet connections) in the event of a technological failure and is designed to provide reliable service to our customers. . Security. Our fax services provide a type of security not available with traditional faxing since messages arrive directly into the customer's e- mail box and do not remain in view on a traditional fax machine. In addition, all of our message transmission services are merely a conduit for electronic messaging and do not store copies of transmissions in any format, electronic or otherwise. 36 Our Strategy Our objective is to be the leading global provider of Internet-based unified messaging and related services to individuals and businesses. To achieve this objective, we intend to: . Grow Our Traditional Subscriber Base. We plan to add new subscribers through our direct marketing efforts and through our strategic alliances with major online service providers, Internet service providers, e-mail service providers and others. We believe that our strategic alliances provide us with direct access to their customer bases, which reinforces our ability to be the first to reach these potential new subscribers with unified messaging services. . Capitalize on Free Services. We believe that our free services will attract a critical mass of users and educate Internet users regarding the benefits of our services. We then plan to build our paid subscriber base by converting a portion of free subscriptions to paid subscriptions and to sell usage-based services to both free and paid users. . Build the JFAX.COM Brand. We intend to increase our focus on building the JFAX.COM brand. Historically, our growth has been primarily by word of mouth and the limited promotional efforts of our strategic alliances. Following the offering, we intend to launch a new promotional campaign to increase awareness of the JFAX.COM brand through our strategic alliances and through traditional media, including print and radio. . Expand Service Offerings. We continue to add features to make our services more functional and convenient for end-users. Our goal is to have sticky services, where each end-user discovers through use that our services facilitate efficient messaging management and, as a result, the end user increases his or her use of our services. For instance, we plan to introduce notification service, follow me services, cardless calling and cardless conference calling, each of which we more fully describe in the table on page 39. . Further Develop Strategic Alliances. Our indirect marketing efforts use key relationships with companies such as Ameritech, Yahoo!, CompuServe, Critical Path, Prodigy and others. These companies promote our services and provide a base of potential customers. Our intention is to maximize the value of our existing strategic alliances and enter into similar relationships with other leading Internet and communications companies. . Expand International Network. We are expanding our international network, which currently includes locations in North America, Europe and the Pacific Rim. We offer local phone numbers in over 60 area codes in the United States and abroad, including area codes in 21 of the 25 most populous major metropolitan areas in the United States. We have over 15 area codes outside the United States, including area codes in London, Paris, Frankfurt, Milan, Sydney and Tokyo. We intend to increase the number of area codes and target new international locations. Our Services We provide a comprehensive range of Internet-based services to address the messaging and communication needs of individuals and businesses. All of our inbound services provide a unique telephone number assigned from available area codes and digitally compress and route messages to the customer's e-mail box. We collect approximately 95% of our fees through billing customers' credit cards provided at initiation. If a credit card declines to pay a customer's balance, an e-mail notice is sent to the customer. If the customer does not respond to that e-mail, a disconnection warning is sent to the customer who is then allowed up to 60 days to resolve the outstanding bill before being disconnected. Revenues are accrued upon billing of a customer's credit card. Uncollected credit card amounts are written off after 30 days. We write-off 100% of all amounts declined by credit cards on a monthly basis. 37 Our subscription services are summarized in the following table: SUBSCRIPTION SERVICES
Services Description Attributes Pricing** -------- ----------- ---------- --------- Free Services Free Fax Fax to e-mail Free telephone number Free Unlimited number of incoming faxes Only incoming fax capability User cannot choose area code Free Voice Mail* Voice mail to e-mail Free telephone number Free Unlimited number of incoming voice mails User cannot choose area code Paid Services Business Fax Outbound faxing--User Can select area code for phone number Setup Fee of $15 and can Unlimited incoming faxes $12.50 per phone send faxes Annotation capability number per month plus Broadcast fax--User can additional usage-based send the same fax to charges numerous recipients E-mail by Phone Phone access--User can Access, manage and/or reply to e-mail, Setup Fee of $15 plus call a toll-free number voice mail and faxes by phone $9.50 per month and access plus additional e-mail and voice mail usage-based charges through a touch tone telephone Unified Messaging Combined suite of All benefits of Business Fax and Setup fee of $15 plus services E-mail by Phone $12.50 per month plus additional usage-based charges
- -------- (*) This service is not yet active, but we expect to release it within the next 30 days. (**) These are United States dollar prices for phone numbers in most countries. 38 In addition to our subscription services, we provide a number of value-added services which are available to free and paid customers of our subscription services for an incremental usage-based fee. The primary usage-based services that we offer and we expect to offer in the near future are described in the following table: USAGE-BASED SERVICES
Services Description Attributes - -------- ----------- ---------- Current Usage-Based Services Outbound Fax............ User can fax document through his/her e-mail outbox Per minute fax rates via the Internet by using the intended recipient's Paperless forwarding of received destination fax number followed by "@jfaxsend.com" faxes as the e-mail destination address Outbound Voice.......... User can send a voice message through his/her e-mail Respond to e-mails with a voice outbox via the Internet by using the destination phone message number "@jfaxsend.com" as the e-mail destination address Broadcast Faxing........ User can send the same outbound fax to multiple Powerful broadcast faxing recipients via the Outbound Fax service capabilities Broadcast Voice......... User can send the same voice message to multiple Powerful broadcast voice messaging recipients via the Outbound Voice service capabilities Telephone Access to User can call a toll-free number and access e-mail Access, manage and/or reply to E-mail................. through a touch tone telephone e-mail by phone Planned Services Follow Me Services...... Will locate user by routing incoming calls to any phone User will be able to assign number or series of phone numbers. Callers will have telephone/cell phone numbers and option to leave a voice mail or to search for the user pager numbers at which user can be located Service will try all numbers and track user down Notification............ Will keep user updated regarding incoming messages. User will be able to choose to User will be able to apply rules to filter which check messages immediately or do it messages are received and which media is used later for notification Cardless Calling........ User will be able to make outgoing calls through User will be able to make calls JFAX.COM number by entering a pin number without having to hang up and reenter calling card number Conference Calling...... User will be able to speak to more than one party at a time
Each of the above services listed under "Current Usage-Based Services" is currently offered to our Unified Messaging and Business Fax customers. Pricing for outbound and broadcast faxing and voice is based on per minute rates which vary depending on the location of the destination fax/phone number. Pricing for telephone access to e-mail is $0.25 per minute for access to e-mail via a toll- free telephone number. We plan to make these usage-based services available in the future to users of our free services, upon payment of a sign-up/activation fee. There can be no assurance that we will be successful in the development or offering of any of these current or planned services. The planned services are in the concept stage of development and are expected to be offered in the fourth quarter of 1999. 39 Strategic Alliances In order to introduce our services to end-users, we have developed strategic relationships with various online and offline service providers. These service providers have pre-existing relationships with their customer bases which consist of individuals and entities that are heavy users of e-mail and phone services. Those relationships provide us with access to likely consumers for our services. The following table lists examples of our current relationships:
E- Mail Providers/Portals Internet/Online Service Providers ---------------------- --------------------------------- Yahoo! America Online Critical Path CompuServe CommTouch Prodigy mail.com Systems Integrators, Telecommunications Value Added Resellers, Companies and International Resellers ------------------ --------------------------- Ameritech Telos Bell South Daimler-Benz IT Services Telecom New Zealand E.com Global Ltd. ESAT Telecom Kuni International Research/Eudora Japan ACC Telecom
The following is a summary of certain of these key relationships: Ameritech We are Ameritech's provider of telephone access to e-mail services. Our agreement with Ameritech provides that Ameritech pay for the required toll-free traffic to the telephone access servers and that we pay commissions to Ameritech based on customer revenue. Under the agreement, the parties have agreed to brand the JFAX.COM E-Mail by Phone product as Ameritech's "eListen," "powered by JFAX." Critical Path We are the exclusive unified messaging service offered by Critical Path, a provider of e-mail hosting services to corporate clients. Critical Path's customers as of March 1999 included E*Trade, U.S. West, Network Solutions and America Online, or AOL, which has selected Critical Path to provide e-mail accounts to all of its ICQ (real-time Internet messaging service) users. As the exclusive provider of unified messaging to Critical Path's customers, we expect to participate in the deployment of e-mail and related value-added services to Critical Path's rapidly growing base of users. CompuServe We provide the exclusive unified messaging service for CompuServe, an online service provider. We are an active advertiser on the CompuServe Network and CompuServe.com and also share revenue with CompuServe to the extent that the advertising produces greater customer sign-ups than anticipated. CommTouch We are the exclusive unified messaging service offered by CommTouch, a provider of e-mail hosting services to corporate clients. CommTouch co-brands our service as "powered by JFAX.COM" under a revenue-sharing arrangement. Prodigy We are the exclusive unified messaging service offered by Prodigy, an Internet service provider. Prodigy co-brands our services for sale to its customers under a revenue-sharing arrangement. 40 Telecom New Zealand We have a revenue sharing arrangement with Telecom New Zealand Limited, which is the dominant telephone company and our exclusive reseller in New Zealand. Kuni Research International Kuni Research International is our exclusive reseller in Japan. Kuni is a major reseller of Eudora's e-mail products and is Eudora's exclusive reseller in Japan, which has the largest number of e-mail users in the world outside of the United States. Kuni has a revenue sharing arrangement with us. Our agreements with our strategic alliance resellers generally provide for exclusivity and marketing commitments, in exchange for which we make payments to the reseller on a commission basis. We generally pay to the reseller a portion of our activation fees, a percentage of our monthly service fees and a percentage of customer usage fees. In certain cases, such as under our current arrangement with America Online, we simply purchase advertising and other on- line promotions from the strategic alliance partner. In other cases, such as in our agreement with CompuServe, we use a combination of advertising payments and commissions (with commission being paid only to the extent the advertising purchased produces more subscriptions than anticipated). Many of these relationships are terminable at will or upon short notice. Furthermore, none of these relationships include long-term contractual commitments to continue the relationship, and most of these relationships are in the early stages of development. Although we believe that individually none of these relationships is material to our business, we consider our strategic alliances in their entirety to be important to our future success. Sales and Marketing Within the unified messaging market, we believe that we have a significant level of brand recognition. This is despite the fact that we have spent little on marketing and promotion. We believe that we have the largest market share in the world-wide unified messaging market. We intend to enhance our market position by implementing the following strategy. Direct Marketing Our direct marketing efforts have consisted of attracting visitors to our web site and signing them up as customers. In the past, approximately 60% of our new subscriptions have originated directly through our web site. We believe that our free service offerings will result in a significant increase in traffic to our web site. In the past, we have only engaged in modest advertising through direct channels due to limited financial resources. To fully capitalize on our business model, we intend to initiate a more traditional marketing campaign, which will initially include targeted advertising, direct mail, radio and outbound telemarketing. Indirect Marketing Online Advertising and Reselling. We have revenue sharing and commission based arrangements with a large number of resellers that allow us to advertise on their web sites and permit them to resell our service. We have implemented our affiliates program, a tool for enabling companies and individuals to sign up as JFAX.COM resellers online. Integrated Services. With some of our strategic alliances, we co-brand our service, allowing them to integrate their service with ours and sell a "powered by JFAX.COM" service. 41 Telecommunications Companies. Recently, we have contracted with Ameritech, Telecom New Zealand and ESAT Telecom in Ireland to offer services to their customers. These agreements represent a first step in executing a broad recruitment program targeting traditional telephone companies, competitive telephone companies, long distance providers and wireless carriers. Value-Added Resellers and Systems Integrators. We are in the early stages of our relationship with value-added resellers and systems integrators, by which we mean businesses that take our services and bundle them with services of other companies to be sold as a convenient package of services to the customer. We intend to build a network of value-added resellers and systems integrators that will offer our services as part of an overall information technology solution for their corporate and government customers. International Marketing. We believe that we benefit from local representatives in our international markets, since they have the cultural understanding and relationships necessary to sell our services. Our international department in Los Angeles focuses on recruiting and supporting our international marketing effort. We intend to move our European representative recruitment and support activities to Europe by adding an office there, maintaining our Pacific Rim and Latin American representative recruitment and support activities in Los Angeles. Marketing Our Usage Based Services A critical piece of our direct and indirect marketing strategies is to offer free services. The free services allow us to expand our customer base and get customers in the habit of using our services. By virtue of our component-by- component service approach and flexible billing systems, we can then engage in the following two-step approach to sales: . sell additional usage-based services to both free and paid subscribers, and . convert our free subscribers to paid subscriptions. In order to effectively execute this sales strategy, we must identify reasons why our customers may hesitate to buy new services. We believe the primary reasons include: . mere resistance to change, and . the existence of functional alternatives, such as answering machines and fax machines. We intend to overcome this resistance by selling the factors of unified messaging one at a time. In offering our services on a menu basis, we believe we can: . decrease the risk, or perceived risk, to the customer, . take advantage of immediate, compelling needs to bring about behavior changes, for instance, leveraging the privacy afforded by fax to e-mail to wean the customer of dependence on an actual fax machine, and . render functional alternatives redundant through the gradual introduction of more complete unified messaging services. For example, a free fax customer may, initially, only see the need for a fax machine substitute and see no value in fax to e-mail, voice to e-mail or telephone access to e-mail. By introducing this customer to unified messaging via the free fax service, this customer may, through targeted selling of add-on features, gradually see the power of combined fax to e-mail, voice to e-mail and telephone access to e-mail, and thereby migrate to unified messaging. 42 Our unified messaging resources allow us to execute this sales strategy efficiently. As a unified messaging company, we have access to our subscribers' e-mail and are able to customize our marketing efforts to specific customers. As a result, we have a direct, low cost channel in which to advertise our services by sending the customer a promotional fax, e-mail or voice mail message. International Network and Operations We offer our services in over 60 area codes in the United States and abroad, including in 21 of the 25 most populous major metropolitan areas in the United States and such international business centers as London, Milan, Frankfurt, Zurich, Sydney and Tokyo. We obtain phone numbers on an as-needed basis from various local carriers throughout the United States and internationally with whom we have relationships. As of May 15, 1999, we have over 80,000 phone numbers in use by our subscribers and we have an additional 80,000 phone numbers which we have already acquired from local carriers and which are in our inventory. Our ability to continue to acquire additional quantities of phone numbers in the future will depend on our relationships with our local carriers and our ability to pay market prices for such phone numbers. We intend to take advantage of the fact that we were the first company to offer unified message services by creating a leading position in major cities as quickly as possible. We have pursued two basic types of commercial relationships in rolling out our network: . International Strategic Alliances. To expand our international network rapidly, we are pursuing strategic alliances with telecommunications providers in a number of foreign markets. These alliances provide us with local marketing, billing, customer support, co-location and phone numbers. Our agreements with our international strategic alliance resellers provide that the reseller is granted a license as our exclusive reseller in the particular country in question. The license generally has an initial term of one-year following commercial launch and is renewable by the reseller for additional one-year renewal terms, provided that certain threshold requirements for JFAX.COM subscribers are met at the expiration of each term. The reseller agreement provides for the reseller to pay for local phone numbers and hardware, local marketing expenses and local help desk support, in exchange for which the reseller receives a commission based on the JFAX.COM revenues associated with the reseller. . Co-location. Our servers are housed in spaces owned by third parties, frequently local telephone companies, from which they are connected to a network of phone lines dedicated to JFAX.COM or connected to the Internet. We refer to this service provided by third parties as "co- location." (We generally arrange independently for the connection of local phone numbers for our customers to the servers.) Most servers have a direct connection to the Internet. In addition, in the event that a direct connection is not functioning or a server has no connection, each server is also connected to a dedicated network of phone lines and, by virtue of that network, to at least two of our hubs, or central servers, through which messages can be routed to the Internet. Either the local telephone company or an alternate provides us the ability to access our servers through the telephone lines for the purposes of maintenance and repair. Given the simple nature of the services provided by the co- locators, our co-location agreements are much simpler arrangements than the agreements with our strategic alliances and provide for a fixed monthly fee. We have entered into co-location agreements primarily with two carriers. For locations in the United States, we generally co-locate with WorldCom/MFS, which is now MCI WorldCom. For international locations, our co-location agreements are for the most part with a U.S. subsidiary of Telecom Italia. We have certain other co-location agreements, in which we own both the lines and equipment. We pay a fixed fee per month for all of the above co-locations. 43 We intend to enter additional markets and to expand our operations outside the United States. International sales are subject to a number of inherent risks. We face a more complex process to acquire telephone numbers outside the United States, and in many countries we may not acquire telephone numbers directly, but we must use a local company, which increases the importance of our international strategic alliances. We must depend to a greater extent on our foreign strategic alliances for day-to-day management. Internationally, there may be different technology standards, or changes in regulatory requirements and tariffs, which are more difficult for us to anticipate, and will frequently be more difficult for us to accommodate. Services and Information Systems Inbound Services Inbound servers accept incoming fax and voice mail messages on telephone lines from local telephone providers. The servers run on the Unix operating system, known for reliability in telecom environments, using equipment supplied by leading telephony hardware manufacturers, and software designed and written by our programmers. After a fax transmission or a voice message is received by the server, it is compressed into a standard form, and sent to the user's e- mail address via the Internet. By using the Internet we are able to connect efficiently with third parties on a worldwide basis. Voice messages are typically compressed by a factor of 5 to 1 using the internationally-proven Global Systems for Mobile Communications technology, which results in telephone quality voice, with small file sizes. Faxes are compressed to the TIF/F, an Internet standard for multi-page fax documents, with an average page requiring about 40 kilobytes of memory. Outbound Services The outbound system accepts e-mail messages via the Internet that are addressed to fax machines anywhere in the world, or voice messages that are addressed to telephones anywhere in the world. After a message is received by the outbound system, it determines a least cost route for transmitting the message to the final destination fax machine or telephone. The system comprises servers in a distributed network with several scheduling, prioritization and routing procedures designed and written by our programmers, to ensure that the message is delivered in a timely and cost-effective manner to the destination. Telephone Access Services Our telephone access system offers users the capability to call from any touch-tone telephone and listen to their e-mails and voice mails and manage their e-mails, faxes and voice mails. Our servers connect via the Internet to the user's e-mail servers, and retrieve all of the user's messages, permitting customers to listen to their e-mails via a text-to-speech conversion technology and manage their e-mails, faxes and voicemails by phone. Internet Access and Provisioning Services Our Internet-based provisioning systems, by which customers can initiate our services from our web site, permit us to provision phone numbers and manage account information promptly and efficiently. These systems work on a network of servers connected to a centralized database, and are built to handle high volume traffic with back-up technology in the event of a failure and the ability to add servers and users easily. 44 Reliability and Capacity Issues Future growth in our subscriber base for both free and paid services, and growth in the subscriber bases of competing companies, will increase the demand for available network infrastructure and Internet data transmission capacity. This growth could lead to insufficient capacity and an inability on our part to acquire the necessary capacity to accommodate our future growth. Additionally, these trends will increase the demand for large quantities of telephone numbers and may lead to an inability on our part to acquire the necessary phone numbers, particularly in desirable metropolitan areas, to accommodate our future growth. These issues could also lead to a reduction in our services' reliability. Since customers will not tolerate a service hampered by slow delivery times or unreliable service levels, or failures or security breaches, lack of capacity in our network or insufficient telephone numbers could have a material adverse effect on our business, prospects, financial condition and results of operations. Customer Support Services Our customer service department provides various levels of 24-hour support, seven days a week. This department provides support primarily in English, although this department also has French, Spanish and German speakers. The department handles all account issues for our subscribers, ranging from initial sales and sign-up to technical support and account administration. To provide this "one-stop shop," we have installed a technology infrastructure for our customer service representatives to leverage available data from our main enterprise database and our customer database. These databases give our customer service representatives the ability to track purchase history, payment history, caller history, contact history, and report, analyze and solve technical issues in an efficient and organized manner. We maintain a list of frequently asked questions for use by customer service representatives in responding to common queries and issues. This list of questions is updated to keep our customer service representatives abreast of new issues. Further, we offer Internet-based online self-help. This allows customers to resolve simple issues on their own. We have found that most customer questions come from new users, and with an online self-help guide we believe we are able to address the majority of new users' questions efficiently. Competition We principally compete to provide Internet enabled e-mail users with unified messaging and related communications services. Because unified messaging is a new service that is designed to consolidate other methods of messaging (e.g., voice mail, fax and e-mail) into a single repository, we compete with worldwide providers of voice mail services and products and fax services and products. Each of these markets on a stand-alone basis is highly competitive and has numerous service and product providers. Although we currently have direct competitors for some of our services, we are not aware of any service provider currently offering an international unified messaging suite of services directly competitive to our own. We believe this lack of direct competition will change. To the extent our services face competition, that competition is based on price, quality, brand recognition, geography and customer support. Many services provided over the internet are provided free of charge to attract traffic to the service provider's website. These free services include e-mail, news feeds and stock quotes along with many others. The providers of free services attempt to recoup their expenses by selling advertising based on the traffic generated from users of free services. Services similar to ours are being provided free to users on an advertising supported basis. Examples include a free voice mail product provided by Echobuzz. These services require the user to listen to taped ads before they can 45 access their messages. Fax-4-Free offers free faxing services to users with each outbound fax containing ads in the margins. Efax and CallWave each offer fax to e-mail services free to users, and their users view advertisements when they retrieve their faxes. We expect that as these free services become popular with consumers, they will require our subscription services to provide clear incremental benefits over free services to justify paying for our services. In addition, to the extent free services of another provider are used by a potential JFAX.COM customer, it may be harder for us to persuade that potential customer to try our services. Future competition could come from a variety of companies both in the Internet industry and the telecommunications industry. These industries include major companies which have much greater resources than we have, have been in operation for many years and have large subscriber bases. Such companies may be able to develop and expand their communications and network infrastructures more quickly, adapt more swiftly to new or emerging technologies and changes in customer requirements, take advantage of acquisition and other opportunities more readily, and devote greater resources to the marketing and sale of their products and services than we can. There can be no assurance that additional competitors will not enter markets that we plan to serve or that we will be able to compete successfully. We believe that our solution competes favorably with that of other current and potential providers with respect to the following: . range and quality of service offerings, . access to phone numbers in major metropolitan areas in the United States and abroad, . pricing and cost savings for customers, . customer support, and . brand recognition. We believe we can compete effectively in unified messaging because it is a relatively new service and, as the first company offering unified messaging in its complete form, we have a head start on our current and potential competitors with respect to these factors. However, we face strong competition in each of the component portions of our service (e.g., voice mail, fax and e- mail) from larger, financially stronger and better established competitors. Patents and Proprietary Rights We rely on a combination of trademark, trade secret and copyright law and contractual agreements to protect our proprietary technology and intellectual property rights. We have developed substantially all of our software internally. We have entered into agreements with our software programmers that provide for our ownership of all software and intellectual property. We have licensed from third parties some components of our end-user software for unlimited use for one-time, up-front payments pursuant to written license agreements. Some of our license agreements provide for a modest additional payment in the event of a subsequent major upgrade. We have multiple pending U.S. patent applications and one Patent and Trademark Office application for proprietary aspects of the major components of our technology, but we have no issued patents. Unless and until patents are issued, no patent rights can be enforced. We have obtained U.S. copyright registrations for certain proprietary software. We own registrations in the United States for the service marks JFAX(R), JFAX.COM(R) and our J(R) logo, as shown on the cover, as well as a European Community registration and a European Community application for registration of JFAX(R). We also own registrations and applications for registration in the United States of other service marks and slogans that we use. 46 We hold the Internet domain names "jfax.com" and "jconnect.com." Under current domain name registration practices, no one else can obtain an identical domain name, but can obtain a similar name, or the identical name with a different suffix, such as ".net" or ".org" or with a country designation. The relationship between regulations governing domain names and the laws protecting trademarks and similar proprietary rights is evolving. Domain names are regulated by Internet regulatory bodies, while trademarks are enforceable under local national law. In addition, the regulation of domain names in the United States and in foreign countries is subject to change. There are plans to establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names in all of the countries in which we conduct business, and we could be unable to prevent third-parties from acquiring domain names that infringe or otherwise decrease the value of our domain names or trademarks. Like other technology-based businesses, we face the risk that we will be unable to protect our intellectual property and other proprietary rights, and the risk that we will be found to have infringed the proprietary rights of others. For an expanded discussion of these risks, see "Risk Factors--We May Be Unable to Enforce or Defend Our Proprietary Technology" and "--We May Be Found to Have Infringed the Intellectual Property Rights of Others." We have received communications from AudioFAX IP LLC asserting the ownership of certain United States and Canadian patents, making a licensing proposal for these patents on unspecified terms, and demanding that we immediately cease and desist from infringement of these patents. We have reviewed the AudioFAX patents with our business and technical personnel and outside patent counsel and have concluded that we do not infringe these patents. We have communicated this conclusion to AudioFAX, but it is possible that they will pursue further action in this matter. We intend to defend vigorously our intellectual property rights. Government Regulation There is currently only a small body of laws and regulations directly applicable to access to or commerce on the Internet. However, due to the increasing popularity and use of the Internet, it is possible that a number of laws and regulations may be adopted at the international, federal, state and local levels with respect to the Internet, covering issues such as user privacy, freedom of expression, pricing, characteristics and quality of products and services, taxation, advertising, intellectual property rights, information security and the convergence of traditional telecommunications services with Internet communications. Moreover, a number of laws and regulations have been proposed and are currently being considered by federal, state and foreign legislatures with respect to these issues. The nature of any new laws and regulations and the manner in which existing and new laws and regulations may be interpreted and enforced cannot be fully determined. For example, in 1998, Congress passed and the President signed into law: . The Digital Millennium Copyright Act, which provides stronger copyright protection for software, music and other works on the Internet. Under this law, Internet service providers and web site operators must register with the U.S. Copyright Office to avoid liability for infringement by their subscribers. . Child Online Protection Act, which makes illegal the communication of material that is harmful to minors on the Internet for commercial purposes in such a manner as to be available to minors. This law also contains a section that requires web sites to obtain parental consent before collecting information from children 12 and younger. . Child Protection and Sexual Predator Punishment Act, which imposes stronger criminal penalties for using the Internet to solicit minors for sexual purposes and criminalizes sending obscene material to persons under the age of 16. 47 . The Internet Tax Freedom Act, which provides a three-year moratorium on taxes deemed discriminatory in order to give state and federal lawmakers time to develop a more comprehensive approach to Internet taxation. In addition, there is substantial uncertainty as to the applicability to the Internet of existing laws governing issues such as property ownership, copyrights and other intellectual property issues, taxation, libel, obscenity and personal privacy. The vast majority of these laws were adopted prior to the advent of the Internet and, as a result, did not contemplate the unique issues of the Internet. Future developments in the law might decrease the growth of the Internet, impose taxes or other costly technical requirements, create uncertainty in the market or in some other manner have an adverse effect on the Internet. These developments could, in turn, have a material adverse effect on our business, prospects, financial condition and results of operations. The United Kingdom and the European Union have adopted legislation which has a direct impact on business conducted over the Internet and on the use of the Internet. For example, the United Kingdom Defamation Act of 1996 protects an Internet service provider, under certain circumstances, from liability for defamatory materials stored on its servers. The European Directive on the Protection of Consumers is expected to have a direct effect on the use of the Internet for commercial transactions and will create an additional layer of consumer protection legislation with respect to electronic commerce. In addition, numerous other regulatory schemes are being contemplated by governmental authorities in both the United Kingdom and the European Union. As in the United States, there is uncertainty as to the enactment and impact of foreign regulatory and legal developments. These developments may have a material and adverse impact on our business, prospects, financial condition and results of operations. Facilities We currently occupy approximately 15,000 square feet of office space for our headquarters in Los Angeles, California. We sublease this space through an informal arrangement with CIM Group LLC, the named sublessee, which is a limited liability company controlled by Richard S. Ressler, our chief executive officer. Our share of the monthly rent is approximately $20,000. Our Los Angeles sublease expires in 2000. We have an additional 1,000 square feet of office space at 11 Broadway in downtown New York City. Our New York sublease expires in 2000. All of our network equipment is housed either at our Los Angeles or New York leased space or at one of our 40 co-location facilities around the world. Employees As of April 15, 1999, we employed or contracted a total of 79 employees, including 11 consultants on a full or part-time basis. We have 62 full-time and 6 hourly workers. Thirty of our employees are technical staff, reflecting our emphasis on the development of new technologies. Our future success will depend, in part, on our ability to continue to attract, retain and motivate highly qualified technical, marketing and management personnel. Our employees are not represented by any collective bargaining unit. We have never experienced a work stoppage. We believe our relationship with our employees is good. 48 MANAGEMENT Directors and Executive Officers The following table sets forth certain information regarding our directors and executive officers. We currently have seven directors, each of whom serves for a one year term which will expire at the next annual meeting of stockholders expected to be held in May 2000. We do not currently plan to add any additional directors following the offering.
Name Age Position ---- --- -------- Richard S. Ressler.... 40 Co-Chairman of the Board and Chief Executive Officer Jaye Muller........... 26 Co-Chairman of the Board and Director Gary H. Hickox........ 42 President and Chief Operating Officer Dr. Anand Narasimhan.. 33 Chief Technology Officer Nehemia Zucker........ 42 Chief Financial Officer Zohar Loshitzer....... 41 Chief Information Officer and Director John F. Rieley........ 54 Director Michael P. Schulhof... 55 Director R. Scott Turicchi..... 35 Director Robert J. Cresci...... 55 Director
Richard S. Ressler has been our chief executive officer, co-chairman of the board and a director since 1997. He is a member and manager of Orchard/JFax Investors, LLC, one of our principal stockholders. Since 1994, Mr. Ressler has been the president, sole director and sole shareholder of Orchard Capital Corporation, a consulting firm which provides investment, operational, and financial consulting services to, among others, start-up and turn-around companies including JFAX.COM. From 1995 to 1997, Mr. Ressler was chief executive officer of MAI Systems Corporation, a software and network computing company, and he currently serves as MAI's chairman. Mr. Ressler has served MAI in such capacities pursuant to a consulting agreement between MAI and Orchard Capital. Since 1995, Orchard Capital has also acted as the manager of CIM Group, LLC, a real estate investment, development and management company. Since 1996, Mr. Ressler has also been a director and shareholder of Orchard Telecom, Inc., a telecommunications consulting firm. Jaye Muller is a co-founder and co-chairman of the board and has been a director since 1995. From December 1995 until March 1997, he held various offices with JFAX.COM. After March 1997, he has provided consulting services to us under an agreement between us and Boardrush Media LLC, one of our principal stockholders. He is a member and manager of Boardrush. Mr. Muller received his technical education and began his electronics design work in East Germany. He is a musician and the founder of one of the world's first Internet based newsletters, Germany Alert. Gary H. Hickox has been our president and chief operating officer since 1998. From 1996 to 1998 he was global marketing vice president for AT&T Internet Services, where he was responsible for marketing and securing the delivery of an array of Internet-related voice and call center services. From 1983 to 1996, Mr. Hickox held other executive positions within AT&T. Dr. Anand Narasimhan has been our chief technology officer since 1996. Dr. Narasimhan began his career with IBM in 1990 as a graduate fellow and conducted research and design work in areas that included audio and speech coding techniques. He developed technologies on several patented telecommunications, digital cellular and network devices, and additional patents are pending on devices he helped develop in the areas of Internet telephony, voice and audio data transfer and data network switching. Nehemia Zucker has been our chief financial officer since 1996. Prior to joining JFAX.COM in 1996, he was chief operations manager of Motorola's EMBARC division, which packages CNBC and ESPN 49 for distribution to paging and wireless networks. From 1980 to 1996, Mr. Zucker held various positions in finance, operations and marketing at Motorola in the United States and abroad. Zohar Loshitzer has been our chief information officer and a director since 1997. Since 1995, he has been a managing director of Orchard Telecom, Inc., a telecommunications consulting company. From 1987 to 1995, Mr. Loshitzer was the general manager and part owner of Life Alert, a nationwide emergency response service. Mr. Loshitzer has been a director of MAI Systems Corporation since 1998. John F. Rieley is a co-founder and has been a director since 1995. From December 1995 when our business was founded until March 1997, he held various offices with JFAX.COM. After March 1997 he has provided consulting services to us under an agreement between us and Boardrush Media LLC, one of our principal stockholders. He has managed, marketed and consulted on other projects in the media field, the airline industry and in public affairs. Michael P. Schulhof has been a director since 1997. Mr. Schulhof is a private investor in the media, communications and entertainment industry. From 1993 to 1996, he was president and chief executive officer of Sony Corporation of America. Mr. Schulhof is a trustee of Brandeis University, the Lincoln Center for the Performing Arts, New York University Medical Center and the Brookings Institution. He is a member of the Council on Foreign Relations and the Investment and Services Policy Advisory Committee to the U.S. Trade Representative. Mr. Schulhof is a director of SportsLine, USA, Inc., an Internet-based sports media company. R. Scott Turicchi has been a director since 1998. Mr. Turicchi is a Managing Director in Donaldson, Lufkin & Jenrette Securities Corporation's Investment Banking department. He is responsible for Corporate Finance activities including public equity offerings, high grade and high yield debt offerings, private equity placements and mergers and acquisitions advisory services. Mr. Turicchi joined Donaldson, Lufkin & Jenrette Securities Corporation in 1990. Robert J. Cresci has been a director since 1998. Mr. Cresci has been a Managing Director of Pecks Management Partners Ltd., an investment management firm, since September 1990. Mr. Cresci currently serves on the boards of Bridgeport Machines, Inc., EIS International, Inc., Sepracor, Inc., Arcadia Financial, Ltd., Hitox, Inc., Aviva Petroleum Ltd., Film Roman, Inc., Quest Education Corporation, Castle Dental Centers, Inc., Candlewood Hotel Co., Inc., SeraCare, Inc. and on the boards of several other private companies. The holders of our outstanding subordinated notes and preferred stock issued in June and July 1998 are parties to a securityholders' agreement together with us and Orchard/JFAX Investors, LLC. Under that agreement, each of the parties to the agreement has agreed to vote its shares in favor of one designee of the holders of the notes and one designee of the holders of the preferred stock. Pursuant to the agreement, Mr. Turicchi was appointed to the board of directors as the representative of the holders of the preferred stock and Mr. Cresci was appointed to the board of directors as the representative of the holders of the notes. Committees of the Board of Directors In April 1999, the board of directors established an audit committee and a compensation committee. The audit committee consists of Messrs. Cresci, Schulhof and Turicchi, all of whom are outside directors, by which we mean they are directors who are not also officers or employees of JFAX.COM. The audit committee recommends engagement of our independent auditors, approves the services performed by such auditors and reviews and evaluates our accounting policies and our systems of internal accounting controls. The compensation committee consists of Messrs. Cresci, Schulhof and Turicchi, all of whom are outside directors. The compensation committee makes recommendations to the board of directors in connection with matters of compensation, including determining the compensation of our executive officers. The compensation committee also administers our 1997 Stock Option Plan. 50 Compensation Committee Interlocks and Insider Participation During the year ended December 31, 1998, we had no compensation committee. Decisions regarding compensation for 1998 were made by our board of directors. During the last fiscal year, Mr. Ressler and Mr. Loshitzer participated in deliberations of our board of directors concerning executive officer compensation. Following the completion of the offering, compensation decisions will be made by the compensation committee. Director Compensation Our directors who are also officers receive no separate compensation for serving as directors. Our outside directors, Messrs. Schulhof, Turicchi and Cresci, are themselves, or are representatives of, significant stockholders. They receive no compensation for serving as directors. They are reimbursed for their expenses in attending directors' meetings and committee meetings. Some of our directors will receive stock options in connection with this offering at an exercise price of $9.00 per share. See "Certain Transactions." Executive Compensation The following table sets forth information concerning compensation of our chief executive officer and the top four other highly compensated executive officers whose salary and incentive compensation exceeded $100,000 for the year ended December 31, 1998 (the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
Annual Long-Term Compensation Compensation --------------------- ------------ Shares Name And Principal Other Annual Underlying Position Salary Bonus Compensation Options - ------------------ -------- ------- ------------ ------------ Richard S. Ressler....... $200,000 $ 0.00 $ 0.00 N/A Chief Executive Officer Gary H. Hickox........... $ 60,874(/1/) $ 0.00 $40,542(/2/) 375,000 President Nehemia Zucker........... $150,000 $33,261 $ 0.00 12,500 Chief Financial Officer Zohar Loshitzer.......... $140,000 $43,677 $ 0.00 50,000 Chief Information Officer Anand Narasimhan......... $137,453 $25,798 $ 0.00 112,500 Chief Technology Officer
- -------- (1) Represents compensation for the period from September 1998 to December 1998. (2) Consists of re-location expenses reimbursed to Mr. Hickox. 51 OPTION GRANTS AND EXERCISES The following table provides information concerning grants of options to purchase our common stock made during the fiscal year ended December 31, 1998 to the Named Executive Officers. They did not exercise any options during this period. No stock appreciation rights were granted during 1998. Option Grants In Last Fiscal Year
Potential Realizable Value Number of At Assumed Annual Rates Securities % of Total of Stock Price Appreciation Underlying Options Granted Exercise or For Option Term Options to Employees in Base Price Expiration --------------------------- Name Granted Fiscal Year ($/SH) Date 5% ($) 10% ($) ---- ---------- --------------- ----------- ---------- --------------------------- Richard S. Ressler...... 0 N/A N/A N/A N/A N/A Chief Executive Officer Gary H. Hickox.......... 375,000 42.0% $2.40 9/17/08 $ 566,005 $ 1,434,368 President Nehemia Zucker.......... 12,500 1.4% $2.40 9/30/08 $ 18,867 $ 47,812 Chief Financial Officer Zohar Loshitzer......... 50,000 5.6% $2.40 9/30/08 $ 75,467 $ 191,249 Chief Information Officer Anand Narasimhan........ 112,500 12.6% $2.40 9/30/08 $169,082 $ 430,310 Chief Technology Officer
Each option represents the right to purchase one share of common stock. One third of the options vest on the one-year anniversary of the grant date and each of the remaining one-third portions of the options vest on each annual anniversary of the grant date thereafter. In the event of a sale of all or substantially all of our assets, or our merger with or into another corporation, each option will become immediately exercisable in full unless the board of directors determines that the optionee has been offered substantially identical replacement options. Potential realizable value is based on the assumption that our common stock appreciates at the annual rate shown (compounded annually) from the date of grant until the expiration of the option term. These numbers are calculated based on the requirements promulgated by the SEC and do not represent our estimate of future stock price growth. Some of the Named Executive Officers will receive stock options in connection with this offering at an exercise price of $9.00 per share. See "Certain Transactions". 52 AGGREGATE OPTION EXERCISES AND FISCAL YEAR-END VALUES The following table provides information concerning unexercised options held as of December 31, 1998 by the Named Executive Officers. They did not exercise any options during this period.
Number of Unexercised Options Value of Unexercised Held In-The-Money Options at December 31, 1998 at December 31, 1998(1) --------------------------------- --------------------------------- Name Exercisable (#)/Unexercisable (#) Exercisable ($)/Unexercisable ($) ---- --------------------------------- --------------------------------- Richard S. Ressler...... 0/0 $0/0 Chief Executive Officer Gary H. Hickox.......... 0/375,000 $0/0 President Nehemia Zucker.......... 145,834/116,666 $238,000/169,999 Chief Financial Officer Zohar Loshitzer......... 225,000/50,000 $360,000/0 Chief Information Officer Anand Narasimhan........ 75,000/112,500 $122,400/0 Chief Technology Officer
- -------- (1) The value of the unexercised in-the-money options is based on fair market value at December 31, 1998, as determined by the Board of Directors, and is net of the exercise price of such options. 1997 Stock Option Plan Our 1997 Stock Option Plan was adopted by the board of directors and approved by the stockholders in November 1997. A total of 4,375,000 shares of common stock has been reserved for issuance under the plan. As of May 15, 1999, options to purchase 1,515,693 shares of common stock were outstanding under the plan, and 53,329 shares had been issued upon exercise of previously granted options. The plan provides for grants to employees (including officers and employee directors) of "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and for grants of nonstatutory stock options to employees (including officers and employee directors) and consultants (including non-employee directors). The plan is administered by the compensation committee of the board of directors. The plan administrator may determine the terms of the options granted, including the exercise price, the number of shares subject to each option and the exercisability of the option. The plan administrator also has the full power to select the individuals to whom options will be granted and to make any combination of grants to any participants. Options generally have a term of 10 years. One-third of the options vest on the one-year anniversary of the grant date and each of the remaining one-third portions of the options vest on each annual anniversary of the grant date thereafter. The option exercise price may not be less than the higher of the par value or 100% of the fair market value of the common stock on the date of grant; provided, however, that nonstatutory options may be granted at exercise prices of not less than the higher of the par value or 85% of the fair market value on the date the option is granted. In the case of an incentive option granted to a person who at the time of the grant owns stock representing more than 10% of the total combined voting power of all classes of our stock, the option exercise price for each share covered stock by such option may not be less than 110% of the fair market value of share of common stock on the date of grant of such option. 53 In the event of a sale of all or substantially all of our assets, or our merger with or into another corporation, each option will become immediately exercisable in full unless the board of directors determines that the optionee has been offered substantially identical replacement options. Employment Agreements We have employment agreements with Mr. Zucker and Mr. Narasimhan. Each of the employment agreements has no specified term and is terminable at will by either party, but provide for severance payments equal to six-months' salary, in the case of Mr. Zucker, and three-months' salary, in the case of Mr. Narasimhan, in the event of a termination by us without cause. Neither of these agreements provides for accelerated vesting of any employee options upon termination for any reason but do provide for accelerated vesting in the event of a change in control of JFAX.COM. We also have an employment agreement with Mr. Hickox. The agreement has a one year term, which term will be renewed for successive one year terms unless either we or Mr. Hickox give prior notice of termination. We will pay Mr. Hickox 12 months' severance in the event that: . he terminates his employment as a result of a relocation of our principal headquarters or a material change in his powers or duties, . we terminate his employment without cause, or . we choose not to renew his employment at the end of the initial term or any successive renewal term. Under the employment agreement, Mr. Hickox's employee options scheduled to vest within 90 days of such termination will vest immediately in the event he terminates his employment as a result of a relocation of our principal headquarters or a material change in his powers or duties or we terminate his employment without cause. Finally, Mr. Hickox is also entitled under the employment agreement to a bonus of 50% of his annual salary if agreed-upon milestones are met and up to 100% of his annual salary if such milestones are exceeded. We have established an incentive compensation bonus plan designed to recognize efforts required to achieve our annual objectives. A management committee administers the plan. This committee is exclusively responsible for determining and approving the following: . financial planning and setting of corporate goals, . eligibility of plan participants, . bonus structure amounts, which are based on base salary, and . individual assessment guidelines and goals. Corporate attainment of goals drives the funding of the bonus plan. If we meet or exceed the semi-annual revenue and paid subscriptions goals set by the management committee of the board of directors, a fixed percentage (either 75%, 100% or 110%, depending on the extent to which the goals are met or exceeded) of a targeted bonus pool (a total of $921,350 for 1999) is funded. If our financial performance does not reach the goals set by the management committee, no bonuses of any amount will be paid. Assuming that the plan is funded, the individual funding is based on a targeted bonus amount (which is set by the management committee as a percentage of the individual's salary). A percentage of the target amount is paid, which percentage is based on the extent to which the aggregate bonus pool has been funded (i.e., based on our performance) and on an individual's attainment of his or her goals, which may be either quantitative goals or numerical goals. An individual's supervisor determines what percentage of that individual's goals have been attained, and recommends a bonus accordingly. Each of Messrs. Hickox, Zucker, Loshitzer and Narasimhan participates in the bonus plan and could receive a bonus of up to 50% of his base salary. 54 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth information as of May 15, 1999 with respect to the beneficial ownership of our common stock both before and immediately following the offering by: . each person known by us to own beneficially more than five percent, in the aggregate, of the outstanding shares of our common stock, . the selling stockholders in this offering, . our directors and our Named Executive Officers, and . all executive officers and directors as group. The following calculations of the percentages of outstanding shares are based on 24,312,276 shares of our common stock outstanding as of May 15, 1999 and 31,812,276 outstanding immediately following the completion of the offering, but these calculations do not take into account shares of our common stock that we will issue if the underwriters' overallotment option is exercised. We determined beneficial ownership in accordance with the rules of the Securities and Exchange Commission, which generally require inclusion of shares over which a person has voting or investment power. Share ownership in each case includes shares issuable upon exercise of outstanding options and warrants that are exercisable within 60 days of May 15, 1999 as described in the footnotes below. Percentage of ownership is calculated pursuant to SEC Rule 13d-3(d)(1). This table gives effect to the intended redemption of the shares of our Series A Usable Redeemable Preferred Stock. 55 Numbers of shares to be sold by each of the selling stockholders are stated on the assumption that the underwriters exercise their over-allotment option in full, since none of the selling stockholders is participating in the main offering with JFAX.COM. We will issue any other shares that are subject to the underwriters' over-allotment option. Shares to be sold by the selling stockholders may be adjusted prior to the pricing of this offering, and shares to be sold by us will be adjusted to account for any increase or decrease in the shares to be sold by the selling stockholders.
Shares of Common Shares of Common Stock Beneficially Stock to be Owned Before the Beneficially Owned Offering After the Offering ------------------ ------------------ Name and Address of Beneficial Number of Owner(1) Shares to - ------------------------------ Number Percent be Sold Number Percent Five Percent Stockholders: Orchard/JFAX Investors, LLC(2)....................... 13,453,278 54.63% -- 13,453,278 41.88% Boardrush Media LLC 972 Putney Road, Suite 299 Brattleboro, VT 05301........ 5,031,250 20.69% 166,600 4,864,650 15.29% Pecks Management Partners Ltd.(3) One Rockefeller Plaza New York, NY 10020........... 2,676,448 10.80% -- 2,676,448 8.29% DLJ Entities(4) 277 Park Avenue New York, NY 10172........... 1,990,625 7.57% -- 1,990,625 5.89% Directors and Officers: Jaye Muller(5)................ 5,031,250 20.69% 166,600 4,864,650 15.29% Richard Ressler(6)............ 13,453,278 54.63% -- 13,453,278 41.88% John F. Rieley................ 175,000 * -- 175,000 * Gary Hickox................... 41,250 * -- 41,250 * Michael P. Schulhof(7)........ 1,103,104 4.39% -- 1,103,104 3.38% Dr. Anand Narasimhan(8)....... 253,459 1.04% -- 253,459 * Nehemia Zucker(9)............. 449,239 1.83% 449,239 1.40% Zohar Loshitzer(10)........... 150,000 * -- 150,000 * R. Scott Turicchi(11)......... 143,750 * -- 143,750 * Robert Cresci(12)............. 0 * -- 0 * All directors and executive officers as a group (10 persons)................. 20,800,330 79.94% 166,600 20,633,730 62.05% Other Selling Stockholders: Steve M. Aaronson ............ 17,360 * 3,700 13,660 * William D. and Arlene Brown .. 41,665 * 10,400 31,265 * Geoffrey S. Goodfellow ....... 98,491 * 50,000 48,491 * Greg James ................... 375,000 1.54% 187,500 187,500 * Regent Trust Company Ltd. R165 Account ..................... 155,000 * 51,600 103,400 *
- -------- (*) Designates less than 1%. 56 (1) The address for all executive officers and directors and for Orchard/JFAX Investors, LLC is c/o JFAX.COM, Inc., 10960 Wilshire Blvd., Suite 500, Los Angeles, CA 90024. (2) Consist of 13,140,778 shares of common stock and 312,500 vested warrants. (3) Consist of: . 1,391,084 shares of common stock and 295,625 vested warrants held by Delaware State Employees Retirement Fund, . 382,979 shares of common stock and 81,250 vested warrants held by ICI American Holdings, Inc. Defined Benefit Plan, . 257,070 shares of common stock and 54,375 vested warrants held by Zeneca Holdings Inc. Defined Benefit Plan, and . 176,565 shares of common stock and 37,500 vested warrants held by the JW McConnell Family Foundation. (4) Consist of: . 15,625 vested warrants held by DLJ Capital Corp. . 1,181,875 vested warrants held by DLJ Private Equity Partners Fund, L.P. . 460,625 vested warrants held by DLJ Fund Investment Partners II, L.P. .41,875 vested warrants held by DLJ Private Equity Employees Fund, L.P. .247,250 vested warrants held by DLJ Securities Corp. .43,375 vested warrants held by DLJ ESC II, L.P. (5) Consist of holdings of Boardrush Media LLC, which is controlled by Mr. Muller. (6) Consist of holdings of Orchard/JFAX Investors, LLC, which is controlled by Mr. Ressler. (7) Consist of 263,104 shares of common stock and 840,000 vested warrants. For accounting purposes, these warrants are treated as options. See note 8 of the notes to our consolidated financial statements. (8) Consist of 178,459 shares of common stock and 75,000 employee options that are exercisable within 60 days of April 15, 1999. (9) Consist of 261,739 shares of common stock and 187,500 employee options that are exercisable within 60 days of April 15, 1999. (10) Consist of 150,000 employee options that are exercisable within 60 days of May 15, 1999. (11) Consist of 143,750 vested warrants; Mr. Turicchi was appointed as the board representative for the holders of the Series A Usable Redeemable Preferred Stock and the related warrants. (12) Mr. Cresci was appointed as the board representative of Delaware State Employees Retirement Fund, ICI American Holdings, Inc. Defined Benefit Plan, Zeneca Holdings Inc. Defined Benefit Plan and the JW McConnell Family Foundation. 57 CERTAIN TRANSACTIONS Indebtedness of Officers and Directors The following directors and officers are indebted to us. Nehemia Zucker is indebted to us in the amount of $113,250. This amount represents the principal balance of a loan in the original principal amount of $100,000 that was advanced to Mr. Zucker on April 11, 1997. The loan matures on March 31, 2001 and bears interest at the rate of 6.32% per annum. However, interest is not paid periodically, but rather is accrued and added to principal each September 30 and March 31. Anand Narasimhan is indebted to us in the amount of $50,000. This loan was advanced to Mr. Narasimhan on September 17, 1997, matures on September 17, 1999 and bears interest at the rate of 8.0% per annum with interest deducted from Mr. Narasimhan's salary. Boardrush Media LLC, a company controlled by Jaye Muller, is indebted to us in the amount of approximately $2,250,000. The loan to Boardrush was advanced to Boardrush on March 17, 1997. The loan to Boardrush matures on March 17, 2004. However, Boardrush shall be required to repay this loan to us upon the sale by Boardrush or its affiliates of at least $4 million of our common stock, except we have waived this requirement with respect to any sale of stock by Boardrush in this offering. This loan bears interest at the rate of 6.32% per annum with interest payments offset against amounts due and owing to Boardrush under the consulting agreement described below. Gary Hickox is indebted to us in the approximate amount of $101,500. This amount represents the principal balance of a loan in the original principal amount of $99,000 that was advanced to Mr. Hickox in October 1998 when he joined us together with accrued interest through May 15, 1999. Mr. Hickox used the proceeds of this loan to purchase 41,250 shares of our common stock. The loan matures on October 7, 2001 and bears interest at 4.25% per annum. However, interest is not paid periodically, but rather is accrued and payable on maturity. Employment, Consulting and Reimbursement Arrangements We have employment agreements with Mr. Zucker and Mr. Narasimhan. Each of the employment agreements has no specified term and is terminable at will by either party, but provide for severance payments equal to six-months' salary, in the case of Mr. Zucker, and three-months' salary, in the case of Mr. Narasimhan, in the event of a termination by us without cause. We also have an employment agreement with Mr. Hickox. The agreement has a one year term, which term will be renewed for successive one year terms unless either we or Mr. Hickox give prior notice of termination. We will pay Mr. Hickox 12 months' severance in the event that: . he terminates his employment as a result of a relocation of our principal headquarters or a material change in his powers or duties, . we terminate his employment without cause, or . we choose not to renew his employment at the end of the initial term or any successive renewal term. Under the employment agreement, Mr. Hickox's employee options scheduled to vest within 90 days of such termination will vest immediately in the event he terminates his employment as a result of a relocation of our principal headquarters or a material change in his powers or duties or we terminate his employment without cause. Under the employment agreement, we reimbursed Mr. Hickox for $40,542 of expenses incurred in connection with his relocation to Los Angeles. Finally, Mr. Hickox is also entitled under the employment agreement to a bonus of 50% of his annual salary if agreed-upon milestones are met and up to 100% of his annual salary if such milestones are exceeded. 58 We are a party to a consulting agreement with Boardrush, a limited liability company that owns approximately 20% of our common stock and of which Mr. Muller is the manager and therefore the controlling person, pursuant to which Boardrush provides the services of Mr. Muller and Mr. Rieley to us for a maximum of two days each per month. We consider Mr. Muller and Mr. Rieley to be the co-founders of our company. The term of the consulting agreement runs through the earlier of the date on which the Boardrush loan is repaid in full as described above and March 17, 2004. Therefore, there can be no assurance that upon the repayment of the Boardrush loan, Mr. Muller and Mr. Rieley will continue to provide any consulting services to us. Until March 17, 1999, we paid Boardrush $400,000 per year, payable in equal monthly payments, pursuant to the consulting agreement. From and after March 17, 1999, Boardrush's compensation under the consulting agreement consists solely of forgiveness of interest and principal under the loan discussed above, with principal reductions being made pro rata over the five-year period from March 17, 1999 through March 17, 2004. Pursuant to the consulting agreement, we also reimburse Boardrush for expenses it incurs on our behalf. Monthly reimbursements to Boardrush are approximately $10,000 on average. Pursuant to the consulting agreement, for a period of three years which will expire in March 2000, Boardrush, and each of Mr. Muller and Mr. Rieley, will not engage in a business in direct competition with our products and services in those areas where we conduct our business. We are also a party to a consulting arrangement with Orchard Capital Corporation, a company controlled by Richard S. Ressler, our chief executive officer and a member and the manager of Orchard/JFax Investors, LLC, one of our principal stockholders. Under this consulting arrangement, we pay Orchard Capital $200,000 per year, payable in equal monthly payments, for the services of Mr. Ressler. We also reimburse Orchard Capital for expenses it incurs on our behalf. Monthly reimbursements to Orchard Capital are approximately $3,000 on average. These arrangements are not pursuant to a written agreement. In January 1997, we entered into a consulting agreement with Michael P. Schulhof, now a member of our board of directors. Pursuant to this agreement, Mr. Schulhof agreed to provide financial, investment and operational advice to our management team. In consideration for these services, Mr. Schulhof was granted a warrant to purchase 420,000 shares of our common stock at an exercise price of $0.70 per share and a second warrant to purchase 420,000 shares of our common stock at an exercise price of $1.80 per share. Each of these warrants is currently exercisable and expires in January 2007. The consulting agreement had a two year term and expired by its terms in January 1999. Shared Space and Services We share contiguous office space and we pro-rate the cost of office space and facilities, the cost of insurance and other related administrative costs with other entities that are controlled by our chief executive officer. We also make available the services of our general counsel to these other entities and charge them for the proportionate cost of the services of our general counsel that they incur. The entities involved are Orchard Capital, Orchard Telecom, CIM Group, LLC and MAI Systems Corporation, but we do not share space with MAI. These arrangements are not pursuant to written agreements and are adjusted from time to time according to the relative benefits given and received. For example, CIM is the named sublessee on the lease of our office space, but we are named as an occupant. Monthly reimbursements from Orchard Capital, Orchard Telecom, CIM and MAI to us are currently approximately $12,500. This amount reflects our business activity, vis a vis the other affiliated entities, as of March 31, 1999, and could increase or decrease as we and/or these affiliated entities grow. 59 Investments in JFAX.COM by Officers, Directors and Principal Stockholders Between December 1995, when we were founded, and March 1997, when Mr. Ressler invested in us through Orchard/JFax Investors, LLC and obtained a controlling interest, we issued a total of 6,910,000 shares of our common stock to our founders, Mr. Muller and Mr. Rieley, in exchange for cash investments. In March 1997, we issued 5,375,000 shares of common stock to Boardrush in exchange for an equivalent number of Mr. Muller's then-current stock holdings, which holdings were canceled. At the same time, we issued 10,060,000 shares of common stock to Orchard/JFax Investors, LLC in exchange for a cash investment of $7,750,000. In March and May 1997, we issued 220,000 shares and 150,000 shares, respectively, to Nehemia Zucker and Anand Narasimhan, upon the exercise by Messrs. Zucker and Narasimhan of employee options granted to them when they joined us in 1996 and payment by each of them of the option price of 0.02c per share. In connection with the investments by Boardrush, Orchard/JFax Investors, LLC, and Messrs. Zucker and Narasimhan, we entered into a registration rights agreement with those investors as well as Messrs. Reiley and Muller. Under that registration rights agreement, the investors have the right to participate in registrations initiated by JFAX.COM, but they have no right to demand that we effect a registration. These registration rights will expire on March 17, 2007. Except for any shares sold by these persons in this offering, the holders of these registration rights have agreed not to exercise their registration rights for a period of 180 days after the date of this prospectus, except with the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation. In March 1998, we issued a total of 3,750,000 shares of common stock at $0.80 per share pursuant to a rights offering that was made available to all of our then shareholders and warrant holders on the same terms. The principal stockholders, officers and directors who participated and the number of shares purchased by each were as follows: Orchard/JFax Investors, LLC (3,080,776 shares), Michael P. Schulhof (263,104 shares), Nehemia Zucker (41,739 shares) and Anand Narasimhan (28,459 shares). A portion of the proceeds of the rights offering was used to repay a loan to us from Orchard/JFax Investors, LLC. That loan was in the principal amount of $1,400,000, accrued interest at a rate of 15% per annum and was repaid for an aggregate of $1,444,100. In June 1998, we issued $10 million of our 10% Senior Subordinated Notes due 2004 together with 2,101,971 shares of our common stock to an investor group advised by Pecks Management Partners Ltd., consisting of Declaration of Trust for Defined Benefit Plans of Zeneca Holdings, Inc., Declaration of Trust for Defined Benefit Plans of ICI American Holdings, Inc., Delaware State Employees' Retirement Fund and the J.W. McConnell Family Foundation. Mr. Cresci, one of our directors, is a managing director of Pecks Management Partners, Ltd. Pursuant to the terms of the notes, which permit us to make some payments of interest by issuing additional notes and shares of common stock, we have issued an additional $512,500 principal amount of notes and 105,727 shares of common stock to that investor group. The total purchase price was $10 million. In July 1998, we also issued $5 million in liquidation preference of our Series A Usable Redeemable Preferred Stock and warrants to acquire 3,125,000 shares of our common stock. The total purchase price was $5 million. The warrants issued in connection with both the preferred stock and the notes have an exercise price of $2.40 per share and expire on July 1, 2005. Donaldson, Lufkin & Jenrette Securities Corporation, an underwriter in this offering who acted as placement agent for the offerings of notes and preferred stock, received warrants to acquire 268,750 shares of our common stock and a cash payment of $900,000, as compensation for its services. Mr. Turicchi, one of our directors, is a managing director of Donaldson, Lufkin & Jenrette Securities Corporation. The purchasers of the preferred stock and related warrants included the following entities in the following amounts: . Affiliates of Donaldson, Lufkin and Jenrette Securities Corporation purchased 3,500 shares and received 2,187,500 warrants; 60 . Orchard/JFax Investors, LLC purchased 500 shares and received 312,500 warrants; and . The investor group managed by Pecks Management Partners, Ltd. purchased 750 shares and received 468,750 warrants. A portion of the proceeds of the notes and preferred stock offerings was used to repay a loan to us from Orchard/JFax Investors, LLC. That loan was in the principal amount of $1,000,000, accrued interest at a rate of 15% per annum and was repaid for an aggregate of $1,013,625. The holders of the common stock and warrants issued in connection with the notes and the preferred stock offerings are entitled to registration rights following this offering pursuant to an agreement between us and those investors entered into at the time of the notes and preferred stock offerings. Under that agreement, among other things, the holders are generally entitled to demand two registrations of the common stock issued in connection with the notes offering or of the common stock issued upon exercise of the warrants. In addition, the holders are entitled to participate in registrations initiated by us. Finally, under the registration rights agreement, we have also agreed to file a registration statement on Form S-3 permitting resales of the shares of common stock held by such investors when we are eligible to use that form. The holders of these registration rights have agreed not to exercise their registration rights for a period of 180 days after the date of this prospectus, except with the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation. In addition, the holders of the common stock and warrants issued in connection with the notes and preferred stock offerings are entitled to have us repurchase such shares of common stock issued upon exercise of the warrants in the event of a change of control of JFAX.COM. In such event, the shares of common stock issued at the time of the notes and preferred stock offerings are to be repurchased at $3.20 per share, the warrants to be redeemed at $1.60 per warrant and the shares issued upon exercise of warrants to be repurchased at $4.00 per share. Finally, we are party to a securityholders' agreement dated June 30, 1998 with the holders of the notes and preferred stock, including those listed above, and other stockholders, including Orchard/JFax Investors, LLC. Under that agreement, the stockholders have agreed to vote their shares of common stock in favor of one designee to the board of directors selected by the initial purchasers of the notes and one designee to the board of directors selected by the initial purchasers of the preferred stock. Currently, Mr. Cresci has been elected to the board of directors as the designee of the initial purchasers of the notes and Mr. Turicchi has been elected to the board of directors as the designee of the initial purchasers of the preferred stock. Although most provisions in the securityholders' agreement terminate as a result of this offering, the rights of the initial purchasers of the notes to designate a director as described above will survive this offering for so long as such purchasers continue to hold at least 25% of the shares of common stock issued in connection with the notes offering and the right of the initial purchasers of preferred stock to designate a director as described above will survive this offering for so long as such purchasers continue to hold at least 25% of the shares issued or issuable upon exercise of the related warrants. The proceeds of this offering will be used in part to repay the Senior Subordinated Notes and the Series A Usable Redeemable Preferred Stock for amounts estimated to be $10,878,000 and $6,554,000, respectively, including accrued and unpaid interest of $262,000 and dividends of $804,000. Persons participating in these investments will retain their shares of our common stock and warrants to acquire our common stock. To the extent required by the rules of the SEC, the ownership of shares and warrants by such persons is reflected in the table under "Principal and Selling Stockholders." In October 1998, we issued 41,250 shares of our common stock to Mr. Hickox in exchange for the proceeds of the loan discussed above. 61 In connection with the warrants granted to Mr. Schulhof, we also granted to him registration rights with respect to the shares issued upon exercise of the warrants. Mr. Schulhof is entitled to participate in registrations initiated by JFAX.COM and, beginning 180 days after the date of this prospectus, is entitled to demand registration of the shares owned by him. Mr. Schulhof's rights to demand a registration of his shares will expire in January 2007, but there is no express termination of his right to participate in registrations effected by us. We believe that the transactions described above were made on terms no less favorable than could have been obtained from third parties. At the time of the transactions concerned--the initial Orchard/JFAX Investors, LLC investment in our company, the June 1998 issuance of notes and common stock, and the July 1998 issuance of preferred stock and warrants--those transactions were negotiated at arms' length with previously unaffiliated parties. We intend to have all future transactions between us and our officers, directors and affiliates be approved by a majority of disinterested directors of the board of directors or one of its committees, as appropriate, in a manner consistent with Delaware law and the fiduciary duties of our directors. Stock Option Grants to Directors and Officers In connection with this offering, we intend to grant options under our stock option plan to our directors and certain officers and employees. We expect these grants will consist of options to purchase an aggregate of up to 760,000 shares of our common stock at an exercise price $9.00 per share public offering price in this offering. We expect these options will be allocated as follows: . To four of our directors, Messrs. Rieley, Schulhof, Turicchi and Cresci--options to purchase 40,000 shares each, or 160,000 shares in the aggregate, . To our chief executive officer--options to purchase 500,000 shares, and . To other officers and employees, options to purchase approximately 100,000 shares in the aggregate. These options will have a term of 10 years and will follow our standard vesting schedule so that one-third of the shares will vest on each of the first three anniversaries of the grant date. However, we may accelerate the vesting of options granted to our outside directors. 62 DESCRIPTION OF CAPITAL STOCK The following summary information is qualified in its entirety by the provisions of our certificate of incorporation and by-laws, copies of which have been filed as exhibits to the registration statement of which this prospectus is a part. See "Available Information" for more information. Our authorized capital stock consists of 200,000,000 shares of common stock, par value $0.01 per share, and 1,000,000 shares of preferred stock, par value $0.01 per share. As of May 15, 1999, 24,312,276 shares of common stock were issued and outstanding, and there were 36 holders of record of common stock. As of May 15, 1999, 5,000 shares of Series A Usable Redeemable Preferred Stock were issued and outstanding, and there were 20 holders of record of preferred stock. We also have warrants and stock options outstanding, as described below. Common Stock Dividends Subject to the prior rights of any outstanding preferred stock, the holders of common stock are entitled to receive dividends out of assets legally available for payment of dividends at such times and in such amounts as the board of directors may from time to time determine. See "Dividend Policy." Voting Rights Each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of our directors, subject to any class or series voting rights granted to the preferred stock. There is no cumulative voting. The board of directors is expressly authorized to adopt, amend or repeal the by-laws in any manner not inconsistent with Delaware law or the certificate of incorporation, subject to the power of the stockholders to adopt, amend or repeal the by-laws. The certificate of incorporation may be amended by an affirmative vote of the holders of a majority of our outstanding capital stock entitled to vote on the matter, subject to any class or series voting rights granted to the preferred stock. Liquidation Rights and Other Matters The shares of common stock are neither redeemable nor convertible, and the holders of common stock have no preemptive or subscription rights to purchase any of our securities. Upon our liquidation, dissolution or winding up, the holders of common stock are entitled to receive pro rata any of our assets which are legally available for distribution after payment of all debts and other liabilities and subject to any preferential rights of the holders of preferred stock. The holders of 2,207,698 shares of our common stock were granted put rights with respect to those shares, which would be available following a change of control, as defined, in a manner similar to the redemption rights applicable to warrants as described below. The put price is $3.20 per share, subject to anti- dilution adjustments. If the put is triggered, the holders of these shares may require us to purchase these shares at the put price. Preferred Stock As of May 15, 1999, we have one series of preferred stock issued and outstanding, consisting of 5,000 shares of Series A Usable Redeemable Preferred Stock, which will be redeemed for approximately $6.6 million using a portion of the proceeds of the offering. This redemption is expected to occur no later than July 1999. After this stock is redeemed, it will be restored to the status of authorized but unissued shares of preferred stock undesignated as to series. The board of directors may authorize the issuance of one or more additional series of preferred stock having such rights, including voting, conversion and redemption rights, and such preferences, 63 including dividend and liquidation preferences, as the board may determine, without further action by our stockholders. The issuance of additional preferred stock by the board of directors could adversely affect the rights of holders of common stock. For example, the issuance of preferred stock could result in another series of securities outstanding with preferences over the common stock with respect to dividends and in liquidation, with voting rights superior to the common stock, or with rights, upon conversion or otherwise, the same or superior to the common stock. We believe that the board of directors' ability to issue preferred stock on such a wide variety of terms will enable the preferred stock to be used for important corporate purposes, such as financing acquisitions or raising additional capital. However, were it inclined to do so, the board of directors could issue all or part of the preferred stock with, among other things, substantial voting power or advantageous conversion rights. This stock could be issued to persons deemed by the board of directors likely to support current management in a contest for control of the company, either as a precautionary measure or in response to a specific takeover threat. The ability of the board of directors to issue additional preferred stock or the issuance of such preferred stock could have the effect of delaying, deferring or preventing a change in control of JFAX.COM without any further action by the holders of common stock. We have no current plans to issue preferred stock for any purpose. Warrants and Options In connection with the preferred stock offering in July 1999, we issued 3,393,750 warrants to purchase an aggregate of 3,393,750 shares of common stock at an exercise price of $ 2.40 per share, subject to adjustment. These warrants are currently exercisable and expire in July 2005. Holders of unexercised warrants do not have voting or any other rights of stockholders. Upon the occurrence of a change of control, as defined, that is not approved by the holders of 66 2/3% in interest of the warrants and the shares of common stock received on the exercise of warrants, the holders of the warrants and the shares of common stock held as a result of the exercise of the warrants will have the right to require us: . to redeem the warrants at $1.60 each, and . to redeem the shares of common stock received on exercise of any warrants at $4.00 each, in each case subject to anti-dilution adjustment. We have also issued warrants to purchase 420,000 shares of common stock at an exercise price of $0.70 per share, to purchase 420,000 shares of common stock at $1.80 per share and to purchase 29,166 shares of common stock at $2.40 per share, in each case subject to anti-dilution adjustment. The latter warrants expire in April 1, 2005, and the former two series of warrants expire in January 2007. We also issued 250,000 warrants to America Online on October 15, 1997 to purchase 250,000 shares of our common stock at $2.40 per share. These warrants expire on October 15, 2004. All of the above warrants are immediately exercisable. We also have options outstanding and available for grant under our stock option plan, including outstanding and currently exercisable options to acquire 496,315 shares of our common stock. See "Management--1997 Stock Option Plan" and "Certain Transactions." Registration Rights Pursuant to various registration rights agreements, including agreements with most of our officers, directors and significant stockholders, the holders of 21,258,026 shares of our common stock may make requests that we register their shares, or include their shares in other registrations, under 64 the Securities Act, subject to conditions as to the minimum aggregate value of shares to be sold and other customary conditions. These registration rights also extend to another 4,933,750 shares not yet issued, for example shares issuable upon the exercise of warrants, for the benefit of the persons having these rights. Including the shares not yet issued, these registration rights will cover approximately 70% of our outstanding shares of common stock, including shares issuable upon the exercise of warrants or options, after the offering. Each person or entity that holds registration rights has agreed, pursuant to a separate agreement between that person or entity and the underwriters, not to exercise any of their rights to demand or participate in a registration for a period of 180 days following the date of this prospectus, without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation. For a further description of the terms of those agreements, see "Underwriting." For a further description of the terms of the registration rights agreements with our officers, directors and principal stockholders, see "Certain Transactions." Securityholders' Agreement We have a securityholders' agreement dated as of June 30, 1998 with investors in our notes and preferred stock in the June and July 1998 private placements. For a description of the terms of that securityholders' agreement, see "Certain Transactions." Anti-Takeover Effects of Delaware Law We are a Delaware corporation and are subject to Delaware law, which generally prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the time that the person became an interested stockholder, unless: . before such time the board of directors of the corporation approved either the business combination or the transaction in which the person became an interested stockholder; . upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested person owns at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding shares owned by persons who are directors and also officers of the corporation and by certain employee stock plans; or . at or after such time the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock of the corporation that is not owned by the interested stockholder. A "business combination" generally includes mergers, asset sales and similar transactions between the corporation and the interested stockholder, and other transactions resulting in a financial benefit to the stockholder. An "interested stockholder" is a person: . who, together with affiliates and associates, owns 15% or more of the corporation's outstanding voting stock, or . who is an affiliate or associate of the corporation and, together with his or her affiliates and associates, has owned 15% or more of the corporation's outstanding voting stock within three years. The provisions of Delaware law described above would make more difficult or discourage a proxy contest or acquisition of control by a holder of a substantial block of our stock or the removal of the incumbent board of directors. Such provisions could also have the effect of discouraging an outsider from making a tender offer or otherwise attempting to obtain control of JFAX.COM, even though such an attempt might be beneficial to us and our stockholders. 65 Our certificate of incorporation and by-laws also: . eliminate the personal liability of directors for monetary damages resulting from breaches of fiduciary duty to the extent permitted by Delaware law; and . indemnify directors and officers to the fullest extent permitted by Delaware law, including in circumstances in which indemnification is otherwise discretionary. We believe that these provisions are necessary to attract and retain qualified directors and officers. Our by-laws require that any stockholder proposals to be considered at an annual meeting of stockholders must be delivered to us not less than 60 nor more than 90 days prior to the meeting. In addition, in the notice of any such proposal, the proposing stockholder must state the proposals, the reasons for the proposal, the stockholder's name and address, the number of shares held by such stockholder and any material interest of the stockholder in the proposals. There are additional informational requirements in connection with a proposal concerning a nominee for the board of directors. Transfer Agent and Registrar The transfer agent and registrar for our common stock is American Securities Transfer & Trust, Inc. 66 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the offering, we will have 31,812,276 shares of common stock issued and outstanding, or 32,467,476 shares if the underwriters' over- allotment option is exercised in full, and 6,028,609 shares issuable upon the exercise of outstanding warrants and options, in each case as of May 15, 1999 and as adjusted for the issuance of shares in this offering. The 7,500,000 shares sold in the offering, plus any shares issued or sold upon exercise of the underwriters' over-allotment option, will be freely tradable without restriction or further registration under the Securities Act, except that any shares purchased by "affiliates" as that term is defined in Rule 144 under the Securities Act, may generally only be resold in compliance with applicable provisions of Rule 144. We issued and sold the remaining 24,312,276 shares in private transactions. These shares may be publicly sold only if registered under the Securities Act or sold in accordance with an applicable exemption from registration, such as Rule 144. In general, under Rule 144, as currently in effect, a person who has beneficially owned shares for at least one year, including an "affiliate," is entitled to sell, within any three-month period, a number of "restricted" shares that does not exceed the greater of one percent (1%) of the then outstanding shares of common stock, or 318,122 shares based on the number of shares expected to be outstanding after the offering, or the average weekly trading volume during the four calendar weeks preceding such sale. Sales under Rule 144 are subject to manner of sale limitations, notice requirements and the availability of current public information about the issuer. Rule 144(k) provides that a person who is not deemed an "affiliate" and who has beneficially owned shares for at least two years is entitled to sell such shares at any time under Rule 144 without regard to the limitations described above. We estimate that 2,248,750 outstanding shares fall in this category Of the 24,312,276 shares outstanding before the offering, affiliates beneficially own over 90% of such shares. See "Risk Factors--The Price of Our Common Stock May Decline Due to Shares Eligible for Future Sale." Any employee, officer, director, advisor or consultant who purchased his or her shares pursuant to a written compensatory plan or contract is entitled to rely on the resale provisions of Rule 701, which permits non-affiliates to sell their Rule 701 shares without having to comply with the public information, holding period, volume limitation or notice provisions of Rule 144 and permits affiliates to sell their Rule 701 shares without having to comply with Rule 144's holding period restrictions, in each case commencing 90 days after we become subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934. As of May 15, 1999, there were outstanding stock options to purchase an aggregate of 1,515,693 shares of common stock, of which 521,734 are presently exercisable or exercisable within 60 days. These outstanding stock options are held by our executive officers or employees. Following the offering, we intend to file a registration statement on Form S-8 covering the 4,375,000 shares of common stock issuable under our stock option plan, including shares subject to outstanding options, thus permitting the resale of such shares in the public market without restriction under the Securities Act, other than restrictions applicable to affiliates. As of May 15, 1999, there were also outstanding warrants to purchase an aggregate of 4,512,916 shares of common stock, which are all presently exercisable. The warrants have a weighted-average exercise price of $2.19 per share. We have granted registration rights to many of our stockholders. As of the date of this prospectus, 21,258,026 of the outstanding shares of common stock are entitled to these registration rights. These registration rights also extend to another 4,933,750 shares not yet issued, for example shares issuable upon the exercise of warrants. See "Certain Transactions" for a description of the agreements governing those registration rights. 67 We, our executive officers and directors, and many of our stockholders have agreed that, subject to limited exceptions in which the transferee agrees to the same restriction, for a period of 180 days from the date of this prospectus, neither we nor they will, without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation: . offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock; or . enter into any swap or other arrangement that transfers all or a portion of the economic consequences associated with the ownership of any common stock, regardless of whether any of these transactions are to be settled by the delivery of common stock, or such other securities, in cash or otherwise. In addition, during the same period, we have agreed not to file any registration statement with respect to, and each of our executive officers, directors and stockholders entitled to registration rights has agreed not to make any demand for, or exercise any right with respect to, the registration of any shares of our common stock or any securities convertible into or exercisable or exchangeable for common stock without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation. The lock-up agreements by persons other than us cover an aggregate of 23,171,913 shares, and an additional 5,941,735 shares issuable upon exercise of outstanding options and warrants. Of the 1,227,236 outstanding shares and shares issuable upon exercise of outstanding options and warrants not subject to lock-up agreements, only 738,750 of such shares will be freely tradable immediately following the offering under Rule 144 as discussed above. Under Rule 144, the remaining 488,486 shares will be available for resale subject to the limitations of Rule 144 beginning 90 days following the offering. Prior to the offering, there has been no public market for our common stock. We are unable to estimate the number of shares that may be sold in the future by our existing stockholders or the effect, if any, that sales of shares by such stockholders, or the availability of shares for sale, will have on the market price of the common stock prevailing from time to time. Sales of substantial amounts of common stock by existing stockholders could adversely affect prevailing market prices. 68 CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES TO NON-U.S. HOLDERS OF COMMON STOCK The following discussion summarizes certain United States federal income and estate tax consequences of the ownership and disposition of our common stock by a "non-U.S. holder." You are a "non-U.S. holder" if you are, for United States federal income tax purposes: . a non-resident alien individual, . a foreign corporation, . a foreign partnership, or . an estate or trust that is not subject to United States federal income tax on a net income basis on income or gain from our common stock. This summary does not discuss all aspects of United States federal income taxation which may be important to particular non-U.S. holders in light of their specific investment circumstances, such as non-U.S. holders subject to special tax rules (e.g., financial institutions, insurance companies, broker- dealers, and tax-exempt organizations) or to non-U.S. holders that hold our common stock as a part of a straddle, hedge, conversion, or synthetic security transaction for United States federal income tax purposes, all of whom may be subject to tax rules that differ significantly from those summarized below. The discussion is based on the tax laws of the United States (including the Internal Revenue Code of 1986, as amended, existing and proposed regulations, and administrative and judicial interpretations) as currently in effect. These laws are subject to change, possibly on a retroactive basis. You are urged to consult a tax advisor regarding the United States federal tax consequences of acquiring, holding and disposing of our common stock in your particular circumstances, as well as any tax consequences that may arise under the laws of any state, local or foreign taxing jurisdiction. Dividends If you are a non-U.S. holder of our common stock, dividends paid to you are subject to withholding of United States federal income tax at a 30% rate or at a lower rate if you are eligible for the benefits of an income tax treaty that provides for a lower rate. If, however, the dividends are "effectively connected" with your conduct of a trade or business within the United States (and they are attributable to a permanent establishment that you maintain in the United States, if that is required by an applicable income tax treaty as a condition for subjecting you to United States income tax on a net income basis), then the dividends generally will not be subject to withholding tax. Instead, "effectively connected" dividends are subject to tax at rates applicable to United States citizens, resident aliens and domestic United States corporations and if you are a non-U.S. corporation, "effectively connected" dividends that you receive may, under certain circumstances, be subject to an additional "branch profits tax" at a 30% rate or at a lower rate if you are eligible for the benefits of an income tax treaty that provides for a lower rate. Under currently effective United States Treasury regulations, dividends paid to an address in a foreign country are presumed to be paid to a resident of that country (unless the person making the payment has knowledge to the contrary) for purposes of the 30% withholding tax discussed above. Under current interpretations of United States Treasury Regulations, this presumption also applies for purposes of determining whether a lower withholding rate applies under an income tax treaty. Under United States Treasury withholding regulations that will generally apply to dividends paid after December 31, 2000, you must satisfy certain certification requirements in order to claim the benefit of a lower treaty rate. In addition, in the case of common stock held by a foreign partnership, the certification requirement generally will apply to the partners of the partnership and the 69 partnership must provide certain information, including a United States taxpayer identification number. These regulations also provide look-through rules for tiered partnerships. If you are eligible for a reduced rate of United States withholding tax under a tax treaty, you may claim a refund of amounts withheld in excess of that rate by filing a refund claim with the United States Internal Revenue Service. Gain on Disposition of Common Stock If you are a non-U.S. holder, you generally will not be subject to United States federal income tax on gain that you recognize on a disposition of our common stock unless: .the gain is "effectively connected" with your conduct of a trade or business in the United States (and the gain is attributable to a permanent establishment that you maintain in the United States, if that is required by an applicable income tax treaty as a condition for subjecting you to United States taxation on a net income basis), or .you are an individual, you hold our common stock as a capital asset, and you are present in the United States for 183 or more days in the taxable year of the sale and certain other conditions exist. If you are a corporate non-U.S. holder, "effectively connected" gains that you recognize may also, under certain circumstances, be subject to an additional "branch profits tax" at a 30% rate or at a lower rate if you are eligible for the benefits of an income tax treaty that provides for a lower rate. Federal Estate Taxes Our common stock held by a non-U.S. holder at the time of death will be included in the holder's gross estate for United States federal estate tax purposes, unless an applicable estate tax treaty provides otherwise. Information Reporting and Backup Withholding In general, dividends paid to you will not be subject to United States information reporting requirements and backup withholding tax if you are either: .subject to the 30% withholding tax (discussed above), or .not subject to the 30% withholding tax because you are eligible for the benefits of an income tax treaty that reduces or eliminates the withholding tax. Dividend payments to you will be reported to the Internal Revenue Service, however, for purposes of the 30% withholding tax (discussed in the "Dividends" section above). If you do not meet either of the two requirements above for exemption from backup withholding tax, and you fail to provide certain information (including your United States taxpayer identification number) or otherwise establish your status as an "exempt recipient", you may be subject to backup withholding of United States federal income tax at a rate of 31% on dividends paid on our common stock. However, under the withholding regulations discussed above, dividend payments generally will be subject to information reporting and backup withholding unless certain certification requirements are met. (See the discussion under "Dividends" for the rules applicable to foreign partnerships under these regulations.) If you sell our common stock outside of the United States through a non-U.S. office of a non-U.S. broker, and the sale proceeds are paid to you outside the United States, then United States backup withholding and information reporting requirements generally will not apply to that payment. 70 However, United States information reporting (but not backup withholding) will apply to a payment of sales proceeds (even if that payment is made to you outside the United States) if you sell your Common Stock through a non-U.S. office of a broker that: .is a United States person, .derives 50% or more of its gross income for certain periods from the conduct of a trade or business in the United States, .is a "controlled foreign corporation" under United States federal tax law, or .with respect to payments made after December 31, 2000, is a foreign partnership, if at any time during its tax year: . one or more of its partners are U.S. persons (as defined in U.S. Treasury regulations) who in the aggregate hold more than 50% of the income or capital interest in the partnership, or . such foreign partnership is engaged in a United States trade or business, unless the broker has documentary evidence in its files that you are a non-U.S. person or you otherwise establish an exemption. If you receive payments of the proceeds of a sale of common stock to or through a United States office of a broker, the payment is subject to both United States backup withholding and information reporting unless you certify that you are a non-U.S. person (under penalties of perjury) or you otherwise establish an exemption. You generally may claim a refund of any amounts withheld under the backup withholding rules that exceed your income tax liability by filing a refund claim with the United States Internal Revenue Service. 71 UNDERWRITING Subject to the terms and conditions of an underwriting agreement, dated , 1999, the underwriters named below, who are represented by Donaldson, Lufkin & Jenrette Securities Corporation, BancBoston Robertson Stephens, Inc. and CIBC World Markets Corp., have severally and not jointly agreed to purchase from us and the selling stockholders the number of shares of common stock set forth opposite their names below.
Number Underwriters: of Shares Donaldson, Lufkin & Jenrette Securities Corporation................ BancBoston Robertson Stephens, Inc. ............................... CIBC World Markets Corp. .......................................... --------- Total.......................................................... 7,500,000 =========
The underwriting agreement provides that the obligations of the several underwriters to purchase and accept delivery of the shares of common stock included in the offering are subject to approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to purchase and accept delivery of all the shares, other than those covered by the over-allotment option described below, if they purchase any of the shares. The underwriters propose to initially offer some of the shares of common stock directly to the public at the public offering price set forth on the cover page of this prospectus and some of the shares to certain dealers at the public offering price less a concession not in excess of $ per share. The underwriters may allow, and such dealers may re-allow, a concession not in excess of $ per share on sales to certain other dealers. After the initial offering of the shares to the public, the representatives may change the public offering price and such concessions. The underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. The following table shows the underwriting fees to be paid to the underwriters by us and the selling stockholders in connection with the offering. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase additional shares of common stock.
Paid by Selling Paid by JFAX.COM Stockholders ------------------------- ------------------------- No Exercise Full Exercise No Exercise Full Exercise Per share................ $ $ $ $ Total.................... $ $ $ $
We will pay the offering expenses, estimated to be $900,000. DLJdirect Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities Corporation and a member of the selling group, is facilitating the distribution of the shares sold in the offering over the Internet. The underwriters have agreed to allocate a limited number of shares to DLJdirect Inc. for sale to its brokerage account holders. We and the selling stockholders have granted to the underwriters an option, exercisable for 30 days from the date of the underwriting agreement, to purchase up to 1,125,000 additional shares at the public offering price less the underwriting fees. The underwriters may exercise such option solely to cover over-allotments, if any, made in connection with the offering. To the extent that the underwriters exercise such option, each underwriter will become obligated, subject to certain conditions, to purchase a number of additional shares approximately proportionate to such underwriter's initial purchase commitment. 72 We and the selling stockholders have agreed to indemnify the underwriters against certain civil liabilities, including liabilities under the Securities Act of 1933, or to contribute to payments that the underwriters may be required to make in respect of any of those liabilities. We, our executive officers and directors, and certain of our stockholders (including the selling stockholders) have agreed that, subject to limited exceptions in which the transferee agrees to the same restriction, for a period of 180 days from the date of this prospectus, neither we nor they will, without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation: . offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock; or . enter into any swap or other arrangement that transfers all or a portion of the economic consequences associated with the ownership of any common stock, regardless of whether any of these transactions is to be settled by the delivery of common stock, or such other securities, in cash or otherwise. In addition, during the same period, we have agreed not to file any registration statement with respect to, and each of our executive officers, directors and stockholders entitled to registration rights has agreed not to make any demand for, or exercise any right with respect to, the registration of any shares of our common stock or any securities convertible into or exercisable or exchangeable for common stock without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation. The lock-up agreements by persons other than us cover an aggregate of 23,171,913 shares, and an additional 5,941,735 shares issuable upon exercise of outstanding options and warrants. We have applied to have our common stock approved for quotation on the NASDAQ National Market under the symbol "JFAX." Prior to the offering, there has been no established trading market for our common stock. The initial public offering price for our shares of common stock offered hereby will be determined by negotiation among us, the selling stockholders and the representatives of the underwriters. The factors to be considered in determining the initial public offering price include the history of and the prospects for the industry in which we compete, our past and present operations, our historical results of operations, the prospects for future earnings, the recent market prices of securities of generally comparable companies and the general condition of the securities markets at the time of the offering. Other than in the United States, no action has been taken by us, the selling stockholders or the underwriters that would permit a public offering of the shares of our common stock included in the offering in any jurisdiction where action for that purpose is required. The shares included in the offering may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisement in connection with the offer and sale of any such shares be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of such jurisdiction. Persons who receive this prospectus are advised to inform themselves about and to observe any restrictions relating to the offering of the common stock and the distribution of this prospectus. This prospectus is not an offer to sell or a solicitation of an offer to buy any shares of common stock included in the offering in any jurisdiction where that would not be permitted or legal. At our request, the Underwriters have reserved for sale, at the initial public offering price, up to 750,000 of the shares included in the offering, to be sold to certain of our directors, officers, employees, distributors, dealers, business associates and related persons. The number of shares 73 available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares that are not orally confirmed for purchase within one day of the pricing of the offering will be offered by the underwriters to the general public on the same terms as the other shares offered hereby. Because affiliates of Donaldson, Lufkin & Jenrette Securities Corporation hold more than 10% of our preferred equity (which we will redeem with the proceeds of this offering), Donaldson, Lufkin & Jenrette Securities Corporation may be deemed to have a conflict of interest with us. Consequently, the offering will be conducted in accordance with Conduct Rule 2720 of the National Association of Securities Dealers, Inc., which requires that the public offering price of any equity security be no higher than the price recommended by a qualified independent underwriter that has participated in the preparation of the registration statement and performed its usual standard of due diligence with respect thereto. BancBoston Robertson Stephens, Inc. has agreed to act as qualified independent underwriter with respect to the offering, and the public offering price of the common stock will be no higher than that recommended by BancBoston Robertson Stephens, Inc. In connection with the offering, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of our common stock. Specifically, the underwriters may overallot the offering, creating a syndicate short position. The underwriters may bid for and purchase shares of our common stock in the open market to cover such syndicate short position or to stabilize the price of the common stock. In addition, the underwriting syndicate may reclaim selling concessions from syndicate members if Donaldson, Lufkin & Jenrette Securities Corporation repurchases previously distributed common stock in syndicate covering transactions, in stabilizing transactions or otherwise or if Donaldson, Lufkin & Jenrette Securities Corporation receives a report that indicates that the clients of such syndicate members have "flipped" the common stock. These activities may stabilize or maintain the market price of our common stock above independent market levels. The underwriters are not required to engage in these activities, and may end any of these activities at any time. Pursuant to the terms of our securityholders' agreement dated as of June 30, 1998, affiliates of Donaldson, Lufkin & Jenrette Securities Corporation that hold some of our securities have the right to designate one of the members of our board of directors. Accordingly, R. Scott Turicchi, a Managing Director of Donaldson, Lufkin & Jenrette Securities Corporation, has been elected to and is a member of our board of directors. Donaldson, Lufkin & Jenrette Securities Corporation acted as the placement agent for the sale of our common stock and 10% Senior Subordinated Notes due 2004 in June 1998 and for the sale of our preferred stock and warrants to purchase common stock in July 1998. Donaldson, Lufkin & Jenrette Securities Corporation and its affiliates purchased shares of our preferred stock and warrants to purchase our common stock on the same terms and at the same price as other purchasers in that placement. See "Certain Transactions." 74 VALIDITY OF SECURITIES The validity of the shares of common stock offered hereby will be passed upon for us by Sullivan & Cromwell, Los Angeles, California, our counsel. Certain legal matters in connection with the offering will be passed upon for the underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, California. EXPERTS Our consolidated financial statements as of December 31, 1997 and 1998, and for each of the years in the three-year period ended December 31, 1998 included in this prospectus and in the registration statement have been so included in reliance upon the report of KPMG LLP, independent certified public accountants, appearing elsewhere in this prospectus and in the registration statement, and upon the authority of that firm as experts in accounting and auditing. AVAILABLE INFORMATION We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered by this prospectus. This prospectus does not contain all the information set forth in the registration statement, certain portions of which are omitted as permitted by the rules and regulations of the SEC. For further information about us and the shares offered by this prospectus, you should refer to the registration statement, including the exhibits and schedules filed with the registration statement. You may obtain copies of the registration statement, of which this prospectus is a part, together with such exhibits and schedules, upon payment of the fee prescribed by the SEC, or you may examine these documents without charge at the office of the SEC. After the offering is completed, we will be subject to the informational requirements of the Securities Exchange Act of 1934 and will be required to file annual and quarterly reports, proxy statements and other information with the SEC. You can inspect and copy reports and other information filed by us with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0300. The SEC also maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements regarding issuers, including us, that file electronically with the SEC. 75 INDEX TO FINANCIAL STATEMENTS
Page ---- Independent Auditor's Report............................................... F-2 Consolidated Balance Sheets................................................ F-3 Consolidated Statements of Operations...................................... F-4 Consolidated Statements of Stockholders' Equity (Deficiency)............... F-5 Consolidated Statements of Cash Flows...................................... F-6 Notes to Consolidated Financial Statements................................. F-7
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors JFAX.COM, Inc.: We have audited the accompanying consolidated balance sheets of JFAX.COM, Inc. (formerly known as JFAX Communications, Inc.) and subsidiary as of December 31, 1997 and 1998 and the related consolidated statements of operations, stockholders' equity (deficiency) and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of JFAX.COM, Inc. and subsidiary as of December 31, 1997 and 1998 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ KPMG LLP Los Angeles, California March 26, 1999, except for note 14 which is as of May 21, 1999 F-2 JFAX.COM, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
As of December 31, As of ------------------------ March 31, 1997 1998 1999 (unaudited) ASSETS Current assets: Cash and cash equivalents............. $ 23,039 7,278,873 5,510,066 Accounts receivable................... 10,774 112,729 88,655 Due from related parties.............. -- 128,578 159,607 Interest receivable................... 4,639 48,603 55,734 Prepaid marketing costs............... 1,000,000 1,000,000 1,100,000 Capitalized offering costs............ -- -- 105,000 Other current assets.................. 14,100 81,888 166,245 ----------- ----------- ----------- Total current assets................ 1,052,552 8,650,671 7,185,307 Furniture, fixtures and equipment, net................................... 1,560,145 1,777,646 1,698,406 Other long-term assets................. -- 84,372 76,527 ----------- ----------- ----------- $ 2,612,697 10,512,689 8,960,240 =========== =========== =========== LIABILITIES, REDEEMABLE SECURITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Accounts payable and accrued expenses............................. $ 945,164 1,100,544 1,787,860 Interest payable...................... -- -- 265,008 Deferred revenue...................... 49,184 328,740 345,561 Current portion of capital lease obligations.......................... -- 89,931 91,470 Current portion of long-term debt..... -- 317,402 386,823 Customer deposits..................... -- 79,286 79,286 ----------- ----------- ----------- Total current liabilities........... 994,348 1,915,903 2,956,008 Capital lease obligations.............. -- 141,783 118,491 Long-term debt......................... -- 6,137,004 6,284,939 Put warrants........................... -- 1,062,331 -- Redeemable common stock; issued and outstanding 2,207,698 shares at December 31, 1998 and March 31, 1999 (unaudited) (redemption value of $7,065,000 at December 31, 1998 and $19,428,000 at March 31, 1999 (unaudited), respectively)............ -- 4,970,975 5,774,975 Mandatorily redeemable Series A preferred stock. Authorized 1,000,000 shares; issued and outstanding 5,000 shares at December 31, 1998 and March 31, 1999 (unaudited) at par value of $1,000 (liquidation preference $5,386,915 at December 31, 1998 and $5,591,459 (unaudited) at March 31, 1999)........ -- 4,070,671 4,329,019 Stockholders' equity (deficiency): Common stock, $0.01 par value. Authorized 200,000,000 shares; total issued and outstanding 18,185,000, 22,099,996 and 22,100,413 (unaudited) shares at December 31, 1997 and 1998, and March 31, 1999, respectively, excluding 2,207,698 issued as redeemable at December 31, 1998 and March 31, 1999 (unaudited).......................... 181,851 221,000 221,004 Additional paid-in capital............ 9,409,703 11,975,043 11,975,354 Notes receivable from stockholders.... (2,400,000) (2,499,000) (2,499,000) Accumulated deficit................... (5,573,205) (17,483,021) (20,200,550) ----------- ----------- ----------- Total stockholders' equity (deficiency)....................... 1,618,349 (7,785,978) (10,503,192) Commitment and Contingencies (note 11)................................... Liquidity (note 13).................... Subsequent Events (note 14)............ ----------- ----------- ----------- $ 2,612,697 10,512,689 8,960,240 =========== =========== ===========
See accompanying notes to consolidated financial statements. F-3 JFAX.COM, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Year Ended December 31, March 31, ---------------------------------- ---------------------- 1996 1997 1998 1998 1999 (unaudited) Revenue................. $ 104,531 685,465 3,519,836 490,427 1,411,343 Cost of revenue......... 149,651 857,924 3,398,243 626,217 1,053,943 --------- ---------- ----------- ---------- ---------- Gross profit (loss)............. (45,120) (172,459) 121,593 (135,790) 357,400 Operating expenses: Sales and marketing... 150,218 1,068,523 4,990,188 371,969 707,594 Research and development.......... 61,291 792,985 1,225,542 261,482 517,071 General and administrative....... 511,382 2,962,477 4,880,854 917,320 1,422,332 --------- ---------- ----------- ---------- ---------- Total operating expenses........... 722,891 4,823,985 11,096,584 1,550,771 2,646,997 --------- ---------- ----------- ---------- ---------- Operating loss...... (768,011) (4,996,444) (10,974,991) (1,686,561) (2,289,597) Other: Interest expense...... -- -- (1,353,751) (154) (535,421) Interest income....... -- 214,663 420,426 -- 108,989 --------- ---------- ----------- ---------- ---------- Loss before income taxes.............. (768,011) (4,781,781) (11,908,316) (1,686,715) (2,716,029) Income tax expense...... 721 1,640 1,500 1,500 1,500 --------- ---------- ----------- ---------- ---------- Net loss.............. $(768,732) (4,783,421) (11,909,816) (1,688,215) (2,717,529) --------- ---------- ----------- ---------- ---------- Cumulative preferred dividends and accretion of discount attributable to preferred stock........ -- -- (494,523) -- (258,349) --------- ---------- ----------- ---------- ---------- Net loss attributable to common shareholders......... (768,732) (4,783,421) (12,404,339) (1,688,215) (2,975,878) ========= ========== =========== ========== ========== Net loss per common share: Basic................. $ (0.12) (0.30) (0.56) (0.09) (0.12) Diluted............... (0.12) (0.30) (0.56) (0.09) (0.12) ========= ========== =========== ========== ========== Weighted average common shares used in determining loss per share: Basic and diluted..... 6,406,666 15,738,394 22,181,960 19,435,000 24,308,111 ========= ========== =========== ========== ==========
See accompanying notes to consolidated financial statements. F-4 JFAX.COM, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Notes Common stock Additional receivable Stockholders' -------------------- paid-in Accumulated from equity Shares Amount capital deficit stockholders (deficiency) ---------- -------- ---------- ----------- ------------ ------------- Balance, December 31, 1995................... 5,000,000 $ 10,000 -- (21,052) -- (11,052) Issuance of common stock.................. 2,452,500 64,525 1,301,955 -- -- 1,366,480 Common stock issued for services............... 112,500 1,125 88,875 -- -- 90,000 Net loss................ -- -- -- (768,732) -- (768,732) ---------- -------- ---------- ----------- ---------- ----------- Balance, December 31, 1996................... 7,565,000 75,650 1,390,830 (789,784) -- 676,696 Exercise of stock options................ 370,000 74 -- -- -- 74 Stock option compensation........... -- -- 120,000 -- -- 120,000 Repurchase of common stock.................. (200,000) (2,000) (118,000) -- -- (120,000) Issuance of common stock.................. 10,450,000 108,127 8,016,873 -- -- 8,125,000 Issuance of notes receivable from stockholders........... -- -- -- -- (2,400,000) (2,400,000) Net loss................ -- -- -- (4,783,421) -- (4,783,421) ---------- -------- ---------- ----------- ---------- ----------- Balance, December 31, 1997................... 18,185,000 181,851 9,409,703 (5,573,205) (2,400,000) 1,618,349 Accretion to common stock redemption....... -- -- (39,000) -- -- (39,000) Dividends on mandatorily redeemable Preferred Stock.................. -- -- (386,915) -- -- (386,915) Accretion to preferred stock redemption....... -- -- (107,608) -- -- (107,608) Issuance of common stock.................. 3,791,250 37,912 3,061,088 -- (99,000) 3,000,000 Exercise of stock options................ 123,746 1,237 37,775 -- -- 39,012 Net loss................ -- -- -- (11,909,816) -- (11,909,816) ---------- -------- ---------- ----------- ---------- ----------- Balance, December 31, 1998................... 22,099,996 $221,000 11,975,043 (17,483,021) (2,499,000) (7,785,978) Exercise of stock options (unaudited).... 416 4 329 -- -- 333 Accretion to common stock redemption (unaudited)............ -- -- (804,000) -- -- (804,000) Dividends on mandatorily redeemable Preferred Stock (unaudited)...... -- -- (204,544) -- -- (204,544) Accretion to preferred stock redemption (unaudited)............ -- -- (53,805) -- -- (53,805) Conversion of put warrants (unaudited)... -- -- 1,062,331 -- -- 1,062,331 Net loss (unaudited).... -- -- -- (2,717,529) -- (2,717,529) ---------- -------- ---------- ----------- ---------- ----------- Balance, March 31, 1999 (unaudited)............ 22,100,412 $221,004 11,975,354 (20,200,550) (2,499,000) (10,503,192) ========== ======== ========== =========== ========== ===========
See accompanying notes to consolidated financial statements. F-5 JFAX.COM, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended Years Ended December 31, March 31, ---------------------------------- ---------------------- 1996 1997 1998 1998 1999 (unaudited) Cash flows from operating activities: Net loss............... $(768,732) (4,783,421) (11,909,816) (1,688,215) (2,717,529) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization......... 64,775 216,553 634,158 138,673 214,815 Stock option compensation expense.............. -- 120,000 -- -- -- Common stock issued for services......... 90,000 -- -- -- -- Redeemable common stock issued in lieu of interest.......... -- -- 251,999 -- -- Notes issued for payment of interest expense.............. -- -- 499,665 -- -- Amortization of note payable discount..... -- -- 436,304 -- 210,197 Changes in assets and liabilities: Decrease (increase) in: Accounts receivable........ (34,592) 23,892 (101,955) (49,210) 24,074 Due from related parties........... -- -- (128,578) -- (31,029) Interest receivable........ -- (4,639) (43,964) (1,657) (7,131) Prepaid marketing costs............. -- (1,000,000) -- (1,250,000) (100,000) Capitalized offering costs.... -- -- -- -- (105,000) Other.............. (8,000) (6,100) (152,160) (39,334) (7,912) Increase in: Accounts payable... 107,086 838,078 155,380 87,019 687,316 Interest payable... -- -- -- -- 265,008 Deferred revenue... -- 49,184 279,556 (12,454) 16,821 Customer deposits.......... -- -- 79,286 -- -- --------- ---------- ----------- ---------- ---------- Net cash used in operating activities...... (549,463) (4,546,453) (10,000,125) (2,815,178) (1,550,370) --------- ---------- ----------- ---------- ---------- Cash flows from investing activities-- purchase of furniture, fixtures and equipment.............. (265,848) (1,579,409) (543,170) (123,944) (107,485) --------- ---------- ----------- ---------- ---------- Cash flows from financing activities: Proceeds from issuance of common stock....... 1,366,480 8,125,000 3,099,000 3,000,000 -- Issuance of notes receivable from stockholders.......... -- (2,400,000) (99,000) -- -- Common stock repurchased........... -- (120,000) -- -- -- Exercise of stock options............... -- -- 39,012 -- 333 Proceeds from issuance of mandatorily redeemable preferred stock and put warrants, net......... -- -- 4,638,479 -- -- Proceeds from issuance of notes payable...... -- -- 5,698,717 30,000 -- Proceeds from issuance of redeemable common stock, net............ -- -- 4,679,976 -- -- Repayments of notes payable............... -- -- (208,910) (2,399) (89,532) Repayments of capital lease obligations..... -- -- (48,145) -- (21,753) Net increase (decrease) in due to related parties............... 104,519 (111,787) -- 571,240 -- Proceeds from note payable, net.......... -- -- -- -- -- --------- ---------- ----------- ---------- ---------- Net cash provided by financing activities...... 1,470,999 5,493,213 17,799,129 3,598,841 (110,952) --------- ---------- ----------- ---------- ---------- Net increase (decrease) in cash and cash equivalents..... 655,688 (632,649) 7,255,834 659,719 (1,768,807) Cash and cash equivalents at beginning of year...... -- 655,688 23,039 23,039 7,278,873 --------- ---------- ----------- ---------- ---------- Cash and cash equivalents at end of year................... $ 655,688 23,039 7,278,873 682,758 5,510,066 ========= ========== =========== ========== ========== Cash paid during the year for: Income taxes........... $ -- 721 1,500 -- 1,500 Interest............... -- -- 137,148 -- 23,453 ========= ========== =========== ========== ========== Supplemental disclosure of noncash investing and financing activities (see notes 3, 4, 9 and 11)
See accompanying notes to consolidated financial statements. F-6 JFAX.COM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1997 and 1998 (Information relating to the three months ended March 31, 1998 and 1999 is unaudited) (1) Organization JFAX.COM, Inc., formerly known as JFAX Communications, Inc., (the Company or JFAX) was incorporated in the state of Delaware on December 14, 1995. The Company is engaged in providing delivery of fax and voice messages via telephone and the Internet network. JFAX has strategic alliances with online network/service providers (OSPs), Internet service providers (ISPs), software and hardware producers (OEMs), other significant online communities and international resellers. (2) Summary of Significant Accounting Policies (a) Principles of Consolidation The consolidated financial statements include the accounts of JFAX.COM, Inc. and its wholly owned marketing subsidiary, JFAX.COM Europe Ltd. All intercompany accounts and transactions have been eliminated in consolidation. In the opinion of the Company's management, the consolidated financial statements as of March 31, 1999 and for the three-month periods ended March 31, 1998 and 1999 include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of operations for such periods and the financial position at such date. (b) Revenue Recognition The Company recognizes revenue as services are provided to the customer. Substantially all of the Company's revenue is collected by use of credit cards and is paid in advance. The Company provides customer support as an accommodation to purchasers of its services. These amounts are expensed as incurred. Deferred revenue represents prepayments received from customers in advance of services provided. The Company recognizes revenue for activation fees when the customer's account is activated at which time related direct selling costs are incurred, which substantially offset the activation fee. (c) Research and Development Research and development costs are expensed as incurred. Costs for software development incurred subsequent to establishing technological feasibility, in the form of a working model, are capitalized and amortized over their estimated useful lives. To date, software development costs incurred after technological feasibility has been established have not been material. F-7 JFAX.COM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1996, 1997 and 1998 (Information relating to the three months ended March 31, 1998 and 1999 is unaudited) (d) Prepaid Advertising Costs Prepaid advertising costs are recorded for amounts paid to online service providers. The Company expenses advertising cost, as advertising is placed on the providers' respective sites. (e) Cash Equivalents For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. (f) Depreciation and Amortization Furniture, fixtures and equipment are stated at cost. Depreciation is provided on furniture and equipment using the straight-line method over a three to five year period. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or their estimated useful lives. (g) Income Taxes The Company accounts for income taxes under Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes" (SFAS No. 109). SFAS No. 109 requires that deferred income taxes be recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities and operating loss carryforwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (h) Accounting for Stock Options The Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense for option grants to employees would be recorded on the date of the grant only if the current fair value of the underlying stock exceeds the exercise price. Effective January 1, 1997, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of the grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro-forma net loss disclosures for employee stock option grants made in 1995 and future years as if the fair-value based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB No. 25 and provide the pro-forma disclosure provisions of SFAS No. 123 for options granted to employees. (i) Use of Estimates The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the consolidated financial statements, management is required to F-8 JFAX.COM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1996, 1997 and 1998 (Information relating to the three months ended March 31, 1998 and 1999 is unaudited) make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the dates of the balance sheets and revenues and expenses for the periods. Actual results could differ from those estimates. (j) Long-Lived Assets Long-lived assets to be held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets that are to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell. (k) Fair Value of Financial Instruments SFAS No. 107, "Disclosure about Fair Value of Financial Instruments," requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet, for which it is practicable to estimate fair value. SFAS No. 107 defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As of December 31, 1997 and 1998, the carrying value of cash and cash equivalents, accounts receivable, interest receivable, accounts payable, accrued expenses, interest payable and customer deposits approximate fair value due to the short- term nature of such instruments. The carrying value of long-term debt and notes payable, approximate fair value as the related interest rates approximate rates currently available to the Company. (l) Loss Per Share of Common Stock The Company has adopted SFAS No. 128, "Earnings Per Share." Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Dividends on Preferred Stock and amortization of Preferred Stock issuance costs and mandatory redemption value increase the net loss for determining basic and diluted net loss per share attributable to Common Stock. Diluted net loss per share excludes the effect of common stock equivalents, because their effect would be anti-dilutive. (m) Reclassifications Certain reclassifications have been made to the 1996 and 1997 consolidated financial statements to conform to the 1998 presentation. (n) Accounting Pronouncements In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS Nos. 130 and 131, "Reporting Comprehensive Income" (SFAS 130) and "Disclosure about Segments of an Enterprise and Related Information" (SFAS 131), respectively, (collectively, the Statements). The Statements are effective for fiscal years beginning after December 15, 1997. SFAS 130 establishes standards for F-9 JFAX.COM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1996, 1997 and 1998 (Information relating to the three months ended March 31, 1998 and 1999 is unaudited) reporting of comprehensive income and its components in annual financial statements. SFAS 131 establishes standards for reporting financial and descriptive information about an enterprise's operating segments in its annual financial statements and selected segment information in interim financial reports. Reclassification or restatement of comparative financial statements or financial information for earlier periods is required upon adoption of SFAS 130 and SFAS 131, respectively. Application of the statement requirements did not have a material impact on the Company's consolidated financial position, results of operations or loss per share data as currently reported. With respect to SFAS 130, the Company has no elements of other comprehensive income, therefore net loss equals total comprehensive loss for all periods presented. With respect to SFAS 131, the Company operates in one reportable segment: unified messaging service, which provides delivery of fax and voice messages via telephone and the Internet network. The Company has a U.K. subsidiary, which operated as a marketing division for nine months in 1998 and, as such, did not generate revenue as of December 31, 1998. Thus, the Company considers that thus far it has only operated in one geographic segment. As the Company operates in one segment, additional disclosure per SFAS 131 has not been presented. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefit Plans." This statement is effective for fiscal years beginning after December 15, 1997 and restatement of disclosures for earlier periods is required. The Company adopted SFAS No. 132 in 1998. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is effective for transactions entered into after January 1, 2000. This statement requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and the type of hedge transaction. The ineffective portion of all hedges will generally be recognized in earnings. The Company does not presently engage in hedging activities and accordingly the adoption of SFAS No. 133 will not have an impact on its results of operations and financial position. (3) Furniture, Fixtures and Equipment Furniture, fixtures and equipment, stated at cost, at December 31, 1997 and 1998 consists of the following:
1997 1998 ---------- --------- Computer and related equipment........................ $1,692,052 2,232,397 Furniture and equipment............................... 36,905 39,729 Capital leases--computer and related equipment........ -- 279,859 Leasehold improvements................................ 116,661 116,661 ---------- --------- 1,845,618 2,668,646 Less accumulated depreciation and amortization........ (285,473) (891,000) ---------- --------- $1,560,145 1,777,646 ========== =========
Included in accumulated amortization at December 31, 1998 is $58,791 related to capital leases. F-10 JFAX.COM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1996, 1997 and 1998 (Information relating to the three months ended March 31, 1998 and 1999 is unaudited) (4) Redeemable Securities and Stockholders' Equity (Deficiency) (a) Private Placement Offering In June 1998, the Company completed a private placement offering of Senior Subordinated Notes (Notes), Common Stock (Common Shares), and Series A Usable Redeemable Preferred Stock (Preferred Shares) with 3,125,000 detachable warrants (Warrants) for proceeds aggregating $15,000,000 before offering expenses. The private placement offering consisted of the following components: Notes and Common Shares $10,000,000 principal amount of Notes (see note 9) together with 2,101,971 Common Shares were issued for combined proceeds of $10,000,000. The Notes bear interest at 10% per annum of the principal amount. Through June 30, 1999, the Company may pay interest through the issuance of additional interest notes in the form of Senior Subordinated Notes together with a proportionate number of additional Shares. As of December 31, 1998, the Company issued approximately $500,000 of interest notes and 105,726 additional shares (at a value of $251,999) in lieu of interest payments. The Notes are due at maturity on June 30, 2004, but half the Notes must be paid one year earlier, in each case payable at 100% of the principal amount plus accrued and unpaid interest. The Notes and Shares were recorded at their fair values at the date of issuance of $4,955,269 and $5,044,731, respectively. The discount attributable to the Notes is being amortized to interest expense over the term of the Notes using the interest method. The Notes are subject to optional redemption by the Company at any time at 101% of the principal amount plus accrued and unpaid interest. The Common Shares issued in this transaction including shares issued in connection with interest notes are subject to certain put rights by the holders at $3.20 per share, upon a change of control or as an exit put at fair market value if the Company has not completed a qualified public offering by July 1, 2003. Accordingly, the Common Shares issued in the transaction are shown as redeemable securities in the accompanying 1998 consolidated balance sheet. The fair market value put rights terminate in the event of a public offering of equity securities by the Company. The Company is accreting to the redemption amount (fair market value) of the Common Shares through a charge to additional paid-in capital using the straight line method. Preferred Shares and Warrants The Company issued $5,000,000 in stated value of Preferred Shares consisting of 5,000 shares together with 3,125,000 Warrants to acquire a like number of shares of the Company's common stock, for an exercise price of $2.40 per share, for a combined purchase price of $5,000,000. The Preferred Shares are entitled to cumulative dividends at 15% per annum based on the stated value and accrued and unpaid dividends. Until and including the dividend payment date falling on June 30, 2005, the Company has the option of accruing dividends or paying in cash. F-11 JFAX.COM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1996, 1997 and 1998 (Information relating to the three months ended March 31, 1998 and 1999 is unaudited) The Preferred Shares are mandatorily redeemable by the holders on June 30, 2005 at the stated value plus all accrued and unpaid dividends. The Company is accreting to the mandatory redemption amount through a charge to additional paid-in capital using the straight line method. Preferred Shares are subject to optional redemption by the Company after July 1, 1999 at the following prices:
Until Date Percent of Stated Value ---------- ----------------------- 07/01/2000......... 115.0% 07/01/2001......... 107.5 Thereafter......... 100.0 (in each case plus accrued and unpaid dividends)
The Preferred Shares and Warrants and/or warrant shares (if converted to common stock) are subject to certain put rights by the holders, upon a change of control. The warrants are exercisable by the holders at $2.40 per share at any time until June 30, 2005 and may be "put" to the Company upon a change in control. The warrants were recorded at their estimated fair value of $1,145,000 as of the date of issuance, as determined using a Black-Scholes model, and are reflected outside of stockholders' equity as a reduction of the proceeds received from the issuance of Preferred Shares in the accompanying consolidated balance sheets. Any increase in fair value of these put rights above the initially determined amount of $.36 per warrant will be expensed by the Company in its Statements of Operations as such values accrue. (see note 14) In connection with the placement of Notes, Warrants and Preferred and Common Shares, an additional 268,750 warrants were issued to the placement agent. Such warrants carry the same exercise price and put features as those issued in connection with the preferred shares. (see note 14) Fees and expenses related to the offering aggregated $1,084,564 which were allocated based on the relative fair value of the instruments as follows: Notes............................................................. $ 358,288 Common Shares..................................................... 364,755 Preferred Shares.................................................. 278,852 Warrants.......................................................... 82,669 ---------- $1,084,564 ==========
Capitalized offering fees and expenses allocated to the Notes and Warrants are being amortized to interest expense; offering costs attributable to Common Shares and Preferred Shares were recorded as a reduction of the proceeds received at the date of issuance. In addition, warrants to purchase 29,166 common shares at $2.40 per share were issued in connection with issuance of long-term notes to a financial institution and warrants to purchase 250,000 common shares at $2.40 per share were issued to America Online (see note 6). F-12 JFAX.COM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1996, 1997 and 1998 (Information relating to the three months ended March 31, 1998 and 1999 is unaudited) (b) Notes Receivable from Stockholders Notes receivable from stockholders were issued in connection with sales of common stock and consist of the following at December 31, 1997 and 1998:
1997 1998 ---------- --------- Loan receivable secured by 2,925,000 shares of the Company's common stock held by the stockholder; interest accrues at 6.32% and is payable monthly, due in March 2004. This amount will be repaid in services rendered by the stockholder ratably over five years... $2,250,000 2,250,000 Loan receivable secured by 220,000 shares of the Company's common stock held by the stockholder; interest accrues at 6.32% with all principal and accrued interest due in March 2001.................... 100,000 100,000 Loan receivable secured by 150,000 shares of the Company's common stock held by the stockholder; interest accrues at 8.00% and is payable monthly, due in September 1999..................................... $ 50,000 50,000 Loan receivable secured by 41,250 shares of the Company's common stock held by the stockholder; interest accrues at 4.25% and is payable monthly, due in October 2001....................................... -- 99,000 ---------- --------- $2,400,000 2,499,000 ========== =========
(5) Amounts Due to Related Parties, Principally Stockholders Amounts due to related parties were $111,787 as of December 31, 1996 and represented advances by certain stockholders of the Company to fund operations. These amounts did not bear interest, were due upon demand and were repaid in full in 1997. In January 1998, the Company received bridge financing from a related party. The borrowings were repaid in full in May 1998 with proceeds received from a capital stock rights offering. Interest expense related to the borrowings aggregated $57,725. As of December 31, 1998, there were $128,578 of amounts due from related parties. Such amounts represent salary advances. As of December 31, 1998, the Company is involved in a consulting arrangement with a related party, pursuant to which the Company pays $200,000 per year, for services provided by the related party. The Company also reimbursed the related party for expenses incurred on the Company's behalf of approximately $27,000 per month. Of the $27,000 per month, approximately $20,000 was related to a subleasing arrangement with CIM Group, LLC for office space to house our headquarters in Los Angeles, California. The remaining portion is for certain shared expenses. In connection with the private placement offering in June 1998, certain related parties were directly associated with the investor groups that provided the funding to the Company. F-13 JFAX.COM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1996, 1997 and 1998 (Information relating to the three months ended March 31, 1998 and 1999 is unaudited) (6) Agreements with OnLine Service Providers (a) America Online In October 1997, the Company entered into an interactive marketing relationship with AOL. In connection with this agreement, the Company issued warrants to purchase 250,000 common shares at $2.40 per share. The fair value of the warrants as of the date of issuance was de minimis. Under the agreement, the Company pays amounts to AOL based on advertising placed on the AOL site. During 1998, the Company incurred $1,250,000 in advertising expense for advertising activity placed on the site. Such amount is included in sales and marketing expense in the accompanying Statement of Operations. As of December 31, 1997 and 1998, the Company had $1,000,000 in prepaid advertising costs included in the accompanying consolidated balance sheets. The current agreement stipulates that AOL will provide the Company with a credit of $1,000,000 towards impressions on the AOL site. The value of the credit is allocated evenly between impressions on AOL's Email, Netmail and various service banners throughout the site. As the impressions are utilized, the Company expenses the associated value of these impressions in the period incurred at a predetermined value per impression. The Company expects to fully amortize all prepaid advertising costs during 1999 as services are provided by AOL. (b) CompuServe and Yahoo The Company is the exclusive unified messaging provider for CompuServe and Yahoo under interactive marketing agreements. These marketing agreements provide for the Company to make certain fixed and revenue share payments based on advertising amounts placed on the respective sites and customers acquired. Amounts expensed under agreements with all on line service providers are included in sales and marketing expense and amounted to $7,888 and $2,959,313 in 1997 and 1998, respectively. Future annual fixed payments associated with all arrangements with on line service providers for future services aggregate $550,000 in 1999. Specific terms of the CompuServe agreement are as follows: From June 1997 through June 1998, the Company's agreement with CompuServe provided for the payment of a per-sign-up commission or bounty to CompuServe for each subscriber who was directed to the JFAX.COM website via the CompuServe web site. This agreement was modified in June 1998. The modified agreement required fixed, guaranteed quarterly payments and further provided for commission payments, based on customer revenues, to the extent such revenues exceeded the amount targeted. Effective February 1, 1999, the agreement was again modified. The current agreement calls for fixed, guaranteed quarterly payments through January 31, 2000, as well as a per-sign-up commission or bounty for each subscriber in excess of a targeted number of sign-ups. CompuServe agrees to produce a certain number of subscribers each quarter and cumulatively over the course of the contract. In the event that results are below target, CompuServe will provide additional advertising to compensate for the shortfall. F-14 JFAX.COM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1996, 1997 and 1998 (Information relating to the three months ended March 31, 1998 and 1999 is unaudited) Specific terms of the Yahoo agreement are as follows: The Company's original agreement with Yahoo was in effect from June 1, 1998 through December 1, 1998. The original agreement required fixed, guaranteed monthly payments, together with commission payments, based on customer revenues, to the extent such revenues exceeded targeted revenues. The agreement was amended effective December 1, 1998 and now calls for fixed, guaranteed monthly payments through May 31, 1999, as well as a per-sign-up bounty for each subscriber (in excess of a targeted number of sign-ups) who signs up in response to e-mail solicitations, as well as a commission payment based on the customer revenue received from all other subscribers. All these above are expensed as incurred and are reflected in sales and marketing expense. (7) Income Taxes The income tax provision for all years presented is comprised of state minimum tax expense. Deferred tax assets and liabilities result from differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The significant components of deferred income taxes are as follows:
December 31, March 31, ------------------------ 1999 1997 1998 (unaudited) Deferred tax assets: Net operating loss carryforwards....... $ 2,088,997 $ 6,863,361 7,841,254 Accrued expenses....................... 70,900 127,350 232,869 ----------- ----------- ---------- 2,159,897 6,990,711 8,074,123 Less valuation allowance............... (2,159,897) (6,990,711) (8,074,123) ----------- ----------- ---------- Net deferred tax assets.............. $ -- -- -- =========== =========== ==========
The Company has recorded a valuation allowance in the amount set forth above for certain deductible temporary differences and net operating loss carryforwards where it is not more likely than not the Company will receive future tax benefits. The net change in the valuation allowance for the years ended 1997 and 1998 and the three months ended March 31, 1999 (unaudited) was $1,867,070, $4,830,814 and $1,083,412, respectively. As of December 31, 1998, the Company has Federal and state net operating losses (NOL) carryforwards of approximately $17,100,000. These NOL carryforwards will expire through year 2013 for Federal NOLs and 2003 for state NOLs. The Tax Reform Act of 1986 imposed substantial restrictions on the utilization of net operating losses in the event of an "ownership change" of a corporation. Accordingly, the Company's ability to utilize net operating losses may be limited as a result of such an "ownership change," as defined in the Internal Revenue Code. F-15 JFAX.COM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1996, 1997 and 1998 (Information relating to the three months ended March 31, 1998 and 1999 is unaudited) Income tax expense differs from the amount computed by applying the Federal corporate income tax rate of 34% to loss before income taxes as follows (in percentages):
Year ended December 31 ----------- 1996 1997 1998 Statutory tax rate...................................... (34.0)% (34.0)% (34.0)% Change in valuation allowance........................... 38.1 40.0 41.0 State income taxes, net................................. (5.9) (5.7) (5.9) Other................................................... 1.9 (0.2) (1.0) ----- ----- ----- Effective tax rate.................................... 0.1% 0.1% 0.1% ===== ===== =====
(8) Stock Option Plan In November 1997, the Board of Directors adopted the JFAX Communications, Inc. 1997 Stock Option Plan (the 1997 Plan). Under the 1997 Plan, 4,375,000 authorized shares of common stock are reserved for issuance of options. An additional 840,000 shares were authorized for issuance of options outside the 1997 Plan for which 840,000 options were issued to Michael P. Schulhof, then a consultant and currently a director for services to be provided to the Company under a consulting contract. The Company recorded $120,000 in compensation expense during 1997 relating to these options. These options are treated by the Company as warrants. Options under the 1997 Plan may be granted at exercise prices determined by the Board of Directors, provided that the exercise prices shall not be less than the fair market value of the Company's common stock on the date of grant for incentive stock options and not less than 85% of the fair market value of the Company's common stock on the date of grant for nonstatutory stock options. At December 31, 1998, 340,690 options and 840,000 options were exercisable under and outside of the 1997 Plan, respectively, and the weighted average exercise price of these options were $0.78 and $1.26. Stock options generally expire after 10 years and vest over a three-year period. At December 31, 1998, there were 1,060,353 additional shares available for grant under the 1997 Plan and no additional shares available for grant outside of the 1997 Plan. The per share weighted-average fair value of stock options granted during 1997 and 1998 was $0.22 and $0.49, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: risk-free interest rate of 6.5% and 4.6% for 1997 and 1998, respectively, and an expected life of 5 years. F-16 JFAX.COM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1996, 1997 and 1998 (Information relating to the three months ended March 31, 1998 and 1999 is unaudited) The Company applies APB Opinion No. 25 in accounting for its stock option plan and, accordingly, no compensation cost using the intrinsic value method has been recognized for its stock option grants in the consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net loss attributable to common shareholders for fiscal 1997 and 1998 would have been increased to the pro forma amounts indicated below:
1997 1998 ---------- ----------- Net loss attributable to common stockholders.............................. As reported $4,783,421 $12,404,339 Pro forma 4,868,421 12,614,339 Basic loss per common share................ As reported 0.30 0.56 Pro forma 0.30 0.57 Diluted loss per common share.............. As reported 0.30 0.56 Pro forma 0.30 0.57 ========== ===========
The following is a summary of stock option activity:
Number of Weighted-average shares exercise price --------- ---------------- 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 =========
At December 31, 1998, the exercise prices of options ranged from $.70 to $2.40 with a weighted-average remaining contractual life of 8.9 years.
Options outstanding Options exercisable --------------------------------------- --------------------- Range of Number Weighted- Number Weighted exercise outstanding Weighted average average exercisable average prices December 31, remaining exercise December 31, exercise -------- 1998 contractual life price 1998 price $ 0.70.... 420,000 8.1 $0.70 420,000 $0.70 $0.77-0.80.... 679,860 8.5 $0.78 340,690 $0.78 $ 1.80.... 420,000 8.1 $1.80 420,000 $1.80 $1.60-2.40.... 890,625 9.7 $2.34 -- $ -- --------- --- ----- --------- ----- 2,410,485 8.9 $1.53 1,180,690 $1.11 ========= === ===== ========= =====
At December 31, 1997 and 1998, 434,705 and 1,180,690 options, respectively, were exercisable. F-17 JFAX.COM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1996, 1997 and 1998 (Information relating to the three months ended March 31, 1998 and 1999 is unaudited) (9) Long Term Debt Long term debt consists of the following:
March 31, December 31, 1999 1998 (unaudited) ------------ ----------- Loan payable secured by certain computer equipment bearing interest at 15%. Monthly principal and interest payments of $26,086 from April 21, 1998 to April 2001............................................ $ 716,155 651,936 Loan payable secured by certain computer equipment bearing interest at 15%. Monthly principal and interest payments of $5,879 from December 22, 1998 to January 1, 2001....................................... 192,580 183,535 Senior Subordinated Notes with aggregate principal value of $10,000,000 bearing interest at 10% per annum of principal amount, with maturity date of June 30, 2004, less unamortized debt discount of $4,624,337 at December 31, 1998 and $4,412,939 at March 31, 1999 (unaudited) and debt issuance costs of $329,656 at December 31, 1998 and $314,401 at March 31, 1999. The Company also satisfied accrued interest of $499,665 as of July 1, 1998 through the issuance of additional notes payable......................................... 5,545,671 5,783,956 Other.................................................. -- 52,335 ---------- --------- 6,454,406 6,671,762 Less current installments of long term debt............ (317,402) (386,823) ---------- --------- Long term debt, excluding current installments....... $6,137,004 6,284,939 ========== =========
At December 31, 1998, annual maturities of long-term debt, before consideration of unamortized original issue discount and debt issuance costs, are as follows: 1999............................................................. $ 317,402 2000............................................................. 352,632 2001............................................................. 220,257 2002............................................................. 18,443 2003............................................................. 5,000,000 Thereafter....................................................... 5,499,665 ----------- $11,408,399 ===========
(10) Employee Benefit Plan The Company has a 401(k) savings plan covering substantially all of its employees. Eligible employees may contribute through payroll deductions. The Company matches employees' contributions at the discretion of the Company's Board of Directors. To date, the Company has not matched employee contributions to the 401(k) savings plan. F-18 JFAX.COM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1996, 1997 and 1998 (Information relating to the three months ended March 31, 1998 and 1999 is unaudited) (11) Commitments and Contingencies (a) Leases The Company leases certain facilities and equipment under noncancelable capital and operating leases which expire at various dates through 2001. The Company sub-leases its corporate facilities from a related party. The sub-lease expires in January 2000 and requires monthly payments of $19,310. Future minimum lease payments at December 31, 1998, under agreements classified as capital and operating leases with noncancelable terms in excess of one year, are as follows:
Capital leases Operating leases -------------- ---------------- Fiscal year: 1999..................................... $106,860 286,078 2000..................................... 106,860 41,452 2001..................................... 44,681 -- -------- ------- Total minimum lease payments........... 258,401 327,530 ======= Amounts representing interest.............. (26,687) -------- Present value of net minimum lease payments.............................. 231,714 Less current maturities.................... 89,931 -------- Long-term maturities................... $141,783 ========
Rental expense was $18,175, $224,289 and $346,515 for the years ended December 31, 1996, 1997 and 1998, respectively. F-19 JFAX.COM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1996, 1997 and 1998 (Information relating to the three months ended March 31, 1998 and 1999 is unaudited) (12) Loss Per Share As discussed in note 1, the Company adopted SFAS No. 128 for all periods presented. The following table illustrates the computation of basic and diluted loss per common share under the provisions of SFAS No. 128:
Three Months Ended Year ended December 31 March 31, ---------------------------------- ---------------------- 1996 1997 1998 1998 1999 (unaudited) Numerator--numerator for basic and diluted loss per common share: Net loss............. $(768,732) (4,783,421) (11,909,816) (1,688,215) (2,717,529) Dividends on Preferred Stock..... -- -- (386,915) -- (204,544) Accretion to Preferred Stock redemption.......... -- -- (107,608) -- (53,805) --------- ---------- ----------- ---------- ---------- Numerator for basic and diluted loss per common share.. (768,732) (4,783,421) (12,404,339) (1,688,215) (2,975,878) Denominator: Denominator for basic loss per common share-- weighted average number of common shares outstanding during the period............ 6,406,666 15,738,334 22,181,960 19,435,000 24,308,111 --------- ---------- ----------- ---------- ---------- Denominator for diluted loss per common share...... 6,406,666 15,738,334 22,181,960 19,435,000 24,308,111 ========= ========== =========== ========== ========== Basic loss per common share................. (.12) (.30) (.56) (.09) (.12) Diluted loss per common share................. (.12) (.30) (.56) (.09) (.12) ========= ========== =========== ========== ==========
The computation of diluted loss per share for each of the years in the three-year period ended December 31, 1998 excludes the effects of incremental common shares attributable to the exercise of 2,410,485 outstanding common stock options and 3,672,916 warrants because their effect would be antidilutive (see notes 4 and 8). Redeemable common shares outstanding have been included in the computation of both basic and diluted loss per share. (13) Liquidity The Company has incurred operating losses since its inception and has funded such losses through equity infusions and advances from stockholders. The Company expects losses and negative cash flows from operations during 1999. Based on its present cost structure, financing arrangements, and revenue growth rate, management believes the Company has sufficient capital to fund operations for the upcoming fiscal year. Additionally, management closely monitors its cash balances and projected cash flows and evaluates discretionary operating items accordingly. F-20 JFAX.COM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1996, 1997 and 1998 (Information relating to the three months ended March 31, 1998 and 1999 is unaudited) (14) Subsequent Events Subsequent to December 31, 1998, holders of a majority of the put warrants discussed in note 4 agreed to eliminate a fair market value put feature associated with these warrants for nominal consideration, effective January 1, 1999. As a result of the elimination of the put feature, the Company reclassified the put warrant liability of $1,062,331 at December 31, 1998 to additional paid in capital effective in January 1999. Effective May 21, 1999, the Company completed a 1.25:1.00 stock split that was effected by means of a stock dividend. Accordingly, all shares and per share information has been restated for all periods presented to give effect to the stock split. F-21 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- May , 1999 [JFAX LOGO APPEARS HERE] JFAX.COM, Inc. 7,500,000 Shares of Common Stock --------------------- PROSPECTUS --------------------- Donaldson, Lufkin & Jenrette BancBoston Robertson Stephens CIBC World Markets DLJdirectInc. ---------------- - -------------------------------------------------------------------------------- We have not authorized any dealer, salesperson or other person to give you written information other than this prospectus or to make representations as to matters not stated in this prospectus. You must not rely on unauthorized information. This prospectus is not an offer to sell these securities or our solicitation of your offer to buy the securities in any jurisdiction where that would not be permitted or legal. Neither the delivery of this prospectus nor any sales made hereunder after the date of this prospectus shall create an implication that the information contained herein or the affairs of the company have not changed since the date hereof. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Until , 1999 (25 days after the date of this prospectus), all dealers that effect transactions in these securities may be required to deliver a prospectus. This is in addition to the dealer's obligation to deliver a prospectus when acting as an underwriter in the offering and when selling previously unsold allotments or subscriptions. - -------------------------------------------------------------------------------- Inside Front Cover [Graphic depicting the JFAX.COM Website Homepage. The homepage contains texts and graphics as follows:] Sign-up Now! JFAX.COM Unified Messaging JFAX.COM Business Fax JFAX.COM Email-by-Phone JFAX.COM Free Fax JFAX.COM Free Voice JFAX.COM Customer Care JFAX.COM Community JFAX.COM The Company JFAX.COM Opportunities [GRAPHIC #1:] A picture of a lightbulb [ASSOCIATED TEXT:] Access My Account [GRAPHIC #2:] Depiction of a Phone, Letter, Envelope & Mailbox [ASSOCIATED TEXT:] JFAX.COM United Messaging Brings All of Your Voicemail, Faxes and Email Together. Learn More. Sign-Up. [GRAPHIC #3:] Depiction of a fax machine and a globe [ASSOCIATED TEXT:] JFAX.COM Business Fax Send and Receive Faxes from Your Email. Learn More. Sign-Up. [GRAPHIC #4:] Depiction of documents/letters. [ASSOCIATED TEXT:] JFAX.COM Free Fax Receive Faxes In Your Email Forever! Learn More. Sign-Up. [GRAPHIC #5:] Depiction of a globe, telephone and envelope. [ASSOCIATED TEXT:] JFAX.COM Email-by-Phone Listen to Your Email. Learn More. Sign-Up. [GRAPHIC #6:] Depiction of a globe, envelope and telephone [ASSOCIATED TEXT:] JFAX.COM Free Voice, Receive Voice Messages in Your Email Forever! Learn More. Sign-Up. COMING SOON. JFAX.COM has strategic relationships with the following online and offline service providers: [YAHOO! Logo] [CriticalData Logo] [Prodigy Communications Corporation Logo] [Ameritech Logo] [Bell South Logo] [Esat.net Logo] [Commtouch Logo] [Telecom Internet Services Logo] [Mail.Com Logo] [CompuServe Logo] Logos reproduced with the permission of their respective owners. All logos are trademarks, and the property, of their respective owners. Inside Front Cover Fold-Out [JFAX.COM Logo.] [In the left-hand column are five graphics and associated text as follows:] [GRAPHIC #1:] Depiction of a Phone, Letter, Envelope & Mailbox [ASSOCIATED TEXT:] JFAX.COM Unified Messaging Brings all of your voice mail, faxes, and email together . Saves time and money . Easy-to-use, secure, instant activation . Virtual office [GRAPHIC #2:] Depiction of a fax machine and a globe [ASSOCIATED TEXT:] JFAX.COM Email-By-Phone Listen to your email from any touch tone phone . Secure and reliable . Always stay in touch anytime, anywhere [GRAPHIC #3:] Depiction of documents/letters and a globe. [ASSOCIATED TEXT:] JFAX.COM Business Fax Send and receive faxes from your email . Convenient - choose your own area code . Simple, fast, and saves money [GRAPHIC #4:] Depiction of a globe, telephone and envelope. [ASSOCIATED TEXT:] JFAX.COM Free Voice Receive voice messages in your email . Simple - no additional phone line . It's FREE [GRAPHIC #5:] Depiction of a globe, envelope and telephone [ASSOCIATED TEXT:] JFAX.COM Free Fax Receive faxes in your email . Fast and easy-to-use . It's FREE [In the center of the fold-out are maps and text as follows:] Cities available on the JFAX.COM network [MAP #1:] Map of the United State overlaid on a map of portions of the world [Cities identified on the map are:] Tokyo, Vancouver, Seattle, Portland, Phoenix, Denver, Minneapolis, Chicago, Detroit, Cleveland, Pittsburgh, Toronto, Dallas, Houston, Tampa, Atlanta, Montreal, Boston, Philadelphia, New York, Washington D.C., Orlando, Ft. Lauderdale, Miami, Dublin, Amsterdam, London, Brussels, Paris, Zurich, Berlin, Frankfurt, Sydney, Auckland, Munich, Milan, and Helsinki. [MAP #2:] Blow-up of a map of California [Cities identified on the map of California are:] Redding, Sacramento, Stockton, Santa Rosa, San Francisco, Oakland, San Mateo, San Jose, Modesto, Pleasanton, Santa Cruz, Pasadena, Van Nuys, Los Angeles, San Bernardino, Long Beach, San Diego, and Anaheim. Pending Locations: . Las Vegas . Hong Kong . Melbourne . Osaka Inside Back Cover "[Unified Messaging is a] single 'in-box' for voice, fax, and email accessible by both telephone and PC." - IDC [In the center of the page are text headers and two sets of graphics with associated text as follows:] OLD WAY [GRAPHIC #1:] Depiction of a telephone with an arrow pointing downward towards a text-bubble which reads "Voicemail" [GRAPHIC #2:] Depiction of a fax machine with an arrow pointing downward towards a text-bubble which reads "Faxes." [GRAPHIC #3:] Depiction of a computer with an arrow pointing downward toward a text-bubble which reads "Email." UNIFIED MESSAGING SOLUTION [In this section, [JFAX.COM logo] is surrounded by 5 graphics, each with two-way arrows pointing to the logo and the graphic:] [GRAPHIC #1:] Depiction of a telephone with the text "Voicemail" [GRAPHIC #2:] Depiction of a fax machine with the text "fax" [GRAPHIC #3:] Depiction of a beeper and other communications devise with the text "Other Devices" [GRAPHIC #4:] Depiction of a text-box with the text "Email Box" [GRAPHIC #5:] Depiction of a laptop computer with the text "Email" PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The following is a statement of the estimated expenses, other than underwriting discounts and commissions, to be incurred by JFAX.COM in connection with the distribution of the securities registered under this registration statement.
Amount to be paid -------- SEC registration fee............................................... $ 26,376 NASD fees and expenses............................................. $ 9,988 Legal fees and expenses............................................ $350,000 Nasdaq National Market listing fees................................ $ 95,000 Accounting fees and expenses....................................... $125,000 Printing and engraving fees........................................ $200,000 Registrar and transfer agent's fees................................ $ 10,000 Miscellaneous...................................................... $ 83,636 -------- Total.......................................................... $900,000 ========
Item 14. Indemnification of Directors and Officers As permitted by Delaware law, our certificate of incorporation includes a provision that eliminates the personal liability of our directors to us or our stockholders for monetary damages for breach of fiduciary duty as a director. Article VI of our by-laws provides: "The Corporation shall indemnify to the full extent permitted by law any person made or threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person or such person's testator or intestate is or was a director, officer or employee of the Corporation or serves or served at the request of the Corporation any other enterprise as a director, officer or employee. Expenses, including attorneys' fees, incurred by any such person in defending any such action, suit or proceeding shall be paid or reimbursed by the Corporation promptly upon receipt by it of an undertaking of such person to repay such expenses if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation. The rights provided to any person by this by-law shall be enforceable against the Corporation by such person who shall be presumed to have relied upon it in serving or continuing to serve as a director, officer or employee as provided above. No amendment of this by-law shall impair the rights of any person arising at any time with respect to events occurring prior to such amendment. For purposes of this by- law, the term "Corporation' shall include any predecessor of the Corporation and any constituent corporation (including any constituent of a constituent) absorbed by the Corporation in a consolidation or merger; the term "other enterprise' shall include any corporation, partnership, joint venture, trust or employee benefit plan; service "at the request of the Corporation' shall include service as a director, officer or employee of the Corporation which imposes duties on, or involves services by, such director, officer or employee with respect to an employee benefit plan, its participants or beneficiaries; any excise taxes assessed on a person with respect to an employee benefit plan shall be deemed to be indemnifiable expenses; and action by a person with respect to an employee benefit plan which such person reasonably believes to be in the interest of the participants and beneficiaries of such plan shall be deemed to be action not opposed to the best interests of the Corporation." II-1 In addition, the underwriting agreement for the offering will include customary provisions indemnifying the officers, directors and our control persons against liabilities in respect of information provided by the underwriters for use in this registration statement. We have also obtained a policy of directors' and officers' liability insurance for our directors and officers to insure directors and officers against the cost of defense, settlement or payment of a judgment under certain circumstances. Item 15. Recent Sales of Unregistered Securities Between December 1995, when we were founded, and March 1997, when Mr. Ressler invested in the Company through Orchard/JFAX Investors LLC and obtained a controlling interest, we issued a total of 6,910,000 shares of our common stock to our founders, Jaye Muller and John F. Rieley, as well as to various individuals who made cash investments totaling $212,830 and who provided investment, software and development consulting services to us in our early stages of growth. During this time, we also issued 155,000 shares to The Regent Trust Company Limited in September 1996 in exchange for a cash investment of $412,500 and we issued 300,000 shares to Toxford Corporation in October 1996 in exchange for a cash investment of $750,000. In March 1997, we issued 5,375,000 shares of common stock to Boardrush Media LLC in exchange for an equivalent number of Mr. Muller's then-current stock holdings, which holdings were canceled. At the same time, we issued 10,060,000 shares of common stock to Orchard/JFAX Investors LLC in exchange for a cash investment of $7,750,000 and 240,000 shares to Globetrans Ltd. in satisfaction of a consultant's fee due to Globetrans as a result of helping to procure Orchard's investment. In March and May 1997, we issued 220,000 shares and 150,000 shares to Nehemia Zucker and Anand Narasimhan, upon the exercise by Messrs. Zucker and Narasimhan of employee options granted to them when they joined us in 1996 and payment by each of them of the option price of .02c per share. The total purchase price was $44 and $30, respectively. In November 1997, we issued 150,000 shares to Toxford Corporation upon the exercise by Toxford Corporation of a previously issued warrant and the payment by Toxford Corporation of the warrant exercise price of $2.50 per share, or a total of $375,000. In March 1998, we issued a total of 3,750,000 shares of common stock at $0.80 per share pursuant to a rights offering that was made available to all of our then shareholders and warrant holders on the same terms. The total purchase price was $3 million. The shareholders who participated and the number of shares purchased were as follows: Orchard/JFAX Investors LLC (3,080,776), Michael P. Schulhof (263,104), Globetrans Ltd. (147,481), Toxford Corporation (140,949), Nehemia Zucker (41,739), Anand Narasihman (28,459), Geoff Goodfellow (23,491), Neil Seeman (15,000) and Marc Seeman (9,000). In April 1998, we granted Transamerica Business Credit Corporation a warrant to purchase 29,166 shares of common stock for $2.40 per share, exercisable until April 21, 2005, as partial consideration for a secured equipment loan in the amount of approximately $1 million. On October 15, 1997, we also issued 250,000 warrants to America Online to purchase 250,000 shares of our common stock at $2.40 per share, as part of our contract with America Online. In June 1998, we issued $10 million of our 10% Senior Subordinated Notes due 2004 together with 2,101,971 shares of our common stock to an investor group advised by Pecks Management Partners Ltd. consisting of Declaration of Trust for Defined Benefit Plans of Zeneca Holdings, Inc., II-2 Declaration of Trust for Defined Benefit Plans of ICI American Holdings, Inc., Delaware State Employees' Retirement Fund and The J.W. McConnell Family Foundation. The total purchase price was $10 million. At the same time, we also issued $5 million in liquidation preference of our Series A Usable Redeemable Preferred Stock and related warrants to acquire 3,125,000 shares of our common stock at $2.40 per share, $3.5 million of which was purchased by DLJ Capital Corp. and its affiliates and $750,000 of which was purchased by the group advised by Pecks Management Partners Ltd. discussed above. In addition, Donaldson Lufkin & Jenrette Securities Corporation, the affiliate of DLJ Capital Corp. that acted as placement agent for the offerings, received warrants to acquire 268,750 shares of our common stock on the same terms as purchasers, as compensation for its services. The total purchase price was $5 million. Orchard/JFAX Investors LLC, a company in which Richard S. Ressler is the managing member, participated to the extent of $500,000 and GMT Partners, LLC participated to the extent of $250,000 in the latter investment. In October 1998 and January 1999, we issued $506,250 of our 10% Senior Subordinated Notes due 2004 together with 105,726 shares of our common stock to the investor group advised by Pecks Management Partners Ltd. above in satisfaction of certain pay-in-kind obligations owing under the terms of the original issued $10 million in 10% Senior Subordinated Notes due 2004 issued in June 1998. In October 1998, we issued 41,250 shares of our common stock to Gary H. Hickox at a purchase price of $99,000. We loaned such amount to Mr. Hickox pursuant to a $99,000 promissory note given to us by Mr. Hickox. The sale and related note issuance were part of the terms of Mr. Hickox's employment agreement with us. Also in October 1998, we issued 75,000 shares to an individual upon the exercise of an option granted in January 1996 and payment by such individual of the total option price of $15.00. Between August 1998 and January 1999, we issued a total of 49,163 shares of our common stock to various employees who exercised employee options to purchase such stock at a price of $1.00 per share for a total purchase price of $49,163. As of May 21, 1999, we effected a 1.25 for one stock split of our common stock by means of a stock dividend, with a result that share numbers and numbers of shares issuable upon exercise of warrants and options were proportionately increased, and the purchase price per share of warrants and options was proportionately reduced. All of the above issuances were effected in private transactions pursuant to the exemption provided by Section 4(2) under the Securities Act. II-3 Item 16. Exhibits and Financial Statement Schedules (a) Exhibits *1.1 Form of Underwriting Agreement. 3.1 Certificate of Incorporation, as amended and restated. 3.2 By-laws, as amended and restated. *4.1 Specimen of common stock certificate. +5.1 Opinion of Sullivan & Cromwell, counsel to the Company. 9.1 Securityholders' Agreement, dated as of June 30, 1998, with the investors in the June and July 1998 private placements. 10.1 JFAX.COM Incentive Compensation Bonus Plan. +10.2 JFAX Communications, Inc. (JFAX.COM) 1997 Stock Option Plan. 10.3 Employment Agreement for Gary H. Hickox, dated September 2, 1998. +10.3.1 Promissory Note issued by Gary H. Hickox to JFAX Communications, Inc. on October 7, 1998, due October 7, 2001. 10.4 Employment Agreement for Dr. Anand Narasimhan, dated March 17, 1997. +10.4.1 Amended and Restated Interest Only Note issued by Anand Narasimhan to JFAX Communications, Inc. on September 17, 1997, due September 17, 1998. 10.5 Employment Agreement for Nehemia Zucker, dated March 21, 1997. +10.5.1 Promissory Note issued by Nehemia Zucker to JFAX Communications, Inc. on April 11, 1997, due March 31, 2001. 10.6 Consulting Agreement for Boardrush Media LLC, dated as of March 17, 1997. 10.7 Put Rights, for the benefit of the investors in the June and July 1998 private placements 10.8 Registration Rights Agreement, dated as of June 30, 1998, with the investors in the June and July 1998 private placements. 10.9 Registration Rights Agreement, dated as of March 17, 1997, with Orchard/JFax Investors, LLC, Boardrush LLC (Boardrush Media LLC), Jaye Muller, John F. Rieley, Nehemia Zucker and Anand Narasimhan. +10.9.1 Letter, dated as of June 30, 1998, to Boardrush LLC, Jens Muller, John F. Rieley, Anand Narasimhan, and Nehemia Zucker from Richard S. Ressler regarding the Registration Rights Agreement, dated as of March 17, 1997, among JFAX Communications, Inc., Boardrush LLC, Jens Muller, John F. Rieley, Anand Narasimhan, and Nehemia Zucker. +10.10 Stock Option Agreement, dated as of January 24, 1997, by and among JFAX Communications, Inc. and Michael P. Schulhof. +10.11 Letter, dated as of June 30, 1998, to Michael P. Schulhof from Richard S. Ressler regarding the Stock Option Agreement, dated as of January 24, 1997, between JFAX Communications, Inc. and Michael P. Schulhof. +10.12 Purchase Agreement, dated as of July 2, 1998, relating to $5 million of preferred stock and warrants. +10.13 Consent to Amendment of Purchase Agreement, dated as of April 16, 1999. +10.14 Form of warrant pursuant to such Purchase Agreement. +10.15 Master Loan and Security Agreement, dated as of March 10, 1998, by JFAX Communications, Inc. in favor of Transamerica Business Credit Corporation. +10.16 Promissory Note issued by JFAX Communications, Inc. to Transamerica Business Credit Corporation on April 21, 1998 due May 1, 2001. +10.17 Promissory Note issued by JFAX Communications, Inc. to Transamerica Business Credit Corporation on December 22, 1998 due January 1, 2002.
II-4 +10.18 Investment Agreement among JFAX Communications, Inc., Jens Muller, John F. Rieley and Boardrush LLC and Orchard/JFax Investors, L.L.C. and Richard S. Ressler, dated as of March 14, 1997 and effective as of March 17, 1997. +10.19 Promissory Note issued by Boardrush LLC to JFAX Communications, Inc. dated March 17, 1997 due March 17, 2004. 21.1 List of subsidiaries of the Company. +23.1 Consent of KPMG LLP. +23.2 Consent of Sullivan & Cromwell (included in 5.1 above). 24.1 Power of Attorney (included in Signature Page of the original Registration Statement). +27.1 Financial Data Schedule.
- -------- * To be filed by amendment + Filed herewith All other exhibits were previously filed Item 17. Undertakings Insofar as indemnification for liabilities arising under the Securities Act may be permitted for directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) It will provide to the underwriters at the closing(s) specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on the 26th day of May, 1999. JFAX.COM, Inc. /s/ Richard S. Ressler By: _________________________________ Richard S. Ressler Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated on May 26, 1999:
Signature Title --------- ----- /s/ Richard S. Ressler Co-Chairman of the Board and ____________________________________ Chief Executive Officer Richard S. Ressler (Principal Executive Officer) * Chief Financial and ____________________________________ Accounting Officer Nehemia Zucker (Principal Financial and Accounting Officer) * Director ____________________________________ Jaye Muller * Director ____________________________________ Zohar Loshitzer * Director ____________________________________ John F. Rieley * Director ____________________________________ Michael P. Schulhof * Director ____________________________________ R. Scott Turicchi * Director ____________________________________ Robert J. Cresci *By: /s/ Richard S. Ressler __________________________________ Richard S. Ressler Attorney-in-fact
II-6 EXHIBIT INDEX
Exhibit No. Description ------- ----------- *1.1 Form of Underwriting Agreement. 3.1 Certificate of Incorporation, as amended and restated. 3.2 By-laws, as amended and restated. *4.1 Specimen of common stock certificate. +5.1 Opinion of Sullivan & Cromwell, counsel to the Company. 9.1 Securityholders' Agreement, dated as of June 30, 1998, with the investors in the June and July 1998 private placements. 10.1 JFAX.COM Incentive Compensation Bonus Plan. +10.2 JFAX Communications, Inc. (JFAX.COM) 1997 Stock Option Plan. 10.3 Employment Agreement for Gary H. Hickox, dated September 2, 1998. +10.3.1 Promissory Note issued by Gary H. Hickox to JFAX Communications, Inc. on October 7, 1998, due October 7, 2001. 10.4 Employment Agreement for Dr. Anand Narasimhan, dated March 17, 1997. +10.4.1 Amended and Restated Interest Only Note issued by Anand Narasimhan to JFAX Communications, Inc. on September 17, 1997, due September 17, 1998. 10.5 Employment Agreement for Nehemia Zucker, dated March 21, 1997. +10.5.1 Promissory Note issued by Nehemia Zucker to JFAX Communications, Inc. on April 11, 1997, due March 31, 2001. 10.6 Consulting Agreement for Boardrush Media LLC, dated as of March 17, 1997. 10.7 Put Rights, for the benefit of the investors in the June and July 1998 private placements 10.8 Registration Rights Agreement, dated as of June 30, 1998, with the investors in the June and July 1998 private placements. 10.9 Registration Rights Agreement, dated as of March 17, 1997, with Orchard/JFax Investors, LLC, Boardrush LLC (Boardrush Media LLC), Jaye Muller, John F. Rieley, Nehemia Zucker and Anand Narasimhan. +10.9.1 Letter, dated as of June 30, 1998, to Boardrush LLC, Jens Muller, John F. Rieley, Anand Narasimhan, and Nehemia Zucker from Richard S. Ressler regarding the Registration Rights Agreement, dated as of March 17, 1997, among JFAX Communications, Inc., Boardrush LLC, Jens Muller, John F. Rieley, Anand Narasimhan, and Nehemia Zucker. +10.10 Stock Option Agreement, dated as of January 24, 1997, by and among JFAX Communications, Inc. and Michael P. Schulhof. +10.11 Letter, dated as of June 30, 1998, to Michael P. Schulhof from Richard S. Ressler regarding the Stock Option Agreement, dated as of January 24, 1997, between JFAX Communications, Inc. and Michael P. Schulhof. +10.12 Purchase Agreement, dated as of July 2, 1998, relating to $5 million of preferred stock and warrants. +10.13 Consent to Amendment of Purchase Agreement, dated as of April 16, 1999. +10.14 Form of warrant pursuant to such Purchase Agreement. +10.15 Master Loan and Security Agreement, dated as of March 10, 1998, by JFAX Communications, Inc. in favor of Transamerica Business Credit Corporation. +10.16 Promissory Note issued by JFAX Communications, Inc. to Transamerica Business Credit Corporation on April 21, 1998 due May 1, 2001. +10.17 Promissory Note issued by JFAX Communications, Inc. to Transamerica Business Credit Corporation on December 22, 1998 due January 1, 2002. +10.18 Investment Agreement among JFAX Communications, Inc., Jens Muller, John F. Rieley and Boardrush LLC and Orchard/JFax Investors, L.L.C. and Richard S. Ressler, dated as of March 14, 1997 and effective as of March 17, 1997. +10.19 Promissory Note issued by Boardrush LLC to JFAX Communications, Inc. dated March 17, 1997 due March 17, 2004. 21.1 List of subsidiaries of the Company. +23.1 Consent of KPMG LLP. +23.2 Consent of Sullivan & Cromwell (included in 5.1 above). 24.1 Power of Attorney (included in Signature Page of the original Registration Statement). +27.1 Financial Data Schedule.
- ------- * To be filed by amendment + Filed herewith All other exhibits were previously filed EX-5.1 2 OPINION OF SULLIVAN & CROMWELL Exhibit 5.1 May 25, 1999 JFAX.COM, Inc., 10960 Wilshire Boulevard, Suite 500, Los Angeles, California 90024. Dear Sirs: In connection with the registration under the Securities Act of 1933 (the "Act") of 8,625,000 shares (the "Securities") of Common Stock, par value $0.01 per share, of JFAX.COM, Inc., a Delaware corporation (the "Company"), we, as your counsel, have examined such corporate records, certificates and other documents, and such questions of law, as we have considered necessary or appropriate for the purposes of this opinion. Upon the basis of such examination, we advise you that, in our opinion, when the registration statement relating to the Securities (the "Registration Statement") has become effective under the Act, the terms of the sale of the Securities have been duly established in conformity with the Company's certificate of incorporation, and the Securities have been duly issued and JFAX.COM, Inc. -2- sold as contemplated by the Registration Statement, the Securities will be validly issued, fully paid and nonassessable. The foregoing opinion is limited to the Federal laws of the United States and the General Corporation Law of the State of Delaware, and we are expressing no opinion as to the effect of the laws of any other jurisdiction. We have relied as to certain matters on information obtained from public officials, officers of the Company and other sources believed by us to be responsible. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to us under the heading "Validity of Securities" in the Prospectus. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Act. Very truly yours, /s/ SULLIVAN & CROMWELL EX-10.2 3 JFAX.COM 1997 STOCK OPTION PLAN EXHIBIT 10.2 JFAX.COM, INC. AMENDED AND RESTATED 1997 STOCK OPTION PLAN ---------------------- ARTICLE I PURPOSES -------- 1.1. Purpose of Plan. The purpose of the JFAX Communications, Inc. (JFAX.COM) ---------------- 1997 Stock Option Plan (the "Plan") are to advance the interests of JFAX.COM, Inc.(the "Company") and its shareholders by providing significant incentives to selected officers, employees, and consultants of the Company who contribute and are expected to contribute to the success of the Company, and to enhance the interest of such officers and employees in the Company's success and progress by providing them with an opportunity to become shareholders of the Company. Further, the Plan is designed to enhance the Company's ability to attract and retain qualified employees necessary for the success and progress of the Company. ARTICLE DEFINITIONS ----------- 2.1. Definitions. Certain terms used herein shall have the meaning below ------------ stated, subject to the provisions of Section 7.1 hereof. (a) "Board" or "Board of Directors" means the Board of Directors of the Company. (b) "Code" means the Internal Revenue Code of 1986, as amended. (c) "Committee" means either (i) the Board of Directors or (ii) the Compensation Committee of the Board of Directors or such other committee of the Board as shall be appointed by the Board to administer the Plan pursuant to Article VII hereof. (d) "Common Stock" means, subject to the provisions of Section 9.3, the authorized common stock of the Company, par value $.01 per share. (e) "Company" means JFAX.COM, Inc. (f) "Effective Date" means the date on which the Company's 1997 Stock Option Plan is adopted by the Board or the date the Plan is approved by the stockholders of the Company, whichever is earlier. (g) "Employee" means (i) any individual who is a common-law employee of the Company or of a Subsidiary, (ii) a member of the Board of Directors, or (iii) any consultant or other persons to the extent permitted by the instructions to Form S-8 under the Securities Act of 1933, as amended, who performs services for the Company or a Subsidiary. Service as a member of the Board of Directors or as a consultant shall be considered employment for all purposes under the Plan except the third sentence of Section 4.1. (h) "Fair Market Value" means, in respect of a share of Common Stock on any date, the last reported sales price regular way on such date or, in case no such reported sale takes place on such date, the last reported sales price regular way on the day preceding such date on which a reported sale occurred, in either case on the New York Stock Exchange or, if at the time the Common Stock is not listed or admitted to trading on such Exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if at the time the Common Stock is not listed or admitted to trading on any national securities exchange, in the National Association of Securities Dealers Automated Quotations National Market System or, if at the time the Common Stock is not listed or admitted to trading on any national securities exchange or quoted on such National Market System, the average of the closing bid and asked prices in the over-the-counter market as furnished by any New York Stock Exchange member firm selected from time to time by the Company for that purpose or, if the Common Stock is not traded over-the- counter, as determined by the Committee using any reasonable valuation method. (i) "Incentive Stock Option" means an Option to purchase Common Stock, granted by the Company to an Employee pursuant to Section 5.1 hereof, which meets the requirements of Section 422 of the Code. (j) "Nonstatutory Stock Option" means and Option to purchase Common Stock, granted by the Company to an Employee pursuant to Section 5.1 hereof, which does not meet the requirements of Section 422 of the Code or which provides, as of the time the Option is granted, that it will not be treated as an Incentive Stock Option. (k) "Option" means an Incentive Stock Option or a Nonstatutory Stock Option. (l) "Option Agreement" means an agreement between the Company and an Optionee evidencing the terms of an Option 2 Granted under the Plan. (m) "Optionee" means an Employee to whom an Option has been granted under the Plan. (n) "Plan" means the JFAX.COM, Inc. 1997 Stock Option Plan, as set forth herein and as from time to time amended. (o) "Subsidiary" means a subsidiary of the Company within the meaning of Section 424(f) of the Code. ARTICLE III EFFECTIVE DATE OF THE PLAN; RESERVATION OF SHARES ------------------------------------------------- 3.1. Effective Date. The Plan shall become effective as of the Effective --------------- Date. 3.2. Shares Reserved Under Plan. The aggregate number of shares of Common --------------------------- Stock which may be issued upon the exercise of Options granted under the Plan shall not exceed 4,375,000 of the authorized shares of Common Stock on the Effective Date, all or any part of which may be issued pursuant to Incentive Stock Options or Nonstatutory Stock Options or any combination thereof. Shares of Common Stock issued upon the exercise of Options granted under the Plan may consist of either authorized but unissued shares or shares which have been issued and which shall have been reacquired by the Company. The total number of shares authorized under the Plan shall be subject to increase or decrease in order to give effect to the provisions of Section 9.3 and to give effect to any amendment adopted pursuant to Article VIII. If any Option granted under the Plan shall expire, terminate or be cancelled for any reason without having been exercised in full, the number of shares as to which such Option was not exercised shall again be available for purposes of the Plan. The Company shall at all times while the Plan is in effect reserve such number of shares of Common Stock as will be sufficient to satisfy the requirements of the Plan. ARTICLE IV PARTICIPATION IN PLAN --------------------- 4.1. Eligibility. Options under the Plan may be granted to any key Employee ------------ of the Company or a Subsidiary who performs services for the Company or a Subsidiary that the Committee deems to be of special importance to the growth and success of the Company. The Committee shall determine those Employees to whom Options shall be granted, the type of Option to be granted to each such person, and, subject to Sections 3.2 hereof, the number of shares of Common Stock subject to each such Option. Only 3 individuals who are employed as common-law employees by the Company or a Subsidiary shall be eligible for the grant of Incentive Stock Options. 4.2. Participation Not Guarantee of Employment or Retention. Nothing in this ------------------------------------------------------- Plan or in any Option Agreement shall in any manner be construed to limit in any way the right of the Company or any Subsidiary to terminate an Employee's employment at any time, without regard to the effect of such termination on any rights such Employee would otherwise have under this Plan, or give any right to an Employee to remain employed by the Company or a Subsidiary thereof in any particular position or at any particular rate of compensation. ARTICLE V GRANT AND EXERCISE OF OPTIONS ----------------------------- 5.1. Grant of Options. The Committee may from time to time in its discretion ----------------- grant Incentive Stock Options and/or Nonstatutory Stock Options to Employees at any time after the Effective Date. All Options under the Plan shall be granted within ten (10) years from the date the Plan is adopted by the Board or the date the Plan is approved by the stockholders of the Company, whichever is earlier. 5.2. Option Terms. Options granted under the Plan shall be subject to the ------------- following requirements: (a) Option Price. The exercise price of each Incentive Stock Option shall not be less than the higher of the par value or 100% of the Fair Market Value of the shares of Common Stock subject to the Option on the date the Option is granted. The exercise price of each Nonstatutory Stock Option shall be the amount determined by the Committee as set forth in the applicable Option Agreement, provided that such amount shall not be less than the higher of the par value or 85% of the Fair Market Value of the shares of Common Stock subject to the Option on the date the Option is granted, provided further that options may only be granted at less than 100% of the Fair Market Value of the shares of Common Stock subject to the Option on the date of grant if the discount is expressly in lieu of a reasonable amount of salary or cash bonus, as determined by the Board of Directors or the Committee in its sole discretion. The exercise price of an Option may be subject to adjustment pursuant to Section 9.3 hereof. (b) Term of Option. The term during which an Option is exercisable shall be that period determined by the Committee as set forth in the applicable Option Agreement, provided that no Option shall have a term that exceeds a period of 10 years from the date of its grant. 4 (c) Nontransferability of Option. No Option granted under the Plan shall be transferable by the Optionee otherwise than by will or the laws of descent and distribution, and each such Option shall be exercisable during the Optionee's lifetime only by him. No transfer of an Option by an Optionee by will or by the laws of descent and distribution shall be effective to bind the Company unless the Company shall have been furnished with written notice thereof and a copy of the will and/or such other evidence as the Committee may determine necessary to establish the validity of the transfer. (d) Exercise of Option. Unless the Option Agreement pursuant to which an Option is granted provides otherwise, each Option shall become exercisable, on a cumulative basis, with respect to 33% of the aggregate number of the shares of Common Stock covered thereby on the first anniversary of the date of grant and with respect to an additional 33% of the shares of Common Stock covered thereby on each of the next two succeeding anniversaries of the date of grant; provided, however, the Committee may establish a different vesting -------- schedule for any optionee or group of optionees. Any portion of an Option which has become exercisable shall remain exercisable until it is exercised in full or terminates pursuant to the terms of the Plan or the Option Agreement pursuant to which it is granted. (e) Acceleration of Exercise on Change of Control. Notwithstanding the provisions of paragraph (d) of this Section or any other restrictions limiting the number of shares of Common Stock as to which an Option may be exercised, each Option shall become immediately exercisable in full upon and simultaneously with any "Change of Control" of the Company unless the Board determines that the optionee has been offered substantially identical replacement options and a comparable position at any acquiring company. For purposes of this Plan, a "Change of Control" shall be deemed to have occurred if: (i) any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company, any employee benefit plan sponsored by the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the 5 Company representing 50% or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of two consecutive years individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii) or (iv) of this Section) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least a majority of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. For the purposes of this subsection (iv), "substantially all" of the Company's assets shall mean assets for which the price or consideration upon sale or disposition equals or exceeds seventy-five percent (75%) or more of the fair market value of the Company. (f) Incentive Stock Options Granted to Ten Percent Shareholders. No Incentive Stock Options shall be granted to any Employee who owns, directly or indirectly within the mean of Section 424(d) of the Code, stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any Subsidiary, unless at the time the Incentive Stock Option is granted, the exercise price of the Incentive Stock Option is at least 110% of the Fair Market Value of the Common Stock subject to such Incentive Stock Option and such Incentive Stock Option, by its terms, is not exercisable after the expiration of five years from the date such Incentive Stock Option is granted. (g) Limitation on Incentive Stock Options. To the extent that the aggregate Fair Market Value of the Common Stock with 6 respect to which Incentive Stock Options are exercisable for the first time by an Optionee during any calendar year (under all plans of the Company and its parent and subsidiary corporations) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For this purpose, Options shall be taken into account in the order in which they were granted and the Fair Market Value of the Common Stock shall be determined as of the time the Option with respect to such Common Stock is granted. 5.3. Payment of Exercise Price and Delivery of Shares. ------------------------------------------------- (a) Notice and Payment for Shares. Each Option shall be exercised by delivery of a written notice to the Company in such form as the Committee shall approve stating the number of the whole shares of Common Stock as to which the Option is being exercised and accompanied by payment therefor. No Option shall be deemed exercised in the event that payment therefor is not received and shares of Common Stock shall not be issued upon the exercise of an Option unless the exercise price is paid in full. Payment for shares of Common Stock purchased upon the exercise of an Option shall be made by (i) cash, (ii) certified check payable to the order of the Company, (iii) outstanding shares of Common Stock duly endorsed to the Company (which shares of Common Stock shall be valued at their Fair Market Value as of the day preceding the date of such exercise), (iv) any combination of the foregoing, or (v) such other method of payment as may be provided in the applicable Option Agreement. (b) Rights of Optionee in Stock. Neither any Optionee nor the legal representatives, heirs, legatees or distributees of any Optionee, shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Common Stock issuable upon exercise of an Option granted hereunder unless and until such shares are issued to him or them and such person or persons have received a certificate or certificates therefor. Upon the issuance and receipt of such certificate or certificates, such Optionee or the legal representatives, heirs, legatees or distributees of such Optionee shall have absolute ownership of the shares of Common Stock evidenced thereby, including the right to vote such shares, to the same extent as any other owner of shares of Common Stock, and to receive dividends thereon, subject, however, to the terms, conditions and restrictions of this Plan. ARTICLE VI TERMINATION AND DEATH --------------------- 6.1. Termination Other Than by Death or for Cause. If an Optionee's position --------------------------------------------- as an Employee of the Company or a Subsidiary terminates for any reason other than death or for Cause (as defined in Section 6.2) he may, unless the applicable Option Agreement provides otherwise, exercise an Option previously 7 granted and vested within three months after the date of such termination, but in no event later than the date on which the Option would have expired in accordance with its terms. To the extent the Option is not so exercised, it shall expire at the end of such three-month period. 6.2. Termination for Cause. If an Optionee's position as an Employee of the ---------------------- Company or a Subsidiary is terminated for Cause, any Option theretofore granted to him shall expire and cease to be exercisable on the date notice of such termination is delivered to the Optionee. "Cause" shall mean (a) the willful and continued failure by an Optionee to substantially perform his duties with the Company (other than any such failure resulting from his incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Optionee by the Board, which demand specifically identifies the manner in which the Board believes that the Optionee has not substantially performed his duties, or (b) the willful engaging by the Optionee in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of this Section 6.2, no act, or failure to act, shall be deemed "willful" unless done, or omitted to be done, not in good faith and without reasonable belief that such action or omission was in the best interest of the Company. 6.3. Death. If an Optionee dies (i) while he is an Employee of the Company or ------ a Subsidiary or (ii) during the three-month period after the termination of his position as an Employee of the Company or a Subsidiary, and at the time of his death the Optionee was entitled to exercise an Option theretofore granted to him, such Option shall, unless the applicable Option Agreement provides otherwise, expire one year after the date of his death, but in no event later than the date on which the Option would have expired if the Optionee had lived. During such one-year period the Option may be exercised by the Optionee's executor or administrator or by any person or persons who shall have acquired the Option directly from the Optionee by bequest or inheritance, but only to the extent that the Optionee was entitled to exercise the Option at the date of his death and, to the extent the Option is not so exercised, it shall expire at the end of such one-year period. ARTICLE VII ADMINISTRATION OF PLAN ---------------------- 7.1. Administration. The Plan shall be administered by the Compensation --------------- Committee of the Board of Directors or such other committee as may be appointed by the Board of Directors of the Company, which Committee shall consist of not less than two members, all of whom are members of the Board of Directors. A majority of the Committee shall constitute a quorum thereof and the actions of a majority of the Committee at a meeting at which a quorum is present, or actions unanimously approved in writing by 8 all members of the Committee, shall be the actions of the Committee. Vacancies occurring on the Committee shall be filled by the Board. The Committee shall have full and final authority (i) to interpret the Plan and each of the Option Agreements, (ii) to prescribe, amend and rescind rules and regulations, if any, relating to the Plan, (iii) to make all determinations necessary or advisable for the administration of the Plan and (iv) to correct any defect, supply any omission and reconcile any inconsistency in the Plan and any Option Agreement. The Committee's determination in all matters referred to herein shall be conclusive and binding for all purposes and upon all persons including, but without limitation, the Company, the shareholders of the Company, the Committee, and each of the members thereof, Employees and their respective successors in interest. 7.2. Liability. No member of the Committee shall be liable for anything done ---------- or omitted to be done by him or by any other member of the Committee in connection with the Plan, except for his own willful misconduct or gross negligence. The Committee shall have power to engage outside consultants, auditors or other professional help to assist in the fulfillment of the Committee's duties under the Plan at the Company's expense. 7.3. Determinations. In making its determinations concerning the key --------------- Employees who shall receive Options as well as the number of shares to be covered thereby and the time or times at which they shall be granted, the Committee shall take into account the nature of the services rendered by such key Employees, their past, present and potential contribution to the Company's success and such other factors as the Committee may deem relevant. The Committee shall determine the form of Option Agreements under the Plan and the terms and conditions to be included therein, provided such terms and conditions are not inconsistent with the terms of the Plan. The Committee may waive any provisions of any Option Agreement, provided such waiver is not inconsistent with the terms of the Plan as then in effect. The Committee's determinations under the Plan need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, Options under the Plan, whether or not such persons are similarly situated. ARTICLE VIII AMENDMENT AND TERMINATION OF PLAN --------------------------------- 8.1. Amendment of Plan. (a) Generally. The Board of Directors may amend the ------------------ Plan at any time and from time to time. Rights and obligations under any Option granted before amendment of the Plan shall not be materially altered, or impaired adversely, by such amendment, except with consent of the Optionee. An amendment of the Plan shall be subject to the approval of the Company's stockholders only to the extent required by applicable laws, regulations or rules. 9 (b) Amendments Relating to Incentive Stock Options. To the extent applicable, the Plan is intended to permit the issuance of Incentive Stock Options to Employees in accordance with the provisions of Section 422 of the Code. Subject to paragraph 8.1(a) above, the Plan and Option Agreements may be modified or amended at any time, both prospectively and retroactively, and in a manner that may affect Incentive Stock Options previously granted, if such amendment or modification is necessary for the Plan and Incentive Stock Options granted hereunder to qualify under said provisions of the Code. 8.2. Termination. The Board may at any time terminate the Plan as of any date ------------ specified in a resolution adopted by the Board. If not earlier terminated, the Plan shall terminate on November 11, 2007. No Options may be granted after the Plan has terminated, but the Committee shall continue to supervise the administration of Options previously granted. ARTICLE IX MISCELLANEOUS PROVISIONS ------------------------ 9.1. Restrictions upon Grant of Options. If the listing upon any stock ----------------------------------- exchange or the registration or qualification under any federal or state law of any shares of Common Stock to be issued on the exercise of Options granted under this Plan (whether to permit the grant of Options or the resale or other disposition of any such shares of Common Stock by or on behalf of Optionees receiving such shares) should be or become necessary or desirable, the Board in its sole discretion may determine that delivery of the certificates for such shares of Common Stock shall not be made until such listing, registration or qualification shall have been completed. The Company agrees that it will use its best efforts to effect any such listing, registration or qualification, provided, however, that the Company shall not be required to use its best efforts to effect such registration under the Securities Act of 1933 other than on Form S-8 or such other forms as may be in effect from time to time calling for information comparable to that presently required to be furnished under Form S-8. 9.2. Restrictions upon Resale of Unregistered Stock. Each Optionee shall, if ----------------------------------------------- the Company deems it advisable, represent and agree in writing (i) that any shares of Common Stock acquired by such Optionee pursuant to this Plan will not be sold except pursuant to an effective registration statement under the Securities Act of 1933 or pursuant to an exemption from registration under said Act, (ii) that such Optionee is acquiring such shares of Common Stock for his own account and not with a view to the distribution thereof, and (iii) to such other customary matters as the Company may request. In such case, no shares of Common Stock shall be issued to such Optionee unless 10 such Optionee provides such representations and agreements and the Company is reasonably satisfied that such representations and agreements are correct. 9.3. Adjustments. ------------ (a) General. In the event of a subdivision of the outstanding Common Stock, a declaration of a dividend payable in shares of Common Stock, a declaration of a dividend payable in a form other than shares in an amount that has a material effect on the value of shares of Common Stock, a combination or consolidation of the outstanding Common Stock into a lesser number of shares of Common Stock, a recapitalization, a reclassification or a similar occurrence, the Committee shall make appropriate adjustments in one or more of (i) the number of shares of Common Stock available for future grants of Options under Section 3.2, (ii) the number of shares of Common Stock covered by each outstanding Option, or (iii) the exercise price of each outstanding Option. (b) Reorganizations. In the event that the Company is a party to a merger or reorganization, outstanding Options shall be subject to the agreement of merger or reorganization. (c) Reservation of Rights. Except as provided in this Section 9.3, an Optionee shall have no rights by reason of (i) any subdivision or consolidation of shares of stock of any class, (ii) the payment of any dividend, or (iii) any other increase or decrease in the number of shares of stock of any class. Any issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or exercise price of shares of Common Stock subject to an Option. The grant of an Option Shares pursuant to the Plan shall not affect in anyway the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge or consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or assets. 9.4. Withholding of Taxes. (a) Each Optionee who exercises a Nonstatutory --------------------- Stock Option shall agree that no later than the date of such exercise or receipt of shares of Common Stock pursuant thereto he will pay to the Company, or make arrangements satisfactory to the Committee regarding payment of, any Federal, state or local taxes of any kind required by law to be withheld with respect to the transfer to him of such shares of Common Stock. (b) The applicable Option Agreement may provide that an Optionee may satisfy, in whole or in part, the requirements of paragraph (a): 11 (i) by delivery of shares of Common Stock owned by the Optionee for at least six months (or such shorter or longer period as the Committee may approve) having a Fair Market Value (determined as of the date of such delivery) equal to all or part of the amount to be so withheld, or (ii) by electing to have the Company withhold the requisite number of shares from shares otherwise deliverable pursuant to the exercise of the Option giving rise to the tax withholding obligation provided, however, that (A) the Optionee's election and the withholding pursuant thereto take effect during the period beginning on the third business day following the date of release for publication of the quarterly and annual summary statements of the Company's sales and earnings and ending on the twelfth business day following such date, and six months have elapsed since the date the Option was granted, or (B) such election was irrevocably made by the Optionee and filed with the Committee in writing at least six months in advance of the date on which such withholding occurs. The Committee may require, as a condition of accepting any such delivery of Common Stock or any such election by the Optionee, that the Optionee furnish to the Company an opinion of counsel to the effect that such delivery or election will not result in the Optionee incurring any liability under Section 16(b) of the Securities Exchange Act of 1934, as amended. 9.5. Use of Proceeds. The proceeds from the sale of Common Stock pursuant to ---------------- Options granted under the Plan shall constitute general funds of the Company and may be used for such corporate purposes as the Company may determine. 9.6. Substitution of Options. (a) The Committee may, with the consent of the ------------------------ holder of any Option granted under the Plan, cancel such Option and grant a new Option in substitution therefor, provided that the Option as so substituted shall satisfy all of the requirements of the Plan as of the date such new Option is granted. (b) Options may be granted under this Plan in substitution for options held by individuals who are employees of another corporation and who become Employees of the Company or any Subsidiary of the Company eligible to receive Options pursuant to the Plan as a result of a merger, consolidation, reorganization or similar event. The terms and conditions of any Options so granted may vary from those set forth in the Plan to the extent deemed appropriate by the Committee in order to conform the provisions of Options granted pursuant to the Plan to the provisions of the 12 options in substitution for which they are granted. 9.7. Notices. Any notice required or permitted hereunder shall be -------- sufficiently given only if sent by registered or certified mail, return receipt requested, postage prepaid, addressed to the Company at its principal place of business, and to the Optionee at the address on file with the Company at the time of grant hereunder, or to such other address as either party may hereafter designate in writing by notice similarly given by one party to the other. 9.8. Governing Law. The Plan and all determinations made and actions taken -------------- hereunder, to the extent not otherwise governed by the Code or the laws of the Untied States of America, shall be governed by the laws of the State of California and construed accordingly. 13 EX-10.3(1) 4 PROMISSORY NOTE ISSUED BY GARY H. HICKOX EXHIBIT 10.3.1 PROMISSORY NOTE --------------- U.S. $99,000.00 October 7, 1998 W I T N E S S E T H: - - - - - - - - - - FOR VALUE RECEIVED, GARY H. HICKOX, an individual whose business address is 10960 Wilshire Blvd., Fifth Floor, Los Angeles, California 90024 ("Borrower"), -------- hereby promises to pay JFAX COMMUNICATIONS, INC., a Delaware corporation having a place of business at 10960 Wilshire Blvd., Fifth Floor, Los Angeles, California 90024 ("Lender"), or any subsequent assignee of this Note ------ ("Lender"), the principal sum of Ninety-nine Thousand Dollars ($99,000.00), with ------ interest on the unpaid balance of such amount from the date hereof until repaid, at the rate of interest specified herein. This Note evidences Borrower's obligation to repay a loan (the "Loan") made by Lender to Borrower in the ---- principal amount hereof on the date hereof. All principal and accrued but unpaid interest thereon shall be due and payable to Lender on October 7, 2001 (the "Maturity Date"). The principal of the Loan ------------- shall bear interest at a rate equal to four and one-quarter percent (4.25%) per annum, and all interest on the principal balance hereof shall be due and payable in arrears on the Maturity Date. In the case of partial years, interest shall be computed at the above rate on the basis of the actual number of days during which the principal balance is outstanding, dividing by 360, which shall, for interest computation purposes, be considered one year. Borrower agrees that this Note, or any payment hereunder, may be extended from time to time by the holder hereof without notice to or consent of Borrower, and Borrower hereby consents to the acceptance of the holder hereof of any security for this Note or the release by the holder hereof of any such security, without any need for any consent by or notice to, and without affecting the liability of, Borrower. Upon any extension of the maturity date of this Note, or any additions to the principal amount of this Note (other than on account of the accrual of interest), Borrower shall execute and deliver to Lender either a restated Note (setting forth the applicable provisions of such extension or addition) or an appropriate addendum to this Note. No extension of time for the payment of this Note made by agreement by the holder hereof with any person now or hereafter liable for the payment of this Note shall affect the original liability under this Note of Borrower, whether or not Borrower is a party to such agreement. Borrower hereby waives diligence, presentment, protest, and demand, and also notice of dishonor, protest, demand, and nonpayment, and all other demands and notices in connection with the delivery, acceptance, performance, or enforcement of this Note. This Note may be prepaid at any time, in whole or in part. IN WITNESS WHEREOF, Borrower has executed this instrument as of the date first above written. /s/ Gary H. Hickox ------------------------------ GARY H. HICKOX 2 EX-10.4(1) 5 AMENDED AND RESTATED INTEREST ONLY NOTE EXHIBIT 10.4.1 Amended and Restated Interest Only Note $50,000 Los Angeles, California October 16, 1998 Anand Narasimhan ("Borrower"), for value received, hereby promises to pay to JFAX Communications, Inc. ("JFAX"), the principal sum of $50,000 on September 17, 1999 and to pay interest thereon from September 17, 1997 payable monthly on the last business day of each month, commencing in October, 1997, at a rate of 8% per annum. Interest shall be computed on the basis of a 360 day year of twelve 30 day months. The note is a senior obligation of the Borrower secured by Borrowers 120,000 shares of JFAX common stock outstanding as of the date of this note. At any time, the privilege is reserved to pay more than the sum due. Each payment shall be credited first on the interest due, and the remainder on the principal sum. Should default be made in the payment of principal or interest when due or in the performance or observance when due of any term, covenant or condition of the stock options securing this note, then, at the option of the holder hereof and without notice or demand, the entire balance of principal and accrued interest then remaining unpaid shall become immediately due and payable and thereafter bear interest, until paid in full, at the rate of 8% per annum, but not in excess of the maximum rate allowed by law to the holder hereof. Should suit be commenced to collect this note or any portion thereof, such sum as the Court may deem reasonable shall be added hereto as attorney's fees. Principal and interest payable in lawful money of the United States of America. Anand Narasimhan /s/ Anand Narasimhan _________________________ EX-10.5(1) 6 PROMISSORY NOTE ISSUED BY NEHEMIA ZUCKER Exhibit 10.5.1 THIS NOTE IS SUBJECT TO RESTRICTIONS ON TRANSFER AS SET FORTH ON THE REVERSE. PROMISSORY NOTE ISSUED BY MR. NEHEMIA ZUCKER 6.32% Secured Non-Recourse Note due 2001 No. 1 $100,000 Mr. Nehemia Zucker, an individual ("Maker"), for value received, hereby promises to pay to JFAX Communications, Inc., or registered assigns ("Holder"), the principal sum of $100,000 on March 31, 2001, together with additions to such original principal amount as specified below. The Maker shall also be responsible for interest on the unpaid principal of this Note, from April 11, 1997, provided that interest shall not be paid periodically, but instead shall be accrued and added to principal on a semi-annual compounding basis, on the last day of March and September each year, commencing in September 1997, and at the date the principal is to be paid, at the rate of 6.32% per annum. Interest shall be computed on the basis of a 360-day year of twelve 30- day months. This Note may be prepaid by the Maker at any time prior to maturity, at the principal amount hereof, subject to increase of such principal amount as referred to herein. This Note is issued pursuant to the Employment Agreement, dated as of March 21, 1997, between Mr. Zucker (as Employee) and JFAX Communications, Inc. (as the Company) (the "Employment Agreement") and is subject to the provisions thereof. The indebtedness evidenced by this Note is, to the extent provided in the Employment Agreement, subject to the provisions stating that this Note is a non-recourse obligation of the Maker, with recourse solely against shares to be issued upon exercise of a certain stock option granted to the Maker, as provided in Paragraph 7 of the Employment Agreement and as described more fully below, and provisions permitting an extension of the maturity date of this Note in certain circumstances, or additions to the principal amount of this Note, both as provided in Paragraph 7 of the Employment Agreement. The Holder of this Note, by accepting the same, agrees to and shall be bound by such provisions. As provided in the Employment Agreement, the indebtedness represented by this Note shall be recourse only against shares to be issued upon exercise of a stock option granted to the Maker for forty shares of the common stock of JFAX Communications, Inc., exercisable at $1 per share. In case arrangements mutually satisfactory to the Maker and the Holder are not made for the payment of this Note at the maturity date hereof (subject to extension as mentioned above), or at such earlier date as the Maker wishes to exercise such option, then the Holder shall be entitled to cancel such option and the Maker agrees that he (and any of his successor(s) in interest) shall not be entitled to exercise the same and shall not attempt to exercise the same. In order to effectuate this provision, it is agreed by the Maker and the Holder, that the Holder will not issue shares issuable upon exercise of the Stock Option Agreement evidencing such stock option until such time as this Note is paid, or other arrangements mutually acceptable to the Maker and the Holder are agreed to. The Maker shall in no event be entitled to transfer such option except by will or intestate distribution, and these provisions with respect to such option and this Note shall be binding on any such successor(s) to the Maker. Upon any extension of the maturity date of this Note, or any additions to the principal amount of this Note (other than on account of the accrual of interest), the Maker shall execute and deliver to the Holder either a replacement Note (setting forth the applicable provisions of such extension or addition) or an appropriate addendum to this Note. The undersigned Maker hereby waives presentment, demand, notice of dishonor, protest and all other demands and notices in connection with the delivery, acceptance, performance and enforcement of this Note. IN WITNESS WHEREOF, the Maker has caused this Note to be duly executed. Dated: April 11, 1997 /s/ Nehemia Zucker --------------------------------------------- Nehemia Zucker THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED EXCEPT IN ACCORDANCE THEREWITH. THE HOLDER OF THIS NOTE SHALL NOT BE ENTITLED TO TRANSFER IT WITHOUT THE PRIOR WRITTEN CONSENT OF THE MAKER. HOWEVER, THE MAKER AGREES THAT HE WILL NOT UNREASONABLY WITHHOLD HIS CONSENT IN THE CASE OF ANY TRANSFER IN CONNECTION WITH ANY MERGER, CONSOLIDATION, OR SALE OF ALL OR SUBSTANTIALLY ALL ASSETS BY THE HOLDER, OR OTHER SIMILAR CORPORATE RESTRUCTURING TRANSACTION. - 2 - EX-10.9(1) 7 LETTER DATED AS OF JUNE 30, 1998 EXHIBIT 10.9.1 June 30, 1998 John F. Rieley Orchard/JFAX Investors, L.L.C. Jens Muller 10960 Wilshire Blvd, Suite 500 Boardrush LLC Suite 500 225 Lafayette Street, # 306 Los Angeles, California 90024 New York, New York 10012 Attn: Richard S. Ressler Anand Narasimhan Nehemia Zucker 10960 Wilshire Blvd. 10960 Wilshire Blvd. Suite 500 Suite 500 Los Angeles, California 90024 Los Angeles, California 90024 Re: Registration Rights Agreement, dated as of March 17, 1997 (the "Boardrush Agreement"), among JFAX Communications, Inc. ("JFAX"), Boardrush LLC, Jens Muller, John F. Rieley, Anand Narasimhan, and Nehemia Zucker Dear Sirs: Reference is hereby made to the Boardrush Agreement for the definition of certain capitalized terms used but not defined herein. This letter will serve to clarify the following in connection with the Boardrush Agreement and a certain Registration Rights Agreement, dated as of June 30, 1998 (the "Investors Agreement"), among and certain investors ("Investors") named therein: 1. If, in the event of a registration by JFAX demanded by one or more Investors pursuant to Section 2.1 of the Investors Agreement (with respect to which any Holder or Holders requests to be included pursuant to Section 2(b) of the Boardrush Agreement), the managing underwriter shall advise JFAX that, in its opinion, the number of securities requested to be included in such registration exceeds the number which can be sold in such offering within a price range acceptable to the requesting Investors, the number of securities that are otherwise entitled to be included in the registration shall be allocated in the following manner: (i) all securities other than the securities of the requesting Investors (including the Common Stock held by any Holder) shall be reduced on a pro rata basis (based on the number of securities requested to be included in such registration) and (ii) if, after the exclusion of all such securities (if necessary), further reductions are still required, securities of the requesting Investors shall be reduced on a pro rata basis (based on the number of securities requested to be included in such registration). 2. If, in the event of a registration by JFAX pursuant to Section 2.3 of the Investors Agreement (with respect to which any Holder or Holders requests to be included pursuant to Sections 2(a) or 2(b) of the Boardrush Agreement), the managing underwriter shall advise JFAX that marketing considerations require a limitation on the number of securities that can be included in such registration, then JFAX may include in such registration all securities proposed to be sold by JFAX for its own account or by any applicable person exercising demand registration rights, or the maximum amount that the underwriter considers saleable, and such limitation on any remaining securities that may, in the opinion of the underwriter, be sold will be imposed on all securities (including securities held by any Investor and the Common Stock held by any Holder) on a pro rata basis (based on the number of securities requested to be included in such registration). To the extent the provisions of this letter are contrary to the provisions of the Boardrush Agreement, the provisions of this letter shall govern and this letter shall operate as an amendment to the Boardrush Agreement. Except as otherwise expressly modified herein, the Boardrush Agreement shall continue in full force and effect. Very truly yours, JFAX COMMUNICATIONS, INC. By: --------------------- Richard S. Ressler President 2 ACCEPTED AND AGREED: ORCHARD/JFAX INVESTORS, L.L.C. By: /s/ Richard S. Ressler ------------------------ Richard S. Ressler Manager Dated: June 30, 1998 ------- BOARDRUSH L.L.C. By: /s/ Jens Muller ------------------- Jens Muller Manager Dated: June 30, 1998 ------- /s/ Jens Muller - ----------------------------- JENS MULLER Dated: June 30, 1998 ------- /s/ John F. Rieley - -------------------------- JOHN F. RIELEY Dated: June 30, 1998 ------- /s/ N. Zucker - ----------------------------- NEHEMIA ZUCKER Dated: June 30, 1998 ------- /s/ Anand Narasimhan - -------------------------- ANAND NARASIMHAN Dated: June 30, 1998 ------- 3 EX-10.10 8 STOCK OPTION AGREEMENT - MICHAEL P. SCHULHOF EXHIBIT 10.10 STOCK OPTION AGREEMENT THIS STOCK OPTION AGREEMENT (this "Agreement") made as of the 24th day of January, 1997, by and among JFAX Communications, Inc., a Delaware corporation (the "Company"), Michael P. Schulhof (the "Optionee"); and, for purposes of Section 8 hereof only, Jens Muller and John F. Rieley (each a "Shareholder" and together, the "Majority Shareholder"; the Company, the Optionee and the Majority Shareholder hereinafter collectively the "Parties"); W I T N E S S E T H: - - - - - - - - - -- WHEREAS, the Company and the Optionee have entered into an Engagement Agreement, dated January 24, 1997, a copy of which is attached hereto as Exhibit A (the "Engagement Agreement"), pursuant to which the Optionee shall provide consulting services to the Company on a non-exclusive basis for a two-year period commencing from the date of such Engagement Agreement; WHEREAS, as compensation for the performance of the Optionee's duties under the Engagement Agreement, the Company has agreed to grant the Optionee an option to purchase shares of common stock of the Company upon the terms and conditions set forth herein; NOW, THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, the Parties hereby agree as follows: SECTION 1. Option to Purchase. The Company hereby grants to the --------- ------------------ Optionee an Option (the "Option"), exercisable in whole or in part, at the sole discretion of the Optionee, on the terms and subject to the conditions set forth in this Agreement, to purchase (a) eighty-four (84) shares of the common stock of the Company ("A Option Shares") at an exercise price per share of $3,500 and (b) eighty-four (84) shares of the common stock of the Company ("B Option Shares") at an exercise price per share of $9,000, from the Company. SECTION 2. Exercise of Option. --------- ------------------ (a) Exercise of Option for A Option Shares. The Optionee may exercise -------------------------------------- the option with respect to the A Option Shares, by notice provided to the Company in writing, in part or in whole at any time or from time to time during the period from the date hereof until the date which is ten years from the date hereof (the "A Option Exercise Period"), which notice shall specify (a) the number of A Option Shares to be purchased, (b) the aggregate purchase price therefor, (c) the date (the "Option Payment Date") upon which payment of such purchase price shall be made, which date shall be no earlier than fifteen (15) days following the receipt by the Company of such notice, and (d) the name in which the A Option Shares being purchased shall be registered. (b) Exercise of Option for B Option Shares. The Option with respect -------------------------------------- to the B Option Shares shall vest in equal monthly installments over an eighteen (18) month period (the "B Option Vesting Period") on the last calendar day of each month commencing with the seventh (7th) month following the date of this Agreement. The Optionee may exercise the Option with respect to the B Option Shares, to the extent vested, by notice provided to the Company in writing, in part or in whole at any time or from time to time during the period from the initial vesting of the Option with respect to the B Option Shares until the date which is ten years from the date hereof (the "B Option Exercise Period"), which notice shall specify (a) the number of B Option Shares to be purchased, (b) the aggregate purchase price therefor, (c) the Option Payment Date upon which payment of such purchase price shall be made, which date shall be no earlier than fifteen (15) days following the receipt by the Company of such notice, and (d) the name in which the B Option Shares being purchased shall be registered. (c) Notwithstanding the foregoing, in the event of an initial public offering by the Company of the common stock of the Company at any time during the B Option Vesting Period, the Option with respect to the B Option Shares shall fully vest and the Optionee shall have the right to purchase all of the B Option Shares immediately prior to the occurrence of such initial public offering or at any time thereafter. SECTION 3. Confirmation. Within five (5) days of receipt of notice --------- ------------ pursuant to Section 2(a) or (b) hereof, the Company shall provide to the Optionee written confirmation of the purchase of the specified A Option Shares or B Option Shares, as the case may be, pursuant to the Option. All notices provided for in this Agreement shall be deemed given when received, receipt thereof being evidenced by confirmation of delivery. SECTION 4. Payment. The Optionee shall make payment of the purchase --------- ------- price payable upon exercise of all or any portion of the Option to the Company (i) by certified check payable to the Company on the Option Payment Date therefor or (ii) by wire transfer to the account of the Company at PNC Bank, 4323 Governor Printz Blvd., Wilmington, Delaware 19802, Account No. 5600034872, Routing No. 031100089, for value as of the Option Payment Date, or such other account as shall be specified by the Company to the Optionee. SECTION 5. Delivery of Shares. Promptly upon receipt of the purchase --------- ------------------ price for the A Option Shares or B Option Shares, as the case may be, the Company shall deliver to the Optionee a duly and validly issued certificate representing the relevant -2- number of such A Option Shares or B Option Shares, registered in the name of the Optionee or the Optionee's nominee. SECTION 6. Effect of Termination of the Engagement Agreement; --------- -------------------------------------------------- Restrictions. - ------------ (a) In the event that the Engagement Agreement is terminated at any time during the Term (as defined in the Engagement Agreement), the Optionee's right to exercise the Option with respect to the A Option Shares and/or the B Option Shares, as the case may be, shall be as set forth in Section 4 of the Engagement Agreement. (b) The Optionee agrees that, prior to the earlier of (i) consummation of an initial public offering by the Company of the Company's common stock, and (ii) expiration of the Restricted Period (as defined in the Engagement Agreement), the Optionee shall not sell, other than to the Company or a designee of the Company, pursuant to the provisions of Section 8 hereof, or with the prior written consent of the Company, any of the A Option Shares or B Option Shares acquired pursuant to the Option provided for herein. (c) The Optionee agrees that, in the event the Optionee intends to sell any of the A Option Shares or B Option Shares acquired pursuant to the Option at any time following the expiration of the Restricted Period and prior to the consummation of an initial public offering by the Company of the common stock of the Company, the Company shall have a right of first refusal with respect to the purchase of any such A Option Shares or B Option Shares, as follows: In the event that the Optionee desires to make a bona fide sale or other transfer of any or all of such shares, the Optionee shall give prior written notice to the Company, which notice shall specify (i) the number of shares proposed to be sold or otherwise transferred, (ii) the proposed cash purchase price, (iii) the name and address of the proposed Optionee or transferee thereof, and (iv) all other material terms and conditions of the proposed sale or transfer. The Company shall, within ten (10) days of receipt of such notice, notify the Optionee of its election to purchase the relevant shares at a purchase price equal to the proposed cash purchase price specified in the Optionee's notice. In the event that the Company elects to purchase the relevant shares, the Optionee and the Company shall use their reasonable efforts to consummate such purchase transaction as promptly as practicable thereafter. In the event that the Company elects not to purchase the relevant shares or fails to provide the required notice of its election within the specified period, then the Optionee shall be entitled to effect the proposed sale or other transfer in accordance with the terms set forth in its notice; provided, -------- however, that the Company shall be entitled to receive an opinion, reasonably - ------- satisfactory to the Company, of counsel to the Optionee and at the sole cost and expense of the Optionee, that such sale or transfer does not require registration under the Securities Act of 1933, as amended (the "Act"). -3- SECTION 7. Anti-Dilution Provision. If the Company shall at any time --------- ----------------------- subdivide its outstanding shares of common stock by recapitalization, reclassification or split-up thereof, or if the Company shall declare a stock dividend or distribute shares of common stock to its shareholders, the number of A Option Shares and B Option Shares then subject to the Option immediately prior to such subdivision shall be proportionately increased and the purchase price for such A Option Shares and B Option Shares shall be proportionately decreased; and if the Company shall at any time combine the outstanding shares of common stock by recapitalization, reclassification, or combination thereof, the number of A Option Shares and B Option Shares then subject to the Option immediately prior to such combination shall be proportionately decreased and the purchase price for such A Option Shares or B Option Shares shall be proportionately increased. Any such adjustments pursuant to this Section 7 shall be effective as of the close of business on the effective date of such subdivision or combination or if any adjustment is the result of a stock dividend or distribution then the effective date for such adjustment based thereon shall be the record date therefor. SECTION 8. Tag-Along Rights. In the event that the Majority --------- ---------------- Shareholder proposes to sell, transfer or otherwise dispose of, in a single transaction or a series of related transactions, shares of common stock of the Company, on a fully diluted basis, such that upon consummation of such transaction or transactions the Majority Shareholder shall hold directly or indirectly a percentage of the issued and outstanding common stock of the Company which is less than 20% of the issued and outstanding common stock of the Company as the proposed date of closing of such transaction (a "Tag-Along Sale"), the Majority Shareholder shall provide notice of such proposed Tag-Along Sale to Optionee (a "Tag-Along Notice"), which Tag-Along Notice shall state the proposed purchase price, date of closing and all other proposed material terms and conditions of the Tag-Along Sale, not later than fifteen (15) days prior to the proposed date of closing of such Tag-Along Sale. Optionee shall have the right (a "Tag-Along Right") to require the Majority Shareholder to reduce the number of shares of common stock to be sold by them and have the acquiring entity acquire from Optionee that number of shares of common stock derived by multiplying the total number of shares of common stock to be purchased in such Tag-Along Sale by Optionee's "fractional interest" rounded up to the nearest whole number. For purposes of this Section 8, the term "fractional interest" means (a) the sum of the total number of shares of common stock previously acquired by Optionee pursuant to the Option and the number of additional A Option Shares and B Option Shares, to the extent vested pursuant to Section 2(b) hereof as of the proposed date of closing of the Tag-Along Sale, to which the Optionee would be entitled upon exercise of the Option as of such date, divided by (b) the sum of the total number of shares calculated pursuant to clause (a) of this sentence and the number of shares owned by the Majority Shareholder, calculated on a fully-diluted basis. Optionee shall give written notice of his election to the Majority Shareholder no later than five (5) days after his receipt of a Tag-Along Notice. In the event the Majority Shareholder shall grant other -4- shareholders of the Company "tag along" rights on more favorable terms than those provided in this Section 8, then equivalent rights shall be made available to Optionee. SECTION 9. Piggy-Back Registration. --------- ----------------------- (a) If, at any time following an exercise by the Optionee of the Option hereunder in whole or in part, the Company proposes to register any of the common stock of the Company under the Act (in a secondary offering and not solely in connection with an initial public offering), it shall give Optionee notice of its intention to do so at least thirty (30) days prior to the filing of the registration statement with respect thereto. If Optionee shall notify the Company within fifteen (15) days after receipt of any such notice of his desire to have any of the A Option Shares and/or B Option Shares, as the case may be, which have been purchased by the Optionee or which the Optionee intends to purchase pursuant to the Option included in such registration and covered by such proposed registration statement, the Company shall include such A Option Shares and/or B Option Shares in such registration statement. Notwithstanding the foregoing, the Company shall have the right at any time (irrespective of whether a written request for inclusion of any A Option Shares and/or B Option Shares shall have been made) to elect not to file any such proposed registration statement, or to withdraw the same after the filing but prior to the effective date thereof. (b) If at any time the Company proposes to register its shares of common stock on Form S-8 or successor form in connection with an employee stock option or other employee benefit plan, then it shall include in such registration statement, to the extent it is legally permitted to do so, the Option Shares. (c) In connection with any registration under Section 9(a) or (b) above or Section 10, the Company covenants and agrees as follows: (i) the Company shall furnish Optionee such number of prospectuses as reasonably shall be requested; (ii) the Company shall pay all costs, fees and expenses in connection with such registration including, without limitation, the Company's legal and accounting fees, printing expenses and registration and filing fees. Optionee shall pay his pro rata share of underwriting or selling commissions in connection with any sale of the A Option Shares and/or B Option Shares sold upon such registration; (iii) the Company shall take all necessary action which may be required to qualify or register the A Option Shares and/or B Option Shares, as the case may be, for offering and sale under the securities or blue sky laws of such jurisdictions -5- as reasonably are requested by Optionee; provided, however, that the -------- ------- Company shall not be obligated to execute or file any general consent to do business under the laws of any such jurisdiction; (iv) the Company shall use its best efforts to keep such registration statement effective for the shorter of (i) six months or (ii) until the A Option Shares and/or B Option Shares, as the case may be, included therein have been sold; (v) the Company shall indemnify Optionee from and against any and all loss, claim, damage, expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which Optionee may become subject under the Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act") or otherwise, arising from such registration statement, except to the extent that the same arises out of or is based upon information supplied or omitted to be supplied in such registration statement by Optionee; and (vi) Optionee shall indemnify the Company, its officers and directors and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, from and against any and all loss, claim, damage, expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of Optionee for specific inclusion in such registration statement. SECTION 10. Demand Registration. ---------- ------------------- (a) At any time commencing 180 days from the date of the Company's initial public offering under the Act and expiring on the tenth anniversary of this Agreement (the "Demand Registration Period"), the Optionee shall have the right, on one occasion, to request, exercisable by written notice to the Company, to have the Company prepare and file with the Securities and Exchange Commission (the "Commission") a registration statement to permit the public offering and sale of any or all of the Option Shares at any time after the date of effectiveness of such registration statement up to and including the date that is six months thereafter. The Company agrees to file such registration statement reasonably promptly following demand therefor and to use its best efforts to (i) cause such registration statement to be declared effective at the earliest practicable time, and (ii) maintain the effectiveness of such registration statement until the earlier of the sale of all the Option Shares or six months. -6- (b) Notwithstanding the foregoing, the Company's obligation to effect such action and to keep such registration statement effective shall be conditioned upon the Company's meeting and continuing to meet the then current eligibility requirements for the use of Form S-3 or successor form, provided, -------- however, that if the demand is made during the last twelve months of the Demand - ------- Registration period, and the Company is unable to utilize a Form S-3 or successor form at that time, then the Company shall promptly prepare and file with the Commission a registration statement on Form S-1, or on such other Form as will permit Optionee to sell any or all of the Option Shares in accordance with the provisions of this Section 10. SECTION 11. No Representations and Warranties. The Optionee ---------- --------------------------------- acknowledges and agrees that (a) the A Option Shares and B Option Shares will be sold to and purchased by the Optionee on an "as is" basis, (b) the Optionee is a sophisticated investor capable of making an informed investment decision, (c) the Optionee has made such examinations and investigations, including legal due diligence, of the Company, its organizational and other legal documentation and its business as it has required in order to make an informed business decision regarding the purchase of the A Option Shares and B Option Shares, (d) neither the Company, any of the officers of the Company nor the Shareholder has made or will make any representations or warranties, express or implied, with respect to the A Option Shares, the B Option Shares or the Company, its due incorporation, good standing, business or financial condition, and (e) the Optionee will, if the Option is exercised, be purchasing the A Option Shares and/or the B Option Shares, as the case may be, for investment and not with the intent of selling such shares. The Optionee agrees the neither the Shareholder, any of the Officers of the Company nor any of their respective representatives shall have any liability with respect to the sale of the A Option Shares and B Option Shares contemplated hereby. SECTION 12. Execution of Customary Documents. The Optionee agrees to ---------- -------------------------------- execute such customary agreements and instruments as the Company deems reasonably necessary to effectuate the arrangements set forth in this Agreement. SECTION 13. Assignment. The rights of the Optionee under this ---------- ---------- Agreement shall not be assignable or otherwise transferable, except to the heirs or representatives of the Optionee in the event of the Optionee's death or otherwise by operation of law, without the prior express written consent of the Company, which consent shall be at the sole discretion of the Company. In the event of a sale by the Optionee of any of the A Option Shares and/or B Option Shares purchased by the Optionee pursuant to the Option, the rights provided for in Sections 8 and 9 of this Agreement shall be terminated with respect to such A Option Shares and B Option Shares sold. -7- SECTION 14. Severability. In the event that one or more of the ---------- ------------ provisions hereof should be null and void, unlawful or unenforceable in any way under any law, the validity and enforceability of the other provisions hereof shall not in any way be affected thereby. SECTION 15. Counterparts. This Agreement may be executed by the ---------- ------------ Parties in counterparts, all of which together shall constitute one and the same instrument. SECTION 16. Governing Law. This Agreement shall be governed by and ---------- ------------- construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the Parties hereto have duly executed this Agreement as of the day and year first above written. JFAX COMMUNICATIONS, INC. /s/ Jens Muller ---------------------------- Name: Jens Muller Title: President MICHAEL P. SCHULHOF /s/ Michael P. Schulhof ---------------------------- Acknowledged and Agreed for purposes of Section 8 hereof only: JENS MULLER, as Shareholder /s/ Jens Muller - -------------------------------------- JOHN F. RIELEY, as Shareholder /s/ John F. Rieley - -------------------------------------- -8- EX-10.11 9 LETTER DATED 6/30/98 TO MICHAEL P. SCHULHOF EXHIBIT 10.11 June 30,1998 Michael P. Schulhof 375 Park Avenue Suite 1506 New York, New York 10152 Re: Stock Option Agreement, dated as of January 24, 1997 (the "Option Agreement"), between JFAX Communications, Inc. ("JFAX") and Michael P. Schulhof Dear Mickey: Reference is hereby made to the Option Agreement for the definition of certain capitalized terms used but not defined herein. This letter will serve to clarify the following in connection with the Option Agreement and a certain Registration Rights Agreement, dated as of June 30, 1998 (the "Investors Agreement"), among JFAX and certain investors ("Investors") named therein: 1. If, in the event of a registration by JFAX demanded by one or more Investors pursuant to Section 2.1 of the Investors Agreement (with respect to which Optionee requests to be included pursuant to Section 9 of the Option Agreement), the managing underwriter shall advise JFAX that, in its opinion, the number of securities requested to be included in such registration exceeds the number which can be sold in such offering within a price range acceptable to the requesting Investors, the number of securities that are otherwise entitled to be included in the registration shall be allocated in the following manner: (i) all securities other than the securities of the requesting Investors (including the Option Shares held by the Optionee) shall be reduced on a pro rata basis (based on the number of securities requested to be included in such registration) and (ii) if, after the exclusion of all such securities (if necessary), further reductions are still required, securities of the requesting Investors shall be reduced on a pro rata basis (based on the number of securities requested to be included in such registration). 2. If, in the event of a registration by JFAX pursuant to Section 2.3 of the Investors Agreement (with respect to which the Optionee requests to be included pursuant to Section 9 of the Option Agreement), the managing underwriter shall advise JFAX that marketing considerations require a limitation on the number of securities that can be included in such registration, then JFAX may include in such registration all securities proposed to be sold by JFAX for its own account or by any applicable person exercising demand registration rights, or the maximum amount that the underwriter considers saleable, and such limitation on any remaining securities that may, in the opinion of the underwriter, be sold will be imposed on all securities (including securities held by any Investor and the Option Shares held by Optionee) on a pro rata basis (based on the number of securities requested to be included in such registration). To the extent the provisions of this letter are contrary to the provisions of the Option Agreement, the provisions of this letter shall govern and this letter shall operate as an amendment to the Option Agreement. Except as otherwise expressly modified herein, the Option Agreement shall continue in full force and effect. This letter will further clarify that solely in connection with the investment being made by the Investors in JFAX on the date hereof (on substantially the same terms described on Exhibit A attached hereto), you have waived your rights to purchase additional shares of JFAX's common stock, at the price per share being paid by such Investors, pursuant to the rights granted to in Section 5 (Anti-Dilution) of the letter agreement, dated January 24, 1997, between you and JFAX. Very truly yours, JFAX COMMUNICATIONS, INC. By: /s/ Richard S. Ressler ______________________ Richard S. Ressler President ACCEPTED AND AGREED: /s/ Michael P. Schulhof __________________________ MICHAEL P. SCHULHOF Dated: June 30, 1998 (Attachment) 2 EX-10.12 10 PURCHASE AGREEMENT DATED JULY 2, 1998 EXHIBIT 10.12 ================================================================================ JFAX COMMUNICATIONS, INC. $5,000,000 Preferred Stock and Warrants -------------------------- PURCHASE AGREEMENT -------------------------- Dated as of July 2, 1998 ================================================================================ TABLE OF CONTENTS
Page ---- 1. AUTHORIZATION OF ISSUE OF SECURITIES................................... 1 A. Authorization.......................................................... 1 B. Sale of Series A Preferred Shares and Warrants to the Investors........ 1 2. PURCHASE AND SALE OF SECURITIES........................................ 1 A. Purchase and Sale...................................................... 1 B. Closing................................................................ 2 3. CONDITIONS OF CLOSING.................................................. 2 A. Opinions of Counsel to the Company..................................... 2 B. Representations and Warranties......................................... 2 C. Certificate of Incorporation and By-laws............................... 3 D. Purchase Permitted by Applicable Laws.................................. 3 E. Securityholders Agreement.............................................. 3 F. Registration Rights Agreement.......................................... 3 G. Compliance with Securities Laws........................................ 3 H. Proceedings............................................................ 3 I. No Adverse U.S. Legislation, Action or Decision........................ 3 J. Approval and Consents.................................................. 4 K. Material Changes....................................................... 4 L. Board Nominees......................................................... 4 M. Sale of Senior Subordinated Notes and Common Stock..................... 4 N. Payment of Expenses.................................................... 4 O. Certificate of Designations............................................ 4 P. Purchase of Securities................................................. 5 4. PUT RIGHTS WITH RESPECT TO THE WARRANTS AND WARRANT SHARES............. 5 A. Option of Holders Upon Change of Control............................... 5 B. Notice of Redemption of Warrants and Warrant Shares Upon Change of Control................................................................ 5 C. Option of Holders to Put Securities at Exit............................ 5 D. Exercise of the Exit Put Option........................................ 6
5. AFFIRMATIVE COVENANTS.................................................. 6 A. Financial Statements................................................... 7 B. Use of Proceeds........................................................ 8 C. Books and Records; Inspection of Property.............................. 8 D. Additional Covenant Pending the Closing................................ 9 E. Compliance With Laws, etc.............................................. 9 F. Corporate Existence; Maintenance of Properties......................... 9 G. Insurance.............................................................. 9 H. Further Assurances..................................................... 10 I. Rule 144A.............................................................. 10 J. Filing of Reports Under the Exchange Act............................... 10 K. Securities Act Registration Statements................................. 10 L. Notices of Certain Events.............................................. 11 M. Board Nominees......................................................... 11 N. Listing of Common Stock................................................ 12 O. Investors' Right of First Refusal...................................... 12 P. Company's Right of First Refusal....................................... 13 6. NEGATIVE COVENANTS..................................................... 13 A. Limitation on Transaction with Affiliates.............................. 14 B. Registration Rights.................................................... 14 C. Offering of Securities................................................. 14 D. Registration Exceptions................................................ 14 7. REMEDIES............................................................... 14 8. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......................... 15 A. Organization, Qualification and Authority.............................. 15 B. Financial Statements................................................... 15 C. Capital Stock and Related Matters...................................... 15 D. Actions Pending........................................................ 16 E. Outstanding Debt; Defaults............................................. 16 F. Title to Properties.................................................... 17 G. Taxes.................................................................. 17 H. Conflicting Agreements................................................. 17 I. Offering of Securities................................................. 17
ii J. Broker's or Finder's Commissions...................................... 18 K. Federal Reserve Regulations........................................... 18 L. Environmental Matters................................................. 18 1. ............................................................ 18 2. ............................................................ 18 3. ............................................................ 18 4. ............................................................ 18 M. ERISA................................................................. 19 N. Possession of Franchises, Licenses, etc............................... 19 O. Patents, etc.......................................................... 19 P. Holding Company and Investment Company Status......................... 19 Q. Governmental Consents................................................. 20 R. Insurance Coverage.................................................... 20 S. Subsidiaries.......................................................... 20 T. Disclosure............................................................ 20 U. Related Party Transactions............................................ 20 V. Registration Rights................................................... 21 W. Absence of Foreign or Enemy Status.................................... 21 X. Agreements with Affiliates............................................ 21 Y. Employees............................................................. 21 Z. Year 2000............................................................. 21 AA. Validity of Stock..................................................... 22 9. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS....................... 22 10. DEFINITIONS........................................................... 23 11. MISCELLANEOUS......................................................... 29 A. Expenses; Indemnification............................................. 29 B. Consent to Amendments................................................. 30 C. Form, Registration, Transfer and Exchange of Series A Preferred Stock and Warrants; Lost Series A Preferred Stock and Warrants.............. 30 D. Provisions Applicable if any of the Securities are Sold............... 30 E. Restrictive Legends................................................... 31 F. Persons Deemed Owners................................................. 31 G. Survival of Representations and Warranties............................ 31 H. Successors and Assigns................................................ 31
iii I. Notices............................................................... 31 J. Descriptive Headings.................................................. 32 K. GOVERNING LAW; CONSENT TO JURISDICTION................................ 32 L. Delay Fees............................................................ 32 M. Allocation of Purchase Price.......................................... 33 N. Remedies.............................................................. 33 O. Entire Agreement...................................................... 33 P. Severability.......................................................... 33 Q. WAIVER OF TRIAL BY JURY............................................... 34 R. Counterparts.......................................................... 34 S. Confidentiality....................................................... 34
EXHIBITS Exhibit A Form of Certificate of Designations Exhibit B Form of Warrant Exhibit C Forms of Opinions of Counsel to the Company Exhibit D Form of Registration Rights Agreement Exhibit E Form of Securityholders Agreement iv JFAX COMMUNICATIONS, INC. PREFERED STOCK AND WARRANTS PURCHASE AGREEMENT ------------------ Dated as of July 2, 1998 ------------------ This Preferred Stock and Warrants Purchase Agreement (this "Agreement"), -------- dated as of July 1, 1998, is among JFAX Communications, Inc. (the "Company"), a ------- Delaware corporation, and each of the investors named on the signature pages hereto (the "Investors"). --------- AGREEMENTS In consideration of the mutual promises, covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows (with certain terms used herein being defined in Section 10): 1. AUTHORIZATION OF ISSUE OF SECURITIES. ------------------------------------ A. Authorization. The Company will, prior to the Closing, (a) cause its ------------- Certificate of Incorporation to be duly amended by filing the Certificate of Designations in the form attached as Exhibit A (the "Certificate of -------------- Designations"), (b) duly authorize the issuance of 5,000 units ("Units") with - ------------ ----- each Unit consisting of one share of Series A Usable Redeemable Preferred Stock of the Company ("Series A Preferred Stock") and 500 Warrants (the "Warrants"), ------------------------ -------- with each Warrant representing the right to purchase one share of Common Stock, of the Company, and (c) duly authorize and reserve 2,500,000 shares of Common Stock, subject to adjustment as provided in the certificate evidencing the Warrants, for issuance upon exercise of such Warrants. The Warrants shall be evidenced by certificates in the form of Exhibit B. The Series A Preferred Stock and the Warrants shall be referred to herein collectively as the "Securities". ---------- B. Sale of Series A Preferred Shares and Warrants to the Investors. --------------------------------------------------------------- Subject to the satisfaction of the terms and conditions herein set forth and in reliance upon the respective representations and warranties of the parties set forth herein or in any document delivered pursuant hereto, the Company agrees to sell to the Investors, free and clear of any liens, claims, charges or encumbrances whatsoever, and each of the Investors, severally but not jointly, agrees to purchase from the Company, Units consisting of the number of shares of Series A Preferred Stock and detachable Warrants set forth opposite such Investor's name on Schedule 1.B to this Agreement at a purchase price of $1,000.00 per Unit and for the aggregate purchase price set forth opposite such Investor's name on Schedule 1.B to this Agreement. 2. PURCHASE AND SALE OF SECURITIES. ------------------------------- A. Purchase and Sale. The Company hereby agrees to sell to the Investors ----------------- and, subject to the terms and conditions herein set forth, the Investors severally agree to purchase from the Company, the Securities set forth opposite the name of each of the Investors on the signature pages hereof. The parties hereby agree that the aggregate purchase price for the Securities is $5,000,000. B. Closing. The purchase and delivery of the Securities to be purchased ------- by the Investors shall take place at a closing (the "Closing") at the offices of ------- Willkie Farr & Gallagher, 787 Seventh Avenue, New York, New York 10019 at 10:00 a.m., local time, on July 1, 1998 (or at such other time and place or on such other Business Day thereafter as the parties hereto shall agree) (herein called the "Closing Date"). On the Closing Date, the Company will deliver the ------------ Securities to be purchased by the Investors payable to or registered in the names of the Investors and/or the Investors' nominees or other designees specified on the signature pages hereof in the amounts set forth opposite the name of the Investors on the signature pages hereof, against receipt of the purchase price therefor by wire transfer to the account of: JFAX Communications, Inc., Union Bank of California, ABA No. 122-000-496, Account No. 072-00-491-63, Attn: Denise Decker. If at the Closing, the Company shall, in breach of this Agreement, fail to tender to the Investors any of the Securities to be purchased by them or if any of the conditions specified in Section 3 hereof shall not have been satisfied or waived by the Investors, the Investors shall, at their election, be relieved of all further obligations under this Agreement without thereby waiving any other rights they may have by reason of such failure or such non-fulfillment. Notwithstanding anything to the contrary, the obligation of the Company to deliver any Securities to any Investor at the Closing shall be conditioned on its concurrent receipt of the purchase price of all of the Securities from the Investors. 3. CONDITIONS OF CLOSING. --------------------- The obligation of each of the Investors to purchase and pay for the Securities to be purchased hereunder is subject to the satisfaction, on or before the Closing Date, of the following conditions: A. Opinions of Counsel to the Company. The Investors shall have received ---------------------------------- from each of Sullivan & Cromwell and Nicholas V. Morosoff, each counsel to the Company, a legal opinion addressed to the Investors and dated the Closing Date, substantially in the form of Exhibit C attached hereto. Such opinions shall also --------- cover such other matters incident to the matters herein contemplated as the Investors may reasonably request. B. Representations and Warranties. Each of the representations and ------------------------------ warranties contained in Section 8 hereof and those otherwise made in writing by or on behalf of the Company and contained in any document, certificate or other written statement provided to the Investors in connection with the transactions contemplated by this Agreement shall be true and correct in all material respects when made and on and as of the Closing Date, without giving additional effect to any qualification as to materiality contained therein and except to the extent of changes caused by the transactions herein contemplated; all of the covenants and obligations of the Company hereunder to be performed or observed on or prior to the Closing shall have been duly performed or observed; and the Company shall have delivered to the Investors an Officer's Certificate, dated the Closing Date, to the foregoing effects. 2 C. Certificate of Incorporation and By-laws. The Investors shall have ---------------------------------------- received certificates, dated the Closing Date, of the Secretary of the Company and its Subsidiaries attaching (i) true and complete copies of the Certificate of Incorporation of the Company (which shall be amended by the Certificate of Designations) and its Subsidiaries as filed with the appropriate state officials of its jurisdiction of incorporation with all amendments thereto, (ii) true and complete copies of the By-laws of the Company and its Subsidiaries in effect as of such date, (iii) certificates of good standing of the appropriate officials of the jurisdiction of incorporation of the Company and its Subsidiaries and of each state in which each of the Company and its Subsidiaries is required to be qualified to do business as a foreign corporation, (iv) resolutions of the Board of Directors of the Company authorizing (a) the execution, delivery and performance of the Related Documents, (b) the filing of the Certificate of Designations, and (c) the issuance and delivery of the Securities and the reservation of the Warrant Shares and certificates as to the incumbency of the officers of the Company executing this Agreement or any other Related Document. D. Purchase Permitted by Applicable Laws. The purchase of and payment for ------------------------------------- the Securities shall not be prohibited by any applicable law or governmental regulation and shall not subject the Investors to any tax, penalty, liability or other onerous condition under or pursuant to any applicable law or governmental regulation, and the Investors shall have received such certificates or other evidence as they may request to establish compliance with this condition. E. Securityholders Agreement. The Investors shall have received a fully ------------------------- executed counterpart of the Securityholders Agreement, and such Securityholders Agreement shall be in full force and effect and no term or condition thereof shall have been amended, modified or waived. F. Registration Rights Agreement. The Investors shall have received a ----------------------------- fully executed counterpart of the Registration Rights Agreement, and such Registration Rights Agreement shall be in full force and effect and no term or condition thereof shall have been amended, modified or waived. G. Compliance with Securities Laws. The offering and sale of the ------------------------------- Securities under this Agreement shall have complied with all applicable requirements of federal and state securities laws, and the Investors shall have received evidence of such compliance in form and substance satisfactory to them. H. Proceedings. All required corporate and other proceedings taken or ----------- required to be taken in connection with the transactions contemplated hereby and all documents incident thereto shall be reasonably satisfactory in form and substance to the Investors and their counsel, and the Investors and their counsel shall have received all such counterpart originals or certified or other copies of such documents as they may reasonably request. I. No Adverse U.S. Legislation, Action or Decision. No legislation, ----------------------------------------------- order, rule, ruling or regulation shall have been enacted or made by or on behalf of any governmental body, department or agency of the United States, nor shall any legislation have been introduced and favorably reported for passage to either House of Congress by any committee of either such House to which such legislation has been referred for consideration, nor shall any decision of any 3 court of competent jurisdiction within the United States have been rendered which, in the Investors' reasonable judgment, would materially and adversely affect their investment in the Securities. There shall be no action, suit, investigation or proceeding, pending or threatened, against or affecting the Company, its Subsidiaries or any of their respective properties or rights, or any of their respective affiliates, associates, officers or directors, before any court, arbitrator or administrative or governmental body which (i) seeks to restrain, enjoin, prevent the consummation of or otherwise affect the transactions contemplated by any of the Related Documents or (ii) questions the validity or legality of any such transaction or seeks to recover damages or to obtain other relief in connection with any such transaction, and there shall be no valid basis for any such action, proceeding or investigation. J. Approval and Consents. The Company and each Subsidiary shall have duly --------------------- received all authorizations, consents, approvals, licenses, franchises, permits and certificates by or of all Governmental Authorities necessary or advisable for the issuance of the Securities, the issuance of Warrant Shares and the consummation of the transactions contemplated hereby and by the Related Documents, and all such authorizations, consents, approvals, licenses, franchises, permits and certificates shall be in full force and effect at the time of the Closing. The Company shall have delivered to the Investors an Officer's Certificate, dated the Closing Date, to such effect. K. Material Changes. Since December 31, 1997, there shall not have been ---------------- any changes in the business of the Company or any of its Subsidiaries which have or could reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect, nor shall there have been any development or discovery or any material contingency or other liability which could have such effect. There shall exist no defaults under the provisions of any instrument evidencing Indebtedness of the Company or its Subsidiaries and the Company shall have delivered to the Investors an Officer's Certificate, dated the Closing Date, to such effect. L. Board Nominees. The Board of Directors of the Company shall be -------------- constituted as contemplated by Section 3.1 of the Securityholders Agreement and the nominee designated by the Investors shall have been appointed to the Board of Directors effective upon the Closing. M. Sale of Senior Subordinated Notes and Common Stock. The Company shall -------------------------------------------------- have consummated the sale of no less than $10,000,000 aggregate principal amount of its Senior Subordinated Notes and 1,681,577 shares of Common Stock for an aggregate purchase price equal to $10,000,000, pursuant to the terms of that certain Securities Purchase Agreement, dated as of the date hereof, among the Company and the investors party thereto, without waiver of any material term or condition thereunder; and the Investors shall have received an Officer's Certificate, dated the Closing Date, to the foregoing effect. N. Payment of Expenses. The Company shall have paid to the Investors all ------------------- reasonable fees and expenses of the Investors (including legal fees) incurred in connection with the transactions contemplated by this Agreement and the Related Documents. O. Certificate of Designations. The Certificate of Designations relating --------------------------- to the terms and conditions of the Series A Preferred Stock shall have been filed with the Secretary of State of the State of Delaware and shall be in full force and effect. 4 P. Purchase of Securities. At the Closing, the Investors severally shall ---------------------- have purchased the Securities in the amounts set forth opposite their names on Schedule 1.B to this Agreement. 4. PUT RIGHTS WITH RESPECT TO THE WARRANTS AND WARRANT SHARES. ----------------------------------------------------------- A. Option of Holders Upon Change of Control. Upon the occurrence of a ---------------------------------------- Change of Control, unless the holders of at least 66-2/3% in interest of the Warrants and Warrant Shares approve such Change of Control in writing, each holder of Warrants and/or Warrant Shares ("Warrant Investor") has the option to ---------------- require the Company to redeem all of the outstanding Warrants and/or Warrant Shares (or any portion thereof), and all shares of Common Stock issued pursuant to stock splits, dividends or similar events in respect of such Warrants or Warrant Shares ("Additional Warrant Shares"; the Warrants, Warrant Shares and ------------------------- Additional Warrant Shares being referred to herein as "Warrant Securities") held ------------------ by such holder at a price equal to (i) for unexercised Warrants, $2.00 per Warrant and (ii) for each of the Warrant Shares that were issued upon exercise of a Warrant and for each of the Additional Warrant Shares, if any related to such Warrant Share, an amount equal to 1.67 multiplied by the exercise price paid for such Warrant Share being redeemed (such exercise price to be appropriately adjusted for subsequent stock splits, dividends or similar events occurring after such exercise to the extent that the holders of Warrant Shares received their proportionate benefit of such stock splits, dividends or similar events in the form of Additional Warrant Shares which are included in the package of securities which the Company must redeem). B. Notice of Redemption of Warrants and Warrant Shares Upon Change of ------------------------------------------------------------------ Control. - ------- The Company shall give each Warrant Investor written notice (a "Notice of --------- Change of Control Event") within five (5) days after the Company or any of its - ----------------------- executive officers or directors obtains knowledge of the occurrence of a Change of Control Event, specifying that a Change of Control Event has occurred, the material facts and circumstances of such Change of Control Event, the applicable purchase price(s) and instructions that a Warrant Investor must follow in order to have his Warrant Securities redeemed. Within five (5) days after receipt of a Notice of Change of Control Event, a Warrant Investor may, at his option, if applicable give notice to the Company specifying the number of Warrant Securities held by such holder that such holder requires the Company to redeem. The redemption date for any Change of Control Event (each, a "Change of Control ----------------- Redemption Date") shall be the twenty-fifth date following such Change of - --------------- Control Event. In the event some or all of the Warrant Securities are not tendered for redemption, the holder of such Warrant Securities not so tendered shall be deemed to have consented to the redemption by the Corporation of any Junior Stock being prepaid, retired or exchanged pursuant to a Change of Control Event. C. Option of Holders to Put Securities at Exit. In the event that the ------------------------------------------- Company has not completed a Qualified Public Offering by July 1, 2003, each Warrant Investor shall have the right upon written notice to require the Company to purchase at the Exit Closing (as defined below), and the Company agrees to so purchase, all or any of the Warrant Securities. The purchase price for such Warrant Securities held by such Warrant Investor shall be paid by certified check at the Exit Closing or by wire transfer of immediately available funds 5 denominated in U.S. dollars to one or more accounts designated by such Warrant Investor to the Company prior to the Exit Closing in an amount equal to, (i) for unexercised Warrants, the Fair Market Value of such unexercised Warrants at the time of the Exit Notice with respect to such unexercised Warrants and (ii) for each of the Warrant Shares that were issued upon exercise of a Warrant and for each of the Additional Warrant Shares, if any related to such Warrant Share, the greater of the Fair Market Value of such Warrant Share and such Additional Warrant Share at the time of the Exit Notice with respect to such Warrant Share and the exercise price paid for such Warrant Share issued upon exercise of the Warrant (such exercise price to be appropriately adjusted for stock splits, dividends or similar events occurring after such exercise to the extent that the holders of Warrant Shares received their proportionate benefit of such stock splits, dividends or similar events in the form of Additional Warrant Shares which are included in the package of securities which the Company must redeem). The Company shall not be required to hold more than one Exit Closing during any six-month period, and no holder may participate in more than one Exit Closing. D. Exercise of the Exit Put Option. Upon the receipt of a notice given ------------------------------- pursuant to paragraph 4C, the Company shall provide notice to each Warrant Investor (the "Exit Notice"), which shall (i) refer specifically to this ----------- paragraph 4D, (ii) state that the Company may be required to purchase all of the outstanding Warrant Securities, (iii) contain the Company's calculation of the purchase price for the Warrant Securities to be purchased (including a detail of any adjustments for stock splits, recombinations, dividends or similar events or of the applicable Fair Market Value, as the case may be), (iv) indicate that the Company will purchase the Warrant Securities at the Exit Closing upon written notice of the exercise of an option by a Warrant Investor, (v) indicate that a closing (the "Exit Closing") for such purchase and sale shall take place on a ------------ date specified in the notice, which date shall be a date occurring not later than 30 days nor more than 60 days after the date on which the notice to the Company is given pursuant to paragraph 4C, (vi) indicate where the Exit Closing shall take place and (vii) be delivered by certified mail return receipt requested. A Warrant Investor who desires to exercise its option shall furnish written notice to the Company of the exercise of such option within at least 10 days prior to the Exit Closing. At the Exit Closing, the Company shall pay the purchase price for the Warrant Securities being purchased determined as described above against delivery of the securities being purchased. No waiver by a Warrant Investor of its right under this paragraph 4D to require the purchase of any or all of the Warrant Securities held by such Warrant Investor at any Exit Closing shall affect the rights of such Warrant Investor to participate in another Exit Closing. 5. AFFIRMATIVE COVENANTS. ---------------------- All covenants contained herein shall be given independent effect so that if a particular action or condition is not permitted by any such covenant, the fact that such action or condition would be permitted by an exception to, or otherwise be within the limitations of, another covenant shall not avoid the occurrence of a breach if such action is taken or condition exists. The provisions of this Section 5 are for the benefit of the Investors so long as they hold any of the Securities or other Warrant Securities and, to the extent set forth herein, for the benefit of each other holder of the Securities or other Warrant Securities; provided, however, that (i) upon the redemption of all -------- ------- of the Series A Preferred Stock, the Company and its Subsidiaries shall no 6 longer be bound by the covenants set forth in paragraphs 5A(i) and 5B, (ii) upon consummation of a Qualifying Public Offering, the Company shall no longer be bound by the covenant set forth in paragraph 5O, (iii) upon the conditions in both clauses (i) and (ii) above being satisfied, the Company shall no longer be bound by any covenants set forth in this Section 5 other than those set forth in paragraphs 5I, 5M and 5N and (iv) the provisions of paragraph 5P are for the benefit of the Company so long as an Initial Public Offering has not occurred. A. Financial Statements. The Company will deliver to each holder of -------------------- Securities: (i) as soon as practicable and in any event within 30 days after the end of each month in each fiscal year commencing with May 1998, unaudited management reports of the Company and its Subsidiaries setting forth the financial, operational and other performance data of the Company and its Subsidiaries in reasonable detail and reasonably satisfactory in scope to the Investors (taking into account the human and technical resources that the Company has or reasonably ought to have and the importance of such information to the Investors under the circumstances), which shall include at least a consolidated statement of operations, a consolidated statement of cash flows and a consolidated balance sheet for or as at the end of such month, in each case setting forth, in comparative form, management's budget for such month and comparable information from the same month in the preceding fiscal year, all in the format in which such reports are then prepared by management of the Company in the conduct of its business; (ii) as soon as practicable and in any event within 45 days after the end of each quarterly period in each fiscal year, consolidated statements of income, changes in stockholders' equity and cash flow of the Company and its Subsidiaries for such quarterly period and for the period from the beginning of the current fiscal year to the end of such quarterly period and a consolidated balance sheet of the Company and its Subsidiaries as at the end of the most recent year and at the end of such quarterly period, setting forth in each case in comparative form figures for the corresponding period in the preceding fiscal year, all in reasonable detail and reasonably satisfactory in scope to the holders of Securities (taking into account the human and technical resources that the Company has or reasonably ought to have and the importance of such information to the Investors under the circumstances), and prepared in accordance with GAAP (except for footnote disclosure) on a basis consistent with past practice and certified by the chief financial officer or chief executive officer of the Company as fairly presenting the financial condition of the Company and its Subsidiaries, subject to the changes resulting from audit and year-end adjustments; (iii) as soon as practicable and in any event within 120 days after the end of each fiscal year, consolidated statements of income, changes in stockholders' equity and cash flow of the Company and its Subsidiaries for such year, and a consolidated and consolidating balance sheet of the Company and its Subsidiaries as at the end of such year, setting forth in each case in comparative form corresponding figures from the preceding annual audit, all in reasonable detail and reasonably satisfactory in scope to the holders of Securities (taking into account the human and technical resources that the Company has or reasonably ought to have and the importance of such information to the Investors under the circumstances), and in each case audited by KPMG Peat Marwick 7 LLP or such other independent public accountants of recognized national standing selected by the Company, whose report in each case shall state that such consolidated financial statements present fairly the results of operations and cash flows of the Company and its Subsidiaries, in accordance with GAAP on a basis consistent with prior years and that the examination by such accountants has been made in accordance with generally accepted auditing standards then in effect in the United States; (iv) as soon as practicable and in any event by the end of each fiscal year beginning with fiscal year 1998, a budget for the Company and its Subsidiaries, as approved by the Board of Directors of the Company, for the following fiscal year setting forth in comparative form corresponding figures from the preceding fiscal year's budget, in reasonable detail and certified as to its good-faith preparation by the chief financial officer or chief executive officer of the Company and each Subsidiary; (v) promptly upon transmission thereof, copies of all financial statements, information circulars, proxy statements and reports as the Company or any Subsidiary shall send to its stockholders that are material to the business of the Company and its Subsidiaries, taken as a whole, and copies of all registration statements and prospectuses and all reports which it or any of its officers or directors file with the Commission (or any governmental body or agency succeeding to the functions of the Commission) or with any securities exchange on which any of its securities are listed or with Nasdaq, and copies of all press releases and other statements made available generally by the Company or its Subsidiaries to the public concerning material developments in the business of the Company and its Subsidiaries; (vi) promptly upon receipt thereof, a copy of each other report submitted to the Company or any of its Subsidiaries by independent accountants in connection with any annual, interim or special audit made by them of the books of the Company or any of its Subsidiaries; and (vii) with reasonable promptness, such other financial and/or operating data as any holder of Securities may reasonably request. Each holder of Securities is hereby authorized to deliver a copy of any financial statement or certificate delivered pursuant to this paragraph 5A to any regulatory body having jurisdiction over such holder that requests or requires delivery of such information. B. Use of Proceeds. The proceeds of the sale of the Securities shall be --------------- used for capital expenditures and general corporate purposes. C. Books and Records; Inspection of Property. The Company will keep, and ----------------------------------------- will cause each of its Subsidiaries to keep, proper books of record and account in which full, true and correct entries in conformity in all material respects with GAAP shall be made of all material dealings and transactions in relation to their business and activities. The Company will, upon reasonable advance notice, permit any Person representing any holder of Securities and designated in writing by such holder, at such holder's expense, to visit and inspect any of the properties of the Company and its Subsidiaries during normal business hours in a manner which 8 does not unduly interrupt the normal course of business, to examine the corporate, financial and operating records of the Company or any of its Subsidiaries and make copies thereof or extracts therefrom and to discuss the affairs, finances and accounts of any of such corporations with the directors, officers and independent accountants of the Company and its Subsidiaries, all at such reasonable times and as often as the holders may reasonably request. D. Additional Covenant Pending the Closing. Pending the Closing, the --------------------------------------- Company will not, without the prior written consent of the Investors, take any action which would result (i) in any of the representations or warranties contained in this Agreement not being true and correct in all material respects (without giving additional effect to any qualification as to materiality contained therein) at and as of the time immediately after such action or (ii) in any of the covenants contained in this Agreement becoming incapable of performance. Pending the Closing, the Company will promptly advise the Investors of any action or event of which either becomes aware which has the effect of making incorrect, in any material respect, any of such representations or warranties (without giving additional effect to any qualification as to materiality contained therein) or which has the effect of rendering any of such covenants incapable of performance. The Company will duly perform, in all material respects, all of its respective obligations required to be performed under each of the Related Documents to which it is a party. E. Compliance With Laws, etc. The Company will, and will cause each of ------------------------- its Subsidiaries to, comply with the requirements of all applicable laws, rules, regulations and orders of any Governmental Authority, and obtain and maintain in good standing all licenses, permits and approvals from any and all governments, governmental commissions, boards or agencies of jurisdictions in which they carry on business required in respect of the operations of the Company and its Subsidiaries, except for those with which the failure to comply or maintain would not have a Material Adverse Effect. F. Corporate Existence; Maintenance of Properties. The Company (i) will ---------------------------------------------- do or cause to be done all things reasonably necessary to preserve and keep in full force and effect its corporate existence, rights and franchises and the corporate existence, rights and franchises of its Subsidiaries (except as specifically permitted by paragraphs7E and 7F of the Securities Purchase Agreement), (ii) will cause its material properties and the material properties of its Subsidiaries to be maintained and kept in good condition, repair and working order (ordinary wear and tear excepted) and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereto, and (iii) will, and will cause each of its Subsidiaries to, qualify and remain qualified to conduct business in each jurisdiction where the nature of the business of or ownership of property by the Company or such Subsidiary may require such qualification. G. Insurance. The Company will maintain, and will cause each of its --------- Subsidiaries to maintain, with financially sound and reputable insurance companies, funds or underwriters, insurance for itself and its Subsidiaries of the kinds, covering the risks and in the relative proportionate amounts usually carried by companies conducting business activities similar to those of the Company and its Subsidiaries. From and after an Initial Public Offering, the Company will use its reasonable efforts to obtain and maintain directors and officers liability insurance similar to the insurance usually carried by companies conducting business activities similar to those of the Company and its Subsidiaries. 9 H. Further Assurances. The Company shall cooperate with any of the ------------------ Investors and execute such further instruments and documents as the Investors shall reasonably request to carry out to the reasonable satisfaction of such Investors the transactions contemplated by this Agreement. I. Rule 144A. In connection with any prospective transfer pursuant to --------- Rule 144A promulgated by the Securities and Exchange Commission, to the extent permitted under such rule, of (a) Securities, (b) Warrant Shares, or (c) shares of Common Stock or other securities issued as, or upon conversion or exercise of other securities issued as, a dividend or other distribution with respect to or in replacement of any shares referred to in clause (a) or (b), upon the written request of any holder of such shares, the Company will make available to such holder and any prospective purchaser of such shares, promptly after such request, the information required pursuant to paragraph (d)(4)(i) of Rule 144A of the Commission. J. Filing of Reports Under the Exchange Act. The Company shall, and ---------------------------------------- shall cause each of its Subsidiaries to, give prompt notice to each Investor of the filing of any registration statement (an "Exchange Act Registration ------------------------- Statement") pursuant to the Exchange Act relating to any class of securities of - --------- the Company or any of its Subsidiaries and the effectiveness of such Exchange Act Registration Statement and, with respect to equity securities, the number of shares of such class of equity security outstanding as reported in such Exchange Act Registration Statement. If and for so long as the Company or any of its Subsidiaries has a class of equity securities required to be registered under the Exchange Act, the Company and such Subsidiaries shall (i) comply in all material respects with the reporting requirements of the Exchange Act, and (ii) comply in all material respects with all other public information reporting requirements of the Commission that are a condition to the availability of an exemption from the Securities Act (under Rule 144 thereof, as amended from time to time, or successor rule thereto or otherwise) for the sale of shares of Common Stock by any Investor. The Company shall, and shall cause each of its Subsidiaries to, cooperate with each Investor in supplying such information as may be reasonably necessary for such Investor to complete and file any information reporting forms presently or hereafter required by the Commission as a condition to the availability of an exemption from the Securities Act (under Rules 144 or 144A thereunder or otherwise) for the sale of shares of Common Stock by any Investor. K. Securities Act Registration Statements. The Company covenants that it -------------------------------------- shall not, and shall cause each of its Subsidiaries not to, file any registration statement under the Securities Act covering any securities unless it shall first have given to each Investor 20 days written notice thereof. The Company further covenants that each Investor shall have the right, at any time when it may reasonably be deemed by such Investor or the Company or any of its Subsidiaries to be a controlling person of the Company or any of its Subsidiaries, to participate in the preparation of such registration statement (regardless of whether or not an Investor will be a selling security holder in connection with such registration statement) and to request the insertion therein of material furnished to the Company or any of its Subsidiaries in writing which in such Investor's reasonable judgment should be included. In connection with any registration statement referred to in this paragraph 5K, the Company will indemnify each Investor, its partners, officers and directors and each person, if any, who controls such Investor within the meaning of Section 15 of the Securities Act (collectively, the "Investor Parties"), against all ---------------- losses, claims, damages, liabilities and expenses caused by any untrue statement or alleged 10 untrue statement of a material fact contained in any registration statement or prospectus or any preliminary prospectus or any amendment thereof or supplement thereto or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or expenses are caused by any untrue statement or alleged untrue statement or omission or alleged omission contained in written information furnished to the Company or any of its Subsidiaries by such Investor Parties expressly for use in such registration statement. If, in connection with any such registration statement, such Investor Parties shall furnish written information to the Company or any of its Subsidiaries expressly for use in the registration statement, such Investor will indemnify the Company, its directors, each of its officers who signs such registration statement and each person, if any, who controls the Company within the meaning of the Securities Act against all losses, claims, damages, liabilities and expenses caused by any untrue statement or alleged untrue statement of a material fact or any omission or alleged omission of a material fact required to be stated in the registration statement or prospectus or any preliminary prospectus or any amendment thereof or supplement thereto or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or alleged untrue statement or such omission or alleged omission is contained in information so furnished in writing by such Investor for use therein. The provisions of this paragraph 5K are in addition to, and not in limitation of, the provisions of the Registration Rights Agreement. L. Notices of Certain Events. The Company shall promptly give notice to ------------------------- each holder of Securities (i) of the occurrence of any breach of its obligations hereunder, (ii) of any default or event of default under any contractual obligation of the Company or any of its Subsidiaries if such default or event of default, individually or in the aggregate, would reasonably be expected to result in a Material Adverse Effect, (iii) of any pending or threatened litigation, investigation or proceeding to which the Company or any of its Subsidiaries is or is threatened to be a party which, if such pending or threatened litigation, investigation or proceeding were adversely determined, would reasonably be expected to result in a Material Adverse Effect and (iv) of a Change of Control Event. Any notice delivered pursuant to this paragraph 5L shall be accompanied by an Officer's Certificate specifying the details of the occurrence referred to therein and stating what action the Company proposes to take with respect thereto. In addition to the foregoing, in the case contemplated by clause (iv) of this paragraph 5L, the Company will also comply with the provisions of Section 4 hereof. M. Board Nominees. During the period specified in Section 3.1 of the -------------- Securityholders' Agreement, the Company will use its reasonable best efforts to (i) have the Preferred Designee, as defined in the Securityholders' Agreement, designated in the manner provided therein, elected to the Board of Directors of the Company, and (ii) if requested in writing by the Investors, cause the number and composition of directors of the Board of Directors of any Subsidiary to be identical to the number and composition of the Board of Directors of the Company. Any Preferred Designee shall receive (A) all materials distributed to the Board of Directors of the Company or any Subsidiary, as the case may be, whether provided to directors in advance of, during or after, any meeting of the applicable Board of Directors, regardless of whether such director shall be in attendance at any such meeting, (B) the same compensation other outside members of the Board of Directors of the Company or any Subsidiary, as the case may be, shall receive in his or her capacity as a director and (C) 11 reimbursement of the reasonable out-of-pocket expenses of such director incurred in attending the meetings of the Board of Directors of the Company or any Subsidiary, as the case may be. N. Listing of Common Stock. The Company covenants and agrees for the ----------------------- benefit of the Investors and each holder of any Warrant Shares and Additional Warrant Shares, if any, that at the time of and in connection with the listing of Common Stock or any other equity securities of the Company on any national securities exchange, it will, at its expense, use its reasonable best efforts to cause the Warrant Shares and Additional Warrant Shares, if any, to be approved for listing, subject to notice of issuance, and will provide prompt notice to each such exchange of the issuance thereof from time to time. O. Investors' Right of First Refusal. --------------------------------- (a) The Company hereby grants to each Warrant Investor the right of first refusal to purchase its Pro Rata Share of New Securities which the Company may, from time to time, propose to sell and issue. "Pro Rata -------- Share," for purposes of this right of first refusal, is the ratio that (i) ----- the number of Warrant Shares and Additional Warrant Shares, if any, then held by such Warrant Investor (including the Warrant Shares that have not been issued under unexercised Warrants) bears to (ii) the Fully Diluted Outstanding Shares of Common Stock. (b) Except as set forth below, "New Securities" shall mean any -------------- shares of capital stock of the Company, including Common Stock and any series of preferred stock, whether now authorized or not, and rights, options or warrants to purchase said shares of Common Stock or preferred stock, and securities of any type whatsoever that are, or may become, convertible into or exchangeable for said shares of Common Stock or preferred stock. Notwithstanding the foregoing, "New Securities" does not include (i) Common Stock offered to the public generally pursuant to a registration statement under the Securities Act in connection with the Company's Initial Public Offering, (ii) securities issued pursuant to the acquisition of another corporation by the Company by merger, purchase of all or substantially all of the assets or other reorganization whereby the Company or its stockholders own more than fifty percent (50%) of the voting power of the surviving or successor corporation, (iii) up to 6% of the Fully Diluted Outstanding Shares (net of any repurchase) of the Company's Common Stock or related options, warrants or other rights to purchase such Common Stock issued on or after the Closing Date to employees, officers and directors of and consultants to the Company, pursuant to arrangements approved by the Board of Directors of the Company, (iv) stock issued pursuant to any rights, agreements or convertible securities, including without limitation options and warrants, provided that (A) such rights, agreements or convertible securities were outstanding prior to the date of this Agreement or (B) the rights of first refusal established by this paragraph 5O applied with respect to the initial sale or grant by the Company of such rights, agreements or convertible securities, (v) stock issued in connection with any stock split, stock dividend or recapitalization by the Company, (vi) securities issued in connection with an equipment lease or other similar transaction which is approved by the Board of Directors of the Company or (vii) securities issued pursuant to the Securities Purchase Agreement. 12 (c) In the event the Company proposes to undertake an issuance of New Securities, it shall give each Warrant Investor written notice of its intention, describing the amount and type of New Securities, and the price and terms upon which the Company proposes to issue the same. Each Warrant Investor shall have ten (10) Business Days from the date of receipt of any such notice to agree to purchase up to its respective Pro Rata Share of such New Securities for the price and upon the terms specified in the notice by giving written notice to the Company and stating therein the quantity of New Securities to be purchased. (d) In the event all of the New Securities are not elected to be purchased by Warrant Investors within ten (10) Business Days after the notice pursuant to clause (c) above, the Company shall have ninety (90) days thereafter to sell the New Securities not elected to be purchased by Warrant Investors at the price and upon the terms no more favorable to the purchasers of such securities than specified in the Company's notice. In the event the Company has not sold the New Securities within said ninety (90) day period, the Company shall not thereafter issue or sell any New Securities without first offering such securities in the manner provided above. P. Company's Right of First Refusal. -------------------------------- (a) In the event any Warrant Investor proposes to sell or transfer any Warrant Securities prior to the consummation of an Initial Public Offering, it shall give the Company written notice of its intention, describing the number of Warrants and/or other Warrant Securities and the price and other material terms upon which such Warrant Investor proposes to sell or transfer such Warrant Securities; provided, however, that the sale on transfer of Warrants and/or other Warrant Securities in an aggregate amount equal to or less than 10% of the Warrant Shares and Additional Warrant Shares issued or issuable to such Warrant Investor shall not be subject to this paragraph 5P. The Company shall have ten (10) Business Days from the date of receipt of any such notice to agree to purchase all, but not less than all, of such Warrant Securities for the price and upon the terms specified in the notice by giving written notice to the Investor. (b) In the event the Company fails to elect to so purchase all of such Warrant Securities within ten (10) Business Days after the notice pursuant to clause (a) above, the Warrant Investor shall have ninety (90) days thereafter to sell such Warrant Securities at the price and upon the terms no more favorable to the purchaser of such Warrant Securities than specified in the Warrant Investor's notice. In the event the Warrant Investor has not sold such Warrant Securities within said ninety (90) day period, such Warrant Investor shall not thereafter sell or transfer any Warrant Securities without first offering such securities in the manner provided above. 6. NEGATIVE COVENANTS. ------------------- All covenants contained herein shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that such action or condition would be permitted by an exception to, or otherwise be within the limitations of, another covenant shall not avoid the occurrence of a breach if such action is taken or condition 13 exists. The provisions of this Section 6 are for the benefit of the Investors so long as they hold any of the Securities or other Warrant Securities and for the benefit of each other holder of Securities or other Warrant Securities, provided that Section 6A shall cease to be applicable to any such other holder from and after the date on which both of the following occur: (i) the redemption or other retirement of all of the Series A Preferred Stock and (ii) the consummation of a Qualifying Public Offering. A. Limitation on Transaction with Affiliates. After the Closing, the ----------------------------------------- Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, enter into any transaction including, without limitation, the purchase, sale, lease or exchange of any property or the rendering of any service, with any Affiliate, unless such transaction (including any investments, loans or advances by or to any Affiliate) is conducted in good faith, the terms of which are fair and reasonable to the Company. For the purposes of this section 6A, any transaction in excess of $250,000 or any series of transactions in excess of $1,000,000 in the aggregate shall be approved by a majority of the Board of Directors, including a majority of the disinterested directors. B. Registration Rights. The Company will not hereafter, so long as the ------------------- Registration Rights Agreement is in effect, enter into any agreement with respect to its securities any provision of which is inconsistent with or more favorable than the rights granted to the Investors in the Registration Rights Agreement. C. Offering of Securities. The Company will not, directly or indirectly, ---------------------- take any action which would subject the issuance or sale of any of the Securities to the provisions of Section 5 of the Securities Act or violate the provisions of any securities or "blue sky" law of any applicable jurisdiction. D. Registration Exceptions. The Company will not take any action ----------------------- hereafter that could cause the loss of the exemptions from the registration requirements of the Securities Act for the sale and issuance of the Securities and the issuance of the Warrant Shares. 7. REMEDIES. --------- Without limiting the rights of the Investors to pursue all other legal and equitable rights available to them for the Company's failure to perform any of its obligations under this Agreement, the Related Documents or the Certificate of Incorporation of the Company, the parties hereto acknowledge and agree that, while such Investor will be entitled to recover damages and to exercise all other rights granted by law, the remedy at law for any failure by the Company to perform any of such obligations may be inadequate and that the Investors may be entitled to specific performance, injunctive relief or other equitable remedies in the event of any such failure. No remedy conferred in this Agreement upon the Investors or any other holder of any Security is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to every other remedy conferred herein or now or hereafter existing at law or in equity or by statute or otherwise. 14 8. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. ---------------------------------------------- The Company represents and warrants to each Investor that: A. Organization, Qualification and Authority. The Company and each of ----------------------------------------- its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and is duly qualified to do business as a foreign corporation and in good standing in each jurisdiction in which the character of its properties or the nature of its business makes such qualification necessary, except where the failure to so qualify would not have a Material Adverse Effect. The Company and each of its Subsidiaries has the corporate power to own its properties and to carry on its business as now being conducted. The Company has all requisite corporate power and authority to enter into each of the Related Documents, to issue and sell the Securities hereunder and the Warrant Shares, and has the requisite corporate power and authority to carry out the transactions contemplated hereby and thereby to be performed by it, and the execution, delivery and performance hereof and thereof have been duly authorized by all necessary corporate action. This Agreement constitutes, and each other agreement (including the Related Documents) or instrument (including the Securities) executed and delivered by the Company pursuant hereto or thereto or in connection herewith or therewith will constitute, legal, valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar laws or by the application of principles of equity. B. Financial Statements. The Company has furnished the Investors with (a) -------------------- its audited consolidated balance sheets for the year ended December 31, 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended (collectively, the "Financial Statements") -------------------- and (b) its unaudited consolidated balance sheet as of March 31, 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for the quarter then ended (collectively, the "Interim Financials"). ------------------ Except as set forth on Schedule 8B, the Financial Statements and the Interim Financials (including any related schedules and notes) have been prepared in accordance with GAAP consistently applied throughout the period or periods in question and show all material liabilities, direct or contingent, required to be shown in accordance with GAAP consistently applied throughout the period or periods in question and fairly present, in all material respects, the financial condition of the Company for the periods indicated therein, except for normal audit adjustments and the omission of footnotes in the case of the Interim Financials. There has been no material adverse change in the business, condition (financial or other), assets, properties, rights, operations or prospects of the Company or its Subsidiaries since the date of the balance sheet included in the Financial Statements. C. Capital Stock and Related Matters. As of the Closing Date, and after --------------------------------- giving effect to the transactions contemplated hereby and pursuant to the Related Documents, (i) the authorized capital stock of the Company will consist of a total of 101,000,000 shares as follows: (a) 100,000,000 shares of Common Stock, of which 19,229,577 shares are issued and outstanding after giving effect to the closing under the Securities Purchase Agreement, the ownership and the consideration paid for which is set forth on Schedule 8C and (1) 4,383,333 shares of which are reserved for the exercise of options or warrants to purchase such shares 15 issued or issuable to officers, directors, consultants, independent contractors and employees of the Company and its Subsidiaries and other providers of services to the Company and its Subsidiaries and (2) 2,715,000 shares of which are reserved for issuance upon exercise of the Warrants and other warrants, after giving effect to the Closing; and (b) 1,000,000 shares of preferred stock, par value $.01, of which 5,000 shares are designated Series A Preferred Stock, all of which are issued and outstanding as of the Closing Date after giving effect to the Closing; (ii) all issued and outstanding shares shall have been duly and validly issued, fully paid and non-assessable; (iii) no shares of capital stock of the Company will be owned or held by or for the account of the Company or any of its Subsidiaries; (iv) except as set forth on Schedule 8C, neither the Company nor any of its Subsidiaries will have outstanding any securities convertible into or exchangeable for any shares of capital stock or any rights (either preemptive or other) to subscribe for or to purchase, or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any other character relating to the issuance of, any capital stock, or any stock or securities convertible into or exchangeable for any capital stock; (v) except as set forth on Schedule 8C, neither the Company nor any of its Subsidiaries will be subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital stock or warrants or options to purchase shares of its capital stock; (vi) except as set forth on Schedule 8C, neither the Company nor any of its Subsidiaries is a party to any agreement (other than this Agreement, the Securities Purchase Agreement and the Securityholders Agreement) restricting the transfer of any shares of its capital stock; and (vii) neither the Company nor any of its Subsidiaries will have filed or be required to file, pursuant to Section 12 of the Exchange Act, a registration statement relating to any class of debt or equity securities as of the date hereof. Upon the Closing, and after giving effect the issuance of 2,500,000 Warrant Shares upon exercise of the Warrants, such Warrant Shares will constitute 10.41% of the Fully Diluted Outstanding Shares. D. Actions Pending. Except as set forth in Schedule 8D, there is no --------------- action, suit, investigation or proceeding pending or, to the knowledge of the Company, threatened against the Company or any Subsidiary or any of their properties or rights, by or before any court, arbitrator or administrative or governmental body, which if adversely decided, could have a Material Adverse Effect. E. Outstanding Debt; Defaults. Neither the Company nor any of its -------------------------- Subsidiaries (i) has outstanding Indebtedness, except as set forth on Schedule 8E, and there exist no material defaults under the provisions of any instrument evidencing such Indebtedness or of any agreement relating thereto, (ii) is in default under its Certificate of Incorporation (as amended to date) or By-laws, (iii) is in violation of or in default under or with respect to any indenture, mortgage, lease or any other contract or agreement to which it is a party or by which it or any of its property is bound or affected in any respect which could have a Material Adverse Effect, and there exists no condition, event or act which constitutes, or which after notice, lapse of time, or both, would constitute, such a violation or default under the foregoing, (iv) has any material debts, liabilities, obligations (whether absolute, accrued, contingent or otherwise) of any nature whatsoever other than (A) liabilities appearing on the Financial Statements, (B) liabilities incurred in the ordinary course of business since December 31, 1997, and (C) liabilities under contracts to which the Company or any of its Subsidiaries is a party and which are listed on Schedule 8E hereto or which have an obligation thereunder of less than $100,000 and which were entered into in the ordinary course of business or (D) liabilities described on the other 16 schedules hereto or (v) is in material default with respect to any order, writ, injunction or decree of any court or Governmental Authority, and there exists no condition, event or act which constitutes, or which after notice, lapse of time, or both, would constitute, such a violation or default under any of the foregoing. F. Title to Properties. Each of the Company and its Subsidiaries has (i) ------------------- indefeasible, sufficient and legal title to its real property (other than real properties which it leases from others), subject to no Lien of any kind except as set forth on Schedule 8F and (ii) good title to all of its other properties and assets (other than properties and assets which it leases from others), subject to no Lien of any kind except as set forth on Schedule 8F. Each of the Company and its Subsidiaries enjoys peaceful and undisturbed possession under all leases necessary in any material respect for the operation of its properties and assets and all such leases are valid and subsisting and in full force and effect. G. Taxes. Each of the Company and its Subsidiaries has filed all ----- Federal, state and other income tax returns which are required to be filed, and each has paid all taxes as shown on said returns and on all assessments received by it to the extent that such taxes have become due, or except such as any of the foregoing are being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with GAAP; and no tax lien has been filed and no claim is being asserted with respect to any tax or other similar charge. H. Conflicting Agreements. Neither the execution or delivery of the ---------------------- Related Documents nor the offering, issuance and sale of the Securities, nor fulfillment of or compliance with the terms and provisions hereof, will conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, or result in the creation of any Lien upon any of the properties or assets of the Company or any of its Subsidiaries pursuant to (i) the Certificate of Incorporation (as amended to date) or By-laws of the Company or any of its Subsidiaries, or (ii) any award of any arbitrator or any agreement (including any agreement with stockholders), instrument, order, judgment, decree, statute, law, rule or regulation to which the Company or any of its Subsidiaries is subject. Except as set forth on Schedule 8H, neither the Company nor any of its Subsidiaries is a party to, or otherwise subject to any provision contained in, any instrument evidencing Indebtedness of the Company or any of its Subsidiaries, any agreement relating thereto or any other contract or agreement (including its Certificate of Incorporation (as amended to date) and By-laws) which limits the amount of, or otherwise imposes restrictions on the incurring of, redeemable preferred stock of the type to be evidenced by the Series A Preferred Stock, or contains dividend or redemption limitations on any capital stock of the Company or any of its Subsidiaries, except for the Related Documents. I. Offering of Securities. The offer, sale and issuance of the ---------------------- Securities pursuant to this Agreement do not require registration of such securities under the Securities Act or registration or qualification under any applicable state "blue sky" or securities laws (or if so required, has been so registered or qualified). The Company has not taken any action which would subject the issuance or sale of any of the Securities or the Common Stock to the provisions of Section 5 of the Securities Act or violate the provisions of any securities or "blue sky" law of any applicable jurisdiction. 17 J. Broker's or Finder's Commissions. Except for Donaldson, Lufkin & -------------------------------- Jenrette Securities Corporation, no broker's or finder's fee or commission will be payable by the Company or any of its Subsidiaries with respect to the issuance and sale of the Securities or the transactions contemplated hereby or under the Related Documents. The fee of Donaldson, Lufkin & Jenrette Securities Corporation will be paid by the Company. K. Federal Reserve Regulations. Neither the Company nor any of its --------------------------- Subsidiaries owns or has any present intention of acquiring, any "margin stock" as defined in Regulation U of the Board of Governors of the Federal Reserve System (herein called a "margin stock"). None of the proceeds resulting from the ------------ sale of the Senior Subordinated Notes will be used, directly or indirectly, for the purpose of purchasing or carrying any margin stock or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry margin stock or for any other purpose which might constitute this transaction a "purpose credit" within the meaning of Regulation U. Neither the Company nor any of its Subsidiaries nor any agent acting on its behalf has taken or will take any action which might cause the Securities Purchase Agreement or the Senior Subordinated Notes to violate Regulation U, Regulation T, Regulation X or any other regulation of the Board of Governors of the Federal Reserve System or to violate the Exchange Act, in each case as in effect now or as the same may hereafter be in effect. L. Environmental Matters. (i) The Company and each of its Subsidiaries --------------------- has obtained and is in compliance with all licenses, permits and other authorizations required under all Environmental Laws, with the exceptions of instances that will not in the aggregate result in any Material Adverse Effect. 1. Neither the Company nor any of its Subsidiaries has received written notice of any failure to comply with, nor has any such notice been issued that has not been fully satisfied so as to bring the subject property into full compliance with, all Environmental Laws. 2. All licenses, permits or registrations (or any extensions thereof) required under any Environmental Law for the business of the Company or any of its Subsidiaries have been obtained and the Company and its Subsidiaries, as the case may be, will be in compliance therewith, except in such instances as will not in the aggregate result in a Material Adverse Effect. 3. Neither the Company nor any of its Subsidiaries is in noncompliance with, breach of or default under any applicable writ, order, judgment, injunction or decree where such noncompliance, breach or default would materially and adversely affect the ability of the Company or any of its Subsidiaries to operate any real property owned or leased by them and no event has occurred and is continuing that, with the passage of time or the giving of notice or both, would constitute such noncompliance, breach or default thereunder. 4. No Hazardous Substance has been Released (as such term is defined in CERCLA) (and no oral or written notification of such Release has been filed) (whether or not in a reportable or threshold planning quantity) at, on or under any property owned or leased by the Company or any of its Subsidiaries, or to be acquired or leased by the Company or any of its Subsidiaries, during the period of the Company's or any of its Subsidiaries' ownership or lease of such property, or at any time previous to such ownership or lease, under conditions that 18 require remedial action under applicable Environmental Laws. Neither the Company nor any of its Subsidiaries has, directly or indirectly, transported or arranged for the transportation of any Hazardous Substances to any site listed, or proposed for listing, on the National Priorities List promulgated pursuant to CERCLA, on CERCLIS (as defined in CERCLA) or on any similar Federal, state or foreign list of sites requiring investigation or cleanup. Neither the Company nor any of its Subsidiaries is aware of any event, condition or circumstance involving environmental pollution or contamination, or employee safety or health relating to the use or handling of, or exposure to, Hazardous Substances, that could result in a Material Adverse Effect. M. ERISA. None of the Company, any Subsidiary or any ERISA Affiliate ----- maintains or has an obligation to contribute to any Pension Plan or any Multiemployer Pension Plan. None of the Company, any Subsidiary or any ERISA Affiliate has incurred any liability to the PBGC (other than annual premiums due to the PBGC), a Pension Plan under Title IV of ERISA or a Multiemployer Pension Plan under Title IV of ERISA. The execution and delivery by the Company of this Agreement and the purchase and delivery of the Securities will not involve any prohibited transaction within the meaning of ERISA or Section 4975 of the Code. The Company has delivered to the Investors a complete list and accurate description of each Pension Plan and each other employee benefit plan covered by ERISA maintained or contributed to by the Company, any Subsidiary and any ERISA Affiliate. N. Possession of Franchises, Licenses, etc. The Company and each of its --------------------------------------- Subsidiaries possesses all franchises, certificates, licenses, permits and other authorizations from governmental political subdivisions or regulatory authorities, that are necessary for the ownership, maintenance and operation of its properties and assets, except where the failure to be in such compliance would not have a Material Adverse Effect, and the Company and each of its Subsidiaries is not in violation of any thereof in any material respect. O. Patents, etc. The Company and each of its Subsidiaries owns or has ------------ the right to use all material patents, trademarks, service marks, trade names, copyrights, industrial designs, licenses and other rights, free from non- customary burdensome restrictions, which are material to the operation of its business substantially as presently conducted. No product, process, method, substance, part or other material presently sold by or employed by the Company or any of its Subsidiaries in connection with their business infringes in any material respect any patent, trademark, service mark, trade name, copyright, industrial design, license or other right owned by any other Person. No claim or litigation is pending or, to the Company's knowledge, threatened against or affecting the Company or any of its Subsidiaries contesting their right to sell or use any such product, process, method, substance, part or other material which would prevent, inhibit or render obsolete in any material respect the production or sale of any products of, or substantially reduce the projected revenues of, the Company or any of its Subsidiaries, or otherwise have a Material Adverse Effect. P. Holding Company and Investment Company Status. Neither the Company --------------------------------------------- nor any of its Subsidiaries is a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", or a "public utility", within the meaning of the Public Utility Holding Company Act of 1935, as amended, or a "public utility" within the meaning of the Federal Power Act, as amended. Neither the Company nor any of its Subsidiaries is an "investment company" or a 19 company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or an "investment adviser" within the meaning of the Investment Advisers Act of 1940, as amended. Q. Governmental Consents. Neither the nature of the Company or any of --------------------- its Subsidiaries nor any of their businesses or properties, nor any relationship between the Company or any of its Subsidiaries and any other Person, nor any circumstance in connection with the offer, issue, sale or delivery of the Securities being purchased by the Investors hereunder is such as to require on behalf of the Company or any of its Subsidiaries any consent, approval or other action by or any notice to or filing with any court or administrative or governmental body in connection with the execution, delivery and performance of this Agreement, the other Related Documents, the offer, issue, sale or delivery of the Securities being purchased hereunder, or fulfillment of or compliance with the terms and provisions hereof or the Securities being purchased hereunder, except for such filings or consents all of which have been heretofore made or obtained, or, with respect to filings, will be promptly and timely made hereafter. R. Insurance Coverage. The business and properties of the Company and ------------------ each of its Subsidiaries are insured for the benefit of the Company and each of its Subsidiaries in amounts deemed adequate by the Company's management against risks usually insured against by Persons operating businesses similar to those of the Company and each of its Subsidiaries in the localities where such properties are located. S. Subsidiaries. The Subsidiaries set forth on Schedule 8S hereto are ------------ the only Subsidiaries of the Company. All the outstanding shares of capital stock of such Subsidiaries have been validly issued and are fully paid and non- assessable and are owned by the Company free and clear of any Lien or claim. No such Subsidiary has outstanding capital stock or securities convertible into or exchangeable or exercisable for any shares of capital stock, nor does it have outstanding any rights to subscribe for or to purchase, any options for the purchase of, any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any other character relating to the issuance of, any shares of capital stock or any securities convertible into or exchangeable or exercisable for any shares of capital stock. T. Disclosure. This Agreement and the other Related Documents, and the ---------- other documents, certificates and written statements furnished to the Investors by or on behalf of the Company in connection herewith or therewith (including, without limitation, that certain Private Placement Offering Memorandum of the Company dated December 1997 do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained herein and therein not misleading that have not been corrected or disclosed, as the case may be, in a written statement furnished subsequently to the Investors. U. Related Party Transactions. Except as described on Schedule 8U, no -------------------------- current or former stockholder, director, officer of the Company, nor any "Associate" (as defined in Rule 405 promulgated under the Securities Act) of any such Person, is presently, directly or indirectly through his affiliation with any other Person, a party to any transaction with the Company and any Subsidiary providing for the furnishing of services by or to, or rental of real or personal property from or to, or otherwise requiring cash payments to or by any such Person. 20 V. Registration Rights. Except as contemplated by the Registration ------------------- Rights Agreement or as specified on Schedule 8V, no Person has the right to cause the Company or any of its Subsidiaries to effect the registration under the Securities Act of any shares of Common Stock or any other securities (including debt securities) of the Company or any of its Subsidiaries. W. Absence of Foreign or Enemy Status. Neither the Company nor any of ---------------------------------- its Subsidiaries is (i) a "national" of a foreign country designated in Executive Order No. 8389, as amended, or of any "designated enemy country" as defined in Executive Order No. 9193, as amended, of the President of the United States of America within the meaning of said Executive Orders, as amended, or of any regulation issued thereunder, or a "national" of any "designated foreign country" within the meaning of the Foreign Assets Control regulations, 31 CFR, Part 500, as amended, or of the Cuban Assets Control Regulations, 31 CFR, Part 515, as amended, of the United States Treasury Department, or (ii) an "Iranian entity" or a "person subject to the jurisdiction of the United States" in which an "Iranian entity" has any "interest" within the meaning of the Iranian Assets Control Regulations, 31 CFR, Part 535, as amended. X. Agreements with Affiliates. Except as set forth on Schedule 8X or 8U, -------------------------- neither the Company nor any of its Subsidiaries is a party to any contract or agreement with, or any other commitment to, an Affiliate of the Company or any of its Subsidiaries. Y. Employees. The Company does not have any collective bargaining --------- agreements with any of its employees, and no labor union organizing activity is pending or threatened with respect to the Company. To the Company's knowledge, no employee is obligated under any agreement or judgment that would conflict with such employee's obligation to use his or her reasonable best efforts to promote the interests of the Company or that would conflict with the Company's business as currently conducted or proposed to be conducted. To the Company's knowledge, no employee is in violation of any term of any employment agreement, proprietary information agreement, noncompetition agreement or any other agreement relating to such employee's relationship with any previous employer. To the Company's knowledge, neither the execution nor delivery of this Agreement or any of the Related Documents nor the carrying on of the Company's business by the employees of the Company, nor the conduct of the Company's business as proposed, will conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any of such employees is now obligated. The Company is not a party to or bound by any currently effective employment contract, deferred compensation agreement, bonus plan, incentive plan, profit sharing plan, retirement agreement, or other employee compensation agreement. Z. Year 2000. None of the custom-made software or hardware designed or --------- purchased or licensed by the Company or any of its Subsidiaries from third parties and, to the knowledge of the Company, none of the commercially available software used by the Company or any of its Subsidiaries in the course of the operation or management of, or the compiling, reporting or generation of data relating to, its business contains any deficiency (i) in the ability of such software or hardware to identify correctly or perform calculations or other processing with respect to dates after December 31, 1999 or (ii) that would cause such software or hardware to be fit no longer for the purpose for which it was intended by reason of the changing of the date form 21 1999 to 2000, in each case that would be reasonably expected to result in a Material Adverse Effect. AA. Validity of Stock. The Securities, when issued, sold and delivered in ----------------- accordance with the terms of this Agreement, will be duly and validly issued, fully paid, non-assessable and free and clear of all liens, charges, claims and encumbrances whatsoever and will be issued free of any preemptive rights (contractual or otherwise). The Warrant Shares have been duly and validly reserved and, upon issuance in accordance with the exercise provisions of the Certificate of Warrants, will be duly and validly issued, fully paid, non- assessable and free and clear of all liens, charges, claims and encumbrances whatsoever and will be issued free of any preemptive rights (contractual or otherwise). 9. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS. ------------------------------------------------ Each Investor represents and warrants that it is acquiring the Securities to be purchased by it hereunder for its own account for the purpose of investment and not with a view to or for sale in connection with any distribution thereof in violation of the Securities Act; provided, however, that -------- ------- nothing herein contained shall prevent the Investors from selling or transferring any Securities or Warrant Shares in any transaction that, in the opinion of their special counsel, is exempt from the registration provisions of the Securities Act and applicable state securities laws. It is agreed that the Company will include a customary legend on each of the Securities referring to the absence of registration of the Securities and to limitations on resale thereof; and the Investors understand that they may be required to maintain their investment in the Securities for an indefinite period and that the Securities will not be readily marketable except under "private placement" procedures; and the Company may require an opinion of counsel to be delivered as a condition to any transfer not effected in accordance with Rule 144 under the Securities Act (including paragraph (k) thereof); provided that, in connection with any such opinion requested by the Company, the Company shall pay the reasonable fees and expenses of counsel to the Investors in an aggregate amount not to exceed $10,000. Notwithstanding the foregoing, the Company shall not unreasonably require an opinion of counsel if such transfer is (i) to any Person Affiliated or associated (as defined in the Exchange Act, and the rules and regulations thereunder) with Donaldson, Lufkin & Jenrette Securities Corporation or (ii) to any employee of Donaldson, Lufkin & Jenrette Securities Corporation or its Affiliates; provided, that the transferee referred to in (i) and (ii) shall deliver to the Company a certificate stating that such transferee is an "accredited investor" as that term is defined in Rule 501(a) of Regulation D under the Securities Act and is capable of evaluating the risks and merits of acquiring the Securities and/or Warrants and is acquiring the Securities and/or Warrants for its own account for investment only and not with a view to distribution. In addition, each Investor represents and warrants that it (a) has full power and authority to enter into and perform its obligations under this Agreement and that this Agreement has been duly authorized, executed and delivered by a Person authorized to do so, (b) has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of its investment in the Securities, (c) is able to bear the complete loss of its investment in the Securities and (d) has had the opportunity to ask questions of, and receive answers from, the Company and its management concerning the terms and conditions of the offering of the Securities and to obtain additional 22 information. In addition, each Investor represents and warrants that it is an "accredited investor" as defined in Rule 501 of the General Rules and Regulations under the Securities Act. 10. DEFINITIONS. ------------ For the purpose of this Agreement, and in addition to terms defined elsewhere in this Agreement, the following terms shall have the following meanings. In addition, all terms of an accounting character not specifically defined herein shall have the meanings assigned thereto by GAAP. "Acceptable Controlling Person" shall mean any of Orchard/JFAX Investors, ----------------------------- L.L.C. or any other entity controlled by Richard Ressler. "Additional Warrant Shares" shall have the meaning set forth in paragraph ------------------------- 4A. "Affiliate" shall mean, with respect to any Person, a Person directly or --------- indirectly controlling, controlled by, or under direct or indirect common control with, such Person. A Person shall be deemed to control a corporation if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such corporation, whether through the ownership of voting securities, by contract or otherwise. For purposes of this Agreement, the Investors shall not be deemed to be Affiliates of the Company or any of its Subsidiaries. "Business Day" shall mean any day which is not a Saturday, Sunday or day on ------------ which banks are authorized by law to close in the State of New York. "Capital Lease" shall mean any lease of any Property (whether real, ------------- personal, or mixed) that, in conformity with GAAP, is accounted for as a capital lease on the balance sheet of the lessee. "Capitalized Lease Obligations" of any Person means all obligations of such ----------------------------- Person, as lessee, under leases which should, in accordance with GAAP, be recorded as Capital Leases. "CERCLA" shall mean the Comprehensive Environmental Response, Compensation, ------ and Liability Act of 1980, as amended (42 U.S.C. (S)(S) 9601 et seq.), and any ------ regulations promulgated thereunder. "Change of Control" shall mean the occurrence of any of the following: ----------------- (a) the acquisition or holding by (i) any person (as such term is used in section 13(d) and section 14(d)(2) of the Exchange Act as in effect on the Closing Date) other than an Acceptable Controlling Person or the Investors, or (ii) related Persons constituting a group (as such term is used in Rule 13d-5 under the Exchange Act as in effect on the Closing Date) other than related Acceptable Controlling Persons or Investors constituting such a group, 23 of legal and/or beneficial ownership of more than 35% of the Common Stock or any securities convertible into more than 35% of the Common Stock of the Company outstanding at such time if at such time the owners of Common Stock on the Closing Date, the Investors and the investors under the Securities Purchase Agreement beneficially own in the aggregate less than a majority of the Common Stock or any securities convertible into less than a majority of the Common Stock of the Company (excluding for such purpose persons who own shares through any employee benefit plan of the Company in connection therewith); (b) all or substantially all of the assets of the Company are sold or otherwise transferred, in a single transaction or in a series of related transactions, to any other Person; (c) any merger, consolidation or other similar transaction of, or in respect of, the Company which results in the failure by the owners of Common Stock on the Closing Date, the Investors and the investors under the Securities Purchase Agreement to, directly or indirectly in the aggregate, maintain beneficial ownership and voting control of at least fifty percent (50%) of the outstanding common sock of the surviving entity in such merger, consolidation or similar transaction; or (d) any liquidation or dissolution of the Company, or action taken by the Board of Directors of the Company to authorize any such liquidation or dissolution. Notwithstanding the foregoing, any transaction permitted under paragraph 7E of the Securities Purchase Agreement shall not constitute a "Change of Control." Any sale of assets of the Company (or any of its Subsidiaries) which generated 2/3 or more of the revenues of the Company (on a consolidated basis) during the immediately preceding fiscal year shall constitute a "Change of Control". "Change of Control Event" shall mean the earlier of the occurrence of a ----------------------- Change of Control or the Company acquiring knowledge of a pending Change of Control. "Closing" shall have the meaning specified in paragraph 2B. ------- "Closing Date" shall have the meaning specified in paragraph 2B. ------------ "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- "Commission" shall mean the United States Securities and Exchange ---------- Commission. "Common Stock" shall mean the shares of Common Stock, par value $.01 per ------------ share, of the Company. "Company" shall have the meaning specified in the preamble. ------- "Environmental Laws" shall mean all applicable laws, regulations, orders, ------------------ notices and other requirements of Governmental Authorities relating to public health and safety, pollution or to the protection of the environment. 24 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as ----- amended from time to time, and the regulations promulgated and rulings issued thereunder. "ERISA Affiliate" shall mean each trade or business (whether or not --------------- incorporated) which together with the Company or a Subsidiary would be deemed to be a "single employer" within the meaning of Section 4001 of ERISA. "Exchange Act" shall mean the United States Securities Exchange Act of ------------ 1934, as amended. "Exchange Act Registration Statement" shall have the meaning specified in ----------------------------------- paragraph 5J. "Exit Closing" shall have the meaning set forth in paragraph 4D. ------------ "Fair Market Value" shall mean either (i) the Market Price, if applicable, ----------------- of the Common Stock or (ii) if no Market Price exists, the value (which shall not take into effect any minority discounts) of the Common Stock as determined by a nationally recognized investment banking firm or accounting firm designated by the Investors and reasonably acceptable to the Company; provided that if the parties cannot agree on such a firm, each party shall choose a nationally recognized investment banking firm, which shall choose a third nationally recognized firm and that third firm shall determine the Fair Market Value, which determination shall be final and binding. The cost relating to retaining any such firm(s) pursuant to this Agreement or the other Related Documents shall be borne by the Company. "Fully Diluted Outstanding Shares" shall mean, when used with reference to -------------------------------- Common Stock on any date of determination, all shares of Common Stock or any other capital stock of the Company Outstanding at such date, including all shares of Common Stock or any other capital stock of the Company issuable upon exercise or conversion of any outstanding warrants, options or convertible securities that are then "in the money" (excluding that portion of the warrants of American Online, Inc. that are performance based). "GAAP" shall mean generally accepted accounting principles set forth in the ---- opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board, or in such other statements by such other entity as may be in general use by significant segments of the accounting profession in the United States, which are applicable to the circumstances as of the date of determination. "Governmental Authority" shall mean any governmental agency, authority, ---------------------- instrumentality or regulatory body, other than a court or other tribunal, in each case whether federal, state, local or foreign. "Hazardous Substances" shall mean any hazardous substance, hazardous waste, -------------------- contaminant, pollutant or toxic substance (as such terms are defined in any applicable Environmental Law). 25 "Indebtedness" shall mean (without duplication), for any Person, (a) ------------ indebtedness of such Person for borrowed money or arising out of any extension of credit to or for the account of such Person (including, without limitation, extensions of credit in the form of reimbursement or payment obligations of such Person relating to letters of credit issued for the account of such Person) or for the deferred purchase price of property or services, except indebtedness which is owing to trade creditors in the ordinary course of business and which is due within ninety (90) days after the original invoice date; (b) indebtedness of the kind described in clause (a) of this definition which is secured by (or for which the holder of such Indebtedness has any existing right, contingent or otherwise, to be secured by) any Lien upon or in Property (including, without limitation, accounts and contract rights) owned by such Person, whether or not such Person has assumed or become liable for the payment of such indebtedness or obligations; (c) Capitalized Lease Obligations of such Person; (d) obligations under direct or indirect Guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred in clauses (a) through (c) above, including without limitation, (i) any endorsement not for collection in the ordinary course of business or discount with recourse or undertaking substantially equivalent to or having economic effect similar to a guaranty in respect of any such Indebtedness; (ii) any agreement (1) to purchase, or to advance or supply funds for the payment or purchase of, any such Indebtedness, (2) to purchase, sell, or lease property, products, materials, supplies, transportation, or services, in order to enable such Person to pay any such Indebtedness or to assure the owner thereof against loss regardless of the delivery or non-delivery of the property, products, materials, supplies, transportation, or services or (3) to make any loan, advance, or capital contribution to, or other investment in, or to otherwise provide funds to or for, such other Person in order to enable such Person to satisfy any obligation (including any liability for a dividend, stock liquidation payment or expense) or to assure a minimum equity, working capital, or other balance sheet condition in respect of any such obligation; and (iii) obligations under surety, appeal, or custom bonds; and (e) liabilities in respect of unfunded vested benefits under plans covered by Title IV of ERISA. "Indemnitee" shall mean the Investors and each holder from time to time of ---------- the Securities and each of their respective directors, officers, employees, agents, partners and Affiliates. "Initial Public Offering" shall mean the closing of the Company's initial ----------------------- public offering of its Common Stock pursuant to a registration statement declared effective under the Securities Act, except that an Initial Public Offering shall not include an offering made solely in connection with a business acquisition or an employee benefit plan. "Interim Financials" shall have the meaning set forth in paragraph 8B. ------------------ "Investor Parties" shall have the meaning set forth in paragraph 5K. ---------------- "Investors" shall have the meaning set forth in the preamble. --------- "Lien" shall mean any mortgage, pledge, security interest, encumbrance, ---- lien or charge of any kind, including, without limitation, any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any lease in the nature thereof and the filing of 26 or agreement to file any financing statement under the Uniform Commercial Code of any jurisdiction. "Margin stock" shall have the meaning set forth in paragraph 8K. ------------ "Market Price" of any security shall mean the value determined in ------------ accordance with the following provisions: (i) if such security is listed on a national securities exchange registered under the Exchange Act, a price equal to the average of the closing sales prices for such security on such exchange for each day during the 20 consecutive trading days immediately preceding the measurement date; and (ii) if not so listed, and such security is quoted on Nasdaq, a price equal to the average of the average of the closing bid and asked prices for such security quoted on such system each day during the 20 consecutive trading days immediately preceding the measurement date. "Material Adverse Effect" shall mean (i) a material adverse effect on the ----------------------- business, condition or prospects (financial or other), assets, properties, rights or operations of the Company and its Subsidiaries taken as a whole or (ii) any effect which could materially adversely affect the ability of the Company or its Subsidiaries to perform their respective obligations under any of the Related Documents. "Multiemployer Pension Plan" shall mean any multiemployer plan, as defined -------------------------- in Section 4001 of ERISA and subject to Title IV of ERISA, which the Company, any Subsidiary or any ERISA Affiliate has an obligation to make contributions (or has had an obligation to make contributions during the five calendar years preceding the Closing) for the employees of the Company, any of its Subsidiaries, or any ERISA Affiliates. "Nasdaq" shall mean the Nasdaq Stock Market's National Market or Smallcap ------ Market of the National Association of Securities Dealers. "Notice of Change of Control Event" shall have the meaning set forth in --------------------------------- paragraph 4B. "Officer's Certificate" of a Person shall mean a certificate of the --------------------- President, one of the Vice Presidents, the Chief Financial Officer or the Treasurer or Controller of such Person. "Outstanding" shall mean, when used with reference to Common Stock, at any ----------- date as of which the number of shares thereof is to be determined, all issued and outstanding shares of Common Stock. "PBGC" shall mean the Pension Benefit Guaranty Corporation established ---- pursuant to Section 4002 of ERISA, or any successor entity thereto. "Pension Plan" shall mean any single-employer plan, as defined in Section ------------ 4001 of ERISA and subject to Title IV of ERISA, which is maintained or contributed to (or previously 27 maintained or contributed to during the five calendar years preceding the Closing) for employees of the Company, any of its Subsidiaries or any ERISA Affiliates. "Person" shall mean and include an individual, partnership, corporation ------ (including a business trust), a limited liability company, joint stock company, trust, unincorporated association, joint venture, or other entity, or a government, or any political subdivision or agency of any of the foregoing. "Property" shall mean any interest or right in any kind of property or -------- asset, whether real, personal or mixed, owned or leased, tangible or intangible, and whether now held or hereafter acquired. "Qualifying Public Offering" shall mean the sale by one or more Persons in -------------------------- one or more underwritten offerings registered under the Securities Act of any Common Stock of the Company (or its successor) which results in aggregate net proceeds from such sales (after underwriters' discounts and selling commissions) to the Company greater than or equal to $20,000,000. "Registration Rights Agreement" shall mean the Registration Rights ----------------------------- Agreement between the Company and the Investors in the form of Exhibit D attached hereto. "Related Documents" shall mean this Agreement, the Certificate of ----------------- Designations, the Certificate of Warrants, the Securities Purchase Agreement, the Senior Subordinated Notes, the Securityholders Agreement and the Registration Rights Agreement. "Released" shall have the meaning set forth in paragraph 8L. -------- "securities" shall mean "securities" as defined in Section 2(1) of the ---------- Securities Act and includes, with respect to any Person, such Person's capital stock or other equity interests or any options, warrants or other securities that are directly or indirectly convertible into, or exercisable or exchangeable for, such Person's capital stock or other equity interests. "Securities Purchase Agreement" shall mean the Senior Subordinated Notes ----------------------------- and Common Stock Purchase Agreement dated as of June 30, 1998 among the Company, the Guarantors and the investors therein. "Securities" shall have the meaning set forth in paragraph 1A. ---------- "Securities Act" shall mean the United States Securities Act of 1933, as -------------- amended. "Securityholders Agreement" shall mean the Securityholders Agreement ------------------------- between the Company, certain shareholders thereof and the Investors in the form of Exhibit E hereto. "Senior Subordinated Notes" shall have the meaning ascribed to it in the ------------------------- Securities Purchase Agreement. "Series A Preferred Stock" shall have the meaning set forth in paragraph ------------------------ 1A. 28 "Subsidiary" as to any Person shall mean a corporation or other entity of ---------- which shares or similar stock having ordinary voting power to elect a majority of the board of directors or other managers of such corporation or entity are at the time owned, directly or indirectly, through one or more intermediaries, by such Person. Except as otherwise expressly indicated herein, references to Subsidiaries shall mean any Subsidiaries of the Company. "Warrants" shall have the meaning set forth in paragraph 1A. -------- "Warrant Securities" shall have the meaning set forth in paragraph 4A. ------------------ "Warrant Shares" shall mean the shares of Common Stock issued or issuable -------------- upon exercise of the Warrants. 11. MISCELLANEOUS. -------------- -- A. Expenses; Indemnification. (a) The Company agrees, whether or not ------------------------- the transactions hereby contemplated shall be consummated, to pay the Indemnitees all of their reasonable out-of-pocket expenses arising in connection with the transactions and other agreements and instruments contemplated by this Agreement, including reasonable fees, expenses and disbursement of counsel incurred in connection with the preparation and negotiation of this Agreement, and any other agreement or instrument to be executed and delivered in connection with this Agreement, any subsequent modification hereof or thereof or consent hereunder or thereunder (regardless of whether any such modifications or consent becomes effective) or the execution, delivery or acquisition of Securities, printing, reproduction and similar costs, and the reasonable cost and expenses, including reasonable attorneys' fees, incurred by any Indemnitee in enforcing any of its rights under any Related Document, including without limitation reasonable costs and expenses incurred in any bankruptcy case (including reasonable fees and expenses of the Indemnitee's counsel in connection with such bankruptcy case). The fees of counsel to the Investors incurred in connection with the preparation and negotiation of this Agreement shall be paid at the Closing. (b) The Company agrees to indemnify the Indemnitees and hold them harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind (including, without limitation, the reasonable fees and disbursements of the Indemnitees' counsel in connection with any investigative, administrative or judicial proceeding, whether or not the Indemnitees be designated a party thereto) which may be incurred by the Indemnitees (i) as a result of any breach of any representation, warranty or covenant of the Company contained in any Related Document or (ii) in connection with a claim, demand or other proceeding by the Company or any third party relating to or arising out of any Related Document (other than claims, demands or other proceedings among the Investors or their investment adviser), provided that no Indemnitee shall have the right to be indemnified hereunder for its own gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. The obligations of the Company under this paragraph 11A shall survive the transfer of any Security, the redemption of all of the shares of the Series A Preferred Stock, the exercise of all of the Warrants and the issuance of all of the Warrant Shares. The indemnification required by this paragraph 11A shall be made by periodic payments of the amount thereof during the course of the 29 investigation or defense, as and when bills are received or expense, loss, damage or liabilities are incurred. B. Consent to Amendments. This Agreement may be amended and the Company --------------------- may take any action herein prohibited, or omit to perform any act herein required to be performed by it, or take action which by the express terms of this Agreement requires the consent of the Investors, only if the Company shall have obtained the prior written consent to such amendment, action or omission to act after the Closing Date of the holders of a majority in interest of the Series A Preferred Stock and a majority in interest of the Warrants. Each holder of any Security at the time or thereafter outstanding shall be bound by any consent authorized by this paragraph 11B, whether or not such Security shall have been marked to indicate such consent, but any Security issued thereafter shall contain a reference or bear a notation referring to any such consent. The Company shall promptly send copies of any amendment, waiver or consent (and any request for any such amendment, waiver or consent) relating to this Agreement or the Securities to each holder of the Securities and shall consult with such holders in connection with each such amendment, consent and waiver. No course of dealing between the Company or any Subsidiary and the holder of any Security nor any delay in exercising any rights hereunder or under any Security shall operate as a waiver of any rights of any holder of such Security. As used herein and in the Securities, the term "this Agreement" and references thereto shall mean this Agreement as it may, from time to time, be amended or supplemented. Any amendments to this Agreement shall also require the consent of the Company. C. Form, Registration, Transfer and Exchange of Series A Preferred Stock --------------------------------------------------------------------- and Warrants; Lost Series A Preferred Stock and Warrants. The Securities are - -------------------------------------------------------- issuable as registered securities transferable by endorsement and delivery. The Company shall keep at its principal office a register in which the Company shall provide for the registration of the Securities. Upon surrender for registration of transfer of any registered Security at such office, the Company shall, at its expense, execute and deliver one or more replacement Securities of like tenor and of a like aggregate principal amount which replacement Securities shall be registered Securities. At the option of the holder of any Security such Security may be exchanged for other Securities of any authorized denominations, of a like tenor and of a like aggregate principal amount, upon surrender of the Security to be exchanged at the office of the Company. Whenever any Securities are so surrendered for exchange, the Company shall execute and deliver, at its expense, the Securities which the holder thereof making the exchange is entitled to receive. Every Security presented or surrendered for registration of transfer shall be duly endorsed, or be accompanied by a written instrument of transfer duly executed, by the holder of Security, or his attorney duly authorized in writing. Upon receipt of written notice from a holder or other evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Security held by a holder and, in the case of any such loss, theft or destruction, upon receipt of its unsecured indemnity agreement, or other indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such mutilated Security, the Company will make and deliver a replacement Security of like tenor, in lieu of such lost, stolen, destroyed or mutilated Security. D. Provisions Applicable if any of the Securities are Sold. The parties ------------------------------------------------------- acknowledge that, subject to compliance with the Related Documents and applicable securities laws, the Investors shall be free to transfer the Securities or Warrant Shares without restriction. In the 30 event that the Investors should sell or otherwise transfer any of the Securities or Warrant Shares or any part thereof to any Person other than the Company, if any Security or Warrant Share shall have been transferred to another holder and such holder shall have designated in writing the address to which communications with respect to the Security or Warrant Share shall be mailed, all notices, certificates, requests, statements and other documents required to be delivered to the Investors by any provision hereof by reason of the holding of the transferred Security or Warrant Share shall also be delivered to such holder at such address. E. Restrictive Legends. Each Security shall bear the following (or ------------------- substantially equivalent) legend on the face or reverse side thereof: "The securities represented hereby have not been registered under the Securities Act of 1933, as amended, or applicable state securities laws, and the securities may not be sold, transferred or otherwise disposed of in the absence of such registration or an exemption therefrom under said Act and such laws and the respective rules and regulations thereunder." In addition, the Securities shall bear at the time of issuance any legend required by the state securities or "blue sky" laws of any state in which a registered holder thereof is resident. F. Persons Deemed Owners. Prior to due presentment for registration of --------------------- transfer, the Company may treat the Person in whose name any Security is registered as the owner and holder of such Security for the purpose of receiving payments in respect of such Security and for all other purposes whatsoever, and the Company shall not be affected by notice to the contrary. G. Survival of Representations and Warranties. All representations and ------------------------------------------ warranties contained herein or made in writing by or on behalf of any party to this Agreement in connection herewith shall survive the execution and delivery of this Agreement, regardless of any investigation made by the Investors or on their behalf. H. Successors and Assigns. Except as otherwise provided herein, all ---------------------- covenants and agreements in this Agreement contained by or on behalf of the parties hereto shall bind and inure to the benefit of the respective successors, transferees and assigns of the parties hereto whether so expressed or not and, for greater certainty, a purchaser of Securities from any holder of Securities, which transaction is effected prior to a Qualifying Public Offering or in a private transaction following a Qualifying Public Offering, will be entitled to the benefits of this Agreement and the Company shall be deemed to have received express notice in writing of any such assignment by a request for registration of Securities in the name of such a subsequent purchaser. I. Notices. All communications provided for hereunder shall be sent by ------- first class mail, overnight courier or by fax with hard copy by first class mail or overnight courier and, if to the Investors, addressed to the Investors in the manner in which its address appears on the signature page hereof, with a copy to David W. Ambrosia, Esq., at Winthrop, Stimson, Putnam & Roberts, New York, NY 10004, telecopy number (212) 858-1500, if to the Company, addressed to it at 10960 Wilshire Boulevard, 5/th/ Floor, Los Angeles, California 90024, telecopy number (310) 966-1651, with a copy to Sullivan & Cromwell, 1888 Century Park East, Los Angeles, California 90067, telecopy number (310) 712-8800, Attention: Frank Golay, Esq., or to 31 such other address with respect to any party as such party shall notify the other in writing, and (unless otherwise specified herein) shall be deemed received 24 hours after it is sent if sent via facsimile (with receipt confirmed) or overnight courier; provided, however, that any such communication -------- ------- to the Company may also, at the option of the Investors, be either delivered to the Company at its address set forth above or to any executive officer of the Company. J. Descriptive Headings. The descriptive headings of the several -------------------- Sections and paragraphs of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. K. GOVERNING LAW; CONSENT TO JURISDICTION. THIS AGREEMENT IS BEING -------------------------------------- DELIVERED AND IS INTENDED TO BE PERFORMED IN THE STATE OF NEW YORK, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAW OF SUCH STATE WITHOUT GIVING EFFECT TO THE CHOICE OF LAW OR CONFLICTS OF LAW PRINCIPLES THEREOF. THIS AGREEMENT IS EFFECTIVE ONLY WHEN DELIVERED AND ENTERED INTO BY THE INVESTORS IN NEW YORK. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE COMPANY HEREBY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. THE COMPANY IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE COMPANY AT ITS ADDRESS SET FORTH IN PARAGRAPH 11I, SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER SUCH MAILING. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE INVESTORS OR ANY HOLDER OF A SECURITY TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE COMPANY IN ANY OTHER JURISDICTION. L. Delay Fees. If the Closing shall not actually occur on any date on ---------- which the Closing is scheduled to occur, and the Company shall have failed to notify each Investor prior to 10:00 A.M. local time, in the place in which an Investor is located, on the day prior to such scheduled Closing that such Closing has been postponed, the Company shall pay to each Investor (as compensation for such Investor's loss of fund and administrative costs) an amount equal to interest on the purchase price for the Securities to have been purchased by each such Investor on such scheduled date at such Closing, at the rate per annum on the Senior Subordinated Notes as if the Senior Subordinated Notes had been issued on the scheduled date of Closing, for each day from and including such scheduled date of Closing to but not including the earlier of the date on which such Closing actually occurs or the date on which the amount to be paid by each such Investor as said purchase price is available to such Investor for reinvestment, but in any case not less than one day's interest; provided, -------- however, that the Company shall not owe any Investor any amount under this - ------- 32 paragraph 11M if the Company has fulfilled all of its obligations under this Agreement and such Investor is not willing or able to fulfill its obligations on the scheduled date of Closing. M. Allocation of Purchase Price. The Company and the Investors hereby ---------------------------- acknowledge and agree that, for all income tax purposes, (i) the Series A Preferred Stock, together with the Warrants, constitute an investment unit and (ii) the aggregate issue price of the investment units at Closing is $5,000,000, and such amount will be allocated between the Series A Preferred Stock and the Warrants based upon their relative fair market values in a manner consistent with Treasury Regulation Section 1.1273-2(h) and such allocation shall be determined within thirty days of the Closing Date by the Company in good faith with the approval of a majority in interest of the holders of the Series A Preferred Stock and the Warrants. The Company and the Investors further agree to be bound by such allocation for all income tax purposes, to prepare and file all income tax returns in a manner consistent with such allocation, and to take no position inconsistent with such allocation in any income tax return, any proceeding before any taxing authority or otherwise. In the event that such allocation is disputed by any authority, the party receiving such notice of such dispute shall promptly notify and consult with the other parties concerning resolution of such dispute. N. Remedies. In case any one or more of the covenants and/or agreements -------- set forth in this Agreement shall have been breached by the Company or any holder of Securities, the Company, or any holder of Securities (or any of them), as applicable, may proceed to protect and enforce its or their rights either by suit in equity and/or by action at law, including, but not limited to, an action for damages as a result of any such breach and/or an action for specific performance of any such covenant or agreement contained in this Agreement. Without limitation of the foregoing, the Company agrees that failure to comply with any of the covenants including, without limitation, those included in Section 5 and those in respect of the Series A Preferred Stock and the Warrant Securities will cause irreparable harm and that specific performance shall be available in the event of any breach thereof. The Company, or a holder of Securities acting pursuant to this paragraph 11N, shall be indemnified against all liability, loss or damage, together with all reasonable costs and expenses related thereto (including reasonable legal and accounting fees and expenses) in accordance with paragraph 11A. O. Entire Agreement. This Agreement, the other Related Documents and the ---------------- other writings referred to herein or delivered pursuant hereto contain the entire agreement among the parties with respect to the subject matter hereof and supersede all prior and contemporaneous arrangements or understandings with respect thereto. This Agreement shall not constitute a valid and binding agreement, enforceable in accordance with its terms, until it has been executed and delivered by duly authorized representatives of each party hereto. No discussions regarding or exchange of drafts or comments in connection with the transactions contemplated herein shall constitute an agreement among the parties. P. Severability. Any provision of this Agreement that is prohibited or ------------ unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 33 Q. WAIVER OF TRIAL BY JURY. THE COMPANY HEREBY KNOWINGLY, VOLUNTARILY ----------------------- AND INTENTIONALLY WAIVES (TO THE EXTENT PERMITTED BY APPLICABLE LAW) ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY OF ANY DISPUTE ARISING UNDER OR RELATING TO THIS AGREEMENT OR ANY OTHER AGREEMENT OR DOCUMENT REFERRED TO HEREIN AND AGREES THAT ANY SUCH DISPUTE SHALL, AT THE OPTION OF ANY INVESTOR AS THE CASE MAY BE, BE TRIED BEFORE A JUDGE SITTING WITHOUT A JURY. R. Counterparts. This Agreement may be executed in counterparts, each of ------------ which shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart. S. Confidentiality. For the purposes of this paragraph 11S, --------------- "Confidential Information" means information delivered to any holder of ------------ ----------- Securities by or on behalf of the Company or any Subsidiary pursuant to this Agreement or any other Related Document that is proprietary in nature, provided that such term does not include information that (a) was publicly known or otherwise known to such holder prior to the time of such disclosure, (b) subsequently becomes publicly known through no act or omission by such holder or any Person acting on such holder's behalf or (c) constitutes financial statements delivered to such holder under paragraph 5A that are otherwise publicly available. Such holder will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by such holder in good faith to protect confidential information of third parties delivered to such holder, provide that such holder may deliver or disclose Confidential Information to (i) such holder's directors, officers, trustees, employees, agents, attorneys and Affiliates whose duties require them to hold confidential the Confidential Information substantially in accordance with the terms of this paragraph 11S, (ii) such holder's financial advisors and other professional advisors whose duties require them to hold confidential the Confidential Information substantially in accordance with the terms of this paragraph 11S, (iii) any other holder of Securities, (iv) any prospective investor to which such holder sells or offers to sell Securities or any participation therein (if such Person agrees to be bound by the provisions of this paragraph 11S), or (v) any other Person to which such delivery or disclosure may be necessary or appropriate (x) to effect compliance with any law, rule, regulation or order applicable to such holder, (y) in response to any subpoena or other legal process or (z) if a breach or default under any of the Related Documents has occurred and is continuing, to the extent such holder may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement or for the protection of the rights and remedies under any of the Related Documents. 34 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their respective officers thereunto duly authorized as of the date first above written. JFAX COMMUNICATIONS, INC. By: /s/ N. Zucker -------------------------------- Name: Hemi Zucker Title: Chief Financial Officer 35 INVESTOR: The foregoing Agreement is hereby accepted as of the date first above written. DLJ FUND INVESTMENT PARTNERS II, L.P. 277 Park Avenue New York, NY 10172 By: DLJ LBO PLANS MANAGEMENT CORPORATION Its General Partner By: /s/ Ivy Dodes ------------------------ 629 Shares of Name: Ivy Dodes Series A Preferred Stock: Title: Vice President 314,500 Warrants to purchase 314,500 shares of Common Stock INVESTOR: The foregoing Agreement is hereby accepted as of the date first above written. DLJ PRIVATE EQUITY EMPLOYEES FUND, L.P. 277 Park Avenue New York, NY 10172 By: DLJ LBO PLANS MANAGEMENT CORPORATION Its General Partner By: /s/ Ivy Dodes ------------------------- 71 Shares of Name: Ivy Dodes Series A Preferred Stock: Title: Vice President 35,500 Warrants to purchase 35,500 shares of Common Stock INVESTOR: The foregoing Agreement is hereby accepted as of the date first above written. DLJ CAPITAL CORPORATION 277 Park Avenue New York, NY 10172 By: /s/ Ivy Dodes ------------------------- 2,800 Shares of Name: Ivy Dodes Series A Preferred Stock: Title: Vice President 1,400,000 Warrants to purchase 1,400,000 shares of Common Stock INVESTOR: The foregoing Agreement is hereby accepted as of the date first above written. GMT PARTNERS, LLC c/o Blue Capital Management 152 West 57/th/ Street, 11/th/ Floor New York, New York 10019 Attention: Chris Gagnon By: /s/ Chris Gagnon ------------------------- 250 Shares of Name: Chris Gagnon Series A Preferred Stock: Managing Member 125,000 Warrants to purchase 125,000 shares of Common Stock INVESTOR: The foregoing Agreement is hereby accepted as of the date first above written. ORCHARD/JFAX INVESTORS, L.L.C. 10960 Wilshire Blvd., 5/th/ Floor Los Angeles, California 90024 New York, New York 10019 Attention: Richard Ressler By: /s/ Richard S. Ressler ------------------------------- 500 Shares of Name: Richard S. Ressler Series A Preferred Stock: Manager 250,000 Warrants to purchase 250,000 shares of Common Stock INVESTOR: The foregoing Agreement is hereby accepted as of the date first above written. DECLARATION OF TRUST FOR DEFINED BENEFIT PLANS OF ZENECA HOLDINGS INC. c/o Pecks Management Partners Ltd. One Rockefeller Plaza New York, New York 10020 Attention: Robert J. Cresci By: Pecks Management Partners Ltd., Its Investment Adviser By: /s/ Robert J. Cresci ------------------------- 87 Shares of Robert J. Cresci Series A Preferred Stock: Managing Director 43,500 Warrants to purchase 43,500 shares of Common Stock Tax ID Number: 042-809861 Nominee: FUELSHIP & COMPANY Bank: State Street Bank & Trust Company One Enterprise Drive- Solomon Willard Building, 4A North Quincy, MA 02171 ABA Routing Number: 0110-00028 for Master Trust/ (Wiring Dividend Payments) State Street Bank & Trust Company Boston, MA 02101 BNF Zeneca Holdings Acct. JG10 DDA: 34758508 Physical Delivery State Street Bank & Trust Company Via Federal Express: 225 Franklin Street Incoming Securities, Concourse Level Boston, MA 02101 Attn: David Kay Account: Zeneca Holdings Account #JG10 The foregoing Agreement is hereby accepted as of the date first above written. DECLARATION OF TRUST FOR DEFINED BENEFIT PLANS OF ICI AMERICAN HOLDINGS INC. c/o Pecks Management Partners Ltd. One Rockefeller Plaza New York, New York 10020 Attention: Robert J. Cresci By: Pecks Management Partners Ltd., Its Investment Adviser By: /s/ Robert J. Cresci ------------------------ 130 Shares of Robert J. Cresci Series A Preferred Stock Managing Director 65,000 Warrants to Purchase 65,000 shares of Common Stock Tax ID Number: 043-171-204 Nominee: NORTHMAN & CO. Bank: State Street Bank & Trust Company One Enterprise Drive- Solomon Willard Building, 4A North Quincy, MA 02171 ABA Routing Number: 0110-00028 for Master Trust/ State Street Bank & Trust Company Boston, MA 02101 BNF: ICI Americas Account: I510 DDA: 34758649 Physical Delivery State Street Bank & Trust Company Via Federal Express: 225 Franklin Street Incoming Securities, Concourse Level Boston, MA 02101 Attn: David Kay Account Name: ICI Americas Acct # I510 The foregoing Agreement is hereby accepted as of the date first above written. DELAWARE STATE EMPLOYEES' RETIREMENT FUND c/o Pecks Management Partners Ltd. One Rockefeller Plaza New York, New York 10020 Attention: Robert J. Cresci By: Pecks Management Partners Ltd., Its Investment Adviser By: /s/ Robert J. Cresci ---------------------------- Robert J. Cresci 473 Shares of Managing Director Series A Preferred Stock 236,500 Warrants to Purchase 236,500 shares of Common Stock Tax ID Number: 516-00-0279 Nominee: NAP & COMPANY Bank: Mercantile Safe Deposit & Trust Company 2 Hopkins Plaza Baltimore, MD 21201 Attn: Isabelle Corbett ABA Routing Number: 052-000618 for State of Delaware Account Account #214380-8 Physical Delivery Mercantile Safe Deposit & Trust Company 2 Hopkins Plaza Baltimore, MD 21201 Attn: Connie Philpot The foregoing Agreement is hereby accepted as of the date first above written. THE J.W. MCCONNELL FAMILY FOUNDATION c/o Pecks Management Partners Ltd. One Rockefeller Plaza New York, New York 10020 Attention: Robert J. Cresci By: Pecks Management Partners Ltd., Its Investment Adviser By: /s/ Robert J. Cresci ------------------------------ Robert J. Cresci 60 Shares of Managing Director Series A Preferred Stock 30,000 Warrants to Purchase 30,000 shares of Common Stock Tax ID Number: 015-7859-03 Nominee: HARE & CO. Bank: Royal Trust Corporation of Canada Royal Trust Tower, 10th Floor 777 King Street West Toronto, Ontario M5W1P9 ABA Routing Number: 021000018 Bank of New York BK of NY/CUST Account: Royal Trust, #298324 Physical Delivery The Bank of New York Via Federal Express 1 Wall Street, 5th Floor New York, NY 10286 Attn: Special Processing Department Re: Account #298324 EXHIBIT A [Form of Certificate of Designations] EXHIBIT B [Form of Warrant] EXHIBIT C [Forms of Opinions of Counsel to the Company] EXHIBIT D [Form of Registration Rights Agreement] EXHIBIT E [Form of Securityholders Agreement] EX-10.13 11 CONSENT TO AMENDMENT DATED APRIL 16, 1999 Exhibit 10.13 ------------- CONSENT TO AMENDMENT CONSENT TO AMENDMENT, dated as of April 16, 1999 and effective as of January 1, 1999, acknowledged by JFAX.COM, Inc., a Delaware corporation (the "Company") and executed by the undersigned (the "Investors"). RECITALS -------- WHEREAS, the Investors and JFAX Communications, Inc. are parties to a Preferred Stock and Warrants Purchase Agreement (the "Agreement"), dated as of July 2, 1998; WHEREAS, the Investors own 4,000 shares of Series A Usable Redeemable Preferred Stock (the "Preferred Stock") of the Company and 2,000,000 Warrants to purchase 2,000,000 shares of common stock of the Company (the "Warrants"), both of which were issued pursuant to the Agreement; and WHEREAS, the Investors are holders of a majority in interest of the Preferred Stock and a majority in interest of the Warrants. NOW, THEREFORE, the Investors hereby consent to amend the Agreement, and the Company acknowledges such amendment, as follows: Section 1. Amendment. Pursuant to Section 11.B. of the Agreement, --------- which permits the Agreement to be amended by the holders of a majority in interest of the Preferred Stock and a majority in interest of the Warrants, the Investors hereby consent to amend the Agreement by deleting Section 4.C. and Section 4.D. from the Agreement. ACKNOWLEDGED BY: JFAX.COM, INC. By: /s/ Richard S. Ressler ---------------------------- Name: Richard S. Ressler Title: Chief Executive Officer IN WITNESS WHEREOF, the Investors have caused this Consent to be executed and delivered by their respective officers thereunto duly authorized as of the effective date written above. ORCHARD/JFAX INVESTORS, L.L.C. 10960 Wilshire Blvd., 5th Floor Los Angeles, California 90024 New York, New York 10019 Attention: Richard Ressler 500 Shares of Stock: Series A Preferred Stock: By: /s/ Richard S. Ressler 250,000 Warrants to purchase -------------------------- 250,000 shares of Common Stock Name: Richard S. Ressler Manager DLJ CAPITAL CORPORATION 277 Park Avenue New York, NY 10172 2,800 Shares of Series A Preferred Stock: By: /s/ Ivy Dodes 1,400,000 Warrants to purchase ------------------------- 1,400,000 shares of Common Stock Name: Ivy Dodes Title: Vice President DLJ PRIVATE EQUITY EMPLOYEES FUND, L.P. 277 Park Avenue New York, NY 10172 By: DLJ LBO PLANS MANAGEMENT CORPORATION Its General Partner 71 Shares of Series A Preferred Stock: By: /s/ Ivy Dodes 35,500 Warrants to purchase ------------------------- 35,500 shares of Common Stock Name: Ivy Dodes Title: Vice President DLJ FUND INVESTMENT PARTNERS II, L.P. 277 Park Avenue New York, NY 10172 By: DLJ LBO PLANS MANAGEMENT CORPORATION Its General Partner 629 Shares of Series A Preferred Stock: By: /s/ Ivy Dodes 314,500 Warrants to purchase ------------------------- 314,500 shares of Common Stock Name: Ivy Dodes Title: Vice President EX-10.14 12 FORM OF WARRANT EXHIBIT 10.14 [FORM OF WARRANT] THE WARRANTS REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT AS SPECIFIED IN THE PREFERRED STOCK PURCHASE AGREEMENT. NEITHER THE RIGHTS REPRESENTED BY THIS CERTIFICATE NOR THE SHARES ISSUABLE UPON THE EXERCISE OF THE RIGHTS GRANTED HEREIN HAVE BEEN REGISTERED FOR OFFER OR SALE UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE LAW. SUCH RIGHTS AND SHARES MAY NOT BE SOLD OR OFFERED FOR SALE IN WHOLE OR IN PART EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF THE PREFERRED STOCK PURCHASE AGREEMENT. JFAX COMMUNICATIONS, INC. Warrants to Purchase Common Stock --------------------------------- JFAX Communications, Inc., a Delaware corporation (the "Company"), hereby certifies that, for value received and pursuant to that certain Preferred Stock Purchase Agreement (as defined herein), [ ], the registered holder hereof, or its registered assigns, is entitled, subject to the terms set forth below, to purchase from the Company upon surrender of this certificate, at any time or times on or after the date hereof but not after 5:00 P.M., New York City Time, on the Expiration Date (as defined herein), [ ] [( )] fully paid, nonassessable shares of Common Stock (as defined herein) of the Company (as adjusted from time to time as provided in this certificate) at a purchase price per share equal to the Warrant Exercise Price (as defined herein) in effect at the time of exercise hereof in lawful money of the United States. The Warrant Exercise Price may be paid in cash or by surrender of the number of shares of Series A Preferred Stock (as defined herein) having an aggregate Stated Value plus any accrued but unpaid dividends from and after the Original Issue Date (as defined herein) equal to the aggregate Warrant Exercise Price of the Warrants being exercised or a combination of cash and shares of Series A Preferred Stock, all as contemplated by Section 3. Alternatively, the holder may, in lieu of paying the Warrant Exercise Price in cash and/or shares of Series A Preferred Stock, receive a "net issuance" of shares of Common Stock pursuant to Section 3. SECTION 1. (a) Definitions. The following terms as used in this ------------ certificate shall have the following meanings: "Common Stock", means (a) the Company's common stock, par value $.01 per ------------ share, and (b) any capital stock into which such "Common Stock" shall have been changed or any capital stock resulting from a reclassification of such "Common Stock". "Expiration Date" means the date that is the later of (a) July 1, 2005 or --------------- (b) the date on which all of the Series A Preferred Stock (as defined herein) is redeemed. "Fair Market Value" means either (i) the Market Price, if any, of the ----------------- Common Stock or (ii) if no Market Price exists, the value (which shall not take into effect any minority discounts) of the Common Stock as determined by a nationally recognized investment banking firm or accounting firm designated by the Investors and reasonably acceptable to the Company; provided that if the -------- parties cannot agree on such a firm, each party shall choose a nationally recognized investment banking firm, which shall choose a third nationally recognized firm and that third firm shall determine the Fair Market Value, which determination shall be final and binding. The cost relating to retaining any such firm(s) pursuant to this definition shall be borne by the Company. "Market Price" of any security means the value determined in accordance ------------ with the following provisions: (i) if such security is listed on a national securities exchange registered under the Exchange Act, a price equal to the average of the closing sales prices for such security on such exchange for each day during the 20 consecutive trading days immediately preceding the date in question; and (ii) if not so listed, and such security is quoted on NASDAQ, a price equal to the average of the closing bid and asked prices for such security quoted on such system each day during the 20 consecutive trading days immediately preceding the date in question. "Original Issue Date" means the date of original issuance of the Series A ------------------- Preferred Stock. "Preferred Stock Purchase Agreement" means the Preferred Stock and Warrants ---------------------------------- Purchase Agreement dated as of July 1, 1998 among the Company and the investors signatories thereto. "Qualified IPO" shall mean the consummation of an initial public offering ------------- pursuant to an effective registration statement under the Securities Act of 1933, as amended, in an amount at least equal to gross proceeds of $20.0 million. "Series A Preferred Stock" means the Series A Usable Redeemable Preferred ------------------------ Stock issued pursuant to the Preferred Stock Purchase Agreement. "Warrants" shall mean the warrants represented by a certificate in the form -------- hereof and issued pursuant to the Preferred Stock Purchase Agreement. "Warrant Exercise Price" shall initially be $3.00 per share and shall be ---------------------- adjusted and readjusted from time to time as provided in this certificate. "Warrant Shares" means the shares of Common Stock issuable upon exercise of -------------- the Warrants. (b) Other Definitional Provisions. (i) Except as otherwise specified ----------------------------- herein, all references herein (A) to any person other than the Company, shall be deemed to include such person's successors and assigns, (B) to the Company shall be deemed to include the Company's successors and (C) to any applicable law defined or referred to herein, shall be deemed -2- references to such applicable law as the same may have been or may be amended or supplemented from time to time. (ii) When used in this certificate, the words "herein", "hereof' and "hereunder", and words of similar import, shall refer to this certificate as a whole and not to any provision of this certificate, and the words "Section" and "Exhibit" shall refer to Sections of, and Exhibits to, this certificate unless otherwise specified. (iii) Whenever the context so requires the neuter gender includes the masculine or feminine, and the singular number includes the plural, and vice versa. (iv) Any capitalized term not otherwise defined in this certificate shall have the meaning ascribed to such term in the Preferred Stock Purchase Agreement. SECTION 2. Detachable Warrants. The Warrants were originally issued as a ------------------- unit together with shares of Series A Preferred Stock pursuant to the Preferred Stock Purchase Agreement. The Preferred Stock Purchase Agreement, the Securityholders Agreement and the Registration Rights Agreement contain terms governing the rights of the holders of the Warrants and Warrant Shares. SECTION 3. Exercise of Warrants. (a) Subject to the terms and conditions -------------------- hereof, the Warrants may be exercised, in whole or in part, at any time during normal business hours on or after the opening of business on the date hereof and prior to the close of business on the Expiration Date. The rights represented by this certificate may be exercised by the holder hereof then registered on the books of the Company, in whole or from time to time in part (except that the Warrants shall not be exercisable as to a fractional share) by (i) delivery of a written notice, in the form of the Subscription Notice attached as Exhibit A --------- hereto, of such holder's election to exercise Warrants, which notice shall specify the number of Warrant Shares to be purchased, (ii) subject to Section 3(c), payment to the Company of an amount equal to the Warrant Exercise Price multiplied by the number of Warrant Shares as to which Warrants are being exercised in cash or by certified or official bank check or an equivalent amount of Series A Preferred Stock having an aggregate Stated Value plus any accrued but unpaid dividends from and after the Original Issue Date equal to the aggregate Warrant Exercise Price or a combination of cash and such shares of Series A Preferred Stock, for the number of Warrant Shares as to which Warrants shall have been exercised, and (iii) the surrender of this certificate, properly endorsed, at the principal office of the Company at 10960 Wilshire Boulevard, 5/th/ Floor, Los Angeles, California 90024 (or at such other agency or office of the Company as the Company may designate by notice to the holder hereof); provided, that if such Warrant Shares are to be issued in any name other than that of the registered holder of this certificate, such issuance shall be deemed a transfer and the provisions of Sections 9 and 11(D) of the Preferred Stock Purchase Agreement shall be applicable. In the event of any exercise of the rights represented by this certificate, a certificate or certificates for the Warrant Shares so purchased, registered in the name of, or as directed by, the holder, shall be delivered to, or as directed by such holder within a reasonable time, not exceeding 15 days, after such rights shall have been so exercised. (b) Unless the rights represented by this certificate shall have expired or have been fully exercised, the Company shall issue a new certificate identical in all respects to the -3- certificate surrendered upon exercise except (x) it shall represent rights to purchase the number of Warrant Shares purchasable immediately prior to such exercise under the Warrants exercised, less the number of Warrant Shares with respect to which such Warrants were exercised, and (y) the Warrant Exercise Price thereof shall be the Warrant Exercise Price of the Warrants so exercised. The person in whose name any certificate for Warrant Shares is issued upon exercise of the Warrants shall for all purposes be deemed to have become the holder of record of such Warrant Shares immediately prior to the close of business on the date on which this certificate was surrendered and payment of the amount due in respect of such, irrespective of the date of delivery of such share certificate, except that, if the date of such surrender and payment is a date when the stock transfer books of the Company are properly closed, such person shall be deemed to have become the holder of such Warrant Shares at the opening of business on the next succeeding date on which the stock transfer books are open. (c) In lieu of any holder of this certificate exercising the Warrants (or any portion of the Warrants) evidenced hereby for cash or shares of Series A Preferred Stock, such holder may, in connection with such exercise, elect to satisfy the Warrant Exercise Price by exchanging solely the Warrants represented by this certificate (or such portion thereof) for a number of Warrant Shares equal to the product of (i) the number of shares of Common Stock issuable upon such exercise of such Warrants (or, if only a portion of such Warrants are being exercised, issuable upon the exercise of such portion) for cash or shares of Series A Preferred Stock multiplied by (ii) a fraction, the numerator of which is the Fair Market Value per share of the Common Stock at the time of such exercise minus the Warrant Exercise Price per share of the Common Stock at the time of such exercise, and the denominator of which is the Fair Market Value per share of the Common Stock at the time of such exercise, such number of shares so issuable upon such exercise to be rounded up or down to the nearest whole number of Warrant Shares. SECTION 4. Covenants as to Common Stock. (a) The Company covenants and ---------------------------- agrees that all Warrant Shares which may be issued upon the exercise of the rights represented by this certificate will, upon issuance, be validly issued, fully paid and nonassessable. The Company further covenants and agrees that during the period within which the Warrants may be exercised, the Company will at all times have authorized and reserved a sufficient number of shares of Common Stock to provide for the exercise of the rights then represented by this certificate and that the par value of said shares will at all times be less than or equal to the applicable Warrant Exercise Price. (b) If any shares of Common Stock reserved or to be reserved to provide for the exercise of the Warrants require registration with or approval of any governmental or self-regulatory authority under any federal or state law or stock exchange or NASDAQ rule before such shares may be validly issued, then the Company covenants that it will in good faith and as expeditiously as possible endeavor to secure such registration or approval, as the case may be. SECTION 5. Anti-Dilution Adjustments. -------------- (a) Adjustments. The number of Warrant Shares and the Warrant Exercise ----------- Price shall be subject to adjustment from time to time as hereinafter provided in this Section 5. -4- (b) Definitions. For the purposes of this Section 5: ----------- (i) "Actual Consideration" shall mean the aggregate consideration -------------------- received by the Company in respect of an Actual Issuance of Common Stock; (ii) an "Actual Issuance of Common Stock" or "Actual Issuance" shall ------------------------------- --------------- mean an issuance by the Company of any shares of Common Stock other than pursuant to the Exercise of a Right or a Convertible; (iii) "Aggregate Consideration" shall mean the Actual Consideration ----------------------- received by the Company in respect of an Actual Issuance of Common Stock or the Deemed Consideration received and/or deemed received by the Company in respect of a Deemed Issuance of Common Stock; (iv) "Consideration Per Share", with respect to any Issuance, shall ----------------------- mean an amount equal to (x) the Actual Consideration with respect to any Actual Issuance of Common Stock divided by the number of shares of Common ---------- Stock issued, or (y) the Deemed Consideration with respect to any Deemed Issuance of Common Stock divided by the Shares Deemed Issued as a result of ---------- such Deemed Issuance; (v) a "Convertible" shall mean any capital stock, note or other ----------- security or instrument convertible into or exchangeable for Common Stock, a Right or another Convertible without the payment of any consideration (other than in respect of fractional shares), whether or not the right of conversion or exchange is presently exercisable and whether or not the right of conversion or exchange expires or terminates on any specific date in the future; (vi) "Deemed Consideration" shall mean the aggregate consideration -------------------- received and deemed to be received by the Company in respect of a Deemed Issuance of Common Stock, determined by adding (x) the aggregate amount, if any, received or receivable by the Company as consideration in respect of the Issuance of Rights or Convertibles constituting such Deemed Issuance of Common Stock and (y) the minimum aggregate amount of additional consideration, if any, payable to the Company upon the Full Exercise of all Rights or Convertibles necessary in order to obtain the Shares Deemed Issued in such Deemed Issuance of Common Stock; (vii) a "Deemed Issuance of Common Stock" or "Deemed Issuance" shall ------------------------------- --------------- mean an issuance by the Company of a Right or a Convertible; (viii) "Exercise" shall mean the (x) purchase of or subscription for -------- Common Stock, a Convertible and/or another Right pursuant to the terms of a Right or (y) the conversion or exchange of a Convertible for Common Stock, a Right and/or another Convertible pursuant to the terms of a Convertible, and "Full Exercise" shall mean the Exercise of each Right or Convertible ------------- received in a Deemed Issuance of Common Stock and the Exercise of any Rights or Convertibles purchased or received upon such Exercise so that the maximum number of shares of Common Stock which may ultimately be obtained as a result of such Deemed Issuance of Common Stock are issued; -5- (ix) "Included in such Deemed Issuance of Common Stock" or ------------------------------------------------ "Included in such Deemed Issuance", with respect to any Right or -------------------------------- Convertible, shall mean that the Exercise of such Right or Convertible is required to be taken account of in determining the Shares Deemed Issued in a Deemed Issuance of Common Stock (for example, in the case of a Deemed Issuance which consists of the issuance of a Convertible which may be exchanged for a Right which may, in turn, be exercised for Common Stock, the issuance of the Convertible is a Deemed Issuance of Common Stock and the Exercise of the Convertible and the Right are Included in such Deemed Issuance); (x) an "Issuance of Common Stock" or "Issuance" shall mean an ------------------------ -------- Actual Issuance of Common Stock or a Deemed Issuance of Common Stock; (xi) a "Right" shall mean any right to purchase or subscribe for, ----- or any option, warrant or other security or instrument (other than a Convertible) conferring on the holder thereof a right to purchase or subscribe for, Common Stock, another Right or a Convertible, in one transaction or in a series of transactions, whether or not such right is presently exercisable and whether or not such right expires or terminates on any specific date in the future; (xii) "Shares" shall mean the shares of Common Stock issued pursuant ------ to the Securities Purchase Agreement, including the shares of Common Stock issuable in connection with the issuance, if any, by the Company of interest notes, pursuant to the Securities Purchase Agreement (as all of the foregoing shares of Common Stock shall be appropriately adjusted for any stock split, dividend or combination or any similar event) and "Securities Purchase Agreement" shall mean the Securities Purchase ------------------------------ Agreement dated as of June 30, 1998 among the Company and the Investors signatory thereto; (xiii) "Shares Deemed Issued", with respect to a Deemed Issuance of -------------------- Common Stock, shall mean the maximum aggregate number of shares of Common Stock issuable upon the Full Exercise of the Rights or Convertibles the issuance of which constitutes such Deemed Issuance of Common Stock; and (xiv) "Shares of Common Stock Deemed Outstanding" and "Shares Deemed ----------------------------------------- ------------- Outstanding" shall mean, at any time, the sum of (x) the number of shares ----------- of Common Stock actually issued and outstanding at such time and (y) the aggregate number of Shares Deemed Issued in all Deemed Issuances of Common Stock effected after the Closing Date until such time. (c) Adjustments Upon Stock Splits, Dividends, Distributions and ----------------------------------------------------------- Combinations. In case the Company shall at any time subdivide its outstanding - ------------ shares of Common Stock into a greater number of shares or issue a stock dividend or make a distribution in shares of Common Stock with respect to outstanding shares of Common Stock or other securities or in case the outstanding shares of Common Stock of the Company shall be combined into a smaller number of shares, then in each such case the holder hereof shall thereafter be entitled to purchase, at the Warrant Exercise Price resulting from such adjustment as described below, the number of Warrant Shares determined by multiplying the number of Warrant Shares purchasable pursuant hereto immediately prior to such adjustment by a fraction of which (i) the numerator shall be the -6- Shares of Common Stock Deemed Outstanding immediately after and giving effect to such Issuance and (ii) the denominator shall be the Shares of Common Stock Deemed Outstanding immediately prior to such adjustment; Upon each adjustment of the number of Warrant Shares as provided above in this Section 5(c), the Warrant Exercise Price in effect immediately prior to such combination shall be proportionately increased or reduced to a price determined by multiplying the Warrant Exercise Price in effect immediately prior to such adjustment by a fraction of which the (i) the numerator shall be the number of Warrant Shares purchasable pursuant hereto immediately prior to such adjustment and (ii) the denominator shall be the number of Warrant Shares purchasable pursuant hereto immediately after such adjustment. (d) Certain Issuances of Common Stock. In the event that the Company --------------------------------- shall, at any time or from time to time prior to or upon a Qualified IPO, effect any Issuance of Common Stock for a Consideration Per Share less than the Warrant Exercise Price in effect immediately prior to such Issuance, then in each such case the holder hereof shall thereafter be entitled to purchase, at the Warrant Exercise Price resulting from such adjustment as described below, the number of Warrant Shares determined by multiplying the number of Warrant Shares purchasable pursuant hereto immediately prior to such adjustment by a fraction of which (i) the numerator shall be the Shares of Common Stock Deemed Outstanding immediately after and giving effect to such adjustment less the number of Shares and (ii) the denominator shall be the sum of (A) the Shares of Common Stock Deemed Outstanding immediately prior to such adjustment less the number of Shares and (B) the number of shares of Common Stock which the Aggregate Consideration for such Issuance would purchase at the Warrant Exercise Price in effect immediately prior to such adjustment; Upon each adjustment of the number of Warrant Shares as provided above in this Section 5(d), the Warrant Exercise Price shall be reduced (but not increased) to a price determined by multiplying the Warrant Exercise Price in effect immediately prior to such adjustment by a fraction of which (i) the numerator shall be the number of Warrant Shares purchasable pursuant hereto immediately prior to such adjustment and (ii) the denominator shall be the number of Warrant Shares purchasable pursuant hereto immediately after such adjustment. Notwithstanding the foregoing, no adjustment in the number of Warrant Shares or the Warrant Exercise Price shall be made pursuant to this Section 5(d) (i) upon the Issuance of Common Stock in connection with Rights issued to directors, officers, employees or consultants of the Company in an aggregate amount not to exceed 6% of the Fully Diluted Outstanding Shares on the Closing Date (after giving effect to the issuance of the Warrant Shares and the Shares) or (ii) upon the Issuance of Common Stock in connection with Rights issued to directors, officers or employees of the Company for Consideration Per Share at or above the greater of (A) $3.00 (as such amount shall be appropriately adjusted for any stock split, dividend or combination or any similar event) and (B) the Fair Market Value of a share of Common Stock at the time of issuance of such Rights; provided, in each case that such Issuance was approved by the Board of Directors of the Company. This Section 5(d) shall apply to any Issuance irrespective of whether the Investors exercised their option to purchase New Securities pursuant to Section 5(O) of the Preferred Stock Purchase Agreement in connection with such Issuance. "Fully Diluted Outstanding Shares" shall mean, on any date of determination, all shares of -7- Common Stock or any other capital stock of the Company Outstanding at such date, including all shares of Common Stock issuable upon exercise or conversion of any outstanding warrants, options or convertible securities that are then "in the money" (excluding that portion of the warrants of American Online, Inc. that are performance based). "Outstanding" shall mean at any date as of which the number of shares thereof is to be determined, all issued and outstanding shares of Common Stock. (e) Principles in Applying Anti-Dilution Adjustments. The following ------------------------------------------------ provisions shall be applicable for the purpose of calculations utilizing the formula set forth in Section 5(d) hereof and otherwise, as appropriate, for the purposes of this Section 5: (i) Deemed Issuances of Common Stock. Notwithstanding the -------------------------------- provisions of Section 5(d), whenever additional shares of Common Stock shall be issuable pursuant to Section 5(d) based upon a Deemed Issuance of Common Stock, no additional adjustment in the number of Warrant Shares or the Warrant Exercise Price shall be made upon the subsequent Actual Issuance of Common Stock which were Shares Deemed Issued in such Deemed Issuance, nor shall the Exercise of any Right or Convertible included in such Deemed Issuance constitute an Issuance. (ii) Consideration for Shares, Rights and Convertibles. In case at ------------------------------------------------- any time any shares of Common Stock, Rights or Convertibles shall be issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Company therefor in the form of such cash, without deduction of any expenses incurred or any underwriting commissions, discounts or concessions paid or allowed by the Company in connection therewith. In case at any time any shares of Common Stock, Rights or Convertibles shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company shall be deemed to be the fair value of such consideration at the time of such issuance as determined reasonably and in good faith by the Board of Directors of the Company, without deduction of any expenses incurred or any underwriting commissions, discounts or concessions paid or allowed by the Company in connection therewith. In case at any time any shares of Common Stock, Rights or Convertibles shall be issued in connection with any merger or consolidation in which the Company is the surviving corporation, the amount of consideration received therefor shall be deemed to be the fair value as determined reasonably and in good faith by the Board of Directors of the Company of such portion of the assets and business of the non-surviving entity as the Board of Directors of the Company may determine to be attributable to such shares of Common Stock, Rights or Convertibles, as the case may be. In case at any time any Rights or Convertibles shall be issued in connection with the issue and sale of other securities of the Company, together comprising one integral transaction in which no allocation of consideration is made between such Rights or Convertibles and such other securities by the parties thereto, such Rights or Convertibles shall be deemed to have been issued for an amount of consideration equal to the fair value thereof as determined reasonably and in good faith by the Board of Directors of the Company. Notwithstanding any other provisions of this Section 5(e), in case any shares of Common Stock, Rights or Convertibles shall be issued or sold to an Affiliate for consideration other than cash and fifty percent (50%) or more of the shares of Common Stock to be issued or sold -8- (including for this purpose any shares of Common Stock issuable upon exercise of any Rights to be issued or sold and/or any shares of Common Stock issuable upon conversion of any Convertibles to be issued or sold) are to be issued or sold to an Affiliate, then the holders of greater than 50% of the outstanding Warrants shall have the right to demand, upon written notice to the Company given within ten (10) days after receipt of the determination of fair value pursuant to this Section 5(e)(ii) by the Board of Directors of the Company, and in lieu thereof, a determination of fair value of such consideration to be made by appraisal, by investment banks or accounting firms as described in the definition of Fair Market Value. (iii) Change in Aggregate Consideration or Conversion/Exercise Rate. ------------------------------------------------------------- If the Aggregate Consideration or number of shares purchasable under any Right or Convertible, or the rate at which any Convertible is convertible into or exchangeable for Common Stock, shall change at any time (other than under or by reason of provisions designed to protect against dilution for which provision for adjustments in the number of Warrant Shares and the Warrant Exercise Price are provided for pursuant to this certificate), the number of Warrant Shares and the Warrant Exercise Price then in effect hereunder shall forthwith be readjusted to such number of Warrant Shares and Warrant Exercise Price as would have obtained had the adjustments made upon the issuance of such Right, Convertible been made upon the basis of the changed terms; and on the expiration of any such Right or the termination of any such right to convert or exchange such Convertible, the number of Warrant Shares and the Warrant Exercise Price then in effect hereunder shall forthwith be readjusted to such number of Warrant Shares and Warrant Exercise Price as would have obtained had the adjustments made upon the issuance of such Right or Convertible been made upon the basis of the issuance of only the number of shares of Common Stock, if any, theretofore actually delivered upon the exercise of such Right or upon the conversion or exchange of such Convertible; (iv) Treasury Shares. The number of Shares of Common Stock Deemed --------------- Outstanding at any given time shall not include shares of Common Stock owned or held by or for the account of the Company or any Subsidiary. The disposition of any such shares shall be considered an Issuance of Common Stock for the purpose of determining any issuance of additional shares of Common Stock to Investors required pursuant to Section 5, unless such shares are issued upon the Exercise of any Right or Convertible which was outstanding on the date hereof or the grant or sale of which constituted a Deemed Issuance of Common Stock. (f) Certain Dividends and Distributions. If the Company shall ----------------------------------- distribute to all holders of its Common Stock evidences of its indebtedness or assets (including cash) in the form of an Extraordinary Dividend, then in such case (i) the Warrant Exercise Price shall be reduced by an amount equal to the amount of such indebtedness and/or assets distributed per share of Common Stock until the Warrant Exercise price equals $.01 and (ii) if the amount of such indebtedness or assets distributed per share of Common Stock exceeds the Warrant Exercise Price, an amount of such indebtedness and assets equal to such excess amount multiplied by the number of Warrant Shares issuable upon exercise of a Warrant shall be distributed to the holder of Warrants for each outstanding Warrant held by such holder. Such adjustment and distribution to the holders, if applicable, shall be made whenever any such distribution to holders of Common -9- Stock is made and such adjustment shall be retroactively effective as of immediately after the record date for the determination of stockholders entitled to receive such distribution. The amount of any such distribution to holders of Common Stock for purposes of calculating a reduction in the Warrant Exercise Price under this Section 5(f) shall be based upon the "fair market value" of such indebtedness and assets distributed per share of Common Stock as determined reasonably and in good faith by the Board of Directors of the Company. "Extraordinary Dividend" shall mean any dividend or distribution other than a regularly scheduled dividend paid out of cumulative consolidated net income (including all losses) after July 1, 1998 pursuant to an announced Company dividend policy. (g) Computation of Adjustments. Upon each computation of an adjustment -------------------------- in the Warrant Exercise Price and the number of Warrant Shares, the Warrant Exercise Price shall be computed to the nearest cent (i.e., fractions of .5 of a ---- cent, or greater, shall be rounded to the next highest cent) and the number of Warrant Shares shall be calculated to the nearest whole share (i.e., fractions ---- of less than one half of a share shall be disregarded and fractions of one half of a share, or greater, shall be treated as being a whole share). No such adjustment shall be made, however, if the change in the Warrant Exercise Price would be less than $.01 per share, but any such lesser adjustment shall be made (i) at the time and together with the next subsequent adjustment which, together with any adjustments carried forward, shall amount to $.01 per share or more, or (ii) if earlier, upon the third anniversary of the event for which such adjustment is required. (h) Notice of Additional Adjustments. Upon any event requiring an -------------------------------- adjustment in the number of Warrant Shares or the Warrant Exercise Price pursuant to Section 5, then and in each such case the Company promptly shall give written notice thereof to each holder of Warrants, which notice shall state the number of Warrant Shares and the Warrant Exercise Price after giving effect to such adjustment and shall set forth in reasonable detail the method of calculation and the facts upon which such calculation is based. (i) Issuance Tax. The issuance of certificates for shares of Common Stock ------------ pursuant to Section 5 shall be made without charge to the holders of Shares for any issuance tax in respect thereto, provided that the Company shall not be -------- required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the holder of the Shares. (j) Closing of Books. The Company will not close its books against the ---------------- issuance or transfer of any shares of Common Stock issuable pursuant to Section 5. (k) Record Date. in case the Company shall take a record of the holders of ----------- its Common Stock (or Convertible Securities) for the purpose of entitling them (x) to receive a dividend or other distribution, or (y) to receive Rights, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right or option of subscription or purchase. SECTION 6. Reorganization, Reclassification, Etc. In case of any ------------------------------------- capital reorganization, or of any reclassification of the capital stock, of the Company (other than a -10- change in par value or from par value to no par value or from no par value to par value or as a result of a split-up or combination) or in case of the consolidation or merger of the Company with or into any other person (other than a consolidation or merger in which the Company is the continuing corporation and which does not result in the Common Stock being changed into or exchanged for stock or other securities or property of any other person), or of the sale of all or substantially all of the properties and assets of the Company to any other person, the Warrants shall, after such capital reorganization, reclassification of capital stock, consolidation, merger or sale, entitle the registered holder hereof to purchase the kind and number of shares of stock or other securities or property of the Company, or of the person resulting from such consolidation or surviving such merger or to which such sale shall be made, as the case may be, to which the holder hereof would have been entitled if such holder had held the Common Stock issuable upon the exercise hereof immediately prior to such capital reorganization, reclassification of capital stock, consolidation, merger or sale, and in any such case appropriate provision shall be made with respect to the rights and interests of the holder of this certificate to the end that the provisions hereof (including without limitation provisions for adjustment of the Warrant Exercise Price and of the number of shares purchasable upon the exercise of the Warrants) shall thereafter be applicable, as nearly as may be in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise of the Warrants. The Company shall not effect any such consolidation, merger or sale, unless prior to or simultaneously with the consummation thereof the successor (if other than the Company) resulting from such consolidation or merger or the person purchasing such assets shall assume by written instrument executed and mailed or delivered to the registered holder hereof at the address of such holder appearing on the books of the Company, the obligation to deliver to such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to purchase. SECTION 7. Notice of Certain Events. In case at any time: ------------------------- (a) the Company shall pay any dividend upon, or make any distribution in respect of, its Common Stock; (b) the Company shall propose to register any of its Common Stock under the 1933 Act, in connection with a public offering of such Common Stock (other than with respect to a registration statement filed on Form S-8 or such other similar form then in effect under the 1933 Act); (c) the Company shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or other rights; (d) there shall be any capital reorganization, or reclassification of the capital stock, of the Company, or consolidation or merger of the Company with, or sale of all or substantially all of its assets to, another person; or (e) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of said cases, the Company shall give notice to each registered holder of the Warrants hereof of the date on which (i) the books of the Company shall close or a record -11- shall be taken for such dividend, distribution or subscription rights, or (ii) such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall be given not less than ten (10) days prior to the record date or the date on which the transfer books of the Company are to be closed in respect thereto in the case of an action specified in clause (i) and at least twenty (20) days prior to the action in question in the case of an action specified in clause (ii). SECTION 8. No Change in Warrant Terms on Adjustment. Irrespective of ---------------------------------------- any adjustment in the Warrant Exercise Price or the number of the number of Warrant Shares, this certificate, whether theretofore or thereafter issued or reissued, may continue to express the same price and number of Warrant Shares as are stated herein and the Warrant Exercise Price and such number of Warrant Shares specified herein shall be deemed to have been so adjusted. SECTION 9. Transfer Taxes. The Company shall not be required to pay -------------- any tax or taxes attributable to the initial issuance of the Warrant Shares or any transfer involved in the issue or delivery of any certificates for Warrant Shares in each case in a name other than that of the registered holder hereof or upon any transfer of the Warrants. SECTION 10. Exchange of Warrants. This certificate is exchangeable upon -------------------- the surrender hereof by the holder at such office or agency of the Company, for a new certificate of like tenor representing in the aggregate the right to subscribe for and purchase the number of shares which may be subscribed for and purchased hereunder from time to time after giving effect to all the provisions hereof, each of such new certificates to represent the right to subscribe for and purchase such number of shares as shall be designated by said holder hereof at the time of such surrender. SECTION 11. Lost, Stolen, Mutilated or Destroyed Warrant. If this -------------------------------------------- Certificate is lost, stolen, mutilated or destroyed, the Company shall, on such terms as to indemnity or otherwise as it may in its discretion impose (which shall, in the case of a mutilated Certificate, include the surrender thereof), issue a new Certificate of like denomination and tenor as the Certificate so lost, stolen, mutilated or destroyed. Any such new certificate shall constitute an original contractual obligation of the Company, whether or not the allegedly lost, stolen, mutilated or destroyed certificate shall be at any time enforceable by anyone. SECTION 12. Notice. All notices and other communications under this ------ Warrant shall (a) be in writing (which shall include communications by telex and telecopy), (b) be (i) sent by registered or certified mail, postage prepaid, return receipt requested, by prepaid telex or telecopier, or (ii) delivered by hand, (c) be given at the following respective addresses and telex, telecopier and telephone numbers and to the attention of the following persons: (i) if to the Company, to it at: JFAX Communications, Inc. 10960 Wilshire Boulevard, 5/th/ Floor Los Angeles, California 90024 Telephone No.: (310) 966-1833 -12- Telecopier No.: (310) 966-1651 Attention: General Counsel with a copy to: Sullivan & Cromwell 1888 Century Park East Los Angeles, California 90067 Telephone No.: (310) 712-6600 Telecopier No.: (310) 712-8800 Attention: Frank Golay, Esq. (ii) if to the holder, to it at the address specified in the Preferred Stock Purchase Agreement; or at such other address or telex, telecopier or telephone number or to the attention of such other person as the party to whom such information pertains may hereafter specify for the purpose in a notice to the other specifically captioned "Notice of Change of Address", and (d) be effective or deemed delivered or furnished (i) if given by mail, on the fifth Business Day after such communication is deposited in the mail, addressed as above provided, (ii) if given by telex or telecopier, when such communication is transmitted to the appropriate number determined as above provided in this Section 12 and the appropriate answerback is received or receipt is otherwise acknowledged, (iii) if given by hand delivery, when left at the address of the addressee addressed as above provided, and (iv) if given by telephone, when communicated to the person or to the holder of the office specified as the person or officeholder to whose attention communications are to be given, except that notices of a change of address, telex, telecopier or telephone number, shall not be deemed furnished, until received. SECTION 13. Miscellaneous. All certificates evidencing outstanding ------------- Warrants and any term hereof or thereof may be amended or waived only by an instrument in writing signed by the Company and the holders of a majority of the outstanding Warrants, provided that such amendment or waiver shall amend or waive each Warrant certificate in the same manner. The headings in this certificate are for purposes of reference only and shall not limit or otherwise affect the meaning hereof. SECTION 14. Date. The date of this certificate is July 1, 1998. This ---- certificate, in all events, shall be wholly void and of no effect after the close of business on the Expiration Date. -13- IN WITNESS WHEREOF, the Company has caused this certificate to be executed by its duly authorized officers and its corporate seal to be hereunto affixed as of the 2/nd/ day of July, 1998. JFAX COMMUNICATIONS, INC. By: _____________________________ Name: Title: ATTEST: By: ________________________ Secretary -14- EXHIBIT A TO WARRANT CERTIFICATE ------------------- SUBSCRIPTION FORM TO BE EXECUTED BY THE REGISTERED HOLDER IF SUCH REGISTERED HOLDER DESIRES TO EXERCISE WARRANTS JFAX COMMUNICATIONS, INC. The undersigned hereby exercises the right to purchase Warrant Shares covered by this certificate according to the conditions thereof and herewith [makes payment of $__________ , the aggregate Warrant Exercise Price for ________ Warrant Shares.] [tenders _______ shares of Series A Preferred Stock having an aggregate Stated Value plus accrued and unpaid dividends equal to the aggregate Warrant Exercise Price for ____ Warrant Shares] [tenders solely the Warrants evidenced by this certificate, or applicable portion hereof, in full satisfaction of the Warrant Exercise Price for _____ Warrant Shares upon the terms and conditions set forth herein.] HOLDER: _________________________________ By: _____________________________ Name: Title: [Net] Number of Warrant Shares Being Purchased_____________________ Dated: _____________, ______ EX-10.15 13 MASTER LOAN AND SECURITY AGREEMENT EXHIBIT 10.15 MASTER LOAN AND SECURITY AGREEMENT THIS AGREEMENT dated as of March 10, 1998, is made by JFAX Communications, Inc. (the "Borrower"), a Delaware corporation having its principal place of business and chief executive office at 10960 Wilshire Boulevard, Los Angeles, CA, 90024 in favor of Transamerica Business Credit Corporation, a Delaware corporation (the "Lender"), having its principal office at Riverway II, West Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018. WHEREAS, the Borrower has requested that the Lender make Loans to it from time to time; and WHEREAS, the Lender has agreed to make such Loans on the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the premises and to induce the Lender to extend credit, the Borrower hereby agrees with the Lender as follows: SECTION 1. DEFINITIONS. ----------- As used herein, the following terms shall have the following meanings, and shall be equally applicable to both the singular and plural forms of the terms defined: Agreement shall mean this Master Loan and Security Agreement together with all - --------- schedules and exhibits hereto, as amended, supplemented, or otherwise modified from time to time. Applicable Law shall mean the laws of the State of Illinois (or any other - -------------- jurisdiction whose laws are mandatorily applicable notwithstanding the parties' choice of Illinois law) or the laws of the United States of America, whichever laws allow the greater interest, as such laws now exist or may be changed or amended or come into effect in the future. Business Day shall mean any day other than a Saturday, Sunday, or public holiday - ------------ or the equivalent for banks in New York City. Code shall have the meaning specified in Section 8(d). - ---- Collateral shall have the meaning specified in Section 2. - ---------- Effective Date shall mean the date on which all of the conditions specified in - -------------- Section 3.3 shall have been satisfied. Equipment shall have the meaning specified in Section 2. - --------- Event of Default shall mean any event specified in Section 7. - ---------------- Financial Statements shall have the meaning specified in Section 6.1. - -------------------- GAAP shall mean generally accepted accounting principles in the United States of - ---- America, as in effect from time to time. Loans shall mean the loans and financial accommodations made by the Lender to - ----- the Borrower in accordance with the terms of this Agreement and the Notes. Loan Documents shall mean, collectively, this Agreement, the Notes, and all - -------------- other documents, agreements, certificates, instruments, and opinions executed and delivered in connection herewith and therewith, as the same may be modified, extended, restated, or supplemented from time to time. Material Adverse Change shall mean, with respect to any Person, a material - ----------------------- adverse change, as compared to the date hereof, in the business, prospects, operations, results of operations, assets, liabilities or condition (financial or otherwise) of such Person taken as a whole. Material Adverse Effect shall mean, with respect to any Person, a material - ----------------------- adverse effect on the business, prospects, operations, results of operations, assets, liabilities, or condition (financial or otherwise) of such Person taken as a whole. Note shall mean each Promissory Note made by the Borrower in favor of the - ---- Lender, as amended, supplemented, or otherwise modified from time to time, in each case substantially in the form of Exhibit B. Obligations shall mean all indebtedness, obligations, and liabilities of the - ----------- Borrower under the Notes and under this Agreement, whether on account of principal, interest, indemnities, fees (including, without limitation, attorneys' fees, remarketing fees, origination fees, collection fees, and all other professionals' fees), costs, expenses, taxes, or otherwise. Permitted Liens shall mean the following: (a) liens for taxes, assessments, and - --------------- other governmental charges or levies or the claims or demands of landlords, carriers, warehousemen, mechanics, laborers, materialmen, and other like Persons arising by operation of law in the ordinary course of business for sums which are not yet due and payable, or which are being contested in good faith by appropriate proceedings diligently conducted and with respect to which adequate reserves are maintained to the extent required by GAAP; (b) deposits or pledgees to secure the payment of worker's compensation, unemployment insurance, or other social security benefits or obligations, public or statutory obligations, surety or appeal bonds, bid or performance bonds, or other obligations of a like nature incurred in the ordinary course of business; (c) licenses, restrictions, or covenants for or on the use of the Equipment which do not materially impair either the use of the Equipment in the operation of the business of the Borrower or the value of the Equipment; and (d) attachment or judgment liens that do not constitute an Event of Default. Person shall mean any individual, sole proprietorship, partnership, limited - ------ liability partnership, joint venture, trust, unincorporated organization, association, corporation, limited liability company, institution, entity, party, or government (including any division, agency, or department thereof), and the successors, heirs , and assigns of each. Schedule shall mean each Schedule in the form of Schedule A hereto delivered by - -------- the Borrower to the Lender from time to time. Solvent means, with respect to any Person, that as of the date as to which such - ------- Person's solvency is measured: (a) the fair saleable value of its assets is in excess of the total amount of its liabilities (including contingent liabilities as valued in accordance with GAAP) as they become absolute and matured; (b) it has sufficient capital to conduct its business; and 2 (c) it is able generally to meet is debts as they mature. Taxes shall have meaning specified in Section 5.5 - ----- SECTION 2. CREATION OF SECURITY INTEREST; COLLATERAL. The Borrower ----------------------------------------- hereby assigns and grants to the Lender a continuing general, first priority lien on, and security interest in, all the Borrower's right, title, and interest in and to the collateral described in the next sentence (the "Collateral") to secure the payment and performance of all the Obligations. The Collateral consists of all equipment set forth on all the Schedules delivered from time to time under the terms of this Agreement (the "Equipment"), together with all present and future additions, parts, accessories, attachments, substitutions, repairs, improvements, and replacements thereof or thereto, and any and all proceeds thereof, including, without limitation, proceeds of insurance and all manuals, blueprints, know-how, warranties, and records in connection therewith, all rights against suppliers, warrantors, manufacturers, sellers, or others in connection therewith, and together with all substitutes for any of the foregoing. SECTION 3. THE CREDIT FACILITY. ------------------- SECTION 3.1 Borrowings. Each Loan shall be in an amount not less than $50,000, and in no event shall the sum of the aggregate Loans made exceed the amount of the Lender's written commitment to the Borrower in effect from time to time. Notwithstanding anything herein to the contrary, the Lender shall be obligated to make the initial Loan and each other Loan only after the Lender, in its sole discretion, determines that the applicable conditions for borrowing contained in Sections 3.3 and 3.4 are satisfied. The timing and financial scope of Lender's obligation to make Loans hereunder are limited as set forth in a commitment letter executed by Lender and Borrower, dated as of March 6, 1998 and attached hereto as Exhibit A (the "Commitment Letter"). SECTION 3.2 Application of Proceeds. The Borrower shall not directly or indirectly use any proceeds of the Loans, or cause, assist, suffer, or permit the use of any proceeds of the Loans, for any purpose other than for the purchase, acquisition, installation, or upgrading of Equipment or the reimbursement of the Borrower for its purchase, acquisition, installation, or upgrading of Equipment. SECTION 3.3 Conditions to Initial Loan. (a) The obligation of the Lender to make the initial Loan is subject to the Lender's receipt of the following, each dated the date of the initial Loan or as of an earlier date acceptable to the Lender, in form and substance satisfactory to the Lender and its counsel: (i) completed requests for information (Form UCC-11) listing all effective Uniform Commercial Code financing statements naming the Borrower as debtor and all tax lien, judgment, and litigation searches for the Borrower as the Lender shall deem necessary or desirable; (ii) Uniform Commercial Code financing statements (Form UCC-1) duly executed by the Borrower (naming the Lender as secured party and the Borrower as debtor and in form acceptable for filing in all jurisdictions that the Lender deems necessary or desirable to perfect the security interests granted to it hereunder) and, if applicable, termination statements or other releases duly filed in all jurisdictions that the Lender deems necessary or desirable to perfect and protect the priority of the security interests granted to it hereunder in the Equipment related to such initial Loan; (iii) a Note duly executed by the Borrower evidencing the amount of such Loan; 3 (iv) certificates of insurance required under Section 5.4 of this Agreement together with loss payee endorsements for all such policies naming the Lender as lender loss payee and as an additional insured; (v) a copy of the resolutions of the Board of Directors of the Borrower (or a unanimous consent of directors in lieu thereof) authorizing the execution, delivery, and performance of this Agreement, the other Loan Documents, and the transactions contemplated hereby and thereby, attached to which is a certificate of the Secretary or an Assistant Secretary of the Borrower certifying (A) that the copy of the resolutions is true, complete, and accurate, and that such resolutions have not been amended or modified since the date of such certification and are in full force and effect and (B) the incumbency, names, and true signatures of the officers of the Borrower authorized to sign the Loan Documents to which it is a party; (vi) evidence satisfactory to Lender that Borrower has received at least $2,400,000 cash in the form of a loan or an equity investment from one or more shareholders of the Borrower; (vii) such other agreements and instruments as the Lender deems necessary in its good faith discretion in connection with the transactions contemplated hereby. (b) There shall be no pending or, to the knowledge of the Borrower after due inquiry, threatened litigation, proceeding, inquiry, or other action (i) seeking an injunction or other restraining order, damages, or other relief with respect to the transactions contemplated by this Agreement or the other Loan Documents or thereby or (ii) which affects or could affect the business, prospects, operations, assets, liabilities, or condition (financial or otherwise) of the Borrower, except, in the case of clause (ii), where such litigation, proceeding, inquiry, or other action could not be expected to have a Material Adverse Effect in the judgment of the Lender. (c) The Borrower shall have paid all fees and expenses required to be paid by it to the Lender as of such date. (d) The security interests in the Equipment related to the initial Loan granted in favor of the Lender under this Agreement shall have been duly perfected and shall constitute first priority liens. (e) Lender shall have completed a satisfactory due diligence discussion with America On-Line. SECTION 3.4 Conditions Precedent to Each Loan. The obligation of the Lender to make each Loan is subject to the satisfaction of the following conditions precedent: (a) the Lender shall have received the documents, agreements, and instruments set forth in Section 3.3(a)(i) through (v) applicable to such Loan, each in form and substance satisfactory to the Lender and its counsel and each dated the date of such Loan or as of an earlier date acceptable to the Lender; (b) the Lender shall have received a Schedule of the Equipment related to such Loan, in form and substance satisfactory to the Lender and its counsel, and the security interests in such Equipment related to such Loan granted in favor of the Lender under this Agreement shall have been duly perfected and shall constitute first priority liens; (c) all representations and warranties contained in this Agreement and the other Loan Documents shall be true and correct on and as of the date of such Loan as if then made, other than representations 4 and warranties that expressly relate solely to an earlier date, in which case they shall have been true and correct as of such earlier date; (d) no Event of Default or event which with the giving of notice or the passage of time, or both, would constitute an Event of Default shall have occurred and be continuing or would result from the making of the requested Loan as of the date of such request; and (e) the Borrower shall be deemed to have hereby reaffirmed and ratified all security interests, liens, and other encumbrances heretofore granted by the Borrower to the Lender. SECTION 4. THE BORROWER'S REPRESENTATIONS AND WARRANTIES --------------------------------------------- SECTION 4.1 Good Standing; Qualified to do Business. The Borrower (a) is duly organized, validly existing, and in good standing under the laws of the State of its organization, (b) has the power and authority to own its properties and assets and to transact the businesses in which it is presently, or proposes to be, engaged, and (c) is duly qualified and authorized to do business and is in good standing in every jurisdiction in which the failure to be so qualified could have a Material Adverse Effect on (i) the Borrower, (ii) the Borrower's ability to perform its obligations under the Loan Documents, or (iii) the rights of the Lender hereunder. SECTION 4.2 Due Execution, etc. The execution, delivery, and performance by the Borrower of each of the Loan Documents to which it is a party are within the powers of the Borrower, do not contravene the organizational documents, if any, of the Borrower, and do not (a) violate any law or regulation, or any order or decree of any court or governmental authority, (b) conflict with or result in a breach of, or constitute a default under, any material indenture, mortgage, or deed of trust or any material lease, agreement, or other instrument binding on the Borrower or any of its properties, or (c) require the consent, authorization by, or approval of or notice to or filing or registration with any governmental authority or other Person. This Agreement is, and each of the other Loan Documents to which the Borrower is or will be a party, when delivered hereunder or thereunder, will be, the legal, valid, and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, or similar laws affecting creditors' rights generally and by general principles of equity. SECTION 4.3 Solvency; No Liens. The Borrower is Solvent and will be Solvent upon the completion of all transactions contemplated to occur hereunder (including, without limitation, the Loan to be made on the Effective Date); the security interests granted herein constitute and shall at all times constitute the first and only liens on the Collateral other than Permitted Liens; and the Borrower is, or will be at the time additional Collateral is acquired by it, the absolute owner of the Collateral with full right to pledge, sell, consign, transfer, and create a security interest therein, free and clear of any and all claims or liens in favor of any other Person other than Permitted Liens. SECTION 4.4 No Judgments, Litigation. No judgments are outstanding against the Borrower nor is there now pending or, to the best of the Borrower's knowledge after diligent inquiry, threatened any litigation, contested claim, or governmental proceeding by or against the Borrower except judgments and pending or threatened litigation, contested claims, and governmental proceedings which would not, in the aggregate, have a Material Adverse Effect on the Borrower. SECTION 4.5 No Defaults. The Borrower is not in default or has not received a notice of default under any material contract, lease, or commitment to which it is a party or by which it is bound. The 5 Borrower knows of no dispute regarding any contract, lease, or commitment which could have a Material Adverse Effect on the Borrower. SECTION 4.6 Collateral Locations. On the date the applicable Loan is made, each item of the Collateral is located at the place of business specified in the applicable Schedule. SECTION 4.7 No Events of Default. No Event of Default has occurred and is continuing nor has any event occurred which, with the giving of notice or the passage of time, or both, would constitute an Event of Default. SECTION 4.8 No Limitation on Lender's Rights. Except as permitted herein, none of the Collateral is subject to contractual obligations that may restrict or inhibit the Lender's rights or abilities to sell or dispose of the Collateral or any part thereof after the occurrence of an Event of Default. SECTION 4.9 Perfection and Priority of Security Interest. This Agreement creates a valid and, upon completion of all required filings of financing statements, perfected first priority and exclusive security interest in the Collateral, securing the payment of all the Obligations. SECTION 4.10 Model and Serial Numbers. The Schedules set forth the true and correct model number and serial number of each item of Equipment that constitutes Collateral. SECTION 4.11 Accuracy and Completeness of Information. All data, reports, and information heretofore, contemporaneously, or hereafter furnished by or on behalf of the Borrower in writing to the Lender or for purposes of or in connection with this Agreement or any other Loan Document, or any transaction contemplated hereby or thereby, are or will be true and accurate in all material respects on the date as of which such data, reports, and information are dated or certified and not incomplete by omitting to state any material fact necessary to make such data, reports, and information not misleading at such time. There are no facts now known to the Borrower which individually or in the aggregate would reasonably be expected to have a Material Adverse Effect and which have not been specified herein, in the Financial Statements, or in any certificate, opinion, or other written information previously furnished by the Borrower to the Lender. SECTION 4.12 Price of Equipment. The cost of each item of Equipment does not exceed the fair and usual price for such type of equipment purchased in like quantity and reflects all discounts, rebates and allowances for the Equipment (including, without limitation, discounts for advertising, prompt payment, testing, or other services), given to the Borrower by the manufacturer, supplier, or any other person. SECTION 5. COVENANTS OF THE BORROWER. -------------------------- SECTION 5.1 Existence, etc. The Borrower shall: (a) retain its existence and its current yearly accounting cycle, (b) maintain in full force and effect all licenses, bonds, franchises, leases, trademarks, patents, contracts, and other rights necessary or desirable to the profitable conduct of its business unless the failure to do so could not reasonably be expected to have a Material Adverse Effect on the Borrower, (c) continue in, and limit its operations to, the same general lines of business as those presently conducted by it, and (d) comply with all applicable laws and regulations of any federal, state, or local governmental authority, except for such laws and regulations the violations of which would not, in the aggregate, have a Material Adverse Effect on the Borrower. SECTION 5.2 Notice to the Lender. As soon as possible, and in any event within five days after the Borrower learns of the following, the Borrower will give written notice to the Lender of (a) any 6 proceeding instituted or threatened to be instituted by or against the Borrower in any federal, state, local, or foreign court or before any commission or other regulatory body (federal, state, local, or foreign) involving a sum, together with the sum involved in all other similar proceedings, in excess of $100,000 in the aggregate, (b) any contract that is terminated or amended and which has had or could reasonably be expected to have a Material Adverse Effect on the Borrower, (c) the occurrence of any Material Adverse Change with respect to the Borrower, and (d) the occurrence of any Event of Default or event or condition which, with notice or lapse of time or both, would constitute an Event of Default, together with a statement of the action which the Borrower has taken or proposes to take with respect thereto. SECTION 5.3 Maintenance of Books and Records. The Borrower will maintain books and records pertaining to the Collateral in such detail, form, and scope as the Lender shall require in its commercially reasonable judgment. The Borrower agrees that the Lender or its agents may enter upon the Borrower's premises at any time and from time to time during normal business hours, and at any time upon the occurrence and continuance of an Event of Default, for the purpose of inspecting the Collateral and any and all records pertaining thereto. SECTION 5.4 Insurance. The Borrower will maintain insurance on the Collateral under such policies of insurance, with such insurance companies, in such amounts, and covering such risks as are at all times satisfactory to the Lender. All such policies shall be made payable to the Lender, in case of loss, under a standard non-contributory "lender" or "secured party" clause and are to contain such other provisions as the Lender may reasonably require to protect the Lender's interests in the Collateral and to any payments to be made under such policies. Certificates of insurance policies are to be delivered to the Lender, premium prepaid, with the loss payable endorsement in the Lender's favor, and shall provide for not less than thirty days' prior written notice to the Lender, of any alteration or cancellation of coverage. If the Borrower fails to maintain such insurance, the Lender may arrange for (at the Borrower's expense and without any responsibility on the Lender's part for) obtaining the insurance. Unless the Lender shall otherwise agree with the Borrower in writing, the Lender shall have the sole right, in the name of the Lender or the Borrower, to file claims under any insurance policies, to receive and give acquittance for any payments that may be payable thereunder, and to execute any endorsements, receipts, releases, assignments, reassignments, or other documents that may be necessary to effect the collection, compromise, or settlement of any claims under any such insurance policies. SECTION 5.5 Taxes. The Borrower will pay, when due, all taxes, assessments, claims, and other charges ("Taxes") lawfully levied or assessed against the Borrower or the Collateral other than taxes that are being diligently contested in good faith by the Borrower by appropriate proceedings promptly instituted and for which an adequate reserve is being maintained by the Borrower in accordance with GAAP. If any Taxes remain unpaid after the date fixed for the payment thereof, or if any lien shall be claimed therefor, then, without notice to the Borrower, but on the Borrower's behalf, the Lender may pay such Taxes, and the amount thereof shall be included in the Obligations. SECTION 5.6 Borrower to Defend Collateral Against Claims; Fees on Collateral. The Borrower will defend the Collateral against all claims and demands of all Persons at any time claiming the same or any interest therein. The Borrower will not permit any notice creating or otherwise relating to liens on the Collateral or any portion thereof to exist or be on file in any public office other than Permitted Liens. The Borrower shall promptly pay, when payable, all transportation, storage, and warehousing charges and license fees, registration fees, assessments, charges, permit fees, and taxes (municipal, state, and federal) which may now or hereafter be imposed upon the ownership, leasing, renting, possession, sale, or use of the Collateral, other than taxes on or measured by the Lender's income and fees, assessments, charges, and taxes which are being contested in good faith by appropriate proceedings diligently conducted and with respect to which adequate reserves are maintained to the extent required by GAAP. 7 SECTION 5.7 No Change of Location, Structure, or Identity. The Borrower will not (a) change the location of its chief executive office or establish any place of business other than those specified herein or (b) move or permit the movement of any item of Collateral from the location specified in the applicable Schedule, except that the Borrower may change its chief executive office and keep Collateral at other locations within the United States provided that the Borrower has delivered to the Lender (i) prior written notice thereof and (ii) duly executed financing statements and other agreements and instruments (all in form and substance satisfactory to the Lender) necessary or, in the opinion of the Lender, desirable to perfect and maintain in favor of the Lender a first priority security interest in the Collateral. Notwithstanding anything to the contrary in the immediately preceding sentence, the Borrower may keep any Collateral consisting of motor vehicles or rolling stock at any location in the United States provided that the Lender's security interest in any such Collateral is conspicuously marked on the certificate of title thereof and the Borrower has complied with the provisions of Section 5.9. SECTION 5.8 Use of Collateral; Licenses; Repair. The Collateral shall be operated by competent, qualified personnel in connection with the Borrower's business purposes, for the purpose for which the Collateral was designed and in accordance with applicable operating instructions, laws, and government regulations, and the Borrower shall use every reasonable precaution to prevent loss or damage to the Collateral from fire and other hazards. The Collateral shall not be used or operated for personal, family, or household purposes. The Borrower shall procure and maintain in effect all orders, licenses, certificates, permits, approvals, and consents required by federal, state, or local laws or by any governmental body, agency, or authority in connection with the delivery, installation, use, and operation of the Collateral. The Borrower shall keep all of the Equipment in a satisfactory state of repair and satisfactory operating condition in accordance with industry standards, and will make all repairs and replacements when and where necessary and practical. The Borrower will not waste or destroy the Equipment or any part thereof, and will not be negligent in the care or use thereof. The Equipment shall not be annexed or affixed to or become part of any realty without the Lender's prior written consent. SECTION 5.9 Further Assurances. The Borrower will, promptly upon request by the Lender, execute and deliver or use its reasonable efforts to obtain any document required by the Lender (including, without limitation, warehouseman or processor disclaimers, mortgagee waivers, landlord disclaimers, or subordination agreements with respect to the Obligations and the Collateral), give any notices, execute and file any financing statements, mortgages, or other documents (all in form and substance satisfactory to the Lender), mark any chattel paper, deliver any chattel paper or instruments to the Lender, and take any other actions that are necessary or, in the opinion of the Lender, desirable to perfect or continue the perfection and the first priority of the Lender's security interest in the Collateral, to protect the Collateral against the rights, claims, or interests of any Persons, or to effect the purposes of this Agreement. The Borrower hereby authorizes the Lender to file one or more financing or continuation statements, and amendments thereto, relating to all or any part of the Collateral without the signature of the Borrower where permitted by law. A carbon, photographic, or other reproduction of this Agreement or any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement where permitted by law. To the extent required under this Agreement, the Borrower will pay all costs incurred in connection with any of the foregoing. SECTION 5.10 No Disposition of Collateral. The Borrower will not in any way hypothecate or create or permit to exist any lien, security interest, charge, or encumbrance on or other interest in any of the Collateral, except for the lien and security interest granted hereby and Permitted Liens, and the Borrower will not sell, transfer, assign, pledge, collaterally assign, exchange, or otherwise dispose of any of the Collateral. In the event the Collateral, or any part thereof, is sold, transferred, assigned, exchanged, or otherwise disposed of in violation of these provisions, the security interest of the Lender shall continue in such Collateral or part thereof notwithstanding such sale, transfer, assignment, exchange, or other disposition, and the Borrower will hold the 8 proceeds thereof in a separate account for the benefit of the Lender. Following such a sale, the Borrower will transfer such proceeds to the Lender in kind. SECTION 5.11 No Limitation on Lender's Rights. The Borrower will not enter into any contractual obligations which may restrict or inhibit the Lender's rights or ability to sell or otherwise dispose of the Collateral or any part thereof. SECTION 5.12 Protection of Collateral. Upon notice to the Borrower (provided that if an Event of Default has occurred and is continuing the Lender need not give any notice), the Lender shall have the right at any time to make any payments and do any other acts the Lender may deem necessary to protect its security interests in the Collateral, including, without limitation, the rights to satisfy, purchase, contest, or compromise any encumbrance, charge, or lien which, in the reasonable judgment of the Lender, appears to be prior to or superior to the security interests granted hereunder, and appear in, and defend any action or proceeding purporting to affect is security interests in, or the value of, any of the Collateral. The Borrower hereby agrees to reimburse the Lender for all such payments made and expenses incurred under this Agreement including fees, expenses, and disbursements of attorneys and paralegals acting for the Lender, which amounts shall be secured under this Agreement, and agrees it shall be bound by any payment made or act taken by the Lender hereunder absent the Lender's gross negligence or willful misconduct. The Lender shall no obligation to make any of the foregoing payments or perform any of the foregoing acts. SECTION 5.13 Delivery of Items. The Borrower will (a) promptly (but in no event later than one Business Day) after its receipt thereof, deliver to the Lender any documents or certificates of title issued with respect to any property included in the Collateral, and any promissory notes, letters of credit or instruments related to or otherwise in connection with any property included in the Collateral, which in any such case come into the possession of the Borrower, or shall cause the issuer thereof to deliver any of the same directly to the Lender, in each case with any necessary endorsements in favor of the Lender and (b) deliver to the Lender as soon as available copies of any and all press releases and other similar communications issued by the Borrower. SECTION 5.14 Solvency. The Borrower shall be and remain Solvent at all times. SECTION 5.15 Fundamental Changes. The Borrower shall not (a) amend or modify its name, unless the Borrower delivers to the Lender thirty days prior to any such proposed amendment or modification written notice of such amendment or modification and within ten days before such amendment or modification delivers executed Uniform Commercial Code financing statements (in form and substance satisfactory to the Lender) or (b) merge or consolidate with any other entity, in each case without the Lender's prior written consent which shall not be unreasonably withheld. SECTION 5.16 Right of First Refusal. The Borrower shall notify the Lender when it seeks additional equipment financing in an amount up to $9,000,000, and shall select Lender to provide such equipment financing, provided that Lender offers to provide such financing on terms competitive with any other bona fide offer received by Borrower from an arm's-length third party financing source. SECTION 5.17 Additional Requirements. The Borrower shall take all such further actions and execute all such further documents and instruments as the Lender may reasonably request. SECTION 6. FINANCIAL STATEMENTS. Until the payment and satisfaction -------------------- in full of all Obligations, the Borrower shall deliver to the Lender the following financial information: 9 SECTION 6.1 Annual Financial Statements. As soon as available, but not later than 120 days after the end of each fiscal year of the Borrower and its consolidated subsidiaries, the consolidated balance sheet, income statement, and statements of cash flows and shareholders equity for the Borrower and its consolidated subsidiaries (the "Financial Statements") for such year, reported on by independent certified public accountants without an adverse qualification; and SECTION 6.2 Quarterly Financial Statements. As soon as available, but not later than 60 days after the end of each of the first three fiscal quarters in any fiscal year of the Borrower and its consolidated subsidiaries, the Financial Statements for such fiscal quarter, together with a certification duly executed by a responsible officer of the Borrower that such Financial Statements have been prepared in accordance with GAAP and are fairly stated in all material respects (subject to normal year-end audit adjustments). SECTION 7. EVENTS OF DEFAULT. The occurrence of any of the following ----------------- events shall constitute an Event of Default hereunder: (a) the Borrower shall fail to pay within two business days after notice of failure to pay when due any amount required to be paid by the Borrower under or in connection with any Note and this Agreement; (b) any representation or warranty made or deemed made by the Borrower under or in connection with any Loan Document or any Financial Statement shall prove to have been false or incorrect in any material respect when made; (c) the Borrower shall fail to perform or observe (i) any of the terms, covenants or agreements contained in Sections 5.4, 5.7, 5.10, 5.14, or 5.15 hereof or (ii) any other term, covenant, or agreement contained in any Loan Document (other than the other Events of Default specified in this Section 7) and such failure remains unremedied for the earlier of fifteen days from (A) the date on which the Lender has given the Borrower written notice of such failure and (B) the date on which the Borrower knew or should have known of such failure; (d) any provision of any Loan Document to which the Borrower is a party shall for any reason cease to be valid and binding on the Borrower, or the Borrower shall so state; (e) dissolution, liquidation, winding up, or cessation of the Borrower's business, failure of the Borrower generally to pay its debts as they mature, admission in writing by the Borrower of its inability generally to pay its debts as they mature, or calling of a meeting of the Borrower's creditors for purposes of compromising any of the Borrower's debts; (f) the commencement by or against the Borrower of any bankruptcy, insolvency, arrangement, reorganization, receivership, or similar proceedings under any federal or state law and, in the case of any such involuntary proceeding, such proceeding remains undismissed or unstayed for forty-five days following the commencement thereof, or any action by the Borrower is taken authorizing any such proceedings; (g) an assignment for the benefit of creditors is made by the Borrower, whether voluntary or involuntary, the appointment of a trustee, custodian, receiver or similar official for the Borrower or for any substantial property of the Borrower, or any action by the Borrower authorizing any such proceeding; (h) the borrower shall default in (i) the payment of principal or interest on any secured indebtedness in excess of $50,000 (other than the Obligations) beyond the period of grace, if any, provided in the instrument or agreement under which such indebtedness was created; or (ii) the observance or performance of any 10 other agreement or condition relating to any such indebtedness or contained in any instrument or agreement relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such indebtedness to cause, with the giving of notice if required, such indebtedness to become due prior to it stated maturity; or (iii) any loan or other agreement under which the Borrower has received financing from Transamerica Corporation or any of its affiliates; (i) the Borrower suffers or sustains a Material Adverse Change; (j) any tax lien, other than a Permitted Lien, is filed of record against the Borrower and is not bonded or discharged within five Business Days; (k) any judgment which has had or could reasonably be expected to have a Material Adverse Effect on the Borrower and such judgment shall not be stayed, vacated, bonded, or discharged within sixty days; (l) any material covenant, agreement, or obligation, as determined in the sole discretion of the Lender, made by the Borrower and contained in or evidenced by any of the Loan Documents shall cease to be enforceable, or shall be determined to be unenforceable, in accordance with its terms; the Borrower shall deny or disaffirm the Obligations under any of the Loan Documents or any liens granted in connection therewith; or any liens granted on any of the Collateral in favor of the Lender shall be determined to be void, voidable, or invalid, or shall not be given the priority contemplated by this Agreement; or (m) there is a change, other than a change which results from the sale of newly issued securities to investors, in more than 35% of the ownership of any equity interests of the Borrower on the date hereof or more than 35% of such interests become subject to any contractual, judicial, or statutory lien, charge, security interest, or encumbrance. SECTION 8. REMEDIES. If any Event of Default shall have occurred and -------- be continuing: (a) The Lender may, without prejudice to any of its other rights under any Loan Document or Applicable Law, declare all Obligations to be immediately due and payable (except with respect to any Event of Default set forth in Section 7(f) hereof, in which case all Obligations shall automatically become immediately due and payable without necessity of any declaration) without presentment, representation, demand of payment or protest, which are hereby expressly waived. (b) The Lender may take possession of the Collateral and, for that purpose may enter, with the aid and assistance of any person or persons, any premises where the Collateral or any part hereof is, or may be placed, and remove the same. (c) The obligation of the Lender, if any, to make additional Loans or financial accommodations of any kind to the Borrower shall immediately terminate. (d) The Lender may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein (or in any Loan Document) or otherwise available to it, all the rights and remedies of a secured party under the applicable Uniform Commercial Code (the "Code") whether or not the Code applies to the affected Collateral and also may (i) require the Borrower to, and the Borrower hereby agrees that it will at its expense and upon request of the Lender forthwith, assemble all or part of the Collateral as directed by the Lender and make it available to the Lender at a place to be designated by the Lender that is reasonably convenient to both parties and (ii) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public 11 or private sale, at any of the Lender's offices or elsewhere, for cash, on credit, or for future delivery, and upon such other terms as the Lender may deem commercially reasonable. The Borrower agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to the Borrower of the time and place of any public sale or that time after which any private sale is to be made shall constitute reasonable notification. The Lender shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Lender may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without future notice, be made at the time and place to which it was so adjourned. (e) All cash proceeds received by the Lender in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the discretion of the Lender, be held by the Lender as collateral for, or then or at any time thereafter applied in whole or in part by the Lender against, all or any part of the Obligations in such order as the Lender shall elect. Any surplus of such cash or cash proceeds held by the Lender and remaining after the full and final payment of all the Obligations shall be paid over the Borrower or to such other Person to which the Lender may be required under applicable law, or directed by a court of competent jurisdiction, to make payment of such surplus. SECTION 9. MISCELLANEOUS PROVISIONS. ------------------------ SECTION 9.1 Notices. Except as otherwise provide herein, all notices, approvals, consents, correspondence, or other communications required or desired to be given hereunder shall be given in writing and shall be delivered by overnight courier, hand delivery, or certified or registered mail, postage prepaid, if to the Lender, then to Transamerica Technology Finance Division, 76 Batterson Park Road, Farmington, Connecticut 06032, Attention: Assistant Vice President, Lease Administration, with a copy to the Lender at Riverway II, West Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018, Attention: Legal Department, and if to the Borrower, then to JFAX Communications, Inc. 10960 Wilshire Boulevard, Suite 500, Los Angeles, CA 90024, Attention: Chief Financial Officer or such other address as shall be designated by the Borrower or the Lender to the other party in accordance herewith. All such notices and correspondence shall be effective when received. SECTION 9.2 Headings. The headings in this Agreement are for purposes of reference only and shall not affect the meaning or construction of any provision of this Agreement. SECTION 9.3 Assignments. The Borrower shall not have the right to assign any Note or this Agreement or any interest therein unless the Lender shall have given the Borrower prior written consent and the Borrower and its assignee shall have delivered assignment documentation in form and substance satisfactory to the Lender in its sole discretion. The Lender may assign its rights and delegate its obligations under any Note or this Agreement. SECTION 9.4 Amendments, Waivers, and Consents. Any amendment or waiver of any provision of this Agreement and any consent to any departure by the Borrower from any provision of this Agreement shall be effective only by a writing signed by the Lender and shall bind and benefit the Borrower and the Lender and their respective successors and assigns, subject, in the case of the Borrower, to the first sentence of Section 9.3. SECTION 9.5 Interpretation of Agreement. Time is of the essence in each provision of this Agreement of which time is an element. All terms not defined herein or in a Note shall have the meaning set forth in the applicable Code, except where the context otherwise requires. To the extent a term or provision of this Agreement conflicts with any Note, or any term or provision thereof, and is not dealt with herein with more specificity, this Agreement shall control with respect to the subject matter of such term or provision. Acceptance 12 of or acquiescence in a course of performance rendered under this Agreement shall not be relevant in determining the meaning of this Agreement even though the accepting or acquiescing party had knowledge of the nature of the performance and opportunity for objection. SECTION 9.6 Continuing Security Interest. This Agreement shall create a continuing security interest in the Collateral and shall (i) remain in full force and effect until the indefeasible payment in full of the Obligations, (ii) be binding upon the Borrower and its successors and assigns and (iii) inure, together with the rights and remedies of the Lender hereunder, to the benefit of the Lender and its successors, transferees, and assigns. SECTION 9.7 Reinstatement. To the extent permitted by law, this Agreement and the rights and powers granted to the Lender hereunder and under the Loan Documents shall continue to be effective or be reinstated if at any time any amount received by the Lender in respect of the Obligations is rescinded or must otherwise be restored or returned by the Lender upon the insolvency, bankruptcy, dissolution, liquidation, or reorganization of the Borrower or upon the appointment of any receiver, intervenor, conservator, trustee, or similar official for the Borrower or any substantial part of its assets, or otherwise, all as though such payments had not been made. SECTION 9.8 Survival of Provisions. All representations, warranties, and covenants of the Borrower contained herein shall survive the execution and delivery of this Agreement, and shall terminate only upon the full and final payment and performance by the Borrower of the Obligations secured hereby. SECTION 9.9 Indemnification. The Borrower agrees to indemnify and hold harmless the Lender and its directors, officers, agents, employees, and counsel from and against any and all costs, expenses, claims, or liability incurred by the Lender or such Person hereunder and under any other Loan Document or in connection herewith or therewith, unless such claim or liability shall be due to willful misconduct or gross negligence on the part of the Lender or such Person. SECTION 9.10 Counterparts; Telecopied Signatures. This Agreement may be executed in counterparts, each of which when so executed and delivered shall be an original, but both of which shall together constitute one and the same instrument. This Agreement and each of the other Loan Documents and any notices given in connection herewith or therewith may be executed and delivered by telecopier or other facsimile transmission all with the same force and effect as if the same was a fully executed and delivered original manual counterpart. SECTION 9.11 Severability. In case any provision in or obligation under this Agreement or any Note or any other Loan Document shall be invalid, illegal, or unenforceable in any jurisdiction, the validity, legality, and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. SECTION 9.12 Delays; Partial Exercise of Remedies. No delay or omission of the Lender to exercise any right or remedy hereunder, whether before or after the happening of any Event of Default shall impair any such right or shall operate as a waiver thereof or as a waiver of any such Event of Default. No single or partial exercise by the Lender of any right or remedy shall preclude any other or further exercise thereof or preclude any other right or remedy. SECTION 9.13 Entire Agreement. The Borrower and the Lender agree that this Agreement, the Schedule hereto, and the Commitment Letter are the complete and exclusive statement and agreement between the parties with respect to the subject matter hereof, superseding all proposals and prior agreements, oral 13 or written, and all other communications between the parties with respect to the subject matter hereof. Should there exist any inconsistency between the terms of the Commitment Letter and this Agreement, the terms of this Agreement shall prevail. SECTION 9.14 Setoff. In addition to and not in limitation of all rights of offset that the Lender may have under Applicable Law, and whether or not the Lender has made any demand or the Obligations of the Borrower have matured, the Lender shall have the right to appropriate and apply to the payment of the Obligations of the Borrower all deposits and other obligations then or thereafter owing by the Lender to or for the credit or the account of the Borrower. SECTION 9.15 WAIVER OF JURY TRIAL. THE BORROWER AND THE LENDER IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. SECTION 9.16 GOVERNING LAW. THE VALIDITY, INTERPRETATION, AND ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF. SECTION 9.17 Venue; Service of Process. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF ILLINOIS SITUATED IN COOK COUNTY, OR OF THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF ILLINOIS, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE BORROWER HEREBY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. THE BORROWER HEREBY IRREVOCABLY WAIVES, IN CONNECTION WITH ANY SUCH ACTION OR PROCEEDING, (a) ANY OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, THAT IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS AND (b) THE RIGHT TO INTERPOSE ANY NONCOMPULSORY SETOFF, COUNTERCLAIM, OR CROSS-CLAIM. THE BORROWER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE BORROWER AT THE ADDRESS FOR IT SPECIFIED IN SECTION 9.1 HEREOF. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE LENDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE BORROWER IN ANY OTHER JURISDICTION, SUBJECT IN EACH INSTANCE TO THE PROVISIONS HEREOF WITH RESPECT TO RIGHTS AND REMEDIES. 14 IN WITNESS WHEREOF, the undersigned Borrower has caused this Agreement to be duly executed and delivered by its proper and duly authorized officer as of the date first set forth above. JFAX COMMUNICATIONS, INC. By: /s/ N. Zucker -------------------------------------------- Name: Hemi Zucker Title: CFO Federal Tax ID: 510371142 Accepted as of the 10th day of March, 1998 TRANSAMERICA BUSINESS CREDIT CORPORATION By:____________________________________________ Name: Title: 15 EX-10.16 14 PROMISSORY NOTE DATED APRIL 21, 1998 EXHIBIT 10.16 PROMISSORY NOTE --------------- Date: April 21, 1998 FOR VALUE RECEIVED, the undersigned promises to pay to the order of Transamerica Business Credit Corporation or its assigns (the "Payee") at its office located at Riverway II, West Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018, or at such other place as the Payee or the holder hereof may designate in writing, the principal amount of Eight Hundred Eighteen Thousand Four Hundred Twelve and 60/100 Dollars ($818,412.60) received by the undersigned, plus interest, in lawful money of the United States and in immediately available funds. This Note shall be payable commencing with a first installment of Sixty Thousand Eight Hundred Sixty Nine and 43/100 ($60,869.43) payable on April 21, 1998 and thereafter in 34 consecutive equal monthly installments of Twenty-Six Thousand Eighty-Six and 90/100 Dollars ($26,086.90) commencing June 1, 1998 and a final installment payable on May 1, 2001 of Eighty-One Thousand Eight Hundred Forty-One and 26/100 ($81,841.26) together with the unpaid balance of the Note, if any (it being agreed that if all of the foregoing payments are timely made, there will be no unpaid balance). Each installment shall be applied first to the payment of interest on the unpaid principal of this Note and the balance on account of the principal of this Note. No amount of principal paid or prepaid hereunder may be reborrowed. This Note is one of the Notes referred to in the Master Loan and Security Agreement dated as of March 10, 1998 (as amended, supplemented or otherwise modified from time to time, the "Agreement"), between the undersigned and the Payee and is subject and entitled to all provisions and benefits thereof. Capitalized terms used but not defined herein shall have the meanings set forth in the Agreement. If any installment of this Note is not paid within five days after its due date, the undersigned agrees to pay on demand, in addition to the amount of such installment, an amount equal to 5% of such installment, but only to the extent permitted by Applicable Law. The undersigned shall have the right to prepay this Note at any time on or after March 1, 1999, on thirty days' prior written notice to the Payee. On the date of any such prepayment, the undersigned shall pay an amount equal to the present value of the remaining payments (principal and interest) due hereunder discounted at 6% simple interest per annum, together with all --- ----- interest, fees and other amounts, if any, payable on the amount so prepaid or in connection therewith to the date of such prepayment. Any prepayments shall be applied to the installments hereof in the inverse order of maturity. Upon the maturity of this Note or the acceleration of the maturity of this Note in accordance with the terms of the Agreement, the entire unpaid principal amount on this Note, together with all interest, fees and other amounts payable hereon or in connection herewith, shall be immediately due and payable without further notice or demand, with interest on all such amounts at a rate not to exceed the lawful limit, from the date of such maturity or acceleration, as the case may be, until all such amounts have been paid. If any payment on this Note becomes payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day. The undersigned hereby waives diligence, demand, presentment, protest and notice of any kind, and assents to extensions of the time of payment, release, surrender or substitution of security, or forbearance or other indulgence, without notice. The undersigned agrees to pay all amounts under this Note without offset, deduction, claim, counterclaim, defense or recoupment, all of which are hereby waived. The Payee, the undersigned and any other parties to the Loan Documents intend to contract in strict compliance with applicable usury law from time to time in effect. In furtherance thereof such Persons stipulate and agree that none of the terms and provisions contained in the Loan Documents shall ever be construed to create a contract to pay, for the use, forbearance or detention of money, interest in excess of the maximum amount of interest permitted to be charged by Applicable Law from time to time in effect. Neither the undersigned nor any present or future guarantors, endorsers, or other Persons hereafter becoming liable for payment of any Obligation shall ever be liable for unearned interest thereon or shall ever be required to pay interest thereon in excess of the maximum amount that may be lawfully charged under Applicable Law from time to time in effect, and the provisions of this paragraph shall control over all other provisions of the Loan Documents which may be in conflict or apparent conflict herewith. The Payee expressly disavows any intention to charge or collect excessive unearned interest or finance charges in the event the maturity of any Obligation is accelerated. If (a) the maturity of any Obligation is accelerated for any reason, (b) any Obligation is prepaid and as a result any amounts held to constitute interest are determined to be in excess of the legal maximum, or (c) the Payee or any other holder of any or all of the Obligations shall otherwise collect amounts which are determined to constitute interest which would otherwise increase the interest on any or all of the Obligations to an amount in excess of that permitted to be charged by Applicable Law then in effect, then all sums determined to constitute interest in excess of such legal limit shall, without penalty, be promptly applied to reduce the then outstanding principal of the related Obligations or, at the Payee's or such holder's option, promptly returned to the undersigned upon such determination. In determining whether or not the interest paid or payable, under any specific circumstance, exceeds the maximum amount permitted under Applicable Law, (i) characterize any non-principal payment as an expense, fee or premium rather than as interest, (ii) exclude voluntary prepayments and the effects thereof, and (iii) amortize, prorate, allocate, and spread the total amount of interest through the entire contemplated term of this Note in accordance with the amount outstanding from time to time thereunder and the maximum legal rate of interest from time to time in effect under Applicable Law in order to lawfully charge the maximum amount of interest permitted under Applicable Law. This Note may not be changed, modified or terminated orally, but only by an agreement in writing signed by the undersigned and the Payee or any holder thereof. The undersigned shall, upon demand, pay to the Payee all costs and expenses (including the fees and disbursements of counsel and other professionals) paid or incurred by the Payee in (A) enforcing or defending its rights under or in respect of this Note or any of the other Loan Documents, (B) collecting any of the liabilities by the undersigned to the Payee or otherwise administering the Loan Documents, (C) foreclosing or otherwise collecting upon any collateral and (D) obtaining any legal, accounting or other advice in connection with any of the foregoing. This Note shall be binding upon the successors and assigns of the undersigned and inure to the benefit of the Payee and its successors, endorsees and assigns. If any term or provision of this Note shall be held invalid, illegal or unenforceable, the validity of all other terms and provisions hereof shall in no way be affected thereby. EACH OF THE UNDERSIGNED AND, BY ITS ACCEPTANCE HEREOF, THE PAYEE HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES (TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW) ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY OF ANY DISPUTE ARISING UNDER OR RELATING TO THIS NOTE AND AGREES THAT ANY SUCH DISPUTE SHALL BE TRIED BEFORE A JUDGE SITTING WITHOUT A JURY. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. JFAX COMMUNICATIONS, INC. By: /s/ N. Zucker ---------------------------------------- Name: Zucker Title: CFO EX-10.17 15 PROMISSORY NOTE DATED DECEMBER 22, 1998 EXHIBIT 10.17 PROMISSORY NOTE --------------- Date: December 22, 1998 FOR VALUE RECEIVED, the undersigned promises to pay to the order of Transamerica Business Credit Corporation or its assigns (the "Payee") at its office located at Riverway II, West Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018, or at such other place as the Payee or the holder hereof may designate in writing, the principal amount of One Hundred Eighty Four Thousand Four Hundred Forty One and 24/100 Dollars ($184,441.24) received by the undersigned, plus interest, in lawful money of the United States and in immediately available funds. This Note shall be payable commencing with a first installment of Thirteen Thousand Six Hundred Fifty Four and 70/100 ($13,654.70) payable on December 22, 1998 and thereafter in 34 consecutive equal monthly installments of Five Thousand Eight Hundred Seventy Nine and 10/100 Dollars ($5,879.10) commencing February 1, 1999 and a final installment payable on January 1, 2002 of Eighteen Thousand Four Hundred Forty Four and 12/100 ($18,444.12) together with the unpaid balance of the Note, if any (it being agreed that if all of the foregoing payments are timely made, there will be no unpaid balance). Each installment shall be applied first to the payment of interest on the unpaid principal of this Note and the balance on account of the principal of this Note. No amount of principal paid or prepaid hereunder may be reborrowed. This Note is one of the Notes referred to in the Master Loan and Security Agreement dated as of March 10, 1998 (as amended, supplemented or otherwise modified from time to time, the "Agreement"), between the undersigned and the Payee and is subject and entitled to all provisions and benefits thereof. Capitalized terms used but not defined herein shall have the meanings set forth in the Agreement. If any installment of this Note is not paid within five days after its due date, the undersigned agrees to pay on demand, in addition to the amount of such installment, an amount equal to 5% of such installment, but only to the extent permitted by Applicable Law. The undersigned shall have the right to prepay this Note at any time on or after November 1, 1999, on thirty days' prior written notice to the Payee. On the date of any such prepayment, the undersigned shall pay an amount equal to the present value of the remaining payments (principal and interest) due hereunder discounted at 6% simple interest per annum, together with all --- ----- interest, fees and other amounts, if any, payable on the amount so prepaid or in connection therewith to the date of such prepayment. Any prepayments shall be applied to the installments hereof in the inverse order of maturity. Upon the maturity of this Note or the acceleration of the maturity of this Note in accordance with the terms of the Agreement, the entire unpaid principal amount on this Note, together with all interest, fees and other amounts payable hereon or in connection herewith, shall be immediately due and payable without further notice or demand, with interest on all such amounts at a rate not to exceed the lawful limit, from the date of such maturity or acceleration, as the case may be, until all such amounts have been paid. If any payment on this Note becomes payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day. The undersigned hereby waives diligence, demand, presentment, protest and notice of any kind, and assents to extensions of the time of payment, release, surrender or substitution of security, or forbearance or other indulgence, without notice. The undersigned agrees to pay all amounts under this Note without offset, deduction, claim, counterclaim, defense or recoupment, all of which are hereby waived. The Payee, the undersigned and any other parties to the Loan Documents intend to contract in strict compliance with applicable usury law from time to time in effect. In furtherance thereof such Persons stipulate and agree that none of the terms and provisions contained in the Loan Documents shall ever be construed to create a contract to pay, for the use, forbearance or detention of money, interest in excess of the maximum amount of interest permitted to be charged by Applicable Law from time to time in effect. Neither the undersigned nor any present or future guarantors, endorsers, or other Persons hereafter becoming liable for payment of any Obligation shall ever be liable for unearned interest thereon or shall ever be required to pay interest thereon in excess of the maximum amount that may be lawfully charged under Applicable Law from time to time in effect, and the provisions of this paragraph shall control over all other provisions of the Loan Documents which may be in conflict or apparent conflict herewith. The Payee expressly disavows any intention to charge or collect excessive unearned interest or finance charges in the event the maturity of any Obligation is accelerated. If (a) the maturity of any Obligation is accelerated for any reason, (b) any Obligation is prepaid and as a result any amounts held to constitute interest are determined to be in excess of the legal maximum, or (c) the Payee or any other holder of any or all of the Obligations shall otherwise collect amounts which are determined to constitute interest which would otherwise increase the interest on any or all of the Obligations to an amount in excess of that permitted to be charged by Applicable Law then in effect, then all sums determined to constitute interest in excess of such legal limit shall, without penalty, be promptly applied to reduce the then outstanding principal of the related Obligations or, at the Payee's or such holder's option, promptly returned to the undersigned upon such determination. In determining whether or not the interest paid or payable, under any specific circumstance, exceeds the maximum amount permitted under Applicable Law, (i) characterize any non-principal payment as an expense, fee or premium rather than as interest, (ii) exclude voluntary prepayments and the effects thereof, and (iii) amortize, prorate, allocate, and spread the total amount of interest through the entire contemplated term of this Note in accordance with the amount outstanding from time to time thereunder and the maximum legal rate of interest from time to time in effect under Applicable Law in order to lawfully charge the maximum amount of interest permitted under Applicable Law. This Note may not be changed, modified or terminated orally, but only by an agreement in writing signed by the undersigned and the Payee or any holder thereof. The undersigned shall, upon demand, pay to the Payee all costs and expenses (including the fees and disbursements of counsel and other professionals) paid or incurred by the Payee in (A) enforcing or defending its rights under or in respect of this Note or any of the other Loan Documents, (B) collecting any of the liabilities by the undersigned to the Payee or otherwise administering the Loan Documents, (C) foreclosing or otherwise collecting upon any collateral and (D) obtaining any legal, accounting or other advice in connection with any of the foregoing. This Note shall be binding upon the successors and assigns of the undersigned and inure to the benefit of the Payee and its successors, endorsees and assigns. If any term or provision of this Note shall be held invalid, illegal or unenforceable, the validity of all other terms and provisions hereof shall in no way be affected thereby. EACH OF THE UNDERSIGNED AND, BY ITS ACCEPTANCE HEREOF, THE PAYEE HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES (TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW) ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY OF ANY DISPUTE ARISING UNDER OR RELATING TO THIS NOTE AND AGREES THAT ANY SUCH DISPUTE SHALL BE TRIED BEFORE A JUDGE SITTING WITHOUT A JURY. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. JFAX COMMUNICATIONS, INC. By: /s/ N. Zucker --------------------------------------- Name: Hemi Zucker Title: CFO EX-10.18 16 INVESTMENT AGREEMENT EXHIBIT 10.18 ______________________________________________________ INVESTMENT AGREEMENT Among JFAX COMMUNICATIONS, INC. JENS MULLER and JOHN F. RIELEY (collectively, Seller) and BOARDRUSH LLC ("Borrower") and ORCHARD/JFAX INVESTORS, L.L.C. and RICHARD S. RESSLER (collectively, Buyer) ______________________________________________________ March 14, 1997 ______________________________________________________ INVESTMENT AGREEMENT This Investment Agreement (the "Agreement") is entered into as of March 14, 1997, and is effective as of March 17, 1997 (the "Effective Date"), by and between JFAX Communications, Inc., a Delaware corporation ("JFAX"), Jens Muller ("Muller") and John F. Rieley ("Rieley") (unless the context otherwise requires, JFAX, Muller and Rieley are collectively referred to herein as "Seller"), Boardrush LLC , a New York limited liability company ("Borrower"), and Orchard/JFAX Investors, L.L.C., a Delaware limited liability company ("Orchard L.L.C.") and Richard S. Ressler ("Ressler") (unless the context otherwise requires, Orchard L.L.C. and Ressler are collectively referred to herein as "Buyer"). Certain capitalized terms used herein are defined in Section 10.1 and the locations of the definitions of certain other capitalized terms are set forth in Section 10.2. As used in this Agreement, except as the context may otherwise require, references to JFAX or to Orchard L.L.C. shall include their respective Subsidiaries (as defined in Section 10.1). BACKGROUND Buyer wishes to subscribe to shares of the common stock of JFAX in an amount that will represent a majority of the common stock of JFAX on a fully diluted basis. Borrower wishes to make a secured non-recourse borrowing from JFAX. JFAX, Muller and Rieley wish to facilitate Buyer's investment in JFAX and to achieve the other benefits of this Agreement. The parties acknowledge that this Agreement and the agreements attached as exhibits hereto collectively constitute the agreements necessary to accomplish the transactions contemplated by this Agreement and are parts of an integrated arrangement between the parties with respect to the transactions and certain other relationships between the parties. In consideration of the premises and of the mutual agreements, representations, warranties and covenants hereinafter set forth, the parties hereto agree as follows: ARTICLE I INVESTMENT TRANSACTIONS SECTION 1.1 Purchase and Sale of Shares Subject to the terms and --------------------------- conditions herein set forth, JFAX shall issue and sell, and Orchard L.L.C. shall purchase, an aggregate of two thousand-twelve (2,012) shares (the "Shares") of the common stock of JFAX, at a purchase price of $3,851.89 per share, for a total consideration of $7,750,000 payable in immediately available funds by Orchard L.L.C. to JFAX. SECTION 1.2 Loan by JFAX to Borrower. Subject to the terms and conditions ------------------------ herein set forth, JFAX shall purchase from Borrower a promissory note issued by Borrower, in the initial principal amount of $2,250,000, for the purchase price of $2,250,000 payable by JFAX to Borrower. Such note is herein called the "Note" or the "Notes". The Notes will be issued pursuant to the Note Agreement (as hereinafter defined) and will mature on March ___, 2004, and will bear interest at the rate of 6.32% per annum, payable monthly as provided in the Notes. The Notes will be available in denominations of $100,000 and integral multiples of $1,000 in excess thereof. The Notes will be non-recourse to Borrower, but the performance of the Notes will be secured by a pledge by Borrower of not less than five hundred-eighty-five (585) shares of JFAX common stock, such number to be subject to customary anti-dilution adjustments, owned by Borrower, to be pledged and delivered to Sullivan & Cromwell as the initial pledge agent, pursuant to a pledge and security agreement (the "Pledge Agreement") in the form previously negotiated by the parties. The Notes will be subject to mandatory prepayment by Borrower at such time as the common stock of JFAX becomes publicly traded and Borrower, Muller and their Affiliates sell, whether in an initial public offering or otherwise, at least $4,000,000 of the JFAX common stock. In case the JFAX common stock does not become publicly traded, Borrower may elect to effect repayment of the Notes by extending the Consulting Agreement (as defined below) for an additional 5- year term, subject to certain conditions as provided therein and in the Note Agreement. SECTION 1.3 Consultancy Arrangements. At the Closing, Borrower shall ------------------------ enter into a Consulting Agreement (as defined below) with JFAX, in which Borrower will agree to provide the consulting services of Rieley and Muller to JFAX. The initial term of each such Consulting Agreement shall be for two years and, subject to certain conditions as provided therein and in the Note Agreement, may be extended by Borrower for an additional five years. SECTION 1.4 Other Agreements. At the Closing, Seller, Borrower and Buyer ---------------- (or certain of them, as applicable) shall enter into the note agreement, which includes the form of Note ("Note Agreement"), the Pledge Agreement, the consulting agreement ("Consulting Agreement") and the registration rights agreement ("Registration Rights Agreement") in the form previously negotiated by the parties. SECTION 1.5 Closing. Subject to the terms and conditions of this ------- Agreement, the consummation of the transactions contemplated by Section 1.1 and Section 1.2 (the "Closing") shall take place simultaneously with the execution and delivery of this Agreement (the "Closing Date"). The Closing shall take place at the offices of Sullivan & Cromwell in Los Angeles (or at such other place as the parties mutually agree). SECTION 1.6 Actions at the Closing. At the Closing, (i) JFAX shall ---------------------- deliver the Shares to Orchard L.L.C. and Orchard L.L.C. deliver the purchase price thereof to JFAX in accordance with the provisions of Section 1.1, (ii) Borrower shall deliver the Note issued by it to JFAX and JFAX shall deliver the purchase price thereof to Borrower, and (iii) Buyer, Borrower and Seller shall take such actions and execute and deliver such agreements, receipts and other instruments and documents as are necessary or appropriate to effect the transactions contemplated by this Agreement in accordance with its terms, including without limitation the following: (a) At the Closing, Seller shall deliver to Buyer the documents set forth in Article VI of this Agreement. (b) At the Closing, Buyer shall deliver to Seller the documents set forth in Article VII of this Agreement. -2- ARTICLE II REPRESENTATIONS AND WARRANTIES OF SELLER Each representation and warranty set forth below is qualified by the exceptions or disclosures applicable thereto and set forth in the Seller Disclosure Schedule, a copy of which is attached hereto (collectively, the "Seller Disclosure Schedule"). Each Seller represents and warrants to each Buyer as follows: SECTION 2.1 Organization of JFAX. JFAX is a corporation duly formed and -------------------- validly existing under the laws of the State of Delaware and has full corporate power and authority and legal right to own and operate its assets (herein sometimes called the "Assets") and to carry on its business (herein sometimes called the "Business") as presently conducted, to execute and deliver this Agreement and all of the other agreements and instruments to be executed and delivered by JFAX pursuant hereto, and to consummate the transactions contemplated hereby and thereby. JFAX has no subsidiaries. JFAX has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties or conducts any business so as to require such qualification, or is subject to no material liability or disability by reason of a failure to be so qualified in any such jurisdiction. Attached hereto as Schedule 2.1 are true, correct and complete copies of the certificate of incorporation and by- laws of JFAX, as amended and currently in effect, and any other agreements or instruments defining the rights of JFAX shareholders. SECTION 2.2 Authority of JFAX. The execution and delivery of this ----------------- Agreement (and all other agreements and instruments contemplated hereunder) by JFAX, the performance by JFAX of its obligations hereunder and thereunder, and the consummation by JFAX of the transactions contemplated hereby and thereby have been duly authorized by all necessary action by the Board of Directors of JFAX, and no other act or proceeding on the part of or on behalf of JFAX or any of JFAX's shareholders is necessary to approve the execution and delivery of this Agreement and such other agreements and instruments by JFAX, the performance by JFAX of its obligations hereunder and thereunder and the consummation of the transactions contemplated hereby and thereby by JFAX. The signatory officers of JFAX have the power and authority to execute and deliver this Agreement and all of the other agreements and instruments to be executed and delivered by JFAX pursuant hereto, to consummate the transactions hereby and thereby contemplated and to take all other actions required to be taken by JFAX pursuant to the provisions hereof and thereof. SECTION 2.3 Execution and Binding Effect. This Agreement has been duly ---------------------------- and validly executed and delivered by Seller and constitutes, and the other agreements and instruments to be executed and delivered by Seller pursuant hereto, upon their execution and delivery by Seller will constitute (assuming, in each case, the due and valid authorization, execution and delivery thereof by Buyer), legal, valid and binding agreements of Seller, enforceable against Seller in accordance with their respective terms, except as enforceability may be limited by bankruptcy, insolvency, moratorium, or other laws affecting the enforcement of creditors' rights generally or provisions limiting competition, and by equitable principles. -3- SECTION 2.4 Consents and Approvals of Governmental Entities. There is no ----------------------------------------------- requirement applicable to Seller to make any filing, declaration or registration with, or to obtain any permit, authorization, consent or approval of, any Governmental Entity (as defined in Section 10.1) as a condition to the lawful consummation by Seller of the transactions contemplated by this Agreement and the other agreements and instruments to be executed and delivered by Seller, except for such filings the failure of which to make would not have a material adverse effect on the business of JFAX or on the transactions contemplated hereby. SECTION 2.5 No Violation. Neither the execution, delivery and performance ------------ of this Agreement and all of the other agreements and instruments to be executed and delivered pursuant hereto, nor the consummation of the transactions contemplated hereby or thereby, will, with or without the passage of time or the delivery of notice or both, (a) conflict with, violate or result in any breach of the terms, conditions or provisions of the certificate of incorporation or bylaws of JFAX, (b) conflict with or result in a violation or breach of, or constitute a default or require consent of any Person (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, franchise, permit, agreement, lease or other instrument or obligation to which Seller is a party or by which Seller or any of the properties or assets of Seller may be bound, where such conflict, violation, breach, default or consent would have a material adverse effect on the business of JFAX or on the transactions contemplated hereby or (c) violate any statute, ordinance or law or any rule, regulation, order, writ, injunction or decree of any Governmental Entity applicable to Seller or by which any properties or assets of Seller may be bound, where such violation would have a material adverse effect on the business of JFAX or on the transactions contemplated hereby. SECTION 2.6 Software, Etc.. -------------- (a) The software listed on Schedule 2.6(a) contains all of the software (the "Software" or "software") that comprises the JFAX products or that supports the services provided by JFAX to its customers. Such services include principally the e-mail accessing of phone mail and fax messages, and the provision of other computer telephony services to individuals or businesses (the "Services"). Such listing includes each of the software modules ("Modules") of JFAX, and such listing is subdivided by the software components that comprise the JFAX software.. (b) To Seller's knowledge, JFAX holds valid title, license to or leasehold interest in all of the Software, Products, Tools and Intellectual Property, free and clear of any mortgages, pledges, liens, security interests, encumbrances, charges or other claims of third parties of any kind (collectively, "Liens"), other than non-exclusive licenses to use the Products granted by Seller to end-users in the ordinary course of business; provided, however, with respect to Software written by or at the direction of JFAX, this representation and warranty shall not be limited to knowledge. For purposes of this Agreement, the terms Products, Tools and Intellectual Property shall be defined in Section 10.1. (c) Except for end-user, nonexclusive licenses listed in the Seller Disclosure Schedule, Seller has not granted to any Person or entity, and to Seller's knowledge, no Person or entity, other than Seller, holds any rights in, or licenses, or rights to acquire licenses, to produce, distribute, license, sublicense, sell, use in development or otherwise use, any of the Software, -4- Products, Tools or Intellectual Property. Schedule 2.6(c), together with Schedule 2.6(a), lists all the Software, Products, Tools and Intellectual Property of JFAX. (d) To the knowledge of Seller, the software of JFAX as listed on Schedule 2.6(a) includes software that is sufficient, in all material respects, to run the products/services of JFAX as currently conducted by the existing management of JFAX. SECTION 2.7 Capitalization of JFAX. ---------------------- (a) As of the date hereof, JFAX has 100,000 shares of capital stock authorized, consisting of 100,000 shares of common stock, par value $.01 per share (the "JFAX common stock"), of which 1,513 shares are issued, including 1,513 shares outstanding and no shares held as treasury stock (no other class of capital stock being authorized). (b) As of the date hereof, except as set forth on the Seller Disclosure Schedule, JFAX does not have any shares of its capital stock reserved for issuance, any outstanding option, call or commitment relating to shares of its capital stock or any outstanding securities, obligations or agreements convertible into or exchangeable for, or giving any person any right (including, without limitation, pre-emptive rights) to subscribe for or acquire from it, any shares of its capital stock (collectively, "Rights"), except for the Rights granted herein to Buyer. (c) Schedule 2.7(c) sets forth a listing of all the shareholders and all the holders of Rights of JFAX together with the number of shares held by each of them, or the number of shares subject to Rights held by each of them, as of the date hereof. SECTION 2.8 Intellectual Property. To Seller's knowledge, JFAX does not --------------------- infringe any United States or foreign trade name, trademark, copyright, trade secret, patent (including any process patent) or any other intellectual property right of any Person. To Seller's knowledge, there is no pending or threatened claim by Seller against any Person, or by any Person against Seller, for infringement, misuse or misappropriation of any Intellectual Property. To Seller's knowledge, Seller is not obligated or under any liability whatsoever to make any payments by way of royalties, fees or otherwise to any owner of, licensor of, or other claimant to, any patent, trademark, trade name, copyright, trade secret or other intellectual property rights, with respect to the use thereof or in connection with the business of JFAX. To Seller's knowledge, all of the Intellectual Property is owned by JFAX free and clear of any rights or claims of any present or former employees, consultants, officers and directors of JFAX or other Persons. SECTION 2.9 Litigation; Other Claims. ------------------------ (a) There are no claims, actions, suits, inquiries, proceedings or investigations against Seller which are currently pending or, to Seller's knowledge, threatened, at law or in equity or before or by any Governmental Entity which could materially affect the Business of JFAX or Seller's ability to consummate the transactions contemplated hereby. (b) There are no pending claims or, to Seller's knowledge, material liabilities under any product liability, breach of warranty or maintenance claim, express or implied, arising out -5- of or relating to any defect or damage, or alleged defect or damage, in engineering, development, design, programming, tooling, manufacturing, installation, packaging, shipping or provision of any Service, Product, Software or Intellectual Property of the Business. SECTION 2.10 Validity of Securities, Etc. --------------------------- (a) All of the outstanding shares of capital stock of JFAX have been duly authorized and are duly issued and fully paid and non-assessable, and were not issued in violation of any pre-emptive or similar rights. (b) The Shares have been duly authorized and are duly issued and fully paid and non-assessable, and are not issued in violation of any pre-emptive or similar rights. (c) Neither Seller, nor any person acting on its behalf (other than Buyer, as to which Seller makes no representation), has offered or sold the any of the above-mentioned securities (collectively, the "Securities") by means of any general solicitation or general advertising within the meaning of Rule 502(c) under the Securities Act of 1933, as amended (the "Securities Act"). (d) Borrower is a limited liability company duly formed and validly existing under the laws of New York, and has full power and authority and the legal right to execute and deliver this Agreement and all of the other agreements and instruments to be executed and delivered by it pursuant hereto, and to consummate the transactions contemplated hereby and thereby. This Agreement, the Note Agreement, the Notes and the Pledge Agreement have been duly authorized, executed and delivered by Borrower and constitute valid and binding obligations of Borrower enforceable in accordance with their terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. SECTION 2.11 Brokers and Finders. Except as set forth in Schedule 2.11, ------------------- neither Seller nor any of Seller's officers, directors or employees has employed any broker or finder or incurred any liability for any brokerage fee, commission or finders fee in connection with the transactions contemplated by this Agreement. SECTION 2.12 Certain Disclosures. Seller has reviewed the disclosures set ------------------- forth in the Seller Disclosure Schedule relating to subsections (a) through (f) below and, based on that review, to the knowledge of Seller, such disclosures provide a complete listing or a fair summary of the items called for, in all material respects: (a) Insurance. Schedule 2.12(a) sets forth a current listing of the --------- insurance policies of the JFAX business. (b) Chronology. Schedule 2.12(b) sets forth a chronology of the ---------- development of the JFAX business since its inception including current plans for the business. (c) Enhancements. Schedule 2.12(c) sets forth a listing of all ------------ current enhancements that are planned or being worked on for the Software of the JFAX product. -6- (d) Cash Balance and Liabilities. Schedule 2.12(d) sets forth the ---------------------------- cash balance of JFAX in its bank account as of March 13, 1997, and there has been no material reduction in such cash balance through the date hereof, and further sets forth all the liabilities of JFAX, whether absolute, contingent, accrued or otherwise, as of the date hereof ; provided, however, that such schedule may omit liabilities up to $50,000 in the aggregate and may further omit liabilities arising under the provisions of, and ascertainable by a review of, the contracts listed on Schedule 2.12(e) below or the other contracts listed elsewhere on the Seller Disclosure Schedule. (e) Contracts and Negotiations. Schedule 2.12(e) sets forth a listing -------------------------- of all the material agreements, commitments, licenses and other contracts of JFAX, whether written or oral, including forms of such contracts in cases where no individual contract is material but the aggregate of all similar contracts is material. Such schedule further lists all pending negotiations of JFAX which, if consummated, would lead to such a material contract. Seller has provided to buyer correct and complete copies of each of such contracts or summaries thereof in the case of oral contracts. (f) Notarized Documents. Schedule 2.12(f) sets forth copies of three ------------------- notarized documents prepared by JFAX that describe "fields of invention," "summary of invention" and "brief description of drawings" of the JFAX services/products. ARTICLE III REPRESENTATIONS AND WARRANTIES OF BUYER Each Buyer represents and warrants to each Seller as follows: SECTION 3.1 Organization of Orchard L.L.C.. Orchard L.L.C. is a limited ------------------------------ liability company duly formed and validly existing under the laws of Delaware, and has full power and authority and the legal right to execute and deliver this Agreement and all of the other agreements and instruments to be executed and delivered by Orchard L.L.C. pursuant hereto, and to consummate the transactions contemplated hereby and thereby. SECTION 3.2 Authority of Orchard L.L.C.. The execution and delivery of --------------------------- this Agreement (and all other agreements and instruments contemplated hereunder) by Orchard L.L.C., the performance by Orchard L.L.C. of its obligations hereunder and thereunder, and the consummation by Orchard L.L.C. of the transactions contemplated hereby and thereby have been duly authorized by all necessary action by the Manager of Orchard L.L.C., and no other act or proceeding on the part of Orchard L.L.C. or its Members is necessary to approve the execution and delivery of this Agreement and such other agreements and instruments by Orchard L.L.C., the performance by Orchard L.L.C. of its obligations hereunder and thereunder and the consummation of the transactions contemplated hereby and thereby by Orchard L.L.C.. The signatory officers of the Manager of Orchard L.L.C. have the power and authority to execute and deliver this Agreement and all of the other agreements and instruments to be executed and delivered by Orchard L.L.C. pursuant hereto, to consummate the transactions hereby and thereby contemplated and to take all other actions required to be taken by Orchard L.L.C. pursuant to the provisions hereof and thereof. -7- SECTION 3.3 Execution and Binding Effect. This Agreement has been duly ---------------------------- and validly executed and delivered by Buyer and constitutes, and the other agreements and instruments to be executed and delivered by Buyer pursuant hereto, upon their execution and delivery by Buyer, will constitute (assuming, in each case, the due and valid authorization, execution and delivery thereof by Seller), legal, valid and binding agreements of Buyer, enforceable against Buyer in accordance with their respective terms, except as enforceability may be limited by bankruptcy, insolvency, moratorium, or other laws affecting the enforcement of creditors' rights generally or provisions limiting competition, and by equitable principles. SECTION 3.4 Consent and Approvals. There is no requirement applicable to --------------------- Buyer to make any filing, declaration or registration with, or to obtain any permit, authorization, consent or approval of, any Governmental Entity as a condition to the lawful consummation by Buyer of the transactions contemplated by this Agreement and the other agreements and instruments to be executed and delivered by Buyer pursuant hereto, except for such filings referred to in the Seller Disclosure Schedule and such filings the failure of which to make would not have a material adverse effect on the transactions contemplated hereby. SECTION 3.5 No Violation. Neither the execution, delivery and performance ------------ of this Agreement and all of the other agreements and instruments to be executed and delivered pursuant hereto, nor the consummation of the transactions contemplated hereby or thereby, will, with or without the passage of time or the delivery of notice or both, (a) conflict with, violate or result in any breach of the terms, conditions or provisions of the Certificate of Formation or the Limited Liability Company Agreement of Orchard L.L.C., (b) conflict with or result in a violation or breach of, or constitute a default or require consent of any Person (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, franchise, permit, agreement, lease or other instrument or obligation to which Buyer is a party or by which Buyer or any of its properties or assets may be bound, where such conflict, violation, breach, default or consent would have a material adverse effect on the business of Buyer or on the transactions contemplated hereby, or (c) violate any statute, ordinance or law or any rule, regulation, order, writ, injunction or decree of any Governmental Entity applicable to Buyer or by which any of its properties or assets may be bound, where such violation would have a material adverse effect on the business of Buyer or on the transactions contemplated hereby. SECTION 3.6 Brokers and Finders. Neither Buyer nor any of Buyer's ------------------- officers, directors or employees has employed any broker or finder or incurred any liability for any brokerage fee, commission or finders fee in connection with the transactions contemplated by this Agreement. SECTION 3.7 Litigation; Other Claims. There are no claims, actions, suits, ------------------------ inquiries, proceedings or investigations against Buyer which are currently pending or, to Buyer's knowledge, threatened, at law or in equity or before or by any Governmental Entity which could materially affect Buyer's ability to consummate the transactions contemplated hereby. SECTION 3.8 Financing. Orchard L.L.C. has available to it sufficient cash --------- necessary to pay the purchase price of the transactions contemplated in Section 1.1 and such funds are not necessary to operate the business of Orchard L.L.C. in the ordinary course of business. -8- SECTION 3.9 Securities Laws. Buyer represents and warrants to, and agrees --------------- with, Seller that: (a) The Shares are not, as of the date of this Agreement, registered under the Securities Act or any state securities laws; it understands that the offering and sale of the Shares are intended to be exempt from registration under the Securities Act, by virtue of Section 4(2) and the provisions of Regulation D promulgated thereunder, based, in part, upon the representations, warranties and agreements contained in this Agreement; and it understands that the Shares will bear a legend to that effect. (b) With respect to this transaction, it is an accredited investor within the meaning of Regulation D under the Securities Act, and it has such knowledge and experience in financial, tax and business matters so as to enable it to utilize the information made available to it by Seller and other sources including this Agreement to evaluate the merits and risks of an investment in the Shares and to make an informed investment decision with respect thereto. (c) It is acquiring the Shares solely for its own account for investment and not with a view to resale or distribution thereof except pursuant to registration under the Securities Act or pursuant to an applicable exemption therefrom. ARTICLE IV COVENANTS SECTION 4.1 Access to Information, Etc. At all times following the --------------------------- Closing, each party shall provide the other party (at such other party's expense) with such reasonable assistance, including the provision of available relevant records or other information and reasonable access to and cooperation of any personnel within their employ, as may be reasonable requested by either of them in connection with the preparation of any financial statement or tax return, or any audit or examination by any taxing authority, or any judicial or administrative proceeding. SECTION 4.2 Third Party Consents. Seller and Buyer shall use commercially -------------------- reasonable efforts to obtain, within the applicable time periods required, all waivers, permits, consents and approvals and to effect all registrations, filings and notices with or to third parties or Governmental Entities which are necessary to consummate the transactions contemplated by this Agreement. Seller and Buyer agree that obtaining any or all of such consents shall not be a condition to either Seller or Buyer's obligations under this Agreement, except in the case of consents required from Governmental Entities. Seller and Buyer agree to cooperate to resolve any objections raised by any third party. Seller and Buyer also agree that any costs or liabilities arising out of the failure to obtain any such consent shall be shared equally by Buyer and Seller. SECTION 4.3 Reasonable Efforts. The parties shall use commercially ------------------ reasonable efforts to cause to be performed all of the matters required of each of them at the Closing, or subsequent thereto pursuant to the provisions of this Agreement. -9- SECTION 4.4 Shares to Represent Majority of JFAX Common Stock. It is the ------------------------------------------------- intention of the parties that upon the purchase of the Shares pursuant to Section 1.1 hereof, and based on the representation and warranty of the Seller in Section 2.7, Buyer will acquire, on a fully-diluted basis, a majority of the shares of the JFAX common stock, effective as of the Closing Date, and after giving effect to such transaction. If the Shares should fail to represent such majority, due to, for example, certain shares of the JFAX common stock or certain Rights being overlooked, resulting in Buyer failing to achieve at the Closing a majority ownership position, on a fully-diluted basis, in JFAX, then Buyer shall be entitled to delivery by JFAX of additional shares of JFAX common stock, without further consideration, in a number sufficient to remedy any such shortfall. SECTION 4.5 Public Announcements. The parties shall keep the proposed -------------------- transactions and agreements (including drafts of such agreements) strictly secret and confidential until such time as they mutually agree that a public announcement shall be made, provided that if in the written opinion of counsel for either of Buyer or Seller public disclosure is required under the federal securities laws, then the consent of the other party shall not be required. The parties shall consult with each other and use all reasonable efforts to agree on the content and manner of any disclosure permitted or required under this section. ARTICLE V RIGHT OF FIRST NEGOTIATION, ETC. SECTION 5.1 Right of First Negotiation. During the period from the -------------------------- date hereof and until the common stock of JFAX is publicly traded, if either Rieley or Muller wishes to sell any of his JFAX shares, he shall first give written notice, stating the number of shares proposed to be sold and indicating generally the desired terms for their sale, to JFAX, and during the next 10 business days JFAX shall have the exclusive right of first negotiation with Rieley or Muller (as the case may be) (the "Transferor"). If Transferor and JFAX reach an agreement as to the proposed disposition of any of Transferor's shares in JFAX within such 10 business days period, then the transaction will proceed according to their agreement. If however, they are unable to reach such an agreement within such period, then Transferor shall be free to dispose of the shares that were the subject of such negotiation on terms, including price, that are more favorable to Transferor than the most favorable offer (if any) made by JFAX and available for acceptance by Transferor at the completion of the exclusive period of negotiations. Such right of disposition on the part of Transferor shall expire 45 business days after the end of the exclusive negotiation period. The shares not disposed of by Transferor during such 45 business day period, in a manner consistent with the foregoing requirements (i.e., terms more favorable), shall not thereafter be available for sale or - - other disposition by Transferor except by complying again with the provisions of this Section 5.1. However, the foregoing right of first negotiation shall not be applicable to up to seventy (70) shares of the JFAX common stock that may be disposed of by Reiley and Muller without complying with these provisions. Also, the shares of JFAX common stock owned by Reiley or Muller for purposes of this Section 5.1 shall consist of the JFAX shares that are beneficially owned by Reiley or Muller, respectively, within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended. -10- SECTION 5.2 Certain Voting Provisions. So long as the JFAX common ------------------------- stock is not publicly traded, and Rieley and Muller jointly hold directly or indirectly 10% or more of the common stock of JFAX, Buyer shall designate or vote for each of Rieley and Muller, or a designee of Rieley and/or Muller reasonably acceptable to Buyer, as board members of JFAX, and Rieley and/or Muller (either jointly, or separately so long as each person exercising the veto himself owns directly or indirectly 10% or more of the common stock of JFAX) shall have the right to veto (1) any transaction (other than ordinary course reimbursement of the pass-through of third-party expenses) between JFAX or any affiliate thereof on the one hand, and Buyer and any direct or indirect affiliate thereof on the other hand, (2) any merger, acquisition, sale or pledge (except in connection with the bonafide extension of credit for the benefit of JFAX) of substantially all of JFAX's assets, and (3) any other transaction the effect of which would be to dilute the direct or indirect ownership of Rieley and/or Muller in JFAX in a manner disproportionate to any dilution of Buyer (or any affiliates of Buyer holding JFAX stock). For purposes of this provision, any entity, 10% or more of the equity ownership interests of which is directly or indirectly owned or controlled by, or under common control with, Buyer shall be deemed to be an affiliate of Buyer, and otherwise the term affiliate shall have the meaning set forth in Section 10.1. ARTICLE VI CONDITIONS TO BUYER'S OBLIGATIONS; CLOSING DOCUMENTS SECTION 6.1 Buyer's Closing Condition: Representations and Warranties --------------------------------------------------------- True; Performance; Certificate. The obligations of Buyer are subject to the - ------------------------------- fulfillment, prior to or on the date hereof, of each of the following conditions, all or any of which may be waived by Buyer in writing, except as otherwise provided by law: (a) The representations and warranties of Seller contained in this Agreement shall be true and correct in all material respects as of the date hereof. (b) Seller shall have performed and complied with all of its agreements, covenants and conditions required by this Agreement to be performed or complied with by it prior to or at the date hereof. (c) No preliminary or permanent injunction or other order shall have been issued by any Governmental Entity, nor shall any statute, rule, regulation or executive order be promulgated or enacted by any Governmental Entity which prevents the consummation of the transactions contemplated by this Agreement. (d) Seller shall have delivered a certificate, dated as of the date hereof, signed and verified by Seller, or in the case of JFAX, by an officer of JFAX on behalf of JFAX and solely in his or her capacity as an officer of JFAX, certifying to the matters set forth in Section 6.1(a)-(c). -11- (e) Each of JFAX, Borrower, Rieley and Muller shall have executed and delivered each of the agreements to which he or it is intended to be a party, as contemplated herein, and such agreements shall remain in full force and effect. (f) Seller shall have delivered to Buyer an opinion, dated the date hereof, of Curtis, Mallet-Prevost, Colt & Mosle, counsel to Seller. (g) The persons designated by Buyer (up to three in number), being Mr. Richard S. Ressler, Mr. David Robb and Mr. Zohar Loshitzer, shall have been elected to the Board of Directors of JFAX and shall represent a majority of the Directors of JFAX. ARTICLE VII CONDITIONS TO SELLER'S OBLIGATIONS; CLOSING DOCUMENTS SECTION 7.1 Seller's Closing Condition: Representations and ----------------------------------------------- Warranties True; Performance; Certificate. The obligations of Seller are - ------------------------------------------ subject to the fulfillment, prior to or on the date hereof, of each of the following conditions, all or any of which may be waived by Seller in writing, except as otherwise provided by law: (a) The representations and warranties of Buyer contained in this Agreement shall be true and correct in all material respects as of the date hereof. (b) Buyer shall have performed and complied with all of its agreements, covenants and conditions required by this Agreement to be performed or complied with by it prior to or at the date hereof. (c) No preliminary or permanent injunction or other order shall have been issued by any Governmental Entity, nor shall any statute, rule, regulation or executive order be promulgated or enacted by any Governmental Entity which prevents the consummation of the transactions contemplated by this Agreement. (d) Buyer shall have delivered a certificate, dated as of the date hereof, signed and verified by Buyer, or in the case of Orchard L.L.C., by an officer of the Manager of Orchard L.L.C. on behalf of Orchard L.L.C. and solely in his or her capacity as an officer of the Manager of Orchard L.L.C., certifying to the matters set forth in Sections 7.1(a)-(c). (e) Buyer shall have executed and delivered each of the agreements to which he or it is intended to be a party as contemplated herein, and such agreements shall remain in full force and effect. (f) Buyer shall have delivered to Seller an opinion, dated the date hereof, of Sullivan & Cromwell, counsel to Buyer. -12- (g) Loans from Muller and Rieley to JFAX in the amount of $138,424.19 shall have been repaid at the Closing. ARTICLE VIII INDEMNIFICATION SECTION 8.1 Survival of Representations and Warranties. The ------------------------------------------ representations and warranties of Seller in Article II and Buyer in Article III shall survive until April 30, 1998, and shall thereafter automatically expire, except with respect to any prior breaches thereof as to which a Claim (as defined below) has been given, specifying the nature and basis of the Claim in reasonable detail, on or prior to such date. However, this provision shall not apply to the representations and warranties in Sections 2.3, 2.7, 2.10, 3.3 and 3.9 which shall survive without contractual time limit. SECTION 8.2 Indemnification by Seller. Seller shall indemnify and hold ------------------------- harmless Buyer and its affiliates and each of their officers, directors, employees, agents, successors and assigns ("Buyer Indemnitees") for any and all liabilities, losses, damages, claims, costs and expenses, interest, awards, judgments and penalties (including, without limitation, reasonable legal costs and expenses and interest on the amount of any Loss from the date suffered or incurred) (a "Loss") arising out of, resulting from or caused by any inaccuracy or misrepresentation in or breach of any of the representations or warranties made by or covenants or agreements of Seller contained in this Agreement. However, for purposes of such indemnification by Seller, the liability of Muller and Rieley, taken together, shall be limited to 62% of any aggregate liability of Seller pursuant to this provision, and such liability of Muller and Rieley when taken together shall be further limited so as not to exceed the sum of $1.395 million. The liability of JFAX as a Seller shall be limited to $7.75 million, the purchase price paid for the Shares. SECTION 8.3 Indemnification by Buyer. Buyer shall indemnify and hold ------------------------ harmless Seller and its affiliates and each of their officers, directors, employees, agents, successors and assigns ("Seller Indemnitees") for any and all Losses arising out of or resulting from any inaccuracy or misrepresentation in or breach of any of the representations or warranties made by or covenants or agreements of Buyer contained in this Agreement. SECTION 8.4 Indemnification Procedure. ------------------------- (a) Whenever any Loss shall be asserted against or incurred by a Buyer Indemnitee or Seller Indemnitee (the "Indemnified Party"), the Indemnified Party shall with reasonable promptness give written notice thereof (a "Claim") to Seller or Buyer, respectively (the "Indemnifying Party"). The Indemnified Party shall furnish to the Indemnifying Party in reasonable detail such information as the Indemnified Party may have with respect to the Claim (including in any case copies of any summons, complaint or other pleading which may have been served on it and any written claim, demand, invoice, billing or other document evidencing or asserting the same). The failure to give such notice with reasonable promptness shall not relieve the Indemnifying Party of its indemnification obligations under this Agreement, unless the Indemnifying Party is irreparably harmed by such failure. -13- (b) If the Claim is based on a claim of a third party, the Indemnifying Party shall, at its expense, undertake the defense of such Claim with attorneys of its own choosing reasonably satisfactory to the Indemnified Party. In the event the Indemnifying Party, within a reasonable time after receiving notice of a Claim from the Indemnified Party, fails to defend the Claim, the Indemnified Party may, at the Indemnifying Party's expense, undertake the defense of the Claim and may compromise or settle the Claim, all for the account of the Indemnifying Party. After notice from the Indemnifying Party to the Indemnified Party of its election to assume the defense of such Claim, the Indemnifying Party shall not be liable to the Indemnified Party under this Section 8.4 for any legal expenses subsequently incurred by the Indemnified Party in connection with the defense thereof, except for such expenses incurred in connection with cooperation with, or at the request of, the Indemnifying Party; provided, however, that the Indemnified Party shall have the right to employ counsel to represent it if, in the Indemnified Party's reasonable judgment, based upon the advice of counsel, it is advisable, in light of the separate interests of the Indemnified Party and the Indemnifying Party, for the Indemnified Party to be represented by separate counsel, and in that event the reasonable fees and expenses of such separate counsel shall be paid by the Indemnifying Party. (c) The Indemnifying Party shall not consent to entry of any judgment, except with the consent of the Indemnified Party given in its sole discretion, or enter into any settlement, except with the consent of the Indemnified Party, which such consent shall not be unreasonably withheld or delayed. In the event the Indemnified Party refuses to consent to the entry of a judgment or a settlement for which Indemnifying Party is solely and entirely responsible and has indicated its sole and entire responsibility in writing to the Indemnified Party, following such refusal, the liability of the Indemnifying Party to the Indemnified Party will be fixed at the amount of any money damages provided in the proposed judgment or settlement. ARTICLE IX [This Article Intentionally Omitted.] ARTICLE X DEFINITIONS SECTION 10.1 Certain Definitions. As used in this Agreement, the ------------------- following terms shall have the following respective meanings: "Affiliate" or "affiliate" shall mean any Person controlling, controlled by or under common control, with the relevant Person. -14- "Governmental Entity" shall mean any court, or any Federal, state, municipal or other governmental authority, department, commission, board, agency or other instrumentality (domestic or foreign). "Intellectual Property" shall mean: (i) The copyright registrations, trademarks, service marks, and trade names of JFAX, together with all associated goodwill; and (ii) Any and all design and code documentation, methodologies, processes, trade secrets, copyrights, design information, product information, technology, formulae, routines, engineering specifications, technical manuals and data, drawings, inventions, know-how, techniques, engineering work papers, and programmer's notes, which are necessary to, used in, or derived from the Business of JFAX. "Person" shall mean an individual, corporation, partnership, trust or unincorporated organization or Governmental Entity. "Products" shall mean the software products owned, licensed, or under development by JFAX, including without limitation any and all source and object codes, binaries, interfaces for third party databases, supplements, modifications, ports to hardware platforms, updates, corrections and enhancements to past and current versions of such products, shipping versions of such products and versions of such products currently under development, in each case as existing as of the date hereof or the Closing Date; and any and all English and foreign language versions of past and current versions of such products, shipping versions of such products and versions of such products currently under development, and any and all related back-up tapes and archived tapes. "publicly traded" shall mean that the common stock of JFAX is publicly traded on a national securities exchange or on NASDAQ and that JFAX is a reporting company under the Securities Exchange Act of 1934, as amended. "Subsidiary" or "subsidiary" shall mean those direct and indirect majority- owned subsidiary corporations or other entities of the referenced Person. "Tools" shall mean the software design and development tools and scripts, and modifications and additions to such tools and scripts of JFAX which were or are used in the development, operation or maintenance of its Business, including without limitation any and all source and object codes, binaries, supplements, modifications, updates, corrections and enhancements to past and current versions of such tools and scripts and versions of such tools and scripts under development, and any and all related back-up tapes and archived tapes, in each case as existing as of the date hereof or the Closing Date. SECTION 10.2 Certain Other Defined Terms. --------------------------- -15- Term Defined in Section - ---- ------------------ Agreement Preamble Assets Section 2.1 Borrower Preamble Business Section 2.1 Buyer Preamble Buyer Indemnitees Section 8.2 Closing Section 1.5 Closing Date Section 1.5 Consulting Agreement Section 1.4, Exhibit B Effective Date Preamble Indemnified Party Section 8.4(a) Indemnifying Party Section 8.4(a) JFAX Preamble JFAX common stock Section 2.7(a) Liens Section 2.6(b) Loss Section 8.2 Modules Section 2.6(a) Muller Preamble Note Section 1.2 Note Agreement Section 1.4, Exhibit A Orchard L.L.C. Preamble Registration Rights Agreement Section 1.2 Rieley Preamble Ressler Preamble Rights Section 2.7(b) Securities Section 2.10(c) Securities Act Section 2.10(c) Seller Preamble Seller Disclosure Schedule Article II Seller Indemnitees Section 8.3 Services Section 2.6(a) Shares Section 1.1 Software or software Section 2.6(a) Transferor Section 5.1 -16- ARTICLE XI GENERAL TERMS AND CONDITIONS SECTION 11.1 Notices. Every notice or other communication required or ------- contemplated by this Agreement by either party shall be delivered by (i) personal delivery, (ii) postage prepaid, return receipt requested, registered or certified mail (airmail if available), or the equivalent of registered or certified mail under the laws of the country where mailed, (iii) internationally recognized express courier, such as Federal Express, UPS or DHL, (iv) "tested" telex (a telex for which the proper answer back has been received), or (v) facsimile with a confirmation copy sent simultaneously in the manner contemplated by clauses (i), (ii) or (iii) of this Section 11.1, in each case addressed to the party for whom intended at the following address: (1) If to JFAX, Borrower, Muller or Rieley: Mr. Jens Muller Mr. John F. Rieley Boardrush LLC JFAX Communications, Inc. 225 Lafayette Street, Suite 501 New York, NY 10012 Facsimile Number: (212) 253-4321 With a copy to: Curtis, Mallet-Prevost, Colt & Mosle 101 Park Avenue New York, NY 10178 Attention: Yves Le Page Facsimile Number: (212) 697-1559 (2) If to Buyer: Mr. Richard S. Ressler Orchard/JFAX Investors, L.L.C. c/o Orchard Capital Corp. 10960 Wilshire Blvd., Suite 500 Los Angeles, CA 90024 Facsimile Number: (310) 201-4351 -17- With a copy to: Sullivan & Cromwell 444 S. Flower Street Los Angeles, California 90071 Attention: Frank H. Golay, Jr. Facsimile Number: (213) 683-0457 or at such other address as the intended recipient previously shall have designated by written notice to the other party. Notice by registered or certified mail shall be effective on the date it is officially recorded as delivered to the intended recipient by return receipt or equivalent, and in the absence of such record of delivery, the effective date shall be presumed to have been the sixth (6th) business day after it was deposited in the mail. All notices and other communications required or contemplated by this Agreement to be delivered in person or sent by courier shall be deemed to have been delivered to and received by the addressee and shall be effective on the date of personal delivery; notices delivered by "tested" telex or by facsimile with simultaneous confirmation copy by registered or certified or equivalent mail or courier shall be deemed delivered to and received by the addressee and effective on the date sent. Notice not given in writing shall be effective only if acknowledged in writing by a duly authorized representative of the party to whom it was given. SECTION 11.2 Force Majeure. No party hereto shall be liable for failure ------------- to perform, in whole or in material part, its obligations under this Agreement if such failure is caused by any event or condition not existing as of the date of this Agreement (unless reasonably foreseeable by such party) and not reasonably within the control of the affected party, including without limitation, by fire, flood, typhoon, earthquake, explosion, strikes, labor troubles or other industrial disturbances, unavoidable accidents, war (declared or undeclared), acts of terrorism, sabotage, embargoes, blockage, acts of Governmental Entities, riots, insurrections, or any other cause beyond the control of the parties; provided, only, that the affected party promptly notifies the other party of the occurrence of the event of force majeure and takes all reasonable steps necessary to resume performance of its obligations so interfered with. SECTION 11.3 No Agency. This Agreement shall not constitute an --------- appointment of any of the parties hereto as the legal representative or agent of any other party hereto nor shall any party hereto have any right or authority to assume, create or incur in any manner any obligation or other liability of any kind, express or implied, against, or in the name or on behalf of, the other party hereto. SECTION 11.4 Severability. In the event any provision of this Agreement ------------ shall be determined to be invalid or unenforceable under applicable law, all other provisions of this Agreement shall continue in full force and effect unless such invalidity or unenforceability causes substantial deviation from the underlying intent of the parties expressed in this Agreement or unless the invalid or unenforceable provisions comprise an integral part of, or are inseparable from, the remainder of this Agreement. If this Agreement continues in full force and effect as provided above, the parties shall replace the invalid provision with a valid provision which corresponds as far as possible to the spirit and purpose of the invalid provision. -18- SECTION 11.5 Assignment and Succession. Except as expressly permitted ------------------------- herein, no party may assign or otherwise transfer any rights, interests or obligations under this Agreement without the prior written consent of the other party, which consent may be withheld in the sole and absolute discretion of such party for any reason whatsoever or for no reason and any attempted assignment in violation of this provision shall be void and of no effect. SECTION 11.6 Amendments and Waivers. No amendment, modification, ---------------------- termination or waiver of any provision of this Agreement or consent to any departure by any party therefrom, shall in any event be effective without the written concurrence of the other party hereto. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which it is given. No notice to or demand on any party in any case shall entitle any other party to any other or further notice or demand in similar or other circumstances. SECTION 11.7 Further Assurances. Each of the parties hereto agrees that, ------------------ from and after the Closing, upon the reasonable request of the other party hereto and without further consideration, such party will execute and deliver to such other party such documents and further assurances and will take such other actions (without cost to such party) as such other party may reasonably request in order to carry out the purpose and intention of this Agreement including but not limited to the effective consummation of the transactions contemplated under the provisions of Article I of this Agreement, and the correction of errors and defects in any such documents. SECTION 11.8 Absence of Third-Party Beneficiaries. No provisions of this ------------------------------------ Agreement, express or implied, are intended or shall be construed to confer upon or give to any Person other than the parties hereto, any rights, remedies or other benefits under or by reason of this Agreement unless specifically provided otherwise herein, and except as so provided, all provisions hereof shall be personal solely between the parties to this Agreement. SECTION 11.9 Governing Law. THE VALIDITY, CONSTRUCTION, PERFORMANCE AND ------------- ENFORCEABILITY OF THIS AGREEMENT SHALL BE GOVERNED IN ALL RESPECTS BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO THE CHOICE-OF-LAW PRINCIPLES THEREOF. SECTION 11.10 Interpretation. This Agreement, including any exhibits, -------------- addenda, schedules and amendments, has been negotiated at arm's length and between persons sophisticated and knowledgeable in the matters dealt with in this Agreement. Each party has been represented by experienced and knowledgeable legal counsel. Accordingly, any rule of law or legal decision that would require interpretation of any ambiguities in this Agreement against the party that has drafted it is not applicable and is waived. The provisions of this Agreement shall be interpreted in a reasonable manner to effect the purposes of the parties and this Agreement. THIS AGREEMENT CONTAINS NO IMPLIED REPRESENTATIONS OR WARRANTIES AND, IN PARTICULAR, NEITHER BUYER NOR BORROWER NOR SELLER MAKES ANY REPRESENTATION OR WARRANTY TO THE OTHERS AS TO THE TAX TREATMENT OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, INCLUDING WITHOUT LIMITATION UNDER THE CODE OR UNDER APPLICABLE STATE TAX STATUTES. EACH PARTY IS LOOKING SOLELY TO HIS OR ITS OWN FINANCIAL, ACCOUNTING AND LEGAL ADVISERS WITH RESPECT TO THE STRUCTURING OF -19- THE TRANSACTIONS CONTEMPLATED HEREBY. NOTHING IN THIS PROVISION, HOWEVER, SHALL LIMIT THE EXPRESS REPRESENTATIONS AND WARRANTIES IN THIS AGREEMENT. SECTION 11.11 Entire Agreement. The terms of this Agreement and the other ---------------- writings referred to herein and delivered by the parties hereto are intended by the parties to be the final expression of their agreement with respect to the subject matter hereof and may not be contradicted by evidence of any prior or contemporaneous agreement; provided, however, that the terms of a certain confidentiality letter agreement, dated January 9, 1997, by and between Seller and Buyer shall survive the execution and, if terminated, the termination of this Agreement. The parties acknowledge and agree that this Agreement and exhibits and schedules hereto constitute the agreements necessary to accomplish the transactions contemplated by this Agreement and are parts of an integrated arrangement between the parties with respect to such transactions, and that separate agreements have been used for the sake of convenience. SECTION 11.12 Counterparts. This Agreement may be executed simultaneously ------------ in multiple counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. Execution and delivery of this Agreement by exchange of facsimile copies bearing the facsimile signature of a party hereto shall constitute a valid and binding execution and delivery of this Agreement by such party. Such facsimile copies shall constitute enforceable original documents. SECTION 11.13 Expenses. Each of the parties agrees to pay its own -------- expenses in connection with the transactions contemplated by this Agreement, including without limitation legal, consulting, accounting and investment banking fees, whether or not such transactions are consummated; provided, however, that JFAX shall reimburse all costs of Buyer, Muller and Rieley that are directly related to the transactions contemplated by this Agreement, subject to completion of the Closing hereunder. SECTION 11.14 Consents. Whenever this Agreement requires or permits -------- consent by or on behalf of any party hereto, such consent shall be given in writing. SECTION 11.15 Headings. The article and section headings contained in -------- this Agreement are for reference purposes only and will not affect in any way the meaning or interpretation of this Agreement. -20- IN WITNESS WHEREOF, this Agreement has been duly executed and delivered individually or by the duly authorized officers of Seller and Buyer as of the date first above written. JFAX COMMUNICATIONS, INC. By: /s/ Jens Muller ----------------------------------- Name: Jens Muller Title: President /s/ Jens Muller --------------------------------------- JENS MULLER /s/ John F. Rieley --------------------------------------- JOHN F. RIELEY BOARDRUSH LLC By: /s/ Jens Muller ___________________________________ Name: Jens Muller Title: Manager ORCHARD/JFAX INVESTORS, L.L.C. By: /s/ R.S. Ressler ___________________________________ Name: R.S. Ressler Title: Manager /s/ Richard Ressler --------------------------------------- RICHARD S. RESSLER -21- SCHEDULES --------- Seller Disclosure Schedule Schedule 2.1 Certificate of Incorporation and By-laws Schedule 2.6(a) Software Schedule 2.6(c) Products, Tools, Intellectual Property Schedule 2.7(b) Rights Schedule 2.7(c) Shareholders and Rightsholders Schedule 2.11 Brokers and Finders Schedule 2.12 Certain Disclosures -22- EX-10.19 17 PROMISSORY NOTE DATED MARCH 17, 1997 Exhibit 10.19 THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFER AS SET FORTH ON THE REVERSE. PROMISSORY NOTE ISSUED BY BOARDRUSH LLC 6.32% Secured Non-Recourse Note due 2004 No. 1 $2,250,000 Boardrush LLC, a limited liability company formed under the laws of the State of New York ("Issuer"), for value received, hereby promises to pay to JFAX Communications, Inc., or registered assigns (the "holder"), the principal sum of two million two hundred fifty thousand dollars ($2,250,000) on March 17, 2004, and to pay interest thereon from March 17, 1997 (the "Funding Date") or from the most recent Interest Payment Date to which interest has been paid or duly provided for, payable monthly on the last Business Day of each month, commencing in April 1997, at a rate of 6.32% per annum. Interest shall be computed on the basis of a 360-day year of twelve 30-day months. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will be paid to the person in whose name this Note (or a predecessor note) is registered at the close of business on the fifth Business Day next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such regular record date and may either be paid to the person in whose name this Note is registered at the close of business on a special record date for the payment of such defaulted interest, to be fixed by the Issuer, or be paid at any time in any other lawful manner. This Note is issued pursuant to a Note Agreement, dated as of the Funding Date, between the Issuer and JFAX Communications, Inc., as the initial Investor named therein (the "Note Agreement") and is subject to the provisions thereof, including the restrictions on transfer contained therein. The Notes shall be issuable solely in denominations of $100,000 and integral multiples of $1,000 in excess thereof. Terms used herein and not otherwise defined shall have the meanings set forth in the Note Agreement. The indebtedness evidenced by this Note is, to the extent provided in the Note Agreement, subject to the provisions stating that this Note is a non- -1- recourse obligation of the Issuer, with recourse solely against the Collateral, as provided in Section 5.2 of the Note Agreement, and provisions permitting payment of this Note by the Issuer through the provision of consulting services to JFAX Communications, Inc., as provided in Section 5.3 of the Note Agreement, and this Note is issued subject to the provisions of the Note Agreement with respect thereto, including Section 5.4 of the Note Agreement. The holder of this Note, by accepting the same, agrees to and shall be bound by such provisions. Payment of this Note will be made by wire transfer to the address or account specified by the holder or, in the absence of such specification, by check mailed to the holder at his address appearing in the Notes register. Upon the occurrence of any Event of Default under the Note Agreement, this Note (including principal, interest, and all other amounts) shall be immediately due and payable. This Note is subject to redemption, either (a) mandatorily, in whole, at such time as the common stock of JFAX Communications, Inc. has become publicly traded (as defined for purposes of the Note Agreement) and the Issuer, Mr. Jens Muller and their Affiliates have sold at least $4 million in value of such common stock, or (b) optionally, in whole or in part, at the option of the Issuer after the second anniversary of the Funding Date, in either case at 100% of the principal amount hereof (or the portion to be redeemed) together with accrued interest to the redemption date, as set forth in the Note Agreement. The Notes are issuable only in registered form without coupons and transfers will be effected only on the Notes register maintained as provided in Section 7.5 of the Note Agreement. The undersigned Issuer hereby waives presentment, demand, notice of dishonor, protest and all other demands and notices in connection with the delivery, acceptance, performance and enforcement of this Note. -2- IN WITNESS WHEREOF, the Issuer has caused this Note to be duly executed. Dated: March 17, 1997 BOARDRUSH LLC By: /s/ Jens Muller ----------------------------------- Name: Jens Muller Title: Manager THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED EXCEPT IN ACCORDANCE THEREWITH. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFER CONTAINED IN THE NOTE AGREEMENT, DATED AS OF MARCH ___, 1997, BETWEEN BOARDRUSH LLC, AS ISSUER, AND JFAX COMMUNICATIONS, INC., AS THE INVESTOR NAMED THEREIN, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL EXECUTIVE OFFICES OF JFAX COMMUNICATIONS, INC., AND WHICH RESTRICTIONS REQUIRE, AS A CONDITION TO ANY TRANSFER, APPROPRIATE DOCUMENTATION TO EVIDENCE COMPLIANCE WITH APPLICABLE SECURITIES LAWS, INCLUDING AN OPINION OF COUNSEL WITH RESPECT THERETO. NO REGISTRATION OF TRANSFER OF THIS SECURITY WILL BE EFFECTED ON THE NOTES REGISTER UNLESS AND UNTIL SUCH RESTRICTIONS ARE COMPLIED WITH. -3- EX-23.1 18 CONSENT OF KPMG LLP EXHIBIT 23.1 ACCOUNTANT'S CONSENT The Board of Directors JFAX.COM, Inc. We consent to the use of our report included herein and to the reference to our firm under the headings "Selected Consolidated Financial Data" and "Experts" in the prospectus. Los Angeles, California /s/ KPMG LLP May 26, 1999 EX-27.1 19 FINANCIAL DATA SCHEDULE
5 YEAR YEAR DEC-31-1997 DEC-31-1998 JAN-01-1997 JAN-01-1998 DEC-31-1997 DEC-31-1998 23,039 7,278,873 0 0 15,413 289,910 0 0 0 0 1,052,552 8,650,671 1,845,618 2,668,646 285,473 891,000 2,612,697 10,512,689 994,348 1,915,903 0 0 0 4,070,671 0 0 181,851 221,000 1,436,498 (8,006,978) 2,612,697 10,512,689 685,465 3,519,836 685,465 3,519,836 857,924 3,398,243 5,681,909 14,494,827 0 0 0 0 0 1,353,751 (4,781,781) (11,908,316) 1,640 1,500 (4,783,421) (11,909,816) 0 0 0 0 0 0 (4,783,421) (11,909,816) (.30) (.56) (.30) (.56)
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