AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 13, 2006
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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JAG MEDIA HOLDINGS, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 8999 88-0380546
(State or jurisdiction (Primary Standard (I.R.S. Employer
of incorporation Industrial Classification Identification Number)
or organization) Code Number)
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JAG MEDIA HOLDINGS, INC.
6865 SW 18TH STREET
SUITE B-13
BOCA RATON, FLORIDA 33433
(866) 300-7410
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
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THOMAS J. MAZZARISI
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
JAG MEDIA HOLDINGS, INC.
6865 SW 18TH STREET
SUITE B-13
BOCA RATON, FLORIDA 33433
(866) 300-7410
(Name and address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
W. PRESTON TOLLINGER, JR., ESQ. MICHAEL I. STOLZAR, ESQ.
MORGAN, LEWIS & BOCKIUS LLP KARLEN & STOLZAR, LLP
101 PARK AVENUE WHITE PLAINS PLAZA
NEW YORK, NY 10178 ONE NORTH BROADWAY - SUITE 800
TEL: 212-309-6000 WHITE PLAINS, NEW YORK 10601
FAX: 212-309-6001 TEL: 914-949-4600
FAX: 914-682-0387
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this registration statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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(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. |_|
CALCULATION OF REGISTRATION FEE
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Proposed maximum Proposed maximum Amount of
Title of each class of Amount to be offering price per aggregate offering registration
securities to be registered registered (1) share price (2) fee
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Common Stock, par value $0.00001 per share 350,000,000 $0.057 $18,430,310 $1,972.04
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Total..................................... 350,000,000 $0.057 $18,430,310 $1,972.04
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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.
- -----------------------
(1) Represents the maximum number of shares of common stock, par value
$0.00001 per share, of JAG Media Holdings, Inc. ("JAG Media") estimated
to be issuable by JAG Media upon consummation of the acquisition of
Cryptometrics, Inc. ("Cryptometrics") by JAG Media, including shares to
be issued with respect to Cryptometrics options, warrants and
exchangeable shares of a Cryptometrics subsidiary.
(2) Calculated in accordance with Rules 457(c) and 457(f) under the
Securities Act of 1933, as amended, the proposed maximum offering price
is computed by multiplying (A) the book value of Cryptometrics common
stock on October 31, 2005 ($1.23) by 15,000,000 (the maximum number of
shares of Cryptometrics common stock to be exchanged for the common
stock being registered, including shares to be registered with respect
to Cryptometrics options, warrants and exchangeable shares of a
Cryptometrics subsidiary).
[NOTE: ALTERNATIVE PAGE TO BE INCLUDED IN PROXY DELIVERED TO
JAG MEDIA HOLDINGS, INC. STOCKHOLDERS ONLY]
JAG MEDIA HOLDINGS, INC.
6865 SW 18th Street
Suite B-13
Boca Raton, Florida 33433
January ____, 2006
To the Stockholders of JAG Media Holdings, Inc.:
The Annual Meeting of the Stockholders of JAG Media Holdings, Inc. will
be held on ________, 2006 at ______ a.m. (Pacific Standard Time) in the law
offices of Jones Vargas, located on the Twelfth Floor of 100 West Liberty Street
in Reno, Nevada.
Details of the business to be conducted at the Annual Meeting are
provided in the enclosed Notice of Annual Meeting of Stockholders and Proxy
Statement.
On behalf of the Board of Directors of JAG Media Holdings, Inc., I
cordially invite all stockholders to attend the Annual Meeting. It is important
that your shares be voted on matters that come before the Annual Meeting.
Whether or not you plan to attend the Annual Meeting, I urge you to promptly
complete, sign, date and return the enclosed proxy card in the prepaid envelope
provided. You may also grant your proxy via the Internet by following the
instructions on the proxy card.
Sincerely,
------------------------------------------
Thomas J. Mazzarisi, Chairman of the Board
and Chief Executive Officer
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE JAG MEDIA COMMON STOCK TO BE ISSUED IN THE MERGER
DESCRIBED IN THIS PROXY STATEMENT/PROSPECTUS OR DETERMINED IF THIS PROXY
STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
[NOTE: ALTERNATIVE PAGE TO BE INCLUDED IN PROXY DELIVERED TO
JAG MEDIA HOLDINGS, INC. STOCKHOLDERS ONLY]
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON ________, 2006
Notice is hereby given that the Annual Meeting of Stockholders of JAG
Media Holdings, Inc., a Nevada corporation ("JAG Media"), will be held on
____________, 2006 at ________ a.m. (Pacific Standard Time) at the law offices
of Jones Vargas, located on the Twelfth Floor of 100 West Liberty Street in
Reno, Nevada for the following purposes:
1. To elect two directors to the Board of Directors of JAG Media;
2. To ratify the appointment of J.H. Cohn LLP as JAG Media's
independent registered public accounting firm for the fiscal
year ending July 31, 2006;
3. To vote upon a proposal to amend JAG Media's Articles of
Incorporation to increase the authorized capital from 250,000,000
to 500,000,000 shares of common stock, par value $ 0.00001 per
share (the "JAG Media Common Stock");
4. To vote upon a proposal to amend JAG Media's Articles of
Incorporation to change JAG Media's name to "Cryptometrics, Inc."
conditioned upon the consummation of the merger of Cryptometrics
Acquisition, Inc., a Delaware corporation and wholly owned
subsidiary of JAG Media with and into Cryptometrics, Inc., a
Delaware corporation;
5. To vote upon a proposal to adjourn the Annual Meeting, if
necessary, to assure the presence of a quorum or solicit additional
proxies to approve the foregoing proposals to amend JAG Media's
Articles of Incorporation; and
6. To transact such other business as may properly come before the
Annual Meeting.
The close of business on _____, 2006 has been fixed as the record date
for determining the stockholders entitled to notice of and vote at the Annual
Meeting. Only holders of record of JAG Media Common Stock at that date are
entitled to vote the Annual Meeting or any adjournments.
YOUR VOTE IS IMPORTANT. PLEASE COMPLETE, SIGN, DATE AND MAIL THE ENCLOSED PROXY
IN THE ACCOMPANYING ENVELOPE EVEN IF YOU INTEND TO BE PRESENT AT THE MEETING.
RETURNING THE PROXY WILL NOT LIMIT YOUR RIGHT TO VOTE IN PERSON OR TO ATTEND THE
ANNUAL MEETING, BUT WILL ENSURE YOUR REPRESENTATION IF YOU CANNOT ATTEND. YOU
MAY ALSO GRANT YOUR PROXY VIA THE INTERNET BY FOLLOWING THE INSTRUCTIONS ON THE
PROXY CARD. IF YOU HOLD SHARES IN MORE THAN ONE NAME, OR IF YOUR STOCK IS
REGISTERED IN MORE THAN ONE WAY, YOU MAY RECEIVE MORE THAN ONE COPY OF THE PROXY
MATERIAL. IF SO, PLEASE SIGN AND RETURN EACH OF THE PROXY CARDS THAT YOU RECEIVE
SO THAT ALL OF YOUR SHARES MAY BE VOTED. THE PROXY IS REVOCABLE AT ANY TIME
PRIOR TO ITS USE.
By Order of the Board of Directors
-------------------------------------
Stephen J. Schoepfer, Secretary
Boca Raton, Florida
January ___, 2006
[NOTE: ALTERNATIVE PAGE TO BE INCLUDED IN PROXY DELIVERED TO
JAG MEDIA HOLDINGS, INC. STOCKHOLDERS ONLY]
THE ANNUAL MEETING OF THE STOCKHOLDERS OF JAG MEDIA
This Proxy Statement/Prospectus is being furnished to the stockholders
of JAG Media in connection with the solicitation of proxies on behalf of the
Board of Directors of JAG Media for use at the Annual Meeting of the
Stockholders of JAG Media (the "Annual Meeting") to be held at the time and
place specified in the accompanying Notice of Annual Meeting of Stockholders,
and at any adjournment or postponement thereof.
The purpose of the Annual Meeting is to consider and vote upon the
following proposals:
1. To elect two directors to the Board of Directors of JAG Media;
2. To ratify the appointment of J.H. Cohn LLP as JAG Media's
independent registered public accounting firm for the fiscal year
ending July 31, 2006;
3. To vote upon a proposal to amend JAG Media's Articles of
Incorporation to increase the authorized shares of JAG Media Common
Stock from 250,000,000 to 500,000,000;
4. To vote upon a proposal to amend JAG Media's Articles of
Incorporation to change JAG Media's name to "Cryptometrics, Inc."
conditioned upon the consummation of the merger of Cryptometrics
Acquisition, Inc., a Delaware corporation and wholly owned
subsidiary of JAG Media with and into Cryptometrics, Inc., a
Delaware corporation;
5. To vote upon a proposal to adjourn the Annual Meeting, if
necessary, to assure the presence of a quorum or solicit additional
proxies to approve the foregoing proposals to amend JAG Media's
Articles of Incorporation; and
6. To transact such other business as may properly come before the
Annual Meeting.
Each copy of this Proxy Statement/Prospectus mailed to the JAG Media
stockholders is accompanied by a form of proxy for use at the Annual Meeting.
THE JAG MEDIA BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF
ALL OF THE FOREGOING PROPOSALS.
RECORD DATE; QUORUM
The JAG Media Board of Directors has fixed the close of business on
________, 2006 as the record date (the "Record Date") for the determination of
the holders of JAG Media Common Stock entitled to receive notice of and to vote
at the Annual Meeting. The presence, in person or by proxy, of the holders of a
majority of the outstanding shares of JAG Media Common Stock entitled to vote at
the Annual Meeting is necessary to constitute a quorum. Shares of JAG Media
Common Stock represented at the Annual Meeting by a properly executed, dated and
returned proxy will be treated as present at the Annual Meeting for purposes of
determining a quorum, without regard to whether the proxy is marked as casting a
vote or abstaining.
VOTE REQUIRED
As of the Record Date for the Annual Meeting, there were ______ shares
of JAG Media Common Stock outstanding, each of which is entitled to one vote on
each matter properly submitted at the Annual Meeting.
[NOTE: ALTERNATIVE PAGE TO BE INCLUDED IN PROXY DELIVERED TO
JAG MEDIA HOLDINGS, INC. STOCKHOLDERS ONLY]
Set forth below are the proposals to be considered at the Annual
Meeting and the vote required to act on each proposal.
PROPOSAL REQUIRED VOTE
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a proposal to elect Thomas J. the vote of a plurality of holders
Mazzarisi and Stephen J. Schoepfer of the outstanding shares of JAG
to the Board of Directors of JAG Media Common Stock present in
Media person or represented by duly
executed proxies at the Annual
Meeting; the two director nominees
receiving the greatest number of
votes cast will be elected,
regardless of the number of votes
withheld for the election of such
director nominees; a stockholder's
failure to vote for a particular
nominee for director will not
prevent the election of such
nominee if the nominee otherwise
receives the affirmative vote of a
plurality of the vote cast in
person or by proxy at the Annual
Meeting
- ------------------------------------------- -----------------------------------
a proposal to ratify the the affirmative vote of holders of
appointment of J.H. Cohn LLP as our a majority of the shares of JAG
independent auditors for the fiscal Media Common Stock whose votes are
year ending July 31, 2006 cast at the Annual Meeting; a
stockholder's failure to vote on
the proposal to ratify the
appointment of JAG Media's auditors
will not operate as a vote against
such proposal
- ------------------------------------------- -----------------------------------
a proposal to amend JAG Media's the affirmative vote of the holders
Articles of Incorporation to of a majority of the outstanding
increase its authorized capital shares of JAG Media's Common Stock
from 250,000,000 to 500,000,000 voting in person or by proxy at the
shares of Common Stock (permitting Annual Meeting; a stockholder's
the requisite shares to be issued failure to vote on the proposal or
in the Merger) a broker non-vote will effectively
count as a vote against the
proposal
- ------------------------------------------- -----------------------------------
a proposal to amend JAG Media's the affirmative vote of the holders
Articles of Incorporation to change of a majority of the outstanding
its corporate name to shares of JAG Media's Common Stock
"Cryptometrics, Inc." upon voting in person or by proxy at the
completion of the Merger Annual Meeting; a stockholder's
failure to vote on the proposal or
a broker non-vote will effectively
count as a vote against the
proposal
- ------------------------------------------- -----------------------------------
a proposal to adjourn the Annual the affirmative vote of the holders
Meeting of JAG Media stockholders, of a majority of the shares of JAG
if necessary, to assure the Media's Common Stock voting in
presence of a quorum or solicit person or by proxy at the Annual
additional votes to (i) approve the Meeting on this proposal; a
proposal to amend JAG Media's stockholder's failure to vote on
Articles of Incorporation to the proposal or a broker non-vote
increase its authorized capital will not count as a vote against
from 250,000,000 to 500,000,000 the proposal
shares of Common Stock and (ii) to
approve the proposal to amend JAG
Media's Articles of Incorporation
to change its corporate name to
"Cryptometrics, Inc." upon
completion of the Merger
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[NOTE: ALTERNATIVE PAGE TO BE INCLUDED IN PROXY DELIVERED TO
JAG MEDIA HOLDINGS, INC. STOCKHOLDERS ONLY]
VOTING OF PROXIES
Shares of JAG Media Common Stock represented by a proxy properly signed
and received at or prior to the Annual Meeting, unless subsequently revoked,
will be voted in accordance with the instructions thereon.
The persons named as proxies by a JAG Media stockholder may propose and
vote for one or more adjournments of the Annual Meeting to permit further
solicitations of proxies in favor of approval of the proposals presented at the
Annual Meeting.
An adjournment proposal requires the affirmative vote of a majority of
the votes cast by holders of JAG Media Common Stock and, therefore, broker
non-votes and abstentions will have no effect.
REVOCABILITY OF PROXIES
The grant of a proxy on the enclosed form does not preclude a JAG Media
stockholder from voting in person. A JAG Media stockholder may revoke a proxy at
any time prior to its exercise by (i) submitting a signed written revocation to
the secretary of JAG Media or (ii) by submitting a signed proxy bearing a later
date or (iii) by appearing at the Annual Meeting and voting in person at the
Annual Meeting. No special form of revocation is required. Attendance at the
Annual Meeting will not, in and of itself, constitute revocation of a proxy.
SOLICITATION OF PROXIES
JAG Media will bear the cost of the solicitation of proxies from its
stockholders, including the costs of preparing, filing, printing and
distributing this Proxy Statement/Prospectus and any other solicitation
materials that are used. In addition to solicitation by mail, the directors,
officers and employees of JAG Media may solicit proxies from stockholders of JAG
Media by telephone, the Internet or by other means of communication.
Such directors, officers and employees will not be additionally compensated but
may be reimbursed for reasonable out-of-pocket expenses in connection with such
solicitation. Arrangements will also be made with brokerage houses and other
custodians, nominees and fiduciaries for the forwarding of solicitation material
to the beneficial owners of JAG Media Common Stock held of record by such
persons, and JAG Media will reimburse such custodians, nominees and fiduciaries
for their reasonable out-of-pocket expenses in connection therewith.
THE MATTERS TO BE CONSIDERED AT THE ANNUAL MEETING ARE OF GREAT
IMPORTANCE TO THE JAG MEDIA STOCKHOLDERS. ACCORDINGLY, JAG MEDIA STOCKHOLDERS
ARE URGED TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS PROXY
STATEMENT/PROSPECTUS, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY IN THE ENCLOSED POSTAGE PRE-PAID ENVELOPE.
JAG MEDIA STOCKHOLDERS SHOULD NOT SEND JAG MEDIA COMMON STOCK
CERTIFICATES WITH THEIR PROXY CARDS. IF THE PROPOSALS PRESENTED AT THE
STOCKHOLDER MEETING ARE APPROVED BY THE STOCKHOLDERS AND THE MERGER IS
COMPLETED, CURRENT STOCKHOLDERS WILL CONTINUE TO HOLD THEIR EXISTING SHARES OF
JAG MEDIA COMMON STOCK.
[NOTE: ALTERNATIVE PAGE TO BE INCLUDED IN PROSPECTUS DELIVERED TO
CRYPTOMETRICS, INC. STOCKHOLDERS ONLY]
INFORMATION STATEMENT TO CRYPTOMETRICS STOCKHOLDERS
The Boards of Directors of JAG Media Holdings, Inc. ("JAG Media"),
Cryptometrics Acquisition, Inc., and Cryptometrics, Inc. have approved the
merger of Cryptometrics Acquisition, Inc., a subsidiary of JAG Media with and
into Cryptometrics, Inc. (the "Merger"). JAG Media, as the sole stockholder of
Cryptometrics Acquisition, Inc., approved the Merger on December 27, 2005.
Acting in accordance with Delaware law, a majority of the holders of
Cryptometrics common stock, par value $0.001 per share ("Cryptometrics Common
Stock") outstanding adopted the Merger Agreement and related Merger by written
consent on _____, 2006.
Immediately upon consummation of the Merger, JAG Media Common Stock,
par value $0.00001 per share will be held as follows:
o approximately 11.8125% by the current stockholders of JAG Media; and
o approximately 88.1875% by the stockholders of Cryptometrics
immediately prior to the consummation of the Merger.
JAG Media Common Stock currently trades "Over-the-Counter" and is
quoted on the Pink Sheets "JAGH". On January 3, 2006, the closing bid price of
JAG Media's Common Stock as reported on the Pink Sheets was $.30 per share.
Cryptometrics Common Stock is not traded on any recognized stock
exchange.
Holders of Cryptometrics Common Stock will in general receive shares of
JAG Media Common Stock in proportion to their holdings of Cryptometrics Common
Stock compared to all outstanding shares of Cryptometrics Common Stock at the
time of the Merger, subject to certain adjustments. However, Cryptometrics
stockholders holding 400,750 shares of Cryptometrics Common Stock, by virtue of
subscription agreements with Cryptometrics, will receive a greater or lesser
number of JAG Media shares. They will be entitled to own shares of JAG Media
Common Stock with an aggregate value following the effectiveness of the Merger
(in most cases, based on the post-merger opening price on the NASDAQ Capital
Market) equal to twice the original aggregate purchase price of their shares of
Cryptometrics Common Stock under their subscription agreements ($10.00 per
share). The number of shares of JAG Media Common Stock available to other
stockholders of Cryptometrics will be increased or decreased accordingly.
Holders of Cryptometrics Common Stock who dissent from the Merger and
perfect their appraisal rights will be entitled to appraisal rights with respect
to such shares of Cryptometrics Common Stock in accordance with the provisions
of the Delaware General Corporation Law.
In connection with the Merger, the stockholders of JAG Media are being
asked to approve the following proposals, which are referred to collectively
herein, as the Merger-related proposals:
[NOTE: ALTERNATIVE PAGE TO BE INCLUDED IN PROSPECTUS DELIVERED TO
CRYPTOMETRICS, INC. STOCKHOLDERS ONLY]
o a proposal to amend JAG Media's Articles of Incorporation, as
amended, to increase its authorized capital from 250,000,000 to
500,000,000 shares of JAG Media Common Stock;
o a proposal to amend JAG Media's Articles of Incorporation, as
amended, to change the name of the corporation from JAG Media
Holdings, Inc. to Cryptometrics, Inc. upon completion of the Merger;
and
o a proposal to adjourn the Special Meeting, if necessary, to assure
the presence of a quorum or solicit additional proxies to approve
the foregoing proposals to amend JAG Media's articles of
incorporation.
The consummation of the merger is subject to the fulfillment of various
conditions set forth in the merger agreement, including, among others, (i) the
delivery by JAG Media and Cryptometrics of disclosure schedules to one another
which are satisfactory to both parties by January 18, 2006, (ii) the approval by
JAG Media's stockholders of an amendment to JAG Media's articles of
incorporation to increase its authorized shares of common stock from 250,000,000
to 500,000,000, (iii) the approval by JAG Media's stockholders of an amendment
to JAG Media's articles of incorporation to change JAG Media's name to
Cryptometrics and (iv) the listing of JAG Media's common stock on the NASDAQ
Capital Market. In addition, until JAG Media and Cryptometrics agree otherwise,
the merger agreement, notwithstanding approval by the Cryptometrics
stockholders, may be cancelled with or without any reason at any time by either
the Company or Cryptometrics with no liability.
The Board of Directors of JAG Media has determined that the Merger is
advisable and in the best interests of its stockholders. Accordingly, the Board
of Directors of JAG Media has unanimously recommended that the stockholders of
JAG Media vote FOR each of the foregoing proposals.
JAG Media and Cryptometrics cannot complete the Merger unless the
stockholders of JAG Media approve the proposed amendments to JAG's Media's
Articles of Incorporation.
[JAG MEDIA HOLDINGS, INC. LOGO]
Proxy Statement/Prospectus
JAG Media Holdings, Inc.
This Proxy Statement/Prospectus is being mailed on or about
____________, 2006, to holders of record as of _________, 2006 (the "Record
Date"), of common stock, par value $0.00001 per share ("JAG Media Common
Stock"), of JAG Media Holdings, Inc. ("JAG Media") in connection with the
solicitation by the Board of Directors of JAG Media of a proxy in the enclosed
form for the Annual Meeting of Stockholders of JAG Media to be held on ________,
2006 (the "Annual Meeting").
This Proxy Statement/Prospectus is also being provided to the
stockholders of Cryptometrics, Inc., a Delaware corporation, for their
information in connection with the merger of Cryptometrics, Inc. with
Cryptometrics Acquisition, Inc., a wholly-owned subsidiary of JAG Media (the
"Merger"). Acting in accordance with Delaware law, a majority of the holders of
Cryptometrics common stock, par value $0.01 per share ("Cryptometrics Common
Stock") outstanding, adopted and approved the agreement and plan of merger dated
as of December 27, 2005 by and among JAG Media, Cryptometrics, Inc.,
Cryptometrics Acquisition, Inc., Robert Barra and Michael A. Vitale and the
related Merger by written consent on ______, 2006. No proxy or consent is being
solicited from the remaining holders of Cryptometrics Common Stock.
A PROXY CARD IS ENCLOSED FOR USE BY JAG MEDIA STOCKHOLDERS. YOU ARE
REQUESTED ON BEHALF OF THE BOARD OF DIRECTORS TO SIGN, DATE AND RETURN THE PROXY
CARD IN THE ACCOMPANYING ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE
UNITED STATES. YOU MAY ALSO GRANT YOUR PROXY VIA THE INTERNET BY FOLLOWING THE
INSTRUCTIONS ON THE PROXY CARD.
If no instructions are specified on the proxy, shares represented
thereby will be voted for all Proposals.
Any JAG Media stockholder who has given a proxy may revoke his or her
proxy by executing a proxy bearing a later date or by delivering written notice
of revocation of his or her proxy to the Secretary of JAG Media at JAG Media's
executive offices at any time prior to the Annual Meeting or any postponement or
adjournment thereof. Any stockholder who attends in person the Annual Meeting or
any postponement or adjournment thereof may revoke any proxy previously given
and vote by ballot.
As of January 3, 2006, there were 42,119,655 shares of JAG Media Common
Stock issued and outstanding. Every holder of JAG Media Common Stock is entitled
to one vote, in person or by proxy, for each share of JAG Media Common Stock
outstanding in the holder's name on JAG Media's stock transfer records. The
presence of the holders of a majority of the issued and outstanding shares of
JAG Media Common Stock entitled to vote at the Annual Meeting, either in person
or represented by properly executed proxies, is necessary to constitute a quorum
for the transaction of business at the Annual Meeting. Abstentions and broker
"non-votes" (which result when a broker holding shares for a beneficial owner
has not received timely voting instructions on certain matters from such
beneficial owner) will be counted for purposes of determining the existence of a
quorum at the Annual Meeting. If there are not sufficient shares represented in
person or by proxy at the meeting to constitute a quorum or to obtain the
required affirmative vote, the meeting may be postponed or adjourned in order to
permit further solicitation of proxies by JAG Media. Proxies given pursuant to
this solicitation and not revoked will be voted at any postponement or
adjournment of the Annual Meeting in the manner set forth above.
Nevada law specifies that directors must be elected by a plurality of
the votes cast by holders of shares of the JAG Media Common Stock (Proposal 1).
Cumulative voting for the election of directors is not permitted. The
ratification of the appointment of JAG Media's auditors (Proposal 2) will
require the affirmative vote of holders of a majority of the shares of JAG Media
Common Stock whose votes are cast on the subject matter. Abstentions and broker
non-votes will not be counted for purposes of determining an affirmative
plurality vote with respect to Proposal 1 or majority vote with respect Proposal
2. Accordingly, in the case of shares that are present at the Annual Meeting for
quorum purposes, not voting such shares for a particular nominee for director
(Proposal 1) will not prevent the election of such nominee if other stockholders
vote for such nominee, nor will an abstention on the proposal to ratify the
appointment of JAG Media's auditors (Proposal 2) operate as a vote "against"
such proposal.
Nevada law specifies that an amendment to JAG Media's Articles of
Incorporation (i) to increase the authorized shares of JAG Media Common Stock
from 250,000,000 to 500,000,000 (Proposal 3) and (ii) to change the name of JAG
Media to "Cryptometrics, Inc." (Proposal 4) requires the affirmative vote of the
holders of the majority of the outstanding shares of JAG Media's Common Stock
voting in person or by proxy at the Annual Meeting. Because the affirmative vote
of the holders of the majority of the outstanding shares of JAG Media Common
Stock voting in person or by proxy at the Annual Meeting is required to amend
JAG Media's Articles of Incorporation, abstentions and broker non-votes will
have the same effect as a vote "against" Proposal 3 and Proposal 4.
Nevada law specifies that a proposal to adjourn the Annual Meeting
(Proposal 5), if necessary, to assure the presence of a quorum or to solicit
additional votes to (i) approve the proposal to amend JAG Media's Articles of
Incorporation to increase its authorized shares of JAG Media Common Stock form
250,000,000 to 500,000,000 and (ii) to approve the change of the name of JAG
Media to "Cryptometrics" requires the affirmative vote of the holders of the
majority of the shares of JAG Media Common Stock present in person or by proxy
at the Annual Meeting. An abstention on the vote to adjourn the meeting
(Proposal 5) will not have the effect of a vote "against" the proposal.
The expense of preparing, printing and mailing proxy solicitation
materials will be borne by JAG Media. In addition, certain directors, officers,
representatives and employees of JAG Media may solicit proxies by telephone and
personal interview. Such individuals will not receive additional compensation
from JAG Media for solicitation of proxies, but may be reimbursed for reasonable
out-of-pocket expenses in connection with such solicitation. Banks, brokers and
other custodians, nominees and fiduciaries also will be reimbursed by JAG Media
for their reasonable expenses for sending proxy solicitation materials to the
beneficial owners of JAG Media Common Stock. Although JAG Media does not
currently intend to retain a proxy solicitation firm, it may do so.
TABLE OF CONTENTS
MATTERS TO BE CONSIDERED AND VOTED UPON AT THE ANNUAL MEETING..............1
PROPOSAL 1.................................................................1
PROPOSAL 2.................................................................3
PROPOSAL 3.................................................................5
PROPOSAL 4.................................................................7
PROPOSAL 5.................................................................8
STOCK OWNERSHIP............................................................9
AFFILIATED VOTING..........................................................10
MARKET FOR JAG MEDIA COMMON STOCK AND RELATED MATTERS......................11
EXECUTIVE COMPENSATION.....................................................13
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE....................19
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................20
SUBMISSION OF STOCKHOLDER PROPOSALS........................................21
QUESTIONS AND ANSWERS ABOUT THE MERGER.....................................22
SUMMARY....................................................................27
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF JAG MEDIA........35
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
OF CRYPTOMETRICS..................................................36
COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA........................37
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS.................38
RISK FACTORS...............................................................39
RISKS RELATED TO JAG MEDIA'S BUSINESS......................................39
RISKS RELATED TO JAG MEDIA'S INDUSTRY......................................43
RISKS RELATED TO JAG MEDIA'S CAPITAL STRUCTURE.............................45
RISKS RELATED TO CRYPTOMETRICS' BUSINESS...................................50
RISKS RELATED TO THE MERGER................................................53
APPRAISAL RIGHTS...........................................................56
THE MERGER.................................................................59
THE MERGER AGREEMENT..................................................67
GENERAL .............................................................67
TIMING OF CLOSING.....................................................67
CONVERSION OF SHARES OF CRYPTOMETRICS COMMON STOCK....................67
CONVERSION OF SHARES OF MERGER SUB COMMON STOCK.......................68
TREATMENT OF CRYPTOMETRICS STOCK OPTIONS..............................68
TREATMENT OF CRYPTOMETRICS WARRANTS...................................69
TREATMENT OF EXCHANGEABLE SHARES......................................69
EXCHANGE OF SHARES OF CRYPTOMETRICS COMMON STOCK AND
SURRENDER OF STOCK CERTIFICATES...................................69
LOST, STOLEN OR DESTROYED CERTIFICATES................................72
APPRAISAL RIGHTS......................................................72
THE BOARD OF DIRECTORS AND OFFICERS OF CRYPTOMETRICS AFTER THE MERGER.72
THE CERTIFICATE OF INCORPORATION AND BYLAWS OF CRYPTOMETRICS
AFTER THE MERGER..................................................72
POST MERGER ACTIONS...................................................73
REPRESENTATIONS AND WARRANTIES........................................73
CERTAIN COVENANTS.....................................................74
DISCLOSURE SCHEDULES..................................................79
EXCLUSIVITY...........................................................79
PROXY STATEMENT; REGISTRATION STATEMENT...............................82
OTHER FILINGS; FORM S-8...............................................84
ANNUAL MEETING OF STOCKHOLDERS OF JAG MEDIA...........................84
CONSENT OF PRINCIPAL CRYPTOMETRICS STOCKHOLDERS.......................84
CONDITIONS TO THE MERGER..............................................84
BOARD OF DIRECTORS' AND EXECUTIVE OFFICERS' LIABILITY.................86
-i-
TERMINATION OF THE MERGER AGREEMENT...................................87
AMENDMENT AND WAIVER OF MERGER AGREEMENT..............................88
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION...............90
NOTES TO UNAUDITED CONDENSED COMBINED PRO FORMA FINANCIAL STATEMENTS.......97
INTERESTS OF RELATED PERSONS IN THE MERGER.................................98
SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION..............................100
MANAGEMENT OF JAG MEDIA (TO BE RENAMED CRYPTOMETRICS, INC.)................103
CAPITAL STOCK OF JAG MEDIA AND CRYPTOMETRICS...............................105
COMPARISON OF STOCKHOLDERS' RIGHTS.........................................108
BUSINESS OF JAG MEDIA......................................................111
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF JAG MEDIA FOR THE FISCAL YEARS
ENDED JULY 31, 2005 AND 2004 AND THE THREE MONTH PERIODS
ENDED OCTOBER 31, 2005 AND 2004...................................124
BUSINESS OF CRYPTOMETRICS..................................................133
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF CRYPTOMETRICS FOR THE FISCAL YEARS
ENDED APRIL 30, 2005 AND 2004.....................................153
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF CRYPTOMETRICS FOR THE SIX
MONTHS ENDED OCTOBER 31, 2005 AND OCTOBER 31, 2004................159
PRINCIPAL STOCKHOLDERS OF CRYPTOMETRICS....................................164
LEGAL MATTERS..............................................................165
EXPERTS ..................................................................165
WHERE YOU CAN FIND MORE INFORMATION........................................165
INDEX TO HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS OF
JAG MEDIA HOLDINGS, INC. AND SUBSIDIARIES.........................F-1
INDEX TO HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS OF
CRYPTOMETRICS AND SUBSIDIARIES....................................F-35
PART II....................................................................II-1
Indemnification of Officers and Directors ............................II-1
Exhibits and Financial Statements and Schedules ......................II-2
Undertakings..........................................................II-7
SIGNATURES.................................................................II-8
LIST OF APPENDICES
Appendix A - Form of Amendment to Article Fourth of the Articles of
Incorporation of JAG Media Holdings, Inc.
Appendix B - Form of Amendment to Article First of the Articles of
Incorporation of JAG Media Holdings, Inc.
Appendix C - Merger Agreement dated as of December 27, 2005 by and among
JAG Media Holdings, Inc., Cryptometrics Acquisition, Inc. and
Cryptometrics, Inc.
Appendix D - Section 262 of the Delaware General Corporation Law
(Appraisal Rights)
Appendix E - Form of Proxy
Appendix F - Form of Employment Agreement
-ii-
MATTERS TO BE CONSIDERED AND VOTED UPON AT THE ANNUAL MEETING
PROPOSAL 1
ELECTION OF DIRECTORS
The number of directors of JAG Media currently is fixed at two. The
Board of Directors has nominated the two persons named below to serve as
directors until the next Annual Meeting of Stockholders or until their earlier
resignation or removal. If the Merger described below is consummated, such
persons would resign. If any of the nominees should be unavailable to serve for
any reason (which is not anticipated), the Board of Directors may (i) designate
a substitute nominee or nominees, in which case the persons named on the
enclosed proxy card, or its substitute, will vote all valid proxy cards for the
election of such substitute nominee, (ii) allow the vacancy to remain open until
a suitable candidate or candidates are located or (iii) by resolution provide
for fewer directors. Proxies for this Annual Meeting may not be voted FOR more
than two nominees.
NOMINEES FOR ELECTION AT THIS ANNUAL MEETING
Thomas J. Mazzarisi, age 48, is our Chairman of the Board, Chief
Executive Officer and General Counsel. Previously, Mr. Mazzarisi served as our
Executive Vice President and General Counsel from March 1999 to April 2, 2004
and as our Chief Financial Officer from November 9, 2001 to April 2, 2004. Mr.
Mazzarisi has been a member of our Board of Directors since July 1999. From 1997
until joining JAG Media, Mr. Mazzarisi practiced law from his own firm in New
York, specializing in international commercial transactions. From 1988 until
1997, Mr. Mazzarisi was a Senior Associate at the former law firm of Coudert
Brothers where he also specialized in international commercial transactions.
Prior to joining Coudert Brothers, Mr. Mazzarisi was Deputy General Counsel of
the New York Convention Center Development Corporation. Mr. Mazzarisi is a
graduate of Fordham University where he received a B.A. in Political Economy and
was elected to Phi Beta Kappa. Mr. Mazzarisi received his J.D. from Hofstra
University School of Law.
Stephen J. Schoepfer, age 46, is our President, Chief Operating
Officer, Chief Financial Officer and Secretary. Previously, Mr. Schoepfer served
as our Executive Vice President, Chief Operating Officer and Secretary from July
1999 to April 2, 2004. Mr. Schoepfer has been a member of our Board of Directors
since July 1999. Prior to joining JAG Media in July 1999, he was a Financial
Advisor with the investment firm of Legg Mason Wood Walker. Prior to joining
Legg Mason, Mr. Schoepfer served as a Financial Advisor and Training Coordinator
at Prudential Securities. Mr. Schoepfer attended Wagner College.
If the Merger is completed, Messrs. Mazzarisi and Schoepfer will resign
as directors of JAG Media and will be replaced by designees of Cryptometrics.
SEE "THE MERGER AGREEMENT - POST MERGER ACTIONS" ON PAGE 73 AND
"MANAGEMENT OF JAG MEDIA (TO BE RENAMED CRYPTOMETRICS, INC.) ON PAGE 104 FOR A
DESCRIPTION OF THE MANAGEMENT OF JAG MEDIA (TO BE RENAMED CRYPTOMETRICS, INC.)
IF THE MERGER IS CONSUMMATED.
VOTE REQUIRED FOR APPROVAL
The vote of a plurality of holders of the outstanding shares of JAG
Media Common Stock present in person or represented by duly executed proxies at
the Annual Meeting for the election of a given nominee is necessary to elect
such nominee as a director of JAG Media. Accordingly, the two director nominees
receiving the greatest number of votes cast will be elected, regardless of the
number of votes withheld for the election of such director nominees. Shares
represented by an executed proxy in the form enclosed will,
1
unless otherwise directed, be voted "FOR" the election of the two persons
nominated to serve as directors. A stockholder's abstention from voting shares
or a broker non-vote for a particular nominee for director will not prevent the
election of such nominee if the nominee otherwise receives the affirmative vote
of a plurality of the votes cast in person or by proxy at the Annual Meeting.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE
ELECTION OF THE TWO PERSONS NOMINATED TO SERVE AS DIRECTORS.
BOARD ORGANIZATION AND MEETINGS
During the fiscal year ended July 31, 2005, the Board of Directors
acted on 12 occasions by unanimous written consent.
JAG Media does not have a standing audit, nominating or compensation
committee. JAG Media does not believe it is feasible or in the best interest of
JAG Media to establish stand alone audit, nominating or compensation committees
given that as of January 3, 2006 JAG Media only had twelve employees, two of
whom serve as directors.
Our two directors and executive officers, Messrs. Mazzarisi and
Schoepfer, are responsible for reviewing and recommending potential nominees to
the Board of Directors, but do not follow any specific process in identifying
and evaluating the nominees. Historically, including for purposes of this
forthcoming Annual Meeting, nominations have never been submitted by JAG Media's
stockholders and our directors have therefore never considered any such
nominations. However, if in the future stockholders would like to nominate
persons for election as directors, they may submit such nominations in writing
by mail to the Board of Directors, c/o Thomas J. Mazzarisi, JAG Media Holdings,
Inc., 6865 S.W. 18th Street, Suite B-13, Boca Raton, FL 33433. In order to
ensure that the Board of Directors of JAG Media has a reasonable opportunity to
evaluate such nominations, JAG Media requests that such nominations be submitted
no later than 120 days prior to the mailing of our proxy statement.
Stockholders may communicate with either or both members of the Board
of Directors of JAG Media by writing to the above address. We encourage our
directors to attend the Annual Meeting of Stockholders. One member of the Board
of Directors of JAG Media attended the Annual Meeting of Stockholders held on
February 24, 2005.
DIRECTORS' REMUNERATION
JAG Media currently does not compensate its directors, both of whom
receive compensation as officers.
2
PROPOSAL 2
APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors, subject to ratification by the stockholders,
has appointed J.H. Cohn LLP as independent registered public accounting firm to
examine JAG Media's consolidated financial statements for the fiscal year ending
July 31, 2006. J.H. Cohn LLP has served as JAG Media's independent registered
public accounting firm since April 1999 and performed the audit of JAG Media's
financial statements for the fiscal year ended July 31, 2005.
J.H. Cohn LLP is not expected to attend the Annual Meeting.
VOTE REQUIRED FOR APPROVAL
The affirmative vote, in person or by proxy at the Annual Meeting, of
holders of a majority of the shares of JAG Media Common Stock whose votes are
cast on this proposal is required to ratify the appointment of JAG Media's
independent accountants. Shares represented by an executed proxy in the form
enclosed, or its substitute, will, unless otherwise directed, be voted "FOR" the
ratification of the appointment of J.H. Cohn LLP as JAG Media's independent
registered public accounting firm. A stockholder's abstention from voting shares
or a broker non-vote on the proposal to ratify the appointment of JAG Media's
auditors will not operate as a vote "against" such proposal.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE
RATIFICATION OF THE APPOINTMENT OF J.H. COHN LLP AS INDEPENDENT PUBLIC
ACCOUNTANTS TO AUDIT THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE
FISCAL YEAR ENDING JULY 31, 2006.
AUDIT FEES
The aggregate fees billed for the fiscal years ended July 31, 2005 and
2004 for professional services rendered by J.H. Cohn LLP for the audit of the
our annual financial statements and the review of the financial statements
included in our quarterly reports on Form 10-QSB were $103,262 and $66,793,
respectively.
AUDIT-RELATED FEES
The aggregate fees billed for the fiscal years ended July 31, 2005 and
2004 for assurance and related services rendered by J.H. Cohn LLP related to the
performance of the audit or review of our financial statements were $15,110 and
$25,678, respectively.
TAX FEES
The aggregate fees billed for the fiscal years ended July 31, 2005 and
2004 for services rendered by J.H. Cohn LLP in connection with the preparation
of our federal and state tax returns were $5,250 and $4,000, respectively.
ALL OTHER FEES
There were no other fees billed by J.H. Cohn in the years ended July
31, 2005 or July 31, 2004.
PRE-APPROVAL POLICIES AND PROCEDURES
The Board of Directors is required to pre-approve the rendering by our
independent auditor of audit or permitted non-audit services. The services
provided for 2005 were 84% audit services, 12% audit related
3
services and 4% tax services. The services provided above for 2004 were 69%
audit services, 27% audit related services and 4% tax services.
4
PROPOSAL 3
AMEND ARTICLES OF INCORPORATION TO INCREASE AUTHORIZED SHARES OF
JAG MEDIA COMMON STOCK
At the Annual Meeting, JAG Media stockholders will be asked to consider
and vote upon an amendment to Article Fourth of JAG Media's Articles of
Incorporation to increase the authorized shares of JAG Media Common Stock from
250,000,000 to 500,000,000. The form of the amendment is attached as Appendix A
hereto.
VOTE REQUIRED FOR APPROVAL
The affirmative vote, in person or by proxy at the Annual Meeting, of
the holders of a majority of the outstanding shares of JAG Media Common Stock is
required to approve the amendment to JAG Media's Articles of Incorporation to
increase the authorized shares of JAG Media Common Stock from 250,000,000 to
500,000,000. A stockholder's abstention from voting shares or a broker non-vote
on the proposal to amend JAG Media's Articles of Incorporation to increase the
authorized shares of JAG Media Common Stock from 250,000,000 to 500,000,000 will
effectively count as a vote "against" the proposal.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
AMENDMENT JAG MEDIA'S ARTICLES OF INCORPORATION TO INCREASE THE AUTHORIZED
SHARES OF JAG MEDIA COMMON STOCK FROM 250,000,000 TO 500,000,000.
PURPOSE OF THE AMENDMENT
The Boards of Directors of JAG Media and Cryptometrics, Inc., a
Delaware corporation ("Cryptometrics"), have adopted the plan of merger (the
"Merger") of Cryptometrics Acquisition, Inc., a Delaware corporation and
wholly-owned subsidiary of JAG Media ("Merger Sub") with and into Cryptometrics,
Inc. and approved the Merger Agreement between such parties related to the
Merger dated as of December 27, 2005 (the "Merger Agreement"). In addition, JAG
Media, as the sole stockholder of Merger Sub, has approved the Merger.
Immediately upon consummation of the Merger, JAG Media Common Stock
will be held as follows:
o approximately 11.8125% by the stockholders of JAG Media immediately
prior to the consummation of the Merger; and
o approximately 88.1875% by the stockholders of Cryptometrics
immediately prior to the consummation of the Merger.
In connection with the Merger, JAG Media will issue over 300,000,000
shares of JAG Media Common Stock to Cryptometrics stockholders and for this
reason, must increase the number of shares of JAG Media Common Stock that it is
authorized to issue. Whether or not the Merger is consummated, however, if the
holders of a majority of the outstanding shares of JAG Media Common Stock vote
to approve the amendment to JAG Media's Articles of Incorporation to increase
the authorized shares of JAG Media Common Stock from 250,000,000 to 500,000,000,
the Articles of Incorporation will be amended to reflect this increase in the
number of authorized JAG Media Common Stock.
JAG Media Common Stock currently trades "Over-the-Counter" and is
quoted on the Pink Sheets Electronic Quotation Service (the "Pink Sheets") under
the symbol "JAGH". On January 3, 2006, the closing bid price of JAG Media's
Common Stock as reported on the Pink Sheets was $0.30 per share.
5
Cryptometrics common stock, par value $0.001 per share (the
"Cryptometrics Common Stock") is not traded on any recognized stock exchange.
SEE "JAG MEDIA'S REASONS FOR THE MERGER" ON PAGE 61 FOR A DESCRIPTION OF JAG
MEDIA'S REASONS TO ENTER INTO THE MERGER AGREEMENT.
SEE "RISK FACTORS" BEGINNING ON PAGE 39 FOR A DESCRIPTION OF RISK FACTORS THAT
SHOULD BE CONSIDERED BY STOCKHOLDERS OF JAG MEDIA WITH RESPECT TO THE MERGER.
6
PROPOSAL 4
AMEND ARTICLES OF INCORPORATION TO CHANGE NAME OF JAG MEDIA
At the Annual Meeting, JAG Media stockholders will be asked to consider
and vote upon an amendment to Article First of JAG Media's Articles of
Incorporation to change JAG Media's name to "Cryptometrics, Inc." conditioned
upon the consummation of the Merger. The form of the amendment is attached as
Appendix B hereto.
VOTE REQUIRED FOR APPROVAL
The affirmative vote, in person or by proxy at the Annual Meeting, of
the holders of a majority of the outstanding shares of JAG Media Common Stock is
required to approve the amendment to JAG Media's Articles of Incorporation to
change JAG Media's name to "Cryptometrics, Inc." A stockholder's abstention from
voting shares or a broker non-vote on the proposal to amend JAG Media's Articles
of Incorporation to change its name to "Cryptometrics, Inc." will effectively
count as a vote "against" the proposal.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
AMENDMENT OF JAG MEDIA'S ARTICLES OF INCORPORATION TO CHANGE JAG MEDIA'S NAME TO
"CRYPTOMETRICS, INC." CONDITIONED UPON THE CONSUMMATION OF THE MERGER.
PURPOSE OF THE AMENDMENT
In connection with the Merger, JAG Media will, if the Merger is
consummated, change its name to "Cryptometrics, Inc." If the Merger is not
consummated, JAG Media will not change its name. The name change will better
reflect the principal activities of JAG Media after the Merger has been
consummated. In the event of a name change, JAG Media would also expect that its
ticker symbol would be changed to reflect its new name.
7
PROPOSAL 5
ADJOURNMENT OF ANNUAL MEETING, IF NECESSARY, TO ASSURE THE PRESENCE OF A
QUORUM OR SOLICIT ADDITIONAL PROXIES TO APPROVE PROPOSALS 3 AND 4
At the Annual Meeting, JAG Media stockholders will be asked to consider
and vote upon a proposal to adjourn the Annual Meeting, if necessary, to assure
the presence of a quorum or solicit additional votes in favor of approving
Proposal 3 (Amend Articles of Incorporation to Increase Authorized Shares of JAG
Media Common Stock) and Proposal 4 (Amend Articles of Incorporation to Change
Name of JAG Media).
VOTE REQUIRED FOR APPROVAL
The affirmative vote, in person or by proxy at the Annual Meeting, of
holders of a majority of the shares of JAG Media Common Stock whose votes are
cast on this proposal is required to approve the adjournment of the Annual
Meeting, if necessary, to assure the presence of a quorum or solicit additional
votes in favor of approving Proposals 3 and 4. A stockholder's failure to vote
on the proposal or a broker non-vote will not count as a vote "against" the
proposal.
PURPOSE OF THE ADJOURNMENT
JAG Media cannot transact any business at the meeting unless a quorum
is present. In addition, JAG Media and Cryptometrics cannot complete the Merger
unless the stockholders of JAG Media approve each of Proposals 3 and 4.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR AN
ADJOURNMENT OF THE ANNUAL MEETING, IF NECESSARY, TO ASSURE THE PRESENCE OF A
QUORUM OR SOLICIT ADDITIONAL VOTES IN FAVOR OF APPROVING PROPOSAL 3 AND PROPOSAL
4.
8
STOCK OWNERSHIP
The following table sets forth information regarding the beneficial
ownership of JAG Media Common Stock as of January 3, 2006 (except as otherwise
indicated) by (i) each person known by JAG Media to be the beneficial owner of
more than 5% of JAG Media Common Stock, (ii) each director and nominee to be a
director, (iii) each named executive officer and (iv) all directors and
executive officers as a group. Except as otherwise indicated below, each of the
persons named in the table has sole voting and investment power with respect to
the shares set forth opposite such person's name.
Name & Address of Beneficial Owner Number of Shares Beneficially Owned Percentage of Class (1)
- ---------------------------------------------- ------------------------------------ -----------------------
Thomas Mazzarisi (Chairman of the Board, 610,000 (2) 1.4%
Chief Executive Officer and General Counsel)
6865 SW 18th Street, Suite B-13,
Boca Raton, Florida 33433
Stephen Schoepfer 325,000 (3) *
(President, Chief Operating Officer,
Chief Financial Officer and Director)
6865 SW 18th Street, Suite B-13,
Boca Raton, Florida 33433
All executive officers and directors as 935,000 (2) (3) 2.2%
a group (2 persons)
- -------------------
* Less than one percent
(1) Based on 42,119,655 shares of JAG Media Common Stock issued and outstanding
as of January 3, 2006, plus the number of shares of JAG Media Common Stock
which the beneficial owner has the right to acquire within 60 days, if any.
(2) Includes 500,000 shares of JAG Media Common Stock issuable upon the
exercise of stock options, exercisable within 60 days.
(3) Includes 250,000 shares of JAG Media Common Stock issuable upon the
exercise of stock options, exercisable within 60 days.
9
AFFILIATED VOTING
On January 3, 2006, directors and executive officers of JAG Media and
their affiliates beneficially owned and were entitled to vote 235,000 shares of
JAG Media Common Stock, or approximately 0.6% of JAG Media Common Stock
outstanding on that date.
Cryptometrics has represented to JAG Media in the Merger Agreement that
none of its directors, executive officers or affiliates owned any shares of JAG
Media Common Stock as of the record date for the Annual Meeting. JAG Media has
represented to Cryptometrics in the Merger Agreement that none of the directors,
executive officers or affiliates of JAG Media now owns or will own any shares of
Cryptometrics Common Stock as of the record date for the Annual Meeting.
10
MARKET FOR JAG MEDIA COMMON STOCK
AND RELATED MATTERS
PRICE RANGE OF COMMON STOCK
On April 8, 2002, JAG Media effected a recapitalization of its then
outstanding common stock pursuant to which each one and one-tenth (1.1) shares
of its outstanding common stock was reclassified into one (1) share of Class A
Common Stock and one-tenth (1/10th) of a share of Series 1 Class B Common Stock.
A public trading market for such Series 1 Class B Common Stock never developed.
On June 4, 2004, JAG Media effected a second recapitalization pursuant
to which each share of its outstanding Class A Common Stock and Series 1 Class B
Common Stock was reclassified into one (1) share of new JAG Media Common Stock.
JAG Media's Class A Common Stock traded through June 4, 2004 in the
over-the-counter market on the Nasdaq OTC Bulletin Board under the symbol
"JGMHA." Thereafter, JAG Media's Common Stock traded in the over-the-counter
market on the Pink Sheets under the symbol "JAGH." The following table reflects
quarterly high and low bid prices of its Class A Common Stock and JAG Media
Common Stock from August 1, 2003 through July 31, 2005. Such prices are
inter-dealer quotations without retail mark-ups, mark-downs or commissions, and
may not represent actual transactions.
HIGH LOW
---- ---
Fiscal Year 2004
First Quarter............................. 0.67 0.30
Second Quarter............................ 1.00 0.25
Third Quarter............................. 1.45 0.51
Fourth Quarter............................ 1.10 0.30
Fiscal Year 2005
First Quarter............................. 1.10 0.15
Second Quarter............................ 0.65 0.15
Third Quarter............................. 0.52 0.11
Fourth Quarter............................ 0.30 0.001
Fiscal Year 2006
First Quarter............................. 0.30 0.02
JAG Media issued shares of its Series 2 Class B Common Stock to holders
of record as of April 14, 2003 of its then Class A Common Stock. JAG Media
issued shares of its Series 3 Class B Common Stock to an investor in June 2003
and to an investor in September 2003. A public trading market for the Series 2
Class B Common Stock and the Series 3 Class B Common Stock never developed.
The high and low bid prices of JAG Media Common Stock on January 3,
2006 were $0.42 and $0.19, respectively, as reported on the Pink Sheets. As of
January 3, 2006, there were approximately 3,739 stockholders of record of JAG
Media Common Stock.
JAG Media has never paid any cash dividends on JAG Media Common Stock
and anticipates that for the foreseeable future, no cash dividends will be paid
on JAG Media Common Stock whether or not the Merger is consummated. Payment of
future cash dividends will be determined by the Board of Directors of JAG Media
upon conditions then existing, including JAG Media's financial condition,
capital requirements,
11
cash flow, profitability, business outlook and other factors. In addition, JAG
Media's future credit arrangements may restrict the payment of dividends. The
Cryptometrics Common Stock is not traded on any recognized securities market.
12
EXECUTIVE COMPENSATION
The following table sets forth certain summary information regarding
compensation paid to our Chief Executive Officer and President for services
rendered during the fiscal years ended July 31, 2003, 2004 and 2005. Except as
listed in the table below, no executive officer holding office in fiscal year
2005 received total annual salary and bonus exceeding $100,000. No such officers
have been awarded any stock options, stock appreciation rights or other long
term or incentive compensation not reflected below.
ANNUAL COMPENSATION
LONG-TERM
COMPENSATION
COMMON SHARES
FISCAL OTHER ANNUAL SUBJECT TO ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS GRANTED COMPENSATION
- --------------------------- ------ ------ ----- ------------ --------------- ------------
Thomas J. Mazzarisi, Chairman 2005 $150,000 -- -- -- --
of the Board, Chief Executive 2004 $150,000 -- -- -- --
Officer and General Counsel 2003 $150,000 -- -- -- --
Stephen J. Schoepfer, 2005 $150,000 -- -- -- --
President, Chief Operating 2004 $150,000 -- -- -- --
Officer, Chief Financial 2003 $150,000 -- -- -- --
Officer and Secretary
13
OPTION GRANTS IN FISCAL YEAR 2005
No freestanding SARs or restricted stock awards were granted to, or
exercised by, any of our named executive officers during the fiscal year ended
July 31, 2005.
The following table sets forth information regarding options to acquire
shares of JAG Media Common Stock granted under our Long-Term Incentive Plan to
Thomas J. Mazzarisi (our Chairman, Chief Executive Officer and General Counsel)
and Stephen J. Schoepfer (our President, Chief Operating Officer, Chief
Financial Officer and Secretary) during the fiscal year ended July 31, 2005.
OPTION GRANTS IN PERIOD BEGINNING AUGUST 1, 2004
AND ENDING JULY 31, 2005
PERCENTAGE OF TOTAL
OPTIONS GRANTED TO
NUMBER OF EMPLOYEES IN THE
SECURITIES PERIOD BEGINNING EXERCISE OR MARKET PRICE
UNDERLYING AUGUST 1, 2004 AND BASE PRICE ON THE DATE EXPIRATION
NAME OPTIONS GRANTED ENDED JULY 31, 2005 PER ($/SHARE) OF GRANT DATE
- --------------------- ------------------ ------------------- ------------- ------------ ----------
Thomas J. Mazzarisi 0 * * * *
Stephen J. Schoepfer 0 * * * *
- ---------------
* Not applicable.
REPORT ON REPRICING OF OPTIONS
Our Board of Directors believes that the retention of executives who
possess an in depth knowledge of our operations, contacts within the
professional financial community for certain information that we provide to our
subscribers and the skills and expertise required to lead our organization is
vital to our competitive strength. It is the policy of our Board of Directors to
award stock options to our executive officers in order to align their interests
with those of our long-term investors and to help attract and retain these
persons. It is our Board of Directors' goal to preserve this incentive as an
effective tool in compensating, motivating and retaining our executives. We have
granted these options at exercise prices below the market price of our stock as
a form of immediate compensation to our executives.
We did not reprice any stock options during our fiscal year ended July
31, 2005.
14
OPTION EXERCISES IN FISCAL YEAR 2005
The following table sets forth certain information regarding the stock
options exercised during the fiscal year ended July 31, 2005 and the stock
options held as of July 31, 2005 by Thomas J. Mazzarisi (our Chairman, Chief
Executive Officer and General Counsel) and Stephen J. Schoepfer (our President,
Chief Operating Officer, Chief Financial Officer and Secretary).
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES JULY 31, 2005 JULY 31, 2005
ACQUIRED VALUE ------------------------------ -----------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------- ----------- --------- ----------- ------------- ----------- -------------
Thomas J. Mazzarisi 0 0 500,000 0 $40,000 0
Stephen J. Schoepfer 0 0 250,000 0 $20,000 0
DIRECTOR COMPENSATION
We currently do not compensate our directors for their services in such
capacity.
1999 LONG-TERM INCENTIVE PLAN
In October, 1999 the Board of Directors approved the 1999 Long-Term
Incentive Plan. This plan was most recently amended in April 2002. The purpose
of the plan is to allow us to attract and retain officers, employees, directors,
consultants and certain other individuals and to compensate them in a way that
provides additional incentives and enables such individuals to increase their
ownership interests in JAG Media. Individual awards under the plan may take the
form of:
o either incentive stock options or non-qualified stock options;
o stock appreciation rights;
o restricted or deferred stock;
o dividend equivalents;
o bonus shares and awards in lieu of our obligations to pay cash
compensation; and
o other awards, the value of which is based in whole or in part upon
the value of shares of JAG Media Common Stock.
The plan will generally be administered by a committee appointed by the
Board of Directors, except that the Board of Directors will itself perform the
committee's functions under the plan for purposes of grants of awards to
directors who serve on the committee. The Board of Directors may also perform
any other function of the committee and is currently serving as the committee.
The committee generally is empowered to select the individuals who will receive
awards and the terms and conditions of those awards, including exercise prices
for options and other exercisable awards, vesting and forfeiture conditions,
performance conditions, the extent to which awards may be transferable and
periods during which awards will remain outstanding. Awards may be settled in
cash, shares, other awards or other property, as the committee may determine.
The maximum number of shares that may be subject to outstanding awards
under the plan will not exceed 6,000,000 shares of JAG Media Common Stock. As of
January 3, 2006, there were a total of 2,010,000 shares of JAG Media Common
Stock subject to outstanding options granted under the plan. These options are
exercisable at prices ranging from $0.02 to $1.00 per share.
15
The plan will remain in effect until terminated by the Board of
Directors. The plan may be amended by the Board of Directors without the consent
of our stockholders, except that any amendment, although effective when made,
will be subject to stockholder approval if required by any Federal or state law
or regulation or by the rules of any stock exchange or automated quotation
system on which our Common Stock may then be listed or quoted. The number of
shares reserved or deliverable under the plan, the annual per-participant
limits, the number of shares subject to options automatically granted to
non-employee directors, and the number of shares subject to outstanding awards
are subject to adjustment in the event of stock splits, stock dividends and
other extraordinary corporate events.
We generally will be entitled to a tax deduction equal to the amount of
compensation realized by a participant through awards under the plan, except no
deduction is permitted in connection with incentive stock options if the
participant holds the shares acquired upon exercise for the required holding
periods; and deductions for some awards could be limited under the $1.0 million
deductibility cap of Section 162(m) of the Internal Revenue Code. This
limitation, however, should not apply to certain options, stock appreciation
rights and performance-based awards granted thereafter if JAG Media complies
with certain requirements under Section 162(m).
EMPLOYMENT CONTRACTS
Mazzarisi and Schoepfer Employment Agreements
On August 31, 2001, we entered into amended and restated three-year
employment agreements with each of Stephen J. Schoepfer (our President, Chief
Operating Officer, Chief Financial Officer and Secretary) and Thomas J.
Mazzarisi (our Chairman of the Board, Chief Executive Officer and General
Counsel). On November 3, 2005, these agreements were retroactively extended for
an additional three years and certain of the provisions of the amended and
restated employment agreements were amended. Each of these employment agreements
now expires on August 31, 2007 and continues to provide for an annual base
salary of $150,000. In addition, each executive is entitled to receive annual
incentive stock option bonuses as follows:
o Option for 500,000 shares of Common Stock if the average closing bid
price of our Common Stock for the year ended August 31, 2006 under
the contract is $1.00 or greater;
o Option for 500,000 shares of Common Stock if the average closing bid
price of our Common Stock for the year ended August 31, 2007 under
the contract is $2.00 or greater; and
o Such options are exercisable at fair market value as defined in the
employment agreements as recently amended, determined with respect
to the indicated year end.
No annual incentive stock option bonuses have been earned to date under
the employment agreements.
The executives shall also be granted an option to purchase a 5%
ownership interest in any subsidiary that JAG Media successfully creates and
spins off during the term of their employment contracts.
Pursuant to these employment agreements, each of the above named
executives is entitled to the same medical and other benefits, including health
and life insurance coverage, as are provided to other employees of JAG Media. In
the event JAG Media terminates the employment of any of such executives without
cause or such executive resigns for good reason as defined in the employment
agreements, such executive shall be entitled to receive (i) continued medical
and life insurance coverage for a period equal to the greater of one year or the
number of years and fractions thereof between the date of such termination and
the end of the term (the "Severance Period"), (ii) a lump sum cash payment equal
to the executive's highest rate of annual salary in effect during the employment
term multiplied by the Severance Period, (iii) a lump sum cash payment equal to
the number of accrued and unused vacation days calculated at the executive's
16
then current salary rate and (iv) accelerated vesting of all of the executive's
outstanding stock options. Such cash payments will be made within 10 days of
termination of employment, and shall not be subject to offset for amounts earned
by the executive in respect of any subsequent employment, nor is the executive
required to seek any such subsequent employment.
Further, immediately prior to a "change in control" (as defined in JAG
Media's Long-Term Incentive Plan) of JAG Media, the above-named executives shall
also be granted an option to acquire 1,000,000 shares of our Common Stock
(subject to equitable adjustments for stock splits, etc.) at an exercise price
equal to the fair market value of the average closing bid price of the Company's
stock for the 30 days prior to such change in control, which option shall be
fully vested and immediately exercisable in full and expire on a date which is
the earlier of ten years from such change in control and three years after
termination of employment. Generally, under our Long-Term Incentive Plan, a
"change in control" shall be deemed to have occurred (i) if there is an
acquisition of 30% or more of our then outstanding shares of Common Stock, (ii)
Messrs. Mazzarisi and Schoepfer cease for any reason to constitute at least a
majority of the members of our Board, or (iii) a merger, consolidation,
recapitalization, reorganization, sale or disposition of all or a substantial
portion of our assets, or similar transaction shall have occurred. The proposed
Merger described in this proxy statement would constitute a "change in control."
However, a change in control shall not be deemed to have occurred if
consummation of such a transaction would result in at least 70% of the total
voting power represented by the voting securities of JAG Media outstanding
immediately after such transaction being beneficially owned by at least 75% of
the holders of outstanding voting securities of JAG Media immediately prior to
the transaction, with the voting power of each such continuing holder relative
to other such continuing holders not substantially altered in the transaction.
In the unlikely event that we issue to Cornell Capital under the equity
line more than approximately 19,180,000 shares of our Common Stock and Cornell
Capital does not sell any such shares and we issue no other shares, such
issuance to Cornell Capital would result in the acquisition by Cornell Capital
of more than 30% of our then outstanding shares of Common Stock and would
trigger the change in control provisions in the employment agreements of our
executive officers. As a result, each of Messrs. Mazzarisi and Schoepfer would
be granted an option to acquire 1,000,000 shares of our Common Stock at an
exercise price equal to the fair market value of the stock prior to such change
in control, which option would be fully vested and immediately exercisable in
full and expire on a date which would be the earlier of ten years from such
change in control and three years after termination of such person's employment.
The occurrence of the change of control would also permit each executive to
resign from JAG Media if they so chose and be entitled to all of the severance
benefits described above, including medical and life insurance coverage,
accelerated vesting of outstanding stock options and certain lump sum cash
payments.
In lieu of options previously granted which were cancelled, we granted
on August 31, 2001 to each of Messrs. Mazzarisi and Schoepfer options to
purchase an aggregate of 1,000,000 shares of our Common Stock exercisable at a
price per share of $0.02, all of which vested immediately upon the execution of
the amended and restated agreements. These options are subject to the terms of
our 1999 Long-Term Incentive Plan, as amended, and may be exercised, in whole or
in part, by the executives on a cashless basis. As noted under "Post-Merger
Actions" (See Page 73) at the closing of the Merger such employment agreements
shall be assigned to JAG Media LLC and Messrs. Mazzarisi and Schoepfer shall
release JAG Media (to be renamed Cryptometrics) from all further responsibility
under the employment agreements (including salary payments) except that JAG
Media (to be renamed Cryptometrics) will remain contractually obligated to
fulfill any exercise of options and will continue to provide Messrs. Mazzarisi
and Schoepfer with the same medical coverage as it provides employees of JAG
Media (to be renamed Cryptometrics).
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our Articles of Incorporation provide that we shall indemnify our
officers, directors, employees and agents to the full extent permitted by Nevada
law. Our Bylaws include provisions to indemnify our officers
17
and directors and other persons against expenses (including judgments, fines and
amounts paid for settlement) incurred in connection with actions or proceedings
brought against them by reason of their serving or having served as officers,
directors or in other capacities. We do not, however, indemnify them in actions
in which it is determined that they have not acted in good faith or have acted
unlawfully or not in JAG Media's best interest. In the case of an action brought
by or in the right of JAG Media, we shall indemnify them only to the extent of
expenses actually and reasonably incurred by them in connection with the defense
or settlement of these actions and we shall not indemnify them in connection
with any matter as to which they have been found to be liable to JAG Media,
unless the deciding court determines that, notwithstanding such liability, that
person is fairly entitled to indemnity in light of all the relevant
circumstances.
We do not currently maintain director's and officer's liability
insurance but we may do so in the future.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors and officers pursuant to the foregoing
provisions, or otherwise, we have 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.
18
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the securities laws of the United States, our directors,
executive officers and any person holding more than 10% of our common stock are
required to file initial forms of ownership of our common stock and reports of
changes in that ownership at the Securities and Exchange Commission. Specific
due dates for these forms have been established, and we are required to disclose
in this report any failure to file by these dates.
Based solely on our review of the copies of such forms received by it
with respect to fiscal 2005, or written representations from certain reporting
persons, to the best of our knowledge, all reports were filed on a timely basis.
19
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LOANS FROM OFFICERS OF THE COMPANY
On April 1, 2002, Thomas J. Mazzarisi, our Chairman, Chief Executive
Officer and General Counsel, loaned us $200,000. The loan was subject to the
terms and conditions of an unsecured promissory note issued by us to Mr.
Mazzarisi on such date. The loan, which bore interest at 9.0% per annum, was
repaid in full, including interest, by JAG Media on March 29, 2004.
On April 1, 2002, Stephen J. Schoepfer, our President, Chief Operating
Officer, Chief Financial Officer and Secretary, loaned us $200,000. The loan was
subject to the terms and conditions of an unsecured promissory note issued by us
to Mr. Schoepfer on such date. The loan, which bore interest at 9.0% per annum,
was repaid in full, including interest, by JAG Media on March 29, 2004.
OTHER MATTERS
The Board of Directors of JAG Media knows of no matters that are
expected to be presented for consideration at the Annual Meeting other than
those described in this proxy statement. Should any other matter properly come
before the Annual Meeting, however, the persons named in the form of proxy
accompanying this Proxy Statement will vote all shares represented by proxies in
accordance with their best judgment on such matters.
20
SUBMISSION OF STOCKHOLDER PROPOSALS
Any proposal to be presented by a stockholder at JAG Media's 2007
Annual Meeting of Stockholders must be received by JAG Media no later than
September 28, 2006 so that it may be considered by JAG Media for inclusion in
its proxy statement and form of proxy, or its substitute, relating to that
meeting.
21
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q. WHY ARE THE COMPANIES PROPOSING TO MERGE?
The companies believe that JAG Media's acquisition of Cryptometrics will create
a company stronger than either JAG Media or Cryptometrics standing alone and
will provide significant benefits to the stockholders of both companies. The
combined companies will have better access to financial markets to support
future growth and the overhead costs of being a public company will be absorbed
by a potentially larger revenue base. The Boards of Directors of JAG Media and
Cryptometrics unanimously approved the Merger Agreement and the related Merger.
Q: WHAT AM I BEING ASKED TO VOTE UPON OR CONSENT TO? WHAT VOTE IS REQUIRED?
A: In connection with the Merger, JAG Media stockholders are being asked to vote
to approve the following proposals:
PROPOSAL REQUIRED VOTE
- ----------------------------------------- --------------------------------------
a proposal to amend JAG Media's the affirmative vote, in person or
Articles of Incorporation to by proxy at the Annual Meeting, of
increase its authorized capital the holders of a majority of the
from 250,000,000 to 500,000,000 outstanding shares of JAG Media's
shares of Common Stock (permitting Common Stock; a stockholder's
the requisite shares to be issued failure to vote on the proposal or
in the Merger) a broker non-vote will effectively
count as a vote against the
proposal
- ----------------------------------------- --------------------------------------
a proposal to amend JAG Media's the affirmative vote, in person or
Articles of Incorporation to change by proxy at the Annual Meeting, of
its corporate name to the holders of a majority of the
"Cryptometrics, Inc." upon outstanding shares of JAG Media
completion of the Merger Common Stock; a stockholder's
failure to vote on the proposal or
a broker non-vote will effectively
count as a vote against the
proposal
- ----------------------------------------- --------------------------------------
a proposal to adjourn the Annual the affirmative vote, in person or
Meeting of JAG Media stockholders, by proxy at the Annual Meeting, of
if necessary, to assure the the holders of a majority of the
presence of a quorum or solicit shares of JAG Media's Common Stock
additional votes to (i) approve the whose votes are cast on this
proposal to amend JAG Media's proposal; a stockholder's failure
Articles of Incorporation to to vote on the proposal or a broker
increase its authorized capital non-vote will not count as a vote
from 250,000,000 to 500,000,000 against the proposal
shares of Common Stock and (ii) to
approve the proposal to amend JAG
Media's Articles of Incorporation
to change its corporate name to
"Cryptometrics, Inc." upon
completion of the Merger
- ----------------------------------------- --------------------------------------
The presence, in person or by proxy, of the holders of a majority of the
outstanding shares of JAG Media Common Stock entitled to vote at the Annual
Meeting constitutes a quorum.
Q. WHAT SHOULD I DO IF MY SHARES ARE HELD IN STREET NAME?
22
A. Shares of JAG Media Common Stock held in "street name" will not be voted on
any matter related to the Merger if the holder of such stock does not provide
his broker with instructions on how to vote the "street name" shares. A JAG
Media stockholder whose shares of JAG Media Common Stock are held in "street
name" should follow the directions provided by the broker in order to instruct
the broker how to vote the shares. Please check the voting form used by the
broker to see if the broker will permit a vote by telephone or over the
Internet.
Q. WHY HAS CRYPTOMETRICS NOT SCHEDULED A STOCKHOLDERS' MEETING?
A. As permitted under Delaware law, Cryptometrics stockholders holding a
majority of the outstanding shares of Cryptometrics Common Stock have approved
the proposed merger without the need for a meeting by providing their written
consents. Such stockholder approval followed the adoption of a resolution by the
Board of Directors of Cryptometrics approving the Merger Agreement and declaring
its advisability.
Q: WILL THE MERGER HAVE ANY EFFECT ON THE CURRENTLY OUTSTANDING SHARES OF JAG
MEDIA COMMON STOCK?
A: Although the Merger will not have any effect on the rights attributable to
the shares of JAG Media Common Stock currently owned by a JAG Media stockholder,
there will be an overall dilution of such stockholder's ownership interest in
JAG Media. The number of outstanding shares of JAG Media Common Stock will
increase from approximately 40,000,000 shares to approximately 340,000,000
shares following the Merger. JAG Media stockholders holding 100% of the
outstanding JAG Media common stock just prior to the Merger will hold only
11.8125% just after the Merger.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: JAG Media stockholders will continue to hold their current shares of JAG
Media Common Stock after the Merger.
Q. WHAT WILL CRYPTOMETRICS STOCKHOLDERS RECEIVE IN THE MERGER?
A: Holders of shares of Cryptometrics Common Stock issued and outstanding
immediately prior to the time the Certificate of Merger is filed with the
Delaware Secretary of State, including as outstanding for this purpose the total
number of shares of Cryptometrics Common Stock for which outstanding
exchangeable shares of Cryptometrics' Canadian subsidiary, Cryptometrics Canada,
Inc., can be exchanged, will be entitled to receive shares of fully paid and
nonassessable JAG Media Common Stock equal to 7.4656 times the total number of
shares of JAG Media Common Stock outstanding at the time the Certificate of
Merger is filed with the Delaware Secretary of State (i) excluding all shares of
JAG Media Common Stock held in the treasury of JAG Media, and (ii) excluding all
shares of Series 2 and Series 3 Class B Common Stock outstanding, but (iii)
including as outstanding the relevant number of shares of JAG Media Common Stock
for which shares of prior classes of stock of JAG Media can be exchanged (but
have not yet been exchanged) by virtue of recapitalizations carried out by JAG
Media (the "Merger Consideration").
Each outstanding share of Cryptometrics Common Stock shall be converted into the
right to receive, and become exchangeable for, the number of shares of JAG Media
Common Stock equal to the quotient obtained by dividing the Merger Consideration
by the total number of shares of Cryptometrics Common Stock outstanding at the
time the Certificate of Merger is filed with the Delaware Secretary of State
(including options and warrants for outstanding exchangeable shares of
Cryptometrics' Canadian subsidiary, Cryptometrics Canada, Inc.)
23
The number of shares of JAG Media Common Stock to be issued in connection with
the Merger is fixed based upon the number of shares of JAG Media Common Stock
outstanding just prior to the Merger and will not be adjusted based upon changes
in the value of those shares.
No fractional shares of JAG Media Common Stock shall be issued in connection
with the Merger.
Unless the value of the fractional shares of JAG Media Common Stock which
otherwise would have been issued by virtue of the Merger to a Cryptometrics
stockholder exceeds an aggregate cash amount of One Dollar ($1.00), such
Cryptometrics stockholder shall not be entitled to receive a cash payment in
lieu of a fractional share of JAG Media Common Stock. In the event that the
value of the fractional share of JAG Media Common Stock which otherwise would
have been issued by virtue of the Merger to a Cryptometrics stockholder exceeds
One Dollar ($1.00), any such Cryptometrics stockholder entitled to receive a
fractional share of JAG Media Common Stock will be entitled to receive a cash
payment in lieu of such fractional share in an amount determined by JAG Media to
be equal to such fraction multiplied by the arithmetic mean of the closing
prices of JAG Media Common Stock on the Pink Sheets over the 20 trading days
ending three trading days prior to the closing date of the transaction.
Upon issuance of the shares of JAG Media Common Stock to the Cryptometrics
stockholders in connection with the Merger, such shares shall be registered with
the SEC on this Registration Statement on Form S-4. In accordance with the terms
of the Merger Agreement, however, stockholders of Cryptometrics shall not be
permitted to sell or otherwise dispose of sixty-five percent of the JAG Media
Common Stock received in connection with the Merger for a period of twelve
months from the closing date of the transaction. Subject to compliance with all
relevant securities laws, thirty-five percent of the shares of JAG Media Common
Stock issued to the Cryptometrics stockholders in connection with the Merger
shall not be subject to the twelve-month lock-up provision so long as the shares
of the surviving corporation, JAG Media (to be renamed Cryptometrics, Inc.), are
listed on the NASDAQ Capital Market.
The Form S-4 shall also register the JAG Media shares for which outstanding
options and warrants of Cryptometrics (including options and warrants for
outstanding exchangeable shares of Cryptometrics' Canadian subsidiary,
Cryptometrics Canada, Inc.) which may be exercised after the Merger.
Additionally, the Form S-4 shall separately register the resale of the shares of
JAG Media Common Stock issuable in connection with the Merger to the current
Co-Chief Executive Officers of Cryptometrics, Robert Barra and Michael A.
Vitale, and the current Chief Strategy Officer of Cryptometrics, Joel Shaw, so
that such shares are immediately saleable by them subject to the twelve-month
lock-up restriction noted above.
Q: HOW DOES THE JAG MEDIA BOARD OF DIRECTORS RECOMMEND THAT I VOTE ON PROPOSALS
3, 4 and 5?
A: The JAG Media Board of Directors unanimously recommends that the JAG Media
stockholders vote (i) FOR the amendment to JAG Media's Articles of Incorporation
to increase its authorized capital from 250,000,000 to 500,000,000 shares of
Common Stock, (ii) FOR the amendment to JAG Media's Articles of Incorporation to
change the name of the corporation from JAG Media Holdings, Inc. to
Cryptometrics, Inc. if the Merger is consummated and (iii) FOR the adjournment
of the Annual Meeting, if necessary, to assure the presence of a quorum or
solicit additional votes or proxies to approve the foregoing proposals to amend
JAG Media's Articles of Incorporation.
Q: HOW DO I CAST MY VOTE?
A: You should either (i) indicate on your proxy card how he wants to vote, sign
it and mail it in the enclosed return envelope as soon as possible, so that your
shares may be represented at the Annual Meeting of the
24
stockholders of JAG Media or (ii) vote your shares through the Internet by
following the instructions on your proxy card. You may also attend the Annual
Meeting of the stockholders of JAG Media and vote your shares in person.
As noted above, shares of JAG Media Common Stock held in "street name" will not
be voted on any merger related matter if the holder of such stock does not
provide his broker with instructions on how to vote the "street name" shares. A
JAG Media stockholder whose shares of JAG Media Common Stock are held in "street
name" should instruct his broker how to vote the shares, following the
directions provided by the broker. Please check the voting form used by the
broker to see if the broker will permit a vote by telephone or over the
Internet.
Q: CAN I CHANGE MY VOTE AFTER I DELIVER MY PROXY?
A: Yes. You may change your vote at anytime before your proxy is voted. You can
do this in one of three ways you can (i) send in a later-dated, signed proxy
card to the JAG Media secretary or assistant secretary, as set forth above in
the notice of Annual Meeting, (ii) attend the Annual Meeting of the stockholders
of JAG Media and vote in person if you are a holder of record or (iii) revoke
your proxy by sending a notice of revocation to JAG Media's secretary or
assistant secretary for receipt no later than two business days prior to the
meeting.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. You do not need to do so, and should not send in your stock certificates,
whether or not the Merger is completed. If the Merger is completed,
Cryptometrics stockholders will be sent written instructions for exchanging
their stock certificates.
Q. WILL THE JAG MEDIA OR CRYPTOMETRICS STOCKHOLDERS BE SUBJECT TO TAXATION?
It is intended that the Merger qualify as a "tax-free reorganization" for U.S.
federal income tax purposes. In such event, Cryptometrics stockholders will
generally not recognize any gain or loss for U.S. federal income tax purposes on
the exchange of their Cryptometrics Common Stock for JAG Media Common Stock in
the Merger. Cryptometrics stockholders should refer to the discussion below in
"Material U.S. Federal Income Tax Consequences of the Merger". The holders of
JAG Media Common Stock also will generally not recognize any gain or loss as a
result of the Merger.
Q: WHEN IS THE MERGER GOING TO BE COMPLETED?
A: We will complete the Merger upon receipt of the approval of the stockholders
of JAG Media to amend its Articles of Incorporation as described herein, in
addition to the satisfaction of the other closing conditions set forth in the
Merger Agreement.
Q: ARE CRYPTOMETRICS STOCKHOLDERS ENTITLED TO APPRAISAL RIGHTS?
A: Yes. Under Delaware law, holders of Cryptometrics Common Stock will have the
right to seek appraisal of the fair value of their shares as determined by the
Delaware Court of Chancery if the merger is completed, but only if they submit a
written demand for an appraisal within 20 days after the date of the mailing of
this proxy statement / prospectus and they comply with the Delaware law
procedures explained herein. In the event that holders of more than 100,000
shares of Cryptometrics Common Stock choose to exercise their appraisal rights,
Cryptometrics will be under no obligation to consummate the Merger.
WHO CAN HELP ANSWER YOUR QUESTIONS?
If you are a JAG Media stockholder and have more questions about the Merger,
please contact:
25
JAG Media Holdings, Inc.
6865 SW 18th Street
Suite B-13
Boca Raton, Florida 33433
Attention: Stephen J. Schoepfer, President and Chief Operating Officer
Tel. No. (866) 300-7410 - Extension 112
If you are a Cryptometrics stockholder and have more questions about the Merger,
please contact:
Cryptometrics, Inc.
73 Main Street
Tuckahoe, New York 10707
Attention: Robert Barra, Co-Chief Executive Officer
Tel. No. (914) 274-6140
26
SUMMARY
This summary contains selected information from this Proxy
Statement/Prospectus and may not contain all of the information that is
important to you. To understand the Merger fully and to obtain a more complete
description of the legal terms of the Merger, you should carefully read this
entire document, including the Merger Agreement and other Appendices, and the
documents to which we refer you. See "Where You Can Find More Information" on
page 166.
THE COMPANIES
JAG MEDIA HOLDINGS, INC. (SEE PAGE 111)
JAG Media, a Nevada corporation headquartered in Boca Raton, Florida,
provides Internet-based equity information and advice, offering its subscribers
a variety of market news through its website, jagnotes.com. JAG Media focuses
its marketing efforts on institutional subscribers.
The jagnotes.com website is currently a subscription service which
offers subscribers two targeted products:
o the JAGNotes (Upgrade/Downgrade) Report, a daily consolidated
investment report that summarizes newly issued research, analyst
opinions, upgrades, downgrades and analyst coverage changes from
various investment banks and brokerage houses; and
o the JAG Media Rumor Report where JAG Media posts rumors that have
been heard on the street about various stocks.
JAG Media also maintains a JAGNotes (Upgrade/Downgrade) Report
faxed-based service for a limited number of mostly institutional subscribers.
On November 24, 2004, through JAG Media's English subsidiary now named
Pixaya (UK) Limited, JAG Media purchased certain development stage software and
related assets from TComm Limited, a company also organized in the United
Kingdom. At the time of acquisition, TComm Limited was in various stages of
development of four software products. JAG Media has continued developing Pixaya
Mobile (previously known as TComm TV), which delivers on-demand video/audio
clips and text messages to various Java-based and Symbian-based mobile phones,
and SurvayaCam (previously CCMTV), which consists of software programs and
related hardware intended to permit field personnel to send real-time video
streams from the field to a central location where they can be viewed by one or
more persons. In addition, JAG Media is supporting development of a new mobile
phone product named "SOS Guides", which are mobile travel guides that will be
made available to users through their mobile phones. JAG Media intends to market
the "SOS Guides" to travel agents, metropolitan tourist bureaus and other travel
related companies.
The executive offices of JAG Media are located at 6865 SW 18th Street,
Suite B-13, Boca Raton, Florida 33433. JAG Media's telephone number is
(866) 300-7410. JAG Media's website is located at www.jagnotes.com and
www.pixaya.com.
CRYPTOMETRICS ACQUISITION, INC.
Cryptometrics Acquisition, Inc., a Delaware corporation ("Merger Sub"),
is a wholly-owned subsidiary of JAG Media formed solely in connection with the
proposed Merger. Upon successful completion of the Merger, Merger Sub will be
merged with and into Cryptometrics and will cease to exist as
27
a separate corporation. If the Merger is not consummated as planned, JAG Media
has undertaken to cause Merger Sub to change is name to a name not including
"Cryptometrics".
Merger Sub's principal executive offices are located c/o JAG Media,
6865 SW 18th Street, Suite B-13, Boca Raton, Florida 33433. Merger Sub's
telephone number is (886) 300-7410.
CRYPTOMETRICS, INC. (SEE PAGE 133)
Cryptometrics, a Delaware corporation headquartered in Tuckahoe, New
York, is a security solution provider using cryptography and biometrics
technologies to protect computerized systems, information and physical points of
access to secure sensitive areas. Cryptometrics' technology can be applied to
any business or group of users seeking security solutions for biometric
authentication, encrypted storage, network access and secure electronic
transmission of sensitive data. Cryptometrics' wholly-owned subsidiary,
Cryptometrics Canada, Inc. (formerly known as BioDentity Systems Corporation),
specializes in providing face biometric authentication technologies specifically
designed to strengthen border control, aviation security and homeland defense.
Cryptometrics' website is located at www.cryptometrics.com.
The executive offices of Cryptometrics are located at 73 Main Street,
Tuckahoe, New York 10707. Cryptometrics' telephone number is (914) 274-6140.
THE JAG MEDIA ANNUAL MEETING
The Annual Meeting of the JAG Media Stockholders will be held on
________, 2006 at ___ a.m. (Pacific Standard Time) in the law offices of Jones
Vargas, located on the Twelfth Floor of 100 West Liberty Street in Reno, Nevada.
In addition to the proposal to elect two members to the board of directors of
JAG Media and to ratify J.H. Cohn LLP as JAG Media's independent registered
public accounting firm for the fiscal year ending July 31, 2006, JAG Media
stockholders will be requested to (i) vote upon a proposal to amend JAG Media's
Articles of Incorporation to increase the number of shares of authorized JAG
Media Common Stock from 250,000,000 to 500,000,000, (ii) to amend JAG Media's
Articles of Incorporation to change JAG Media's name to "Cryptometrics, Inc." if
the Merger is consummated and (iii) to adjourn the Annual Meeting, if necessary,
to assure the presence of a quorum or to solicit additional proxies to approve
the foregoing proposed amendments to the Articles of Incorporation.
EACH OF THE DIRECTORS AND EXECUTIVE OFFICERS OF JAG MEDIA INTEND TO VOTE THEIR
SHARES IN FAVOR OF ALL OF THE PROPOSALS IN THIS PROXY STATEMENT/PROSPECTUS.
THE MERGER
THE MERGER AGREEMENT IS ATTACHED TO THIS PROXY STATEMENT/PROSPECTUS AS APPENDIX
C. PLEASE READ THE MERGER AGREEMENT. IT IS THE LEGAL DOCUMENT THAT GOVERNS THE
TRANSACTION.
28
GENERAL (SEE PAGE 67)
If the Merger is completed:
o Merger Sub will be merged with and into Cryptometrics;
o Cryptometrics will become the wholly-owned subsidiary of JAG Media;
and
o JAG Media's name will be changed to "Cryptometrics, Inc."
WHAT CRYPTOMETRICS STOCKHOLDERS WILL RECEIVE IN THE MERGER (SEE PAGE 67)
All holders of Cryptometrics Common Stock issued and outstanding
immediately prior to the time the Certificate of Merger is filed with the
Delaware Secretary of State, including as outstanding for this purpose the total
number of shares of Cryptometrics Common Stock for which outstanding
exchangeable shares (the "Exchangeable Shares") of Cryptometrics' Canadian
subsidiary, Cryptometrics Canada, Inc. can be exchanged, will be entitled to
receive shares of fully paid and nonassessable JAG Media Common Stock equal to
7.4656 times the number of shares of JAG Media Common Stock outstanding at the
time the Certificate of Merger is filed with the Delaware Secretary of State (i)
excluding all shares of JAG Media Common Stock held in the treasury of JAG
Media, and (ii) excluding all shares of Series 2 and Series 3 Class B Common
Stock outstanding, but (iii) including as outstanding the relevant number of
shares of JAG Media Common Stock for which shares of prior classes of stock of
JAG Media can be exchanged converted (but have not yet been exchanged) by virtue
of the various recapitalizations carried out by JAG Media (the "Merger
Consideration").
Each outstanding share of Cryptometrics Common Stock, including as
outstanding for this purpose the total number of shares of Cryptometrics Common
Stock for which outstanding Exchangeable Shares of Cryptometrics' Canadian
subsidiary, Cryptometrics Canada, Inc., can be exchanged shall be converted into
the right to receive, and become exchangeable for, the number of shares of JAG
Media Common Stock equal to the quotient obtained by dividing the Merger
Consideration by the total number of outstanding shares of Cryptometrics Common
Stock at the time the Certificate of Merger is filed with the Delaware Secretary
of State.
Each Cryptometrics stockholder (after aggregating the fractional shares
of JAG Media Common Stock that would otherwise be received by such holder) shall
be entitled only to the number of shares of JAG Media Common Stock per share of
Cryptometrics Common Stock which such Cryptometrics stockholder is entitled to
receive pursuant to the foregoing sentence times the number of shares of
Cryptometrics Common Stock held by such stockholder at the time the Certificate
of Merger is filed with Delaware Secretary of State. Unless the value of the
fractional share of JAG Media Common Stock which otherwise would have been
issued by virtue of the Merger to a Cryptometrics stockholder exceeds an
aggregate cash amount of One Dollar ($1.00), determined as provided below, such
Cryptometrics stockholder shall not be entitled to receive a cash payment in
lieu of a fractional share of JAG Media Common Stock. In the event that the
value of the fractional share of JAG Media Common Stock to be issued by virtue
of the Merger to a Cryptometrics stockholder exceeds One Dollar ($1.00), any
such Cryptometrics stockholder entitled to receive a fractional share of JAG
Media Common Stock will be entitled to receive a cash payment in lieu of such
fractional share in an amount determined by JAG Media to be equal to such
fraction multiplied by the arithmetic mean of the closing prices of JAG Media
Common Stock on the Pink Sheets LLC over the twenty 20 trading days ending three
trading days prior to the closing date of the transaction. No fractional shares
of JAG Media Common Stock shall be issued in connection with the Merger.
The number of shares of JAG Media Common Stock to be issued in
connection with the Merger is fixed based upon the number of shares of JAG Media
Common Stock outstanding just prior to the merger,
29
and will not be adjusted based upon changes in the value of those shares. The
value of the shares of JAG Media Common Stock that Cryptometrics stockholders
will receive will fluctuate as the market price for JAG Media Common Stock
changes. On January 3, 2006 the last reported per share sales price of JAG Media
Common Stock as quoted on the Pink Sheets was $0.43 per share. The actual market
value of the JAG Media Common Stock to be issued in the Merger, however, will
depend on the market price of JAG Media Common Stock on the closing date, which
may be more or less than the sale price stated above. Also, there can be no
assurance that the value of the JAG Media Common Stock will not decline upon
issuance of such shares in the amounts contemplated by the transaction, even if
the sale of the shares is restricted as described above.
Immediately after the Merger, Cryptometrics stockholders will own
approximately 300,000,000 shares of JAG Media Common Stock, equivalent to
approximately 88.1875% of the outstanding JAG Media Common Stock.
INVESTMENT BANKERS RETAINED BY JAG MEDIA WILL BE ENTITLED TO SHARES OF JAG MEDIA
COMMON STOCK AS ARRANGERS' FEES IN CONNECTION WITH THE MERGER. (SEE PAGE 59)
JAG Media has retained investment bankers and/or finders who will
receive success fees if the Merger is consummated. JAG Media's investment
bankers will receive a fee equal to two-thirds of one percent (0.66%) of the
number of shares of JAG Media to be issued or issuable by JAG Media to the
Cryptometrics stockholders. These shares will be issued immediately after the
completion of the Merger.
WHAT JAG MEDIA STOCKHOLDERS WILL OWN FOLLOWING THE MERGER (SEE PAGE 64)
JAG Media stockholders will continue to own their existing shares JAG
Media Common Stock after the Merger. Accordingly, JAG Media stockholders should
not send in their stock certificates in connection with the Merger.
Immediately after the Merger, existing JAG Media stockholders will
continue to own the same number of shares of JAG Media Common Stock, but after
the merger such shares will only be equivalent to approximately 11.8125% of the
outstanding JAG Media Common Stock.
REASONS FOR THE MERGER (SEE PAGES 61 and 63)
The companies believe that JAG Media's acquisition of Cryptometrics
will create a company stronger than either JAG Media or Cryptometrics standing
alone and will provide significant benefits to the stockholders of both
companies. The combined companies will have better access to financial markets
to support future growth and the overhead costs of being a public company will
be absorbed by a potentially larger revenue base. The Boards of Directors of JAG
Media and Cryptometrics unanimously approved the Merger Agreement and the
related Merger.
30
RECOMMENDATIONS TO JAG MEDIA STOCKHOLDERS (SEE PAGE 62)
The Board of Directors of JAG Media believes that the Merger is fair to
JAG Media and in the best interests of its stockholders and unanimously
recommends that the stockholders of JAG Media (i) vote FOR the proposal to amend
JAG Media's Articles of Incorporation to increase its authorized capital from
250,000,000 to 500,000,000 shares of Common Stock, (ii) vote FOR the proposal to
amend JAG Media's Articles of Incorporation to change its corporate name to
"Cryptometrics, Inc." upon completion of the Merger and (iii) vote FOR the
proposal to adjourn the Annual Meeting, if necessary, to assure the presence of
a quorum or solicit additional proxies to approve the foregoing proposals to
amend JAG Media's Articles of Incorporation.
U.S. FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE 65)
It is intended that the Merger qualify as a "tax-free reorganization"
for U.S. federal income tax purposes. In such event, Cryptometrics stockholders
will generally not recognize any gain or loss for U.S. federal income tax
purposes on the exchange of their shares of Cryptometrics Common Stock for
shares of JAG Media Common Stock in the Merger. Cryptometrics stockholders
should refer to the discussion below in "Material U.S. Federal Income Tax
Consequences of the Merger". The holders of JAG Media Common Stock also will
generally not recognize any gain or loss as a result of the Merger.
ACCOUNTING TREATMENT (SEE PAGE 64)
For financial statement purposes, Cryptometrics is the acquiring
company and this transaction will be treated as a purchase by Cryptometrics of
JAG Media. The assets and liabilities of JAG Media will be recorded at their
fair values, which approximate their historical values and the assets and
liabilities of Cryptometrics will be recorded at their historical carrying
values. The reported financial condition and results of operations of JAG Media
after the Merger will reflect these values, but will not be retroactively
restated to reflect the historical financial position or results of
Cryptometrics.
MARKET PRICE INFORMATION (SEE PAGE 133)
JAG Media Common Stock currently trades "Over-the-Counter" and is
quoted on the Pink Sheets under the symbol "JAGH." On September 8, 2005, the
last full trading day before the public announcement of the execution of a
non-binding term sheet relating to the proposed Merger, the last reported per
share sales price of JAG Media Common Stock on the Pink Sheets was $0.12. On
January 3, 2006, the most recent practicable date prior to the filing of this
Proxy Statement/Prospectus, the last reported per share sales price for JAG
Media Common Stock was $0.43.
Cryptometrics Common Stock is not publicly held or traded on any
recognized securities market.
LISTING OF JAG MEDIA COMMON STOCK (SEE PAGE 85)
JAG Media intends to apply to list the shares of JAG Media Common
Stock, including those issued in connection with the Merger, on the NASDAQ
Capital Market under the new name Cryptometrics, Inc. and a new symbol.
OWNERSHIP OF JAG MEDIA AFTER THE MERGER (SEE PAGE 64)
In connection with the Merger, JAG Media will issue approximately
300,000,000 shares of JAG Media Common Stock to the Cryptometrics stockholders.
Immediately upon consummation of the Merger, Cryptometrics stockholders
immediately prior to the merger will own approximately 88.1875% of the
31
outstanding shares of JAG Media Common Stock and JAG Media stockholders will own
11.8125% of the outstanding shares of JAG Media Common Stock.
This information is based on the number of shares of JAG Media Common
Stock and the number of shares of Cryptometrics Common Stock outstanding on
January 3, 2006 and changes currently contemplated by the Merger Agreement to
occur prior to the closing date.
DIRECTORS & MANAGEMENT OF JAG MEDIA AFTER THE MERGER (SEE PAGE 103)
If the Merger is completed, the directors and executive officers of
Cryptometrics just prior to the effective time of the Merger will become
directors and senior management of JAG Media (to be renamed Cryptometrics,
Inc.), including the prior Cryptometrics business and the traditional JAG Media
business. The management of Cryptometrics will also appoint additional directors
of JAG Media. The existing directors and executive officers of JAG Media and its
subsidiary, JAG Media LLC., will resign or be terminated.
CONDITIONS TO COMPLETING THE MERGER (SEE PAGE 84)
The respective obligations of JAG Media, Merger Sub and Cryptometrics
to complete the Merger are subject to many conditions, including the following:
o there is no law or court order prohibiting the Merger;
o the representations and warranties of JAG Media, Merger Sub and
Cryptometrics remain accurate in all respects, with permitted
exceptions;
o each of JAG Media, Merger Sub and Cryptometrics has performed, in
all material respects, all of its respective obligations under the
Merger Agreement;
o the shares of JAG Media Common Stock, including those issued in the
Merger will be listed on the NASDAQ Capital Market; and
o the holders of no more than 100,000 shares of Cryptometrics common
stock exercise appraisal rights in connection with the Merger.
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 87)
JAG Media and Cryptometrics may jointly agree to terminate the Merger
Agreement and abandon the Merger prior to the closing date. Either company may
terminate the Merger Agreement if (i) the Merger is not consummated on or before
April 15, 2006, (ii) if a governmental entity shall have issued an order or
taken any other action having the effect of permanently prohibiting the Merger
or (iii) if JAG Media's stockholders fail to approve the amendments to its
Articles of Incorporation described above.
JAG Media may terminate the Merger Agreement and abandon the Merger
prior to closing date if (i) any condition or obligation of JAG Media contained
in the Merger Agreement becomes incapable of fulfillment other than as a result
of a breach by JAG Media (and JAG Media does not waive such condition), (ii)
there has been a breach by Cryptometrics of a representation, warranty or
covenant contained in the Merger Agreement or (iii) at any time prior to JAG
Media's stockholders' approval of the Merger-related proposals described above,
JAG Media receives an unsolicited proposal from a third party to acquire all or
substantially all of the outstanding stock of JAG Media, or all or substantially
all of the assets of JAG Media and its subsidiaries, on terms that the Board of
Directors, determines in good faith, to be more favorable to JAG Media's
stockholders than the terms of the Merger Agreement and related Merger.
32
Cryptometrics may terminate the Merger Agreement and abandon the Merger
prior to the closing date if (i) any condition or obligation of Cryptometrics
contained in the Merger Agreement becomes incapable of fulfillment other than as
a result of a breach by Cryptometrics (and such condition is not waived by
Cryptometrics), (ii) there has been a breach by JAG Media of a representation,
warranty or covenant contained in the Merger Agreement and such breach is not
curable within 15 days after written notice of such breach is given to JAG Media
by Cryptometrics, (iii) if JAG Media Common Stock is not approved for listing on
the NASDAQ Capital Market (iv) the holders of more than 100,000 shares of
Cryptometrics Common Stock exercise appraisal rights in connection with the
Merger, or (v) at any time prior to JAG Media's stockholders' approval of the
Merger-related proposals set forth above, Cryptometrics receives an unsolicited
proposal from a third party to acquire all or substantially all of the
outstanding stock of Cryptometrics, or all or substantially all of the assets of
Cryptometrics and its subsidiaries, on terms that the Board of Directors,
determines in good faith, to be more favorable to Cryptometrics stockholders
than the terms of the Merger Agreement and related Merger.
INTERESTS OF THE DIRECTORS AND OFFICERS OF JAG MEDIA AND CRYPTOMETRICS IN THE
MERGER (SEE PAGE 98)
Directors and officers of JAG Media and Cryptometrics have interests in
the Merger that are different from, or in addition to, your interests as JAG
Media stockholders or Cryptometrics stockholders. Specifically, if the Merger is
completed, the existing directors and executive officers of Cryptometrics will
become the directors and senior management of JAG Media (to be renamed
Cryptometrics, Inc.).
SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION (SEE PAGE 100)
In accordance with the terms of the Merger Agreement, stockholders of
Cryptometrics shall not be permitted to sell or otherwise dispose of sixty-five
percent of the JAG Media Common Stock received in conjunction with the Merger
for a period of twelve months from the closing date of the transaction. Subject
to compliance with all relevant securities laws, thirty-five percent of the
shares of JAG Media Common Stock issued to the Cryptometrics stockholders in
connection with the Merger shall not be subject to the twelve-month lock-up
provision so long as the shares of JAG Media (to be renamed Cryptometrics, Inc.)
are listed on the NASDAQ Capital Market.
The Form S-4, which includes this prospectus, separately registers the
resale of the shares of JAG Media Common Stock issuable in connection with the
Merger to the current Co-Chief Executive Officers of Cryptometrics, Robert Barra
and Michael A. Vitale, and the current Chief Strategy Officer of Cryptometrics,
Joel Shaw, so that such shares shall be saleable by them subject to the lock-up
restrictions noted above.
RISK FACTORS (SEE PAGE 39)
The Merger involves a number of risks to the stockholders of each
company. The stockholders of JAG Media and Cryptometrics should carefully
consider these risks, certain of which are described under the heading "Risk
Factors" before voting on or consenting to the proposals contained in this Proxy
Statement/ Prospectus.
APPRAISAL RIGHTS (SEE PAGE 56)
If the Merger is completed, Cryptometrics stockholders who do not
consent to the Merger may, under certain circumstances, exercise appraisal
rights under the applicable laws of the State of Delaware. Such stockholders may
be entitled to appraisal rights with respect to their shares of Cryptometrics
Common Stock.
33
JAG Media stockholders do not have appraisal rights in connection with
the proposals to be voted on at the Annual Meeting.
REGULATORY APPROVALS
Once the Registration Statement has been declared effective by the SEC,
the consummation of the Merger Agreement will not be subject to federal or state
regulatory approval.
34
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF JAG MEDIA
The following selected consolidated financial data for the years ended
July 31, 2005 and 2004 have been derived from JAG Media's audited consolidated
financial statements and the related notes, which are included elsewhere in this
Proxy Statement/Prospectus. The selected consolidated financial data for the
years ended July 31, 2003, 2002 and 2001 have been derived from JAG Media's
audited consolidated financial statements which are not included in this Proxy
Statement/Prospectus. The selected consolidated financial data as of October 31,
2005 and 2004 have been derived from unaudited consolidated financial statements
which appear elsewhere in this prospectus. The historical results are not
necessarily indicative of the operating results to be expected in the future.
You should read the following selected consolidated financial data together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and the related notes
included elsewhere in this Proxy Statement/Prospectus.
SELECTED HISTORICAL FINANCIAL DATA OF JAG MEDIA FOR THE YEARS
ENDED JULY 31, 2005, 2004, 2003, 2002 AND 2001 AND FOR
THE THREE MONTHS ENDED OCTOBER 31, 2005 AND 2004
3 MONTHS 3 MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED ENDED
JULY 31, JULY 31, JULY 31, JULY 31, JULY 31, OCTOBER 31, OCTOBER 31,
2005 2004 2003 2002 2001 2005 2004
---------- ---------- ---------- ---------- ---------- ----------- ----------
STATEMENT OF
OPERATIONS DATA:
Revenues $ 239,651 $ 253,256 $ 385,881 $ 624,674 $1,001,463 $40,023 $72,227
Operating loss 1,701,616 1,984,479 2,539,917 4,017,257 14,548,640 521,886 217,792
Net loss 1,889,165 2,005,637 2,578,735 4,020,853 16,665,269 594,554 217,101
Net loss per
common share $0.04 $0.05 $0.07 $0.15 $0.93 $0.01 $0.00
Weighted average
number of common
shares 44,510,641 42,696,349 37,709,338 26,644,860 17,853,515 44,747,799 44,235,299
BALANCE SHEET:
Total assets $ 838,102 $ 507,373 $ 537,654 $ 149,915 $ 599,421 $505,979 $308,936
Total liabilities 2,169,570 104,695 599,458 1,393,883 443,865 2,420,568 108,800
Working capital
(deficit) 500,203 367,392 (87,296) (1,298,666) (289,723) (72,539) (168,437)
Stockholders'
equity (deficiency) (1,331,472) 402,674 (61,808) (1,243,968) 155,556 (1,914,593) 200,132
35
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
OF CRYPTOMETRICS
The following selected consolidated financial data for the years ended
April 30, 2005 and April 30, 2004 and the six months ended October 31, 2005 and
2004 have been derived from Cryptometrics' audited consolidated financial
statements and the related notes, which are included elsewhere in this Proxy
Statement/Prospectus. The following selected financial data for the six months
ended October 31, 2005 and 2004 have been derived from Cryptometrics unaudited
consolidated financial statements and the related notes, which are also included
elsewhere in this Proxy Statement/Prospectus. You should read the following
selected consolidated financial data together with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and the related notes included elsewhere in this Proxy
Statement/Prospectus.
SELECTED HISTORICAL FINANCIAL DATA OF CRYPTOMETRICS FOR THE YEARS
ENDED APRIL 30, 2005 AND 2004 AND
THE SIX MONTHS ENDED OCTOBER 31, 2005 AND 2004
6 MONTHS 6 MONTHS
ENDED ENDED
YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31,
APRIL 30, 2005 APRIL 30, 2004 2005 2004
-------------- -------------- ----------- -----------
STATEMENT ON OPERATIONS DATA:
Revenues....................................... $681,854 $242,022 $63,086 $406,026
Operating loss................................. (5,604,090) (1,879,598) (3,275,983) (2,126,821)
Net loss....................................... (5,501,379) (1,853,591) (3,098,669) (2,126,821)
Net loss available to common stockholders...... (5,501,379) (1,853,591) (3,098,669) (2,126,821)
Net loss per common share...................... (.58) (.26) (0.28) (0.24)
Weighted average number of common shares....... 9,514,345 7,149,900 11,201,424 8,918,947
BALANCE SHEET:
Total assets................................... 23,254,571 13,070,881 19,850,567 13,096,059
Total liabilities.............................. 1,819,947 2,183,532 1,420.257 2,187,093
Working capital................................ 10,069,216 (741,848) 6,902,053 (1,349,942)
Stockholders' equity........................... 21,434,624 10,887,349 18,430,310 10,908,966
36
COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA
The table sets forth for the periods indicated the following:
o the historical net loss and book value per share of JAG Media Common
Stock for the fiscal years ended July 31, 2005, 2004, 2003, 2002 and
2001 and for the fiscal quarter ended October 31, 2005;
o the historical net loss and book value per share of Cryptometrics
Common Stock for the fiscal years ended April 30, 2005 and 2004 and
for the six months ended October 31, 2005;
o pro forma historical net loss and book value per share of JAG Media
(to be renamed Cryptometrics, Inc.) as the holding company
continuing after the Merger, as accounted for as a purchase by
Cryptometrics of JAG Media, for the period presented.
JAG Media has not declared or paid cash dividends on JAG Media Common
Stock. Cryptometrics has not declared or paid cash dividends on Cryptometrics
Common Stock. Any future earnings are expected to be retained for use in the
operations and expansion of Cryptometrics business. Neither JAG Media nor
Cryptometrics anticipates paying any cash dividends in the foreseeable future.
The information presented in this table should be read in conjunction
with the unaudited pro forma condensed consolidated financial information and
the separate historical financial statements of JAG Media and Cryptometrics
included elsewhere in this document.
JAG Media
3 MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED
JULY 31, JULY 31, JULY 31, JULY 31, JULY 31, OCTOBER 31,
2005 2004 2003 2002 2001 2005
---------- ---------- ---------- ---------- ---------- -----------
Net loss per Common Share..................... $ (0.04) $ (0.05) $ (0.07) $ (0.15) $ (0.93) $(0.01)
Cash dividends paid per Common Share.......... - - - - - -
Book value per Common Share................... $ (0.03) $ 0.01 - $ (0.04) $ 0.01 $(0.04)
Cryptometrics
YEAR ENDED YEAR ENDED 6 MONTHS ENDED
APRIL 30, 2005 APRIL 30, 2004 OCTOBER 31, 2005
-------------- -------------- ----------------
Net loss per Common Share..................... $(.26) $(.58) $(0.28)
Cash dividends paid per Common Share.......... - - -
Book value per Common Share................... 1.26 1.91 $ 1.65
Pro Forma Combined - JAG Media (to be renamed Cryptometrics, Inc.), as the
holding company surviving the Merger
YEAR ENDED 3 MONTHS ENDED
JULY 31, 2005 OCTOBER 31, 2005
------------- ----------------
Net loss per Common Share................... $ (0.03) $ (0.01)
Cash dividends paid per Common Share........
Book value per Common Share................. $ 0.08 $ 0.07
37
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Each of JAG Media and Cryptometrics has made forward-looking statements
in this Proxy Statement/Prospectus and in other documents to which you are
referred that are subject to risks and uncertainties. These forward-looking
statements include information about possible or assumed future results of
operations or the performance of the combined companies following the
consummation of the Merger. When any of the words "believes," "expects,"
"anticipates," "intends," "estimates" or similar expressions are used,
forward-looking statements are being made. Many possible events or factors could
affect the actual financial results and performance of each of the companies
before the Merger and of the combined company after the Merger, and these
factors or events could cause those results or performance to differ
significantly from those expressed in these forward-looking statements. Many of
these risks and uncertainties are not within either company's control and are
set forth under "Risk Factors" at page 39. Possible events or factors include
the following:
o revenues of both JAG Media and Cryptometrics after the Merger may be
lower than currently expected for a variety of reasons including
loss of personnel, changes in market conditions and responses by
competitors;
o conducting the JAG Media and Cryptometrics businesses in the future
may be more time consuming, costly and difficult than anticipated;
o competition in Cryptometrics' industry is extremely intense and may
increase;
o third parties may infringe Cryptometrics' proprietary intellectual
property rights;
o issues and difficulties that are faced in connection with the
continued development and improvement of software;
o issues and difficulties that are faced in connection with rapid
growth;
o litigation involving matters such as intellectual property,
securities, employees and customer issues may adversely affect the
businesses of Cryptometrics and JAG Media;
o general economic conditions in the U.S. or abroad may change or be
worse than currently expected; and
o changes may occur with respect to JAG Media's stock price or in the
securities markets in general.
Neither JAG Media nor Cryptometrics is undertaking any responsibility
to release publicly any revisions to these forward-looking statements to take
into account events or circumstances that occur after the date of this Proxy
Statement/Prospectus. Additionally, neither JAG Media nor Cryptometrics is
undertaking any responsibility to update you on the occurrence of any
unanticipated events which may cause actual results to differ from those
expressed or implied by the forward-looking statements contained in this Proxy
Statement/Prospectus. You are cautioned not to place undue reliance on these
statements, which speak only as of the date of this Proxy Statement/Prospectus.
38
RISK FACTORS
The Merger proposed in the Merger Agreement poses a high degree of risk
for both the stockholders of JAG Media and the stockholders of Cryptometrics.
Before deciding how to vote on the proposals set forth in this Proxy
Statement/Prospectus, stockholders are urged to carefully consider the
following.
RISKS RELATED TO JAG MEDIA'S BUSINESS
JAG MEDIA HAS A HISTORY OF LOSSES, ANTICIPATE LOSSES FOR THE FORESEEABLE FUTURE
AND MAY NEVER ACHIEVE PROFITABILITY.
As of October 31, 2005 JAG Media had incurred losses to date of
$45,628,214. JAG Media may never achieve profitability. JAG Media has made, and
will continue to make, very significant expenditures well before its revenues
increase sufficiently to cover these additional costs. JAG Media is not able to
estimate when, if ever, its revenues will increase sufficiently to cover these
costs. Internet users have only been attracted to subscription sites in limited
areas. JAG Media's subscription revenues are materially below the level of a
year ago. JAG Media will continue to incur significant losses for the
foreseeable future and cannot assure you that its revenue will stop declining
and grow in the future or that additional financing will be made available to
it. Many dot-com companies have found it difficult to raise funds, and a number
of such companies have gone bankrupt. If JAG Media requires additional funding
and does not obtain it, JAG Media may be forced to restructure, file for
bankruptcy or cease operations, any of which could cause you to lose all or part
of your investment in JAG Media Common Stock.
JAG MEDIA WILL REQUIRE ADDITIONAL FUNDS TO MEET ITS CASH OPERATING EXPENSES AND
ACHIEVE ITS CURRENT BUSINESS STRATEGY.
JAG Media will require more capital to meet its current operating
expenses as well as any non-recurring costs or liabilities and to achieve its
current business strategy. As JAG Media requires additional funds to sustain its
operations as well as refocus its business and bear the costs involved in
attempting to consummate the Merger. Such financing is very difficult to achieve
under current market conditions and may not be available. Even if it is, it may
be on terms that are materially adverse to your interests with respect to
dilution of book value, dividend preferences, liquidation preferences, or other
terms.
JAG Media cannot guarantee that it will be able to obtain additional
financing as it needs it. When JAG Media's operations require additional
financing, if it is unable to obtain it on reasonable terms, JAG Media will be
forced to restructure, file for bankruptcy or cease operations, any of which
could cause you to lose all or part of your investment in JAG Media Common
Stock.
JAG MEDIA HAS BEEN FORCED TO DISCONTINUE ITS COMMENTATORS AND THE FREE PORTION
OF ITS WEBSITE WHICH MAY CAUSE JAG MEDIA TO LOSE SUBSCRIBERS.
In order to attempt to reduce costs to a level commensurate with its
subscription revenues, JAG Media has been forced to discontinue all its
commentators as well as the entire free portion of its website. Accordingly, JAG
Media runs the risk that existing and potential subscribers may not find the
website valuable. Moreover, many of its competitors offer financial information
for free and are likely to continue to do so, perhaps at an increasing rate. JAG
Media's current and potential subscribers may be unwilling to pay for its
service if they feel they can receive comparable information for free.
JAG MEDIA HAS REFOCUSED ITS BUSINESS STRATEGY TO TARGET PRIMARILY SUBSCRIPTIONS
BY INSTITUTIONAL INVESTORS FOR ITS TRADING PRODUCT.
39
JAG Media's effort to include individual retail subscribers as part of
its strategy to increase sales of its flagship Jag Notes Report has been
unsuccessful, and JAG Media has therefore decided to refocus its strategy on
offering subscriptions solely to institutional investors and professional
traders. Due to the uncertain nature of this undertaking, JAG Media's shift in
business strategy may not be successful and it may not realize any benefit from
it.
JAG MEDIA MAY NOT BE ABLE TO STOP CONTRACTION OF ITS SUBSCRIPTION REVENUES AND
ATTRACT SUFFICIENT INSTITUTIONAL CUSTOMERS.
JAG Media's subscriber base has been shrinking and it has determined
that it cannot expand its retail subscriber base for its traditional product.
JAG Media believes that it must refocus its subscriber base on institutional
customers to be successful. JAG Media's subscription revenues are below the
level they were a year ago. During the year ended July 31, 2005 subscription
revenues decreased to $240,000 from the prior year subscription revenues of
$253,000. Although JAG Media is attempting to refocus its key subscriber base,
its efforts may be ineffective, its competitors may be more successful than JAG
Media is in attracting customers, or the number of institutional and other
professional users seeking or willing to pay for financial information may not
increase or may even decrease. Any of these would adversely affect JAG Media.
Because there is currently limited potential for Internet banner advertising
revenues, if JAG Media cannot reverse the current shrinkage of its subscriber
base or refocus such base, JAG Media will have little, if any, financial
success.
JAG MEDIA MAY NOT BE SUCCESSFUL AT BUILDING BRAND AWARENESS OR BUILDING
STRATEGIC RELATIONSHIPS.
JAG Media's growth and success depends in part on its ability to build
awareness of the JAG Media name. JAG Media changed its name to JAG Media in
April 2002 after operating for almost three years under the name JagNotes.com.
The JAG Media name has only limited recognition within the financial community
and little if any recognition among the general public. JAG Media does not
currently allocate any of its working capital to marketing and advertising the
JAG Media name but rather relies solely upon strategic alliances to increase its
name recognition. JAG Media's ability to refocus its subscriber base, offer new
services or otherwise expand the business will be limited if JAG Media cannot
increase that name recognition. JAG Media cannot guarantee that it will be
successful in doing so.
JAG MEDIA MAY EXPERIENCE DIFFICULTIES IN DEVELOPING NEW AND ENHANCED SERVICES
AND PRODUCTS.
JAG Media believes that its JAGNotes website will be more attractive to
subscribers if JAG Media introduces additional or enhanced services in the
future in order to retain its current users and attract new users. JAG Media's
first attempt to introduce streaming audio and video was not financially
successful and the business was sold. JAG Media is now considering various new
enhanced services for its JAGNotes website, as well as new products for its
Pixaya business unit, but adequate financing is not currently available.
JAG Media may experience other difficulties that could delay or prevent
it from introducing such enhanced services. JAG Media may encounter
technological problems in enhancing its websites and developing new products or
enhancements to current products in its Pixaya business unit. JAG Media may need
to modify significantly the design of these services on its websites and modify
significantly (or discontinue, as JAG Media has already had to do) certain
products and services being offered through its Pixaya business unit. JAG
Media's business could be adversely affected if it experiences difficulties in
introducing or maintaining new services and products, if these new services and
products are not accepted by users or if their cost exceeds the revenue they
generate.
40
If JAG Media introduces enhanced service on its JAGNotes website that
is not favorably received, JAG Media's current users may not continue using its
service as frequently. New users could also choose a competitive service over
JAG Media's service.
JAG MEDIA'S FAILURE TO RESPOND TO RAPID CHANGES IN TECHNOLOGY AND ITS
APPLICATIONS AND INTENSE COMPETITION IN THE MOBILE SERVICES INDUSTRY PRODUCTS
COULD MAKE JAG MEDIA'S SERVICES OBSOLETE.
JAG Media's Pixaya business unit develops software for the mobile phone
and wireless environment. The mobile and wireless services industries are
subject to rapid and substantial technological development and product
innovations. To be successful, JAG Media must respond to new developments in
technology, new applications of existing technology and new delivery methods in
its Pixaya business unit. JAG Media's response may be hindered if it requires,
but cannot secure, rights to essential third party intellectual property. JAG
Media competes against numerous companies, most of which have much greater
financial, marketing and technical resources to utilize in pursuing
technological development. JAG Media's financial condition and operating results
could be adversely affected if its mobile services or wireless services fail to
compete favorably with these technological developments or if it fails to be
responsive on a timely and effective basis to competitors' new prices or
strategies.
JAG MEDIA MAY NOT SUCCESSFULLY ATTRACT OR MANAGE STRATEGIC ALLIANCES.
JAG Media currently intends to evaluate strategic alliances,
partnerships or joint ventures, as a means of acquiring additional distribution.
Pursuing such transactions will entail a number of risks and difficulties. JAG
Media competes with a wide variety of information providers and there is
substantial competition for distribution channels. JAG Media can offer no
guarantee that it will be able to locate suitable candidates for alliances or
risk sharing partners. If JAG Media is able to do so, it will require a high
level of managerial skill to successfully evaluate and implement these
transactions. Due to the fact that JAG Media has limited experience in
evaluating and implementing transactions of this type, JAG Media cannot
guarantee that it will be able to successfully pursue this strategy.
JAG MEDIA MAY HAVE TO DEFEND AGAINST INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS
AND LIBEL AND DEFAMATION CLAIMS, WHICH MAY CAUSE SIGNIFICANT OPERATIONAL
EXPENDITURES.
Parties may assert claims against JAG Media that it has violated a
patent or infringed a copyright, trademark or other proprietary right belonging
to them. Parties could also bring libel, defamation or similar claims based on
the content published on JAG Media's websites. Any such claims, whether
meritorious or not, could result in the expenditure of significant financial and
managerial resources on JAG Media's part, which could materially adversely
affect its business, results of operations and financial condition.
FAILURE TO MAINTAIN JAG MEDIA'S REPUTATION FOR TRUSTWORTHINESS MAY REDUCE THE
NUMBER OF ITS USERS, WHICH MAY HARM ITS BUSINESS.
It is very important that JAG Media maintains its reputation as a
trustworthy provider of financial news. The occurrence of certain events such as
JAG Media misreporting a news story could harm its reputation for
trustworthiness. These events could result in a significant reduction in the
number of its subscribers, which could materially adversely affect JAG Media's
business, results of operations and financial condition.
JAG MEDIA DEPENDS ON KEY PEOPLE IN MANAGEMENT AND OPERATIONS.
JAG Media depends on its key employees' contacts within the
professional financial community for certain information that it provides to its
subscribers. Accordingly, JAG Media's success will be largely dependent on JAG
Media's ability to retain Mr. Thomas J. Mazzarisi, its Chairman, Chief Executive
Officer
41
and General Counsel, and Mr. Stephen J. Schoepfer, its President, Chief
Operating Officer, Chief Financial Officer and Secretary. JAG Media may also
need to attract and retain additional qualified officers, software developers
and other key personnel in the future in order to successfully manage its new
strategy. Although JAG Media has recently attracted a team of employees at its
Pixaya business unit and a new employee to execute its acquisition strategy for
JAG Media LLC, JAG Media cannot guarantee that it will be able to continue to
attract the requisite personnel. If JAG Media loses the services of any of its
key personnel or is unable to attract, hire, train and retain qualified
officers, software developers and other key personnel, its business, and your
investment, could be adversely affected.
CERTAIN TERMS OF THE EMPLOYMENT AGREEMENTS OF JAG MEDIA'S EXECUTIVE OFFICERS
COULD DISCOURAGE A POTENTIAL TAKEOVER OF JAG MEDIA BY A THIRD PARTY.
Pursuant to the amended and restated employment agreements of Thomas J.
Mazzarisi, JAG Media's Chairman, Chief Executive Officer and General Counsel,
and Stephen J. Schoepfer, JAG Media's President, Chief Operating Officer, Chief
Financial Officer and Secretary, each executive may resign upon a
change-in-control of JAG Media. A "change in control" shall be deemed to have
occurred if, among other things, there is an acquisition of 30% or more of its
then outstanding shares of Common Stock. If such executive opts to resign from
his position at JAG Media, he shall be entitled to receive (i) continued medical
and life insurance coverage for a severance period equal to the greater of one
year or the number of years and fractions thereof between the date of such
termination and the end of the term, (ii) a lump sum cash payment equal to the
executive's highest rate of annual salary in effect during the employment term
multiplied by the severance period, (iii) a lump sum cash payment equal to the
number of accrued and unused vacation days calculated at the executive's then
current salary rate and (iv) accelerated vesting of all of the executive's
outstanding stock options. Furthermore, immediately prior to a
change-in-control, each of Messrs. Mazzarisi and Schoepfer shall also be granted
an option to acquire 1,000,000 shares of JAG Media Common Stock at an exercise
price equal to the fair market value of the stock prior to such change in
control, which option shall be fully vested and immediately exercisable in full
and expire on a date which is the earlier of ten years from such change in
control and three years after termination of employment. Any or all of these
provisions may have the effect of preventing or discouraging an attempt by a
party to take over or otherwise gain control of JAG Media or reduce the price
which such a party is willing to pay for JAG Media.
JAG MEDIA MAY FACE DIFFICULTIES CONCERNING CONTINUED AVAILABILITY OF SOURCES OF
INFORMATION FOR CERTAIN PRODUCTS.
Certain products that JAG Media offers through its website, including
JAGNotes and the Rumor Room, rely on information from independent third party
sources. JAG Media does not maintain written agreements with these sources to
provide this information, so JAG Media cannot guarantee that any of these
sources will continue to provide the information necessary to maintain these
products on its website. If information from these sources is altered, curtailed
or discontinued this could adversely affect the viability of these products.
This, in turn, could decrease the demand for JAG Media's website or otherwise
materially adversely affect its business.
JAG MEDIA MAY BECOME A PARTY TO VARIOUS LEGAL PROCEEDINGS RELATING TO THE
DISSEMINATION OF RUMORS AND OTHER INFORMATION OF QUESTIONABLE RELIABILITY.
Information posted in the Rumor Room consists of rumors and other
information received from third party sources that may have no reasonable
factual basis. JAG Media realizes that rumors are inherently unreliable, and it
provides a cautionary note on this portion of the JAG Media website reminding
subscribers that cyberfraud is prevalent and that rumors should not be relied
upon when making investment decisions. There can be no assurance that JAG Media
will be able to prevent the unlawful posting of misleading,
42
fraudulent or intentionally erroneous information, however, and the law relating
to JAG Media's potential liability relating to such activity is currently
unsettled. The potential imposition of liability for unlawful activities of
subscribers to the JAG Media website could require JAG Media to implement
measures to reduce JAG Media's exposure to such liability, which may require it,
among other things, to spend substantial resources and/or to discontinue certain
service offerings. In addition, it is possible that JAG Media could become
subject to various legal proceedings alleging, among other things, that it
intentionally disseminated or aided and abetted others in intentionally
disseminating false information. These claims, even without merit, could cause
JAG Media to expend significant financial and managerial resources, which could
adversely affect JAG Media's business operations.
THE UNCERTAINTY OF FUTURE GOVERNMENT REGULATION OF THE INTERNET MAY ADD TO JAG
MEDIA' OPERATING COSTS.
Like many businesses engaging in Internet-related activities, JAG Media
may face unanticipated operating costs because of the current uncertainty
surrounding potential government regulation of the Internet and e-commerce. JAG
Media believes that it is not currently subject to direct regulation of online
commerce, other than regulations applicable to businesses generally. However,
the Internet has rapidly emerged as a commerce medium, and governmental agencies
have not yet been able to adapt all existing regulations to the Internet
environment. Laws and regulations may be introduced and court decisions reached
that affect the Internet or other online services, covering issues such as user
pricing, user privacy, freedom of expression, access charges, content and
quality of products and services, advertising, intellectual property rights and
information security. For example, if the government determines that Jag Media's
website and the types of activities engaged in by visitors and/or subscribers to
JAG Media's website should be subject to new or existing rules or regulations,
JAG Media's business model may be adversely affected and JAG Media's operating
costs may increase. In addition, as an Internet company it is unclear in which
jurisdictions JAG Media is actually conducting business. JAG Media's failure to
qualify to do business in a jurisdiction that requires it to do so could subject
it to fines or penalties and could result in its inability to enforce contracts
in that jurisdiction. Even if JAG Media were able to ascertain correctly in
which jurisdictions it conducts business, many of these jurisdictions have yet
to determine the application of their existing laws to Internet-related
activities or develop laws that apply to such activities.
JAG MEDIA COULD BE DEEMED TO BE AN INVESTMENT ADVISOR SUBJECT TO FEDERAL OR
STATE REGULATORY OVERSIGHT.
Companies and individuals that provide financial advice to investors in
the United States are generally required to register as an investment adviser at
either the federal or state level, and are subject to extensive regulation. JAG
Media believes that its business consists of a publishing activity for which
investment adviser registration and regulation do not apply under applicable
federal or state law, and JAG Media does not believe that it is required to
register as an investment adviser with either the SEC or any of the various
states. The regulatory environment in which JAG Media operates is subject to
change, however, and it could be required to register as an investment adviser
with an appropriate regulatory agency at some point in the future. Such
registration could adversely affect JAG Media's method of operation and
revenues. For example, if JAG Media were ever deemed to be in non-compliance
with applicable investment adviser regulations, JAG Media could be subject to
various penalties, including administrative or judicial proceedings that might
result in censure, fine, civil penalties (including treble damages in the case
of insider trading violations), the issuance of cease-and-desist orders or other
adverse consequences.
RISKS RELATED TO JAG MEDIA'S INDUSTRY
JAG MEDIA'S BUSINESS IS CURRENTLY DEPENDENT ON THE CONTINUED PUBLIC INTEREST IN
THE STOCK MARKET.
The volatility of the stock market in the 1990s generated unprecedented
public interest in the stock market and trading. JAG Media's success depends
upon the continued maintenance or growth of this interest. The subsequent
downturn in the stock market may have been in part responsible for an overall
decrease in
43
subscription revenues since the end of JAG Media's second fiscal quarter of
2001. Even though the market has recovered to some extent, JAG Media's revenues
have continued to decline. A number of factors that are out of JAG Media's
control could lead to a stagnate or depressed stock market which would likely
decrease the public's interest in stock trading and financial information. If
this were to happen, it is likely that JAG Media would lose a significant
percentage of its then current and potential subscriber base.
JAG MEDIA COMMON STOCK - AND TECHNOLOGY AND INTERNET STOCKS GENERALLY - HAVE
BEEN AND MAY CONTINUE TO BE VOLATILE.
The market for JAG Media Common Stock has been and is likely to
continue to be highly volatile and subject to wide price and volume
fluctuations. These variations are the result of many factors, most of which are
beyond JAG Media's control. Furthermore, Internet and technology related stocks
generally have been subject to wide fluctuations in price and volume that often
appear to be unrelated to the operating results of these companies. The burst of
the dot-com bubble and continued volatility of the stock market has made it
difficult for many dot-com companies to raise funds, and a number of such
companies have gone bankrupt. Such volatility can present risks for investors.
Moreover, such volatility often leads to securities litigation brought by
investors who are seeking to recoup losses resulting from rapid and significant
drops in price and/or volume. Such suits are costly and JAG Media could be
adversely affected if such a suit were brought against it.
MOST OF JAG MEDIA'S CURRENT AND POTENTIAL COMPETITORS HAVE GREATER NAME
RECOGNITION, FINANCIAL, TECHNICAL AND MARKETING RESOURCES, AND MORE EXTENSIVE
CUSTOMER BASES AND INDUSTRY RELATIONSHIPS THAN JAG MEDIA, ALL OF WHICH COULD BE
LEVERAGED TO GAIN MARKET SHARE TO JAG MEDIA'S DETRIMENT.
JAG Media's website's primary current competitors provide financial
news, commentary and analysis on the Internet. Providing financial information
and analysis over the Internet is a relatively new business, but it is already
intensely competitive. An increasing number of web-based financial information
providers are competing for subscribers, customers, advertisers, content
providers, analysts, commentators and staff, and JAG Media continues to face
competition from traditional news and information sources including television
and print. JAG Media expects competition from both sources to intensify and
increase in the future. Many such competitors have substantially greater
financial and other resources than JAG Media has. There can be no guarantee that
JAG Media will be able to compete effectively, or at all, and the failure to do
so would adversely affect JAG Media's business and financial condition.
JAG Media's major competitors currently include:
o Online financial news and information providers including Yahoo
Finance, Marketwatch, TheStreet.com, Briefing.com, America Online
Personal Finance, Reuters and MotleyFool.com
o Internet portals and search engines such as America Online, MSN and
Yahoo;
o Traditional media sources such as The Wall Street Journal, The
Financial Times, Barrons, CNN/Money, and MSN Money/CNBC, all of whom
also have an Internet presence;
o Terminal-based financial news providers including Bloomberg, Reuters
and Dow Jones; and
o Online brokerage firms such as Ameritrade, E*Trade Financial,
Charles Schwab, Fidelity, Harrisdirect and TD Waterhouse.
JAG MEDIA IS IN AN INTENSELY COMPETITIVE BUSINESS WITH LOW BARRIERS TO ENTRY.
44
The barriers to entry into JAG Media's business are relatively low -
i.e., it is not difficult for new competitors to enter the market. Much of the
information JAG Media provides is publicly available and it does not have any
patented or otherwise protected technologies that would preclude or inhibit
competitors from entering its markets. JAG Media's current and future
competitors may develop or offer services that have significant price,
substantive, creative or other advantages over the services JAG Media provides.
If they do so and JAG Media is unable to respond satisfactorily, its business
and financial condition will likely be adversely affected.
JAG MEDIA MAY NOT BE ABLE TO ADEQUATELY PROTECT ITSELF AGAINST SECURITY RISKS.
All Internet businesses are subject to electronic and computer security
risks. JAG Media has taken steps to protect itself from unauthorized access to
its systems and use of its website, but it cannot guarantee that these measures
will be effective. If JAG Media's security measures are ineffective,
unauthorized parties could alter, misappropriate, or otherwise disrupt its
service or information. If such unauthorized parties were able to access certain
of JAG Media's, or its customers', proprietary information, including
subscribers' credit card numbers, JAG Media would face significant unexpected
costs and a risk of material loss, either of which would adversely affect JAG
Media's business.
RISKS RELATED TO JAG MEDIA'S CAPITAL STRUCTURE
JAG MEDIA HAS LIMITED CASH RESOURCES WHICH EXPOSES IT TO CLAIMS.
As of July 31, 2005, JAG Media had $660,865 in cash and as of October
31, 2005, JAG Media had approximately $333,000 in cash and negative working
capital. Such low levels of cash restrict JAG Media's ability to operate and
expose it to claims and lawsuits whatever the merits of such claims may be. If a
claim or lawsuit is pursued against JAG Media and JAG Media does not have
adequate cash at the time to defend against it, JAG Media may be forced to
restructure, file for bankruptcy or cease operations, any of which could cause
you to lose all or part of your investment in JAG Media Common Stock.
THE MARKET FOR JAG MEDIA COMMON STOCK IS LIMITED.
JAG Media's Common Stock is traded on the Pink Sheets. Trading activity
in JAG Media's stock has fluctuated and at times been limited. JAG Media cannot
guarantee that a consistently active trading market for its stock will continue,
especially while it remains on the Pink Sheets.
JAG MEDIA HAS MATERIAL OUTSTANDING INDEBTEDNESS WHICH CAN ONLY BE REPAID BY
ISSUING EQUITY.
In February 2005, JAG Media borrowed $2,000,000 from Cornell Capital
Partners, L.P. and it may be forced to borrow more. Even if JAG Media's
borrowing is restructured, the only foreseeable repayment source at this time is
sales of its equity. If JAG Media is unable to raise money by selling shares of
its common stock through its Equity Line Purchase Agreement with Cornell Capital
Partners, L.P. or otherwise as required to pay its indebtedness and interest
thereon in a timely fashion, JAG Media will be in default. In such event, JAG
Media may be forced to restructure, file for bankruptcy or cease operations, any
of which could cause to you to lose all or part of your investment in JAG Media
Common Stock.
JAG MEDIA MAY NOT BE ABLE TO DRAW DOWN IN WHOLE OR IN PART ON THE EQUITY LINE
PURCHASE AGREEMENT WITH CORNELL CAPITAL, WHICH WOULD ADVERSELY AFFECT JAG
MEDIA'S LIQUIDITY.
JAG Media entered into a $10 million equity line financing arrangement
with Cornell Capital Partners, L.P. on April 9, 2002 and amended this
arrangement on July 8, 2004 and July 21, 2004 to extend the term of the equity
line. As of July 31, 2005, $4,035,000 of the existing equity line with Cornell
Capital had been utilized excluding the $2,000,000 Promissory Note. The Equity
Line Purchase Agreement, as
45
amended, provides for the purchase by Cornell Capital of up to $10 million worth
of shares of JAG Media Common Stock over a 48-month period ending on August 28,
2006. There are limitations on the amount of JAG Media's equity line draws under
the Equity Line Purchase Agreement with Cornell Capital. The maximum dollar
amount JAG Media can draw on the equity line at any one time is $500,000.
Cornell Capital's obligation to purchase JAG Media's shares under the Equity
Line Purchase Agreement is also dependent upon various conditions being
satisfied. The most significant condition to closing is that the registration
statement covering the shares issuable to Cornell Capital pursuant to the equity
line must remain effective at all times and not be subject to any actual or
threatened stop order or subject to any actual or threatened suspension at any
time prior to any closing date. In addition, it is a condition to closing under
the equity line that the shares of Common Stock issuable to Cornell Capital at
the closing be authorized for trading on the Pink Sheets, Nasdaq OTC Bulletin
Board or another market or exchange and such trading shall not have been
suspended at any time by the SEC, Nasdaq or other regulatory authority from the
date JAG Media delivers its put notice to Cornell Capital through the closing
date of the drawdown. It is also a condition that on any given closing date,
there shall be at least one bid for the Common Stock on the market or exchange
on which JAG Media Common Stock is trading. JAG Media is also required to have
performed, satisfied and complied in full with all covenants set forth in the
transaction documents and its representations and warranties set forth in those
agreements must be true and correct at closing. If these conditions are not
satisfied, JAG Media cannot require Cornell Capital to purchase its shares. In
addition, the obligation of Cornell Capital to complete its purchases under the
equity line is not secured or guaranteed. If Cornell Capital does not have
available funds at the time it is required to make a purchase or if Cornell
Capital otherwise refuses to honor its obligation to JAG Media, JAG Media may
not be able to force it to do so. If JAG Media is unable to draw in whole or in
part on the Equity Line Purchase Agreement for any of the above-referenced
reasons, JAG Media's cash, cash equivalents, and securities will not be
sufficient to meet its anticipated cash needs unless JAG Media obtains
alternative financing. There can be no assurance that such financing will be
available to JAG Media. If JAG Media is unable to meet its cash needs, JAG Media
may be forced to restructure, file for bankruptcy or cease operations, any of
which could cause you to lose all or part of your investment in JAG Media Common
Stock.
STOCKHOLDERS MAY EXPERIENCE SIGNIFICANT DILUTION FROM JAG MEDIA'S SALES OF
SHARES TO CORNELL CAPITAL PARTNERS, L.P. PURSUANT TO THE EQUITY LINE PURCHASE
AGREEMENT AND THE PROMISSORY NOTE.
As the market price for JAG Media Common Stock decreases, the number of
shares that may be sold to Cornell Capital Partners, L.P. pursuant to the Equity
Line Purchase Agreement and the Promissory Note will increase. If JAG Media were
to require Cornell Capital to purchase JAG Media's shares at a time when its
stock price is depressed, JAG Media's existing stockholders' interest in JAG
Media will be significantly reduced. JAG Media has registered 20,000,000 shares
for sale to Cornell Capital pursuant to the Equity Line Purchase Agreement and
it has reserved up to 3,500,000 shares of Common Stock for issuance to Cornell
Capital for the exercise of puts under the Promissory Note. If JAG Media
determines to sell Cornell Capital more than a total of 20,000,000 shares under
the Equity Line Purchase Agreement, JAG Media would need to file an additional
registration statement. Additionally, the Company has agreed to register the
Common Stock sold to Cornell Capital on a registration statement on Form SB-2.
In the event the proceeds from the sale of the Common Stock are insufficient to
repay all amounts due under the Promissory Note, the Company has agreed to
reserve additional shares of its Common Stock for issuance to Cornell Capital.
Stockholders will experience significant dilution if, as the result of a
declining market price of JAG Media Common Stock, JAG Media is forced to sell
most or all of these shares to Cornell Capital. In addition, if Cornell Capital
is unable to resell the shares JAG Media issues to it pursuant to the Equity
Purchase Agreement, Cornell Capital could obtain a controlling interest in JAG
Media.
To illustrate this potential for dilution under the Equity Purchase
Agreement, the following table shows, based on the hypothetical variables shown
in the table, (i) the fee payable to Cornell Capital, (ii) the net proceeds to
be received by JAG Media, (iii) the number of shares JAG Media would issue to
Cornell Capital, (iv) the price Cornell Capital would pay for those shares,
(v) the percentage of JAG Media's
46
currently outstanding shares represented by the number of shares issued to
Cornell Capital and (vi) the amount of increase in the net tangible book value
per share that would occur as a result of such issuance. JAG Media's net
tangible book value as of October 31, 2005 was ($1,915,000), representing a net
tangible book value per share of JAG Media Common Stock, based on the number of
such shares outstanding as of October 15, 2005 of ($0.04).
Increase in
Percent of Net Tangible
Advance Investor Net Number of Purchase Outstanding Shares Book Value
Market Price Amount (1) Fee Proceeds Shares Issued Price (2) (7) Per Share
- ------------ ---------- --- -------- ------------- --------- --- ---------
$0.26(3) $500,000 $25,000 $475,000 2,000,000 $0.25 5% $0.01
$0.20 (4) $500,000 $25,000 $475,000 2,631,579 $0.19 6% $0.01
$0.13 (5) $500,000 $25,000 $475,000 4,166,667 $0.12 10% $0.01
$0.07(6) $500,000 $25,000 $475,000 7,462,687 $0.07 18% $0.01
- ----------------------------
(1) Represents the maximum individual advance amount under the Equity Line
Purchase Agreement.
(2) Represents 95% of Market Price (as defined in the Equity Line Purchase
Agreement).
(3) Represents the Market Price of our Common Stock assuming our put right was
exercised on December 9, 2005.
(4) Represents a 25% decline in the Market Price of our Common Stock.
(5) Represents a 50% decline in the Market Price of our Common Stock.
(6) Represents a 75% decline in the Market Price of our Common Stock.
(7) Based on 42,119,655 shares of Common Stock issued and outstanding as of
January 3, 2006.
THE RESALE BY CORNELL CAPITAL PARTNERS, L.P. OF JAG MEDIA'S SHARES MAY LOWER THE
MARKET PRICE OF JAG MEDIA COMMON STOCK.
The resale by Cornell Capital Partners, L.P. of JAG Media Common Stock
that it purchases from JAG Media under the Equity Line Purchase Agreement and
Promissory Note will increase the number of JAG Media's publicly traded shares,
which could lower the market price of JAG Media Common Stock. Moreover, the
shares that JAG Media sells to Cornell Capital will be available for immediate
resale. There are no contractual restrictions on the ability of Cornell Capital
to sell shares issued to it pursuant to the Equity Line Purchase Agreement and
Promissory Note. Under the Promissory Note, Cornell Capital holds puts which can
be exercised every 14 days and JAG Media may continue to exercise its put right
under the Equity Line Purchase Agreement every five trading days. If Cornell
Capital continues to immediately resell such shares, the market price of JAG
Media Common Stock could decrease and you could experience significant dilution.
In addition, the mere prospect of such transactions could lower the market price
for JAG Media Common Stock. The shares of JAG Media Common Stock issuable to
Cornell Capital under the equity line facility will be sold at a 5% discount to
the defined market price of JAG Media Common Stock at the time of the sale.
During July 2005, JAG Media Common Stock traded at an average of approximately
$0.10 per share. If JAG Media were to require Cornell Capital to purchase its
Common Stock when the stock price is low, JAG Media stockholders would
experience substantial dilution.
Because Cornell Capital is purchasing JAG Media's shares at a discount,
it will have an incentive to sell immediately so that it can realize a gain. In
the past JAG Media believes it has done so. If JAG Media Common Stock market
price does decline, this could further accelerate sales of JAG Media Common
Stock as it would require JAG Media to sell more shares under the equity line to
raise the same amount of money. In addition, the perceived risk of dilution and
the resulting downward pressure on JAG Media's stock price could encourage third
parties to engage in short sales of JAG Media Common Stock. By increasing the
number of shares offered for sale, material amounts of short selling could
further contribute to progressive
47
price declines in JAG Media Common Stock. These factors could also make it more
difficult for JAG Media to raise funds through future offerings of JAG Media
Common Stock.
A LARGE PERCENTAGE OF JAG MEDIA'S STOCK COULD BE OWNED BY RELATIVELY FEW PEOPLE,
INCLUDING CORNELL CAPITAL AND JAG MEDIA'S OFFICERS AND DIRECTORS.
Taking into account shares issuable pursuant to JAG Media's Promissory
Note and Equity Line Purchase Agreement with Cornell Capital, JAG Media
estimates that Cornell Capital Partners, L.P. could beneficially own up to
39,766,666 shares of JAG Media Common Stock, or approximately 47% of JAG Media's
issued and outstanding capital stock. If all or most of these shares are issued
to, and held by, Cornell Capital, it would be able to control the disposition of
any matter submitted to a vote of stockholders. This concentration of ownership
may also have the effect of delaying or preventing a change of control of JAG
Media. In addition, if Cornell Capital chose to sell all or a substantial number
of shares of JAG Media Common Stock in the public market at or about the same
time, such sales could cause the market price of JAG Media Common Stock to
decline. In addition, the sale of these shares could impair JAG Media's ability
to raise capital through the sale of additional shares of JAG Media Common
Stock.
BECAUSE JAG MEDIA'S STOCK CURRENTLY TRADES BELOW $5.00 PER SHARE, AND IS QUOTED
ON THE PINK SHEETS, JAG MEDIA'S STOCK IS CONSIDERED BY THE SEC A "PENNY STOCK"
WHICH CAN ADVERSELY AFFECT ITS LIQUIDITY.
JAG Media Common Stock does not currently qualify for listing on the
Nasdaq Capital Market. If JAG Media Common Stock continues to be quoted on the
Pink Sheets or Nasdaq OTC Bulletin Board, and if the trading price of JAG Media
Common Stock remains less than $5.00 per share, JAG Media Common Stock is
considered a "penny stock," and trading in JAG Media Common Stock is subject to
the requirements of Rule 15g-9 under the Securities Exchange Act of 1934. Under
this rule, brokers or dealers who recommend low-priced securities to persons
other than established customers and accredited investors must satisfy special
sales practice requirements. The broker or dealer must make an individualized
written suitability determination for the purchaser and receive the purchaser's
written consent prior to the transaction.
SEC regulations also require additional disclosure in connection with
any trades involving a penny stock, including the delivery, prior to any penny
stock transaction, of a disclosure schedule explaining the penny stock market
and its associated risks. These requirements could severely limit the liquidity
of such securities in the secondary market because few brokers or dealers are
likely to undertake these compliance activities. In addition to the
applicability of the penny stock rules, another risk associated with trading in
penny stocks may be large price fluctuations.
JAG MEDIA MAY NOT RECEIVE ALL OF THE PROCEEDS THAT IT ANTICIPATES FROM ITS
AGREEMENT WITH CORNELL CAPITAL PARTNERS, L.P.
JAG Media's Equity Line Purchase Agreement requires Cornell Capital
Partners, L.P. to purchase up to $10,000,000 of JAG Media's shares, as JAG Media
elects from time to time. As of December 31, 2005, $4,035,000 of the existing
equity line with Cornell Capital had been utilized with a balance of $5,965,000
remaining available under the equity line which must also cover JAG Media's
outstanding $2,000,000 Promissory Note. JAG Media has registered 20,000,000
shares to sell to Cornell Capital under such agreement of which 8,129,540 shares
have been sold. Since the price at which JAG Media will sell its shares to
Cornell Capital is at a 5% discount to the average market price of JAG Media
Common Stock, if the closing stock price is less than $0.50 per share on the day
prior to the date of sale, JAG Media will receive gross proceeds of less than
$5,965,000, unless JAG Media determines to file an additional registration
statement. In addition, depending on the trading volume and market price of the
shares, JAG Media may not be able to raise in timely fashion the funds it
requires or desires through the sale of shares to Cornell Capital.
48
INVESTORS WILL BE RELYING ON JAG MEDIA'S MANAGEMENT JUDGMENT REGARDING THE USE
OF PROCEEDS FROM THE SALE OF SHARES TO CORNELL CAPITAL.
JAG Media's management will have broad discretion with respect to the
use of the net proceeds from its sale of shares to Cornell Capital under the
equity line, and investors will be relying on the judgment of JAG Media's
management regarding the application of those proceeds. JAG Media intends to use
the funds it receives from Cornell Capital to provide general working capital
for JAG Media, including working capital which might be required by its current
or any new subsidiaries it may establish.
JAG MEDIA'S AMENDED CHARTER CONTAINS PROVISIONS WHICH MAY DISCOURAGE AN
UNAFFILIATED PARTY TO TAKE OVER JAG MEDIA.
On June 4, 2004, JAG Media effected a recapitalization of its capital
stock. This recapitalization involved the authorization of 100,440,000
additional shares of stock. Without further stockholder action, the Board of
Directors of JAG Media could authorize the issuance of all or any part of such
additional shares, including preferred stock with special voting rights by class
or with more than one vote per share, to a "white knight" in order to deter a
potential buyer of JAG Media. As a result, the recapitalization might have the
effect of preventing or discouraging an attempt by a party unable to obtain the
approval of the Board of Directors of JAG Media to take over or otherwise gain
control of JAG Media.
POSSIBLE NAKED SHORTING OF JAG MEDIA COMMON STOCK MAY ARTIFICIALLY DEPRESS THE
MARKET PRICE OF OUR SHARES AND OWNERSHIP OF OUTSTANDING SHARES IN JAG MEDIA
COULD BE IN DOUBT DUE SUCH POSSIBLE NAKED SHORTING.
JAG Media's Board of Directors believes, but cannot confirm, that
speculators may have engaged in a practice commonly known as a "naked short"
sale of JAG Media's stock, which means that certain brokers may be permitting
their short selling customers to sell shares of JAG Media stock that their
customers do not own and may have failed to borrow and therefore deliver the
shares sold to the purchaser of the shares. JAG Media has been (but is currently
not) included by Nasdaq on the Regulation SHO Threshold Security List, which is
indicative of a significant amount of naked shorting in the stock. Because naked
shorting may result in an artificial depression of JAG Media's stock price, you
could lose all or part of your investment in JAG Media Common Stock. As a result
of this naked shorting of our stock, there may be a substantial number of
purchasers who believe they are stockholders of JAG Media but who in fact would
not be stockholders since their brokers may never have received any shares of
JAG Media for their account. In addition, investors who believe they are
stockholders may not have received the stock dividend to which they are entitled
or may have been deprived of the right to vote some or all of their shares.
49
RISKS RELATED TO CRYPTOMETRICS' BUSINESS
CRYPTOMETRICS HAS A HISTORY OF LOSSES AND ANTICIPATES THAT IT WILL INCUR
CONTINUED LOSSES FOR THE FORESEEABLE FUTURE. CRYPTOMETRICS DOES NOT HAVE A
SIGNIFICANT SOURCE OF REVENUE AND MAY NEVER GENERATE AN OPERATING PROFIT.
As of April 30, 2005, Cryptometrics accumulated deficit was
approximately $9.9 million. Although Cryptometrics is currently in the process
of bidding for a customer contract that may be substantial, it does not
presently have any significant source of revenue. Cryptometrics expects to incur
operating losses for the foreseeable future. Cryptometrics may never generate an
operating profit or, even if Cryptometrics does become profitable from
operations at some point, it may be unable to sustain that profitability.
CRYPTOMETRICS MAY REQUIRE ADDITIONAL CAPITAL FOR ITS OPERATIONS AND OBLIGATIONS,
WHICH IT MAY NOT BE ABLE TO RAISE OR, EVEN IT IF DOES, COULD HAVE DILUTIVE AND
OTHER NEGATIVE EFFECTS ON IT STOCKHOLDERS.
Although, based on its most recent projections, Cryptometrics believes
its current level of liquid assets will be sufficient to finance its capital
requirements and anticipated operating losses for at least the next 12 months,
any projection of future long-term cash needs and cash flows are inherently
subject to substantial uncertainty. There is no assurance that these resources
will be sufficient for anticipated or unanticipated working capital and capital
expenditure requirements during this period. Cryptometrics may need, or find it
advantageous, to raise additional funds in the future to fund Cryptometrics'
growth, pursue sales opportunities, develop new or enhanced products and
services, respond to competitive pressures or acquire complementary businesses,
technologies or services.
If Cryptometrics raises additional funds through the issuance of equity
or convertible debt securities, the percentage ownership of Cryptometrics'
stockholders will be reduced and stockholders will experience additional
dilution. These new securities may also have powers, preferences and rights that
are senior to those of the rights of Cryptometrics' common stock. Cryptometrics
cannot be certain that additional financing will be available on terms favorable
to it, if at all. If adequate funds are not available or not available on
acceptable terms, Cryptometrics may be unable to fund its operations adequately,
take advantage of acquisition opportunities, develop or enhance products or
services or respond to competitive pressures. Any inability to do so may require
Cryptometrics to delay or abandon some or all of its development and expansion
plans and may threaten Cryptometrics' ability to continue business operations.
CRYPTOMETRICS' MARKETS ARE EVOLVING AND CHARACTERIZED BY RAPID TECHNOLOGICAL
CHANGE, WHICH IT MAY NOT BE ABLE TO KEEP PACE WITH.
The markets for Cryptometrics' products and services are evolving and
characterized by rapid technological change, changing customer needs, evolving
industry standards and frequent new product and service announcements. The
introduction of products employing new technologies and emerging industry
standards could render Cryptometrics' existing products or services obsolete or
unmarketable. If Cryptometrics is unable to respond to these developments
successfully or does not respond in a cost-effective way, its business,
financial condition and operating results will suffer. To be successful,
Cryptometrics must continually improve and enhance its products and service
offerings and introduce and deliver new product and service offerings and
improvement to existing products and services. Cryptometrics may fail to improve
or enhance its products and services or introduce and deliver new products or
services on a timely and cost-effective basis or at all. If Cryptometrics
experiences delays in the future with respect to its products or services, it
could experience a loss of revenues and customer dissatisfaction.
50
CRYPTOMETRICS' SUCCESS DEPENDS ON ITS KEY PERSONNEL WHOM IT MAY NOT BE ABLE TO
RETAIN, AND IT MAY NOT BE ABLE TO RECRUIT ADDITIONAL QUALIFIED PERSONNEL TO MEET
ITS NEEDS, WHICH WOULD HARM ITS BUSINESS.
Cryptometrics believes that its success depends on the continued
employment of its senior management team, including Robert Barra, its
Co-Chairman and Co-Chief Executive Officer; Michael A. Vitale, its Co-Chairman
and Co-Chief Executive Officer; Joel Shaw, its Chief Strategy Officer; Dario
Berini its Senior Vice President of Operations and Sales; Adam Erickson, its
International Sales Officer; and Gregory Chevalier, its Vice President of Sales
and Strategic Partners. If one or more of these executive officers were unable
or unwilling to continue in their present positions, Cryptometrics' business,
financial condition and operating results could be materially adversely
affected.
Cryptometrics' success also depends on having a highly trained
technical staff of software and hardware experts. Cryptometrics will need to
continue to hire personnel with the skill sets necessary to develop new
applications for its software and hardware and to adapt its products and
services to the needs of its potential clients. Competition for personnel,
particularly for employees with technical expertise, is intense. Experienced
software and hardware and technical experts often command sizeable compensation
packages, including signing bonuses and stock options. A shortage in the number
of trained technical personnel could limit Cryptometrics' ability to design,
develop and implement its products, increase sales of its existing products and
services and make new sales as it offers new products and services. Ultimately,
if Cryptometrics' cannot hire and retain suitable personnel, or if it is unable
to hire such persons on satisfactory financial terms, Cryptometrics' business,
financial condition and operating results will be impaired.
CRYPTOMETRICS DEPENDS ON APPLICATIONS AND PROPRIETARY RIGHTS, WHICH MAY OFFER
ONLY LIMITED PROTECTION AGAINST POTENTIAL INFRINGEMENT. IF CRYPTOMETRICS IS
UNABLE TO PROTECT ITS PATENTS AND PROPRIETARY RIGHTS, ITS BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS WILL BE HARMED.
Cryptometrics has eight pending U.S. and foreign patent applications
(including one in the European Union which covers 23 European countries)
relating to its face biometrics technologies and four patent applications
pending relating to its fingerprint biometrics technology. To date, none of
Cryptometrics' patent applications have been granted and accordingly, it has no
present patent protection other than that offered by filing. While Cryptometrics
is confident that some of its claims will result in issued patents, there can be
no assurance that such will be the case. Even if the most important of
Cryptometrics' claims are eventually protected by issued patents, its industry
has been characterized by enormous technological innovation whereby its patents
could well be rendered obsolete. Cryptometrics' ability to compete and to grow
its business could suffer if its intellectual property rights are not adequately
protected. There can be no assurance that its patent applications will result in
patents being issued or that current or additional patents will afford
protection against competitors. Cryptometrics also relies on trade secrets that
are not patented. No guarantee can be given that others will not independently
develop substantially equivalent proprietary information or techniques, or
otherwise gain access to Cryptometrics proprietary technology.
CRYPTOMETRICS MAY FACE INTELLECTUAL PROPERTY INFRINGEMENT OR OTHER CLAIMS
AGAINST US OR ITS CUSTOMERS THAT COULD BE COSTLY TO DEFEND AND RESULT IN LOSS OF
SIGNIFICANT RIGHTS.
Cryptometrics has not conducted any patent or technology searches and
there may be other technology which infringes upon its technology or which it
may be infringing upon. A patent search will not disclose unpublished
applications that are currently pending in the United States Patent Office, and
there may be one or more such unpublished pending applications that would take
precedence over Cryptometrics' applications. Even if Cryptometrics were to be
granted patent protection for some or all of its technology, there can be no
assurance that these patents will afford Cryptometrics any meaningful
protection. Cryptometrics intends to rely primarily on a combination of trade
secrets, technical measures, copyright protection and nondisclosure agreements
with its employees to establish and protect the ideas, concepts and
51
documentation of software and trade secrets developed by Cryptometrics. Such
methods may not afford complete protection, and there can be no assurance that
third parties will not independently develop such technology or obtain access to
the software Cryptometrics has developed. Although Cryptometrics believes that
use of the technology and products it has developed and other trade secrets used
in its operations does not infringe upon the rights of others, its use of the
technology and trade secrets Cryptometrics develops may infringe upon the
patents or intellectual property rights of others. In the event of infringement,
Cryptometrics could, under certain circumstances, be required to obtain a
license or modify aspects of the technology and trade secrets it developed or
refrain from using same. Cryptometrics may not have the necessary financial
resources to defend any infringement claim made against it or be able to
successfully terminate any infringement in a timely manner, upon acceptable
terms and conditions or at all. Failure to do any of the foregoing could have a
material adverse effect on Cryptometrics. Moreover, if the patents, technology
or trade secrets Cryptometrics developed or uses in its business is deemed to
infringe upon the rights of others, Cryptometrics could, under certain
circumstances, become liable for damages, which could have a material adverse
effect on Cryptometrics. As Cryptometrics continues to market its products, it
may encounter patent barriers that are not known today.
Furthermore, since the date of invention (and not the date of
application) governs under U.S. patent law, future applications could be filed
by another party, which would preempt its position. While Cryptometrics has
taken and continues to take steps to become aware of related technical
developments, there can be no assurance that Cryptometrics will not encounter an
unfavorable patent situation. Other parties may assert intellectual property
infringement claims against Cryptometrics or its customers, and its products may
infringe the intellectual property rights of third parties. If Cryptometrics
becomes involved in litigation, Cryptometrics could lose its proprietary rights,
be subject to damages and incur substantial unexpected operating expenses.
Intellectual property litigation is expensive and time-consuming, even if the
claims are subsequently proven unfounded, and could divert management's
attention from its business. If there is a successful claim of infringement,
Cryptometrics may not be able to develop non-infringing technology or enter into
royalty or license agreements on acceptable terms, if at all. This could
prohibit Cryptometrics from providing its products and services to customers.
IF CRYPTOMETRICS PRODUCTS AND SERVICES DO NOT ACHIEVE MARKET ACCEPTANCE, ITS
BUSINESS AND OPERATIONS WOULD BE ADVERSELY AFFECTED.
Biometric-based identification and security is a relatively new
technology. Cryptometrics' products and services may not be widely accepted
until such time as it is established and demonstrated to the marketplace that
biometric-based identification and security is effective and offers benefits
over existing technologies. The failure of Cryptometrics' products and services
to achieve market acceptance, or if accepted in a limited degree, may limit the
size of the market for its products and services which would negatively impact
its business, financial condition and operating results.
CRYPTOMETRICS MAY ULTIMATELY BE UNABLE TO COMPETE IN THE MARKETS FOR THE
PRODUCTS AND SERVICES IT OFFERS.
The markets for Cryptometrics' products and services are intensely
competitive. Increased competition may adversely affect Cryptometrics' ability
to enter into agreements with new customers or strategic partners and may result
in reduced margins, any of which could seriously harm Cryptometrics' business.
Many of Cryptometrics' competitors have longer operating histories, greater
brand recognition and greater financial, technical, marketing and other
resources than it does, and may have well-established relationships with its
existing and prospective customers. This may place Cryptometrics at a
disadvantage in responding to its competitors' pricing strategies, technological
advances, advertising campaigns, strategic partnerships and other initiatives.
Cryptometrics' competitors may also develop products or services that are
superior to, or have greater market acceptance than, the products and services
that Cryptometrics is able to develop. If Cryptometrics is unable to compete
successfully against its competitors, its business, financial condition and
operating results would be negatively impacted.
52
RISKS RELATED TO THE MERGER
In addition to the risks relating to the businesses of JAG Media and
Cryptometrics which are described above, you should carefully consider the
following risk factors relating to the Merger in determining whether to vote in
favor of the proposals contained in this Proxy Statement/Prospectus.
HOLDERS OF CRYPTOMETRICS COMMON STOCK WILL RECEIVE JAG MEDIA COMMON STOCK IN THE
MERGER WHOSE VALUE CANNOT BE DETERMINED.
The market price of the JAG Media Common Stock to be issued to
Cryptometrics stockholders in the Merger will fluctuate as a result of changes
in the business, operations or prospects of JAG Media or Cryptometrics or market
assessments of the impact of the Merger. Because the market price of JAG Media
Common Stock fluctuates, the value of the JAG Media Common Stock that
Cryptometrics stockholders will receive, will fluctuate as well and only be
determined at the time of the Merger. There can be no assurance as to such value
at the time of the Merger. The number of shares of JAG Media Common Stock to be
issued in connection with the Merger is fixed and will not be adjusted based
upon changes in the value of these shares.
For historical and current market prices of JAG Media Common Stock see
"Market for JAG Media Common Stock and Related Matters."
During the period from August 1, 2004 to January 3, 2006 the most
recent practicable date prior to the filing of this Proxy Statement/Prospectus,
the highest closing bid price of the JAG Media Common Stock was 25 times greater
than its lowest closing bid price. You should not view these facts, however, as
necessarily indicating the future market performance or volatility of JAG Media
Common Stock. The actual performance and volatility of JAG Media Common Stock
and/or the financial markets could be significantly more or less than that
indicated by the above facts.
SHARES OF JAG MEDIA COMMON STOCK ISSUED TO CRYPTOMETRICS STOCKHOLDERS WILL BE
SUBJECT TO RESTRICTIONS ON RESALE.
In accordance with the terms of the Merger Agreement, the Cryptometrics
stockholders shall not be permitted to sell or otherwise dispose of at least
sixty-five percent of the JAG Media Common Stock received in connection with the
Merger for a period of twelve months from the closing date of the transaction.
OFFICERS AND DIRECTORS HAVE POTENTIAL CONFLICTS OF INTEREST IN THE MERGER.
In considering the recommendations of the JAG Media and Cryptometrics
Boards of Directors that the stockholders approve the Merger, you should be
aware that some of the directors and officers of each company may have interests
in the Merger different from, or in addition to yours. For example, if the
Merger is completed, the existing directors and executive officers of
Cryptometrics will become the directors and senior management of JAG Media (to
be renamed "Cryptometrics, Inc."). See "Interests of Related Persons in the
Merger."
MANAGEMENT OF THE BUSINESS AFTER THE MERGER
In accordance with the terms of the Merger Agreement, the directors and
executive officers of Cryptometrics will become the directors and executive
officers of JAG Media (to be renamed Cryptometrics, Inc.). The new directors and
executive officers of JAG Media may not have the expertise or capacity to
effectively manage the JAG Media business or the combined businesses after the
Merger. If they are unable to operate the new combined businesses at a profit or
if it incurred substantial costs in merging the
53
businesses, either of such eventualities could materially and adversely affect
JAG Media's business, results of operation and financial condition.
CRYPTOMETRICS' STOCKHOLDERS WILL EXERCISE SIGNIFICANT CONTROL OVER JAG MEDIA AS
A RESULT OF THE MERGER.
After the Merger, Cryptometrics' stockholders just prior to the Merger
will own approximately 88.1875% of the outstanding Common Stock of JAG Media
just after the Merger. As a result, the stockholders of Cryptometrics will have
the ability to control JAG Media. Two Cryptometrics shareholders, who will also
become the Co-Chief Executive Officers of JAG Media after the Merger, will own
controlling blocks of shares of JAG Media Common Stock giving them extensive
control and direction of all aspects of JAG Media's affairs and businesses.
CRYPTOMETRICS' STOCKHOLDERS MAY BE ENTITLED TO APPRAISAL AND DISSENTER'S RIGHTS.
Cryptometrics stockholders who have not signed the written consent
adopting the Merger Agreement may, under certain circumstances, and by following
procedures prescribed by Section 262 of the Delaware General Corporation Law,
exercise appraisal rights for their shares of Cryptometrics Common Stock and be
entitled to appraisal rights with respect to their shares of Cryptometrics
Common Stock.
A dissenting stockholder of Cryptometrics exercising his appraisal
rights must follow the appropriate procedures under Delaware law or suffer the
termination or waiver of such rights. In the event a dissenting stockholder
relinquishes or loses his appraisal rights, the stockholder will receive from
JAG Media the same number of shares of JAG Media Common Stock that the
stockholder would have received in the Merger had such stockholder not attempted
to exercise his appraisal rights. (See "Appraisal Rights" on page 56.)
JAG Media stockholders ownership in JAG Media will be diluted by
88.1875% by virtue of the issuance of shares to Cryptometrics stockholders at
the time of the Merger. Cryptometrics stockholders' ownership of their company
will be diluted by 11.8125% by virtue of the existing JAG Media stockholders
retaining their stock interest in the merged companies. All stockholders will
suffer dilution in the Merger.
FUTURE ISSUANCES OF JAG MEDIA COMMON STOCK COULD DILUTE CURRENT STOCKHOLDERS OR
ADVERSELY AFFECT THE MARKET.
After the Merger, JAG Media anticipates that it will have the authority
to issue almost 150,000,000 additional shares of Common Stock and to issue
options and warrants to purchase such shares without stockholder approval. These
future issuances could be at values substantially below the price paid for by
the current holders of JAG Media Common Stock or those Cryptometrics
stockholders who will exchange their shares of Cryptometrics Common Stock for
JAG Media Common Stock in connection with the Merger. JAG Media anticipates that
the shares of its Common Stock will be issued to pay off the principal and
interest of indebtedness of up to $2,750,000 and additional shares may be issued
to raise cash equivalents under the existing equity line with Cornell Capital or
otherwise. In addition, large blocks of Common Stock could be issued to fend off
unwanted tender offers or hostile takeovers without further stockholder
approval. Future sales of JAG Media Common Stock, whether upon original issuance
or by current stockholders or persons acquiring JAG Media Common Stock upon the
exercise of warrants or stock options, or upon the conversion of any newly
authorized convertible preferred stock or to pay off JAG Media's current
promissory note or any convertible debenture which may replace it, may depress
the market price for JAG Media Common Stock.
Sales of substantial amounts of the JAG Media Common Stock in the
public market, or even just the prospect of such sales, could depress the
prevailing market price of JAG Media's Common Stock and its ability to raise
equity capital in the future.
54
NO DIVIDENDS WILL BE PAID IN THE NEAR FUTURE.
Following the Merger, it is not anticipated that JAG Media (renamed
Cryptometrics, Inc.) will pay dividends in the foreseeable future. It intends to
reinvest any funds that might otherwise be available for the payment of
dividends in further development of its businesses following the Merger.
RISKS OF NON-COMPLETION COSTS
Merger-related costs consist principally of charges related to
professional services, mailing and printing costs, registration and other
regulatory costs and are expected to be approximately $500,000. In the event
that the Merger is not consummated, the parties will still each remain liable to
pay their shares of the total Merger-related costs.
RISKS OF A CONGLOMERATE BUSINESS
In the event that the Merger is completed, the surviving corporation
will be a conglomerate of the businesses of Cryptometrics and JAG Media. Such
conglomerate business may not be successful should management lose focus on, or
give greater attention to, one or the other business. Additionally, should the
markets in which the Cryptometrics business operates or the JAG Media business
operates suffer a decline in profitability, such profit decline will have a
negative financial impact on the conglomerate business as a whole.
RISKS RELATED TO NO FAIRNESS OPINION
No independent investment banker or other professional has been
retained to issue an opinion with respect to the fairness of the exchange ratio
of JAG Media Common Stock and Cryptometrics Common Stock to either JAG Media's
stockholders or Cryptometrics' stockholders. The ratio was reached through
negotiation by the two companies and was found fair to the stockholders of JAG
Media solely by its Board of Directors and fair to the stockholders of
Cryptometrics solely by its Board of Directors.
55
APPRAISAL RIGHTS
Holders of shares of Cryptometrics Common Stock who do not vote in
favor of the adoption of the merger agreement and who properly demand appraisal
of their shares will be entitled to appraisal rights in connection with the
merger under Section 262 of the General Corporation Law of the State of
Delaware, which is referred to herein as Section 262.
THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW
PERTAINING TO APPRAISAL RIGHTS UNDER SECTION 262 AND IS QUALIFIED IN ITS
ENTIRETY BY THE FULL TEXT OF SECTION 262 WHICH IS INCLUDED IN THIS PROXY
STATEMENT AS EXHIBIT E. ALL REFERENCES IN SECTION 262 AND IN THIS SUMMARY TO A
"STOCKHOLDER" ARE TO THE RECORD HOLDER OF THE SHARES OF CRYPTOMETRICS COMMON
STOCK AS TO WHICH APPRAISAL RIGHTS ARE ASSERTED. A PERSON HAVING A BENEFICIAL
INTEREST IN SHARES OF CRYPTOMETRICS COMMON STOCK HELD OF RECORD IN THE NAME OF
ANOTHER PERSON, SUCH AS A BROKER, FIDUCIARY, DEPOSITARY OR OTHER NOMINEE, MUST
ACT PROMPTLY TO CAUSE THE RECORD HOLDER TO FOLLOW THE STEPS SUMMARIZED BELOW
PROPERLY AND IN A TIMELY MANNER TO PERFECT APPRAISAL RIGHTS.
Under Section 262, persons who hold shares of Cryptometrics Common
Stock who follow the procedures set forth in Section 262 will be entitled to
have their shares of Cryptometrics Common Stock appraised by the Delaware Court
of Chancery and to receive payment of the "fair value" of the shares, exclusive
of any element of value arising from the accomplishment or expectation of the
merger, together with a fair rate of interest, as determined by the court.
Any holder of Cryptometrics Common Stock who wishes to exercise
appraisal rights or who wishes to preserve such holder's right to do so, should
review the following discussion and Exhibit E carefully because failure to
timely and properly comply with the procedures specified will result in the loss
of appraisal rights.
A holder of shares of Cryptometrics Common Stock wishing to exercise
the holder's appraisal rights must deliver to Cryptometrics, within 20 days
after the date of the mailing of this proxy statement / prospectus, a written
demand for the appraisal of such holder's shares. A holder of shares of
Cryptometrics Common Stock wishing to exercise appraisal rights must hold of
record the shares on the date the written demand for appraisal is made and must
continue to hold the shares of record through the effective time of the merger.
The written demand must reasonably inform Cryptometrics of the identity of the
holder as well as the intention of the holder to demand an appraisal of the
"fair value" of the shares held by the holder. A stockholder's failure to make
the written demand within such 20 day period will constitute a waiver of
appraisal rights.
Only a holder of record of shares of Cryptometrics Common Stock is
entitled to assert appraisal rights for the shares of Cryptometrics Common Stock
registered in that holder's name. A demand for appraisal in respect of shares of
Cryptometrics Common Stock should be executed by or on behalf of the holder of
record, fully and correctly, as the holder's name appears on the holder's stock
certificates, and must state that the person intends thereby to demand appraisal
of the holder's shares of Cryptometrics Common Stock in connection with the
merger. If the shares of Cryptometrics Common Stock are owned of record in a
fiduciary capacity, such as by a trustee, guardian or custodian, execution of
the demand should be made in that capacity, and if the shares of Cryptometrics
Common Stock are owned of record by more than one person, as in a joint tenancy
and tenancy in common, the demand should be executed by or on behalf of all
joint owners. An authorized agent, including an agent for two or more joint
owners, may execute a demand for appraisal on behalf of a holder of record;
however, the agent must identify the record owner or owners and expressly
disclose the fact that, in executing the demand, the agent is acting as agent
for the record owner or owners. A record holder such as a broker who holds
shares of Cryptometrics Common Stock as nominee for several beneficial owners
may exercise appraisal rights with respect to the shares of Cryptometrics Common
Stock held for one or more beneficial owners while not exercising the rights
with respect to the shares of Cryptometrics Common Stock held for other
beneficial owners; in such case,
56
however, the written demand should set forth the number of shares of
Cryptometrics Common Stock as to which appraisal is sought and where no number
of shares of Cryptometrics Common Stock is expressly mentioned the demand will
be presumed to cover all shares of Cryptometrics Common Stock held in the name
of the record owner. Stockholders who hold their shares of Cryptometrics Common
Stock in brokerage accounts or other nominee forms and who wish to exercise
appraisal rights are urged to consult with their brokers to determine the
appropriate procedures for the making of a demand for appraisal by such a
nominee.
All written demands for appraisal pursuant to Section 262 should be
sent or delivered to Cryptometrics, Inc., 73 Main Street, Tuckahoe, New York
10707, Attention: Robert Barra, Co-Chief Executive Officer.
Within 10 days after the effective time of the merger, the surviving
corporation must notify each holder of Cryptometrics Common Stock who has
complied with Section 262 that the merger has become effective. Within 120 days
after the effective time of the merger, but not thereafter, the surviving
corporation or any holder of Cryptometrics Common Stock who has so complied with
Section 262 and is entitled to appraisal rights under Section 262 may file a
petition in the Delaware Court of Chancery demanding a determination of the fair
value of the holder's shares of Cryptometrics Common Stock. The surviving
corporation is under no obligation to and has no present intention to file a
petition. Accordingly, it is the obligation of the holders of Cryptometrics
Common Stock to initiate all necessary action to perfect their appraisal rights
in respect of shares of Cryptometrics Common Stock within the time prescribed in
Section 262.
Within 120 days after the effective time of the merger, any holder of
Cryptometrics Common Stock who has complied with the requirements for exercise
of appraisal rights will be entitled, upon written request, to receive from the
surviving corporation a statement setting forth the aggregate number of shares
not voted in favor of the adoption of the merger agreement and with respect to
which demands for appraisal have been received and the aggregate number of
holders of such shares. The statement must be mailed within ten days after a
written request therefor has been received by the surviving corporation or
within ten days after the expiration of the period for delivery of demands for
appraisal, whichever is later.
If a petition for an appraisal is timely filed by a holder of shares of
Cryptometrics Common Stock and a copy thereof is served upon the surviving
corporation, the surviving corporation will then be obligated within 20 days to
file with the Delaware Register in Chancery a duly verified list containing the
names and addresses of all stockholders who have demanded an appraisal of their
shares and with whom agreements as to the value of their shares have not been
reached. After notice to the stockholders as required by the Court, the Delaware
Court of Chancery is empowered to conduct a hearing on the petition to determine
those stockholders who have complied with Section 262 and who have become
entitled to appraisal rights thereunder. The Delaware Court of Chancery may
require the holders of shares of Cryptometrics Common Stock who demanded payment
for their shares to submit their stock certificates to the Register in Chancery
for notation thereon of the pendency of the appraisal proceeding; and if any
stockholder fails to comply with the direction, the Court of Chancery may
dismiss the proceedings as to the stockholder.
After determining the holders of Cryptometrics Common Stock entitled to
appraisal, the Delaware Court of Chancery will appraise the "fair value" of
their shares of Cryptometrics Common Stock, exclusive of any element of value
arising from the accomplishment or expectation of the merger, together with a
fair rate of interest, if any, to be paid upon the amount determined to be the
fair value. Holders of Cryptometrics Common Stock considering seeking appraisal
should be aware that the fair value of their shares of Cryptometrics Common
Stock as so determined could be more than, the same as or less than the
consideration they would receive pursuant to the merger if they did not seek
appraisal of their shares of Cryptometrics Common Stock and that investment
banking opinions as to the fairness from a financial point of view of the
consideration payable in a merger are not necessarily opinions as to fair value
under Section 262. We do not anticipate offering more than the merger
consideration to any stockholder exercising appraisal rights and reserve the
right to assert, in any appraisal proceeding, that, for purposes of Section 262,
57
the "fair value" of a share of Cryptometrics Common Stock is less than the
merger consideration. The Delaware Supreme Court has stated that "proof of value
by any techniques or methods which are generally considered acceptable in the
financial community and otherwise admissible in court" should be considered in
the appraisal proceedings. In addition, Delaware courts have decided that the
statutory appraisal remedy, depending on factual circumstances, may or may not
be a dissenting stockholder's exclusive remedy. The Court will also determine
the amount of interest, if any, to be paid upon the amounts to be received by
persons whose shares of Cryptometrics Common Stock have been appraised. The
costs of the action may be determined by the Court and taxed upon the parties as
the Court deems equitable. The Court may also order that all or a portion of the
expenses incurred by any stockholder in connection with an appraisal, including,
without limitation, reasonable attorneys' fees and the fees and expenses of
experts utilized in the appraisal proceeding, be charged pro rata against the
value of all the shares entitled to be appraised.
Any holder of shares of Cryptometrics Common Stock who has duly
demanded an appraisal in compliance with Section 262 will not, after the
effective time of the merger, be entitled to vote the shares of Cryptometrics
Common Stock subject to the demand for any purpose or be entitled to the payment
of dividends or other distributions on those shares of Cryptometrics Common
Stock (except dividends or other distributions payable to holders of record of
Cryptometrics Common Stock as of a record date prior to the effective time of
the merger).
If any stockholder who demands appraisal of shares of Cryptometrics
Common Stock under Section 262 fails to perfect, or effectively withdraws or
loses, such holder's right to appraisal, the shares of Cryptometrics Common
Stock of the stockholder will be converted into the right to receive the merger
consideration. A stockholder will fail to perfect, or effectively lose or
withdraw, the holder's right to appraisal if no petition for appraisal is filed
within 120 days after the effective time of the merger, or if the stockholder
delivers to the surviving corporation a written withdrawal of the holder's
demand for appraisal and an acceptance of the merger, except that any attempt to
withdraw made more than 60 days after the effective time of the merger will
require the written approval of the surviving corporation and, once a petition
for appraisal is filed, the appraisal proceeding may not be dismissed as to any
holder absent court approval.
FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTION 262 FOR PERFECTING
APPRAISAL RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS (IN WHICH EVENT THE
HOLDER OF CRYPTOMETRICS COMMON STOCK WILL BE ENTITLED TO RECEIVE THE
CONSIDERATION SPECIFIED IN THE MERGER AGREEMENT).
58
THE MERGER
GENERAL
This Proxy Statement/Prospectus is being furnished to stockholders of
JAG Media in connection with the solicitation of proxies by its Board of
Directors for use at the Annual Meeting of JAG Media stockholders to be on
________, 2006 at ______ a.m. (Pacific Standard Time) in the law offices of
Jones Vargas, located on the Twelfth Floor of 100 West Liberty Street in Reno,
Nevada and to stockholders of Cryptometrics as an information statement in
connection with the action to be taken by written consent on the date of this
Proxy Statement/Prospectus. This Proxy Statement/Prospectus also constitutes a
prospectus, which is part of a registration statement on Form S-4 filed by JAG
Media with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "Securities Act"), in order to register the shares of JAG
Media Common Stock to be issued to the Cryptometrics stockholders in connection
with the Merger and to register a subsequent resale of such securities by
certain affiliates of Cryptometrics.
If and when the Merger is completed:
o Merger Sub (Cryptometrics Acquisition, Inc.) will be merged into
Cryptometrics;
o Cryptometrics, as the surviving corporation after the Merger, will
become a wholly-owned subsidiary of JAG Media;
o JAG Media will change its name to "Cryptometrics, Inc."; and
o each holder of Cryptometrics Common Stock will have the right to
receive shares of JAG Media Common Stock in the amount described
herein for each share of Cryptometrics Common Stock held.
Immediately after the Merger, JAG Media Common Stock will be held
approximately as follows: (i) 11.8125% by former stockholders of JAG Media and
(ii) 88.1875% by former stockholders of Cryptometrics.
BACKGROUND OF THE MERGER
The possibility of a transaction between JAG Media and Cryptometrics
was first introduced to JAG Media by Albert Auer of Flow Capital Advisers, Inc.,
an investment banking firm, which had previously introduced another merger
candidate to JAG Media. Albert Auer contacted Gary Valinoti, a consultant to JAG
Media and previously its Chief Executive Officer, with whom Mr. Auer had worked
on the prior transaction. Mr. Auer contacted Mr. Valinoti in the first week of
August 2004, briefly described Cryptometrics, Inc. and identified Joseph Nese as
the contact person for the investment bankers acting as finders for
Cryptometrics. A meeting was arranged for later the same week at the executive
offices of Cryptometrics, Inc. in Tuckahoe, New York. Those attending the
meeting were Robert Barra, the Co-Chief Executive Officer of Cryptometrics, Paul
Reid, its product manager, Joseph Nese, Gary Valinoti and Stephen Schoepfer, the
President of JAG Media. The meeting consisted primarily of a presentation by
Cryptometrics of its biometrics technology. There was no discussion of any
transaction between the two companies.
In September 2004, Thomas J. Mazzarisi, Chief Executive Officer of JAG
Media, supplied a form of Mutual Non-Disclosure Agreement to Robert Barra, which
was executed by him on September 27, 2004 so that the companies would be in a
position to discuss a possible transaction.
During the first and second weeks of October 2004, emails were
transmitted between Cryptometrics and JAG Media, principally to and from Messrs.
Barra, Nese, Mazzarisi and Schoepfer, by which Cryptometrics forwarded a copy of
its PowerPoint presentation and its projected financial results.
59
Cryptometrics also provided JAG Media additional information regarding marketing
and potential contracts it was trying to obtain.
In response to a request of Cryptometrics for a term sheet, Thomas J.
Mazzarisi transmitted the first draft of a Term Sheet to Robert Barra on October
29, 2004. The term sheet provided for JAG Media to issue 35,000,000 shares to
Cryptometrics shareholders at closing, together with a post-closing earn out
tied to various revenue milestones, which provided for Cryptometrics
shareholders to receive up to an additional 40,000,000 shares.
After various discussions in which Cryptometrics rejected the proposed
structure of the term sheet, JAG Media prepared a second draft of the term sheet
which Thomas Mazzarisi sent to Joseph Nese on November 22, 2004. The second
draft of the term sheet provided for Cryptometrics shareholders to receive an
85% interest in JAG Media at closing. This draft of the term sheet also
contained a twelve-month lockup provision with respect to all such JAG Media
shares. In response to Cryptometrics comments requesting an increase in the
shares payable to the Cryptometrics shareholders and a request for only a
partial lockup, Thomas Mazzarisi transmitted a third draft of a term sheet to
Joseph Nese on December 3, 2004. This draft increased the percentage of the
shares being issued to Cryptometrics shareholders from 85% to 87% and also
included a to-be-determined carve out from the twelve month lockup.
On December 16, 2004 there was a meeting at the offices of
Cryptometrics' counsel, Greenberg Traurig LLP, in New York City attended by both
companies and their respective counsel. Those attending the meeting on behalf of
JAG Media included Thomas Mazzarisi, Stephen Schoepfer and Preston Tollinger of
Morgan, Lewis & Bockius LLP, counsel for JAG Media. Those attending on behalf of
Cryptometrics included Robert Barra and Michael Vitale, co-chief executive
officers, Paul Reid, Robert Tasinari of TNS Consulting Corporation, finders for
Cryptometrics, Joseph Nese and Alan Annex, of Greenberg Traurig LLP. Paul Reid
led a presentation of Cryptometrics products and technology, following which
there was a detailed discussion of the company's operations and business.
On December 22, 2004 there was a conference call between Thomas
Mazzarisi and Stephen Schoepfer representing JAG Media and Robert Barra, Joseph
Nese and Robert Tasinari representing Cryptometrics. The conference call
discussed the third draft of the term sheet which had been provided by Mr.
Mazzarisi and JAG Media's due diligence requests.
Following up on JAG Media's request for financial information, on
January 21, 2005 Cryptometrics emailed to JAG Media the draft audited financials
for its Canadian subsidiary, covering fiscal years from 2002 through March 10,
2004.
On February 8, 2005, there was a second meeting at Cryptometrics
headquarters, attended by Thomas Mazzarisi and Stephen Schoepfer on behalf of
JAG Media, Cryptometrics' finders and investment bankers Joseph Nese and Robert
Tasinari, and Cryptometrics advisor, Thomas O'Neil of Sander O'Neil & Partners,
L.P., and Cryptometrics co-chief executive officers Robert Barra and Michael
Vitale. The discussions focused on Cryptometrics' Private Placement Memorandum,
pending contracts, teaming agreements, strategic partnerships, and opportunities
with government agencies both foreign and domestic. A conference call then took
place two days later among Thomas Mazzarisi, Stephen Schoepfer, Robert Barra,
Robert Tasinari and Joseph Nese, to assess the progress in the transaction.
During the third week of March 2005, there was a conference call
between JAG Media's litigation counsel, Wes Christian, Thomas Mazzarisi, Robert
Barra, Michael Vitale, and Robert Tasinari. The conference call focused on a
pending lawsuit brought by JAG Media against various brokerage firms.
On April 8th 2005 Robert Barra of Cryptometrics wrote a letter to
Thomas Mazzarisi of JAG Media regarding the status of Cryptometrics' private
placement, indicating that approximately $15 million had been
60
raised. Cryptometrics also stated that it anticipated the private placement
would soon close and requested a revised term sheet. In response to
Cryptometrics' request, on April 21, 2005 Thomas Mazzarisi transmitted a fourth
draft of the term sheet to Cryptometrics. This draft specified a 35% carve out
from the one year lockup provision and continued to provide for the issuance of
87% of JAG Media's shares to Cryptometrics shareholders. A week later Robert
Tasinari on behalf of Cryptometrics requested Thomas Mazzarisi to execute the
term sheet as a condition to the transaction discussions continuing, which JAG
Media declined to do until it was provided audited financial information.
Although for several months there was no substantive discussion between
the companies pending the receipt of more complete audited financial information
by JAG Media, there was a conference call on June 20, 2005 again related to the
status of JAG Media's lawsuit against various brokerage firms and the issue of
so called "naked short sales" which might be affecting JAG Media. Those on the
conference call included Thomas Mazzarisi, Stephen Schoepfer, and Wes Christian
on behalf of JAG Media, Robert Barra and Robert Tasinari on behalf of
Cryptometrics, as well as Michael Stolzar of Dorf, Karlen & Stolzar, LLP,
Cryptometrics' counsel.
On August 10, 2005 Mr. Robert Barra delivered to JAG Media's counsel
financial statements for Cryptometrics' Canadian Subsidiary and draft
consolidated financial statements for Cryptometrics, together with updated
marketing materials. Robert Barra also sent emails to Thomas Mazzarisi
requesting certain information and discussing JAG Media's need for Cryptometrics
to participate in various legal and accounting fees which would be incurred in
connection with the proposed transaction.
On August 19, 2005 Michael Stolzar sent to Preston Tollinger a revised
term sheet based upon the fourth draft provided by JAG Media on April 21, 2005.
The revised term sheet contained a proposed cap of $62,500 of legal fees to be
borne by Cryptometrics. On August 22, 2005 Cryptometrics faxed to counsel for
JAG Media the consolidated audited financials for Cryptometrics. On August 29,
2005 there was a conference call which discussed in detail the draft term sheet,
the structure of the transaction, SEC requirements and other legal and timing
issues related to the transaction. Those on the conference call included Preston
Tollinger, David Sirignano and Owen Littman from Morgan Lewis & Bockius LLP,
Michael Stolzar from Dorf, Karlen & Stolzar, LLP, Robert Barra, Michael Vitale
and Robert Tasinari on behalf of Cryptometrics and Thomas Mazzarisi and Steve
Schoepfer on behalf of JAG Media. On September 9, 2005 counsel for Cryptometrics
and JAG Media exchanged a revised term sheet which increased the number of
shares being issued to Cryptometrics shareholders from 87.5% to 88% to
compensate for $2,000,000 of indebtedness which JAG Media had incurred. This
term sheet also included a resolution of the funding of legal fees with each of
JAG Media and Cryptometrics providing $50,000 of initial funding. This term
sheet was executed on September 9, 2005 by Thomas Mazzarisi and forwarded to
Robert Barra for signature. The term sheet was subsequently signed by Robert
Barra on behalf of Cryptometrics and delivered to JAG Media.
Subsequently, during the last week of October 2005 JAG Media indicated
that it was going to increase its indebtedness by $750,000, as a result of which
a final adjustment to 88.175% was made to the percentage amount of JAG Media
common stock which is to be distributed to the Cryptometrics stockholders.
JAG MEDIA'S REASONS FOR THE MERGER
For several years JAG Media has been looking for a possible merger
candidate. Its search has focused on companies in both related and unrelated
industries. JAG Media's interest in merging with a larger company has increased
over the last several years as it has become apparent to the Board of Directors
of JAG Media that the company, as a stand alone business, is not capable of
increasing its revenues to cover its costs of doing business in an acceptable
time frame. Although JAG Media has been successful in reducing its costs, it
continues to accrue substantial costs as a public company which cannot be
eliminated.
61
The Board of Directors has therefore concluded that it is prudent to increase
JAG Media's revenue base more quickly than the strategy for its existing
business is likely to achieve.
Based upon its investigation of various merger candidates, including
several with which JAG Media entered into non-binding letters of intent or
merger agreements, the Board of Directors of JAG Media has concluded that
Cryptometrics represents a viable attractive merger candidate. In addition to
its cash resources, Cryptometrics is engaged in a business activity which has
the potential to attract additional investment.
The Board of Directors considered the risks of the transaction,
including those set forth above under "RISK FACTORS-Risks related to
Cryptometrics business" and " - Risks related to the Merger." The Board
especially considered the risks involved in an emerging business with minimal
revenues or no revenues in a highly competitive market. The Board also
considered the fact that no synergy was likely to develop between the business
of JAG Media and the business of Cryptometrics. The Board noted that there were
other risks in the proposed transaction as well, including in particular the
risks related to the merger not being consummated for any one of many reasons,
including the condition of a listing of JAG Media's shares of Common Stock on
the NASDAQ Capital Market. The Board, however, determined that Cryptometrics was
a sufficiently attractive candidate for a merger that such risks, including the
incurring of costs and expenses in connection with a transaction which might not
be consummated, were worth taking in light of the potential benefits which JAG
Media stockholders could realize by virtue of the Merger
Once the Board of Directors of JAG Media determined that Cryptometrics
represented an attractive candidate for merger, as the above chronology of the
negotiation of the transaction indicates, the Board attempted to obtain the most
advantageous transaction terms possible for the JAG Media stockholders. In
particular the Board focused on the interest in JAG Media Common Stock which
would be retained by JAG Media's stockholders once the transaction had closed
and the number of shares of JAG Media Common Stock to be issued to Cryptometrics
stockholders which would be available for immediate trading. After negotiation
an agreement on these two key points was reached. The Board noted that on the
trading date preceding the signing of the term sheet for the transaction, the
last sale price of shares of JAG Media Common Stock was $0.12 per share,
indicating a market capitalization of JAG Media of approximately $5,370,000. The
Board also noted that on the basis of recent private placements of Cryptometrics
Common Stock made at $7.00 a share, Cryptometrics had an indicated
capitalization value of approximately $79,000,000, of which JAG Media
stockholders would own approximately 11.8125% with an indicated value of over
$9,000,000. (See Note 1 to "Unaudited Condensed Combined Pro Forma Financial
Statements," page 97.)
Based on all of the foregoing, the Board of Directors of JAG Media
unanimously approved the Merger and the Merger Agreement and determined the
Merger to be advisable, fair to and in the best interests of JAG Media and its
stockholders.
The foregoing discussion summarizes the material factors considered by
the JAG Media Board of Directors in its consideration of the Merger. After
considering these factors, the Board of Directors concluded that the positive
factors relating to the Merger Agreement and the Merger outweighed the negative
factors. The Board did not find it practicable to quantify or otherwise assign
relative weights to the individual factors. In addition, individual members of
the JAG Media Board of Directors may have assigned different weights to various
factors. The JAG Media Board of Directors approved and recommends the Merger
based upon the totality of the information presented to and considered by it.
RECOMMENDATIONS OF JAG MEDIA'S BOARD OF DIRECTORS
The Board of Directors of JAG Media believes that the Merger is in the
best interests of the JAG Media stockholders. Accordingly, the Board of
Directors of JAG Media has unanimously approved the
62
Merger Agreement and has adopted, pending the required approval of the JAG Media
stockholders, (i) the amendment of JAG Media's Articles of Incorporation to
increase its shares of Common Stock (to be issued in the Merger) and (ii) the
amendment of JAG Media's Articles of Incorporation to change its corporate name
to "Cryptometrics, Inc." upon completion of the Merger.
The Board of Directors of JAG Media recommends that the JAG Media
stockholders (i) vote FOR the proposal to amend JAG Media's Articles of
Incorporation to increase its shares of Common Stock (to be issued in the
Merger) and (iii) vote FOR a proposal to amend JAG Media's Articles of
Incorporation to change its corporate name to "Cryptometrics, Inc." upon
completion of the Merger.
CRYPTOMETRICS' REASONS FOR THE MERGER
The Board of Directors and principal stockholders of Cryptometrics,
Inc. have approved the Merger Agreement and have determined that the Merger is
fair and advisable and in the best interests of Cryptometrics and its
stockholders.
In reaching the decision to adopt the Merger Agreement, the Board of
Directors of Cryptometrics considered a number of factors including the
following:
o The shares of JAG Media Common Stock offered as the Merger
consideration would effectively create a public trading market for
Cryptometrics Common Stock and permit the unrestricted trading in
stock of the combined company by the current or non-affiliated
stockholders of Cryptometrics instead of their current position as
holders of common stock of a private company;
o The terms and conditions of the Merger Agreement, including the fact
that Cryptometrics may terminate the Merger Agreement if the JAG
Media Common Stock is not approved for listing on the Nasdaq Capital
Market;
o The percentage of the combined company to be owned by the current
Cryptometrics stockholders following the Merger; and
o Historical financial information concerning Cryptometrics and JAG
Media, which generally informed the Board of Directors of
Cryptometrics' determination as to the relative values of the two
companies.
The Board of Directors of Cryptometrics also considered certain
potential risks related to the Merger, including but not limited to the risks
related to the Merger not being consummated, with resulting distraction in the
interim to Cryptometrics normal business operations. The Board of Directors of
Cryptometrics believed, however, that these risks were outweighed by the
potential benefits to be realized from the Merger.
Based on this analysis, the Board of Directors of Cryptometrics
unanimously determined that the Merger is fair to, and in the best interests of
Cryptometrics stockholders. The foregoing discussion of the information and the
factors considered by the Board of Directors of Cryptometrics is not intended to
be exhaustive, and such information and factors were considered collectively by
the Board of Directors of Cryptometrics in connection with its review of the
Merger Agreement and the transaction contemplated thereby. In lieu of the
variety of factors considered in connection with its evaluation of the Merger,
the Board of Directors of Cryptometrics did not find it practicable to, and did
not quantify or otherwise assign relative weights to, the specific factors
considered in reaching its determination. In addition, the individual members of
the Board of Directors of Cryptometrics may have given different weight to
different factors.
RECOMMENDATIONS OF CRYPTOMETRICS' BOARD OF DIRECTORS
63
The Board of Directors of Cryptometrics believes that the Merger is
fair to, and in the best interests of Cryptometrics and its stockholders.
Accordingly, the Board of Directors of Cryptometrics has unanimously approved
the Merger Agreement and recommends that the Cryptometrics Principal
Stockholders consent to the approval and adoption of the Merger Agreement and
related Merger.
COUNTERVAILING CONSIDERATIONS BY BOTH COMPANIES
The respective Boards of Directors of JAG Media and Cryptometrics also
identified and considered a number of potentially negative factors in their
deliberations concerning the Merger, including, but not limited to:
o the risk that, despite the efforts of Cryptometrics, key personnel
might choose not to remain employed by Cryptometrics, as the
surviving corporation, after the Merger;
o the risk that the potential benefits sought in the Merger might not
be realized fully, or within the time frame contemplated, if at all;
o the possibility that the Merger would not be completed and the
effect of the abandonment of the Merger on each of JAG Media's and
Cryptometrics' ability to attract and retain key management, sales,
marketing and technical personnel;
o the substantial charges to be incurred, primarily in the quarter in
which the Merger is completed, including transaction expenses
arising from the Merger; and
o the other risks associated with each company's business, the Merger
and the combination of the companies described under the section
entitled "Risk Factors" beginning on page 39.
The respective Boards of Directors of JAG Media and Cryptometrics each
believes that the potential benefits of the Merger outweigh these risks.
OWNERSHIP OF JAG MEDIA AFTER THE MERGER
Immediately after the Merger, Cryptometrics stockholders immediately
prior to the Merger will own approximately 300,000,000 shares of JAG Media
Common Stock, equivalent to approximately 88.1875% of the outstanding JAG Media
Common Stock immediately after the Merger. JAG Media stockholders prior to the
Merger will own approximately 40,000,000 shares of JAG Media Common Stock,
equivalent to approximately 11.8125% of the outstanding JAG Media Common Stock
immediately after the Merger.
ACCOUNTING TREATMENT
The Merger will be accounted for as a "purchase" as such term is used
under generally accepted accounting principles, for accounting and financial
reporting purposes. It is expected that the Merger will constitute a tax-free
reorganization under Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). It is anticipated that this transaction will be recorded
as a purchase business combination whereby Cryptometrics is treated as the
accounting acquirer. The assets and liabilities of JAG Media will be recorded at
their fair values, which approximate their historical values and the assets and
liabilities of Cryptometrics will be recorded at their historical values. The
reported financial condition and results of operations of JAG Media after the
Merger will reflect these values, but will not be retroactively restated to
reflect the historical financial position or results of Cryptometrics.
64
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
We have received the opinion of Morgan, Lewis & Bockius LLP, counsel to
JAG Media, that, subject to the assumptions, exceptions, limitations and
qualifications set forth in their opinion, and subject to certain
representations made by JAG Media and Cryptometrics, the Merger will constitute
a tax-free reorganization under Section 368 of the Code. The opinion of Morgan,
Lewis & Bockius LLP and this discussion are based on currently existing
provisions of the Code, existing and proposed treasury regulations thereunder
and current administrative rulings and court decisions, all of which are subject
to change. Any change, which may or may not be retroactive, could alter the tax
consequences to Cryptometrics stockholders as described below, as could any
failure of the representations made by JAG Media or Cryptometrics to be accurate
and complete. Assuming that the Merger is a reorganization under Section 368 of
the Code, the following are the material United States federal income tax
considerations relevant to the exchange of shares of Cryptometrics Common Stock
for JAG Media Common Stock in the Merger that are generally applicable to the
Cryptometrics stockholders:
o Cryptometrics stockholders will not recognize any gain or loss upon
their receipt of JAG Media Common Stock for their shares of
Cryptometrics Common Stock exchanged in the Merger, except to the
extent they receive cash for fractional shares.
o The aggregate tax basis of the JAG Media stockholder that a holder
of Cryptometrics stockholder receives in the Merger will be the same
as the aggregate tax basis of the Cryptometrics Common Stock
surrendered by such holder in exchange for JAG Media Common Stock,
adjusted to take into account the receipt of cash for fractional
shares.
o The holding period of the JAG Media Common Stock that Cryptometrics
stockholders receive in the Merger will include the period for which
the Cryptometrics Common Stock surrendered in exchange for the JAG
Media Common Stock was considered to be held, if the surrendered
Cryptometrics Common Stock is held as a capital asset at the time of
the Merger.
This discussion does not address all United States federal income tax
considerations that may be relevant to a particular Cryptometrics stockholder in
light of the Cryptometrics stockholders' specific particular circumstances, such
as a Cryptometrics stockholder who or that:
o is a dealer in securities;
o is a trader in securities that elects to use a mark-to-market method
of accounting for its securities holdings;
o is a bank;
o is a life insurance company;
o is a tax-exempt organization;
o owns Cryptometrics Common Stock as part of a straddle or conversion
transaction for tax purposes;
o is subject to the alternative minimum tax provisions of the Code;
o is a foreign person;
o does not hold Cryptometrics Common Stock as a capital asset;
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o owns Cryptometrics stock other than Cryptometrics Common Stock; or
o acquired Cryptometrics stock in connection with stock option or
stock purchase plans or in other compensatory transactions.
In addition, the following discussion does not address:
o the tax consequences of the Merger under foreign, state or local tax
laws; or
o the tax consequences of the assumption by JAG Media of Cryptometrics
stock warrants or the tax consequences of the receipt of rights to
acquire JAG Media Common Stock.
The parties are not requesting and will not request a ruling from the
Internal Revenue Service ("IRS") as to the tax consequences of the Merger.
Cryptometrics stockholders should be aware that the tax opinions provided by
Morgan, Lewis & Bockius LLP does not bind the IRS. The IRS may therefore
successfully assert a contrary opinion. The tax opinion is subject to
assumptions, exceptions, limitations and qualifications, including but not
limited to the truth and accuracy of representations made by JAG Media and
Cryptometrics.
A successful IRS challenge to the reorganization status of the Merger
would result in a Cryptometrics stockholder recognizing taxable gain or loss
with respect to each share of Cryptometrics Common Stock surrendered equal to
the difference between (a) each stockholder's basis in the share and (b) the
fair market value, as of the effective time, of the JAG Media Common Stock
received in exchange. In this event, a Cryptometrics stockholder's aggregate
basis in the JAG Media Common Stock received would equal its fair market value
as of the closing date of the Merger, and the stockholder's holding period for
the JAG Media Common Stock would begin the day after the Merger.
CRYPTOMETRICS STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICABLE
FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES.
LOSS LIMITATIONS
Pursuant to the Merger, the stock ownership of JAG Media will change to
such an extent as to cause its net operating loss ("NOL") carryforward to be
subject to limitation under Section 382 of the Code.
FEDERAL SECURITIES LAWS CONSEQUENCES; STOCK TRANSFER RESTRICTIONS
Upon the issuance of shares of JAG Media Common Stock to the
Cryptometrics stockholders in connection with the Merger, such shares shall be
registered with the SEC on this Registration statement on Form S-4. In
accordance with the terms of the Merger Agreement, however, stockholders of
Cryptometrics shall not be permitted to sell or otherwise dispose of sixty-five
percent of the JAG Media Common Stock received in the Merger for a period of
twelve months from the closing date of the transaction. Additionally, the
Registration Statement on Form S-4 shall separately register the shares of JAG
Media Common Stock issuable to the current Co-Chief Executive Officers of
Cryptometrics, Robert Barra and Michael A. Vitale, and the current Chief
Strategy Officer of Cryptometrics, Joel Shaw, so that the shares are immediately
saleable subject to the twelve-month lock-up provision. Notwithstanding the
foregoing, subject to compliance with all relevant securities laws, thirty-five
percent of the shares of JAG Media Common Stock issued to the Cryptometrics
stockholders in connection with the Merger shall not be subject to the
twelve-month lock-up provision so long as the shares of JAG Media (to be renamed
Cryptometrics, Inc.), are trading on the NASDAQ Capital Market.
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THE MERGER AGREEMENT
The following is a summary of the Merger Agreement, a copy of which is
attached as Appendix C and is incorporated into this Proxy Statement/Prospectus
by reference. Stockholders of JAG Media and Cryptometrics are urged to read the
Merger Agreement in its entirety for a more complete description of the terms
and conditions of the Merger.
The text of the Merger Agreement has been included to provide you with
information regarding its terms. The terms of the Merger Agreement (such as the
representations and warranties) are intended to govern the contractual rights
and relationships, and allocate risks, between the parties in relation to the
Merger. The Merger Agreement contains representations and warranties
Cryptometrics, JAG Media and Merger Sub made to each other as of specific dates.
The representations and warranties were negotiated between the parties with the
principal purpose of setting forth their respective rights with respect to their
obligation to complete the Merger and may be subject to important limitations
and qualifications as set forth therein, including a contractual standard of
materiality different from that generally applicable under federal securities
laws.
GENERAL
The Merger Agreement provides that Merger Sub, a wholly-owned
subsidiary of JAG Media newly formed under the laws of the State of Delaware for
purposes of effecting the transactions contemplated by the Merger Agreement,
will merge with and into Cryptometrics, as a wholly-owned subsidiary of JAG
Media. Upon completion of the Merger, JAG Media will change its name to
"Cryptometrics, Inc."
TIMING OF CLOSING
The closing of the Merger (the "Closing") will take place on a date to
be specified by the parties to the Merger Agreement which shall occur no later
than 2 business days after satisfaction (or waiver) of certain conditions set
forth in the Merger Agreement, unless another time is agreed to in writing by
the parties. Simultaneous with, or as soon as practicable following the Closing,
Cryptometrics, as the surviving corporation, will file a Certificate of Merger
with the Secretary of State of the State of Delaware as provided by Section
252(c) of the Delaware General Corporation Law. The Merger shall become
effective at such time as the Certificate of Merger is filed or at such later
time as is set forth in the Certificate of Merger (the "Effective Time").
CONVERSION OF SHARES OF CRYPTOMETRICS COMMON STOCK
At the Effective Time, by virtue of the Merger and without any action
on the part of JAG Media, Merger Sub, Cryptometrics or any stockholder of
Cryptometrics, the holders of all shares of Cryptometrics Common Stock issued
and outstanding immediately prior to the Effective Time, including as
outstanding for this purpose the total number of shares of Cryptometrics Common
Stock for which outstanding Exchangeable Shares of the Cryptometrics' Canadian
Subsidiary, Cryptometrics Canada, Inc., can be exchanged shall be entitled to
receive shares of fully paid and nonassessable JAG Media Common Stock equal to
7.4656 times the number of shares of JAG Media Common Stock issued and
outstanding at the Effective Time of the Merger, (i) excluding all shares of JAG
Media Common Stock held in the treasury of JAG Media and (ii) excluding all
shares of Series 2 and Series 3 Class B common stock outstanding, but (iii)
including as outstanding the relevant number of shares of JAG Media Common Stock
into which shares of JAG Media which are still outstanding can be converted (but
have not yet been converted) by virtue of recapitalization carried out by JAG
Media (the "Merger Consideration").
Each outstanding share of Cryptometrics Common Stock at the Effective
Time shall be converted into the right to receive and become exchangeable for
the number of shares of JAG Media Common Stock
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equal to the quotient obtained by dividing of the Merger Consideration by the
total number of shares of Cryptometrics Common Stock (the "Exchange Multiple").
Each share of Cryptometrics Common Stock held in the Cryptometrics'
treasury immediately prior to the Effective Time and each share owned by any
subsidiary of Cryptometrics shall not represent the right to receive any Merger
Consideration, and each such share shall be canceled and retired and shall cease
to exist, and no cash, securities or other property shall be payable in respect
thereof.
Each Cryptometrics stockholder (after aggregating the fractional shares
of JAG Media Common Stock that would otherwise be received by such holder) shall
be entitled only to the number of shares of JAG Media Common Stock to which such
Cryptometrics stockholder is entitled to receive equal to the quotient obtained
by dividing the Merger Consideration by the total number of outstanding shares
of Cryptometrics Common Stock at the Effective Time. No fractional shares of JAG
Media Common Stock shall be issued in connection with the Merger.
Unless the value of the fractional shares of JAG Media Common Stock
which otherwise would have been issued by virtue of the Merger to a
Cryptometrics stockholder exceeds an aggregate cash amount of One Dollar
($1.00), such Cryptometrics stockholder shall not be entitled to receive a cash
payment in lieu of a fractional share of JAG Media Common Stock. In the event
that the value of the fractional share of JAG Media Common Stock to be issued by
virtue of the Merger to a Cryptometrics stockholder exceeds One Dollar ($1.00),
any such Cryptometrics stockholder entitled to receive a fractional share of JAG
Media Common Stock will be entitled to receive a cash payment in lieu of such
fractional share in an amount determined by JAG Media to be equal to such
fraction multiplied by the arithmetic mean of the closing prices of JAG Media
Common Stock on the Pink Sheets LLC over the 20 trading days ending 3 trading
days prior to the date of the closing.
If between the date of the Agreement and the Effective Time, there
shall be any stock dividend, subdivision, reclassification, recapitalization,
split, combination or exchange of shares or any similar event with respect to
Cryptometrics Common Stock or JAG Media Common Stock, the Exchange Multiple and
the Merger Consideration and any other amounts payable pursuant to this
Agreement shall be correspondingly adjusted to the extent appropriate to reflect
such stock dividend, subdivision, reclassification, recapitalization, split,
combination or exchange of shares or similar event.
CONVERSION OF SHARES OF MERGER SUB COMMON STOCK
Each share of common stock of Merger Sub, par value $0.001 per share,
issued and outstanding immediately prior to the Effective Time shall be
converted into and become one fully paid and nonassessable share of common
stock, par value $0.001 per share of Cryptometrics.
TREATMENT OF CRYPTOMETRICS STOCK OPTIONS
At the Effective time, each outstanding option ("Cryptometrics Stock
Option") to purchase shares of Cryptometrics Common Stock issued, will, by
virtue of the Merger and without further action on the part of Cryptometrics or
the holder of the Cryptometrics Stock Option, be assumed by JAG Media (each a
"Replacement Option"). To the extent that Replacement Options replace options
which qualify as "incentive stock options," each Replacement Option will be
intended to qualify as an "incentive stock option" under the Internal Revenue
Code. JAG Media, however, makes no representation and warranty that such option
will qualify as such under the Internal Revenue Code.
Each Replacement Option will be subject to the same terms and
conditions as the applicable Cryptometrics Stock Option it replaced, provided
that the Cryptometrics Stock Option does not otherwise provide, except that (i)
each such Replacement Option shall be exercisable for, and represent the right
to
68
acquire, that whole number of shares of JAG Media Common Stock (rounded down to
the nearest whole share) equal to the number of shares of Cryptometrics Common
Stock subject to such Company Stock Option multiplied by the Exchange Multiple,
and (ii) the exercise price per share of JAG Media Common Stock shall be an
amount equal to the exercise price per share of the shares of Cryptometrics
Common Stock subject to such Cryptometrics Stock Option in effect immediately
prior to the Effective Time divided by the Exchange Multiple (the exercise price
per share, as so determined, being rounded up to the nearest full cent).
JAG Media will reserve for issuance a sufficient number of shares of
JAG Media Common Stock for delivery upon exercise of the Replacement Options.
TREATMENT OF CRYPTOMETRICS WARRANTS
At the Effective Time, each outstanding warrant to purchase shares of
Cryptometrics Common Stock (each, a "Cryptometrics Warrant") will, to the extent
that such Cryptometrics Warrant does not expire in accordance with its terms
upon consummation of the Merger, be converted into a warrant to acquire, on the
same terms and conditions as were applicable under such Cryptometrics Warrant,
provided that the Cryptometrics warrant does not otherwise provide, that number
of shares of JAG Media Common Stock (rounded down to the nearest whole share)
equal to the number of shares of Cryptometrics Common Stock subject to such
Cryptometrics Warrant multiplied by the Exchange Multiple (such new warrant, the
"Replacement Warrant"), at an exercise price per share (rounded up to the
nearest whole cent) equal to (y) the exercise price per share of Cryptometrics
Common Stock subject to such Cryptometrics Warrant divided by (z) the Exchange
Multiple.
Any restriction on exercise of any Cryptometrics Warrant will continue
in full force and effect and the term, exercisability, schedule and other
provisions of such Cryptometrics Warrant will continue in full force and effect.
At or prior to the Effective Time, Cryptometrics will take all
reasonable action necessary with respect to each Cryptometrics Warrant to permit
the replacement of such Cryptometrics Warrant by JAG Media and to ensure that
holders of Cryptometrics Warrants have no rights with respect to their
Cryptometrics Warrants held greater than those specifically provided for in the
Merger Agreement.
TREATMENT OF EXCHANGEABLE SHARES
At the Effective Time, each outstanding Exchangeable Share will be
converted into the right to acquire, on the same terms and conditions as were
applicable under such Exchangeable Share, provided the relevant Exchangeable
Share does not otherwise provide, that number of shares of JAG Media Common
Stock (rounded down to the nearest whole share) equal to the number of shares of
Cryptometrics Common Stock subject to such Exchangeable Share multiplied by the
Exchange Multiple. Any restriction on exercise of any Exchangeable Share shall
continue in full force and effect and the term, exchangeability, schedule and
other provisions of such Exchangeable Share will continue in full force and
effect. At or prior to the Effective Time, Cryptometrics, Cryptometrics Canada,
Inc. and JAG Media will take all reasonable action, if any, necessary with
respect to each Exchangeable Share to permit the proper modifications of such
Exchangeable Share by Cryptometrics, Cryptometrics Canada, Inc. and JAG Media
and any agreements relating to the Exchangeable Shares so as to ensure that
holders of Exchangeable Shares have no rights with respect thereto greater or
lesser than those specifically provided the Merger Agreements and any additional
agreements made in connection with the Exchangeable Shares.
EXCHANGE OF SHARES OF CRYPTOMETRICS COMMON STOCK AND SURRENDER OF STOCK
CERTIFICATES
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Following the execution of the Merger Agreement, JAG Media will enter
into an agreement with Transfer Online, Inc., or such other bank or trust
company of recognized standing that may be designated by JAG Media and is
reasonably satisfactory to Cryptometrics (the "Exchange Agent"). Upon the
receipt of the approval of the principal stockholders of Cryptometrics, JAG
Media will deposit, or will cause to be deposited, with the Exchange Agent, for
the benefit of the holders of Cryptometrics Common Stock, certificates
representing the shares of JAG Media Common Stock issuable to holders of
Cryptometrics Common Stock as of the Effective Time in respect of the
Cryptometrics Common Stock. JAG Media shall also deposit with the Exchange Agent
cash in an amount sufficient to make the payments in lieu of fractional shares.
The certificates, together with any cash in dividends or distributions with
respect to the certificates and any cash made available in lieu of fractional
shares are referred to herein and in the Merger Agreement as the "Exchange
Fund".
As promptly as reasonably practicable after the Effective Time, JAG
Media will cause the Exchange Agent to mail to each holder of record of
Cryptometrics Common Stock a letter of transmittal and instructions (specifying
that delivery will be effected, and the risk of loss and title to the
Cryptometrics Common Stock shall pass, only upon proper delivery of the
certificates representing the Cryptometrics Common Stock (the "Certificates") to
the Exchange Agent) for use in exchanging Cryptometrics Common Stock for the
Merger Consideration payable in respect of such Cryptometrics Common Stock.
Upon surrender to the Exchange Agent of a Certificate for cancellation,
together with such letter of transmittal duly executed and completed in
accordance with its instructions and such other documents as may be reasonably
required pursuant the instructions, the holder of such Cryptometrics Common
Stock will be entitled to receive (i) that number of whole shares of JAG Media
Common Stock to which the holder of the Cryptometrics Common Stock is entitled,
(ii) payment in lieu of fractional shares which such holder is entitled to
receive in the event the fractional shares of JAG Media Common Stock to be
issued by virtue of the Merger to Cryptometrics stockholders exceeds an
aggregate cash amount of One Dollar ($1.00), and (iii) and any dividends or
distributions payable to the holder. The Certificate so surrendered for with
shall then be canceled.
In the event of a transfer of Cryptometrics Common Stock that is not
registered in the transfer records of the Cryptometrics, shares of JAG Media
Common Stock issued in exchange for Cryptometrics Common Stock may be issued to
a person other than the person in whose name the surrendered Certificate is
surrendered, if (i) such Certificate is properly endorsed or is otherwise in
proper form for transfer and (ii) the person requesting such issuance pays to
the Exchange Agent any and all taxes required as a result of the issuance to a
person other than the registered holder of the Certificate or establishes by
evidence satisfactory to the Exchange Agent that any such taxes have been paid
or are not payable.
Until surrendered or transferred as contemplated, each Certificate
(other than Certificates held represented by holders of Cryptometrics Common
Stock dissenting from the Merger) shall represent at all times after the
Effective Time solely the right to receive, upon such surrender or transfer, in
accordance with the terms of the Merger Agreement, the Merger Consideration,
together with cash payments in lieu of fractional shares and dividends and
distributions payable to the holder in respect of the Cryptometrics Common Stock
represented by the Certificate.
All shares of JAG Media Common Stock issued in accordance with the
terms of the Merger Agreement (including all cash payments in lieu of fractional
shares or dividends and distributions payable to holders of Cryptometrics Common
Stock) upon surrender of the Certificates in accordance with the Merger
Agreement shall be deemed to have been paid in full satisfaction of all rights
pertaining to the Cryptometrics Common Stock represented by Certificates.
At the close of business at 5:00 PM on the day immediately preceding
the Effective Time, the stock transfer books of Cryptometrics will be closed and
there will be no further registration of transfers of
70
Cryptometrics Common Stock on the records of JAG Media. From and after the
Effective Time, the holders of Cryptometrics Common Stock shall cease to have
any rights with respect to shares of Cryptometrics Common Stock outstanding
immediately prior to the Effective Time, except as otherwise provided to holders
of Cryptometrics Common Stock who exercise their appraisal rights or by
applicable law.
On or after the Effective Time, any Certificates presented to the
Exchange Agent or JAG Media for any reason shall be canceled and exchanged for
the Merger Consideration and any cash amounts payable in lieu of fractional
shares or dividends or distributions payable to the holders of Cryptometrics
Common Stock.
Any portion of the Exchange Fund that remains undistributed to the
holders of Cryptometrics Common Stock for 6 months after the Effective Time
shall be redelivered to JAG Media, and any holders of Cryptometrics Common Stock
who have not exchanged their shares of Cryptometrics Common Stock for JAG Media
Common Stock in accordance with the terms provided by the Merger Agreement,
shall thereafter look only to JAG Media for the Merger Consideration to which
they are entitled (in addition to any cash amounts payable in lieu of fractional
shares or dividends or distributions payable to them as holders of Cryptometrics
Common Stock.
Any portion of the Exchange Fund remaining unclaimed by holders of
Cryptometrics Common Stock as of a date that is immediately prior to such time
as such amounts would otherwise escheat to or become property of any government
entity shall, to the extent permitted by applicable law, become the property of
JAG Media free and clear of any claims or interest of any person previously
entitled thereto. To the fullest extent permitted by applicable law, neither JAG
Media nor Cryptometrics, shall be liable to any holders of Cryptometrics Common
Stock for shares of JAG Media Common Stock, cash or other property delivered
from the Exchange Fund to a public official pursuant to any applicable abandoned
property, escheat or similar law.
Each person entitled to receive shares of JAG Media Common Stock shall
receive them on the condition and subject to the requirement that (A) 65% of
such shares may not be sold (but may be transferred (i) by gift to a family
member, (ii) by will or by the laws of descent or distribution or (iii) to a
trust for the benefit of the transferor and/or member of his family until the
first anniversary of the closing date and the certificates evidencing such
shares shall have a legend reflecting such restriction, and (B) the remaining
35% of such shares may be freely sold or transferred even within the first year
following the closing date so long as such shares are traded on the NASDAQ
Capital Market and in the event such shares cease to be traded on the NASDAQ
Capital Market during such first year (or on another U.S. market or exchange
with no less stringent listing requirements), Cryptometrics shall have the right
to impose a stop order on the transfer of all such shares still held by
shareholders of Cryptometrics as of the closing date for the remainder of such
first year.
No dividends or other distributions on shares of JAG Media Common Stock
will be paid with respect to any shares of Cryptometrics Common Stock until such
share of Cryptometrics Common Stock is surrendered for exchanged as provided by
the terms of the Merger Agreement.
Subject to the effect of applicable laws, following the surrender of
any such shares of Cryptometrics Common Stock, the record holder of shares of
JAG Media Common Stock issued in exchange for such shares of Cryptometrics
Common Stock, shall receive, without interest (a) at the time of such surrender,
the amount of dividends or distributions with a record date after the Effective
Time payable with respect to such shares of JAG Media Common Stock and not paid
and (b) at the appropriate payment date, the amount of dividends or
distributions with a record date after the Effective Time but prior to the
surrender of the shares of Cryptometrics Common Stock payable with respect to
such shares of JAG Media Common Stock, less the amount of withholding taxes
which may be required with respect to the JAG Media Common Stock.
71
No holder of Cryptometrics Common Stock will be entitled, until the
surrender of such Certificate(s), to vote the shares of JAG Media Common Stock,
which such holder has the right to receive pursuant to the terms of the Merger
Agreement.
The payment of the Merger Consideration in respect of each share of
Cryptometrics Common Stock (and any cash payments in lieu of fractional shares
or dividends and distributions payable with respect to each share of
Cryptometrics Common Stock) will be deemed to have been issued and fully paid in
full satisfaction of all rights pertaining to each such share of Cryptometrics
Common Stock, and there will be no further registration of transfers on the
stock transfer books of Cryptometrics of Cryptometrics Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented for transfer to Cryptometrics, such
Certificates will be canceled and exchanged for certificates representing shares
of JAG Media Common Stock in accordance with the terms provided in the Merger
Agreement.
LOST, STOLEN OR DESTROYED CERTIFICATES
If any Certificate is lost, stolen or destroyed, upon the making of an
affidavit of that fact by the person claiming such Certificate to be lost,
stolen or destroyed, and if required by Cryptometrics or the Exchange Agent, the
posting by such person of a bond, in such reasonable amount as Cryptometrics, as
the surviving corporation, or the Exchange Agent may direct, as indemnity
against any claim that may be made against it with respect to such Certificate
and the payment of any fee charged by the Exchange Agent for such service, the
Exchange Agent will issue in exchange for such lost, stolen or destroyed
Certificate, the number of shares of JAG Media Common Stock and cash, if any, to
which the holder is entitled pursuant to the Merger Consideration and applicable
Exchange Ratio set forth in the Merger Agreement.
APPRAISAL RIGHTS
Any shares of Cryptometrics Common Stock held by a Cryptometrics
stockholder who has demanded and not lost or withdrawn, or who is eligible to
demand, appraisal rights with respect to such shares of Cryptometrics Common
Stock in the manner provided in the Delaware General Corporation Law does not
represent the right to receive any portion of the Merger Consideration. If any
Cryptometrics stockholder fails to perfect or effectively withdraws or loses his
right to appraisal and payment under the Delaware General Corporation Law, as
the case may be, each share of Cryptometrics Common Stock held by such
Cryptometrics stockholder will represent the right to receive its portion of the
Merger Consideration.
Both Cryptometrics and JAG Media, as the case may be, shall give one
another prompt notice of any demands for appraisal received by Cryptometrics or
JAG Media, withdrawals of such demands, and any other communications received by
Cryptometrics or JAG Media in connection with any demands for appraisal.
Cryptometrics may voluntarily make any payment with respect to any such demands.
Cryptometrics shall have the right to control all negotiations and proceedings
with respect to demands for appraisal, including the right to settle any such
demands.
THE BOARD OF DIRECTORS AND OFFICERS OF CRYPTOMETRICS AFTER THE MERGER
At the Effective Time, the directors and officers of Cryptometrics
immediately prior to the Effective Time shall be the directors and officers of
JAG Media (to be renamed Cryptometrics, Inc.), each to hold office until their
respective death, permanent disability, resignation or removal or until their
respective successors are duly elected and qualified, all in accordance with the
Certificate of Incorporation and Bylaws of JAG Media (to be renamed
Cryptometrics) and applicable law.
THE CERTIFICATE OF INCORPORATION AND BYLAWS OF CRYPTOMETRICS AFTER THE MERGER
72
The Certificate of Incorporation of JAG Media (to be renamed
Cryptometrics, Inc.) shall be the Certificate of Incorporation of Cryptometrics,
Inc. until amended thereafter in accordance with applicable Delaware law.
The Bylaws of JAG Media (to renamed Cryptometrics, Inc.) shall be the
Bylaws of Cryptometrics, Inc. until amended thereafter in accordance with
applicable Delaware law.
POST MERGER ACTIONS
Promptly after the Effective Time, (i) the Board of Directors of JAG
Media will amend the Bylaws of JAG Media to permit a Board of Directors of not
less than one (1) nor more than twelve (12) directors, (ii) the Board of
Directors of JAG Media will appoint as directors to fill some or all of such
vacancies such persons as the management of Cryptometrics will designate, which
designees will include a sufficient number of independent directors to comply
with the requirements of The Sarbanes-Oxley Act of 2002 and the rules and
requirements of the NASDAQ Capital Market, (iii) the officers of JAG Media and
the directors of JAG Media prior to the Effective Time will resign as officers
and directors of JAG Media, but not as managers and officers of JAG Media's
wholly-owned subsidiary, JAG Media LLC, JAG Media will (a) amend Section 11 of
the existing employment agreements of such officers (the "Employment
Agreements") to fix the payout period on termination without cause at 12 months,
(b) amend Section 4 of the Employment Agreement to cancel all options granted to
the officers pursuant to such section and (c) amend Section 6 of the Employment
Agreements to reduce the number of options granted to each of the officers upon
a change in control from 1,000,000 to 750,000, which will be exercisable
immediately on a cashless basis, with one half of such shares being subject to a
lock up period of one year from the date of the closing of the Merger, (iv) JAG
Media will assign the Employment Agreements to JAG Media LLC and cause it to
accept same, and such officers will release JAG Media from all liability
thereunder (including salary payments) except that JAG Media will remain
contractually obligated to carry out its obligations to fulfill any exercise of
options remaining under such Employment Agreements, (v) JAG Media LLC will
terminate the employment of such officers under the Employment Agreements
without cause and (vi) the Board of Directors of JAG Media will elect new
officers of JAG Media.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains customary, mutual representations and
warranties of JAG Media Merger Sub and Cryptometrics, relating to, among other
things:
o corporate organization, power and authority;
o corporate authorization;
o non-contravention;
o third party consents;
o authorized and issued capital stock, options and warrants;
o subsidiaries;
o SEC filings and NASDAQ Capital Market listing (in the case of JAG
Media only);
o financial statements;
o no undisclosed liabilities;
o absence of certain changes;
o personal property, including title to and condition of personal
property;
o real property, including title to or leaseholder interests in real
property as well as condition of real property and environmental
matters;
o intellectual property;
o licenses, permits and other authorizations;
o contracts;
73
o insurance;
o related party transactions;
o investigation and litigation;
o brokers and finders;
o compliance with applicable laws;
o tax matters;
o employee benefits;
o anti-take over statutes
o no illegal payments
o labor and employment law matters; and
o adequacy of disclosure.
The Merger Agreement also contains representations and warranties made
severally, and not jointly, by Robert Barra and Michael A. Vitale, the principal
stockholders (the "Principal Stockholders") of Cryptometrics to JAG Media and
Merger Sub, relating to, among other things,
o authority to enter into the Merger Agreement, the Voting Agreement
and the Lock Up Agreement;
o execution and enforceability of the Merger Agreement, the Voting
Agreement and the Lock Up Agreement;
o title to their securities held in Cryptometrics;
o no conflicts with respect to the execution and enforceability of the
Merger Agreement, the Voting Agreement and the Lock-Up Agreement;
o government approvals and necessary filings;
o legal proceedings; and
o brokers and finders.
CERTAIN COVENANTS
Both JAG Media and Cryptometrics have agreed that the Merger Agreement
may be terminated by either party without giving any reason therefor, unless
otherwise agreed to by the parties. In the event that JAG Media and
Cryptometrics mutually agreed that the Merger Agreement should no longer be
terminable by either party without giving reason therefor, the following
affirmative and negative covenants shall become binding upon the parties.
Notwithstanding the foregoing however, JAG Media shall notify Cryptometrics and
Cryptometrics shall notify JAG Media within two (2) business days after either
one of them permits, allows or otherwise causes to occur any event in violation
of their respective covenants below. In the event that JAG Media decides to
engage in a spin off of assets to its shareholders as a dividend, JAG Media
shall inform Cryptometrics of the relevant terms and conditions of the spin off
at least two (2) business days prior to the consummation of the spin off.
Affirmative Covenants Concerning Cryptometrics
During the period from the closing date and continuing until the
earlier of the termination of the Merger Agreement or the Effective Time,
Cryptometrics has agreed that it will cause Cryptometrics and any of its
subsidiaries to:
o carry on its business in the usual, regular and ordinary course in a
manner consistent with past practice;
o use its reasonable best efforts consistent with past practices and
policies to preserve intact its present business organization, keep
available the services of its present employees and preserve
74
its relationships with customers, suppliers, distributors,
licensors, licensees, and others having business dealings with it;
and
o use its reasonable best efforts to conduct its business in such a
manner that on the closing date the representations and warranties
of Cryptometrics contained in the Merger Agreement shall be true and
correct, as though such representations and warranties were made on
and as of such date, and Cryptometrics shall use its reasonable best
efforts to cause all of the conditions to the obligations of JAG
Media and Merger Sub under the Merger Agreement to be satisfied as
soon as practicable following the closing date.
Negative Covenants Concerning Cryptometrics
Except as expressly provided in the Merger Agreement, Cryptometrics has
agreed that it will not, and will not permit any of its subsidiaries to, without
the prior written consent of JAG Media:
o adopt or propose any amendment to the charter documents of
Cryptometrics or any of its subsidiaries;
o declare, set aside or pay any dividend or other distribution
(whether in cash, stock or other property) with respect to any
securities;
o issue or authorize for issuance any stock dividends or engage in any
subdivision, reclassification, split, combination or exchange of
shares or any similar event with respect to Cryptometrics Common
Stock between the closing date and the Effective Time;
o make any change in any issued and outstanding securities, or redeem,
purchase or otherwise acquire any securities other than the
repurchase at cost from employees of shares of Cryptometrics Common
Stock in connection with the termination of their employment
pursuant to the Cryptometrics standard form of option/restricted
shares agreement;
o other than pursuant to a written agreement or the Cryptometrics
Benefit Plan disclosed on Cryptometrics' disclosure schedule (the
"Cryptometrics Disclosure Schedule") to the Merger Agreement in the
amount required under the Cryptometrics Benefit Plan and other than
payment of bonuses and increases in salaries or wage rates or fringe
benefits to non-officer employees, contractors or consultants in the
ordinary course of business consistent with past practice, (i)
modify the compensation or benefits payable or to become payable by
Cryptometrics or any of its subsidiaries to any of its current or
former directors, officers, employees, contractors or consultants,
or (ii) modify any bonus, severance, termination, pension, insurance
or other employee benefit plan, payment or arrangement made to, for
or with any current or former directors, employees, contractors or
consultants of Cryptometrics or any of its subsidiaries;
o enter into any employment (other than offer letters and letter
agreements entered into in the ordinary course of business
consistent with past practice with employees who are terminable
"at-will"), severance or termination agreement;
o establish, adopt, enter into, amend or terminate any Cryptometrics
Benefit Plan or any collective bargaining, thrift, compensation or
other plan, agreement, trust, fund, policy or arrangement for the
benefit of any current or former directors, employees, contractors
or consultants of Cryptometrics or any of its subsidiaries;
o other than (i) sales of inventory, (i) the grant of Cryptometrics
Out-Bound Licenses on a non-exclusive basis and (iii) other
dispositions of property and assets that are not material,
75
individually or in the aggregate, to Cryptometrics and its
subsidiaries, taken as a whole, in each case in the ordinary course
of business consistent with past practice, sell, lease, transfer or
assign any property or assets of Cryptometrics or any of its
subsidiaries;
o other than borrowings in the ordinary course of business consistent
with past practice pursuant to credit facilities existing on the
closing date or the financing of ordinary course trade payables
consistent with past practice, (i) assume, incur or guarantee any
indebtedness, other than endorsements for collection in the ordinary
course of business or (ii) modify the terms of any existing
indebtedness in any material respect;
o other than liens granted pursuant to credit facilities existing on
the closing date in connection with borrowings permitted under the
previous bullet point, pledge or permit to become subject to liens
any properties or assets of Cryptometrics or any of its
subsidiaries;
o other than travel loans or advances in the ordinary course of
business consistent with past practice, make any loans, advances or
capital contributions to, or investments in, any other person;
o not cancel any debts or waive any claims or rights of substantial
value;
o other than in the ordinary course of business consistent with past
practice, (i) amend, modify or terminate, or waive, release or
assign any rights under, any of Cryptometrics' material contracts,
or (ii) enter into any contracts which, if entered into prior to
closing date, would have been required to be set forth in the list
of materials contracts set forth on the Cryptometrics Disclosure
Schedule to the Merger Agreement;
o acquire, or agree to acquire, from any person any assets,
operations, business or securities or engage in, or agree to engage
in, any Merger, consolidation or other business combination with any
person, except in connection with (i) capital expenditures permitted
under the Merger Agreement or (ii) acquisitions of inventory and
other tangible assets in the ordinary course of business consistent
with past practice;
o not settle or compromise any litigation other than settlements or
compromises of litigation where the settlement is limited solely to
the release of claims and the monetary payment by Cryptometrics or
its subsidiaries does not exceed $50,000 in the aggregate or $10,000
in any individual case;
o amend any Cryptometrics Stock Option, Cryptometrics Warrant or other
documentation evidencing a right to purchase Cryptometrics
securities or authorize cash payments in exchange for any of the
foregoing;
o make any filings or registrations, with any governmental entity,
except routine filings and registrations made in the ordinary course
of business;
o take any actions outside the ordinary course of business;
o other than as required by GAAP (as advised by its regular
independent accountants), make any changes in its accounting
methods, principles or practices;
o make any tax election, change its method of tax accounting or settle
any claim relating to taxes;
76
o take any action or omit to do any act within its reasonable control
which action or omission which is reasonably likely to result in any
of the conditions to the Merger not being satisfied, except as may
be required by applicable law; or
o agree, whether in writing or otherwise, to do any of the foregoing.
Affirmative Covenants Concerning JAG Media
During the period from the closing date and continuing until the
earlier of the termination of the Merger Agreement or the Effective Time, JAG
Media has agreed that it will cause JAG Media and any of its subsidiaries to:
o carry on its business in the usual, regular and ordinary course in a
manner consistent with past practice;
o use its reasonable best efforts consistent with past practices and
policies to preserve intact its present business organization, keep
available the services of its present employees and preserve its
relationships with customers, suppliers, distributors, licensors,
licensees, and others having business dealings with it; and
o use its reasonable best efforts to conduct its business in such a
manner that on the closing date the representations and warranties
of JAG Media contained in the Merger Agreement shall be true and
correct, as though such representations and warranties were made on
and as of such date, and JAG Media shall use its reasonable best
efforts to cause all of the conditions to the obligations of
Cryptometrics under the Merger Agreement to be satisfied as soon as
practicable following the closing date.
Negative Covenants Concerning JAG Media and JAG Media LLC
Except as expressly provided in the Merger Agreement, JAG Media and its
wholly-owned subsidiary JAG Media LLC, have agreed that they will not, and
without the prior written consent of Cryptometrics:
o adopt or propose any amendment to the charter documents of JAG Media
or any of its subsidiaries;
o declare, set aside or pay any dividend or other distribution
(whether in cash, stock or other property) with respect to any
securities;
o issue any stock dividends or engage in any subdivision,
reclassification, recapitalization, split, combination or exchange
of shares or any similar event with respect to JAG Media Common
Stock between the closing date and the Effective Time;
o make any change in any issued and outstanding securities, or redeem,
purchase or otherwise acquire any securities other than the
repurchase at cost from employees of shares of JAG Media Common
Stock in connection with the termination of their employment
pursuant to JAG Media's standard form of option/restricted shares
agreement or a cancellation of issued shares at no cost to JAG
Media;
o other than pursuant to a written agreement in the amount required
thereunder and other than payment of bonuses and increases in
salaries or wage rates or fringe benefits to non-officer employees,
contractors or consultants in the ordinary course of business
consistent with past practice, (i) modify the compensation or
benefits payable or to become payable by JAG Media
77
or any of its subsidiaries to any of its current or former
directors, officers, employees, contractors or consultants, (ii)
modify any bonus, severance, termination, pension, insurance or
other employee benefit plan, payment or arrangement made to, for or
with any current or former directors, employees, contractors or
consultants of JAG Media or any of its subsidiaries or (iii) enter
into any employment (other than offer letters and letter agreements
entered into in the ordinary course of business consistent with past
practice with employees who are terminable "at-will"), severance or
termination agreement;
o establish, adopt, enter into, amend or terminate any employee
benefit plan or any collective bargaining, thrift, compensation or
other plan, agreement, trust, fund, policy or arrangement for the
benefit of any current or former directors, employees, contractors
or consultants of JAG Media or any of its subsidiaries;
o other than (i) sales of inventory, (ii) the grant of licenses,
sublicenses and other contracts pursuant to which JAG Media or any
of its subsidiaries authorizes a third party to use or practice any
rights under, or grant sublicenses with respect to, intellectual
property owned by JAG Media on a non-exclusive basis and (iii) other
dispositions of property and assets that are not material,
individually or in the aggregate, to JAG Media and its subsidiaries,
taken as a whole, in each case in the ordinary course of business
consistent with past practice, sell, lease, transfer or assign any
property or assets of JAG Media or any of its subsidiaries;
o other than borrowings in the ordinary course of business consistent
with past practice pursuant to credit facilities existing on the
date of this Agreement or the financing of ordinary course trade
payables consistent with past practice, (i) assume, incur or
guarantee any indebtedness, other than endorsements for collection
in the ordinary course of business or (ii) modify the terms of any
existing indebtedness in any material respect;
o other than liens granted pursuant to credit facilities existing on
the date of closing date in connection with borrowings permitted
under the previous bullet point, pledge or permit to become subject
to liens any properties or assets of JAG Media or any of its
subsidiaries;
o other than travel loans or advances in the ordinary course of
business consistent with past practice, make any loans, advances or
capital contributions to, or investments in, any other person (other
than its subsidiaries);
o not cancel any debts or waive any claims or rights of substantial
value;
o other than in the ordinary course of business consistent with past
practice, amend, modify or terminate, or waive, release or assign
any rights under, any material contract;
o acquire, or agree to acquire, from any person any assets,
operations, business or securities or engage in, or agree to engage
in, any merger, consolidation or other business combination with any
person, except in connection with (i) capital expenditures permitted
under the Merger Agreement or (ii) acquisitions of inventory and
other tangible assets in the ordinary course of business consistent
with past practice;
o not settle or compromise any litigation other than settlements or
compromises of litigation where the settlement is limited solely to
the release of claims and the monetary payment by JAG Media or any
of its subsidiaries does not exceed $50,000 in the aggregate or
$10,000 in any individual case;
78
o amend any stock option, warrant or other purchase right to acquire
shares of JAG Media Common Stock or authorize cash payments in
exchange for any of the foregoing;
o make any filings or registrations, with any governmental entity,
except routine filings and registrations made in the ordinary course
of business;
o take any actions outside the ordinary course of business;
o other than as required by GAAP (as advised by its regular
independent accountants), make any changes in its accounting
methods, principles or practices;
o make any tax election, change its method of tax accounting or settle
any claim relating to Taxes;
o take any action or omit to do any act within its reasonable control
which action or omission which is reasonably likely to result in any
of the conditions to the Merger not being satisfied, except as may
be required by applicable law; or
o agree, whether in writing or otherwise, to do any of the foregoing
except that JAG Media may, with Cryptometrics' prior consent and
notification to Cryptometrics within two (2) business days
thereafter spin-off various assets to its shareholders as a
dividend.
DISCLOSURE SCHEDULES
As promptly as practicable after the execution of the Merger Agreement,
Cryptometrics shall assist JAG Media and its legal and accounting advisors in
preparing, and shall furnish JAG Media with such business, financial or other
information and documents as may be required to prepare any Securities Act
filings to be made by Parent with the SEC prior to or following the Effective
Time. JAG Media shall provide Cryptometrics and its counsel with an opportunity
to review and comment on the above-referenced documents within the time periods
prescribed by the SEC prior to their submission.
Within fifteen business days of the date of the date of the Merger
Agreement, JAG Media and Cryptometrics will finalize their respective Disclosure
Schedules and provide same to the other, which shall have five days to accept or
reject such Disclosure Schedule. Unless either JAG Media or Cryptometrics
notifies the other within such five day period that it rejects the other's
Disclosure Schedule, both JAG Media's Disclosure Schedule and Cryptometrics'
Disclosure Schedule shall be deemed accepted and shall become part of the Merger
Agreement. If either JAG Media or Cryptometrics notifies the other within such
five day period that it rejects the other's Disclosure Schedule, JAG Media and
Cryptometrics will negotiate in good faith to attempt to agree on an acceptable
Disclosure Schedule for the succeeding ten days. If no agreement is reached by
the end of such ten day good faith negotiation period, the Merger Agreement will
terminate.
EXCLUSIVITY
Except as otherwise provided in the Merger Agreement and except as set
forth on JAG Media's disclosure schedule (the "JAG Media Disclosure Schedule")
to the Merger Agreement or Cryptometrics' Disclosure Schedule to the Merger
Agreement (the "Cryptometrics Disclosure Schedule"), each of Cryptometrics and
JAG Media have agreed that it will not, and it will use its reasonable best
efforts to cause its subsidiaries and its and their respective directors,
officers, employees, affiliates and other agents and representatives (including
any investment banking, legal or accounting firm retained by it or any of them
and any individual member or employee of the foregoing) not to:
79
o initiate, solicit, encourage or seek, directly or indirectly, any
inquiries relating to or the making or implementation of any
proposal initiated by a third party (including any proposal or offer
to the stockholders of Cryptometrics or JAG Media, as the case may
be) with respect to Cryptometrics or JAG Media, which involves any
of the following transactions, such transactions constituting a
"Third Party Proposal":
(i) any sale, lease or other disposition, direct or indirect (and
however structured), of any business or assets of such party
and/or any of its subsidiaries (which business or assets
represent 10% or more of the consolidated revenues, net
income or assets of such party and its subsidiaries, taken as
a whole),
(ii) any tender offer (including a self-tender offer) or exchange
offer that, if consummated, would result in a third party
beneficially owning 10% or more of any class of securities of
such party,
(iii) a Merger, consolidation, share exchange, business
combination, reorganization, joint venture, recapitalization,
liquidation, dissolution or other similar transaction
involving such party and/or any of its subsidiaries (which
subsidiaries represent 10% or more of the consolidated
revenues, net income or assets of such party and its
subsidiaries, taken as a whole),
(iv) the issuance, sale or other disposition, direct or indirect
(and however structured), of securities (or securities or
other rights convertible into, or exercisable or exchangeable
for, such securities) representing 10% or more of the voting
power or capital stock of such party and/or any of its
subsidiaries (which subsidiaries represent 10% or more of the
consolidated revenues, net income or assets of such party and
its subsidiaries, taken as a whole), or
(v) any combination of the foregoing (other than the Merger).
o engage in any negotiations concerning, or provide any information or
data to, or have any substantive discussions with, any person
relating to a Third Party Proposal;
o otherwise cooperate in or facilitate any effort or attempt to make,
implement or accept a Third Party Proposal;
o enter into contract with any person relating to a Third Party
Proposal; or
o release any third party from, or waive any provision of, any
confidentiality or standstill agreement to which it is a party.
Each of the Cryptometrics and JAG Media have agreed to immediately
cease, and cause their respective subsidiaries and agents immediately to cease,
any and all existing activities, discussions or negotiations with any third
parties conducted heretofore with respect to any Third Party Proposal.
The Boards of Directors of JAG Media and Cryptometrics, may furnish
information to, and enter into discussions or negotiations with, a person who
has made an unsolicited, written, bona fide Third Party Proposal if, and only
if, the Board of Directors of JAG Media and/or Cryptometrics have reasonably
concluded that such Third Party Proposal constitutes a "Superior Proposal." A
"Superior Proposal" is an unsolicited written bona fide Third Party Proposal
pursuant to which a person (or its stockholders) would own, if consummated, all
or substantially all of the outstanding capital stock of JAG Media or
Cryptometrics (or of the surviving entity in a Merger or the direct or indirect
parent of the surviving entity in a Merger) or
80
all or substantially all the assets of JAG Media or Cryptometrics and their
subsidiaries taken as a whole on terms that the Board of Directors of JAG Media
and/or Cryptometrics determine, in its good faith judgment, to be more favorable
to the stockholders of JAG Media or Cryptometrics from a financial point of view
than the terms of the Merger and with any financing required to consummate the
transaction contemplated by such Third Party Proposal committed or likely, in
the good faith judgment of the Board of Directors of JAG Media or Cryptometrics,
to be obtained by such third party on a timely basis.
The Board of Directors of JAG Media or Cryptometrics must also have (i)
reasonably concluded, after receiving advice from its outside legal counsel,
that, in light of such superior proposal, the furnishing of such information or
entering into discussions is required to comply with its fiduciary obligations
to its stockholders under applicable law, (ii) provided written notice to the
other party of its intent to furnish information or enter into discussions or
negotiations with such person at least 3 business days prior to taking any such
action and (iii) obtained from such person an executed confidentiality agreement
on terms no less favorable to JAG Media or Cryptometrics, as the case may be,
than those contained in the Mutual Non Disclosure Agreement dated as of
September 27, 2004 by and between JAG Media and Cryptometrics.
The Board of Directors of JAG Media or Cryptometrics must furnish to
the other all information provided to the person who has made the superior
proposal to the extent that such information has not been previously provided to
Cryptometrics or JAG Media, as the case may be, and will keep the other promptly
and reasonably informed as to the status of any discussions regarding such
superior proposal.
No information may be furnished and no discussions may be entered into
in the event that JAG Media or Cryptometrics have taken any actions inconsistent
with the provisions of the Merger Agreement discussing the conduct of JAG Media
and Cryptometrics with respect to Third Party Proposals and Superior Proposals.
The Merger Agreement does not prevent the Board of Directors of JAG
Media or Cryptometrics from withholding, withdrawing, amending, modifying or
changing its recommendation in favor of the approval of the stockholders of JAG
Media or Cryptometrics, as the case may be, and, in the case of a tender or
exchange offer made directly to the stockholders of JAG Media or Cryptometrics,
a recommendation that the stockholders of JAG Media or Cryptometrics, as the
case may be, accept the tender or exchange offer (each, a "Change of
Recommendation"), if all of the following conditions are satisfied:
o a Superior Proposal is made to JAG Media or Cryptometrics and is not
withdrawn;
o the Annual Meeting of the Stockholders of JAG Media has not occurred
and the written consent of the stockholders of Cryptometrics has not
been obtained;
o JAG Media or Cryptometrics, as the case may be, shall have provided
at least 3 business days prior written notice (the "Notice Period")
to the other stating (A) that it has received a Superior Proposal,
(B) the terms and conditions of such Superior Proposal and the
identity the person making such Superior Proposal and (C) that it
intends to effect a Change of Recommendation and the manner in which
it intends to so;
o Cryptometrics shall not have, within the Notice Period, made an
offer that the Board of Directors of JAG Media by a majority vote
determines in its good faith judgment to be at least as favorable to
such party and its stockholders as such Superior Proposal (it being
agreed that the Board of Directors of such party shall convene a
meeting to consider any such offer by the other party promptly
following the receipt thereof);
o JAG Media shall not have, within the Notice Period, made an offer
that the Board of Directors of Cryptometrics by a majority vote
determines in its good faith judgment to be at least as favorable
81
to such party and its stockholders as such Superior Proposal (it
being agreed that the Board of Directors of such party shall convene
a meeting to consider any such offer by the other party promptly
following the receipt thereof);
o the Board of Directors of JAG Media or Cryptometrics, as the case
may be, concludes in good faith, after receiving the advice of its
outside legal counsel, that, in light of such Superior Proposal, the
failure of it to effect a Change of Recommendation would result in a
breach of its fiduciary obligations to its stockholders under
applicable law; and
o Neither JAG Media nor Cryptometrics shall have breached any of the
provisions set forth with respect to the consideration and
acceptance of a Superior Proposal set forth in the Merger Agreement.
PROXY STATEMENT; REGISTRATION STATEMENT
As promptly as practicable after the execution of the Merger Agreement,
JAG Media, with the assistance of Cryptometrics, will prepare and JAG Media will
file with the SEC the Proxy Statement/Prospectus relating to the solicitation of
proxies from JAG Media stockholders to authorize (i) the increase in the number
of shares of JAG Media Common Stock authorized from 250,000,000 to 500,000,000
so as to permit the issuance of JAG Media Common Stock pursuant to the Merger
and (ii) the change of JAG Media's name to "Cryptometrics, Inc." JAG Media will
prepare and file with the SEC the Form S-4 Registration Statement in which the
Proxy Statement will be included as a prospectus (a) in connection with the
registration under the Securities Act of (i) the shares of JAG Media Common
Stock to be issued to JAG Media stockholders pursuant to the Merger, and (ii)
the JAG Media Common Stock issuable upon exercise of the options, warrants and
exchangeable securities to purchase Cryptometrics Common Stock which become
options, warrants and exchangeable securities to purchase JAG Media Common Stock
by virtue of the Merger, and (b) in connection with the registration for resale,
subject to the provisions of Company Lock-Up and Voting Agreements, of the
shares of JAG Media Common Stock issued to Robert Barra and Michael Vitale and
Joel Shaw in the Merger. Each of Cryptometrics and JAG Media will use its
reasonable best efforts to cause the Form S-4 Registration Statement to become
effective as promptly as practicable and, prior to the effective date of the
Form S-4 Registration Statement, JAG Media will use its reasonable best efforts
to take all or any action required under any applicable federal or state
securities laws in connection with the issuance of shares of JAG Media Common
Stock pursuant to the Merger. In the event that Cryptometrics does not elect to
pay the legal costs described in the non-binding letter of intent dated
September 9, 2005, entered into by Cryptometrics and JAG Media, JAG Media may
elect to do so and continue to take all such actions as it may deem advisable to
enable the Form S-4 Registration Statement to become effective. Each of
Cryptometrics and JAG Media will furnish all information concerning itself as
the other may reasonably request in connection with such actions and the
preparation of the Form S-4 Registration Statement and Proxy Statement.
Each of Cryptometrics and JAG Media will use its reasonable best
efforts to cause the Form S-4 Registration Statement to become effective as
promptly as practicable and, prior to the effective date of the Form S-4
Registration Statement, JAG Media will use its reasonable best efforts to take
all or any action required under any applicable federal or state securities laws
in connection with the issuance of shares of JAG Media Common Stock pursuant to
the Merger. Each of Cryptometrics and JAG Media will furnish all information
concerning itself as the other may reasonably request in connection with such
actions and the preparation of the Registration Statement and Proxy Statement.
Each of Cryptometrics and JAG Media have agreed to give the other party
and its counsel a reasonable opportunity to review and comment on any amendment
or supplement to the Proxy Statement or Form S-4 Registration Statement prior to
filing any amendment or supplement with the SEC, and reasonable and good faith
consideration shall be given to any comments made by the other party and its
counsel.
82
Each of Cryptometrics and JAG Media will (i) promptly provide the other
party and its counsel with any comments or other communications, whether written
or oral, that it or its counsel may receive from time to time from the SEC or
its staff with respect to the Proxy Statement and Form S-4 Registration
Statement promptly after receipt of those comments or other communications and
(ii) provide the other party with a reasonable opportunity to participate in the
response to those comments and to provide comments on that response (to which
reasonable and good faith consideration shall be given), including by
participating in any discussions or meetings with the SEC.
Neither Cryptometrics nor JAG Media will make any amendment or
supplement to the Proxy Statement or the Form S-4 Registration Statement without
the approval of the other party (such approval not to be unreasonably withheld
or delayed). Each of Cryptometrics and JAG Media will advise the other, promptly
after it receives notice thereof, of the time at which the Form S-4 Registration
Statement has become effective or any supplement or amendment has been filed, of
the issuance of any stop order, of the suspension of the qualification of the
shares of JAG Media Common Stock issuable pursuant to the Merger for offering or
sale in any jurisdiction.
The information supplied by Cryptometrics and JAG Media, as applicable,
for inclusion in the Form S-4 Registration Statement and the Proxy Statement
shall not, (i) at the time the Form S-4 Registration Statement is declared
effective, (ii) at the time the Proxy Statement (or any amendment thereof or
supplement thereto) is first mailed to the Cryptometrics Common Stockholders and
JAG Media Common Stockholders or (iii) at the time of the Annual Meeting of the
Stockholders of JAG Media, contain any untrue statement of a material fact or
fail to state any material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
If, at any time prior to the Effective Time, any event or circumstance
relating to Cryptometrics and subsidiaries, in the case of Cryptometrics, or to
JAG Media and its subsidiaries, in the case of JAG Media, or their respective
officers or directors, should be discovered by Cryptometrics or JAG Media that
should be set forth in an amendment or a supplement to the Form S-4 Registration
Statement or Proxy Statement so that any of such documents will not contain any
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, Cryptometrics or JAG Media, as applicable,
shall promptly inform the other party. All documents that JAG Media is
responsible for filing with the SEC in connection with the Merger or the other
transactions contemplated by Merger Agreement will comply as to form and
substance in all material respects with the applicable requirements of the
Securities Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
Each of Cryptometrics and JAG Media have agreed to use their reasonable
best efforts to cause to be delivered to the other party two letters from their
respective independent accountants, one dated approximately as of the date the
Form S-4 Registration Statement is declared effective and one dated
approximately as of the closing date, each addressed to the other party, in form
and substance reasonably satisfactory to the other party and customary in scope
and substance for comfort letters delivered by independent public accountants in
connection with registration statements on Form S-4 under the Securities Act.
Each of Cryptometrics and JAG Media shall use its reasonable best
efforts to cause to be delivered to the other party consents from their
respective independent accountants, dated the date on which the Form S-4
Registration Statement is declared effective or a date not more than 2 days
prior to such date, in form reasonably satisfactory to the other party and
customary in scope and substance for consents delivered by independent public
accountants in connection with registration statements on Form S-4 under the
Securities Act.
83
OTHER FILINGS; FORM S-8
As promptly as practicable after the closing date, Cryptometrics has
agreed to assist JAG Media and its legal and accounting advisors in preparing,
and will furnish JAG Media with such business, financial or other information
and documents as may be required to prepare a post-effective amendment to JAG
Media's existing registration statement on Form SB-2 (Registration Nos.
333-118029), which amendment shall be filed by JAG Media with the SEC
immediately following the Effective Time. JAG Media shall provide Cryptometrics
and its counsel with an opportunity to review and comment on the
above-referenced documents within the time periods prescribed by the SEC prior
to their submission.
ANNUAL MEETING OF STOCKHOLDERS OF JAG MEDIA
As promptly as practicable after the Form S-4 Registration Statement
becomes effective, JAG Media will take all action necessary under the Nevada
Revised Statutes and its Articles of Incorporation and Bylaws to call, convene
and hold a meeting of its stockholders to consider the (i) the amendment to JAG
Media's Articles of Incorporation to increase its authorized Common Stock and
(ii) the amendment to JAG Media's Articles of Incorporation to change its
corporate name to "Cryptometrics, Inc."
JAG Media will use its reasonable best efforts to hold the Annual
Meeting of Stockholders as soon as practicable after the date on which the Form
S-4 Registration Statement becomes effective. Unless there has been a Change in
Recommendation, JAG Media will use its reasonable best efforts to solicit from
its stockholders proxies in favor of the approval (i) the amendment to JAG
Media's Articles of Incorporation to increase its authorized Common Stock and
(ii) the amendment to JAG Media's Articles of Incorporation to change the
corporate name to "Cryptometrics, Inc." JAG Media will take all other action
necessary or advisable to secure the vote of its stockholders required by the
Nevada Revised Statutes, to obtain such approvals.
Except to the extent expressly permitted by the terms of the Merger
Agreement, (i) the Board of Directors of JAG Media will recommend that the JAG
Media Common Stockholders vote in favor of the increase in the number of shares
of JAG Media Common Stock, the issuance of such additional shares of JAG Media
Common Stock in connection with the Merger and the change of JAG Media's name,
(ii) the Proxy Statement shall include a statement that the Board of Directors
of JAG Media has recommended that the JAG Media Common Stockholders vote in of
the increase in the number of shares of JAG Media Common Stock, the issuance of
such additional shares of JAG Media Common Stock in connection with the Merger
and the change of JAG Media's name favor of the JAG Media Authorized Stock
Increase and (iii) neither the Board of Directors of JAG Media nor any committee
thereof shall effect any Change of Recommendation; provided, however, that the
foregoing will not prohibit the Board of Directors of JAG Media from fulfilling
its duty of candor or disclosure to its stockholders under applicable law.
CONSENT OF PRINCIPAL CRYPTOMETRICS STOCKHOLDERS
On the closing date, the Principal Stockholders of Cryptometrics have
consented to deliver to JAG Media a Lock-up Agreement and Voting Agreement
pursuant to which each such Principal Stockholder shall irrevocably agree to
deliver to Cryptometrics a written consent in favor of adoption of the Merger
Agreement and the Merger executed by each of the Principal Stockholders.
CONDITIONS TO THE MERGER
Conditions to the Obligations of JAG Media, Merger Sub and Cryptometrics to
Effect the Merger
The obligations of JAG Media, Merger Sub and Cryptometrics to
consummate the Merger are subject to the satisfaction on or prior to the closing
date of the following conditions:
84
o The approval of the JAG Media Common Stockholders shall have been
obtained to the foregoing amendments of the Articles of
Incorporation.
o Other than the filings of the Proxy Statement and Form S-4 of JAG
Media and such items as may be required pursuant to the
Cryptometrics Disclosure Schedule, all authorizations and orders of,
declarations and filings with, and notices to any governmental
entity required to permit the consummation of the Merger shall have
been obtained or made and shall be in full force and effect.
o No temporary restraining order, preliminary or permanent injunction
or other order preventing the consummation of the Merger shall be in
effect.
o No law shall have been enacted or shall be deemed applicable to the
Merger which makes the consummation of the Merger illegal.
o The Form S-4 Registration Statement shall have become effective
under the Securities Act prior to the mailing of the Proxy Statement
by each of Cryptometrics and JAG Media to their respective
stockholders, and shall not be the subject of any stop order or
proceedings seeking a stop order.
o The shares of JAG Media Common Stock issuable to the Cryptometrics
stockholders as provided for in the Merger Agreement shall have been
authorized for listing on the NASDAQ Capital Market upon official
notice of issuance.
o No action shall be pending or threatened before any court or other
governmental entity or before any other person wherein an
unfavorable order would (i) prevent consummation of the Merger, (ii)
affect adversely the right of JAG Media to control Cryptometrics and
the subsidiaries of Cryptometrics or (iii) restrain or prohibit JAG
Media's ownership or operation (or that of its subsidiaries or
affiliates) of all or any material portion of the business or assets
of Cryptometrics and its subsidiaries, taken as a whole, or compel
JAG Media or any of subsidiaries or affiliates to dispose of or hold
separate all or any material portion of the business or assets of
Cryptometrics and its subsidiaries, taken as a whole, or of JAG
Media and its subsidiaries, taken as a whole, and no such order
shall be in effect.
Conditions to Obligations of JAG Media and Merger Sub to Effect the Merger
The obligations of JAG Media and Merger Sub to effect the Merger are
subject to the satisfaction (or waiver by JAG Media in its sole discretion) of
the following further conditions:
o Each of the representations and warranties of Cryptometrics set
forth in the Merger Agreement, shall be true and correct at and as
of the closing date as if made at and as of the closing date, except
to the extent that such representations and warranties refer
specifically to an earlier date, in which case such representations
and warranties shall have been true and correct as of such earlier
date.
o Each of the representations and warranties of the Principal
Stockholders set forth in the Merger Agreement, shall be true and
correct at and as of the closing date as if made at and as of the
closing date, except to the extent that such representations and
warranties refer specifically to an earlier date, in which case such
representations and warranties shall have been true and correct as
of such earlier date.
85
o Cryptometrics shall have performed, or complied with, in all
material respects all obligations required to be performed or
complied with by it under the Merger Agreement at or prior to the
closing date. JAG Media shall have received a certificate signed on
behalf of the Cryptometrics by the Co-Chief Executive Officer of
Cryptometrics to such effect.
o There shall not have occurred any event, occurrence or change that
has had, or could reasonably be expected to have, individually or in
the aggregate, a material adverse effect on the Cryptometrics.
Conditions to Obligation of Cryptometrics to Effect the Merger
The obligation of Cryptometrics to effect the Merger is subject to the
satisfaction (or waiver by Cryptometrics in its sole discretion) of the
following further conditions:
o Each of the representations and warranties of JAG Media set forth in
the Merger Agreement, shall be true and correct, subject to any
materiality provision, at and as of the closing date as if made at
and as of the closing date, except to the extent that such
representations and warranties refer specifically to an earlier
date, in which case such representations and warranties shall have
been true and correct as of such earlier date.
o JAG Media and Merger Sub shall have performed or complied with in
all material respects all obligations required to be performed or
complied with by them under the Merger Agreement at or prior to the
closing date. Cryptometrics shall have received a certificate signed
on behalf of JAG Media by the Chief Executive Officer of JAG Media
to such effect.
o There shall not have occurred any event, occurrence or change that
has had, or would reasonably be expected to have, individually or in
the aggregate, a material adverse effect on JAG Media and its
subsidiaries taken as a whole.
o Cryptometrics shall have received releases from the current
executive officers of JAG Media under any and all agreements they
might have with JAG Media or any of its Subsidiaries, except that
JAG Media shall remain contractually obligated to carry out its
obligations to fulfill any exercise of options under existing
employment agreements with the current executive officers of JAG
Media and shall continue to provide such officers such medical
coverage as it provides to its own employees and those of JAG Media
(to be renamed Cryptometrics, Inc.) and except for any and all
rights of indemnification.
o The holders of no more than 100,000 shares of Cryptometrics Common
Stock shall have given notice of exercise of their appraisal rights
and be in a position to perfect such rights under Delaware Law as
determined just prior to the Effective Time.
BOARD OF DIRECTORS' AND EXECUTIVE OFFICERS' LIABILITY
JAG Media, Merger Sub and Cryptometrics have agreed, that upon the
Effective Time, the directors and officers of Cryptometrics immediately prior to
the Effective Time shall be the directors and officers of Cryptometrics, each to
hold office until their respective death, permanent disability, resignation or
removal or until their respective successors are duly elected and qualified, all
in accordance with the Certificate of Incorporation and Bylaws of Cryptometrics
in effect immediately prior effective filing date of the Certificate of Merger
and Delaware law.
Cryptometrics has agreed that, from the Effective Time, it shall
indemnify, defend and hold harmless, and provide advancement of expenses to,
each person who becomes prior to the Effective Time, an
86
officer, director or employee of Cryptometrics or any of its subsidiaries,
against all losses, claims, damages, costs, expenses, liabilities or judgments
or amounts that are paid in settlement of or in connection with any claim that
is based in whole or in part on the fact that such person is or was a director,
officer or employee of Cryptometrics or any of its subsidiaries and pertaining
to any matter existing or occurring, or any acts or omissions occurring, at or
prior to the Effective Time, whether asserted or claimed prior to, or at or
after, the Effective Time.
TERMINATION OF THE MERGER AGREEMENT
Termination of the Merger Agreement by JAG Media (with any termination by JAG
Media also being an effective termination by Merger Sub) or Cryptometrics
The Merger Agreement may be terminated and the Merger abandoned at any
time prior to the Effective Time by either JAG Media or Cryptometrics without
giving any reason therefor unless the parties agree otherwise or (ii) by JAG
Media or Cryptometrics if: (A) the Merger is not consummated on or before April
15, 2006; provided, however, that the right to terminate the Merger Agreement
shall not be available to any party whose breach of a representation, warranty,
covenant or agreement under the Merger Agreement has been the cause of or
resulted in the failure of the Closing to occur on or before such date; (B) a
governmental entity shall have issued an order or taken any other action in any
case having the effect of permanently restraining, enjoining or otherwise
prohibiting the Merger, which order or other action is final or non-appealable
or (C) the approval of the JAG Media Common Stockholders has not been obtained
at the Annual Meeting of the Stockholders of JAG Media or any adjournment
thereof.
Termination of the Merger Agreement by JAG Media (with any termination by JAG
Media also being an effective termination by Merger Sub)
The Merger Agreement may be terminated and the Merger abandoned at any
time prior to the Effective Time by JAG Media if (i) any condition to the
obligations of JAG Media under the Merger Agreement becomes incapable of
fulfillment other than as a result of a breach by JAG Media of any covenant or
agreement contained in the Merger Agreement, and such condition is not waived by
JAG Media or (ii) there has been a breach by Cryptometrics of any
representation, warranty, covenant or agreement contained in the Merger
Agreement or if any representation or warranty of Cryptometrics shall have
become untrue, (a) in either case such that the conditions to the Merger
required by JAG Media under the terms of the Merger Agreement would not be
satisfied and (b) any such breach is not curable, or, if curable, is not cured
within 15 days after written notice of such breach is given to Cryptometrics by
JAG Media.
The Merger Agreement may be terminated and the Merger abandoned at any
time prior to the effective time by JAG Media if, at any time prior to the
approval of the JAG Media Common Stockholders, (1) a superior proposal is made
to JAG Media and is not withdrawn, (2) JAG Media shall have provided at least 3
business days prior written notice to Cryptometrics stating (a) that it has
received a Superior Proposal, (b) the terms and conditions of such Superior
Proposal and the identity the Person making such Superior Proposal and (c) that
it intends to terminate the Merger Agreement, (3) the Cryptometrics shall not
have, within such 3 business day period, made an offer that the Board of
Directors of JAG Media by a majority vote determines in its good faith judgment
(based on the written advice of its financial advisor) to be at least as
favorable to JAG Media and the JAG Media Common Stockholders as such Superior
Proposal (it being agreed that the Board of Directors of JAG Media shall convene
a meeting to consider any such offer by Cryptometrics promptly following the
receipt thereof and that JAG Media shall not enter into any such binding
agreement during such 3 business day period) and (4) the Board of Directors of
JAG Media concludes in good faith, after consultation with its outside legal
counsel, that, in light of such Superior Proposal, the failure of the Board of
Directors to accept such Superior Proposal would result in a breach of its
fiduciary obligations to the JAG Media Common Stockholders under applicable law;
provided, however
87
that JAG Media shall not have breached any of the provisions set forth with
respect to the consideration and acceptance of a Superior Proposal set forth in
the Merger Agreement.
Termination by Cryptometrics
The Merger Agreement may be terminated and the Merger abandoned at any
time prior to the Effective Time by Cryptometrics if (i) any condition to the
obligations of Cryptometrics under the Merger Agreement becomes incapable of
fulfillment other than as a result of a breach by Cryptometrics of any covenant
or agreement contained in the Merger Agreement, and such condition is not waived
by Cryptometrics or (ii) there has been a breach by JAG Media of any
representation, warranty, covenant or agreement contained in the Merger
Agreement or if any representation or warranty of Cryptometrics shall have
become untrue, (a) in either case such that the conditions to the Merger
required by Cryptometrics under the terms of the Merger Agreement would not be
satisfied and (b) any such breach is not curable, or, if curable, is not cured
within 15 days after written notice of such breach is given to JAG Media by
Cryptometrics, or (iii) if JAG Media Common Stock is not approved for listing on
the NASDAQ Capital Market.
The Merger Agreement may be terminated and the Merger abandoned at any
time prior to the effective time by Cryptometrics if, at any time prior to the
approval of the controlling Cryptometrics Common Stockholders, (1) a superior
proposal is made to Cryptometrics and is not withdrawn, (2) Cryptometrics shall
have provided at least 3 business days prior written notice to JAG Media stating
(a) that it has received a superior proposal, (b) the terms and conditions of
such superior proposal and the identity the person making such superior proposal
and (c) that it intends to terminate the Merger Agreement, (3) JAG Media shall
not have, within such 3 business day period, made an offer that the Board of
Directors of Cryptometrics by a majority vote determines in its good faith
judgment (based on the written advice of its financial advisor) to be at least
as favorable to Cryptometrics and the Cryptometrics Common Stockholders as such
superior proposal (it being agreed that the Board of Directors of Cryptometrics
shall convene a meeting to consider any such offer by JAG Media promptly
following the receipt thereof and that Cryptometrics shall not enter into any
such binding agreement during such 3 business day period) and (4) the Board of
Directors of Cryptometrics concludes in good faith, after consultation with its
outside legal counsel, that, in light of such superior proposal, the failure of
the Board of Directors to accept such superior proposal would result in a breach
of its fiduciary obligations to the Cryptometrics Common Stockholders under
applicable law; provided, however that Cryptometrics shall not have breached any
of the provisions set forth with respect to the consideration and acceptance of
a superior proposal set forth in the Merger Agreement.
AMENDMENT AND WAIVER OF MERGER AGREEMENT
Any provision of the Merger Agreement may be amended or waived if such
amendment or waiver is in writing and signed, in the case of an amendment, by
each party to the Merger Agreement, or in the case of a waiver, by the party
against whom the waiver is to be effective. After approval in connection with
the matters presented in connection with the Merger by the Cryptometrics Common
Stockholders, however, no amendment or waiver shall be made which requires by
law further approval of the Cryptometrics Common Stockholders without such
further approval.
No failure or delay by any party in exercising any right or privilege
under the Merger Agreement shall operate as a waiver of such right or privilege,
nor shall any single or partial exercise of any right or privilege under the
Merger Agreement preclude any further exercise of such right or privilege or any
other right, power or privilege.
To the maximum extent permitted by law, no waiver that may be given by
a party shall be applicable except to the specific instance for which it was
given and no notice to or demand on the party shall be
88
deemed to be a waiver of any obligation of such party or the right of the party
giving such notice or demand to take further action without notice or demand.
89
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited condensed combined pro forma financial
statements of JAG Media and Cryptometrics were derived from the historical
consolidated financial statements of JAG Media and Cryptometrics and should be
read in conjunction with the financial statements and the Notes thereto,
included elsewhere in this Proxy Statement/Prospectus. The unaudited pro forma
condensed combined balance sheet combines the unaudited condensed consolidated
historical balance sheets of JAG Media and Cryptometrics as of October 31, 2005
as if the reverse acquisition had been consummated as of that date. The
unaudited condensed combined pro forma statements of operations combine the
operations of JAG Media for the three months ended October 31, 2005 with the
operations of Cryptometrics for the three months ended October 31, 2005 as if
the reverse acquisition were completed at the beginning of the 3 month period.
The unaudited condensed combined pro forma statements of operations combine the
operations of JAG Media for the twelve months ended July 31, 2005 with the
operations of Cryptometrics for the twelve months ended April 30, 2005 as if the
reverse acquisition was completed at the beginning of the 12 month period.
Certain reclassifications have been made to the historical presentation of
Cryptometrics to conform to the presentation used in the unaudited pro forma
condensed combined financial statements.
The unaudited condensed combined pro forma financial statements were
prepared using the purchase method of accounting in accordance with Statement of
Financial Accounting Standards No. 141 "Business Combinations". On December 27,
2005 JAG Media entered into a Merger Agreement with Cryptometrics pursuant to
which Cryptometrics would merge with a newly created subsidiary (the "Merger
Sub") of JAG Media. In consideration of the Merger, the stockholders of
Cryptometrics would acquire shares of JAG Media common stock which would, upon
issuance, represent approximately 88% of the combined company's outstanding
common stock, in exchange for all of the issued and outstanding capital stock of
Cryptometrics. Since the stockholders of Cryptometrics will receive the majority
of the voting shares of the combined company, and the board of directors and
management of the combined company will be controlled by members of the board of
directors and management of Cryptometrics, the Merger will be accounted for as a
reverse acquisition whereby Cryptometrics will be the accounting acquiror and
JAG Media the legal acquiror will be the accounting acquiree. In such case, JAG
Media's existing public stockholders would experience significant dilution from
the issuance of these shares to the stockholders of Cryptometrics.
Until JAG Media and Cryptometrics agree otherwise, the Merger
Agreement, notwithstanding the approval by the Cryptometrics stockholders, may
be canceled with or without any reason by either JAG Media or Cryptometrics with
no liability. Additionally, the consummation of the Merger is subject to various
conditions set forth in the Merger Agreement, including, among others, (i) the
delivery by JAG Media and Cryptometrics of disclosure schedules to one another
which are statisfactory to both parties by January 18, 2006, (ii) the approval
by JAG Media's stockholders of an amendment to JAG Media's ariticles of
incorporation to increase its authorized shares of common stock from 250,000,000
to 500,000,000, (iii) the approval by JAG Media's stockholders of an amendment
to JAG Media's articles of incorporation to change JAG Media's name to
Cryptometrics and (iv) the listing of JAG Media's common stock on the NASDAQ
Capital Market. There is no assurance that proposed Merger between JAG Media and
Cryptometrics will be consummated, or if it is consummated, that it will be
pursuant to the terms described above.
The Merger Agreement is filed as Appendix C to this Registration
Statement of which this Proxy Statement/Prospectus forms a part and should be
reviewed for further information regarding the merger.
At the Effective Time, by virtue of the Merger and without any action
on the part of JAG Media, Merger Sub, Cryptometrics or any stockholder of
Cryptometrics, the holders of all shares of Cryptometrics Common Stock issued
and outstanding immediately prior to the Effective Time, including as
outstanding for this purpose the total number of shares of Cryptometrics Common
Stock for which outstanding Exchangeable Shares of the Cryptometrics' Canadian
Subsidiary, Cryptometrics Canada, Inc., can be exchanged shall be entitled to
receive shares of fully paid and nonassessable JAG Media Common Stock equal to
7.4656 times the number of shares of JAG Media Common Stock issued and
outstanding at the Effective Time of the Merger, (i) excluding all shares of JAG
Media Common Stock held in the treasury of JAG Media and (ii) excluding all
shares of Series 2 and Series 3 Class B common stock outstanding, but (iii)
including as outstanding the relevant number of shares of JAG Media Common Stock
into which shares of JAG Media which are still outstanding can be converted (but
have not yet been converted) by virtue of recapitalizations carried out by JAG
Media (the "Merger Consideration").
90
Holders of Cryptometrics Common Stock will in general receive shares of
JAG Media Common Stock in proportion to their holdings of Cryptometrics Common
Stock compared to all outstanding shares of Cryptometrics Common Stock at the
time of the Merger, subject to certain adjustments. However, Cryptometrics
stockholders holding 400,750 shares of Cryptometrics Common Stock, by virtue of
subscription agreements with Cryptometrics, will receive a greater or lesser
number of JAG Media shares. They will be entitled to own shares of JAG Media
Common Stock with an aggregate value following the effectiveness of the Merger
(in most cases, based on the post-merger opening price on the NASDAQ Capital
Market) equal to twice the original aggregate purchase price of their shares of
Cryptometrics Common Stock under their subscription agreements ($10.00 per
share). The number of shares of JAG Media Common Stock available to other
stockholders of Cryptometrics will be increased or decreased accordingly. No
fractional shares of JAG Media Common Stock shall be issued in connection with
the Merger.
Each share of Cryptometrics Common Stock held in the Cryptometrics'
treasury immediately prior to the Effective Time and each share owned by any
subsidiary of Cryptometrics shall not represent the right to receive any Merger
Consideration, and each such share shall be canceled and retired and shall cease
to exist, and no cash, securities or other property shall be payable in respect
thereof.
The allocation of the purchase price as reflected in these pro forma
condensed combined financial statements has been based upon preliminary
estimates of the shares to be effectively issued to the JAG Media stockholders
as of the date of the acquisition. Management is currently assessing the fair
values of the identifiable tangible and intangible assets acquired and
liabilities assumed of JAG Media. Management has made a preliminary estimate
that the fair values of the assets and liabilities of JAG Media to be acquired
or assumed will approximate their historical carrying values as of the effective
date of the acquisition but the excess purchase price has not been allocated.
This preliminary allocation of the purchase price is dependent upon certain
estimated assumptions which are preliminary and have been made solely for the
purpose of developing such pro forma condensed financial statements.
A final determination of the fair values of JAG Media's assets and
liabilities, which cannot be made prior to the completion of the transaction,
will be based on the fair value of the shares to be effectively issued to the
JAG Media stockholders as of the date of completion of the acquisition and such
valuations could change significantly upon the completion of further analyses
from those used in the condensed combined pro forma financial statements
presented below.
The unaudited condensed combined pro forma financial statements were
prepared using the assumptions described below and in the related notes. The
historical consolidated financial information has been adjusted to give effect
to pro forma events that are:
o directly attributable to the acquisition;
o factually supportable; and
o with respect to the statements of operations, expected to have a
continuing impact on the combined results.
Amounts preliminarily allocated to unallocated excess purchase price
may change significantly. Management believes that the unallocated excess
purchase price will be allocated to goodwill and accordingly will be subject to
an impairment test pursuant to Statement of Financial Accounting Standards No
142, "Goodwill and Other Intangible Assets" ("SFAS 142") at the end of the
quarter subsequent to the consummation of the acquisition. Upon the initial
impairment test management believes that a significant
91
portion, if not all of such unallocated excess purchase price, will be deemed
impaired which will result in a charge to the statement of operations to the
extent of the impairment. The accompanying pro forma condensed combined
financial statements do not reflect such an impairment charge. In addition to
the completion of the final valuation of certain acquired assets and
liabilities assumed, the impact of ongoing integration activities, the timing of
completion of the transaction and other changes in JAG Media's net tangible and
intangible assets that occur prior to completion of the transaction could cause
material differences in the information presented.
The proposed transaction is subject to various conditions being
satisfied prior to closing, including, among others:
o neither JAG Media nor Cryptometrics having terminated the Merger
Agreement, which either may do so, with or without any reason at any
time by either of them with no liability;
o the Registration Statement relating to the registration of the
shares of JAG Media Common Stock being issued to the stockholders of
Cryptometrics being declared effective by the Securities and
Exchange Commission;
o completion of all steps necessary to increase the number of
authorized shares of JAG Common Stock from 250,000,000 to
500,000,000 and approval of a name change to a name including
"Cryptometrics";
o the listing of the JAG Media Common Stock on the NASDAQ Capital
Market; and
o JAG Media not having outstanding indebtedness for borrowed money in
excess of the principal amount of $2,750,000.
In addition, the closing is conditioned upon (i) the parties delvering
agreed upon disclosure schedules to one another by January 18, 2005, (ii) each
party completing a due diligence review, the results of which are satisfactory
in all respects to each party and (iii) JAG Media and Cryptometrics obtaining
all appropriate and necessary corporate and stockholder approvals for the
transaction.
The unaudited condensed combined pro forma financial statements are
provided for illustrative purposes only. They do not purport to represent what
JAG Media's results of operations and financial position would have been had the
transaction actually occurred as of the dates indicated, and they do not purport
to project JAG Media's future results of operations or financial position.
92
UNAUDITED CONDENSED COMBINED PRO FORMA BALANCE SHEET
AS OF OCTOBER 31, 2005
Pro Forma Pro Forma
Assets JAG Media Cryptometrics Adjustments Combined
- ------ ------------ ------------ ------------ ------------
Current assets:
Cash and cash equivalents $ 332,791 $ 4,736,405 $ -- $ 5,069,196
Short-term investments 3,057,818 -- 3,057,818
Accounts receivable, net 20,519 13,048 -- 33,567
Inventory 173,591 -- 173,591
Income tax recoverable 259,216 -- 259,216
Other current assets 53,693 82,232 -- 135,925
------------ ------------ ------------ ------------
Total current assets 407,003 8,322,310 -- 8,729,313
------------ ------------ ------------ ------------
Equipment, net 69,487 697,195 -- 766,682
------------ ------------ ------------ ------------
Other Assets:
Unallocated excess purchase price 10,686,856 10,686,856
Goodwill 10,700,000 -- 10,700,000
Patents 129,862 -- 129,862
Deferred finance costs 29,489 -- 29,489
Other 1,200 -- 1,200
------------ ------------ ------------ ------------
Total other assets 29,489 10,831,062 10,686,856 21,547,407
Totals 505,979 19,850,567 10,686,856 31,043,402
============ ============ ============ ============
Liabilities and Stockholders' Equity (Deficiency)
- -------------------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 446,515 $ 1,092,989 $ -- $ 1,539,504
Accrued compensation 327,268 -- 327,268
Deferred revenues 33,027 -- 33,027
------------ ------------ ------------ ------------
Total current liabilities 479,542 1,420,257 -- 1,899,799
Long-term liabilities:
Loan payable, net 1,941,026 -- -- 1,941,026
------------ ------------ ------------ ------------
Total liabilities 2,420,568 1,420,257 -- 3,840,825
------------ ------------ ------------ ------------
Mandatorily redeemable Class B
common stock; par value $.00001 per share:
400,000 shares designated as Series 2;
380,829 shares issued and outstanding 4 -- -- 4
40,000 shares designated as Series
3; 21,500 shares issued and outstanding -- -- -- --
------------ ------------ ------------ ------------
4 -- -- 4
------------ ------------ ------------ ------------
Stockholders' equity (deficiency):
Preferred stock; par value $.00001 per share;
50,000,000 shares authorized, none issued
Common stock; par value $.00001 per share;
250,000,000 shares authorized;
44,747,799 shares issued and outstanding;
378,817,346 shares to be outstanding 448 112,021 (108,681) 3,788
Additional paid-in capital 43,798,187 31,305,921 (30,932,677) 44,171,431
Unearned compensation (85,014) -- (3,900,000) (3,985,014)
Accumulated deficit (45,628,214) (12,971,518) 45,628,214 (12,971,518)
Accumulated other comprehensive loss (16,114) -- (16,114)
------------ ------------ ------------ ------------
Total stockholders' equity (deficiency) (1,914,593) 18,430,310 10,686,856 27,202,573
------------ ------------ ------------ ------------
Totals $ 505,979 $ 19,850,567 $ 10,686,856 $ 31,043,402
============ ============ ============ ============
See accompanying notes to unaudited pro forma condensed combined financial
statements.
93
UNAUDITED CONDENSED COMBINED PRO FORMA STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 31, 2005
Pro Forma Pro Forma
JAG Media Cryptometrics Adjustments Combined
------------- ------------- ------------- -------------
Revenues $ 40,023 $ -- $ 40,023
Cost of revenues 25,873 -- 25,873
------------- ------------- ------------- -------------
Gross profit 14,150 -- 14,150
Operating expenses:
Research and development -- 499,260 499,260
Marketing and selling expenses 9,869 654,865 664,734
General and administrative expenses 526,167 563,534 $ 441,250 1,530,951
------------- ------------- ------------- -------------
Total Operating Expenses 536,036 1,717,659 441,250 2,694,945
Loss from operations (521,886) (1,717,659) (441,250) (2,680,795)
Other income (expense):
Interest income 1,702 96,031 97,733
Interest expense (74,370) -- (74,370)
------------- ------------- ------------- -------------
Net loss $ (594,554) $ (1,621,628) $ (441,250) $ (2,657,432)
============= ============= ============= =============
Basic and diluted net loss per share $ (0.01) $ (0.01)
============= =============
Basic weighted average common shares
outstanding 44,747,799 378,817,346
============= =============
See accompanying notes to unaudited condensed combined pro forma financial
statements.
94
UNAUDITED CONDENSED COMBINED PRO FORMA STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED JULY 31, 2005
Pro Forma Pro Forma
JAG Media Cryptometrics(1) Adjustments Combined
------------- ------------- ------------- -------------
Revenues $ 239,651 $ 681,854 $ 921,505
Cost of revenues 152,371 187,817 340,188
------------- ------------- ------------- -------------
Gross profit 87,280 494,037 581,317
Operating expenses:
Research and development -- 1,934,415 1,934,415
Marketing and selling expenses 43,441 1,804,249 1,847,690
General and administrative expenses 1,745,455 2,359,463 $ 1,763,324 5,868,242
------------- ------------- ------------- -------------
Total Operating Expenses 1,788,896 6,098,127 1,763,324 9,650,347
Loss from operations (1,701,616) (5,604,090) (1,763,324) (9,069,030)
Other income (expense):
Write off of goodwill (50,400) -- (50,400)
Interest income 8,357 102,711 111,068
Interest expense (145,506) -- (145,506)
------------- ------------- ------------- -------------
Net loss $ (1,889,165) $ (5,501,379) $ (1,763,324) $ (9,153,868)
============= ============= ============= =============
Basic and diluted net loss per share $ (0.04) $ (0.03)
============= =============
Basic weighted average common shares
outstanding 44,510,641 322,025,494
============= =============
(1) Cryptometrics information is for the twelve months ended April 30, 2005.
See accompanying notes to unaudited pro forma condensed combined financial
statements.
95
NOTES TO UNAUDITED CONDENSED COMBINED
PRO FORMA FINANCIAL STATEMENTS
Note 1: Estimated Purchase Price and Shares to be Issued
The following unaudited condensed combined pro forma financial
statements of JAG Media and Cryptometrics were derived from the historical
consolidated financial statements of JAG Media and Cryptometrics and should be
read in conjunction with the financial statements and the Notes thereto,
included elsewhere in this Proxy Statement/Prospectus. The unaudited pro forma
condensed combined balance sheet combines the unaudited condensed consolidated
historical balance sheet of JAG Media and Cryptometrics as of October 31, 2005
as if the reverse acquisition had been consummated as of that date. The
unaudited condensed combined pro forma statements of operations combine the
operations of JAG Media for the three months ended October 31, 2005 with the
operations of Cryptometrics for the three months ended October 31, 2005 as if
the reverse acquisition were completed at the beginning of the 3 month period.
The unaudited condensed combined pro forma statements of operations combine the
operations of JAG Media for the twelve months ended July 31, 2005 with the
operations of Cryptometrics for the twelve months ended April 30, 2005 as if the
reverse acquisition was completed at the beginning of the 12 month period.
Certain reclassifications have been made to the historical presentation of
Cryptometrics to conform to the presentation used in the unaudited pro forma
condensed combined financial statements.
Purchase Price Calculation: all numbers in thousands except for per share amount
Number of shares of Cryptometrics Common Stock outstanding at date of announcement 11,314
Stock price of Cryptometrics based on per share price of recent private placement $7.00
--------
Total value of Cryptometrics $79,198
Multiplied by percentage of stock to be retained by JAG Media stockholders 11.8125%
--------
Estimated purchase price $9,355
========
Unallocated Excess Purchase Price Calculation:
Estimated purchase price $9,355
Stockholders' deficiency as of July 31, 2005 1,331
--------
Unallocated excess purchase price $10,686
========
Shares of JAG Media Common Stock to be issued to Cryptometrics:
Number of Shares of JAG Media Common Stock outstanding at date of announcement 44,748
Shares to be issued for each outstanding share (amount issued to equal 88.1875% ownership) 7.466
Total shares to be issued 334,069
=======
(a) Management believes that the unallocated excess purchase price will be
allocated to goodwill and accordingly will be subject to an impairment test
pursuant to Statement of Financial Accounting Standards No 142, "Goodwill and
Other Intangible Assets" (SFAS 142") at the end of the quarter subsequent to the
96
consummation of the acquisition. Upon the initial impairment test management
believes that a significant portion if not all of such unallocated excess
purchase price will be deemed impaired which will result in a charge to the
statement of operations to the extent of the impairment. The accompanying pro
forma condensed combined financial statements do not reflect such an impairment
charge.
Note 2: Pro Forma Financial Statement Adjustments
(a) Represents the preliminary adjustment to record the reverse
acquisition of JAG Media by Cryptometrics.
This includes:
o An adjustment to record the excess of purchase price over the
carrying value of net assets acquired which has been recorded as
"unallocated excess purchase price" on the balance sheet;
o an adjustment to record the issuance of 334,069,547 shares of JAG
Media Common Stock in conjunction with the reverse acquisition
representing 88.1875% of JAG Media Common Stock reserved to be owned
initially by the Cryptometrics stockholders;
o the elimination of JAG Media's accumulated deficit;
o an adjustment to conform Cryptometrics's treatment of previously
issued options to employees valued at $58,234 with JAG Media's
treatment of stock options under SFAS 123;
o an adjustment for Cryptometrics' treatment of options to purchase
4,852,900 shares of JAG Media stock, effective upon the reverse
acquistion of JAG Media by Crytometrics stock, with JAG Media's
treatment of stock options under SFAS 123; and
o an adjustment to increase the salaries of two Cryptometrics'
officers based on a compensation agreement that is effective upon
the reverse acquistion of JAG Media by Cryptometrics from $160,000
annually, each, to $525,000 annually, each.
The accompanying pro forma financial statements do not include adjustments
resulting from one time charges associated with the "Change in Control" clauses
in the employment agreements of Thomas J. Mazzarisi and Stephen J. Schoepfer
with JAG Media pursuant to which such officers would receive options to purchase
750,000 shares of common stock each with an aggregate fair value as of
January 12, 2006 of $729,600 and cash consideration of $300,000.
97
INTERESTS OF RELATED PERSONS IN THE MERGER
In considering the recommendations of the respective Boards of
Directors of JAG Media and Cryptometrics with respect to the Merger Agreement
and the Merger, stockholders should be aware that the directors and executive
officers of JAG Media and Cryptometrics have interests that are different from,
or in addition to, the interests of stockholders generally. Each company's Board
of Directors was aware of these interests and considered them, among other
matters, in approving the Merger Agreement and the transactions contemplated
thereby.
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
JAG Media, Merger Sub and Cryptometrics have agreed, that upon the
effective filing date of the Certificate of Merger of Merger Sub with and into
Cryptometrics (the "Certificate of Merger") with the Secretary of State of the
State of Delaware, the directors and officers of Cryptometrics immediately prior
to the effective filing date of the Certificate of Merger shall be the directors
and officers of Cryptometrics, each to hold office until their respective death,
permanent disability, resignation or removal or until their respective
successors are duly elected and qualified, all in accordance with the
Certificate of Incorporation and Bylaws of Cryptometrics in effect immediately
prior effective filing date of the Certificate of Merger and Delaware law.
INDEMNIFICATION AND INSURANCE
Cryptometrics has agreed that, from the effective filing date of the
Certificate of Merger, it will indemnify, defend and hold harmless, and provide
advancement of expenses to, each person who becomes prior to the effective
filing date of the Certificate of Merger, an officer, director or employee of
Cryptometrics or any of its subsidiaries, against all losses, claims, damages,
costs, expenses, liabilities or judgments or amounts that are paid in settlement
of or in connection with any claim that is based in whole or in part on the fact
that such person is or was a director, officer or employee of Cryptometrics or
any of its subsidiaries and pertaining to any matter existing or occurring, or
any acts or omissions occurring, at or prior to the effective filing date of the
Certificate of Merger, whether asserted or claimed prior to, or at or after, the
effective filing date of the Certificate of Merger.
Cryptometrics' indemnification of such directors, officers and
employees shall be to the same extent such directors, officers and employees are
entitled to be indemnified or have the right to advancement of expenses as of
the date of the Merger Agreement by JAG Media or any of its subsidiaries.
JAG Media has also agreed that from and after the effective filing date
of the Certificate of Merger, it shall purchase and maintain directors' and
officers' liability insurance policies with coverage in such amounts and terms
as are comparable to those insurance policies maintained by public companies
that have independent directors and whose securities are listed on the NASDAQ
Capital Market. Such directors' and officers' policies to be purchased and
maintained by JAG Media shall also cover, for a period of 6 years from the
effective filing date of the Certificate of Merger, the former officers and
directors of JAG Media with respect to claims arising from facts or events that
occurred prior to such time.
REGISTRATION RIGHTS
The Form S-4 shall also register the JAG Media shares for which
outstanding options and warrants of Cryptometrics, including options and
warrants for outstanding Exchangeable Shares of Cryptometrics' Canadian
subsidiary, Cryptometrics Canada, Inc., which may be exercised after the Merger.
Additionally, the Form S-4 shall separately register the resale of the shares of
JAG Media Common Stock issuable in connection with the Merger to the current
Co-Chief Executive Officers of Cryptometrics, Robert Barra and
98
Michael A. Vitale, and the current Chief Strategy Officer of Cryptometrics, Joel
Shaw, so that such shares are immediately saleable by them subject to the
twelve-month lock-up restriction noted above.
99
SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION
In accordance with the terms of the Merger Agreement, stockholders of
Cryptometrics shall not be permitted to sell or otherwise dispose of sixty-five
percent of the JAG Media Common Stock received in conjunction with the Merger
for a period of twelve months from the closing date of the transaction. Subject
to compliance with all relevant securities laws, thirty-five percent of the
shares of JAG Media Common Stock issued to the Cryptometrics stockholders in
connection with the Merger shall not be subject to the twelve-month lock-up
provision so long as the shares of JAG Media (to be renamed Cryptometrics, Inc.)
are listed on the NASDAQ Capital Market.
The Form S-4 which includes this prospectus separately registers the
resale of the shares of JAG Media Common Stock issuable in connection with the
Merger to the current Co-Chief Executive Officers of Cryptometrics, Robert Barra
and Michael A. Vitale, and the current Chief Strategy Officer of Cryptometrics,
Joel Shaw, so that such shares shall be saleable by them subject to the lock-up
restrictions noted above.
JAG Media is registering the above-described shares covered by this
prospectus on behalf of the above named selling stockholders. As used in this
prospectus, "selling stockholders" includes donees, pledgees, transferees or
other successors-in-interest selling shares received after the date of this
prospectus from a selling stockholder as a gift, pledge, partnership
distribution or other non-sale related transfer. These shares will be offered
and sold by each selling stockholder for its own account. JAG Media will not
receive any of the proceeds from the sale of such shares pursuant to this
prospectus. JAG Media has agreed to bear the expenses of the registration of
these shares, including legal and accounting fees. JAG Media estimates these
incremental expenses to be de minimis. The selling stockholders will bear all
brokerage commissions and any similar selling expenses attributable to the sale
of shares covered by this prospectus.
The selling stockholders may offer and sell these shares from time to
time in transactions in the over-the-counter market or in negotiated
transactions, at market prices prevailing at the time of sale. Such transactions
may or may not involve brokers or dealers. The selling stockholders have advised
JAG Media that they have not entered into any agreements, understandings or
arrangements with any underwriters or broker-dealers regarding the sale of their
shares, nor is there an underwriter or coordinating broker acting in connection
with the proposed sale of shares by the selling stockholders. Sales may be made
directly to purchasers or to or through broker-dealers which may act as agents
or principals. Broker-dealers may receive compensation in the form of discounts,
concessions or commissions from the selling stockholders or the purchasers of
shares for whom such broker-dealers may act as agent or to whom they may sell as
principal, or both (which compensation as to a particular broker-dealer may be
in excess of customary commissions).
The selling stockholders may also use Rule 144 under the Securities
Exchange Act to sell the shares in open market transactions if they meet the
criteria and conform to the requirements of such rule.
Upon JAG Media being notified by any selling stockholder that any
material arrangement has been entered into with a broker-dealer for the sale of
shares covered by this prospectus through a block trade, special offering,
exchange distribution or secondary distribution or a purchase by a broker
dealer, JAG Media will file a supplement to this prospectus, or a post-effective
amendment, if required, disclosing (i) the name of the selling stockholder and
of the participating broker-dealer(s), (ii) the number of shares involved, (iii)
the price at which such shares were sold, (iv) the commissions paid or discounts
or concessions allowed to such broker-dealer(s), where applicable, (v) that such
broker-dealer(s) did not conduct any investigation to verify the information set
out in this prospectus and (vi) other facts material to the transaction. In
addition, upon being notified by any selling stockholder that a donee, pledgee,
transferee or other successor-in-interest intends to sell more than 500 shares,
JAG Media will file a supplement to this prospectus.
The selling stockholders have, prior to any sales, agreed not to effect
any offers or sales of JAG
100
Media Common Stock in any manner other than as specified in this prospectus and
not to purchase or induce others to purchase JAG Media Common Stock in violation
of any applicable state or federal securities laws, rules and regulations and
the rules and regulations of the Pink Sheets or the NASDAQ OTC Bulletin Board or
NASDAQ Capital Market. Except for the private placement documents described
herein, there are no agreements or understandings, formal or informal,
pertaining to the distribution of the shares described in this prospectus.
The selling stockholders will act independently of JAG Media in making
decisions with respect to the timing, manner and size of each sale. The selling
stockholders may sell the shares through the Pink Sheets or on the NASDAQ OTC
Bulletin Board or on the NASDAQ Capital Market, as relevant, at prices and at
terms then prevailing or at prices related to the then current market price or
in private sales at negotiated prices directly or through brokers.
Any broker-dealer participating in transactions as agent may receive
commissions from the selling stockholders, and, if acting as agent for the
purchase of the shares, from the purchaser. Usual and customary brokerage fees
will be paid by the selling stockholders. Broker-dealers may agree with the
selling stockholders to sell a specified number of shares at a stipulated price
per share, and, to the extent the broker-dealer is unable to do so acting as
agent for the selling stockholders, to purchase as principal may then resell the
shares from time to time in transactions in the over-the-counter market, in
negotiated transactions or by a combination of these methods of sale, at market
prices prevailing at the time of sale or at negotiated prices, and in connection
with resales may pay to or receive from the purchasers of the shares commissions
as described below.
In order to comply with the securities laws of some states, if
applicable, the shares will be sold in some jurisdictions only through
registered or licensed brokers or dealers. In some states, the shares may not be
sold unless the shares have been registered or qualified for sale in the
applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
STOCK REPURCHASE PROGRAMS
JAG Media does not have a stock repurchase program and has no intention
of establishing such a program at this time. From time to time JAG Media's
affiliates may purchase JAG Media Common Stock in the secondary market for their
own account. Any such purchases will be conducted in compliance with the
anti-manipulation rules under the Securities Exchange Act.
REGULATION M
JAG Media has advised the selling stockholders that the
anti-manipulation rules under the Securities Exchange Act may apply to sales of
shares in the market and to the activities of the selling stockholders and any
of their respective affiliates. The selling stockholders have advised JAG Media
that during the time as the selling stockholders may be engaged in the attempt
to sell shares registered under this prospectus, they will:
o not engage in any stabilization activity in connection with any of
the shares;
o not bid for or purchase any of the shares or any rights or acquire
the shares, or attempt to induce any person to purchase any of the
shares or rights to acquire the shares other than as permitted under
the Securities Exchange Act;
o not effect any sale or distribution of the shares until after the
prospectus shall have been appropriately amended or supplemented, if
required, to describe the terms of the sale or distribution; and
101
o effect all sales of shares in broker's transactions through
broker-dealers acting as agents, in transactions directly with
market makers, or in privately negotiated transactions where no
broker or other third party, other than the purchaser, is involved.
The selling stockholders may indemnify any broker-dealer that
participates in transactions involving the sale of the shares against some
liabilities, including liabilities arising under the Securities Act. Any
commissions paid or any discounts or concessions allowed to any broker-dealers,
and any profits received on the resale of shares, may be deemed to be
underwriting discounts and commissions under the Securities Act if the
broker-dealers purchase shares as principal.
102
MANAGEMENT OF JAG MEDIA (TO BE RENAMED CRYPTOMETRICS, INC.)
At the Effective Time of the Merger, the directors and executive
officers of JAG Media (to be renamed Cryptometrics, Inc.)., shall be as follows:
Name Age Position
- -------------------- ----- -----------------------------------------
Robert Barra 52 Co-Chief Executive Officer and Director
Michael A. Vitale 43 Co-Chief Executive Officer and Director
Joel Shaw 59 Chief Strategy Officer
Robert Barra, 52, has over 20 years of experience in financing, managing and
operating companies in healthcare technology and related industries. Mr. Barra
co-founded Cryptometrics in 2000 and has served as its Co-Chief Executive
Officer since that time. Since co-founding Cryptometrics, Mr. Barra has overseen
its expansion from a provider of fingerprint recognition software to a full
service biometric security company by acquiring Cryptometrics Canada, Inc.
(formerly known as BioDendity Systems Corporation), an Ottawa, Canada-based
developer of facial recognition technologies. Prior to co-founding
Cryptometrics, Mr. Barra served as a member of the Board of Directors of
Globaltex Industries, a publicly traded coal and gold mining company located in
British Columbia, Canada, where he developed financial and business plans and
led capital formation efforts. From 1991 to 1993, Mr. Barra was President of
A.L.M. Associates Corporation, a Delaware-based coal-leasing company where his
services were instrumental in the successful completion of a merger of A.L.M.
Associates, leading it to become a publicly traded company. From 1985 to 1990,
Mr. Barra was Founder, President and Chief Executive Officer of American Health
and Nutrition, a company engaged in the financing of nutrition and diet
counseling centers. Mr. Barra holds a B.S. degree from St. John's University and
an M.S. in Clinical Nutrition from New York University.
Michael A. Vitale, 43, has over 26 years of experience in executive sales,
marketing and operational positions at several companies in the environmental
and energy-related industries. Mr. Vitale co-founded Cryptometrics in 2000 and
has served as is Co-Chief Executive Officer since that time. Since co-founding
Cryptometrics, Mr. Vitale has assisted in Cryptometrics' expansion from a
provider of fingerprint recognition software to a full service biometric
security company by acquiring Cryptometrics Canada, Inc. Since 1998, Mr. Vitale
has served as the Chairman of the Board of Environmental Recovery and
Consolidation Services, a North Reading, Massachusetts-based, leader in the
collection, preparation, and pre-sorting of post-consumer materials. Since 2003,
Mr. Vitale has also been a member of the Board of Directors of Carpet America
Recovery Effort, an industry and government group focused on developing carpet
reclamation and recycling methods. From 1993 to 1998, Mr. Vitale served as the
Chief Operating Officer for Tower Recycling, a company contracted by Honeywell
International, Armstrong Industries and Collins & Aikman Flooring to manage many
of their recycling needs.
Joel M. Shaw, 59, has over 18 years of experience in designing and developing
boarder clearance, airport security and document-reading systems. Mr. Shaw is
the Chief Strategy Officer of Cryptometrics. Mr. Shaw is the co-author of a
patent entitled Security Documents, which deals with securing official travel
documents. Mr. Shaw is also one of the authors recently granted a patent
entitled Face Imaging System for Recordal and Automated Identity Confirmation,
which deals with business capture, processing and recognition. Before its
acquisition by Cryptometrics, Mr. Shaw was the founder and chief executive
officer of BioDentity Systems Corporation (now known as Cryptometrics Canada,
Inc.). Prior to founding Cryptometrics Canada, Inc., Mr. Shaw was the founder
and chief executive officer of Business Renewal Corporation from 1995 to 1999.
Prior to founding Business Renewal Corporation, Mr. Shaw served as executive
vice president of Advanced Information Technology Corporation from 1975 to 1995
where he was chief engineer and his responsibilities included strategic business
development.
103
Mr. Shaw has worked closely with the Canadian passport Office, the U.S.
Department of State and the U.S. Immigration and Naturalization Service advising
such organizations on issues of boarder control and the issuance of travel
documentation. Since 1989, Mr. Shaw has also been the Chairman of the
International Standards Organization (ISO) Working Group for the development of
standards for machine-readable documents and serves as International Standard
Organization (ISO) Working Group's official liaison with the International Civil
Aviation Organization.
EXECUTIVE COMPENSATION SUMMARY INFORMATION
Employment Agreements
At the Effective Time of the Merger, the employment agreements of both
Robert Barra and Michael A. Vitale (the "Employment Agreements") with JAG Media
(to be renamed Cryptometrics, Inc.) as the corporation surviving the Merger in
the form attached hereto as Appendix F will become effective.
The relevant provisions of the Employment Agreements are as follows:
o Messrs. Barra and Vitale shall be the Co-Chief Executive Officers of
the surviving corporation.
o Messrs. Barra and Vitale shall be "at will" employees and each of
Messrs. Barra, Vitale and the surviving corporation may terminate
the employment relationship, at any time, upon written notice to the
other party with or without good cause or reason or no cause or
reason.
o During the first calendar year of their employment pursuant to this
agreement, Messrs. Barra and Vitale shall receive a base salary of
$175,000 with a potential bonus of up to $350,000.
o During the second calendar year of their employment pursuant to this
agreement, Messrs. Barra and Vitale shall receive a base salary of
$225,000 with a potential bonus of up to $450,000.
o At the Effective Time of the Merger, Messrs. Barra and Vitale shall
each receive non-qualified stock options to purchase a total of
325,000 shares of common stock of Cryptometrics, Inc. for $1.00 per
share, subject to adjustment in number of shares and purchase price
to an option to purchase shares of stock of JAG Media (to be renamed
Cryptometrics, Inc.) for a number of shares of JAG Media Common
Stock equal to 325,000 times the Exchange Multiple at a set purchase
price of $1.00 divided by the Exchange Multiple.
o The agreements have provisions providing immediate exercisability of
outstanding options and payment of approximately three times their
salary and bonuses to Messrs Barra and Vitale in the case of a
future takeover of JAG Media.
DIRECTOR COMPENSATION
Directors who are also employees of Cryptometrics do not receive
additional compensation to serve as members of the Board of Directors. A policy
has not yet been set as to how non-employees directors of the Cryptometrics
shall be compensated.
104
CAPITAL STOCK OF JAG MEDIA AND CRYPTOMETRICS
DESCRIPTION OF JAG MEDIA CAPITAL STOCK
JAG Media is authorized to issue up to 250,000,000 shares of common
stock, par value $ 0.00001 per share (the "JAG Media Common Stock") and
50,000,000 shares of preferred stock, par value $0.00001 per share (the
"Preferred Stock"). As of January 3, 2006, 42,119,655 shares of JAG Media Common
Stock and no shares of Preferred Stock were issued and outstanding. In
connection with the Merger, the stockholders of JAG Media have been asked to
approve an amendment of JAG Media's Articles of Incorporation to increase its
authorized capital from 250,000,000 to 500,000,000 shares of JAG Media Common
Stock.
COMMON STOCK
Each holder of JAG Media Common Stock is entitled to one vote for each
share held of record. There is no right to cumulative votes for the election of
directors. The shares of Common Stock are not entitled to pre-emptive rights and
are not subject to redemption or assessment. Each share of Common Stock is
entitled to share ratably in distributions to stockholders and to receive
ratably such dividends as may be declared by the Board of Directors of JAG Media
out of funds legally available therefor. Upon liquidation, dissolution or
winding up of JAG Media, the holders of Common Stock are entitled to receive,
pro rata, the assets which are legally available for distribution to
stockholders. The issued and outstanding shares of Common Stock are validly
issued, fully paid and non-assessable.
SERIES 2 CLASS B COMMON STOCK
Except as required by law, the holders of Series 2 Class B Common Stock
are not entitled or permitted to vote on any matter required or permitted to be
voted upon by the stockholders of JAG Media. Upon the dissolution, liquidation
or winding up of JAG Media, subject to the rights of the holders of any of JAG
Media's securities other than Common Stock, the holders of the Series 2 Class B
Common Stock, the Series 3 Class B Common Stock (described below) and the Common
Stock will be entitled to receive all of the assets of JAG Media available for
distribution to its stockholders ratably in proportion to the number of shares
held by them. Holders of Series 2 Class B Common Stock are entitled to receive,
on an equal basis, such dividends, payable in cash or otherwise, as may be
declared by the Board of Directors of JAG Media out of funds legally available
therefor. Each share of Series 2 Class B Common Stock must be redeemed by JAG
Media, to the fullest extent permitted by law, within six months (or as soon
thereafter as permitted by law) following the final resolution of JAG Media's
lawsuit against certain brokerage firms (JAG Media Holdings, Inc. v. A.G.
Edwards & Sons et al) in the U.S. District Court for the Southern District of
Texas or any successor or other lawsuit relating to the subject matter thereof
in which JAG Media is named as a plaintiff.
SERIES 3 CLASS B COMMON STOCK
Except as required by law, the holders of Series 3 Class B Common Stock
are not entitled or permitted to vote on any matter required or permitted to be
voted upon by the stockholders of JAG Media. Upon the dissolution, liquidation
or winding up of JAG Media, subject to the rights of the holders of any of JAG
Media's securities other than Common Stock, the holders of the Series 2 Class B
Common Stock, the Series 3 Class B Common Stock and the Common Stock will be
entitled to receive all of the assets of JAG Media available for distribution to
its stockholders ratably in proportion to the number of shares held by them.
Holders of Series 3 Class B Common Stock are entitled to receive, on an equal
basis, such dividends, payable in cash or otherwise, as may be declared by the
Board of Directors of JAG Media out of funds legally available therefor. Each
share of Series 3 Class B Common Stock must be redeemed by JAG Media, to the
fullest extent permitted by law, within six months (or as soon thereafter as
permitted by law) following
105
the final resolution of JAG Media's lawsuit against certain brokerage firms (JAG
Media Holdings, Inc. v. A.G. Edwards & Sons et al) in the U.S. District Court
for the Southern District of Texas or any successor or other lawsuit relating to
the subject matter thereof in which JAG Media is named as a plaintiff.
PREFERRED STOCK
The Board of Directors of JAG Media is authorized to issue up to
50,000,000 shares of "blank check" preferred stock. From time to time, the Board
of Directors of JAG Media may issue, in one or more series, the number of shares
and any designation of each series and the voting powers, designations,
preferences and relative, participating, optional and other special rights of
the shares of each series, and the qualifications, limitations and restrictions
of the preferred stock.
DESCRIPTION OF CAPITAL STOCK OF CRYPTOMETRICS, INC. AND ITS CANADIAN SUBSIDIARY,
CRYPTOMETRICS CANADA, INC.
COMMON STOCK
Cryptometrics is authorized to issue up to 20,000,000 shares of common
stock, par value $0.001 per share (the "Cryptometrics Common Stock"). As of
October 31, 2005, 11,202,103 shares of Cryptometrics Common Stock were issued
and outstanding, including the 1,382,957 Exchangeable Shares of Cryptometrics
Canada, Inc. outstanding. Each holder of Cryptometrics Common Stock is entitled
to one vote for each share held of record. There is no right to cumulative votes
for the election of directors. The shares of Common Stock are not entitled to
pre-emptive rights. Each share of Common Stock is entitled to share ratably in
distributions to stockholders and to receive ratably such dividends as may be
declared by the Board of Directors of Cryptometrics out of funds legally
available therefor. Upon liquidation, dissolution or winding up of
Cryptometrics, the holders of Cryptometrics Common Stock are entitled to
receive, pro rata, the assets which are legally available for distribution to
stockholders. The issued and outstanding shares of Cryptometrics Common Stock
are validly issued, fully paid and non-assessable.
CANADIAN EXCHANGEABLE SHARES
In connection with the acquisition by Cryptometrics, Inc. for 1,500,000
shares of its common stock of all of the then issued and outstanding shares of
common stock of BioDentity Systems Corporation, a Canadian corporation, (now
known as Cryptometrics Canada, Inc.), the shares of stock of BioDentity were
each converted into 0.1550227 Exchangeable Shares of BioDentity and BioDentity
issued to Cryptometrics 100,000 class A common shares which then constituted all
of the issued and outstanding class A common shares of Biodentity. The
Exchangeable Shares are exchangeable by the holders thereof into a total of
1,382,957 shares of Cryptometrics Common Stock and Cryptometrics has the option
to redeem the Exchangeable Shares and the holders of the Exchangeable Shares
have the option to exchange them for Cryptometrics Common Stock. Previously
outstanding options or warrants of Biodentity were converted into options or
warrant to acquire the balance of the 1,5000,000 shares of stock of
Cryptometrics, i.e. 116,042 shares.
The 1,383,958 shares of Cryptometrics Common Stock for which the
outstanding Exchangeable Shares are exchangeable have been treated the same as
the outstanding shares of Cryptometrics Common Stock and thus share equally in
the Merger Consideration. The options and warrants for the Exchangeable Shares
are treated the same as the options as warrants for the Cryptometrics Common
Stock.
TRANSFER AGENT AND REGISTRAR
The registrar and transfer agent for JAG Media's Common Stock is
Transfer Online, Inc., Portland, Oregon.
106
SHARES ELIGIBLE FOR FUTURE SALE
Upon issuance of the shares of JAG Media Common Stock to the
Cryptometrics stockholders in connection with the Merger, such shares shall be
registered with the SEC on this Registration Statement on Form S-4. In
accordance with the terms of the Merger Agreement, however, stockholders of
Cryptometrics shall not be permitted to sell or otherwise dispose of sixty-five
percent of the JAG Media Common Stock received in connection with the Merger for
a period of twelve months from the closing date of the transaction.
Additionally, the Form S-4 shall separately register the shares of JAG Media
Common Stock issuable to the current Co-Chief Executive Officers of
Cryptometrics, Robert Barra and Michael A. Vitale, and the current Chief
Strategy Officer of Cryptometrics, Joel Shaw, so that the shares are immediately
saleable subject to the twelve-month lock-up restriction. Notwithstanding the
foregoing, subject to compliance with all relevant securities laws, thirty-five
percent of the shares of JAG Media Common Stock issued to the Cryptometrics
stockholders in connection with the Merger shall not be subject to the
twelve-month lock-up provision so long as the shares of the surviving
corporation, JAG Media (to be renamed Cryptometrics, Inc.), are trading on the
NASDAQ Capital Market.
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COMPARISON OF STOCKHOLDERS' RIGHTS
Cryptometrics is incorporated in the State of Delaware. Stockholders of
Cryptometrics, whose rights as stockholders are currently governed by Delaware
law and Cryptometrics' Certificate of Incorporation and By-Laws, will, upon
effectiveness of the Merger become stockholders of a Nevada corporation, and
their rights will be governed by Nevada law and JAG Media's Articles of
Incorporation, and By-Laws. Although it is impractical to note all of the
changes in the rights of the stockholders of Cryptometrics resulting from the
Merger, the following is a summary of the more significant of such changes.
STOCKHOLDER VOTING ON FUNDAMENTAL CHANGES
In Delaware and Nevada the laws pertaining to the stockholder vote
required for a fundamental corporate change such a merger or sale of
substantially all the corporation's assets are the same. In both Delaware and
Nevada, a simple majority (greater than 50%) stockholder vote is required to
effect a corporation's merger or sale of substantially all of its assets.
STOCKHOLDER ACTION WITHOUT A MEETING
Also, in both Delaware and Nevada a corporate action requiring
stockholder approval may be taken without a meeting if a majority of the
stockholders entitled to vote thereon consent to such action in writing.
APPRAISAL RIGHTS
In Nevada and Delaware, appraisal rights are similar.
In Nevada, if (i) the securities of the class entitled to vote are
listed on a national securities exchange or are included in the Nasdaq Capital
Market or (ii) if there are more than 2,000 stockholders of records, there is
not an appraisal right where the Merger is (x) with another company listed on a
national securities exchange or the Nasdaq Capital Market or (y) where such
company has 2,000 stockholders and nothing other than cash or stock or a
combination is being tendered in the Merger.
In Nevada, if corporate action is taken without a meeting of the
stockholders, the corporation shall notify in writing all stockholders entitled
to dissent that the action was taken and shall send them a written dissenter's
notice within 10 days after effectuation of the Merger or business combination,
setting forth the procedure for the dissenting stockholders to follow to make
demand for payment. The corporation shall pay the fair value of the dissenting
stockholders' shares, as determined by the corporation, within 30 days of demand
of payment.
In Delaware, no appraisal rights are available for the shares of any
class or series of stock in connection with a Merger or consolidation if (i) the
securities of the class entitled to vote are listed on a national securities
exchange or designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc. or (ii)
held of record by more than 2,000 stockholders. Furthermore, no appraisal rights
are available for any shares of stock of a constituent corporation surviving a
Merger if the Merger did not require for its approval the votes of the
stockholders of the surviving corporation.
In Delaware, if corporate action is taken without a meeting of the
stockholders, the corporation shall notify, in writing, all stockholders
entitled to dissent that the action was taken and shall send them a written
dissenter's notice within 10 days after effectuation of the Merger, setting
forth the procedure for the dissenting stockholders to follow to make demand for
payment. Within 20 days of the receipt of the notice of by the corporation that
the action was taken, the stockholders must deliver a written demand for
payment.
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Within 120 days after the completion of the Merger, any stockholder who
has complied with Section 262 of the Delaware General Corporation Law may file a
petition in the Delaware Court of Chancery demanding determination of the value
of the shares held by all stockholders entitled to appraisal of their shares. If
a petition for appraisal is duly filed by a stockholder and a copy is delivered
to the company, the company will then be obligated within 20 days of receipt of
the copy to provide the Court of Chancery with a duly verified list containing
the names and addresses of all stockholders who have demanded an appraisal of
their shares and with whom agreement as to the value of their shares has not
been reached. After notice to these stockholders, the Delaware Court of Chancery
is empowered to conduct a hearing to determine which stockholders are entitled
to appraisal rights.
The Delaware Court of Chancery will then appraise the shares of stock,
determining their fair value exclusive of any element of value arising from the
accomplishment of the Merger. When the value is determined, the Delaware Court
will direct the payment by the company of this value, with interest thereon,
simple or compound, if the Delaware Court of Chancery so determines, to the
stockholders entitled to receive this money. For a description of the rights of
Cryptometrics stockholders in connection with the Merger, please see the section
entitled "Appraisal Rights" on page 56 of this Form S-4.
CORPORATE GOVERNANCE
Except as noted below, corporate governance laws and procedures in
Nevada and Delaware are different:
In Nevada, directors may be removed by a vote of 2/3rds of the
stockholders entitled to vote, whereas in Delaware, unless the corporation's
charter documents provide otherwise, directors may be removed by a majority vote
of the stockholders entitled to vote for such purpose. Absent contravening or
limiting provisions in the charter or bylaws of a corporation, both states
permit vacant director positions to be filled by appointment of the remaining
Board of Directors.
In Nevada, the Board of Directors, without a vote of the stockholders,
may approve and effectuate a reverse split or recapitalization of the
outstanding shares on a pro rata basis. In Delaware, the law requires a
stockholder vote to accomplish a reverse split of shares.
In Nevada, a person holding or representing 15% or more of the
outstanding shares of a corporation may, on at least 5 days' notice, inspect the
books and financial records of the corporation. In Delaware, any stockholder
may, during reasonable business hours and upon 5 days written notice, inspect
the books and financial records of the corporation.
TAKEOVER BIDS
In Nevada, unless the Articles of Incorporation provide that the
anti-takeover sections of the Nevada Revised Statutes do not apply any person or
group acting together who acquires one fifth or more of the outstanding shares
of the company (the "Control Shares") must submit a take over statement to the
other stockholders. The Control Shares may not be voted in any takeover attempt,
unless a resolution authorizing the Control Shares to so vote is passed by a
majority of the non-Control Shares.
In Delaware, unless otherwise provided by a corporation's certificate
of incorporation, a corporation shall not engage in any business combination
with any interested stockholder for a period of 3 years following the time that
such stockholder became an interested stockholder, unless: (i) prior to such
time the Board of Directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder; (ii) consummation of the transaction which resulted in
the stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for
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purposes of determining the voting stock outstanding (but not the outstanding
voting stock owned by the interested stockholder) those shares owned (a) by
persons who are directors and also officers and (b) employee stock plans in
which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer; or (iii) at or subsequent to such time the business combination is
approved by the Board of Directors and authorized at an annual or Annual meeting
of stockholders, and not by written consent, by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder.
For purposes of Delaware law, an "interested stockholder" generally
means any person (other than the corporation and any direct or indirect
majority-owned subsidiary of the corporation) that is the owner of 15% or more
of the outstanding voting stock of the corporation. Nevada law includes similar
statutory provisions with the following significant differences. In Nevada, the
threshold for defining an "interested stockholder" is 10% of outstanding voting
stock rather than 15%. Unlike Delaware, Nevada law does not provide for
consummation of a combination prior to the expiration of the three year period
pursuant to stockholder approval; if either the combination or the transaction
which resulted in the stockholder becoming an interested stockholder has not
been approved by the board of directors prior to the stockholder becoming an
interested stockholder the three year period must expire before consummation.
Combinations after expiration of the three year period must meet specified "fair
price" criteria.
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BUSINESS OF JAG MEDIA
BUSINESS OVERVIEW
JAG Media has been providing financial and investment information
within the investment community since 1989. In May 1999, JAG Media began
offering its services on a subscription fee basis to the general public for the
first time through its U.S. website. At www.jagnotes.com, JAG Media offers
timely financial data and reports and commentary from the financial community.
From 1989 to 1992, JAG Media operated as an unincorporated business
entity. In 1992, JAG Media incorporated in the State of New Jersey as New Jag,
Inc. On December 14, 1993, JagNotes, Inc. merged with and into JAG Media, and
JAG Media changed its name to JagNotes, Inc. JAG Media operated as JagNotes,
Inc. until March 1999 when it was acquired by Professional Perceptions, Inc., a
Nevada corporation, which subsequently changed its name to JagNotes.com Inc.
JagNotes, Inc. remained a wholly-owned subsidiary of JagNotes.com Inc. until
August 16, 1999 when it merged with and into JagNotes.com Inc.
Until 1999, JAG Media targeted only a limited audience of financial
professionals and it did not engage in organized sales and marketing efforts. As
discussed in more detail below, in 1999 JAG Media decided to change its focus by
expanding onto the Internet and targeting retail subscribers with the hope of
expanding its subscriber base and business. In September 2000 JAG Media started
an advertiser-based financial webcast which it sold on February 1, 2001 as it
was unable to continue to fund its operating losses.
JAG Media undertook a corporate reorganization in January 2002 in order
to distinguish and better manage its areas of business. On January 4, 2002, JAG
Media LLC was formed as a Delaware limited liability company and a wholly owned
subsidiary of JagNotes.com, Inc. The assets and liabilities of JAG Media's
current fax and Internet subscription business were transferred to JAG Media
LLC. In order to better reflect the overall business in which JAG Media expected
to engage and the corporate structure JAG Media intended to use to conduct that
business, JAG Media changed its corporate name from JagNotes.com Inc. to JAG
Media Holdings, Inc. effective April 8, 2002.
JAG Media's jagnotes.com website currently consists of a
subscription-based service that offers two specific products, the JAGNotes
(Upgrade/Downgrade) Report and the Rumor Room, providing timely market reports,
including breaking news and potentially market moving information. JAG Media
currently derives its revenues primarily from the sale of subscriptions.
JAG Media purchased certain development stage software and related
assets in the United Kingdom on November 24, 2004, now being developed by its
subsidiary, Pixaya (UK) Limited. JAG Media is continuing to finance the
development by Pixaya of certain software products, including those which it
believes will facilitate the delivery to customers through their mobile phones
of JAG Media's fast breaking financial information services.
JAG Media has also decided to expand its business by merging with
Cryptometrics, Inc.
JAG Media is a Nevada corporation. JAG Media's address is 6865 S.W.
18th Street, Suite B13, Boca Raton, Florida 33433, and its telephone number is
866-300-7410.
JAG MEDIA'S INDUSTRY GENERALLY
The growth of the Internet has changed the way investors seek
information and manage their portfolios. Individual investors are increasingly
seeking access to information that was formerly available only to financial
professionals. Professional investors who have traditionally relied on print and
other media for information are demanding faster information and greater
accessibility.
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As of September 30, 2005, there were over 957 million Internet users
worldwide, including over 203 million users in the U.S. See Internet World Stats
website (http://www.internetworldstats.com ).
According to tracking surveys conducted by Pew Internet & American Life
Project as of November 2004, approximately 44% of those with Internet access use
the Internet to obtain financial information and approximately 13% use the
Internet to buy or sell stocks, bonds or mutual funds. According to these
surveys, approximately 8% of those with Internet access obtain financial
information on a typical day.
With respect to JAG Media's Pixaya business unit, the mobile and
wireless industries are experiencing significant growth and changing the way
businesses operate and people communicate. Both industries are also giving rise
to new forms of mobile entertainment and information not available just a few
short years ago.
The following statistics provide some insight into the impact of the
mobile and wireless industries:
o As of October 25, 2005 there were more than 197 million wireless
subscribers in the U.S.
o Reported wireless minutes of use exceeded 675 billion in June 2005.
o It is estimated that U.K. mobile phone users will send up to 30
billion text messages during 2005.
See Cellular Telecommunications and Internet Association (HTTP://WWW.CTIA.ORG);
See Mobile Data News, The Official Newsletter of the Mobile Data Association,
Volume 5, No. 1, January/February 2005 (HTTP://WWW.MDA-MOBILEDATA.ORG).
New forms of wireless are also experiencing significant growth. For
example, municipal wireless networks, which provide wireless coverage to large
portions of municipal areas, have seen significant growth over the past year and
that growth is generally expected to continue in the near term. See Municipal
Wireless State of the Market Report September 2005
(HTTP://WWW.MUNIWIRELESS.COM).
2004 - 2007 U.S. Spending for Municipal Wireless Networks
2004 2005 2006 2007
---- ---- ---- ----
Spending ($ Millions) $31.5 $76.5 $177.7 $405.6
YTY Growth Rate N/A 142% 132% 128%
See Municipal Wireless State of the Market Report September 2005
(http://www.muniwireless.com).
PRODUCTS
JAG Media has been providing financial and investment information
within the investment community since 1989. In May 1999, JAG Media began
offering its services on a subscription fee basis to the general public for the
first time through its U.S. website. At www.jagnotes.com, JAG Media offers
timely financial data and reports and commentary from the financial community.
JAG Media's jagnotes.com website consists solely of a subscription-
based service. During the last fiscal year, JAG Media discontinued the free
portion of its website.
JAG Media offers its subscribers two targeted products: The JAGNotes
(Upgrade/Downgrade) Report, targeted primarily at institutional subscribers, and
the Rumor Room, targeted primarily at retail individual customers. These two
products are accessible only to paid subscribers. Subscriptions are offered to
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individuals at the rate of $9.95 per month, or $99.95 per year. JAG Media has
offered free trial subscriptions at times in the past and may do so in the
future.
JAGNOTES (UPGRADE/DOWNGRADE) REPORT - The JAGNotes Report is a daily
consolidated investment report that summarizes newly issued research, analyst
opinions, upgrades, downgrades and analyst coverage changes from various
investment banks and brokerage houses. Each morning JAG Media gathers this
information, then compiles and releases it in a concise, easy to read format
before the markets open. JAG Media believes that this report gives early,
convenient access to its subscribers of potentially market moving information
which was traditionally not available in a convenient format when the market
opens. This report is updated from time to time during the trading day.
JAG Media's current strategy involves phasing out retail subscribers
for its JAGNotes Report and refocusing on institutional customers and
professional traders. JAG Media has always maintained its original JAGNotes
fax-based service for a limited number of mostly institutional subscribers.
Through this service, JAG Media provides these subscribers faxed copies of its
daily JAGNotes Report, which is provided through installments as information is
received every weekday morning before the stock market opens. JAG Media also
allow these subscribers access to its Internet-based information by providing
them with a specified number of access codes. The price for this combined
service is approximately $1,500 to $2,150 per year. The content of JAG Media's
website contains substantially all of the information provided in the faxed
reports as well as updates of such information and the Rumor Room described
below.
JAG Media intends to continue providing its combined fax/Internet
service in the future primarily to institutional subscribers. JAG Media believes
that some financial institutions are willing to pay a higher price for this
combined service because they consider a faxed report to be a more user friendly
means of receiving the information even if their employees have direct Internet
access. JAG Media is also examining the potential for implementing other product
offerings and subscription structures which may be attractive to institutional
subscribers.
While JAG Media intends to focus its efforts exclusively on offering
the JAGNotes Report to institutional customers, JAG Media recognizes that it
remains of interest to some retail customers as well. However, to avoid the cost
of accessing such individuals JAG Media expects to do so almost exclusively
through strategic affiliations such as its current arrangement with Track Data,
as described under "Business Strategy", below.
THE RUMOR ROOM - Because rumors can move equities, JAG Media has
established the Rumor Room where it posts rumors that have been heard on the
street about various stocks. When JAG Media hears rumors, it posts the
information in the Rumor Room and indicates the date and time of the rumor.
While JAG Media realizes that rumors are inherently unreliable as indicated by a
cautionary note introducing this portion of its website, JAG Media believes that
every trader and investor - large and small - should have access to this
information to determine its usefulness. The Rumor Room is available to JAG
Media's subscribers and updated throughout the day.
Although targeted primarily at individual subscribers, the Rumor Room
is also made available through JAG Media's website to institutional investors as
described above. As described below, once JAG Media's English subsidiary,
Pixaya, has completed development of its Pixaya Mobile software product, which
delivers on-demand video/audio clips and text messages to mobile phones, JAG
Media intends to try to distribute the Rumor Room through mobile phones as well.
JAG Media believes that such a distribution channel might better access its
target audience. There can be no assurance, however, that such development will
be successfully completed or, if completed, that customers will embrace this new
mode of distribution.
PIXAYA - On November 24, 2004, through JAG Media's English subsidiary
now named Pixaya (UK) Limited, JAG Media purchased certain development stage
software and related assets from TComm
113
Limited, a company also organized in the United Kingdom. At the time of
acquisition, TComm Limited was in various stages of development of four software
products. JAG Media has continued developing Pixaya Mobile (previously known as
TComm TV), which delivers on-demand video/audio clips and text messages to
various Java-based and Symbian-based mobile phones, and SurvayaCam (previously
CCMTV), which consists of software programs and related hardware intended to
permit field personnel to send real-time video streams from the field to a
central location where they can be viewed by one or more persons. JAG Media
discontinued its support of a network-based internal communications system for
business that enables employees to communicate securely face-to-face from their
own desks and a network-based instant video messaging platform that allows
employees of an organization to communicate securely in real-time within their
offices and from remote locations, as neither fit within its strategic plan
focused on distribution of content such as the Rumor Room service through mobile
phones and other wireless solutions which would, for example support SurvayaCam.
In addition, JAG Media is supporting development of a new mobile phone product
named "SOS Guides," which are mobile travel guides that will be made available
to users through their mobile phones. JAG Media intends to market the "SOS
Guides" to travel agents, metropolitan tourist bureaus and other travel related
companies.
COMPANY VOICE SERVICE - JAG Media has discontinued offering this
service. Through its wholly owned subsidiary, JAG Company Voice LLC, JAG Media
began marketing its Company Voice service in 2003. JAG Media established the
Company Voice service in order to make available to publicly traded companies
production and distribution services that would enable them to deliver press
releases and other company messages to stockholders and potential investors in
streaming video/audio format. JAG Media's goal was to offer production and
distribution services such as directly contracting for studios in which Company
Voice segments would be taped; providing interviewers for each Company Voice
segment; assisting clients in preparing for each interview; encoding taped
segments to allow distribution via the Internet; and arranging for distribution
and streaming of finalized Company Voice segments on affiliate sites such as
Lycos.
During 2003, JAG Media placed four Company Voice segments on its
website and attempted to obtain distribution of Company Voice segments through
other websites; however, this service did not produce any material revenue for
JAG Media. Therefore, JAG Media allowed its Company Voice contract for streaming
video to expire by its terms and is no longer marketing its Company Voice
services. On April 8, 2004, JAG Company Voice LLC was merged into JAG Media LLC.
ADVERTISING REVENUE
While JAG Media expects the primary source of its revenue to be from
subscriptions for the JAGNotes Report and the Rumor Room, it may supplement this
with advertising revenue. Such revenues have, however, not been meaningful to
date. JAG Media would not expect such revenues to become material until (i)
there is a major upturn from current levels in Internet banner advertising
generally or it is able to offer advertisers various media advertising
alternatives to banners and (ii) JAG Media has been successful in increasing the
number of unique visitors to JAG Media's website.
BUSINESS STRATEGY
The success of JAG Media's business depends on its ability to obtain
the requisite financing and be able to:
o reverse the current downward trend of revenues;
o curtail costs to correspond with revenues; and
o pursue Merger and other expansion opportunities.
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In order to successfully achieve this strategy, JAG Media intends to
re-position its two key products so they are targeted more effectively at their
respective markets: institutional customers (JAGNotes Report) and retail
customers (the Rumor Room). In time, JAG Media hopes that by refocusing its
products on specific customer groups, it will become an important information
resource both for institutional customers (investors, brokers and investment
advisers) and for individual retail customers.
JAG Media believes the institutional market for the JAGNotes Report
offers an opportunity to achieve higher revenues at lower per unit cost than the
retail market it has been pursuing, but at the same time JAG Media believes that
developing technologies, such as mobile phones, may give it a better
distribution channel which can make the individual customer market for the Rumor
Room cost effective as well. With respect to the JAGNotes Report, JAG Media
plans to focus on servicing the institutional segment of its business. JAG Media
is investigating ways of using the Internet more effectively in distributing its
product to the institutional market and helping those customers in turn
redistribute the product to their professional employees. With respect to the
Rumor Room service, JAG Media is actively exploring the feasibility of using
mobile phones as a new distribution channel.
Increase Revenues.
Some avenues which JAG Media is exploring with respect to the JAGNotes
Report to reverse the current downward trend of its revenues include:
o Increasing its sales efforts for the JAGNotes Report to
institutional subscribers by focusing its entire effort on reaching
that market;
o To the extent funds permit, developing related products tailored to
the needs of institutional subscribers such as JAGNotes delivered to
company intranets and featuring company branding;
o In order to access individual professional traders without incurring
excessive marketing costs, pursuing strategic affiliations,
partnerships, joint ventures or other relationships with strategic
partners, such as JAG Media's current arrangements with Track Data,
Cantex, Inc. and Acquire Media Corporation, financial information
platforms for professional traders, whereby they offer the JAGNotes
Report as part of their collection of subscriber services to the
professional trading community; and
o Pursuing distribution arrangements with third party information
providers that service financial institutions.
Some avenues which JAG Media is exploring with respect to the Rumor
Room to reverse the current downward trend of its revenues include:
o To the extent funds permit, further developing JAG Media's Pixaya
mobile software product to allow distribution of stock rumors to
mobile phones via text messaging and on-demand video/audio clips;
o To the extent funds permit, developing related products tailored to
the needs of individual retail customers;
o Pursuing distribution arrangements with third party information
providers that service individual retail customers.
Curtail Costs.
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JAG Media sold its webcasting business and discontinued its efforts to
market the Company Voice product to reduce its cash flow requirements. In
addition, JAG Media has discontinued various commentators and employees in order
to save costs where it concluded that the cost was not justified by the
subscribers' interest and current revenue levels. JAG Media's new strategy of
focusing its marketing efforts on institutional customers for the JAGNotes
Report will, it believes, also permit it to obtain more revenues per marketing
dollar by focusing on a smaller number of customers and potential customers to
whom JAG Media can sell its products.
Pursue Merger and Other Expansion Opportunities.
While JAG Media intends to utilize its available resources as
effectively as possible to increase revenues and reduce costs, it realizes that
it may take some time before revenues can be increased to a level where they can
cover operating costs and then reach the level where they can cover general and
administrative costs. Many of JAG Media's general and administrative costs are
related to being a public company and these costs are difficult to reduce in
light of the recent Sarbanes-Oxley legislation and its new requirements. JAG
Media has therefore concluded that it would be prudent to attempt to increase
its revenue base more quickly than its basic business strategy of refocusing its
two different products on their respective customer bases is likely to achieve,
so that such administrative costs could be absorbed by a materially larger
revenue stream.
JAG Media has looked at various possible acquisitions over the past
three years and has found that Cryptometrics will be suitable candidate for a
merger.
JAG Media is also pursuing the possibility of spinning off one of its
two major services in order to maximize the chances of successfully developing
both such services and focus them on their respective target customer bases.
JAG Media is also considering a possible spin off of either the Rumor
Room, together with JAG Media's related Pixaya mobile phone software development
business, or the JagNotes Report. Any such spin off might possibly be done in
connection with a Merger with another enterprise which may be an unrelated line
of business. JAG Media believes that its two products might be better
repositioned and developed as their own corporate entities which might also
appeal to different investors. JAG Media has not made a final decision as to any
spin off or entered into any term sheet in connection with any merger related to
such a spin off. There can be no assurance that any such spin off, with or
without a merger, will prove feasible or be consummated.
JAG Media will require additional funds in order to implement its
business strategy. At JAG Media's current usage rate of cash, the cash generated
from its operations will not be sufficient to fund the liquidity requirements of
its current business strategy. Accordingly, JAG Media will need to raise
additional funds through public or private financing, strategic relationships,
the Merger with Cryptometrics or other arrangements. There can be no assurances
that JAG Media will be able to do so.
REGULATION
The securities industry is subject to extensive regulation under
federal and state laws in the United States, and companies that provide
financial advice to investors are generally required to register as investment
advisers at either the federal or state level. JAG Media believes that its
business consists of a publishing activity for which investment adviser
registration and regulation does not apply under applicable federal or state
law, and thus it is not registered as an investment adviser with either the SEC
or any of the various states. The regulatory environment in which JAG Media
operates is subject to change, however, and JAG Media could be required to
register as an investment adviser with an appropriate regulatory agency at some
point in the future.
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In addition, JAG Media operates in an environment of tremendous
uncertainty about potential government regulation of the Internet and
Internet-based service providers. JAG Media believes that its business is not
currently subject to direct regulation other than regulations applicable to
businesses generally. However, the Internet is evolving rapidly, and
governmental agencies have not yet been able to adapt all existing regulations
to the Internet environment. The United States Congress has passed legislation
that regulates certain aspects of the Internet, including on-line content,
copyright infringement, user privacy, liability for third-party activities and
jurisdiction. Specifically, with respect to one aspect of copyright law, on
October 28, 1998, the United States Congress passed the Digital Millennium
Copyright Act ("DMCA"). The DMCA includes statutory licenses for the performance
of sound recordings and for the making of recordings to facilitate
transmissions. Under these statutory licenses, depending on JAG Media's future
business activities, JAG Media and its customers may be required to pay
licensing fees in connection with digital sound recordings JAG Media delivers to
its customers. Additionally, federal, state, local and foreign governmental
organizations also are considering other legislative and regulatory proposals
that would regulate the Internet. Although JAG Media is only contemplating
distribution by mobile phone, that sector is also regulated and there is
currently a focus on regulation in that sector, so that changes can be
anticipated.
JAG Media cannot predict what new laws will be enacted or how courts
will interpret both existing and new laws. As a result, JAG Media is uncertain
as to how new laws or the application of existing laws may affect its business.
For example, while JAG Media is not aware of any pending laws or regulations
that would restrict its ability to disseminate market-based rumors and other
information of unsubstantiated reliability, it is possible that such laws or
regulations may be passed in the future. Increased regulation in this area could
decrease the demand for JAG Media's services, increase its cost of doing
business or otherwise have a material adverse effect on JAG Media's business,
results of operations and financial condition.
COMPETITION
Providing financial information and analysis over the Internet is a
relatively new business, but it is already intensely competitive. A large number
of web-based financial information providers are competing for subscribers,
customers, advertisers, content providers, analysts, commentators and staff. In
addition, cable television is an increasingly important source of competition.
JAG Media provides a variety of categories of information to its
subscribers, including daily financial news, technical analysis of stock
activity and selected financial data of corporations. Each of these components
of JAG Media's business competes to a different degree with the following
information sources, many of which provide their information without charge:
o Online financial news and information providers including Yahoo
Finance, Marketwatch, TheStreet.com, Forbes.com, Briefing.com,
America Online Personal Finance, Reuters and MotleyFool.com;
o Internet portals and search engines such as America Online, MSN and
Yahoo;
o Traditional media sources such as The Wall Street Journal, The
Financial Times, Barrons, CNN/Money, and MSN Money/CNBC, all of whom
also have an Internet presence;
o Terminal-based financial news providers including Bloomberg, Reuters
and Dow Jones; and
o Online brokerage firms such as Ameritrade, E*Trade Financial,
Charles Schwab, Fidelity, Harrisdirect and TD Waterhouse.
Because there is not a readily defined market in which JAG Media
competes, it cannot predict which information source or sources will be its
primary competition in the future. However, JAG Media expects
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competition from each of the above information sources to intensify and increase
in the future. Most of JAG Media's current and potential competitors have
greater name recognition, larger financial, technical and marketing resources,
and more extensive customer bases than JAG Media, all of which could be
leveraged to gain market share to JAG Media's detriment. Such advantages would
also permit JAG Media's competitors to enter new sectors such as distribution
through mobile phones, more easily than JAG Media will be able to do.
It is not difficult for new competitors to enter the market. Much of
the information JAG Media provides is publicly available and JAG Media does not
have any patented or otherwise protected technologies that would preclude or
inhibit competitors from entering its markets. JAG Media's current and future
competitors may develop or offer services that have significant price, content,
creative or other advantages over the services JAG Media provides.
In order for JAG Media to successfully compete in this business, it
will need to reliably provide valuable services to a greater number of
institutional and other subscribers who are willing to pay it fees sufficient to
support such services. JAG Media believes that over time a successful
implementation of its business strategy will allow it to compete successfully as
a focused provider of timely investment information to institutional and retail
customers.
INTELLECTUAL PROPERTY
JAG Media is the owner of the trademarks AHEAD OF THE MONEY, STREETSIDE
AND STREETSIDE WITH DAN DORFMAN. Each of the foregoing trademarks was approved
in 2002 and has a duration period of ten years, at which time each of the
trademarks must be renewed or they will expire. JAG Media is also the owner of
eight pending trademark applications. JAG Media does not consider these
trademarks to be material to its business.
WEBSITE TECHNICAL INFORMATION
JAG Media leases two web servers, which are the computer systems on
which all the content for the jagnotes.com website is maintained and through
which JAG Media operates its jagnotes.com website. JAG Media's U.S. servers are
maintained by Woodbourne Solutions and are located at their facility in
Germantown, Maryland. JAG Media's two back-up servers are maintained by
Above.net and PC Communications and are located in San Jose, California and
Jersey City, New Jersey.
The jagenotes.com website was redesigned in July 2000 by Zero-G at a
cost of approximately $500,000. Subsequent redesigns have been handled
internally and by Woodbourne Solutions, a technical consultant to JAG Media.
The Pixaya website is hosted by InnoTech. InnoTech has offices located
in southern California and Raleigh, North Carolina. Its Internet data center is
located in Orange County, California. The Pixaya website is maintained
internally by Pixaya employees.
EMPLOYEES
As of January 3, 2006, JAG Media had twelve employees. As of that date,
JAG Media had entered into employment agreements with eight employees and on
November 3, 2005 entered into an Amended and Restated Employment Agreements (the
"Employment Agreements") with each of Thomas J. Mazzarisi and Stephen J.
Schoepfer. At the Effective Time of the Merger, the Employment Agreements with
JAG Media shall be terminated with the exception that the change in control
option set forth in Section 6 of the Employment Agreements which shall remain in
full force and effect and remain an obligation of JAG Media
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(to be renamed Cryptometrics, Inc.) in connection with the Merger to each of
Thomas J. Mazzarisi and Stephen J. Schoepfer.
EQUITY LINE OF CREDIT
As of April 9, 2002, JAG Media entered into, and on July 8, 2004 and
July 21, 2004, JAG Media amended, an Equity Line Purchase Agreement with Cornell
Capital Partners, L.P. for a $10 million equity line pursuant to which JAG Media
is able to sell its shares of Common Stock to Cornell Capital from time to time
over a 48-month period ending on August 28, 2006. The purpose of the offering is
to provide general working capital for JAG Media, including working capital
which might be required by virtue of its strategic plan. This agreement
superseded JAG Media's original equity line purchase agreement with Cornell
Capital, dated August 17, 2001. As of July 31, 2005 and September 16, 2005,
$4,035,000 of JAG Media's existing equity line with Cornell Capital had been
utilized.
PROMISSORY NOTE
On February 2, 2005 JAG Media borrowed $2,000,000 from Cornell Capital
Partners, L.P. The $2,000,000 loan is evidenced by a Promissory Note dated as of
January 25, 2005 executed by JAG Media and Cornell Capital, the repayment of
which was subsequently extended on August 5, 2005. JAG Media intends to use the
proceeds of the loan for working capital and general corporate purposes.
Under the terms of the Promissory Note, the face amount of the
Promissory Note and interest on the amount from time to time outstanding at a
rate of 12% per year will be payable either (i) out of the net proceeds to be
received by JAG Media upon delivery of put notices under the Equity Line
Purchase Agreement or (ii) in full by JAG Media within 753 calendar days of
January 25, 2005 regardless of the availability of proceeds under the Equity
Line Purchase Agreement, unless an extension is mutually agreed to by the
parties in writing.
Pursuant to the Promissory Note, JAG Media has agreed to deposit in
escrow 35 put notices under the Equity Line Purchase Agreement in an amount not
less than $60,000 each and one request for a put under the Equity Line Purchase
Agreement in an amount not less than $181,016.99. Under the terms of the
Promissory Note, as amended, the put notices held in escrow will be released
every 14 days commencing November 4, 2005. To date, no put notices have been
released and JAG Meida is negotiating with Cornell Capital to restructure the
Promissory Note. JAG Media has also agreed to reserve out of its authorized but
unissued shares of Common Stock, 3,500,000 shares of Common Stock to be
delivered to Cornell Capital under the Equity Line Purchase Agreement upon
delivery of put notices by JAG Media. JAG Media paid to Cornell Capital a fee of
$100,000 in connection with this transaction and has also agreed to pay a $5,000
documentation fee.
JAG Media has provided irrevocable transfer agent instructions dated
January 25, 2005 to Transfer Online, Inc., JAG Media's transfer agent,
instructing Transfer Online to reserve the Common Stock allocable for issuance
to Cornell Capital pursuant to the put notices in a designated account, thereby
reducing the number of shares available to JAG Media for future issuances for
other purposes. The instructions also provide directives to the transfer agent
regarding the issuance, from time to time, of the Common Stock to Cornell
Capital. When delivered to Cornell Capital, the Common Stock may be resold by
Cornell Capital pursuant to JAG Media's registration statement on Form SB-2
(Reg. No. 333-118029). The use of the registration statement may be temporarily
suspended by JAG Media in certain specified circumstances. In the event the
proceeds from the sale of the Common Stock are insufficient to repay all amounts
due under the Promissory Note, JAG Media has agreed to reserve additional shares
of its Common Stock for issuance to Cornell Capital.
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JAG Media has the option to repay the amounts due under the Promissory
Note and to withdraw any put notices yet to be effected provided that each
repayment is in amount not less than $25,000. In addition, JAG Media has the
right to accelerate the delivery of one or more put notices and to select the
specific put notice to be so accelerated.
Upon an event of default, as defined in the Promissory Note, the entire
principal balance and accrued interest of the Promissory Note, and all other
obligations of JAG Media under the Promissory Note, would become immediately due
and payable without any action on the part of Cornell Capital.
As permitted by the terms of the Promissory Note, JAG Media opted to
make 3 interest payments to Cornell Capital, each in the amount of $20,000, paid
in a single lump sum of $60,000 on August 5, 2005. If the Promissory Note is not
paid in full when due, the outstanding principal owed thereunder will be due and
payable in full together with interest at a rate of 14% per year or the highest
permitted by applicable law, if lower.
ACQUISITION OF DEVELOPMENT STAGE SOFTWARE
On November 24, 2004, JAG Media entered into a Business Sale Agreement
with TComm Limited, a company organized in the United Kingdom, and Pixaya (UK)
Limited (formerly known as TComm (UK) Limited), a company organized in the
United Kingdom and a wholly-owned subsidiary of JAG Media. Effective October 3,
2005, TComm (UK) Limited formally changed its name to Pixaya (UK) Limited.
The transactions contemplated by the Business Sale Agreement were
consummated on November 24, 2004. Under the Business Sale Agreement, Pixaya
purchased TComm Limited's software development business which is focused on
streaming video solutions and all of its assets related to that business. The
business acquired has not generated any significant revenue as of the date of
the acquisition or through July 31, 2005.
The acquired product lines JAG Media intends to continue to develop
include: (1) Pixaya Mobile (previously known as TComm TV), which delivers
on-demand video/audio clips to various java-based and Symbian-based mobile
phones and (2) SurvayaCam (previously known as CCMTV), which is currently under
development and will consist of software programs (and related hardware)
intended to enable field personnel to send real-time video streams from the
field to a central point where they can be viewed by one or more persons.
Because the acquired product lines are still under development, it is difficult
for JAG Media to estimate the amount of resources that will be required to
complete the development of these product lines.
The purchase price paid to TComm Limited consisted of (i) 250,000
shares of JAG Media's Common Stock, having a value based on the closing price of
JAG Media's Common Stock as of the close of business on the day prior to the
acquisition, equal to approximately $42,500 and (ii) the payment of
approximately $19,200 in cash. In addition, TComm Limited has agreed not to
compete with the business conducted by Pixaya for a period of two years from the
closing date of the transaction. The Business Sale Agreement also contains
customary representations and warranties. TComm Limited has agreed to indemnify
Pixaya for any damages which may result from a breach of its warranties but only
if the damages exceed approximately $20,000. TComm Limited has entered into a
lockup agreement with JAG Media pursuant to which it has agreed not to sell or
otherwise transfer the Common Stock for a period of one year.
In connection with entering into the Business Sale Agreement, Pixaya
entered into employment agreements on November 24, 2004 with four individuals,
all of whom were previously employed by the TComm Limited. The employment
agreements have a term of three years and automatically renew unless terminated
by either party.
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STOCK DIVIDEND
On March 18, 2003, JAG Media announced its intention to declare a
special stock dividend. To effect such dividend, JAG Media filed a Certificate
of Designation with the Secretary of State of the State of Nevada on April 11,
2003 which designated a new series of Class B Common Stock, par value $0.00001
per share, which was distributed by dividend to the stockholders of record as of
the close of business on April 14, 2003 in the ratio of one share of Series 2
Class B Common Stock for every 100 shares of Common Stock. Such shares of Series
2 Class B Common Stock are non-voting, have dividend and liquidation rights
equal to the Common Stock and are redeemable, which redemption by JAG Media is
mandatory to the fullest extent permitted by law within six months following
final resolution of the lawsuit in Texas federal court against various brokerage
firms (or any related successor lawsuit) at a redemption price which is the
greater of (a) par value or (b) ninety percent of the net proceeds to us of such
lawsuit after payment of fees and expenses incurred in connection with such
lawsuit and all taxes on net income accrued or paid with respect to such net
amount. The shares of Series 2 Class B Common Stock do not have a CUSIP number.
JAG Media's transfer agent has completed the issuance and mailing of
Series 2 Class B Common Stock dividend certificates to all registered beneficial
stockholders and to all beneficial owners who appear on beneficial owner lists
supplied by brokers which are consistent with their share position with the
Depository Trust Company. As of July 31, 2005, Series 2 Class B Common Stock
dividend certificates had not yet been mailed to certain beneficial owners
because as of such date approximately 12 brokers had failed to submit a
beneficial owner list to the transfer agent.
RECAPITALIZATION
At the Annual Meeting on February 11, 2004, JAG Media stockholders
approved, among other matters, a proposal to amend and restate Article Fourth of
the Articles of Incorporation of JAG Media to:
o increase the aggregate authorized number of shares of all classes of
stock from 200,000,000 to 300,440,000 of which (w) 250,000,000
shares shall be designated common stock, par value $0.00001 per
share, (x) 400,000 shares shall be designated Series 2 Class B
common stock, par value $0.00001 per share, (y) 40,000 shares shall
be designated Series 3 Class B common stock, par value $0.00001 per
share and (z) 50,000,000 shares shall be designated preferred stock,
par value $0.00001 per share; and
o reclassify each outstanding share of existing Class A Common Stock
and Series 1 Class B Common Stock into one share of Common Stock
upon surrender of physical share certificates representing the
existing Class A Common Stock and Series 1 Class B Common Stock for
new Common Stock certificates.
The above-described recapitalization was effected on June 4, 2004 upon
the filing of a Certificate of Amendment to JAG Media's Articles of
Incorporation with the Secretary of State of the State of Nevada. As a result of
the recapitalization, the old shares of Class A Common Stock Series 1 Class B
Common Stock only represent the right to receive the applicable number of shares
of the new Common Stock. The holder of such shares not surrendered will not have
the right to vote or to receive any dividends or other distributions payable by
JAG Media until such shares have been exchanged for the new Common Stock.
2005 STOCKHOLDERS MEETING
JAG Media's Articles of Incorporation as amended on June 4, 2004, also
required that the new "certificate only" shares must bear the name of the
beneficial owner on the face of each stock certificate. As required by SEC
regulation Rule 17Ad-20 which was adopted November 30, 2004 and became effective
March 7, 2005, this requirement was deleted by a further amendment of JAG
Media's Articles of
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Incorporation at the stockholders meeting on February 24, 2005. Accordingly, the
shares of Common Stock can now trade in certificate form or in book entry form
through the Depository Trust Company.
FACILITIES
JAG Media's executive and administrative headquarters are currently
located at 6865 SW 18th Street, Suite B13, in Boca Raton, Florida. JAG Media
rents this space at a cost of $1,250 per month. The servers for JAG Media's
websites are housed at separate locations as indicated above (see "Website
Technical Information"). JAG Media believes that it will be able to locate
suitable new office space and obtain a suitable replacement for its Florida
office space, if the lease is not renewed on commercially reasonable terms.
LEGAL PROCEEDINGS
On June 20, 2002, JAG Media and its President and Chief Executive
Officer, Gary Valinoti, filed a complaint in the 165th District Court of Harris
County, Texas against over 150 brokerage firms, alleging, among other things, a
conspiracy among the defendants to short sell JAG Media stock. The original
lawsuit was subsequently amended on June 24, 2002 and was removed to the United
States District Court for the Southern District of Texas. The plaintiffs
subsequently filed a motion in the United States District Court for the Southern
District of Texas to have the action remanded back to the state court where it
was originally commenced. That motion was denied and the action proceeded in the
federal district court. On October 1, 2003, the Court denied various motions to
dismiss made on behalf of the defendants. However, in its ruling, the Court
indicated that all motions to dismiss could have been granted in light of the
defective pleadings made by plaintiffs and allowed plaintiffs 20 days to file an
amended complaint to comply with certain pleading requirements of the Court.
Plaintiffs filed an amended complaint within the required period. Discovery was
stayed while the motions to dismiss were pending.
After plaintiffs filed their third amended complaint, 78 out of the
total of approximately 150 defendants again filed a motion to dismiss the
lawsuit. On September 6, 2004, the Court entered an order granting the moving
defendants' motion to dismiss the lawsuit, again citing various deficiencies in
the pleadings. The Court did not grant the plaintiffs leave to replead.
The plaintiffs and the moving defendants have since stipulated to the
entry of a final judgment dismissing the third amended complaint against the
moving defendants with prejudice. As part of this stipulation, the parties have
agreed that upon entry of final judgment, the parties will (a) waive their right
to attorneys fees or seek sanctions and bear their own costs and (b) not appeal
the judgment.
On December 3, 2004, JAG Media announced that its original counsel had
assigned its legal retainer agreement in connection with the lawsuit to a legal
consortium consisting of various law firms and other consultants throughout the
country, which includes JAG Media's original counsel. JAG Media has met with its
new attorneys and is currently evaluating with them its options for recommencing
an action against certain defendants and possibly other parties in light of the
court's order.
Bay Point Investment Partners, LLC has threatened to commence
litigation against JAG Media, certain of its officers and directors and others.
The Bay Point claim relates to its purchase of shares of JAG Media's stock in
private placements on December 10, 2002 and June 19, 2003. Bay Point alleges,
among other things, various disclosure failings as well as the Company's failure
to register the shares it purchased in the June 19, 2003 private placement by
the date provided in the placement agreement and to use the proceeds as Bay
Point claims they were intended to be used. Bay Point has made various requests
but has most recently sought a payment while continuing to hold all of its
shares in JAG Media. JAG Media believes it has meritorious defenses to Bay
Point's claims.
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On March 4, 2005, JAG Media settled a dispute with a consultant in
connection with his performance of various investment banking services for JAG
Media. The claim was settled for $175,000, of which $100,000 was paid in cash
and the balance was paid by issuing 250,000 shares of Common Stock with an
aggregate fair value of $75,000. The cost of the settlement was accrued as of
January 31, 2005 and has been included in operations for the year ended July 31,
2005.
WHERE YOU CAN FIND MORE INFORMATION ABOUT US
JAG Media is required to file annual, quarterly and Annual reports,
proxy statements and other information with the SEC. You can read and copy any
of this information at the SEC's Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549. You may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. This information is
also available from the SEC's website at http://www.sec.gov.
JAG Media also distributes annual reports containing audited financial
statements and other information to its stockholders after the end of each
fiscal year. JAG Media does not intend to regularly distribute quarterly reports
to its stockholders, but will gladly send them to you upon your written request
to Thomas J. Mazzarisi, Chairman, Chief Executive Officer and General Counsel,
at 6865 S.W. 18th Street, Suite B13, Boca Raton, Florida 33433.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION OF JAG MEDIA
FOR THE FISCAL YEARS ENDING JULY 31, 2005 AND 2004 AND
FOR THE THREE MONTHS ENDED OCTOBER 31, 2005 AND 2004
The following discussion should be read in conjunction with the consolidated
financial statements of JAG Media and the notes to those statements that appear
elsewhere in this prospectus. The following discussion contains forward-looking
statements that reflect our plans, estimates and beliefs. Our actual results
could differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed below and elsewhere in this prospectus, particularly
in "Risk Factors".
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these consolidated financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to accounts receivable, equipment, stock-based compensation,
income taxes and contingencies. We base our estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We have adopted the provisions of Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment of Long-Lived Assets" ("SFAS 144").
Under SFAS 144, impairment losses on long-lived assets, such as equipment and
capitalized web site development costs, are recognized when events or changes in
circumstances indicate that the undiscounted cash flows estimated to be
generated by such assets are less than their carrying value and, accordingly,
all or a portion of such carrying value may not be recoverable. Impairment
losses are then measured by comparing the fair value of assets to their carrying
amounts.
We account for stock options, Common Stock and similar equity instruments issued
to employees as compensation using fair value based methods pursuant to
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Accordingly, we estimate the fair value of options
using an option-pricing model (generally, the Black-Scholes option pricing
model) that meets the criteria set forth in SFAS 123 and Common Stock using the
market value of our stock. We record such value through charges to compensation
cost and corresponding credits to equity. The charges to compensation cost are
amortized to expense over the vesting period. In accordance with SFAS 123, all
other issuances of Common Stock, stock options or other equity instruments to
employees and nonemployees as consideration for goods or services received by us
are accounted for based on the fair value of the consideration received or the
fair value of the equity instrument, whichever is more readily measurable. Such
fair value is measured at an appropriate date pursuant to the guidance in the
consensus reached for EITF Issue No. 96-18 (generally, the earlier of the date
the other party becomes committed to provide goods or services or the date the
performance by the other party is complete) and capitalized or expensed as if we
had paid cash for the goods or services. For purposes of determining the fair
value of options and warrants using the Black-Scholes option pricing model, we
have estimated the life of options and/or warrants to be five years. Given an
active trading market for our Common Stock, we estimate the volatility of our
stock based on week ending closing prices over a historical period of not less
than one year.
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Due to uncertainties related to, among other things, potential changes in
ownership which could subject our net operating loss carryforwards to
substantial annual limitations, and the extent and timing of future taxable
income, we have recorded a full valuation allowance to offset our deferred tax
assets and, accordingly, we have not offset any potential tax benefits against
our losses. A positive adjustment to income or loss will be required in future
years if we determine that we could realize these deferred tax assets.
RELATED PARTY TRANSACTIONS
On April 1, 2002, two of our executive officers loaned JAG Media a total of
$400,000 subject to the terms and conditions of unsecured promissory notes that,
as amended, were payable on April 30, 2004 and bore interest at an annual rate
of 9%. The loans were repaid in full, including interest, in March 2004.
YEAR ENDED JULY 31, 2005 AS COMPARED TO THE YEAR ENDED JULY 31, 2004
The following summarizes changes in our results of operations for such years:
Year ended July 31
2005 2004 $ Change
---- ---- --------
Revenues ......................................................... $239,651 $253,256 $(13,605)
----------- ----------- -----------
Operating Expenses:
Cost of revenues ........................................ 152,371 272,161 119,790
Selling expenses ........................................ 43,441 13,698 (29,743)
General and administrative expenses ..................... 1,745,455 1,951,876 206,421
----------- ----------- -----------
Totals .................................................. 1,941,267 2,237,735 296,468
----------- ----------- -----------
Loss from operations ............................................. (1,701,616) (1,984,479) 282,863
Other income (expense):
Write-off of goodwill ................................... (50,400) (50,400)
Interest income ......................................... 8,357 3,485 4,872
Interest expense ........................................ (145,506) (23,930) (121,576)
Loss from retirement of assets .......................... (713) 713
----------- ----------- -----------
Net loss ......................................................... $(1,889,165) $(2,005,637) $116,472
=========== =========== ===========
REVENUES:
Revenues primarily consist of subscription revenues from annual, semi-annual,
quarterly and monthly subscriptions relating to our product "JAGNotes." JAGNotes
is a daily consolidated investment report that summarizes newly issued research,
analyst opinions, upgrades, downgrades, and analyst coverage changes from
various investment banks and brokerage houses. The decrease in subscription
revenues during the year ended July 31, 2005 was due primarily to a lack of
advertising and increased competition. While our revenues do include revenues
from other sources, these other revenues are not material to our operations as a
whole.
COST OF REVENUES:
Cost of revenues includes the cost to transmit the product over the telephone
and fax lines, on-line service charges for our website, costs in connection with
the development and maintenance of the website, and payments to commentators and
employees for their reports that are posted on our website.
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During the year ended July 31, 2005, consulting fees were approximately $113,300
as compared to approximately $219,000 for the year ended July 31, 2004. Such
fees included non-cash charges associated with the amortization of unearned
compensation arising from the issuance of shares in exchange for services of
approximately $35,000 and $144,000 for the years ended July 31, 2005 and 2004,
respectively. The decrease in consulting fees is a result of the expiration of
consulting contracts associated with commentators for our jagnotes.com website.
In addition, costs associated with the transmission of our product over
telephone and fax lines and costs associated with the maintenance of our website
decreased commensurate with our decrease in revenues.
SELLING EXPENSES:
Selling expenses consist primarily of advertising and other promotional
expenses. This increase results primarily from new sales and marketing expenses
of Pixaya, our United Kingdom subsidiary.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses consist primarily of compensation and
benefits for the officers, other compensation, occupancy costs, professional
fees and other office expenses. The decrease in general and administrative
expenses is attributable to our efforts to better contain costs. In addition, in
the year ended July 31, 2004, we incurred legal and data processing expenses
related to proposed acquisitions and $150,000 of severance payments in
connection with the resignation of our CEO.
INTEREST EXPENSE:
The increase results from borrowings under our Promissory Note payable to
Cornell Capital.
NET LOSS:
Primarily as a result of the above, we had a net loss of approximately
$1,900,000 during the year ended July 31, 2005 as compared to a net loss of
approximately $2,006,000 during the year ended July 31, 2004.
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THREE MONTHS ENDED OCTOBER 31, 2005 AS COMPARED TO THREE MONTHS ENDED OCTOBER
31, 2004.
Three Months Ended October 31,
2005
2005 2004 $ Change
Revenues $40,023 $72,227 $(32,204)
--------- --------- ---------
Operating expenses:
Cost of revenues 25,873 38,443 12,570
Selling expenses 9,869 2,151 (7,718)
General and administrative
expenses 526,167 249,425 (276,742)
--------- --------- ---------
Totals 561,909 290,019 (271,890)
--------- --------- ---------
Loss from operations (521,886) (217,792) (304,094)
Other income (expenses):
Interest income 1,702 691 1,011
Interest expense (74,370) --- (74,370)
--------- --------- ---------
Net loss $(594,554) $(217,101) $(377,453)
========= ========= =========
REVENUES:
The decrease in subscription revenues during the three months ended October 31,
2005 as compared to the three months ended October 31, 2004 was due primarily to
a lack of advertising and increased competition. While our revenues do include
revenues from other sources, these other revenues are not material to our
business.
COST OF REVENUES:
During the three months ended October 31, 2005, consulting fees were
approximately $15,500 as compared to approximately $31,000 for the three months
ended October 31, 2004. Such fees included non-cash charges associated with the
amortization of unearned compensation arising from the issuance of shares in
exchange for services of approximately $2,200 and $15,000 for the three months
ended October 31, 2005 and 2004, respectively. The decrease in consulting fees
is a result of the expiration of consulting contracts associated with
commentators for our jagnotes.com website.
127
SELLING AND GENERAL AND ADMINISTRATIVE EXPENSES:
The increase in general and administrative expenses is attributable legal and
accounting costs associated with a proposed acquisition.
INTEREST EXPENSES:
The increase results from borrowings under our Promissory Note payable to
Cornell Capital.
LIQUIDITY AND CAPITAL RESOURCES:
We only generated revenues of approximately $240,000 and $253,000 and we
incurred net losses of approximately $1,890,000 and $2,006,000 and cash flow
deficiencies from operating activities of approximately $1,524,000 and
$1,700,000 for the years ended July 31, 2005 and 2004, respectively. In
addition, we only generated revenues of approximately $40,000 and we incurred
net losses of approximately $595,000 and cash flow deficiencies from operating
activities of approximately $316,000 for the three months ended October 31,
2005. These matters raise substantial doubt about our ability to continue as a
going concern.
We believe that, in the absence of a substantial increase in subscription
revenues, it is probable that we will continue to incur losses and negative cash
flows from operating activities through at least October 31, 2006 and that we
will need to obtain additional equity or debt financing to sustain our
operations until we can market our services, expand our customer base and
achieve profitability.
As further explained below, we entered into an agreement with an investment
partnership pursuant to which it has, in effect, "put" options whereby, subject
to certain conditions, we are able to require the investment partnership to
purchase shares of our common stock from time to time at prices based on the
market value of its shares. The maximum aggregate purchase price under this
equity line is $10,000,000. The Equity Line became available on August 28, 2002
and was extended in July 2004 for an additional 24 months through August 2006
unless it is terminated earlier at the discretion of the Company. As of December
19, 2005, we had received gross proceeds of $4,035,000, from the exercise of
"put" options. Although the timing and amount of the required purchases under
the agreement are at our discretion, the purchases are subject to certain
conditions and the ability of the investment partnership to fund the purchases.
We believe that we will be able to generate sufficient revenues from our
remaining facsimile transmission and website operations and obtain sufficient
financing from our 2002 Equity Line Agreement described below before it expires
in August 2006 or through other financing agreements to enable us to continue as
a going concern through at least October 31, 2006. However, if we cannot
generate sufficient revenues and/or obtain sufficient additional financing, if
necessary, by that date, we may be forced thereafter to restructure our
operations, file for bankruptcy or entirely cease our operations.
On November 24, 2004, we entered into a Business Sale Agreement with TComm
Limited, a company organized in the United Kingdom, and Pixaya (UK) Limited
(formerly known as TComm (UK) Limited), a company newly organized in the United
Kingdom and a wholly-owned subsidiary of the Company. The Company entered into
the transaction to access the seller's development stage software, which the
Company believed offered a new platform for delivery of the Company's services
as well as being valuable in its own right. Effective October 3, 2005, TComm
(UK) Limited formally changed its name to Pixaya (UK) Limited.
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The transactions contemplated by the Business Sale Agreement were consummated on
November 24, 2004. Under the Business Sale Agreement, Pixaya purchased TComm
Limited's software development business, which is focused on streaming video
solutions, and all of its assets related to that business. The business acquired
had not generated any significant revenue as of the date of the acquisition or
through October 31, 2005.
At the time of acquisition Pixaya was in various stages of development of four
(4) products: (1) TComm TV, which delivers on-demand video/audio clips to
various java-based and Symbian-based mobile phones; (2) CCMTV, which consists of
software programs and related hardware intended to permit field personnel to
send real-time video streams from the field to a central location where they can
be viewed by one or more persons; (3) Eye Contact, which is a network-based
internal communications system for business that enables employees to
communicate securely face-to-face from their own desks; and (4) TComm Messenger,
which is a network based instant video messaging platform that allows employees
of an organization to communicate securely in real-time within their offices and
from remote locations.
After reviewing the above product line, we determined that several adjustments
in the product line were desirable. In this regard Pixaya has discontinued
development of the Eye Contact and TComm Messenger products. Pixaya has
re-branded CCMTV as "SurvayaCam" and TComm TV as "Pixaya Mobile" and is further
developing Pixaya Mobile with a view to supporting the delivery of our
fast-breaking financial information products. In addition, Pixaya is developing
a new product named "SOS Guides," which are mobile travel guides that will be
made available to users on their mobile phones. Pixaya intends to market the SOS
Guides to travel agents, metropolitan tourist bureaus and other travel related
companies.
The purchase price paid to TComm Limited consisted of (i) 250,000 shares of our
common stock, having a value based on the closing price of our common stock as
of the close of business on the day prior to the acquisition, equal to
approximately $42,500 and (ii) the payment of approximately $19,000 in cash. The
purchase price was allocated to the fair value of assets and goodwill as
follows:
Equipment $11,000
Other Assets 100
Goodwill 50,400
-------
Total $61,500
========
As of January 31, 2005 the management tested the goodwill for impairment and
concluded that it had been impaired. Therefore, we recognized a charge of
$50,400 for the write-off of goodwill in the year ended July 31, 2005.
In addition, TComm Limited has agreed not to compete with the business conducted
by Pixaya for a period of two years from the closing date of the transaction.
The Business Sale Agreement also contains customary representations and
warranties. TComm Limited has agreed to indemnify Pixaya for any damages which
may result from a breach of its warranties but only if the damages exceed
approximately $20,000. TComm Limited has entered into a lockup agreement with us
pursuant to which it has agreed not to sell or otherwise transfer the Common
Stock for a period of one year.
In connection with entering into the Sale Agreement, Pixaya entered into
employment agreements on November 24, 2004 with four (4) individuals, all of
whom were previously employed by TComm Limited. The employment agreements have a
term of three (3) years and automatically renew unless terminated by either
party. As a result, our obligations for cash payments under the employment
agreements subsequent to October 31, 2005 will total $345,000 as follows:
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Year ending Amount
----------- ------
October 31, 2006 $144,000
October 31, 2007 $151,000
October 31, 2008 $ 50,000
--------
Total $345,000
========
Pursuant to the employment agreements, we granted options to purchase 260,000
shares of common stock with exercise prices ranging from $.50 - $1.00 as
additional compensation for services to be rendered under such contracts. The
aggregate estimated fair value of the options at the date of issuance of $51,200
will be recognized over the term of the employment agreements.
The employees have each agreed not to compete with the business conducted by
Pixaya for a specified period ranging from six months to 12 months once their
employment with Pixaya has terminated.
Pixaya had no revenues for the year ended July 31, 2005 or the quarter
ended October 31, 2005.
Our cash and cash equivalent position of approximately $333,000 as of October
31, 2005 results primarily from our borrowing from Cornell Capital Partners L.P.
under our $2,000,000 Promissory Note made during the year ended July 31, 2005
described below.
On April 9, 2002, we entered into an Equity Line Purchase Agreement with Cornell
Capital Partners L.P. pursuant to which we have, in effect, put options whereby,
subject to certain conditions, we can require Cornell Capital to purchase shares
of our common stock from time to time at an aggregate purchase price of
$10,000,000. The Equity Line Agreement became available to us on August 28,
2002, and will remain available through August 28, 2006 unless it is terminated
earlier by us in our sole discretion. The purchase price will be 95% of the
lowest closing bid price of our common stock over a specified number of trading
days commencing on specified dates. Cornell Capital shall be entitled to a cash
fee equal to 5% of the gross proceeds received by us from Cornell Capital in
connection with each put. The timing and amount of the required purchases shall
be at our discretion subject to certain conditions including (i) a maximum
purchase price to be paid by Cornell Capital for each put of $500,000; (ii) at
least five trading days must elapse before we can deliver a new put notice to
Cornell Capital; (iii) the registration statement covering the shares issuable
to Cornell Capital pursuant to the equity line must remain effective at all
times and (iv) on any given closing date, there shall be at least one bid for
the common stock on the Nasdaq OTC Bulletin Board. In addition, the obligation
of Cornell Capital to complete its purchases under the Equity Line Purchase
Agreement is not secured or guaranteed and, accordingly, if Cornell Capital does
not have available funds at the time it is required to make a purchase, we may
not be able to force it to do so. We have issued 10,000 shares of our common
stock to a placement agent as of the effective date as consideration for their
services in connection with the Equity Line Purchase Agreement. During the year
ended July 31, 2005 and the three months ended October 31, 2005, no shares of
common stock were issued pursuant to the Equity Line Purchase Agreement. During
the year ended July 31, 2004, 2,506,274 shares of Common Stock were sold under
the Equity Line Purchase Agreement yielding aggregate net proceeds of $2,042,500
to the Company. As of December 15, 2005, we had the ability to require Cornell
Capital to purchase shares of our common stock pursuant to the 2002 Equity Line
Agreement at an aggregate purchase price of $5,965,000 through August 28, 2006.
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On January 25, 2005, we entered into a Promissory Note Agreement with Cornell
Capital for a loan of $2,000,000. The $2,000,000 loan from Cornell Capital was
funded on February 2, 2005. On August 5, 2005, we and Cornell Capital agreed, as
permitted under the Promissory Note to extend for three months the date by which
we must pay all amounts due under the Promissory Note. The face amount of the
Promissory Note (as amended) and interest on the amount from time to time
outstanding at a rate of 12% per year will be payable either (i) out of the net
proceeds to be received by us upon delivery of put notices under the Equity Line
Agreement or (ii) in full by us within 753 calendar days of January 25, 2005
regardless of the availability of proceeds under the Equity Line Agreement,
unless an extension is mutually agreed to by the parties in writing.
Pursuant to the Promissory Note, we have agreed to deposit in escrow 35 put
notices under the Equity Line Agreement in an amount of $60,000 each and one
request for a put under the Equity Line Agreement in an amount of $181,017.
Under the terms of the Promissory Note (as extended), the put notices held in
escrow will be released every fourteen (14) days commencing November 4, 2005. To
date, no put notices have been released and we are negotiating with Cornell
Capital to restructure the Promissory Note. We have also agreed to reserve out
of our authorized but unissued shares of common stock 3,500,000 shares of our
common stock (the "Reserved Shares") to be delivered to Cornell Capital under
the Equity Line upon use of such put notices. We have paid to Cornell Capital a
fee of $100,000 in connection with this transaction which has been recorded as a
debt discount and is being amortized over the life of the loan.
We have the option to repay the amounts due under the Promissory Note and to
withdraw any put notices yet to be effected provided that each repayment is in
an amount not less than $25,000. In addition, we have the right to accelerate
the delivery of one or more put notices and to select the specific put notice to
be so accelerated. If the Promissory Note is not paid in full when due, the
outstanding principal owed thereunder will be due and payable in full together
with interest at a rate of 14% per year or the highest permitted by applicable
law, if lower.
Upon an event of default (as defined in the Promissory Note), the entire
principal balance and accrued interest of the Promissory Note, and all other
obligations of our Company under the Promissory Note, would become immediately
due and payable without any action on the part of Cornell Capital.
We do not believe that our business is subject to seasonal trends or inflation.
On an ongoing basis, we will attempt to minimize any effect of inflation on our
operating results by controlling operating costs and whenever possible, seeking
to insure that subscription rates reflect increases in costs due to inflation.
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
published Statement of Financial Accounting Standards ("SFAS") No. 123 (Revised
2004), "Share-Based Payment". The provisions of SFAS 123R, as amended, will be
effective for the Company in the first quarter of its fiscal year ending July
31, 2007. Management is assessing the implications of this revised standard,
which may materially impact the Company's consolidated results of operations in
the first quarter of fiscal year 2007 and thereafter.
The FASB and the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants had issued certain other accounting
pronouncements as of July 31, 2005 and October 31, 2005 that will become
effective in subsequent periods; however, we do not believe that any of those
pronouncements would have significantly affected our financial accounting
measurements or disclosures had they been in effect during the years ended July
31, 2005 and 2004 or the three months ended October 31, 2005 and October 31,
2004 or that they will have a significant effect at the time they become
effective.
OFF BALANCE SHEET ARRANGEMENTS
We do not currently have any off-balance sheet arrangements.
RECENT EVENTS
On December 27, 2005, we entered into a merger agreement with Cryptometrics
pursuant to which Cryptometrics would merge with a newly created subsidiary of
the Company. In consideration of the merger, the stockholders of Cryptometrics
would acquire shares of our Common Stock which would, upon issuance, represent
approximately 88% of our outstanding Common Stock, in exchange for all of the
issued and outstanding capital stock of Cryptometrics. In such case, our
existing stockholders would experience significant dilution from the issuance of
these shares to the stockholders of Cryptometrics. If consummated, the
transaction would be accounted for as a reverse acquisition in which
Cryptometrics would be the acquirer.
Until Jag Media and Cryptometrics agree otherwise, the merger agreement,
notwithstanding the approval by the Cryptometrics stockholders, may be canceled
with or without reason by either the Company or Cryptometrics with no liability.
Additionally, the consummation of the merger is subject to various conditions
set forth in the merger agreement. There is no assurance that the proposed
merger between the Company and Cryptometrics will be consummated, or if it is
consummated, that it will be pursuant to the terms described above.
The merger agreement is filed as Exhibit 99.4 to this Registration Statement of
which this Prospectus forms a part and should be reviewed for further
information regarding the merger.
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MARKET FOR JAG MEDIA COMMON STOCK AND RELATED STOCKHOLDER MATTERS
On April 8, 2002, we effected a recapitalization of our Common Stock pursuant to
which each one and one-tenth (1.1) shares of our outstanding common stock was
reclassified into one (1) share of Class A Common Stock and one-tenth (1/10th)
of a share of Series 1 Class B Common Stock. A public trading market for such
Series 1 Class B Common Stock never developed.
On June 4, 2004, we effected a second recapitalization pursuant to which each
share of our outstanding Class A Common Stock and Series 1 Class B Common Stock
was reclassified into one (1) share of new Common Stock.
Our Class A Common Stock traded through June 4, 2004 in the over-the-counter
market on the Nasdaq OTC Bulletin Board under the symbol JGMHA. Thereafter, our
Common Stock traded in the over-the-counter market on the Pink Sheets under the
symbol JAGH. The following table reflects quarterly high and low bid prices of
our Class A Common Stock and Common Stock from August 1, 2003 through July 31,
2005. Such prices are inter-dealer quotations without retail mark-ups,
mark-downs or commissions, and may not represent actual transactions.
High Low
---- ---
Fiscal Year 2004
- ----------------
First Quarter, ending October 31, 2003 ...................... 0.67 0.30
Second Quarter, ending January 31, 2004 ..................... 1.00 0.25
Third Quarter, ending April 30, 2004 ........................ 1.45 0.51
Fourth Quarter, ending July 31, 2004 ........................ 1.10 0.30
Fiscal Year 2005
- ----------------
First Quarter, ending October 31, 2004 1.10 0.15
Second Quarter, ending January 31, 2005 0.65 0.15
Third Quarter, ending April 30, 2005 0.52 0.11
Fourth Quarter, ending July 31, 2005 0.30 0.001
Fiscal Year 2006
- ----------------
Fiscal Quarter, ending October 31, 2005 0.30 0.02
We issued shares of our Series 2 Class B Common Stock to holders of record as of
April 14, 2003 of our then Class A Common Stock. We issued shares of our Series
3 Class B Common Stock to an investor in June 2003 and to an investor in
September 2003. A public trading market for the Series 2 Class B Common Stock
and the Series 3 Class B Common Stock never developed.
As of December 15, 2005, there were 2,282 stockholders of record of our Common
Stock. On October 26, 2005, the closing bid price for our Common Stock was
$0.20.
DIVIDEND POLICY
We have never paid any cash dividends on our Common Stock and anticipate that,
for the foreseeable future, no cash dividends will be paid on our Common Stock.
Payment of future cash dividends will be determined by our Board of Directors
based upon conditions then existing, including our financial condition, capital
requirements, cash flow, profitability, business outlook and other factors. In
addition, our future credit arrangements may restrict the payment of dividends.
On March 18, 2003, we announced our intention to declare a special stock
dividend. To effect such dividend, we filed a Certificate of Designation with
the Secretary of State of the State of Nevada on April 11, 2003 which designated
a new series of Class B Common Stock, par value $0.00001 per share, which was
distributed by dividend to the our stockholders of record as of the close of
business on April 14, 2003 in the ratio of one share of Series 2 Class B Common
Stock for every 100 shares of Common Stock.
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BUSINESS OF CRYPTOMETRICS
BUSINESS OVERVIEW
Since its founding in June 2000, Cryptometrics has been a provider of
biometric technology solutions. Unlike many other biometric technology providers
who either offer core biometric software products (e.g. fingerprint matching and
face recognition software) or integrate these products to form turnkey
solutions, Cryptometrics realizes its solutions by combining core biometric
technology with a patent pending technology it has invented to more effectively
capture biometrics to permit preprocessing of such captured biometric data so as
to realize an overall improvement in identity confirmation and technology
specifically designed to integrate, capture and process biometrics within a
specific business process.
Anticipating market needs, Cryptometrics initially focused on creating
a method of protecting computerized systems and information assets by combining
fingerprint technology with fingerprint capture/authentication devices and
public key infrastructure technology. Cryptometrics FingerSURE(R) fingerprint
verification products raise the level of security by requiring users to
authenticate their identity via fingerprint verification not only at log on, but
at user defined, critical points throughout the entire business process.
Through the acquisition of BioDentity Systems Corporation in March 2004
and its subsequent transition to the wholly owned subsidiary, Cryptometrics
Canada, Inc., Cryptometrics moved to address a further emerging market need to
provide next generation face biometric authentication technologies and
end-to-end solutions specifically designed to secure national borders, protect
the traveling public, protect the critical infrastructure of a country, and
support law enforcement, homeland security and first responder activities.
Cryptometrics SecurIDent(TM) facial recognition products and ID(2)PASS(TM)
solutions have an ability to capture facial images in real world settings,
including at distances up to 75 feet without active participation of an
individual. Through the application of patent pending technology Cryptometrics
believes that its SecurIDent(TM) facial recognition products and ID(2)PASS(TM)
solutions will raise overall performance of identity confirmation beyond levels
achievable using strictly commercial off-the-shelf biometric software. These
products and solutions may be used to secure the issuance of passports and a
wide range of national identification documents in addition to securing ports of
entry such as at airports, seaports and land borders.
BUSINESS STRATEGY
Cryptometrics intends to continue to expand its business offerings to
deliver solutions for the financial services, healthcare, government and
educational sectors, as well as travel and identification document provision,
border clearance, aviation security, critical infrastructure protection, law
enforcement and customer service and customer relationship management.
Cryptometrics intends to pursue a sales channel strategy that will include both
direct and partner revenue streams. Cryptometrics is currently working with
companies that specialize in system integration to deliver its hardware and
software technology and integrated solutions to a number of vertical markets.
The use and application of the Cryptometrics' fingerprint biometric
offerings is designed to be complete across the enterprise of any organization.
Cryptometrics believes this is fundamental to delivering a more comprehensive
and effective means of cyber asset protection. It is essential that networked
computerized control systems are protected from a range of threats. It is
equally critical that as more and more desktop computers are converted to the
more accommodating mobile devices (e.g. laptop computers, personal hand-held
devices) steps are taken to protect the wealth of personal and business data and
access credentials they house.
Cryptometrics believes that the use of its facial biometrics offerings
has the potential to play a critical role in enabling the deployment of
biometric travel documents (e.g. the new ePassport) and installing
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enhanced border clearance systems and processes world-wide. Cryptometrics
believes that the use of its facial biometrics offerings may play an essential
role in the developing generation of proactive protection vital for dealing with
international and domestic terrorism.
PRODUCTS
Cryptometrics is a provider of a new generation of biometric solution,
focused on making biometrics work successfully in large scale public
implementations while at the same time working to develop the critical
technology necessary to enable identity confirmation performance levels to
surpass that produced when simply using the latest commercially available
biometric technology. Cryptometrics believes that its solutions are designed to
deal with the some of the most pressing issues facing today's public and private
sectors, from protecting access to vital information held on computers to
achieving enhanced security for global travel.
To date Cryptometrics has developed and launched solutions relying on
both face and fingerprint biometrics. For instance, with respect to use of core
biometric technology; i.e. in the case of fingerprint solutions, Cryptometrics
applications use a wide range of wireless and wired fingerprint devices, and in
the case of facial solutions, Cryptometrics applications are fully compatible
with existing commercially available, off-the-shelf face recognition software.
Cryptometrics' fingerprint offerings are designed to address a broad
spectrum of industries including healthcare, governmental, education and
financial services institutions that are susceptible to a host of
authentication, access control, communications and online data management
security vulnerabilities.
Cryptometrics' facial offerings are designed to address pressing
security issues associated with the issuance of travel and identification
documents, inspection of people seeking entry into a country at border points,
aviation security and law enforcement.
CRYPTOMETRICS FINGERPRINT OFFERINGS
Cryptometrics offers a line of fingerprint authentication products
under the trade name FingerSURE(TM). Cryptometrics believes these offerings
provide users with a high level of information asset security by utilizing
biometric user-authentication systems. FingerSURE(TM) technology combines
convenience with extended levels of security, including the ability to store
sensitive personal security information on a biometric device. FingerSURE(TM)
uses public technology for securing the transfer between the device and the
computer and the storage of sensitive information, data, and user credentials.
FingerSURE(TM) provides a central location for the secure enrollment and
verification of biometric templates and authentications. Cryptometrics believes
FingerSURE(TM) solutions deliver a high level of user authentication and access
control.
Key FingerSURE(TM) product offerings include:
FingerSURE(TM) Enterprise
FingerSURE(TM) Enterprise is a comprehensive biometric fingerprint
authentication offering available to companies and organizations. Ideal for
large businesses, FingerSURE(TM) Enterprise integrates with Microsoft(R) Active
Directory(R) to offer companies and employees the ability to authenticate at any
place and time while connected to the corporate network by simply using their
fingerprint. The audit capabilities provided in the FingerSURE(TM) line of
products allow companies to comply with all industry and government policies and
procedures requiring absolute identification of individuals and transactions.
Benefits of FingerSURE(TM) Enterprise include:
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o User verification with the touch of a finger;
o Integration with Microsoft Active Directory - all user management is
through centralized control;
o Support of virtual private network access;
o File and folder encryption/decryption using RC4 128-bit encryption;
o Session-based encryption - communication through client/server is a
secure tunnel;
o Record retention of who gains access when and where for internal
audits;
o Provision of simple system and Internet access with the touch of a
finger;
o Protection of sensitive data stored on systems, including work in
progress;
o Provision superior network security;
o Support of unlimited users;
o Support of single sign-on;
o Management of an unlimited amount of secure websites and Internet
portals; and
o Preservation of personal desktop settings.
FingerSURE(TM) Professional
FingerSURE(TM) Professional is a biometric security solution offered to
small to medium-sized businesses. FingerSURE(TM) Professional allows users to
protect access to their systems and data, provides access to network domains and
protects critical data file access using biometric user-authentication.
Benefits of FingerSURE(TM) Professional include:
o User verification with the touch of a finger;
o Fast, effortless logins;
o Protection of sensitive data stored on systems, including work in
progress;
o Provision of superior network security;
o Support of unlimited users;
o Support of single sign-on;
o Management of an unlimited amount of secure websites and Internet
portals;
o Record retention of who gains access when and where for internal
audits; and
o Preservation of personal desktop settings.
FingerSURE(TM) WORKSPACE
FingerSURE(TM) WORKSPACE is the interface between the biometric login
device and the operating system. FingerSURE(TM) WORKSPACE replaces traditional
password management processes such as regular password changes, reset of
passwords and storage of passwords with the convenience of using the biometric
login device. The system also secures the unattended workstation by requiring
biometric re-authentication for manually locked and/or timed-out workstations.
FingerSURE(TM) WEBSECURE
FingerSURE(TM) WEBSECURE enables secure biometric login to sensitive
websites and to web-based forms. The user registers the Web page, and when
prompted, supplies his login credentials. The credentials are then stored, and
provided to the Web page on its next access after the user biometrically
authenticates.
FingerSURE(TM) BIO-SSO
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FingerSURE(TM) BIO-SSO provides single sign-on to third-party
applications through the proxy of the user's credentials. FingerSURE(TM) BIO-SSO
interacts directly with the third-party application to provide required
credentials and biometric authentication when requested.
FingerSURE(TM) FILE ENCRYPTION
FingerSURE(TM) FILE ENCRYPTION provides protection for information and
data by encrypting files and folders on hard drives or external devices. This
product also allows for individual access to encrypted material.
FingerSURE(TM) TRUSTED DEVICE SUPPORT
FingerSURE(TM) solutions integrates biometric devices which
Cryptometrics believes elevates security to a heightened level. Biometric
devices have custom software providing full functionality between logical assets
and the authentication devices. Cryptometrics believes that FingerSURE(TM)
presents a unique solution to biometric authentication by using devices with
strong cryptographic capabilities. These devices connect to the local PC by
means of a wireless Bluetooth(R) connection. Cryptometrics leverages the
characteristics of the device to provide customers with a full function logical
desktop access product.
FingerSURE(TM) SDK
FingerSURE(TM) Software Development Kit provides an application program
interface for third parties to integrate the power of FingerSURE(TM)
authentication into their applications. With the FingerSURE(TM) Software
Development Kit clients can request secondary authentications whenever they need
to verify the identity of a user performing an action with their software.
FingerSURE(TM) EFS
Cryptometrics believes that FingerSURE(TM) can increase the security of
using Microsoft(R) Encrypting File System. By using Encrypting File System with
a FingerSURE(TM) Trusted Device Support, FingerSURE(TM) allows for the secure
management of the decryption key for protected files on a computer's hard drive.
Once the key has been entrusted to FingerSURE 7.0, access to the key is
controlled through biometric authentication and the key is moved off the local
workstation and onto the trusted device. If the laptop is lost or stolen, the
key used for the decrypting of the files is not lost or stolen as well. The key
remains securely stored and protected by FingerSURE(TM) 7.0.
FingerSURE(TM) ENTERPRISE ADMINISTRATOR
FingerSURE(TM) ENTERPRISE ADMINISTRATOR integrates directly into the
Microsoft(R) Management Console for Users and Groups. By integrating directly
into the Microsoft(R) Management Console for Users and Groups, Cryptometrics
believes that FingerSURE(TM) provides a single point of administration for user
management and biometric authentication management. By utilizing Microsoft(R)
Management Console for Users and Groups and Microsoft Active Directory(R), a
single point of presence is created for any use enrolled in FingerSURE(TM)
Enterprise 7.0.
CRYPTOMETRICS FACE BIOMETRIC OFFERINGS
Cryptometrics offers a line of face biometric products under the trade
name SecurIDent(TM). These offerings are designed to address the pressing needs
of:
Government
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o More secure issuance of passports, visas and identification
documents
o Secure facilitation of persons seeking entry at border entry points
o Protection of critical infrastructures and key assets of the nation
o Improved aviation security
o Improved levels of law enforcement
o Improved facilitation and greater security for customer service
delivery and customer relationship management
Law Enforcement
o New technology and solutions designed to realize better and more
pre-emptive law enforcement and protection of citizens
Private Sector
o New technology and solutions designed to realize better protection
of customers and staff
o Improved facilitation and greater security for customer service
delivery and customer relationship management
FACE BIOMETRIC ENROLMENT PRODUCTS AND SOLUTIONS
Cryptometrics has invented a suite of enabling technology which it
believes is fundamental to:
o Capturing and enrolling the most effective face biometric sample(s),
whether that be derived from a photograph or captured live;
o Ensuring that all capture devices continuously operate at maximum
performance; and
o Ensuring that all captured face biometric samples meet the special
needs of their intended use, whether that be the encoding of the
Contactless Chip in a new ePassport, creation of a master
photo/facial image database or printing of a portrait in a passport
or on another form of travel or identification document.
ENROLMENT SOFTWARE
Cryptometrics offers a suite of software packages, devices and
integrated solutions designed specifically to enable enrolment of the high
quality face biometric.
o SecurIDent(TM) Face Biometric Enrolment Application Tools - Software
Development Kit and Run License versions allow software developers
to implement all of the critical functions required to successfully
capture the facial image and biometric using their own application
software. An inherent feature of the Tools is Auto Eye Landmark
Determination (finding) logic.
o SecurIDent(TM) Face Biometric Quality Management Software represents
a fully automated facial image and face biometric quality assessment
and assurance software tool. It evaluates such key quality
influencers as:
o Key image quality characteristics;
o Position of the head;
o Resolution across the face;
o Position of face;
o Tilt of the head; and
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o Rotation of the head.
The software performs a series of checks designed to confirm
suitability of the biometric sample for use with any of the currently
available commercial off-the-shelf face recognition software packages.
It runs an equally extensive series of checks to confirm alignment with
the photo and facial biometric guidelines set down by the enrolment
authority.
ENROLMENT DEVICES
Cryptometrics offers a suite of devices designed to enrol a highly
effective face biometric sample:
o SecurIDent(TM) Live Enrolment Cameras overcome the many operational
and quality problems associated with the use of standard cameras for
face biometric capture by:
o Automatically capturing the image/sample at prescribed
resolutions offering best face recognition performance;
o Automatically compensating for lighting effects using software
driven face area exposure control;
o Automatically isolating the best pose to use in face
recognition; and
o Automatically cropping the captured image to meet predefined
specifications for size and location of the facial region.
Cameras are supplied with interface and control software.
o SecurIDent(TM) Photo Enrolment Unit overcomes the numerous
operational and quality problems associated with the use of page
scanners for face biometric capture (i.e. derivation) from
photographs by:
o Automatically locating the face within the photograph and
adjusting the image capture using superior optical techniques -
as versus digital manipulation - to standardize the overall size
of the facial region;
o Automatically capturing the image at prescribed resolutions
offering best face recognition performance;
o Automatically compensating for exposure effects using software
driven face area exposure control; and
o Automatically cropping the image to meet predefined
specifications for size and location of the facial region.
The Unit accelerates the process of capturing images for recording in a
database, enhancing the images to an optimal uniform size and quality
with minimal to no operator assistance. Units are supplied with
interface and control software.
o SecurIDent(TM) Identity Management Controller is a fully scalable,
computerized appliance capable of working with many different
software platforms and comprising the necessary hardware and
software components to support a variety of key face matching tasks.
A Controller can be configured to accommodate the volume,
performance and processing requirements of a given client. Each
Controller houses the mandatory face recognition software on a
SecurIDent(TM) Face Rec Manager, which hosts one or more, commercial
off-the-shelf face recognition software packages to create the
comparative face recognition findings. The Manager also houses
software logic developed by BioDentity to raise the performance of
the core face recognition software beyond that which it can achieve
operating on its own.
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The SecurIDent(TM) Identity Management Controller is designed to house
one or both of the following optional engines:
o SecurIDent(TM) Lookout Engine, carries Lookout (Watch List) Checks.
The Lookout Engine works in cooperation with the SecurIDent(TM) Face
Recognition Manager to deliver a strong Lookout Check based solely
on the facial biometric. Only the face biometric can be used to
carry out a lookout check.
The Lookout Engine returns an ordered summary of "hits", showing those
persons from the Lookout List most like the person being checked. The
hits are ranked in order of likeness.
The SecurIDent(TM) Lookout Engine is face recognition software capable
of working with many other software platforms.
o SecurIDent(TM) Fraud Detection Engine is designed to check large
photo/facial image databases to determine if the person being
enrolled is already enrolled, but under a different identity.
Cryptometrics has created a design in which the entire master
database is checked.
Each of the above optional engines can be installed and configured
prior to on-site installation of the SecurIDent(TM) Identity Management
Controller or directly in the field.
Operational management of the Controller is directed, monitored and
maintained by control software created by Cryptometrics.
INTEGRATED SOLUTIONS
Cryptometrics offers a number of integrated solutions that combine the
individual SecurIDent(TM) software and device offerings with other hardware and
software components to realize a fully functional subsystem capable of
supporting a specific enrolment related task or series of tasks. Integrated
solutions currently offered include:
o SecurIDent(TM) Live/Photo Capture Solutions automate the capture of
live facial images and/or photographs (passport photos and the
like), realizing high quality facial images, as well as globally
interoperable face biometric samples; the latter specifically
designed to enable and enhance a wide range of face recognition
supported applications.
A SecurIDent(TM) Live/Photo Capture Solutions typically include (1)
SecurIDent(TM) Live Capture Camera(s) or SecurIDent(TM) Photo Capture
Unit(s), (2) one or more of the enrolment software offerings and (3)
live/photo capture Application Software.
The Application Software automatically controls the operation of either
a smart live capture camera or a smart photo capture unit, processing
the derived image to ensure that the image(s) and the corresponding
biometric sample(s) meet the specifications defined by the Enrolment
Authority for facial image/photo capture and set out in the new
International Standards governing the global interchange of facial
biometrics.
o SecurIDent(TM) Applicant Identification Solutions are fully
integrated hardware and software solutions designed to support a
client application by managing all those activities associated with
confirming the identity of the person being enrolled.
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SecurIDent(TM) Applicant Identification Solutions comprise process
control software tailored to meet the unique needs of the application
(e.g. passport issuance, visa issuance, national identification
issuance, drivers license issuance, etc.) and state-of-the-art
technologies developed by Cryptometrics, the latter enabling effective
and optimum enrolment of either live captured facial images or images
derived from photographs.
Solutions typically offer the following features:
o Face match check(s) against any on-file image(s) of the same person
(a.k.a. verification);
o Face match check(s) against a Watch List to isolate those persons
that should be checked in greater detail;
o Fraud check(s) against the entire on-file database to ensure the
same person is not already in the database under a different name;
o Construction and maintenance of a face biometric based Watch List;
o Configuration of system response when performing a Watch List check;
o Construction of a optimized stored facial image representation that
ensures: (i) optimum facial recognition performance; (ii) the
ability to successfully derive a new facial recognition template in
the future; (iii) the ability to exchange the facial image with
other face recognition processing systems and allow direct use
(global interoperability); and (iv) the ability to display the image
so that a person seeing the image could reasonably confirm the
identify of the live person.
o SecurIDent(TM) Watch List Check Solutions are fully integrated
hardware and software solutions designed to support a face based
Watch List Check for a client application; for example passport
issuance: travel/identification document issuance, drivers license
issuance, etc.
SecurIDent(TM) Watch List Check Solutions are available to those clients
who do wish to only implement a face based Watch List Check and not
perform a full series of identity checks like those addressed by the
SecurIDent(TM) Applicant Identification Solution.
FACE BIOMETRIC IDENTITY CONFIRMATION PRODUCTS AND SOLUTIONS
Cryptometrics has patent pending technology capable of capturing the
facial biometric at a prescribed resolution across the face at upwards of 75
feet (22.9 meters). In achieving this goal, Cryptometrics has realized a number
of additional successes, which include,
o Developing person detection technology which is used to detect and
track multiple persons in a 60(degree) degrees by 22.9 meters 75
feet field of view in front of the camera;
o Developing a family of over the counter face biometric capture
devices that are 100% solid state and locate and capture facial
images simultaneously;
o Developing an array of critical software technology; e.g. logic for
person detection, face finding, eye finding, simultaneous face
detection; and
o Developing an array of advanced software technology capable of
detecting an exaggerated pose or expression and normalizing each to
create a full frontal, expression free pose, critical for optimum
face recognition.
Cryptometrics offers a range of devices and integrated solutions designed to
capture the facial biometric in real world settings and use the captured sample
to determine identity.
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DEVICES
o SecurIDent BioFACE(TM) Capture System captures images of persons
within a close to near range location. It represents the capture
system for use at primary inspection in border clearance for
confirming the identity of a person presenting a new globally
standardized ePassport or other form of emerging electronic travel
documents.
o Systems that rely on standard video cameras: (i) require a person to
be cooperative and pose at a specific optimal location in front of
the camera; (ii) allow only one person at a time to be processed;
and (iii) often require the inspection officer to manually position
the camera. BioFACE(TM) overcomes those limiting characteristics
with an extensive array of features:
o Detects and tracks multiple persons simultaneously within the
defined capture area;
o Persons do not need to be corralled or forced to position
themselves or pose before the camera;
o Permits unrestricted movement even through high-volume areas;
o Automatically adjusts to compensate for varying lighting
conditions;
o Automatically selects the most optimum pose and stores a
prescribed number of best pose images for use during face
recognition;
o Displays results on the control workstation;
o Works with all facial recognition algorithms;
o Secures transfer of cropped, resolution specific images of the
face to a SecurIDent(TM) Identity Management Controller via
standard LAN or WAN (wire or wireless).
o Cryptometrics believes that Vitalert(TM) is one of the most advanced
camera systems on the market today for performing face recognition
at a distance, as well as, advanced warning lookout detection in
support of border clearance, high-volume traveller screening at
airports, and protection of critical infrastructures and key assets
- such as mass transit systems, key public buildings, etc.
Other systems use standard video cameras that require a person to be
cooperative and pose at a specific optimal point in front of the
camera. Vitalert(TM) not only detects and tracks persons automatically
regardless of the subject's distance from the camera or movement
patterns, but captures close up images of the face - at prescribed
resolutions - automatically. It even isolates the best poses for
optimum facial recognition.
Cryptometrics believes that its patent pending Vitalert(TM) is one of a
limited number of technologies of its kind available offering the
following critical features:
o Person detection technology detects and tracks multiple persons,
stationary or moving within a large target area (60(degree)
[degrees] by 22.9 meters [75 feet]).
o Logic steered high-speed pan, tilt and zoom Camera for fast
acquisition of close up images of subjects face at a prescribed
resolution, regardless of person's height or movements within a
large target area (45(degree) [degrees] by 22.9 meters [75 feet])
o Pose detection logic automatically selects the best pose for face
recognition.
o Lighting compensation logic automatically adjusts the camera to
ensure captured images are of the best quality to confirm identity.
o Predictive tracking to locate multiple targets, anticipate movements
and simultaneously track and gather the facial biometric at a
distance.
o Scene analysis subs-system to enable immediate identification of
areas within the overall field of view to target.
o Face recognition software: works with all facial recognition
algorithms.
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o Secure transfer of cropped face images to SecurIDent(TM)
Identity Management Controller via standard LAN or WAN (wire or
wireless).
o Transmits cropped, resolution specific images of the face to
ensure fastest recognition and maximum availability of face
recognition software for other matching tasks.
o Passengers, travellers and other subjects do not need to be
corralled or forced to position themselves or pose directly in
front of the camera. Permits unrestricted movement even through
high-volume areas.
o Enhanced Service Delivery Kiosks, developed by Cryptometrics use the
facial biometric to deliver improved levels of facilitation. Not
only is the identity of the person confirmed and used to activate
and deliver the kiosk based service, but where approved by the
service provide is also used to carry out Watch List (Lookout)
Checks for immediate detection of those persons that would attempt
to abuse the kiosk based service.
While a broad range of components can be integrated to form an Enhanced Service
Delivery Kiosk, certain features are standard in each:
o Ergonomically designed, high durability enclosure;
o Touch Sensitive Display;
o Integrated SecurIDent(TM) BIOFACE Camera with infill lighting; and
o Controller with remote communications.
Optional components include such features as card readers, receipt printers and
wireless communication.
A range of Enhanced Service Delivery Process Manager Appliances are available to
control the enhanced service delivery process and verification and where
implemented, Watch List Checks.
Cryptometrics offers two basic types of Enhanced Service Delivery
Kiosks:
1. ID(2)PASS(TM) Pre-Enrolled Traveller Kiosk supports inspection where
two forms of identification at a port of entry or exit (i.e., a
valid travel document and the identity of the document presenter to
confirm they are the rightful holder).
2. Enhanced Trusted Service Kiosks supports general delivery of
improved levels of customer service and customer relationship
management in a broad range of government and private sector
applications.
INTEGRATED SOLUTIONS
Cryptometrics offers a number of integrated solutions that combine the
individual device offerings with other hardware and software components to
realize a fully functional subsystem capable of supporting a specific identity
related task or series of tasks, specifically:
o ID(2)PASS SecurBorder(TM) Solutions represents a comprehensive
border clearance solution with fully integrated face biometric
capture and processing. Relying on the confirming of two personal
forms of identification, one being the person's valid identification
document and the other their biometric identity, ID(2)PASS
SecurBorder(TM) Solutions enable governments to immediately
strengthen border security, while at the same time introduce reading
and processing of the new biometrically empowered, globally
standardized ePassport.
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ID(2)PASS SecurBorder(TM) Systems use Cryptometrics fully scalable
SecurIDent(TM) Identity Management Controller with SecurIDent(TM) Face
Rec Manager and SecurIDent(TM) Lookout Engine.
ID(2)PASS SecurBorder(TM) Solutions offer the following key features:
o Computer assisted workflow based on the internationally standardized
Primary and Secondary inspection process;
o Dynamic system architecture supporting LAN, WAN and portable
functionality and affordable redundancy;
o Fully compatible with standardized machine-readable documents
conforming to the United Nation's International Civil Aviation
Organization specifications and ISO Standards;
o Built-in document security feature(s) analysis and reporting;
o High-speed biographical and document-based Lookout search
functionality;
o Full compatibility with existing Lookout databases, including the
retention of existing Lookout databases as the definitive
repository;
o Fully integrated machine-assisted identity confirmation based on the
face biometric;
o Highly reliable Verification and Identification face biometric
confirmation;
o Electronic transfer of referral information to Secondary; and
o Controlled access to databases held by other Ministries and
Agencies.
PHOTOFIND(TM) SOLUTIONS
PHOTOFIND(TM) solutions are designed to enhance professional
photography services on cruise ships, theme parks, etc. A PHOTOFIND(TM) Manager
appliance is available to automatically enrol images taken using digital cameras
including finding the faces in each photo and controlling of the finding and
delivery of photos. The PHOTOFIND(TM) Manager uses bespoke face recognition to
automatically locate and display photos from a database controlled by the
PHOTOFIND(TM) Manager with persons presenting themselves at the Enhanced Service
Delivery Kiosk.
APPLICATION USES
Cryptometrics' fingerprint biometric products offer solutions for
secure access authentication, electronic transactions, secure communications,
file encryption and data storage. Its information security products are designed
to protect sensitive information on workstations, networks, and portable devices
from unauthorized users, both internal and external.
Cryptometrics' facial biometric products offer solutions for securing
national borders and protecting the traveling public, the critical
infrastructure of a country as well as supporting law enforcement, enhancing
homeland security and the delivery of first responder support.
SOFTWARE/HARDWARE COMPATIBILITY
Cryptometrics' fingerprint security solution integrates with advanced
and commercially available biometric devices, elevating internet security to new
levels. Cryptometrics' software has been designed to maximize the technological
capabilities built into a number of leading edge fingerprint biometric devices.
Cryptometrics' facial security solutions are capable of working with
many different platforms and are able to accept and use commercially available
off-the-shelf face recognition software. They equally make use of commercial IT
products such as desktop computers, servers, peripherals and software.
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PROPRIETARY BIOMETRIC TECHNOLOGY
Cryptometrics' fingerprint biometric technology is driven by
FingerSURE(TM) methodology, a method which combines convenience and extended
levels of security including the manner in which sensitive personal security
information is stored on a secure personal device that biometrically identifies
the authentic user.
Cryptometrics' facial biometric technology is underpinned by a family
of proprietary hardware and software technology invented by Cryptometrics. The
family of products is core face recognition which works with commercially
available, off-the-shelf face recognition software packages.
Cryptometrics' facial biometric technology includes software that:
o Automatically detects and locates faces in live video or in
digitized images;
o Automatically identifies and locates the key landmarks of the human
face, such as center of the eye sockets, tip of the nose and corners
of the mouth;
o Automatically assesses the overall quality of a digital image of the
face for suitability with commercial off-the-shelf face recognition
software;
o Automatically crops the face to realize the best orientation of the
image of the face for use with face recognition software;
o Automatically locates the key facial landmarks and turns (rotates)
the face with limited distortion to a full frontal (forward looking)
pose;
o Automatically simulates muscle movement and jaw rotation to realize
an expression neutral pose of the face; for example close an open
mouth;
o Uses sensor derived data such as range to target and angular
location of target to automatically steer a pan, tilt and zoom
camera to capture facial images of a targeted person;
o Uses face detection to locate and then track a person who's facial
image is being captured by a stationary camera;
o Preprocesses images of the face to improve, where possible, the
performance of commercial off-the-shelf face recognition software;
and
o Automates the business process of capturing and confirming ones
facial biometric via face recognition software in such activities as
issuing a official travel document, identification document, seeking
entry to a country at a border check point.
Cryptometrics' facial biometric technology includes hardware that:
o Derives samples of facial images from photographs for use with face
recognition software;
o Utilizes smart camera systems designed to automatically capture
facial images suitable for face recognition from persons in a
defined field of view;
o Utilizes smart camera systems designed to automatically capture
facial images simultaneously in a prescribed field of view;
o Utilizes self-service kiosks that incorporate face biometric capture
and processing; and
o Utilizes computerized appliances that match a captured facial
biometric against a database of biometric samples for the purpose of
isolating those person(s) that look most like that person, or for
the purpose of confirming that the person is who they claim to be.
Aspects of the software and hardware technology are embraced by patent
applications filed in key countries such as the Europe Union, Canada, USA, New
Zealand, Australia, China, Japan and the United Arab Emirates.
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POTENTIAL MARKETS
The potential markets for Cryptometrics' hardware and software
products, and integrated solutions cover the following industries:
Identity Confirmation via Fingerprint Matching. This industry includes
protection of computer based information technology systems and the
information they handle, store and communicate in the fields of
medical, health, government, educational and financial services. In
many cases market demand is being driven by legislation, regulations or
policies that are forcing greater protection associated with access to
information held by computers. Examples of such legislation,
regulations or policies are:
o Health Insurance Portability and Accountability Act. Purpose: To
improve the portability while maintaining the privacy and security
of patient information.
o Gramm-Leach-Bliley Act. Purpose: To protect the information
financial institutions collect about customers.
o California Senate Bill 1386. Purpose: To give California consumers
immediate notice of security compromises in computer systems so they
can take action before identity theft occurs.
o Sarbanes-Oxley Act of 2002. Purpose: To restore investor confidence
in the financial reporting of public companies and hold a company's
officers personally responsible for misrepresentation. Under the
law, public companies must employ a third party to audit not only
their financial statements, but also to verify the reasoning,
policies and controls behind those statements. This means
information technology departments must store and create access to
all information including structured data like spreadsheets and
databases, and unstructured data such as e-mail and instant messages
relating to the company's financial statement. Any public company is
affected by the Sarbanes-Oxley Act of 2002 and experts recommend
private companies hoping to go public or be acquired by a public
company also should abide by the rules.
o The National Strategy to Secure Cyberspace. Purpose: To suggest best
practices to the private sector for protecting critical
infrastructures and businesses from cyber attacks.
Identity Confirmation via Facial Recognition. This industry includes:
(i) identity in the presence of a claimed identity and/or confirming identity of
a person in the absence of a claimed identity in such fields as travel and
identification document issuance (e.g. driver's license); (ii) border clearance;
(iii) aviation security; (iv) critical infrastructure and key asset protection;
(v) law enforcement; (vi) homeland defense; (vii) first responder support; and
(viii) customer service and customer management. As with fingerprint, market
demand for face is being driven by legislation and regulations that have been
enacted in many countries to deal with the threat of terrorism, in addition to
illegal migration, trafficking and smuggling of persons and identity theft.
Examples of such legislation and regulations that specify deployment of face
biometric checks are:
o USA Patriot Act. Purpose: To boost the government's ability to track
and prosecute terrorist activity through increased use of
surveillance, information sharing and other means.
o U.S. Public Law 107-173 - Enhanced Border Security and Visa Entry
Reform Act. Purpose: Use of biometrics (face being designated as the
mandatory, globally interoperable biometric) in travel documents to
support more secure border clearance. It states that not later than
October
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26, 2006, the government of each country that is designated to
participate in the visa waiver program established under Section 217 of
the Immigration and Nationality Act shall certify, as a condition for
designation or continuation of that designation, that it has a program
to issue to its nationals machine readable passports that are tamper
resistant and incorporate biometric and document authentication
identifiers that comply with applicable biometric and document
identifying standards established by the United Nations International
Civil Aviation Organization.
o European Union Regulation - Council Regulation 15152/04. Purpose:
Update the standards governing passport security features for all
twenty five (25) European Union member countries to include the
integration of biometric identifiers into European Union passports
and travel documents. The regulation sets out that at a minimum, all
new European Union passports will have a storage medium containing a
full facial image and fingerprints in interoperable formats, along
with standardized biographical data. The purpose of the biometric
identifiers is to offer protection against falsification of
passports and better identification of passport holders. The
Regulation sets a compliance date of 28 August 2006 for countries to
commence issuance of the new European Union passport with facial
image. Fingerprints are to be added within 18 months following that
date.
In addition the UN's International Civil Aviation Organization has
agreed an International Standard governing Machine Readable passports, including
the ePassport which contains a mandatory, globally interoperable face biometric.
This Standard affects 189 countries. The legislation and regulations referenced
above all cite the United Nations International Civil Aviation Organization
Standard as the basis for biometric data compliance.
As the result of these regulations, policies and legislation,
introduction of new International Standards, and the mounting threat deriving
from terrorism, governments and private sector organizations worldwide are
seeking ways to deliver enhanced levels of protection and security for their
operations, their staff and the people they serve. The introduction of
fingerprint and face technology specifically designed to address these very
specific needs places Cryptometrics in a unique position to capitalize at a time
of concentrated, world-wide implementation.
GENERAL DESCRIPTION OF CRYPTOMETRICS' FINGERPRINT OFFERINGS
Cryptometrics' technology can be universally applied to any business or
group of users seeking to control access, securely identify, transmit and store
private or sensitive data and provide a safeguard solution to internet fraud.
With Cryptometrics' system, the possibility of an individual intercepting an
email or gaining access to stored information has been mitigated. The answer is
in the underlying software/hardware technology. All information in terms of
authentication and personal data is strongly encrypted and securely stored. The
secure storage of the information may be in a corporate directory, or if
required on a cryptographically secure hardware. The cryptographically secure
hardware can take the form factor of a smart card or other cryptographic device.
If a biometric device is used that supports on device storage and matching of
biometric information, then this information is never stored on or transmitted
through the user's workstation.
The banking industry and other financial services institutions that
engage in check transactions, online credit card and debit transactions are
continually seeking a tamper resistant system. The same principles apply to
online gaming, auction and stock/security transactions. Further, any email sent
and retrieved is protected with the same degree of security and identity
recognition. The authentication/verification system has paved the way for
Cryptometrics to offer its online contract signature/verification system,
allowing the execution of binding contracts and other legal documents by signing
on the internet. Since a digital signature is now recognized as legally binding,
having a private
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signing key protected with a password is potentially dangerous as it invites
potential intruders. With the Cryptometrics solution, the private key is secured
with a biometric authentication, and is used in conjunction with a cryptographic
device, can be generated and stored in the self-contained device. Therefore,
information is always secure and is virtually tamper proof during transfer and
storage. Cryptometrics believes that its system can be used globally for all
industries online and offline transactions.
Cryptometrics' software program with digital signature verification
utilizing a biometric device, is a security safeguard that ensures that email
messages sent are not opened until its security software verifies that the
person opening and reading the email is the intended recipient and not an
unintended third party. This degree of safety and effectiveness is provided by
Cryptometrics' Signature Contract Verification System.
GENERAL DESCRIPTION OF CRYPTOMETRICS CANADA'S FACIAL BIOMETRIC OFFERINGS
Cryptometrics Canada, Inc. operates in the rapidly expanding market for
face biometric solutions specifically designed to support travel document
issuance, border clearance and homeland security and public safety. The
following unique competencies and experiences combine to establish and underpin
the uniqueness of Cryptometrics' Facial Biometric offerings,
STRONG APPLICATION EXPERIENCE AND KNOWLEDGE
Cryptometrics Canada senior staff has over 10 years of experience in
creating solutions for travel document issuance. For instance, Cryptometrics
Canada senior staff has developed quality assurance readers for machine readable
passports, passport book printers, and passport issuance software. Cryptometrics
senior staff has also developed solutions for border clearance, including the
first passport/travel document readers. This experience and knowledge allows
Cryptometrics to anticipate the best face biometric solutions, and create each
in a way that best fits those special needs that are travel document issuance
and border clearance.
GLOBAL PURVIEW
Cryptometrics has a special global purview on requirements for machine
assisted identity confirmation systems for supporting travel document issuance
and border clearance. The Chief Strategy Officer of Cryptometrics, Joel F. Shaw,
is the Chairman of the Working Group established by the International Standards
Organization to prepare International Standards for Machine Readable Travel
Documents. This work is carried out collaboratively between the International
Standards Organization and the UN's International Civil Aviation Organization.
Mr. Shaw has held this position since 1989.
NEW BREED OF FACE RECOGNITION PROVIDER
Cryptometrics Canada represents a new breed of end-to-end face
biometric solution provider that designs, develops and contributes critical
technology that enables commercial off-the-shelf face recognition software to
perform better. Cryptometrics Canada has created this suite of enabling
technologies; i.e. hardware and software technology - ranging from smart face
biometric cameras, to kiosks, to photo enrolment units, to fusion technology, to
a fully scalable IT solution architecture - to realize the best overall
performance for any of the commercial off-the-shelf face recognition software
packages.
By combining these enabling technologies with special application
products designed to support travel document issuance and border clearance, end
to end solutions are realized that produce an overall enhanced level of
identification performance.
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FULLY SCALABLE INFORMATION TECHNOLOGY
Cryptometrics Canada has created a fully scalable, information
technology capable of working with many different software platforms that can
support the various process steps involved in delivering and operating small to
large scale face recognition solutions.
EXPERIENCE WITH PASSPORT ISSUANCE AUTHORITIES
While working for passport issuing authorities, Cryptometrics Canada
successfully achieved a back record conversion of existing photographs or image
databases, converting these national assets into valued contributors to urgent
homeland security solutions. It has recently extended that expertise, applying
it to convert and use law enforcement photo image databases with face
recognition technology.
Cryptometrics Canada has created advanced Search Engine technology that
has been used to perform highly accurate fraud searches in support of passport
issuance; i.e. fraud searches that search the entire collection of images
without having to resort to "bogus performance enhancing techniques" such as
biographical filters and binning.
TECHNOLOGY ENABLES MIGRATION BETWEEN 2-D AND 3-D FACE RECOGNITION
Cryptometrics Canada has also developed technology to allow migration
between 3-D and 2-D recognition:
o Technology to detect the 3-D orientation of the face from a
photograph or image and use this information to digitally turn the
face without distortion to the more optimum face recognition
preferred "full frontal pose". The technology can also be used to
create a series of "derivative images "capable of forming a 3-D
facial profile.
o Technology capable of digitally replicating muscle and jaw movement
in the face to allow a facial image to be cleared of performance
reducing gestures (e.g. smile, frown and mouth open), thereby
assuming the more optimum, face recognition preferred "gesture
neutral pose". The technology can also be used to create "derivative
images containing specific gestures" to improve match checks.
These unique competencies and experiences have allowed Cryptometrics
Canada to develop facial biometric capture devices and integrated systems that
do not require a person to be cooperative - from single and multiple person over
the counter capture and identification solutions to solutions able to seek out
and capture a person's facial biometric (in the form of an image) at upwards of
75 feet. They have lead to the creation of a range of unique preprocessing and
image enhancement/handling software that allow commercial off-the-shelf face
recognition software to realize better performance overall than if simply used
on their own to process new live capture images, photos or images reclaimed from
a historical database. They have also ensured that Cryptometrics is able to
offer turn-key systems to address travel documents, border security, aviation
security, homeland defense and critical infrastructure protection as a first
step, thus placing Cryptometrics in a position of being able to meet market
demands at the time of greatest need.
OTHER APPLICATIONS
Cryptometrics will continue to market research and pilot
implementations of its technology and integrated solutions across a number of
vertical markets; for example, the application of face biometrics to realize an
enhanced level of trusted customer service from a self-service kiosk. In 2005
Cryptometrics successfully introduced and pilot tested face biometrically
enabled kiosks on cruise ships to enhance the delivery of professional photo
services to passengers. This successful experiment has opened up a completely
new vertical market for Cryptometrics with significant potential for revenue
realization. It
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equally confirms the potential of applying the technology to a range to
applications outside of the security field. Market research is on going to
determine how the technology can be applied to banking for the purpose of
mitigating fraud and identity theft.
POTENTIAL CLIENTS - FINGERPRINT
Cryptometrics is finalizing a long term three year agreement with a
Fortune 50 company to become the sole source solution for logical access,
logical security, and logical authentication. This contract award over the
anticipated three year period is in excess of $5 Million. The rollout for this
project is expected to begin in early 2006.
Cryptometrics is working with a Fortune 500 financial services firm to
provide more than 22,000 of its consultants and 50,000 of its clients the
FingerSURE(TM) solution.
Cryptometrics is working with a Fortune 50 company that is the leader
in providing wireless products to the market. This potential customer can use
Cryptometrics FingerSURE(TM) for engineering applications and to protect
supplier access to private websites. The opportunity with this customer is
potentially greater than 50,000 users.
Cryptometrics is working with a semi-conductor manufacturer with $2
Billion in annual sales to establish a long term contract for internal use of
FingerSURE(TM).
EXISTING CLIENTS - FACE
Cryptometrics has provided technology and/or services to a number of
governments and private sector organizations, some of which are as follows:
o New Zealand Passport Office - Cryptometrics (i) carried out an
investigation into the potential of using their 2.5 million record
passport photo database with face recognition technology; (ii)
successfully converted the database and pilot tested using a number
of key face recognition software packages; (iii) developed and pilot
tested a prototype passport applicant identity confirmation system
for supporting passport issuance; (iv) designed and delivered a
photo image quality assessment system for live passport issuance;
and (v) designed and delivered a facial image Lookout system for
live passport issuance.
o UK passport Agency - Cryptometrics was retained on several occasions
to assist the UK passport Agency as it moves towards issuance of the
new British ePassport. To date Cryptometrics has (i) evaluated
existing scanning equipment used to digitized passport photos to
determine overall suitability for use in issuing the ePassport; (ii)
recommended a replacement scanning equipment and evaluated overall
suitability for use in issuing the ePassport; (iii) evaluated the
historical database of passport photos to determine potential
suitability for use in confirming identity of applicants using face
recognition; and (iv) assisted in the evaluation of vendors of
passport photos and providing recommendations on suitability for use
with face recognition technology.
o German Federal Criminal Police - Cryptometrics has delivered turnkey
systems used to test face recognition to confirm the identity of a
travel document presenter for potential use in Germany's border
control.
o Netherlands Ministry of the Interior and Kingdom Relations -
Cryptometrics has delivered turnkey systems used to test face
recognition and finger print matching for confirming the
149
identity of a travel document presenter. In addition to counter based
configurations, Cryptometrics created and delivered self-service kiosk
based units.
In addition Cryptometrics has provided face biometric kiosks for
capturing the facial biometric from passengers aboard a cruise ship and then
returning photos that had been taken of them while on the cruise. The kiosk is
the passenger interface into a completely automated retrieval and procurement
system being tested for potential fleet wide use.
Cryptometrics has also supplied face biometric training systems to
special military forces, each containing a number of Cryptometrics advanced face
recognition capture and processing devices and appliances.
STRATEGIC ALLIANCES AND PARTNERSHIP PROGRAM
SOLUTION INTEGRATOR PARTNERS
The objective of the Solution Integrator program is to provide core
Cryptometrics biometric software and hardware technology to organizations
providing solutions that use embedded biometric technology. Such organizations
offer turn key solutions that serve a particular market or application area in
which machine assisted identity (biometric) confirmation is required, or of
value if added within a solution they are delivering to a client. The Solution
Integrator will gain value in partnering with Cryptometrics by delivering a more
complete solution for their respective clients, and providing a unique
competitive advantage to the Solution Integrator.
RESELLER PARTNERS
The objective of the Reseller Partner Program is to establish a network
of qualified and skilled resellers that will promote and sell the Cryptometrics
offerings. Cryptometrics works cooperatively with each reseller partner in order
to establish effective skills transfer and sales effort.
SOURCES OF REVENUE
Currently Cryptometrics' established source of revenue is derived from
software/hardware purchase agreements, consulting contracts, license agreements
of its base product and supporting technologies. Residual revenue will come from
maintenance upgrades and services for new options developed. Other revenue
sources will come from joint development projects with special client
requirements or with other equipment and device manufacturers. These successful
joint development projects can lead to licensing agreements for private labeling
and joint venture opportunities to license its solutions for a fixed term with
renewal options. A potential source of revenue is consultative services to
implement Cryptometrics' packaged solution offering.
Cryptometrics believes that its Cryptometrics Partner program has the
potential to generate revenue and margin for growth. This program involves a
significant up front sales and development effort, some of which should be
funded by the partner but once channeled and established it could become a
recurring revenue stream with relatively low overhead cost for new sales. Once
the development effort is complete and a partnership established, most customer
related selling activities would be expected to come from the partner, thereby
increasing Cryptometrics' representation in the market place in terms of
introductions to potential customers. Thus, this channel quickly becomes a very
predictable, repeatable and high profit margin channel.
150
ADVERTISING, SALES & MARKETING PROMOTION
Cryptometrics intends to target use print media to describe its
services, while continuing to participate in trade shows and other similar
industry conferences. It will also continue to refine its Web Site and to
develop brochures and various promotional material targeted to specific markets
and opportunities.
Cryptometrics has entered into a contract with a public relations firm
to increase its exposure to the public. This has already produced results, with
segments aired on CNN news highlighting the Cryptometrics facial recognition
solution and a number of articles and interviews highlighting the Cryptometrics
FingerSURE solution.
Based upon various referrals, Cryptometrics believes that the features
of its offerings are becoming known and the status of its senior team in the
industry is being recognized.
COMPETITION
There are many companies presently offering identification and
authentication hardware/software packages such as Identix, Viisage, Cognate,
ActivCard and BNX Systems Corp. Many of the large enterprise and governments are
aggressively seeking security solutions to combat internet fraud, data
intrusion, unauthorized network access, and physical perimeter security
breaches. The current market place for this type of technology is well defined
and funded. Current technology addresses these concerns and minimizes the
enterprise and government's exposure to monetary fraud and unauthorized access.
Cryptometrics attempts to distinguish itself from its competition by offering to
both the customer and the client, the security/authentication system that
provides a very high assurance that an intruder cannot access or physically
breach the protected asset. Cryptometrics also stresses the versatility of its
products through its capability of working with may different software
platforms.
Cryptometrics has entered into a partnership with a fingerprint device
manufacturer to deliver the fingerprint authentication solutions. The device
provides wireless, on-device verification of the fingerprint. Cryptometrics
FingerSURE(TM) software leverages the device to provide its customers a robust
and amply featured wireless logical access and authentication solution for their
information systems. To help our customers better understand what we do, the
following information is provided. For protection of critical corporate data,
The FingerSURE(TM) product delivers the highest level of data and information
asset security in the industry at the user and enterprise level. A unique
technology leadership capability is the FingerSURE(TM) movement of a private key
or digital identity certificate to a trusted biometric device or trusted
platform module. This private key can also be associated with the Microsoft
Encrypting File System encryption routine provided as part of the Microsoft
Windows platform and most important, the private key can only be used to decrypt
data or access systems once a successful biometric authentication takes place".
The majority of Cryptometrics' competitors presently offer a closed and
proprietary system for sale to the client. These systems are based on supporting
only the technology that the company sells, and does not offer the client the
flexibility and the additional strengths of being agnostic. Cryptometrics
hardware/software strategy allows Cryptometrics to provide the most robust and
feature rich solution possible. The capability of working with many different
software platforms has allowed Cryptometrics to become the vendor of choice for
large domestic and international government agencies. The ability to support
multiple types of technologies and biometric algorithms has allowed
Cryptometrics to create the support of a new type of biometric identification
known as fusion technology. This fusion technology allows the support of already
deployed biometric systems to be further enhanced and improved with the addition
of Cryptometrics technology.
Cryptometrics is looking to secure all the logical and physical points
of access to the enterprise, from the employee's login at their enterprise
desktop, to remotely connecting from home through a biometrically
151
secured network, to physical access to the enterprise premises. Cryptometrics
offers support for biometric authentication on a biometric device itself, or
through a centrally controlled and administered authentication server. Both
options allow clients the highest level of biometric security and
authentication. Cryptometrics' technology is based on developing
software/hardware applications which drive and fully exploit biometric
recognition technologies.
152
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF CRYPTOMETRICS
FOR THE FISCAL YEARS ENDED APRIL 30, 2005 AND 2004
INTRODUCTION
This Management's Discussion and Analysis of the Financial Condition
and Results of Operations of Cryptometrics contains forward-looking statements
that are based on current expectations, estimates, and projections about
Cryptometrics and the industries in which Cryptometrics operates. In addition,
other written or oral statements which constitute forward-looking statements may
be made by or on behalf of Cryptometrics. Words such as "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates," or
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performances and involve certain risks, uncertainties and assumptions which are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecast in such forward-looking
statements. Cryptometrics undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events, or otherwise, other than as required by law.
Potential risks and uncertainties include, without limitation, the
uncertainties inherent in the development of new products, Cryptometrics' need
for additional funding, the uncertain market acceptance of its products, the
uncertainties inherent in managing the integration of Cryptometrics' acquired
businesses, and rapid developments in technology, including developments by
competitors. Cryptometrics operate in a very competitive and rapidly changing
environment. New risks can arise and it is not possible for management to
predict all such risks, nor can it assess the impact of all such risks on its
business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any forward-looking
statements. Given these risks and uncertainties, investors should not place
undue reliance on forward-looking statements as a prediction of actual results.
OVERVIEW
Cryptometrics is a global provider of facial recognition and
fingerprint biometric solutions to the government and commercial markets. Its
solutions provide leading edge security and access control solutions with facial
recognition and logical fingerprint technology. Cryptometrics specializes in the
development of end-to-end solutions for travel document issuance, border
security, aviation security, critical key infrastructure protection and law
enforcement.
Cryptometrics was incorporated in the State of Delaware in May 2000
under the name Postal Hut, Inc. In November 2001, the Postal Hut, Inc. changed
its name to Cryptometrics, Inc.
ACQUISITIONS
In March 2004, Cryptometrics acquired all of the outstanding shares of
Cryptometrics Canada, Inc. (formerly known as BioDentity Systems Corporation), a
Canadian company specializing in providing next generation face biometric
authentication technologies and end-to-end solutions specifically designed to
strengthen border control, aviation security and homeland defense.
Cryptometrics' SecurIDent and IDPASS solutions are used to secure the issuance
of passports and a wide range of national documents and critical infrastructure.
153
CRITICAL ACCOUNTING POLICIES
Management discussion addresses Cryptometrics' consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of financial statements and the reported amounts of
revenue and expenses during the reporting period. On an on- going basis,
management evaluates its estimates and judgment, including those related to
revenue recognition, goodwill, bad debts, income taxes, and contingent
liabilities. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments as
to the carrying value of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions and conditions.
The SEC defines "critical accounting policies" as those that require
application of management's most difficult, subjective or complex judgments,
often as a result of the need to make estimates about the effect of matters that
are inherently uncertain and may change in subsequent periods.
The following discussion of critical accounting policies represents
Cryptometrics' attempt to report on those accounting policies which
Cryptometrics believes are critical to its consolidated financial statements and
other financial disclosure. The following discussion is not intended to be a
comprehensive list of all of Cryptometrics' significant accounting policies,
which are more fully described in the Notes to the Consolidated Financial
Statements included in this Registration Statement on Form S-4. The following is
a summary of Cryptometrics' critical accounting policies and estimates.
REVENUE RECOGNITION
Significant management judgments and estimates are made in connection
with the revenues recognized in any accounting period. Cryptometrics must assess
whether the fee associated with a revenue transaction is fixed or determinable
and whether or not collection is probable. Material differences could result in
the amount and timing of revenues for any period if management were to make
different judgments or utilize different estimates.
Certain of Cryptometrics' equipment sales such as its SecurIDent
Systems generally require installation subsequent to shipment and transfer of
title. Cryptometrics recognizes revenue on such sales in accordance with Staff
Accounting Bulletin ("SAB") 104, "Revenue Recognition". Revenue related to
equipment sales that are contingent on installation is deferred until
installation is complete, title has transferred and customer acceptance has been
obtained. Due to Cryptometrics' current policy and practices, it considers
acceptance of the SecurIDent Systems contingent upon successful installation of
the product. Revenues from sales of products via authorized representatives,
dealers, distributors or other third party sales channels are recognized at the
time of title transfer, generally upon shipment.
Cryptometrics also sells several stand-alone software products
including the Face Recognition Server, Face Processor and software developer
kits. Revenue is recognized on software products in accordance with Statement of
Position ("SOP") 97-2, "Software Revenue Recognition," as amended.
Cryptometrics' recognizes revenue on software products when persuasive evidence
of an arrangement exists, delivery has occurred, the vendor's fee is fixed or
determinable and vendor-specific objective evidence of fair value exists to
allocate the total fee to all undelivered elements of the arrangement and
collection is deemed reasonably assured. Vendor-specific objective evidence of
fair value is established based upon either sales of the element (e.g,
maintenance, training or consulting) in individual transactions, or, in certain
cases for maintenance, based upon substantive renewal rates. In cases where
Cryptometrics does not have vendor-specific objective evidence of fair value for
all delivered elements in the transaction (e.g., for
154
licenses), the fees from these multiple-element agreements are allocated using
the residual value method. In circumstances when the software and services being
sold include services to provide significant production, modification or
customization of the software, and the services cannot be segregated into
separate units of accounting, Cryptometrics accounts for the software sales
under SOP 97-2 and SOP 81-1 "Accounting for performance of construction-type and
certain production-type contracts". In the cases where SOP 81-1 is applied,
Cryptometrics uses the cost-to-cost method of percentage of completion. Under
this method, sales, including estimated earned fees or profits, are recorded
based on the percentage that total costs incurred bear to total estimated costs.
Maintenance revenue is deferred and recognized ratably over the life of the
service period of the related agreement.
CASH AND TEMPORARY INVESTMENTS
Cash and temporary investments include all cash balances on hand and
short-term, highly liquid investments with original maturities of three months
or less.
INCOME TAXES
As required by SFAS No. 109, Accounting for Income Taxes, Cryptometrics
recognizes deferred tax assets on its consolidated balance sheet if it is "more
likely than not" that the subject net operating loss carryforwards and unused
tax credits will be realized on future federal income tax returns. At April 30,
2005, Cryptometrics continued to provide a full valuation allowance against
accumulated U.S. deferred tax assets reflecting Cryptometrics' historical losses
and the uncertainty of future taxable income.
If Cryptometrics begins to generate taxable income in a future period
or if the facts and circumstances on which its estimates and assumptions are
based were to change, thereby impacting the likelihood of realizing the deferred
tax assets, judgment would have to be applied in determining the amount of
valuation allowance no longer required. Reversal of all or a part of this
valuation allowance could have a significant positive impact on operating
results in the period that it becomes more likely than not that certain of
Cryptometrics' deferred tax assets will be realized.
STOCK-BASED EMPLOYEE COMPENSATION
Cryptometrics has various stock-based compensation plans covering
employees and directors as more fully described in Note 1 to the Consolidated
Financial Statements. As permitted by SFAS No. 123, Accounting for Stock-Based
Compensation, Cryptometrics used the intrinsic value method to account for
stock-based compensation plans under the provisions of APB No. 25, Accounting
for Stock Issued to Employees and related interpretations.
GOODWILL AND OTHER LONG-LIVED ASSETS
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, "Business Combinations",
and No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years
beginning after December 15, 2001. Under the rules, the pooling of interests
method of accounting for acquisitions is no longer allowed and goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to annual impairment tests in accordance with the
Statements.
Cryptometrics' goodwill arose from its purchase of the common stock of
BioDentity and totaled $10,500,000. During the fiscal year ended April 30, 2005,
Cryptometrics incurred additional costs totaling $200,000 which have been added
to the goodwill. Upon acquisition and at the years ended April 30, 2005 and
2004, Cryptometrics performed its required tests for impairment and has
determined there to be no impairment on each of those dates.
155
RESULTS OF OPERATIONS
Fiscal Years Ended April 30, 2005 and 2004
Revenues
Revenues for fiscal year ended April 30, 2005 were $681,854, an
increase of $439,832 or 181% from the same period in the prior year.
Cryptometrics' revenues are primarily generated from sales of its biometric
authentication solutions. The increase in revenues is due to the acquisition of
BioDentity Systems Corporation (now known as Cryptometrics Canada, Inc.) in
March 2004. Cryptometrics' revenues were substantially all generated from the
Cryptometrics Canada subsidiary.
For the year ended April 30, 2005, sales to three customers accounted
for an aggregate of 74% of total revenues. For the year ended April 30, 2004,
Cryptometrics had two customers accounting for more then 10% of revenues in the
fiscal year ended April 30, 2004. The two customers each accounted for
approximately 29% of the annual revenues.
Cost and expenses
Costs of revenues increased to $187,817 (28% of revenues) in 2005 from
$ 46,269 (19% of revenues) in 2004.
Operating expenses increased from $2,075,351 in 2004 to $6,098,127 in
2005 as a direct result of Cryptometrics' developing and marketing its products
and services, from increased headcount as a result of the BioDentity
acquisition, and from increased professional expenses and costs associated with
raising equity financing.
Research and Development Expenses
Research and development expenditures consists largely of salaries for
technical personnel, the cost of related engineering materials, software tools
and support, project expenses and related third party consulting costs.
Research and development increased by $1,491,332 or 337% in the fiscal
period compared to the year earlier period due to the acquisition of BioDentity
and from Cryptometrics' focus on the development of biometric solutions. As a
result of this focus, additional engineering staff was hired and additional
expenditures were incurred in order to allow Cryptometrics to develop new and
innovative products.
General and Administration Expenses
The increase in general and administrative expenses for the fiscal
period ending April 30, 2005 is $1,487,487 or 171% compared to the year earlier
period due primarily to the acquisition of BioDentity Systems Corporation (now
Cryptometrics Canada, Inc.) in March 2004, and from increased corporate
expenditures, principally salaries and professional fees. The increase is in
large part a result of the inclusion of Biodentity's operations since the date
of the acquisition in March 2004.
Selling and Marketing
Selling and marketing expenses primarily relate to remuneration of
sales personnel. Other significant cost components include advertising and
conference/trade show costs for marketing activities and sales force travel
costs.
156
Selling and marketing expenses were $1,804,249 for fiscal 2005,
compared to $760,292 for fiscal 2004. The increase was primarily related to a
full year of results of BioDentity (now Cryptometrics Canada) in fiscal 2005
compared to a 52 day period in fiscal 2004.
Other Income
Interest and other income were $102,711 for fiscal 2005, compared to
$26,007 for fiscal 2004, reflecting principally the higher cash balances held as
a result of the sale of common stock during the year.
Income Taxes
Cryptometrics is in a net deferred tax asset position and has generated
net operating losses to date. No provision for or benefit from income taxes has
been recorded in the accompanying statements of operations. Cryptometrics will
continue to provide a valuation allowance for its deferred tax assets until it
becomes more likely than not, in management's assessment, that Cryptometrics'
deferred tax assets will be realized.
Included in income taxes are investment tax credits on research and
development expenditures incurred by Cryptometrics' wholly owned subsidiary in
Canada. The investment tax credits for the fiscal period ended April 30, 2005
were $183,377.
Loss From Operations
As a result of the factors described above, the net loss for fiscal
2005 was $5,501,379 as compared to $1,853,591 for fiscal 2004.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 2005, we had cash of $11,182,147 and working capital of
$10,069,216, as compared to a working capital deficit of $741,848 at April 30,
2004. The improved financial position is a result of the private placement of
common shares during the year, partially offset by the greater expenditures
increased during the year.
Cash flows for the fiscal periods were as follows:
Year Ended Year Ended
April 30, 2005 April 30, 2004
(Audited) (Audited)
-------------- --------------
Cash flows used in operating activities $ (5,104,345) $ (1,726,793)
Cash flows used in investing activities (486,759) (103,020)
Cash flows from financing activities 15,632,168 2,952,823
-------------- --------------
Increase in cash and cash equivalents $10,040,118 $1,048,487
Cryptometrics used $5,104,345 in operating activities for the year
ended April 30, 2005 as compared to $1,726,793 in the same period in 2004. The
increase in cash used in operations is attributed primarily to an increase in
the net loss for the respective periods and the use of non-cash working capital.
Cryptometrics used $486,759 of cash in investing activities during the year
ended April 30, 2005, as compared to $103,020 for the same period in the
previous year. Cryptometrics increased its cash by $10,040,118 in the 2005
fiscal period, as compared to $ 1,048,487 in the prior year. The increase in
cash is the result of the sale of common stock.
157
Cryptometrics does not have a bank credit facility or other working
capital credit line under which it may borrow funds.
Future liquidity and cash requirements will depend on a wide range of
factors including the level of business in existing operations and
Cryptometrics' ability to raise additional financing.
The following is a summary of Cryptometrics' contractual obligations
for the periods indicated that existed as of April 30, 2005 and is based on
information appearing in the Notes to the Consolidated Financial Statements:
Operating lease obligations $
2006 200,616
2007 166,909
2008 166,041
2009 171,658
2010 177,276
thereafter 14,812
-------
897,312
=======
158
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF CRYPTOMETRICS
FOR THE SIX MONTHS ENDED OCTOBER 31, 2005 AND OCTOBER 31, 2004
INTRODUCTION
This Management's Discussion and Analysis or Plan of Operation contains
forward-looking statements that are based on current expectations, estimates,
and projection about Cryptometrics and the industries in which we operate. In
addition, other written or oral statements which constitute forward-looking
statements may be made by or on behalf of Cryptometrics. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates,"
or variations of such words and similar expressions are intended to identify
such forward-looking statements. These statements are not guarantees of future
performances and involve certain risks, uncertainties and assumptions which are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecast in such forward-looking
statements. Cryptometrics undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events, or otherwise, other than as required by law.
Potential risks and uncertainties include, without limitation, the
uncertainties inherent in the development of new products, Cryptometrics need
for additional funding, the uncertain market acceptance of our products, the
uncertainties inherent in managing the integration of our acquired businesses,
and rapid developments in technology, including developments by competitors. We
operate in a very competitive and rapidly changing environment. New risks can
arise and it is not possible for management to predict all such risks, nor can
it assess the impact of all such risks on our business or the extent to which
any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements. Given these
risks and uncertainties, investors should not place undue reliance on
forward-looking statements as a prediction of actual results.
OVERVIEW
We are a global provider of facial recognition and fingerprint
biometric solutions to the government and commercial markets. Our solutions
provide leading edge security and access control solutions with facial
recognition and logical fingerprint technology. The company specializes in the
development of end-to-end solutions for travel document issuance, border
security, aviation security, critical key infrastructure protection and law
enforcement.
The Company was incorporated in the State of Delaware in May 2000 under
the name Postal Hut, Inc. In November 2001, the Company changed its name to
Cryptometrics, Inc.
ACQUISITIONS
In March 2004, the Company acquired all of the outstanding shares of
BioDentity Systems Corporation, a Canadian company specializing in providing
next generation face biometric authentication technologies and end-to-end
solutions specifically designed to strengthen border control, aviation security
and homeland defense. BioDentity's SecurIDent and IDPASS solutions are used to
secure the issuance of passports and a wide range of national documents and
critical infrastructure.
CRITICAL ACCOUNTING POLICIES
159
Management discussion addresses our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of theses statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of financial statements and the reported amounts of
revenue and expenses during the reporting period. On an on- going basis,
management evaluates its estimates and judgment, including those related to
revenue recognition, goodwill, bad debts, income taxes, and contingent
liabilities. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments as
to the carrying value of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions and conditions.
The Securities and Exchange Commission ("SEC") defines "critical
accounting policies" as those that require application of management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods.
The following discussion of critical accounting policies represents our
attempt to report on those accounting policies which we believe are critical to
our consolidated financial statements and other financial disclosure. It is not
intended to be a comprehensive list of all of our significant accounting
policies, which are more fully described in the Notes to the Consolidated
Financial Statements included in this report. The following is a summary of our
critical accounting policies and estimates.
REVENUE RECOGNITION
Significant management judgments and estimates are made in connection
with the revenues recognized in any accounting period. The Company must assess
whether the fee associated with a revenue transaction is fixed or determinable
and whether or not collection is probable. Material differences could result in
the amount and timing of revenues for any period if management were to make
different judgments or utilize different estimates.
Certain of the Company's equipment sales such as its' SecurIDent
Systems generally require installation subsequent to shipment and transfer of
title. The Company recognizes revenue on such sales in accordance with Staff
Accounting Bulletin ("SAB") 104, "Revenue Recognition". Revenue related to
equipment sales that are contingent on installation is deferred until
installation is complete, title has transferred and customer acceptance has been
obtained. Due to current Company policy and practices, the Company considers
acceptance of the SecurIDent Systems contingent upon successful installation of
the product. Revenues from sales of products via authorized representatives,
dealers, distributors or other third party sales channels are recognized at the
time of title transfer, generally upon shipment.
The Company also sells several stand-alone software products including
Face Recognition server, Face Processor and software developer kits. Revenue is
recognized on software products in accordance with Statement of Position ("SOP")
97-2, "Software Revenue Recognition," as amended. The Company recognizes revenue
on software products when persuasive evidence of an arrangement exists, delivery
has occurred, the vendor's fee is fixed or determinable and vendor-specific
objective evidence ("VSOE") of fair value exists to allocate the total fee to
all undelivered elements of the arrangement and collection is deemed reasonably
assured. VSOE of fair value is established based upon either sales of the
element (e.g, maintenance, training or consulting) in individual transactions,
or, in certain cases for maintenance, based upon substantive renewal rates. In
cases where the Company does not have VSOE of fair value for all delivered
elements in the transaction (e.g., for licenses), the fees from these
multiple-element agreements are allocated using the residual value method. In
circumstances when the software and services being sold
160
include services to provide significant production, modification or
customization of the software, and the services cannot be segregated into
separate units of accounting, the Company accounts for the software sales under
SOP 97-2 and SOP 81-1 "Accounting for performance of construction-type and
certain production-type contracts". In the cases where SOP 81-1 is applied, the
Company uses the cost-to-cost method of percentage of completion. Under this
method, sales, including estimated earned fees or profits, are recorded based on
the percentage that total costs incurred bear to total estimated costs.
Maintenance revenue is deferred and recognized ratably over the life of the
service period of the related agreement.
CASH AND TEMPORARY INVESTMENTS
Cash and temporary investments include all cash balances on hand and
short-term, highly liquid investments with original maturities of three months
or less.
INCOME TAXES
Deferred Tax Assets - As required by SFAS No. 109, Accounting for
Income Taxes, the Company recognizes deferred tax assets on its consolidated
balance sheet if it is "more likely than not" that the subject net operating
loss carryforwards and unused tax credits will be realized on future federal
income tax returns. At July 31, 2005, the Company continued to provide a full
valuation allowance against accumulated U.S. deferred tax assets reflecting the
Company's historical losses and the uncertainty of future taxable income.
If the Company begins to generate taxable income in a future period or
if the facts and circumstances on which its estimates and assumptions are based
were to change, thereby impacting the likelihood of realizing the deferred tax
assets, judgment would have to be applied in determining the amount of valuation
allowance no longer required. Reversal of all or a part of this valuation
allowance could have a significant positive impact on operating results in the
period that it becomes more likely than not that certain of the Company's
deferred tax assets will be realized.
STOCK-BASED EMPLOYEE COMPENSATION
The Company has various stock-based compensation plans covering
employees and directors as more fully described in Note 1 to the consolidated
financial statements. As permitted by SFAS No. 123, Accounting for Stock-Based
Compensation, the Company used the intrinsic value method to account for
stock-based compensation plans under the provisions of APB No. 25, Accounting
for Stock Issued to Employees and related interpretations.
GOODWILL AND OTHER LONG-LIVED ASSETS
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, "Business Combinations",
and No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years
beginning after December 15, 2001. Under the rules, the pooling of interests
method of accounting for acquisitions is no longer allowed and goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to annual impairment tests in accordance with the
Statements.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED OCTOBER 31, 2005 COMPARED TO THE
SIX MONTHS ENDED OCTOBER 31, 2004
Revenues
161
Revenues for the six months ended October 31, 2005 were $63,086, a
decrease of $342,940 from the same period in the prior year.
The decrease in revenues is primarily related to timing issues and due
to a large contract in the prior year fiscal quarters that was substantially
completed prior to year end. The Company's revenues are primarily generated from
sales of its biometric authentication solutions. Our revenues were substantially
all generated from the BioDentity subsidiary.
Research and Development Expenses
Research and development expenditures consists largely of salaries for
technical personnel, the cost of related engineering materials, software tools
and support, project expenses and related third party consulting costs.
Research and development expense for the six months ended October 31,
2005 and 2004 were $981,888 and $833,018, respectively.
On a gross basis, after provisioning for research tax credits from the
Company's Canadian subsidiary, research and development expense for the six
months ended October 31, 2005, and 2004, were $1,060,916 and $833,018,
respectively.
Gross research and development increased due to the Company's focus on
the development of biometric solutions. As a result of this focus, additional
engineering staff was hired and additional expenditures were incurred in order
to allow the Company to develop new and innovative products.
General and Administration Expenses
General and administration expenses consist of salaries and related
personnel costs for executive, financial and administrative functions, office
and facilities expense, and professional fees.
General and administrative expenses for the six months ended October
31, 2005 increased $302,369, or 36%, to $1,133,803 compared to $831,434 for the
same period in 2004.
The increase was primarily attributable to an increase in salary and
related expenses due to additional headcount increases during the second half of
calendar year 2004 and first half of 2005, and increases in insurance, office
supplies, and amortization. As well, since the company incurs the majority of
its expenses in its Canadian subsidiary, the weakening of the US dollar had the
effect of raising the Company's cost base.
Selling and Marketing
Selling and marketing expenses primarily relate to remuneration of
sales personnel. Other significant cost components include advertising and
conference/trade show costs for marketing activities and sales force travel
costs.
Selling and marketing expenses for the six months ended October 31,
2005 increased $436,548, or 58%, to $1,187,801 compared to $751,253 for the same
period in 2004.
The increase was primarily a result of an increase in sales and
marketing efforts which included hiring new personnel in sales and sales support
during the second half of 2004 and the first half of 2005, primarily to expand
our US and international sales team. In addition to the increases in personnel,
sales and marketing overhead and travel expenses increased as a result of the
expansion of our sales force as compared to the same period in 2004.
162
Other Income
Interest and other income was $177,314 for the six months ending
October 31, 2005, reflecting principally investment income on funds the Company
maintains in bank and other short-term investments until the funds are needed
for operating purposes.
Income Taxes
The Company is in a net deferred tax asset position and has generated
net operating losses to date. No provision for or benefit from income taxes has
been recorded in the accompanying statements of operations. The Company will
continue to provide a full valuation allowance for its deferred tax assets until
it becomes more likely than not, in management's assessment, that the Company's
deferred tax assets will be realized.
Loss From Operations
As a result of the factors described above, the net loss for the six
months ended October 31, 2005 was $3,098,669 as compared to $2,126,821 for the
same period in the prior fiscal period.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 2005, we had cash and short-term investments of
$7,794,223 and working capital of $6,902,053, as compared to cash and short-term
investments of $11,182,147 and working capital of $10,069,216 at April 30, 2005.
We used $3,220,717 in operating activities for the six months ended
October 31, 2005 as compared to $2,884,564 in the same period in 2004. The
increase in cash used in operations is attributed primarily to increase in the
net loss for the respective periods.
We used $3,319,380 of cash in investing activities during the six
months ended October 31, 2005, as compared to $199,755 for the same period in
the previous year. Cash used in investing activities was primarily from the net
purchases of short-term marketable securities in the amount of $3,057,818, and
purchases of property and equipment in the amount of $210,840.
Net cash provided by financing activities for the six months ended
October 31, 2005 was $35,000, compared to $2,053,797 provided by financing
activities during the same period in 2004. Cash provided from financing
activities was attributable to the net proceeds from the issuance of common
stock.
We do not have a bank credit facility or other working capital credit
line under which we may borrow funds.
Future liquidity and cash requirements will depend on a wide range of
factors including the level of business in existing operations and
Cryptometrics' ability to raise additional financing.
163
PRINCIPAL STOCKHOLDERS OF CRYPTOMETRICS
The following table sets forth as of the date of this Proxy
Statement/Prospectus certain information regarding the ownership of voting
securities of Cryptometrics by each stockholder known to the management of
Cryptometrics to be (i) the beneficial owner of more than 5% of Cryptometrics'
outstanding common stock, (ii) each of the directors and nominees for director
of Cryptometrics, (iii) the executive officers named in the Summary Compensation
Table herein under "Executive Compensation" and (iv) all named executive
officers and directors as a group. Except as otherwise noted, Cryptometrics
believes that the beneficial owners of the common stock listed below, based on
information furnished by such owners, have sole investment and voting power with
respect to such shares.
- --------------------------------------------------------- ------------------------------ -----------------------------
NUMBER OF SHARES OF COMMON
NAME STOCK PERCENT OF COMMON STOCK
- --------------------------------------------------------- ------------------------------ -----------------------------
Robert Barra 2,975,000 (1) 25.8%
- --------------------------------------------------------- ------------------------------ -----------------------------
Michael A. Vitale 2,975,000 (1) 25.8%
- --------------------------------------------------------- ------------------------------ -----------------------------
Joel Shaw 806,118 (2) 7.0%
- --------------------------------------------------------- ------------------------------ -----------------------------
(1) Does not include options to purchase 325,000 shares of Cryptometrics
Common Stock which will become effective just prior to the
effectiveness of the Merger.
(2) Represents number of shares of Cryptometrics Common Stock to be
received upon conversion of Exchangeable Shares of Cryptometrics
Canada, Inc. held.
164
LEGAL MATTERS
Jones Vargas, counsel to JAG Media, will pass on the validity of the
JAG Media Common Stock to be issued to Cryptometrics stockholders in the Merger.
Morgan, Lewis & Bockius LLP, counsel to JAG Media, will pass on the material
U.S. federal income tax consequences as described in the heading "Material U.S.
Federal Income Tax Consequences of the Merger."
EXPERTS
The financial statements of JAG Media as of July 31, 2005, for each its
fiscal years ended July 31, 2005 and July 31, 2004, included within this Proxy
Statement/Prospectus have been so included in reliance on the report of J.H.
Cohn LLP, independent auditors, given on the authority of said firm as experts
in auditing and accounting.
The financial statements of Cryptometrics as of April 30, 2005 and for
each of its fiscal years ended April 30, 2005 and April 30, 2004, included
within this Proxy Statement/Prospectus have been so included in reliance on the
report of Seligson & Giannattasio, LLP, independent auditors, given on the
authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
JAG Media files annual, quarterly and Annual reports, proxy statements
and other information with the SEC. You may read and copy any reports,
statements or other information that JAG Media files at the SEC's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. JAG Media's SEC filings are also available to the public from
commercial document retrieval services and at the website maintained by the SEC
at "http://www.sec.gov."
JAG Media filed a Registration Statement on Form S-4 to register with
the SEC the JAG Media Common Stock to be issued to Cryptometrics stockholders in
the Merger. This Proxy Statement/Prospectus is a part of the Registration
Statement on Form S-4 and constitutes a prospectus of JAG Media in addition to
being a proxy statement of JAG Media the Annual Meeting of the Stockholders of
JAG Media to take place on will be held on ________, 2006 at ______ a.m.
(Pacific Standard Time) in the law offices of Jones Vargas, located on the
Twelfth Floor of 100 West Liberty Street in Reno, Nevada. As permitted by SEC
rules, this Proxy Statement/Prospectus does not contain all the information that
you can find in the Form Registration Statement on Form S-4 or the exhibits to
that statement. No person is authorized to give any information or to make any
representation with respect to the matters described in this document other than
those contained herein and, if given or made, such information or representation
must not be relied upon as having been authorized by JAG Media or Cryptometrics.
This document does not constitute an offer to sell, or a solicitation of an
offer to purchase, the securities offered hereby, nor does it constitute the
solicitation of a proxy, in any jurisdiction on which, or to any person to whom,
it is unlawful to make such offer or solicitation. Neither the delivery of this
document nor any sale made hereby, under any circumstances, shall create any
implication that there has been no change in the affairs of JAG Media or
Cryptometrics since the date hereof, or that the information herein is correct
as of any time subsequent to its date.
165
HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS OF
JAG MEDIA HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
--------------------------
Report of Independent Registered Public Accounting Firm .......................................... F-2
Consolidated Balance Sheet July 31, 2005 ......................................................... F-3
Consolidated Statements of Operations Years Ended July 31, 2005
and 2004 ......................................................................................... F-4
Consolidated Statements of Changes in Stockholders, Equity
(Deficiency) Years Ended July 31, 2005 and 2004 .................................................. F-5
Consolidated Statements of Cash Flows Years Ended
July 31, 2005 and 2004 ........................................................................... F-6
Notes to Consolidated Financial Statements ....................................................... F-7/23
Condensed Consolidated Balance Sheet October 31, 2005 (Unaudited) ................................ F-24
Condensed Consolidated Statements of Operations Three Months
Ended October 31, 2005 and 2004 (Unaudited) ...................................................... F-25
Condensed Consolidated Statement of Changes in Stockholders'
Equity Three Months Ended October 31, 2005 (Unaudited) ........................................... F-26
Condensed Consolidated Statement of Cash Flows Three Months
Ended October 31, 2005 and 2004 (Unaudited) ...................................................... F-27
Notes to Condensed Consolidated Financial Statements ............................................. F-28/34
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
JAG Media Holdings, Inc.
We have audited the accompanying consolidated balance sheet of JAG
Media Holdings, Inc. and Subsidiaries as of July 31, 2005, and the related
consolidated statements of operations, changes in stockholders' equity
(deficiency) and cash flows for the years ended July 31, 2005 and 2004. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). 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 JAG Media
Holdings, Inc. and Subsidiaries as of July 31, 2005, and their results of
operations and cash flows for the years ended July 31, 2005 and 2004, in
conformity with accounting principles generally accepted in the United States of
America.
The consolidated financial statements referred to above have been
prepared assuming that the Company will continue as a going concern. As further
discussed in Note 2 to the consolidated financial statements, the Company's
operations have generated recurring losses and cash flow deficiencies from
operating activities. Such matters raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 2. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
/s/ J.H. Cohn LLP
Roseland, New Jersey
November 7, 1002
F-2
JAG Media Holdings, Inc. and Subsidiaries
Consolidated Balance Sheet
July 31, 2005
Assets
Current assets:
Cash and cash equivalents $ 660,865
Accounts receivable, net of allowance for doubtful accounts of $7,500 14,510
Other current assets 67,249
------------
Total current assets 742,624
Equipment, net of accumulated depreciation of $95,438 59,052
Other assets 36,426
------------
Total $ 838,102
============
Liabilities and Stockholders' Deficiency
Current liabilities:
Accounts payable and accrued expenses $ 213,190
Deferred revenues 29,231
------------
Total current liabilities 242,421
Loan payable, net of unamortized debt discount of $72,851 1,927,149
------------
Total liabilities 2,169,570
------------
Mandatorily redeemable Class B common stock, par value $.00001 per share:
400,000 shares designated as Series 2; 380,829 shares issued and outstanding 4
40,000 shares designated as Series 3; 21,500 shares issued and outstanding --
------------
4
------------
Commitments and Contingencies
Stockholders' deficiency:
Preferred stock; par value $.00001 per share; 50,000,000 shares authorized;
none issued
Common stock; par value $.00001 per share; 250,000,000 shares
authorized; 44,747,799 shares issued and outstanding 448
Additional paid-in capital 43,742,187
Unearned compensation (40,447)
Accumulated deficit (45,033,660)
------------
Total stockholders' deficiency (1,331,472)
------------
Total $ 838,102
============
See Notes to Consolidated Financial Statements of JAG Media Holdings, Inc.
and Subsidiaries.
F-3
JAG Media Holdings, Inc. and Subsidiaries
Consolidated Statements of Operations
Years Ended July 31, 2005 and 2004
2005 2004
---------- -----------
Revenues $ 239,651 $ 253,256
------------ ------------
Operating expenses:
Cost of revenues 152,371 272,161
Selling expenses 43,441 13,698
General and administrative expenses 1,745,455 1,951,876
------------ ------------
Totals 1,941,267 2,237,735
------------ ------------
Loss from operations (1,701,616) (1,984,479)
Other income (expense):
Writeoff of goodwill (50,400)
Interest income 8,357 3,485
Interest expense (145,506) (23,930)
Loss from retirement of assets (713)
------------ ------------
Net loss $ (1,889,165) $ (2,005,637)
============ ============
Basic net loss per share $ (.04) $ (.05)
============ ============
Basic weighted average common shares outstanding 44,510,641 42,696,349
============ ============
See Notes to Consolidated Financial Statements of JAG Media Holdings, Inc. and
Subsidiaries.
F-4
JAG Media Holdings, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity (Deficiency)
Years Ended July 31, 2005 and 2004
Common Stock
-------------------------- Additional Unearned Accumulated
Number of Shares Amount Paid-in Capital Compensation Deficit Total
---------------- ------ --------------- ------------ ----------- --------------
Balance, August 1, 2003 41,244,025 $ 412 $ 41,217,522 $ (140,884) $(41,138,858) $ (61,808)
Sale of common stock and
1,500 shares of redeemable
Series 3 Class B common
stock through private
placement 35,000 50,000 50,000
Effects of issuance of
common stock in exchange
for services 450,000 5 260,995 (78,000) 183,000
Amortization of unearned
compensation 194,619 194,619
Sales of common stock
pursuant to equity
financing agreement, net
of expenses of $107,500 2,506,274 25 2,042,475 2,042,500
Net loss (2,005,637) (2,005,637)
------------ ------------ ------------ ------------ ------------ ------------
Balance, July 31, 2004 44,235,299 442 43,570,992 (24,265) (43,144,495) 402,674
Effect of issuance of
options in exchange for
services 51,200 (51,200)
Amortization of unearned
compensation 35,018 35,018
Effect of issuance of
common stock for purchase
of business 250,000 3 42,497 42,500
Effects of issuance of
common stock in exchange
for services and claim
settlement 262,500 3 77,498 77,501
Net loss (1,889,165) (1,889,165)
------------ ------------ ------------ ------------ ------------ ------------
Balance, July 31, 2005 44,747,799 $ 448 $ 43,742,187 $ (40,447) $(45,033,660) $ (1,331,472)
============ ============ ============ ============ ============ ============
See Notes to Consolidated Financial Statements of JAG Media Holdings, Inc.
and Subsidiaries.
F-5
JAG Media Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended July 31, 2005 and 2004
2005 2004
----------- ------------
Operating activities:
Net loss $(1,889,165) $(2,005,637)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 19,684 18,769
Amortization of unearned compensation 35,018 194,619
Amortization of debt discount 27,149
Amortization of other assets 13,574
Writeoff of goodwill 50,400
Loss from retirement of assets 713
Effects of issuance of common stock in exchange for services and
claim settlement 77,501 183,000
Changes in operating assets and liabilities:
Accounts receivable (2,270) (7,080)
Other current assets 6,586 10,221
Accounts payable and accrued expenses 147,657 (89,527)
Deferred revenues (10,262) (5,236)
----------- -----------
Net cash used in operating activities (1,524,128) (1,700,158)
----------- -----------
Investing activities - purchase of equipment
Equipment purchases (32,078) (29,276)
Cash paid for business acquisition (19,212)
----------- -----------
Net cash used in investing activities (51,290) (29,276)
----------- -----------
Financing activities:
Proceeds from loan payable 2,000,000
Costs paid in connection with loan payable (150,000)
Net proceeds from private placements of common stock 2,092,500
Repayment of notes payable to officers (400,000)
----------- -----------
Net cash provided by financing activities 1,850,000 1,692,500
----------- -----------
Net increase (decrease) in cash and cash equivalents 274,582 (36,934)
Cash and cash equivalents, beginning of year 386,283 423,217
----------- -----------
Cash and cash equivalents, end of year $ 660,865 $ 386,283
=========== ===========
Supplementary Cash Flow Information:
Interest paid $ 27,150 $ 71,810
=========== ===========
See Notes to Consolidated Financial Statements of JAG Media Holdings, Inc. and
Subsidiaries.
F-6
JAG Media Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Organization:
JAG Media Holdings, Inc., a Nevada corporation, and its subsidiaries (the
"Company") gather and compile financial and investment information from contacts
at financial institutions, experienced journalists, money managers, analysts and
other Wall Street professionals and generate revenues by releasing such
information to subscribers on a timely basis through facsimile transmissions and
a web site, www.jagnotes.com. Subscribers receive, among other things, a daily
early-morning investment report that summarizes newly issued research, analyst
opinions, upgrades, downgrades and analyst coverage changes from various
investment banks and brokerage houses and alerts, during the trading day, of
rumors circulating on Wall Street. The Company is also developing a related
product line which will enable the Company to provide subscribers with select
upgrades/downgrades and rumors in streaming video and/or text message format
delivered to their mobile phones. Management considers all of its activities to
be within the same business segment.
The Company commenced operations in 1989 and its subscribers were initially
limited primarily to institutional investors. During the year ended July 31,
2000, the Company opened its web site and began targeting retail subscribers in
an effort to expand its subscriber base. On January 4, 2002, a subsidiary, JAG
Company Voice LLC, was formed to provide small to medium sized companies with
production and distribution services for delivering press releases and other
company information over the Internet in streaming video format; however, it
never conducted any significant operations, and on April 1, 2004 all of its
operations ceased and it was merged with another subsidiary of the Company, Jag
Media LLC.
On November 24, 2004, a newly established subsidiary of the Company, Pixaya (UK)
Limited ("Pixaya") (formerly known as TComm (UK) Limited), a company organized
in the United Kingdom, acquired the business and assets of TComm Limited, a
development stage company, also organized in the United Kingdom, that was
developing various mobile video streaming products. The Company is continuing to
develop some of these products and has added a new service to this product line,
as further described in Note 5. However, the business acquired had not generated
any significant revenue as of the date of the acquisition or through July 31,
2005. Effective October 3, 2005, TComm (UK) Limited formally changed its name to
Pixaya (UK) Limited.
On February 11, 2004, the stockholders of the Company approved an amendment to
the articles of incorporation that authorized the implementation of changes
related to a recapitalization plan for the Company that was consummated on June
4, 2004 (the "Recapitalization"). As a result of the Recapitalization, the
Company became authorized to issue up to 250,000,000 shares of common stock with
a par value of $.00001 per share, and it issued 1 share of common stock in
exchange for every 1 share of Class A common stock and Series 1 Class B common
stock outstanding prior to the recapitalization.
F-7
JAG Media Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Organization (continued):
Prior to the Recapitalization, each share of Series 1 Class B common stock was
immediately convertible into one share of Class A common stock and each share of
Class A common stock and Series 1 Class B common stock was equal in respect to
dividends and voting rights. Therefore, each share of Series 1 Class B common
stock was, in substance, equivalent to one share of Class A common stock for
financial reporting purposes prior to the Recapitalization, and each share of
Class A common stock and each share of Series 1 Class B common stock is, in
substance, equivalent to 1 share of common stock after the Recapitalization for
financial reporting purposes. Accordingly, the Recapitalization, which has been
retroactively reflected in the accompanying consolidated financial statements
and these notes, did not have any effect on numbers of shares of common stock,
the weighted average number of common shares outstanding or any amounts per
common share.
Note 2 - Basis of presentation and summary of significant accounting policies:
Basis of presentation:
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. However, as shown in the
accompanying consolidated financial statements, the Company only generated
revenues of approximately $240,000 and $253,000 and it incurred net losses of
approximately $1,889,000 and $2,006,000 and cash flow deficiencies from
operating activities of approximately $1,524,000 and $1,700,000 for the years
ended July 31, 2005 and 2004, respectively. In addition, as of July 31, 2005 the
Company only had cash and cash equivalents available of $661,000 and working
capital of $500,000. These matters raise substantial doubt about the Company's
ability to continue as a going concern.
Management believes that in the absence of a substantial increase in
subscription revenues, it is probable that the Company will continue to incur
losses and negative cash flows from operating activities through at least July
31, 2006 and that the Company will need to obtain additional equity or debt
financing to sustain its operations until it can successfully market its
services, expand its customer base and achieve profitability.
As further explained in Note 4, the Company entered into an agreement with an
investment partnership pursuant to which it has, in effect, "put" options
whereby, subject to certain conditions, it is able to require the investment
partnership to purchase shares of its common stock from time to time at prices
based on the market value of its shares. The maximum aggregate purchase
obligation under this equity line is $10,000,000. This equity line was renewed
in July 2004 and expires in August 2006. As of July 31, 2005, the Company had
received gross proceeds of $4,035,000 from the exercise of "put" options.
Although the timing and amount of the required purchases under the agreement are
at the Company's discretion, the purchases are subject to certain conditions as
also explained in Note 4 and the ability of the investment partnership to fund
the purchases. Also as explained in Note 4, on January 25, 2005, the Company
entered into a Promissory Note agreement with the investment partnership
pursuant to which the Company agreed to borrow $2,000,000 from the investment
partnership. The $2,000,000 loan was funded on February 2, 2005. Pursuant to the
Promissory Note as amended, the Company has deposited 35 put notices under the
above agreement in the amount of $60,000 each and one in the amount of $181,017
into escrow which will be released every 14 days beginning November 4, 2005.
F-8
JAG Media Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 2 - Basis of presentation and summary of significant accounting policies
(continued):
Management believes that the Company will be able to generate sufficient
revenues from its remaining facsimile transmission and web site operations and
obtain sufficient financing from its agreement with the investment partnership
prior to its expiration in August 2006 or through other financing agreements to
enable it to continue as a going concern through at least July 31, 2006.
However, if the Company cannot generate sufficient revenues and/or obtain
sufficient additional financing, if necessary, by that date, the Company may be
forced thereafter to restructure its operations, file for bankruptcy or entirely
cease its operations.
The accompanying consolidated financial statements do not include any
adjustments related to the recoverability and classification of assets or the
amount and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
Use of estimates:
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Principles of consolidation:
The accompanying consolidated financial statements include the accounts of JAG
Media Holdings, Inc. and its subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Revenue recognition:
Fees for subscriptions are generally billed in advance on a monthly, quarterly,
semi-annual or annual basis. Revenues from subscriptions are recognized ratably
over the subscription period. Subscription fees collected that relate to periods
subsequent to the date of the consolidated balance sheet are included in
deferred revenues.
Cash equivalents:
Cash equivalents consist of highly liquid investments with a maturity of three
months or less when acquired.
Equipment:
Equipment is stated at cost, net of accumulated depreciation. Depreciation is
provided using accelerated methods over the estimated useful lives of the
assets, which range from three to seven years.
Impairment of long-lived assets subject to amortization:
F-9
JAG Media Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 2 - Basis of presentation and summary of significant accounting policies
(continued):
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment of Long-Lived Assets" ("SFAS
144"). Under SFAS 144, impairment losses on long-lived assets, such as equipment
are recognized when events or changes in circumstances indicate that the
undiscounted cash flows estimated to be generated by such assets are less than
their carrying value and, accordingly, all or a portion of such carrying value
may not be recoverable. Impairment losses are then measured by comparing the
fair value of assets to their carrying amounts.
Goodwill and other intangible assets not subject to amortization:
The Company periodically reviews the carrying value of intangible assets not
subject to amortization, including goodwill, to determine whether impairment may
exist. Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142") requires that goodwill and certain intangible
assets be assessed annually for impairment using fair value measurement
techniques. Specifically, goodwill impairment is determined using a two-step
process. The first step of the goodwill impairment test is used to identify
potential impairment by comparing the fair value of a reporting unit with its
carrying amount, including goodwill. The estimates of fair value of a reporting
unit are determined using various valuation techniques with the primary
technique being a discounted cash flow analysis. A discounted cash flow analysis
requires the Company to make various judgmental assumptions including
assumptions about future cash flows, growth rates, and discount rates. The
assumptions about future cash flows and growth rates are based on the Company's
budget and long-term plans. Discount rate assumptions are based on an assessment
of the risk inherent in the respective reporting units. If the fair value of a
reporting unit exceeds its carrying amount, goodwill of the reporting unit is
considered not impaired and the second step of the impairment test is
unnecessary. If the carrying of a reporting unit exceeds its fair value, the
second step of the goodwill impairment test is performed to measure the amount
of impairment loss, if any. The second step of the goodwill impairment test
compares the implied fair value of the reporting unit's goodwill with the
carrying amount of that goodwill. If the carrying amount of the reporting unit's
goodwill exceeds the implied fair value of that goodwill, an impairment loss is
recognized in an amount equal to that excess. The implied fair value of goodwill
is determined in the same manner as the amount of goodwill recognized in a
business combination. That is, the fair value of the reporting unit is allocated
to all of the assets and liabilities of that unit (including any unrecognized
intangible assets) as if the reporting unit had been acquired in a business
combination and the fair value of the reporting unit was the purchase price paid
to acquire the reporting unit.
The impairment test for other intangible assets not subject to amortization
consists of a comparison of the fair value of the intangible asset with its
carrying value. If the carrying value of the intangible asset exceeds its fair
value, an impairment loss is recognized in an amount equal to that excess. The
estimates of fair value of intangible assets not subject to amortization are
determined using various discounted cash flow valuation methodologies.
Significant assumptions are inherent in this process, including estimates of
discount rates. Discount rate assumptions are based on an assessment of the risk
inherent in the respective intangible assets.
F-10
JAG Media Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 2 - Basis of presentation and summary of significant accounting policies
(continued):
Income taxes:
The Company accounts for income taxes pursuant to the asset and liability method
which requires deferred income tax assets and liabilities to be computed
annually for temporary differences between the financial statement and tax bases
of assets and liabilities that will result in taxable or deductible amounts in
the future based on enacted tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. The income tax provision or credit is the tax
payable or refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities.
Stock-based compensation:
The Company has accounted for stock options, common stock and other similar
equity instruments issued to employees as compensation using fair value based
methods pursuant to Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", ("SFAS 123"). Accordingly, the
Company estimates the fair value of stock options using an option-pricing model
(generally, the Black-Scholes model) that meets criteria set forth in SFAS 123
and common stock using its market value. It records such value through charges
to compensation cost and corresponding credits to equity. The charges to
compensation cost are amortized to expense over the vesting period.
In accordance with SFAS 123, all other issuances of common stock, stock options
or other equity instruments to employees and nonemployees as the consideration
for goods or services received by the Company are accounted for based on the
fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable. Such fair value is
measured as of an appropriate date pursuant to the guidance in the consensus for
the Financial Accounting Standards Board, the Emerging Issues Task Force (the
"EITF") Issue No. 96-18 (generally, the earlier of the date the other party
becomes committed to provide goods or services or the date performance by the
other party is complete) and capitalized or expensed as if the Company had paid
cash for the goods or services.
On December 16, 2004, the FASB published Statement of Financial Accounting
Standards No. 123 (Revised 2004), "Share-Based Payment" ("SFAS 123R"). The
provisions of SFAS 123R, as amended, will be effective for the Company in the
first quarter of its fiscal year ending July 31, 2006. Management is assessing
the implications of this revised standard, which may materially impact the
Company's consolidated results of operations in the first quarter of fiscal year
2006 and thereafter.
F-11
JAG Media Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 2 - Basis of presentation and summary of significant accounting policies
(continued):
Net earnings (loss) per share:
The Company presents "basic" earnings (loss) per share and, if applicable,
"diluted" earnings per share pursuant to the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings per Share." Basic earnings
(loss) per share is calculated by dividing net income or loss by the weighted
average number of common shares outstanding during each period. The calculation
of diluted earnings per share is similar to that of basic earnings per share,
except that the denominator is increased to include the number of additional
common shares that would have been outstanding if all potentially dilutive
common shares, such as those issuable upon the exercise of stock options and
warrants, were issued during the period and the treasury stock method had been
applied to the proceeds from their exercise.
As of July 31, 2005, there were options outstanding for the purchase of a total
of 2,510,000 shares of common stock (see Note 4). However, diluted per share
amounts have not been presented in the accompanying consolidated statements of
operations because the Company had a net loss in the years ended July 31, 2005
and 2004 and the assumed effects of the exercise of the Company's stock options
that were outstanding during all or part of those periods would have been
anti-dilutive.
Other Recently Issued Accounting Standards:
The EITF and the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants have issued certain accounting
pronouncements as of July 31, 2005 in addition to SFAS 123R that will become
effective in subsequent periods; however, management of the Company does not
believe that any of those pronouncements would have significantly affected the
Company's financial accounting measurements or disclosures had they been in
effect during 2005 and 2004, and it does not believe that any of those
pronouncements will have a significant impact on the Company's consolidated
financial statements at the time they become effective.
Note 3 - Income taxes:
As of July 31, 2005, the Company had net operating loss carryforwards of
approximately $29,116,000 available to reduce future Federal taxable income
which will expire from 2019 through 2025. As of July 31, 2005 the Company's
deferred tax assets consisted of the effects of temporary differences
attributable to the following:
Deferred revenues, net $ 10,000
Unearned compensation 648,000
Net operating loss carryforwards 11,185,000
--------------
11,843,000
Less valuation allowance (11,843,000)
--------------
Total $ -
==============
F-12
JAG Media Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 3 - Income taxes (continued):
Due to the uncertainties related to, among other things, the extent and timing
of its future taxable income, the Company offset its net deferred tax assets by
an equivalent valuation allowance as of July 31, 2005.
The Company had also offset the potential benefits from its net deferred tax
assets by an equivalent valuation allowance as of July 31, 2004 and 2003 of
approximately $12,372,000 and $12,300,000. As a result of the changes in the
valuation allowance of $(517,000) and $72,000 during the years ended July 31,
2005 and 2004, respectively, there are no credits for income taxes reflected in
the accompanying consolidated statements of operations to offset pre-tax losses.
Note 4 - Equity and debt financing agreements with Cornell Capital Partners,
L.P.:
On April 9, 2002, the Company entered into an equity line purchase agreement
(the "Equity Line") with Cornell Capital Partners L.P. ("Cornell Capital")
pursuant to which the Company has, in effect, put options whereby, subject to
certain conditions, it can require Cornell Capital to purchase shares of its
common stock from time to time at an aggregate purchase price of $10,000,000.
The Equity Line became available on August 28, 2002 and was extended in July
2004 for an additional 24 months through August 2006 unless it is terminated
earlier at the discretion of The Company. The purchase price will be 95% of the
lowest closing bid price of the Company's common stock over a specified number
of trading days commencing on specified dates. Cornell Capital shall be entitled
to a cash fee equal to 5% of the gross proceeds received by the Company from
Cornell Capital in connection with each put. As of July 31, 2005, $4,035,000 of
the Company's Equity Line with Cornell Capital had been utilized.
The timing and amount of the required purchases shall be at the Company's
discretion subject to certain conditions including (i) a maximum purchase
obligation to be paid by Cornell Capital for each put of $500,000; (ii) at least
five trading days must elapse before the Company can deliver a new put notice to
Cornell Capital; (iii) the registration statement covering the shares issuable
to Cornell Capital pursuant to the equity line must remain effective at all
times and (iv) on any given closing date, there shall be at least one bid for
the common stock on the Nasdaq OTC Bulletin Board. In addition, the obligation
of Cornell Capital to complete its purchases under the Equity Line Agreement is
not secured or guaranteed and, accordingly, if Cornell Capital does not have
available funds at the time it is required to make a purchase, the Company may
not be able to force it to do so.
During the year ended July 31, 2005, no put options were exercised. During the
year ended July 31, 2004, Cornell Capital was required to pay $2,150,000 and it
received 2,506,274 shares of common stock and the Company received proceeds of
$2,042,500, net of $107,500 of placement fees, as a result of the exercise by
the Company of put options pursuant to the Equity Line. As of July 31, 2005, the
Company had the ability to require Cornell Capital to purchase shares of its
common stock pursuant to the Equity Line at an aggregate purchase price of
$5,965,000 through August 28, 2006 before taking into account any puts related
to the Promissory Note described below. The $5,965,000 of availability will be
reduced to the extent the Promissory Note and interest thereunder is repaid out
of the net proceeds received by the Company upon delivery of put notices under
the Equity Line Agreement.
F-13
JAG Media Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4 - Equity and debt financing agreements with Cornell Capital Partners,
L.P. (continued):
On January 25, 2005, the Company entered into a Promissory Note Agreement with
Cornell Capital for a loan of $2,000,000. The $2,000,000 loan from Cornell
Capital was funded on February 2, 2005 net of a debt discount of $100,000
attributable to a fee paid to Cornell Capital deducted at the time of funding
which is being amortized over the life of the loan. The unamortized debt
discount as of July 31, 2005 is $72,851. The face amount of the Promissory Note
and interest on the amount from time to time outstanding at a rate of 12% per
year will be payable either (i) out of the net proceeds to be received by the
Company upon delivery of put notices under the Equity Line Agreement or (ii) in
full by the Company within 663, subsequently extended to 753, calendar days of
January 25, 2005 regardless of the availability of proceeds under the Equity
Line Agreement, unless an extension is mutually agreed to by the parties in
writing.
Pursuant to the Promissory Note, the Company has agreed to deposit in escrow 35
put notices under the Equity Line Agreement in an amount of $60,000 each and one
request for a put under the Equity Line Agreement in an amount of $181,017. No
put notices are currently held by Cornell Capital. Under the terms of the
Promissory Note, as amended on August 5, 2005, the put notices held in escrow
will be released every 14 days commencing November 4, 2005 (See Note 11). To
date, no put notices have been released and we are negotiating with Cornell
Capital to restructure the Promissory Note. The Company has also agreed to
reserve out of its authorized but unissued shares of common stock 3,500,000
shares of the Company's common stock (the "Reserved Shares") to be delivered to
Cornell Capital under the Equity Line upon use of such put notices.
The Company has the option to repay the amounts due under the Promissory Note
and to withdraw any put notices yet to be effected provided that each repayment
is in an amount not less than $25,000. In addition, the Company has the right to
accelerate the delivery of one or more put notices and to select the specific
put notice to be so accelerated. If the Promissory Note is not paid in full when
due, the outstanding principal owed thereunder will be due and payable in full
together with interest at 14% per year or the highest permitted by applicable
law, if lower.
Upon an event of default (as defined in the Promissory Note), the entire
principal balance and accrued interest of the Promissory Note, and all other
obligations of the Company under the Promissory Note, would become immediately
due and payable without any action on the part of Cornell Capital.
On November 24, 2004, the Company entered into a Business Sale Agreement (the
"Sale Agreement") with TComm Limited, a company organized in the United Kingdom
("Seller"), and Pixaya, a company newly organized in the United Kingdom and a
wholly-owned subsidiary of the Company. The Company entered into the transaction
to access the seller's development stage software, which the Company believed
offered a new platform for delivery of the Company's services as well as being
valuable in its own right.
The transactions contemplated by the Sale Agreement were consummated on November
24, 2004. Under the Sale Agreement, Pixaya purchased the Seller's software
development business, which is focused on streaming video solutions and all of
its assets related to that business. The business has not generated any
significant revenue as of the date of the acquisition or through July 31, 2005.
F-14
JAG Media Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4 - Equity and debt financing agreements with Cornell Capital Partners,
L.P. (continued):
The acquired product lines the Company intends to continue to develop include:
(1) Pixaya Mobile (previously known as TComm TV), which delivers on-demand
video/audio clips to various java-based and Symbian-based mobile phones and (2)
SurvayaCam (previously known as CCMTV), which is currently under development and
will consist of software programs (and related hardware) intended to enable
field personnel to send real-time video streams from the field to a central
point where they can be viewed by one or more persons. Because the acquired
product lines are still under development, it is difficult for the Company to
estimate the amount of resources that will be required to complete the
development of these product lines.
Note 5 - Acquisition:
The purchase price paid to TComm Limited consisted of (i) 250,000 shares of the
Company's common stock, having a value based on the closing price of the
Company's common stock as of the close of business on the day prior to the
acquisition, equal to approximately $42,500 and (ii) the payment of
approximately $19,000 in cash. The purchase price was allocated to the fair
value of assets and goodwill as follows:
Equipment $11,000
Other Assets 100
Goodwill 50,400
-------
Total $61,500
=======
As of January 31, 2005, management tested the goodwill for impairment and
concluded that it had been impaired. Therefore, the Company has recognized a
charge of $50,400 for the write-off of goodwill in the year ended July 31, 2005.
In addition, the Seller has agreed not to compete with the business conducted by
Pixaya for a period of two years from the closing date of the transaction. The
Sale Agreement also contains customary representations and warranties. The
Seller has agreed to indemnify Pixaya for any damages which may result from a
breach of its warranties but only if the damages exceed approximately $20,000.
The Seller has entered into a lockup agreement with the Company pursuant to
which it has agreed not to sell or otherwise transfer the shares received as
part payment of the purchase price for a period of one year.
Pixaya had no revenues from its inception in November 2004 through July 31,
2005.
Unaudited pro forma results of operations for years ended July 31, 2005 and 2004
assuming the Company had acquired the business and the related assets from the
Seller as of the beginning of each of these years have not been presented
because such information would not differ materially from the historical results
F-15
JAG Media Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 - Acquisition (continued):
Amendments of Articles of Incorporation:
As explained in Note 1, on February 11, 2004, the stockholders of the Company
approved an amendment to the Articles of Incorporation that authorized the
implementation of changes related to a recapitalization plan for the Company
that was consummated on June 4, 2004 (the "Recapitalization").
Pursuant to the Recapitalization, (i) the total number of shares of all classes
of capital stock authorized for issuance by the Company increased from
200,000,000 shares to 300,440,000 shares with a par value of $.00001 per share,
of which 50,000,000 shares are authorized for issuance as preferred stock,
250,000,000 shares are authorized for issuance as common stock, 400,000 shares
are authorized for issuance as Series 2 Class B common stock and 40,000 shares
are authorized for issuance as Series 3 Class B Common stock; and (ii) the
Company issued 1 share of common stock in exchange for every 1 share of Class A
common stock and Series 1 Class B common stock outstanding prior to the
recapitalization.
Note 6 - Other issuances of common stock and stock options:
Mandatory redeemable Class B common stock:
On March 18, 2003 and June 30, 2003, the Company's Board of Directors approved
the designation of 400,000 shares and 40,000 shares of Class B common stock, par
value $.00001 per share, as "Series 2 Class B common stock" and "Series 3 Class
B common stock," respectively. The Company's Board of Directors also declared a
special stock dividend on March 18, 2003 for the distribution of shares of
Series 2 Class B common stock to owners of the Company's common stock as of the
record date, April 14, 2003, in a ratio of one share of Series 2 Class B common
stock for every 100 shares of common stock owned. As of July 31, 2005, a total
of 380,829 shares of Series 2 Class B common stock were outstanding as a result
of the stock dividend. On June 30, 2003, the Company issued 20,000 shares of
Series 3 Class B common stock in connection with the private placement of common
stock, as further explained below.
The shares of Series 2 and Series 3 Class B common stock will be nonvoting, have
dividend and liquidation rights equal to the Class A common stock and be
redeemable. Redemption by the Company shall be mandatory within six months
following final resolution of the Company's lawsuit against various brokerage
firms currently pending in U.S. District Court for the Southern District of
Texas or any successor or related suit (or as soon thereafter as legally
permissible). The redemption price per share of the Series 2 Class B common
stock will be the greater of (i) the par value of each share or (ii) the amount
obtained by dividing (a) 90% of the net proceeds to the Company of such lawsuit
after payment of fees and expenses incurred in connection with such lawsuit and
all taxes on net income accrued or paid with respect to such net amount divided
by (b) the total number of shares of Series 2 Class B common stock outstanding.
The redemption price per share of the Series 3 Class B common stock will be the
greater of (i) the par value of each share or (ii) .0025% of 10% of the net
proceeds to the Company of such lawsuit after payment of fees and expenses
incurred in connection with such lawsuit and all taxes on net income accrued or
paid with respect to such net amount.
F-16
JAG Media Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6 - Other issuances of common stock and stock options (continued):
Since the value of the Series 2 and Series 3 Class B common stock is contingent
upon the outcome of the pending litigation, the Company recorded the shares of
Series 2 and Series 3 Class B common stock that were issuable as of July 31,
2003 at their total par value of $4.20. Since the Company will be required to
distribute substantially all of the proceeds of the pending litigation to the
holders of Series 2 and Series 3 Class B common stock, the Company has
classified the shares as the equivalent of mandatory redeemable preferred stock
and excluded their carrying value from stockholders' equity and total
liabilities in the accompanying July 31, 2004 consolidated balance sheet
pursuant to the rules and regulations of the Securities and Exchange Commission.
In accordance with Statement of Financial Accounting Standards No. 150,
"Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity, "the par value of the mandatory redeemable stock is
recorded as a liability.
Equity financing agreement:
As further explained in Note 4, during the year ended July 31, 2004, Cornell
Capital was required to pay $2,150,000 and it received 2,506,274 shares of
common stock and the Company received proceeds of $2,042,500 net of $107,500 of
placement fees as a result of the exercise by the Company of put options
pursuant to the Equity Line Agreement.
Shares sold through private placement:
During the year ended July 31, 2004, the Company sold 35,000 shares of its
common stock and 1,500 shares of its Series 3 Class B common stock through a
private placement, and it received proceeds of $50,000.
The private placements were intended to be exempt from registration under the
Act.
Stock dividend:
During the year ended July 31, 2004, the Company issued an additional 6,709
shares of its mandatory redeemable Series 2 Class B common stock based on
required adjustments to the number of shares originally issued in connection
with a stock dividend affected during the year ended July 31, 2003.
Shares issued to pay salaries:
During the year ended July 31, 2004, the Company agreed to issue a total of
300,000 shares of its common stock with an aggregate fair value of $183,000 to
pay salaries, all of which was charged directly to expense.
Shares issued to consultants:
During the year ended July 31, 2005, the Company issued a total of 12,500 shares
of its commons stock with an aggregate fair value of $2,500 to pay for
consulting services.
F-17
JAG Media Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6 - Other issuances of common stock and stock options (continued):
On March 4, 2004, the Company settled a dispute with a consultant in connection
with his performance of various investment banking services for the Company. The
claim was settled for $175,000, of which $100,000 was paid in cash and the
balance was paid by issuing 250,000 shares of common stock with aggregate fair
value of $75,000. The settlement has been included in operations for the year
ended July 31, 2005.
During the year ended July 31, 2004, the Company issued a total of 150,000
shares of its common stock with an aggregate fair value of $78,000 to pay for
consulting services. The fair value of the shares was originally charged to
unearned compensation and is being amortized to expense over the terms of the
consulting agreements.
Options and warrants issued for services:
The Company has issued, from time to time, stock options and warrants for the
purchase of common stock to employees as compensation and to other nonemployees,
including investment analysts and commentators that have entered into agreements
to provide the Company with financial information that is released to
subscribers, as consideration for consulting, professional and other services.
As explained in Note 2, the Company recognizes the cost of such issuances based
on the fair value of the equity instruments issued over the periods in which the
related services are rendered in accordance with the provisions SFAS 123.
The cost of the options and warrants, determined based on their aggregate
estimated fair values at the respective dates of issuance, was initially charged
directly to expense or to unearned compensation and subsequently amortized to
expense.
The following table reconciles the number of shares of common stock subject to
options and warrants that were outstanding at August 1, 2003 as a result of
issuances of those options and warrants to employees and nonemployees as
compensation for services to the number outstanding at July 31, 2005 and sets
forth other related information:
Number of Shares
--------------------------------
Range of
Common Stock Exercise Prices
------------ ---------------
Options and warrants issued for services outstanding, August 1,
2003 and July 31, 2004 3,585,000 $.02-$6.00
Options issued (A) 260,000 $.50-$1.00
Options and warrants cancelled (1,335,000) $.15-$6.00
----------
Options issued for services outstanding, July 31,
2005 (B)(C) 2,510,000 $.02-$3.50
========== ==========
(A) During 2005, the Company granted options to purchase 260,000 shares of
common stock to employees of Pixaya (see Note 5). These options and warrants had
exercise prices ranging from $.50 to $1.00, and will expire in March 2015 and
had a fair value of $51,200.
F-18
JAG Media Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6 - Other issuances of common stock and stock options (continued):
(B) These options also include options for the purchase of 1,750,000 shares of,
effectively, common stock granted pursuant to the Company's 1999 Long-term
Incentive Plan (the "Incentive Plan") which provides for individual awards to
officers, employees, directors, consultants and certain other individuals that
may take the form of stock options and certain other types of awards for which
the value is based in whole or in part upon the fair market value of,
effectively, the Company's common stock. The number of shares of common stock
that may be subject to all types of awards under the Incentive Plan as amended
may not exceed 6,000,000 shares.
(C) These options will expire at various dates from August 2005 through March
2015.
The following table summarizes information about the number of shares of common
stock subject to options and warrants that were outstanding at July 31, 2005 as
a result of issuances of those options and warrants to employees and
nonemployees as compensation for services:
Options and Warrants Outstanding Options and Warrants Exercisable
------------------------------------------------------------------- --------------------------------
Weighted
Average
Years of Weighted
Remaining Average Weighted
Number Contractual Exercise Number Average
Exercise Prices Outstanding Life Price Exercisable Exercise Price
---------------- ------------ ----------- ---------- ------------ --------------
$ .02 1,750,000 6.09 $ .02 1,750,000 $ .02
.50 130,000 9.37 .50 65,000 .50
.75 65,000 9.37 .75 0 0
1.00 65,000 9.37 1.00 0 0
3.50 500,000 .06 3.50 500,000 3.50
--------- ---------
$.02-$3.50 2,510,000 5.23 $.02-$3.50 2,315,000 $ .79
========== ========= ========== ========= =======
Unearned compensation is being amortized to expense on a straight-line basis
over the period in which the related services are rendered (such period is
limited to the initial term of any related employment or consulting agreement).
A total of $35,018 and $194,619 was amortized during 2005 and 2004,
respectively. The unamortized balance of $40,447 and $24,265 has been reflected
as a reduction of stockholders' equity as of July 31, 2005 and 2004,
respectively.
F-19
JAG Media Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 7 - Notes payable to officers:
On April 1, 2002, two executive officers loaned the Company a total of $400,000
subject to the terms and conditions of unsecured promissory notes that, as
amended, were payable on June 30, 2004 and bore interest at an annual rate of
9%. The loans were repaid in full, including interest, in March 2004.
Note 8 - Employee benefit plans:
The Company maintains a profit-sharing plan and a money purchase plan for the
benefit of all eligible employees. The Company's contributions to these defined
contribution plans are made on a discretionary basis. The Company made no
contributions to the plans in 2005 and 2004.
Note 9 - Commitments and contingencies:
Concentrations of credit risk:
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents. From time to time
the Company's cash account balances exceed the Federal insurance limit of
$100,000. The Company reduces its exposure to credit risk by maintaining its
cash deposits with major financial institutions and monitoring their credit
ratings. Accordingly, management does not believe that the Company was exposed
to significant credit risk at July 31, 2005.
In addition, the Company routinely assesses the financial strength of its
customers and establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends and other
information.
Employment agreements:
In connection with the Sale Agreement, Pixaya entered into employment agreements
on November 24, 2004 with four individuals, all of whom were previously employed
by the Seller. The employment agreements have a term of three years and
automatically renew unless terminated by either party. As a result, the
Company's obligations for cash payments under the employment agreements
subsequent to July 31, 2005 will total approximately $345,000, as follows:
Year ending Amount
----------- ------
July 31, 2006 $144,000
July 31, 2007 151,000
July 31, 2008 50,000
--------
Total $345,000
========
F-20
JAG Media Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 9 - Commitments and contingencies (continued):
Leases:
The Company has been leasing office space under month-to-month leases and
noncancelable leases. Rent expense under all such leases, which were classified
as operating leases, totaled approximately $15,000 and $21,000 for 2005 and
2004, respectively. As of July 31, 2005, the Company was not subject to any
significant noncancelable office leases.
Litigation:
The Company is a party to various claims and lawsuits incidental to its
business. In the opinion of management, it is probable that the resolution of
such contingencies will not materially affect the consolidated financial
position or results of operations of the Company in subsequent years.
Bay Point Investment Partners, LLC has threatened to commence litigation against
the Company, certain of its officers and directors and others. The Bay Point
claim relates to its purchase of shares of the Company's stock in private
placements on December 10, 2002 and June 19, 2003. Bay Point alleges, among
other things, various disclosure failings as well as the Company's failure to
register the shares it purchased in the June 19, 2003 private placement by the
date provided in the placement agreement and to use the proceeds as Bay Point
claims they were intended to be used. The Company believes it has meritorious
defenses to Bay Point's claims.
Note 10 - Fair value of financial instruments:
The Company's material financial instruments at July 31, 2005 for which
disclosure of estimated fair value is required by certain accounting standards
consisted of cash and cash equivalents, accounts receivable, accounts payable,
and the loan payable to Cornell Capital. In the opinion of management, the
financial instruments other than the loan payable were carried at values that
approximated their fair values at July 31, 2005 because of their liquidity
and/or their short-term maturities.
Note 11 - Subsequent events:
On August 5, 2005, the Company and Cornell Capital agreed, as permitted under
the Promissory Note, dated as of January 25, 2005, between the Company and
Cornell Capital, to extend for three months the date by which the Company must
pay all amounts due under the Promissory Note. Accordingly, the schedule for
puts under the Company's Equity Line Purchase Agreement, dated as of April 9,
2002, as amended July 8, 2004 and July 21, 2004, between the Company and Cornell
Capital, was extended for three months such that the put date for the first put
notice was November 4, 2005, instead of August 5, 2005, and all bi-weekly put
notices thereafter were adjusted accordingly. Cornell Capital has, however,
recently informed the Company that it is returning the puts for the Company's
shares that it currently holds while it discusses with the Company the
restructuring of the Promissory Note.
On August 5, 2005, as permitted by the Promissory Note, the Company opted to
make three interest payments to Cornell Capital, each in the amount of $20,000,
which payments were made in a single lump sum of $60,000. The payments were
included in accrued liabilities as of July 31, 2005.
F-21
JAG Media Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 11 - Subsequent events (continued):
On September 9, 2005, the Company entered into a non-binding letter of intent
(the "Letter of Intent") with Cryptometrics, Inc., a Delaware corporation
("Cryptometrics"), pursuant to which the Company and Cryptometrics would enter
into a Merger agreement under which Cryptometrics would merge with a newly
created subsidiary of the Company. In consideration of the Merger, the
stockholders of Cryptometrics would acquire shares of common stock of the
Company, which shares would, upon issuance, represent 88.1875% of the
outstanding Company common stock, in exchange for all of the issued and
outstanding capital stock of Cryptometrics (the "Proposed Transaction"). The
shares of common stock to be received by the stockholders of Cryptometrics would
be registered under the U.S. Securities Act of 1933, as amended (the "Securities
Act"). If consummated, the Proposed Transactions would be accounted for as a
reverse acquisition in which Cryptometrics would be the acquirer.
At the closing of the Proposed Transaction (the "Closing"), the Company's
current directors would resign as directors of the Company and would also resign
as officers and executives of the Company. The Company's Board of Directors
would be replaced with designees of Cryptometrics, at least a majority of whom
would be independent and who, in whole or in part, would also constitute the
audit committee of the Company's Board of Directors.
Cryptometrics was incorporated in May 2000 under the name Postal Hut, Inc. and
in November 2001 changed its name to Cryptometrics, Inc. Cryptometrics' business
focuses on the biometric security industry. Cryptometrics produces hardware and
software products that take advantage of the internationally approved standards
for biometric identification and verification.
In connection with the Proposed Transaction, the Cryptometrics stockholders will
agree not to sell or otherwise dispose of the shares of Common Stock that are
received in connection with the Proposed Transaction for a period of 12 months
from the Closing; provided, that subject to compliance with all relevant
securities laws, 35% of the shares will not be subject to the lock-up provision,
if and so long as, the shares of the post-Merger Company are trading on the
NASDAQ Capital Market.
The Proposed Transaction is subject to various conditions being satisfied prior
to Closing, including, among others:
o completion of all steps necessary to increase the number of authorized
shares of common stock of the Company from 250,000,000 to 500,000,000
and approval of a name change to a name including "Cryptometrics";
o the Registration Statement relating to the registration of the shares
of common stock being issued to the stockholders of Cryptometrics
being declared effective by the Securities and Exchange Commission;
o the listing of the Company's common stock on the NASDAQ Capital
Market; and
o the Company not having outstanding indebtedness for borrowed money in
excess of the principal amount of $2,000,000.
F-22
JAG Media Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 11 - Subsequent events (continued):
In addition, the Closing is conditioned upon (i) each party completing a due
diligence review, the results of which are satisfactory in all respects to each
party, (ii) the Company and Cryptometrics obtaining all appropriate and
necessary corporate and stockholder approvals for the transaction, and (iii) the
parties entering into definitive agreements, including, without limitation, a
mutually acceptable definitive acquisition agreement between Cryptometrics and
the Company.
Except for certain specified provisions, the Letter of Intent is non-binding.
There is no assurance that the definitive documentation called for in the Letter
of Intent will ever by executed, or if executed, that the proposed transaction
between the Company and Cryptometrics will be consummated.
On November 3, 2005, the Company renewed and extended the amended and restated
employment agreements between the Company and its two senior executives, each
dated August 31, 2001, retroactively effective to August 31, 2004. Under the
revision, the Company became obligated to make cash payments of $150,000 to each
of the two senior executives annually during the three year period ending August
31, 2007. As a result, the Company's obligations for cash payments under each of
the two employment agreements during periods subsequent to July 31, 2005 totaled
approximately $150,000 payable in each of the years ending July 31, 2006 and
2007 and $12,500 payable in the year in the year ended July 31, 2008. The
exercise price of various options which may be granted under the terms of the
original amended and restated employment agreements was increased from 25% of a
defined market value to 100% of a defined fair market value.
F-23
JAG Media Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheet
October 31, 2005
(Unaudited)
Assets
Current assets:
Cash and cash equivalents........................................................... $332,791
Accounts receivable, net of allowance for doubtful accounts of $7,500............... 20,519
Other current assets................................................................ 53,693
-----------
Total current assets.................................................. 407,003
Equipment, net of accumulated depreciation of $97,140................................... 69,487
Other assets............................................................................ 29,489
-----------
Total................................................................. $505,979
===========
Liabilities and Stockholders' Deficiency
Current liabilities:
Accounts payable and accrued expenses............................................... $446,515
Deferred revenues................................................................... 33,027
-----------
Total current liabilities............................................. 479,542
Loan payable, net of unamortized debt discount of $58,974............................... 1,941,026
-----------
Total liabilities..................................................... 2,420,568
-----------
Mandatorily redeemable Class B common stock, par value $.00001 per share:
400,000 shares designated as Series 2; 380,829 shares issued and outstanding........ 4
40,000 shares designated as Series 3; 21,500 shares issued and outstanding.......... -
-----------
4
-----------
Commitments and Contingencies
Stockholders' deficiency:
Preferred stock; par value $.00001 per share; 50,000,000 shares authorized;
none issued ...................................................................... -
Common stock; par value $.00001 per share; 250,000,000 shares
authorized; 44,747,799 shares issued and outstanding.............................. 448
Additional paid-in capital.......................................................... 43,798,187
Unearned compensation............................................................... (85,014)
Accumulated deficit................................................................. (45,628,214)
-----------
Total stockholders' deficiency........................................ (1,914,593)
-----------
Total................................................................. $505,979
===========
See Notes to Condensed Consolidated Financial Statements of
JAG Media Holdings, Inc. and Subsidiaries.
F-24
JAG Media Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
Three Months Ended October 31, 2005 and 2004
(Undaudited)
2005 2004
---------- ----------
Revenues............................................................. $ 40,023 $ 72,227
---------- ----------
Operating expenses:
Cost of revenues................................................. 25,873 38,443
Selling expenses................................................. 9,869 2,151
General and administrative expenses.............................. 526,167 249,425
---------- ----------
Totals............................................. 561,909 290,019
---------- ----------
Loss from operations................................................. (521,886) (217,792)
Other income (expense):
Interest income.................................................. 1,702 691
Interest expense................................................. (74,370) -
---------- ----------
Net loss............................................................. $ (594,554) $ (217,101)
========== ==========
Basic net loss per share............................................. $(.01) $(.00)
========== ==========
Basic weighted average common shares outstanding..................... 44,747,799 44,235,299
========== ==========
See Notes to Condensed Consolidated Financial Statements of
JAG Media Holdings, Inc. and Subsidiaries.
F-25
JAG Media Holdings, Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Stockholders' Deficiency
Three Months Ended October 31, 2005
(Unaudited)
COMMON STOCK
----------------------------
ADDITIONAL UNEARNED
NUMBER OF SHARES AMOUNT PAID-IN CAPITAL COMPENSATION
---------------- ------ --------------- ------------
Balance, August 1, 2005 ......................... 44,747,799 $ 448 $ 43,742,187 $ (40,447)
Effect of issuance of options in exchange
for services ................................ 56,000 (56,000)
Amortization of unearned compensation ........... 11,433
Net loss ........................................
------------ ------------ ------------ ------------
Balance, October 31, 2005 ....................... 44,747,799 $ 448 $ 43,798,187 $ (85,014)
ACCUMULATED
DEFICIT TOTAL
------------- -------------
Balance, August 1, 2005 ......................... $(45,033,660) $ (1,331,472)
Effect of issuance of options in exchange
for services ................................ - -
Amortization of unearned compensation ........... - 11,433
Net loss ........................................ (594,554) (594,554)
------------ ------------
Balance, October 31, 2005 ....................... $(45,628,214) $ (1,914,593)
============ ============
See Notes to Condensed Consolidated Financial Statements of JAG Media Holdings,
Inc. and Subsidiaries.
F-26
JAG Media Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Three Months Ended October 31, 2005 and 2004
(Unaudited)
2005 2004
---------- ----------
Operating activities:
Net loss ................................................................................ $(594,554) $(217,101)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation ..................................................................... 5,247 3,587
Amortization of unearned compensation ............................................ 11,433 14,559
Amortization of debt discount .................................................... 13,877 -
Amortization of other assets ..................................................... 6,937
Changes in operating assets and liabilities:
Accounts receivable ........................................................... (6,009) 3,320
Other current assets .......................................................... 13,589 27,115
Accounts payable and accrued expenses ......................................... 229,781 5,382
Deferred revenues ............................................................. 3,796 (1,277)
--------- ---------
Net cash used in operating activities ...................................... (315,903) (164,415)
Investing activities
Equipment purchases ................................................................. (12,171) -
--------- ---------
Net decrease in cash and cash equivalents ............................................... (328,074) (164,415)
Cash and cash equivalents, beginning of period .......................................... 660,865 386,283
--------- ---------
Cash and cash equivalents, end of period ................................................ $ 332,791 $ 221,868
========= =========
See Notes to Condensed Consolidated Financial Statements of JAG Media Holdings,
Inc. and Subsidiaries.
F-27
JAG Media Holdings, Inc. and Subsidiaries
Noted to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of Presentation:
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the financial position of JAG
Media Holdings, Inc. ("JAG Media") and its subsidiaries as of October 31, 2005,
their results of operations and cash flows for the three months ended October
31, 2005 and 2004 and their changes in stockholders' deficiency for the three
months ended October 31, 2005. JAG Media and its subsidiaries are referred to
together herein as the "Company." Pursuant to rules and regulations of the
Securities and Exchange Commission (the "SEC"), certain information and
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted from these consolidated financial statements
unless significant changes have taken place since the end of the most recent
fiscal year. Accordingly, these condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements, notes
to consolidated financial statements and the other information in the audited
consolidated financial statements of the Company as of July 31, 2005 and for the
years ended July 31, 2005 and 2004 (the "Audited Financial Statements") included
in this Prospectus.
The results of the Company's operations for the three months ended
October 31, 2005 are not necessarily indicative of the results of operations to
be expected for the full year ending July 31, 2006.
As further explained in Note 1 to the Audited Financial Statements, the
Company gathers and compiles financial and investment information from contacts
at financial institutions, experienced journalists, money managers, analysts and
other Wall Street professionals and generates revenues by releasing such
information to subscribers on a timely basis through facsimile transmissions and
a web site. As a result of an acquisition on November 24, 2004 (see Note 9 to
the Audited Financial Statements), the Company is also in the business of
developing software focused on streaming video solutions.
The accompanying condensed consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. However, as
shown in the accompanying condensed consolidated financial statements, the
Company only generated revenues of approximately $40,000, and it incurred net
losses of approximately $595,000 and cash flow deficiencies from operating
activities of approximately $316,000 for the three months ended October 31,
2005. In addition, as of October 31, 2005, the Company only had cash and cash
equivalents available of $333,000 and a working capital deficiency of $73,000.
These matters raise substantial doubt about the Company's ability to continue as
a going concern.
Management believes that, in the absence of a substantial increase in
subscription revenues, it is probable that the Company will continue to incur
losses and negative cash flows from operating activities through at least
October 31, 2006 and that the Company will need to obtain additional equity or
debt financing to sustain its operations until it can market its services,
expand its customer base and achieve profitability.
F-28
JAG Media Holdings, Inc. and Subsidiaries
Noted to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of Presentation (continued):
As further explained in Note 4 herein, the Company entered into an
agreement with an investment partnership pursuant to which it has, in effect,
"put" options whereby, subject to certain conditions, it is able to require the
investment partnership to purchase shares of its common stock from time to time
at prices based on the market value of its shares. The maximum aggregate
purchase price under this equity line is $10,000,000. This equity line was
renewed in July 2004 and expires in August 2006. As of October 31, 2005 and
December 15, 2005, the Company had received gross proceeds of $4,035,000 from
the exercise of "put" options. Although the timing and amount of the required
purchases under the agreement are at the Company's discretion, the purchases are
subject to certain conditions as also explained in Note 4 herein and the ability
of the investment partnership to fund the purchases. Also as explained in Note 4
herein, on January 25, 2005, the Company entered into a Promissory Note
agreement with the investment partnership pursuant to which the Company agreed
to borrow $2,000,000 from the investment partnership. The $2,000,000 loan was
funded on February 2, 2005. Pursuant to the Promissory Note, the Company has
deposited 35 put notices under the above agreement for puts in the amount of
$60,000 each and one in the amount of $181,017 into escrow. As of the date of
report, no put notices have been released and the Company is negotiating with
Cornell Capital to further revise terms of the Promissory Note.
Management believes that the Company will be able to generate
sufficient revenues from its remaining facsimile transmission and web site
operations and obtain sufficient financing from its agreement with the
investment partnership prior to its expiration in August 2006 or through other
financing agreements to enable it to continue as a going concern through at
least October 31, 2006. However, if the Company cannot generate sufficient
revenues and/or obtain sufficient additional financing, if necessary, by that
date, the Company may be forced thereafter to restructure its operations, file
for bankruptcy or entirely cease its operations.
The accompanying condensed consolidated financial statements do not
include any adjustments related to the recoverability and classification of
assets or the amount and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
Note 2 - Net Earnings (Loss) Per Share:
The Company presents "basic" earnings (loss) per share and, if
applicable, "diluted" earnings per share pursuant to the provisions of Statement
of Financial Accounting Standards No. 128, "Earnings per Share". Basic earnings
(loss) per share is calculated by dividing net income or loss by the weighted
average number of common shares outstanding during each period. The calculation
of diluted earnings per share is similar to that of basic earnings per share,
except that the denominator is increased to include the number of additional
common shares that would have been outstanding if all potentially dilutive
common shares, such as those issuable upon the exercise of outstanding stock
options and warrants, were issued during the period and the treasury stock
method had been applied to the proceeds from their exercise.
F-29
JAG Media Holdings, Inc. and Subsidiaries
Noted to Condensed Consolidated Financial Statements
(Unaudited)
Note 2 - Net Earnings (Loss) Per Share (continued):
As of October 31, 2005, there were options outstanding for the purchase
of a total of 2,460,000 shares of common stock (see Note 4 herein). However,
diluted per share amounts have not been presented in the accompanying condensed
consolidated statements of operations because the Company had a net loss in the
three months ended October 31, 2005 and 2004 and the assumed effects of the
exercise of the Company's stock options that were outstanding during all or part
of those periods would have been anti-dilutive.
Note 3 - Income taxes:
As of October 31, 2005, the Company had Federal net operating loss
carryforwards of approximately $29,685,000 available to reduce future Federal
taxable income which will expire from 2019 through 2025. As of October 31, 2005,
the Company's deferred tax assets consisted of the effects of temporary
differences attributable to the following:
Deferred revenues, net................ $ 11,000
Unearned compensation................. 84,000
Net operating loss carryforwards...... 11,378,000
-----------
$11,473,000
Less Valuation Allowance.............. [11,473,000]
-----------
--
-----------
Due to the uncertainties related to, among other things, the changes in
the ownership of the Company, which could subject its net operating loss
carryforwards to substantial annual limitations, and the extent and timing of
its future taxable income, the Company offset its net deferred tax assets by an
equivalent valuation allowance as of October 31, 2005.
The Company had also offset the potential benefits from its net
deferred tax assets by an equivalent valuation allowance during the year ended
July 31, 2005. As a result of the decrease in the valuation allowance of
$370,000 (which is attributable to the expiration of options that had not been
exercised) and the increase in the valuation allowance of $68,000 during the
three months ended October 31, 2005 and 2004, respectively, there are no credits
for income taxes reflected in the accompanying condensed consolidated statements
of operations to offset pre-tax losses.
Note 4 - Issuances of Common Stock and Options:
Equity and debt financing agreements with Cornell Capital Partners, L.P.:
As further explained in Note 4 to the Audited Financial Statements, on
April 9, 2002, the Company entered into an equity line purchase agreement (the "
Equity Line Agreement") with Cornell Capital Partners L.P. ("Cornell Capital")
pursuant to which the Company has, in effect, put options whereby, subject to
certain conditions, it can require Cornell Capital to purchase shares of its
common stock from time to time at an aggregate purchase price of $10,000,000.
The Equity Line Agreement became available on August 28, 2002 and was extended
in July 2004 for an additional 24 months through August 2006 unless it is
terminated earlier at the discretion of the Company. The purchase price will be
95% of the lowest closing bid price of the Company's common stock over a
specified number of trading days commencing on specified dates. Cornell Capital
shall be entitled to a cash fee equal to 5% of the gross proceeds received by
the Company from Cornell Capital in connection with each put. As of October 31,
2005, $4,035,000 of the Company's Equity Line with Cornell Capital had been
utilized.
F-30
JAG Media Holdings, Inc. and Subsidiaries
Noted to Condensed Consolidated Financial Statements
(Unaudited)
Note 4 - Issuance of Common Stock and Options (continued):
The timing and amount of the required purchases shall be at the
Company's discretion subject to certain conditions including (i) a maximum
purchase price to be paid by Cornell Capital for each put of $500,000; (ii) at
least five trading days must elapse before the Company can deliver a new put
notice to Cornell Capital; (iii) the registration statement covering the shares
issuable to Cornell Capital pursuant to the equity line must remain effective at
all times and (iv) on any given closing date, there shall be at least one bid
for the common stock on the Nasdaq OTC Bulletin Board. In addition, the
obligation of Cornell Capital to complete its purchases under the Equity Line
Agreement is not secured or guaranteed and, accordingly, if Cornell Capital does
not have available funds at the time it is required to make a purchase, the
Company may not be able to force it to do so.
During the three months ended October 31, 2005, no put options were
exercised. As of October 31, 2005, the Company had the ability to require
Cornell Capital to purchase shares of its common stock pursuant to the Equity
Line Agreement at an aggregate purchase price of $5,965,000 through August 28,
2006, before taking into account any puts related to the Promissory Note
described below. The $5,965,000 of availability will be reduced to the extent
the Promissory Note and interest thereunder is repaid out of the net proceeds
received by the Company upon delivery of put notices under the Equity Line
Agreement.
On January 25, 2005, the Company entered into a Promissory Note
Agreement with Cornell Capital for a loan of $2,000,000. The $2,000,000 loan
from Cornell Capital was funded on February 2, 2005, net of a debt discount of
$100,000 attributable to a fee paid to Cornell Capital deducted at the time of
funding which is being amortized over the life of the loan. The unamortized debt
discount as of October 31, 2005 is $58,974. The face amount of the Promissory
Note and interest on the amount from time to time outstanding at a rate of 12%
per year will be payable either (i) out of the net proceeds to be received by
the Company upon delivery of put notices under the Equity Line Agreement or (ii)
in full by the Company within 663 calendar days of January 25, 2005 regardless
of the availability of proceeds under the Equity Line Agreement, unless an
extension is mutually agreed to by the parties in writing.
Pursuant to the Promissory Note, the Company has agreed to deposit in
escrow 35 put notices under the Equity Line Agreement for puts in an amount of
$60,000 each and one request for a put under the Equity Line Agreement in an
amount of $181,017. Under the terms of the Promissory Note as amended on August
5, 2005, the put notices held in escrow were to be released every 14 days since
November 4, 2005. As of the date of report, no put notices have been released
and the Company is negotiating with Cornell Capital to further revise terms of
the Promissory Note. The Company has also agreed to reserve out of its
authorized but unissued shares of common stock. 3,500,000 shares of the
Company's common stock (the "Reserved Shares") to be delivered to Cornell
Capital under the Equity Line Agreement upon use of such put notices.
The Company has the option to repay the amounts due under the
Promissory Note and to withdraw any put notices yet to be effected provided that
each repayment is in amount not less than $25,000. In addition, the Company has
the right to accelerate the delivery of one or more put notices and to select
the specific put notice to be so accelerated. If the Promissory Note is not paid
in full when due, the outstanding principal owed thereunder will be due and
payable in full together with interest at a rate of 14% per year or the highest
interest rate permitted by applicable law, if lower.
F-31
JAG Media Holdings, Inc. and Subsidiaries
Noted to Condensed Consolidated Financial Statements
(Unaudited)
Note 4 - Issuance of Common Stock and Options (continued):
Upon an event of default (as defined in the Promissory Note), the
entire principal balance and accrued interest of the Promissory Note, and all
other obligations of the Company under the Promissory Note, would become
immediately due and payable without any action on the part of Cornell Capital.
Options issued for services:
As explained in Note 5 to the Audited Financial Statements, the Company
has issued, from time to time, stock options for the purchase of common stock to
employees as compensation and to nonemployees, including investment analysts and
commentators that have entered into agreements to provide the Company with
financial information that is released to subscribers, as consideration for
consulting, professional and other services. As explained in Note 2 to the
Audited Financial Statements, the Company recognizes the cost of such issuances
based on the fair value of the equity instruments issued over the periods in
which the related services are rendered in accordance with the provisions of
Stock-Based Compensation" ("SFAS 123").
As of August 1, 2005, the Company had 2,510,000 shares of common stock
that were subject to outstanding options issued to employees and nonemployees as
compensation for services. During the three months ended October 31, 2005, the
Company granted to employees options to purchase 250,000 shares of common stock
and granted to consultants options to purchase 200,000 shares of common stock.
These options had exercise prices ranging from $.02 per share to $1.00 per share
and will expire at various dates from August 2011 through September 2015. During
the three months ended October 31, 2005, options to purchase 500,000 shares were
canceled and no options were exercised. As a result, options to purchase
2,460,000 shares of common stock at prices ranging from $.02 to $1.00 per share
were outstanding as of October 31, 2005.
The cost of the options of $56,000, determined based on their aggregate
estimated fair values at the respective dates of issuance, was initially charged
directly to expense or to unearned compensation and subsequently amortized to
expense.
Note 5 - Legal Proceedings:
The Company is a party to various claims and lawsuits incidental to its
business. In the opinion of management, it is probable that the resolution of
such contingencies will not materially affect the consolidated financial
position or results of operations of the Company in subsequent years. Bay Point
Investment Partners, LLC has threatened to commence litigation against the
Company, certain of its officers and directors and others. The Bay Point claim
relates to its purchase of shares of the Company's stock in private placements
on December 10, 2002 and June 19, 2003. Bay Point alleges, among other things,
various disclosure failings as well as the Company's failure to register the
shares it purchased in the June 19, 2003 private placement by the date provided
in the placement agreement and to use the proceeds as Bay Point claims they were
intended to be used. The Company believes it has meritorious defenses to Bay
Point's claims.
F-32
JAG Media Holdings, Inc. and Subsidiaries
Noted to Condensed Consolidated Financial Statements
(Unaudited)
Note 6 -Employment Agreements:
On November 3, 2005, the Company renewed and extended the amended and
restated employment agreements between the Company and its two senior
executives, each dated August 31, 2001, retroactively effective to August 31,
2004. Under the revision, the Company became obligated to make cash payments of
$150,000 to each of the two senior executives annually during the three year
period ending August 31, 2007. As a result, the Company's obligations for cash
payments under each of the two employment agreements during periods subsequent
to October 31, 2005 totaled approximately $112,500, $150,000 and $12,500 in the
three month periods ending October 31, 2006, 2007 and 2008, respectively. The
exercise price of various options which may be granted under the terms of the
original amended and restated employment agreements was increased from 25% of a
defined market value to 100% of a defined fair market value.
Note 7 - Proposed Acquisition:
On September 9, 2005, the Company entered into a non-binding letter of
intent (the "Letter of Intent") with Cryptometrics, Inc., a Delaware corporation
("Cryptometrics"), pursuant to which the Cryptometrics would enter into a merger
agreement under which Cryptometrics would merge with a Cryptometrics would
acquire shares of common stock of the Company, which shares would, upon
outstanding Company common stock, in exchange for all of the issued and
outstanding capital stock of Cryptometrics (the "Proposed Transaction"). The
shares of common stock to be received by the stockholders of Cryptometrics would
be registered under the U.S. Securities Act of 1933, as amended (the "Securities
Act"). If consummated, the Proposed Transaction would be accounted for as a
reverse acquisition in which Cryptometrics would be the acquirer.
At the closing of the Proposed Transaction (the "Closing"), the
Company's current directors would resign as directors of the Company and would
also resign as officers and executives of the Company. The Company's board of
directors would be replaced with designees of Cryptometrics.
Cryptometrics was incorporated in May 2000 under the name Postal Hut,
Inc. and in November 2001 changed its name to Cryptometrics, Inc. Cryptometrics'
business focuses on the biometric security industry. Cryptometrics produces
hardware and software products that take advantage of the internationally
approved standards for biometric identification and verification.
The Proposed Transaction is subject to various conditions being
satisfied prior to Closing, including, among others, the approval of the
stockholders of the Company of various amendments to its Articles of
Incorporation and the listing of the Company's Common Stock on the Nasdaq
Capital Market.
In addition, the Closing is conditioned upon (i) each party completing
a due diligence review, the results of which are satisfactory in all respects to
each party, (ii) the Company and Cryptometrics obtaining all appropriate and
necessary corporate and stockholder approvals for the transaction, and (iii) the
parties entering into definitive agreements, including, without limitation, a
mutually acceptable definitive acquisition agreement between Cryptometrics and
the Company.
Except for certain specified provisions, the Letter of Intent is
non-binding. There is no assurance that the definitive documentation called for
in the Letter of Intent will ever be executed, or if executed, that the proposed
transaction between the Company and Cryptometrics will be consummated.
F-33
JAG Media Holdings, Inc. and Subsidiaries
Noted to Condensed Consolidated Financial Statements
(Unaudited)
Note 8 - Subsequent Events:
On December 13, 2005, the Company received the following from a
stockholder: (i) instructions for the cancellation of an outstanding option to
acquire 1,000,000 shares of the Company's common stock; (ii) stock certificates
and a stock power to transfer back to the Company 2,631,249 shares of common
stock; and (iii) a stock power to transfer back to the Company 874,999 shares of
common stock and 7,981 shares of Series B common stock held through a broker,
together with a copy of the irrevocable instructions to the broker to deliver
such shares to the Company. The option has been cancelled and 2,631,249 shares
of common stock have been cancelled, reducing the Company's outstanding shares
by such amount and its par value common stock account by $26. The Company paid
no consideration for the return or cancellation of such shares.
On December 27, 2005, we entered into a merger agreement with
Cryptometrics pursuant to which Cryptometrics would merge with a newly created
subsidiary of the Company. In consideration of the merger, the stockholders of
Cryptometrics would acquire shares of our Common Stock which would, upon
issuance, represent approximately 88% of our outstanding Common Stock, in
exchange for all of the issued and outstanding capital stock of Cryptometrics.
In such case, our existing stockholders would experience significant dilution
from the issuance of these shares to the stockholders of Cryptometrics. If
consummated, the transaction would be accounted for as a reverse acquisition in
which Cryptometrics would be the acquirer.
Until Jag Media and Cryptometrics agree otherwise, the merger
agreement, notwithstanding the approval by the Cryptometrics stockholders, may
be canceled with or without reason by either the Company or Cryptometrics with
no liability. Additionally, the consummation of the merger is subject to various
conditions set forth in the merger agreement. There is no assurance that the
proposed merger between the Company and Cryptometrics will be consummated, or if
it is consummated, that it will be pursuant to the terms described above. The
merger agreement was filed as Exhibit 2.1 to a Form 8-K filed with the SEC on
December 30, 2005 and should be reviewed for further information regarding the
merger.
F-34
HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS OF
CRYPTOMETRICS, INC. AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
------------------------------
Report of Independent Registered Public Accounting Firm ...............................................F-36
Consolidated Balance Sheets Years Ended April 30, 2005 and 2004 .......................................F-37/38
Consolidated Statements of Operations Years Ended April 30, 2005 and 2004 .............................F-39
Consolidated Statements of Shareholders Equity and Comprehensive Loss Years Ended
April 30, 2005 and 2004 ...............................................................................F-40
Consolidated Statements of Cash Flows Ended April 30, 2005 and 2004 ...................................F-41
Notes to Consolidated Financial Statements ............................................................F-42/50
Consolidated Balance Sheet October 31, 2005 (Unaudited) ...............................................F-51
Consolidated Statements of Operations Six Months Ended October 31, 2005
and 2004 (Unaudited) ..................................................................................F-52
Consolidated Statement of Shareholders Equity and Comprehensive Loss
Year Ended April 30, 2005 and Six Months Ended October 31, 2005 (Unaudited) ...........................F-53
Consolidated Statement of Cash Flows Six Months Ended October 31, 2005
and 2004 (Unaudited) ..................................................................................F-54
Notes to Financial Statements .........................................................................F-55
F-35
Report of Independent Registered Public Accounting Firm
To the Stockholders and
Board of Directors
Cryptometrics, Inc & subsidiary
Tuckahoe, NY
We have audited the accompanying balance sheets of Cryptometrics, Inc. &
Subsidiary as of April 30, 2005 and 2004 and the related statements of
operations, change in stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit included
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 the audits
provide a reasonable basis for our opinion.
In our opinion, the financial statement referred to above present fairly, in all
material respects, the financial position of Cryptometrics, Inc. & subsidiary as
of April 30, 2005 and 2004, and the result of its operation and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
Seligson & Giannattasio, LLP
White Plains, NY
August 15, 2005
F-36
HISTORICAL FINANCIAL STATEMENTS OF CRYPTOMETRICS
Cryptometrics, Inc. and Subsidiary
Consolidated Balance Sheets
Years Ended April 30, 2005 and 2004
Year Ended April 30,
-------------------------------
2005 2004
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 11,182,147 $ 1,142,029
Accounts receivable 97,534 0
Inventories 143,936 86,426
Prepaid expenses and other assets 72,767 3,827
Income Tax Recoverable 392,779 209,402
------------ ------------
Total current assets 11,889,163 1,441,684
------------ ------------
Fixed assets:
Property and equipment 930,828 506,689
Accumulated Depreciation (345,760) (193,533)
------------ ------------
Total fixed assets 585,068 313,156
------------ ------------
Other Assets:
Goodwill 10,700,000 10,500,000
Loan Receivable Officers -- 798,421
Patents 79,140 16,519
Other 1,200 1,101
------------ ------------
Total other assets 10,780,340 11,316,041
------------ ------------
Total assets $ 23,254,571 $ 13,070,881
============ ============
See Notes to Consolidated Financial Statements.
F-37
Cryptometrics, Inc. and Subsidiary
Consolidated Balance Sheets
Years Ended April 30, 2005 and 2004
Year Ended April 30,
-----------------------------
2005 2004
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade payables & Accrued charges $ 1,481,584 $ 486,100
Loan Payable -- 193,089
Loan payable - related party -- 170,447
Accrued compensation 338,363 1,280,000
Other loans payable -- 53,896
------------ ------------
Total current liabilities: 1,819,947 2,183,532
------------ ------------
Stockholders' equity:
Common stock, $0.01 par value; 20,000,000
Shares Authorized, shares 11,197,103 and
8,640,485 issued and outstanding, respectively 111,971 86,405
Additional paid-in capital 31,270,971 15,246,937
Accumulated deficit (9,872,849) (4,371,470)
Accumulated other comprehensive loss (75,469) (74,523)
------------ ------------
Total stockholders' equity 21,434,624 10,887,349
------------ ------------
Total liabilities and stockholders' equity $ 23,254,571 $ 13,070,881
============ ============
See Notes to Consolidated Financial Statements.
F-38
Cryptometrics, Inc. and Subsidiary
Consolidated Statements of Operations
Years Ended April 30, 2005 and 2004
Year End April 30,
-----------------------------
2005 2004
----------- -----------
Revenues $ 681,854 $ 242,022
----------- -----------
Cost and expenses:
Cost of revenues (excluding
amortization of intangible assets) 187,817 46,269
Research and development 1,934,415 443,083
Marketing and selling 1,804,249 760,292
General and administrative 2,359,463 871,976
----------- -----------
Total costs and expenses 6,285,944 2,121,620
----------- -----------
Loss from operations (5,604,090) (1,879,598)
Interest and other income, net 102,711 26,007
----------- -----------
Net loss $(5,501,379) $(1,853,591)
=========== ===========
See Notes to Consolidated Financial Statements.
F-39
Cryptometrics, Inc. and Subsidiary
Consolidated Statement of Shareholders' Equity and
Comprehensive Loss
Years Ended April 30, 2005 and 2004
COMMON STOCK ACCUM. OTHER
SHARES AMOUNT ADD. PAID IN CAP. ACCUM. DEF. COMP. LOSS
----------- ----------- ----------------- ------------ -------------
Balance May 1, 2003 6,763,184 $ 67,632 $ 1,796,372 $(2,517,879) $ --
Net loss -- -- -- (1,853,591) --
Loss on currency Exchange -- -- -- -- (74,523)
Sale of common stock by
Private Placements 494,344 4,943 2,964,395 -- --
Issuance of common stock in
connection with the acquisition
of Cryptometrics Canada, Inc.
(formerly known as BioDentity
Systems Corporation) 1,382,957 13,830 10,486,170 -- --
----------- ----------- ----------- ----------- -----------
Balance April 30, 2004 8,640,485 86,405 15,246,937 (4,371,470) (74,523)
Net loss -- -- -- (5,501,379) --
Sale of common stock by
Private Placements 2,556,618 25,566 16,024,034 -- --
Loss on currency exchange -- -- -- -- (946)
----------- ----------- ----------- ----------- -----------
Balance April 30, 2005 11,197,103 $ 111,971 $31,270,971 $(9,872,849) $ (75,469)
=========== =========== =========== =========== ===========
See Notes to Consolidated Financial Statements.
F-40
Cryptometrics, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years Ended April 30, 2005 and 2004
Years Ended April 30,
-------------------------------
2005 2004
------------ ------------
Cash flows from operating activities: $ (5,501,379) $ (1,853,591)
Net loss
Adjustments to reconcile net loss to net cash used in 152,227 20,678
operating activities:
Depreciation and amortization
Changes in assets and liabilities:
Accounts receivable (97,534) --
Inventories (57,510) 3,144
Prepaid expenses and other assets (252,416) 19,038
Accounts payable and accrued expenses 652,267 83,938
Net cash used in operating activities (5,104,345) (1,726,793)
------------ ------------
Cash flows from investing activities:
Acquisition of fixed assets (424,138) (103,020)
Patent application costs (62,621) --
------------ ------------
Net cash flows from investing activities (486,759) (103,020)
------------ ------------
Cash flows from financing activities:
Sale of common stock 16,049,600 2,969,338
Repayment of debt (417,432) (16,515)
------------ ------------
Net cash provided by financing activities 15,632,168 2,952,823
Net effect of currency fluctuations (946) (74,523)
------------ ------------
Net increase in cash and cash equivalents 10,040,118 1,048,487
Cash and cash equivalents at period beginning 1,142,029 93,542
------------ ------------
Cash and cash equivalents at period end $ 11,182,147 $ 1,142,029
============ ============
Supplemental cash flow information:
Income taxes paid $ -- $ --
============ ============
Interest paid $ 19,224 $ 898
============ ============
See Notes to Consolidated Financial Statements.
F-41
Cryptometrics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 1 - Organization and summary of significant accounting policies:
Organization
Cryptometrics, Inc. (the "Company") is an emerging leader in the biometric
security industry. As a manufacturer we produce hardware and software products
that take advantage of the internationally approved standards for biometric
identification and verification. The FingerSURE product line provides state of
the art encryption software, allowing users of both trusted and non-trusted
authentication devices the ability to, in a secure manner verify identity via a
finger print. The SecurIDent product line contains proprietary software products
that possess image quality analysis, eye finding logic, image normalization and
matching. From hardware prospective the company manufacturers various cameras
using off the shelf casings, sensors and lens; configured using our intellectual
property and providing high quality live capture images that are suitable for
facial recognition. Combined, these products are used by Border Patrols,
Immigration Authorities, various governmental agencies and the commercial
enterprise.
The Company was incorporated in the State of Delaware in May 2000 under the name
Postal Hut, Inc. In November 2001, the Company changed its name to
Cryptometrics, Inc.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Cryptometrics of Canada (formerly known as
BioDentity Systems Corporation). All material intercompany transactions have
been eliminated in consolidation.
Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts therein. Estimates
are used for, but not limited to, the accounting for the allowance for doubtful
accounts and sales returns, goodwill and other intangible asset impairments,
inventory allowances, warranty costs, revenue recognition as well as loss
contingencies and restructurings. Actual results could differ from these
estimates.
F-42
Cryptometrics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 1- Organization and summary of significant accounting policies (continued):
Revenue Recognition Policy
Significant management judgments and estimates are made in connection with the
revenues recognized in any accounting period. The Company must assess whether
the fee associated with a revenue transaction is fixed or determinable and
whether or not collection is probable. Material differences could result in the
amount and timing of revenues for any period if management were to make
different judgments or utilize different estimates.
Certain of the Company's equipment sales such as its' SecurIDent Systems
generally require installation subsequent to shipment and transfer of title. The
Company recognizes revenue on such sales in accordance with Staff Accounting
Bulletin ("SAB") 104, "Revenue Recognition". Revenue related to equipment sales
that are contingent on installation is deferred until installation is complete,
title has transferred and customer acceptance has been obtained. Due to current
Company policy and practices, the Company considers acceptance of the SecurIDent
Systems contingent upon successful installation of the product. Revenues from
sales of products via authorized representatives, dealers, distributors or other
third party sales channels are recognized at the time of title transfer,
generally upon shipment.
The Company also sells several stand-alone software products including Face
Recognition server, Face Processor and software developer kits. Revenue is
recognized on software products in accordance with Statement of Position ("SOP")
97-2, "Software Revenue Recognition," as amended. The Company recognizes revenue
on software products when persuasive evidence of an arrangement exists, delivery
has occurred, the vendor's fee is fixed or determinable and vendor-specific
objective evidence ("VSOE") of fair value exists to allocate the total fee to
all undelivered elements of the arrangement and collection is deemed reasonably
assured. VSOE of fair value is established based upon either sales of the
element (e.g, maintenance, training or consulting) in individual transactions,
or, in certain cases for maintenance, based upon substantive renewal rates. In
cases where the Company does not have VSOE of fair value for all delivered
elements in the transaction (e.g., for licenses), the fees from these
multiple-element agreements are allocated using the residual value method. In
circumstances when the software and services being sold include services to
provide significant production, modification or customization of the software,
and the services cannot be segregated into separate units of accounting, the
Company accounts for the software sales under SOP 97-2 and SOP 81-1 "Accounting
for performance of construction-type and certain production-type contracts". In
the cases where SOP 81-1 is applied, the Company uses the cost-to-cost method of
percentage of completion. Under this method, sales, including estimated earned
fees or profits, are recorded based on the percentage that total costs incurred
bear to total estimated costs. Maintenance revenue is deferred and recognized
ratably over the life of the service period of the related agreement.
F-43
Cryptometrics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 1- Organization and summary of significant accounting policies (continued):
Stock Based Compensation
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation". The Company currently accounts for its stock-based
compensation plans using the accounting prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees". As the Company
is not required to adopt the fair value based recognition provisions prescribed
under SFAS No. 123, as amended, it has elected only to comply with the
disclosure requirements set forth in the statement which includes disclosing pro
forma net income (loss) and earnings (loss) per share as if the fair value based
method of accounting had been applied.
The effects of applying SFAS No. 123, as amended, in the above pro forma
disclosures are not indicative of future amounts as they do not include the
effects of awards granted prior to Fiscal 1996. Additionally, future amounts are
likely to be affected by the number of grants awarded since additional awards
are generally expected to be made at varying amounts.
During the year ended April 30, 2005, the Company granted options to certain of
its employees to purchases 180,000 shares of the Company's common stock. The
shares vest generally over a one-year period and can be exercised for ten years
at an exercise price of $7 per share.
The pro forma net (loss) consists of the following:
Fiscal year ended April 30,
-----------------------------------
2005 2004
------------ -----------
Net loss $(5,501,379) $(1,853,591)
Effect of stock options (58,234) --
------------ -----------
Proforma net income $(5,559,613) $(1,853,591)
=========== ===========
The Company has not provided for income taxes for the stock options as the
likelihood of realization of the additional net operating losses is uncertain.
F-44
Cryptometrics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 1- Organization and summary of significant accounting policies (continued):
Fixed assets
Fixed assets are stated at cost. The Company provides for depreciation generally
on a straight-line method by charges to income at rates based upon estimated
recovery periods below. Cryptometrics Canada, Inc. provides for depreciation
generally on the declining balance method by charges to income at rates based
upon estimated recovery periods below
Furniture 5 to 7 years
Computer equipment 3 to 5 years
Leasehold improvements Remaining lease term or useful life
Income taxes
The Company's deferred income taxes are principally from the net operating
losses and other timing differences. Income taxes are reported based upon
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes".
Cryptometrics Canada claims research and development deductions and related
investment tax credits for income tax purposes based on management's
interpretation of the applicable legislation in the Income Tax Act of Canada.
These claims are subject to audit by the Canada Revenue Agency and any resulting
adjustments would reduce the investment tax credits in the year. Tax credits are
accrued when the related corporate income tax returns are prepared and when
certainty of collection is assured. These credits are treated as a reduction of
research and development costs.
Marketing
Marketing and promotional costs are expensed as incurred and aggregated
approximately $1,804,249 and $760,292 for the fiscal years ended April 30, 2005
and 2004, respectively.
Shipping
The Company classifies shipping costs as a component of selling expenses.
Shipping costs were not material for the years ended April 30, 2005 and 2004.
Research and development costs
The Company expenses research and development costs as incurred. For research
and development costs incurred in Canada, The Company claims research and
development deductions and the related investment tax credits. These claims are
subject to audit by the applicable tax authorities in Canada.
F-45
Cryptometrics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 1 - Organization and summary of significant accounting policies
(continued):
Patents
Patents pending are capitalized as costs are incurred. They are amortized over a
useful life of ten years commencing in the year of approval. The estimated
amortization for the patents pending as of April 30, 2005 is as follows:
Year Ended
April 30,
2006 $ 8,034
2007 8,034
2008 8,034
2009 8,034
2010 8,034
2011 and thereafter 38,970
-------
$79,140
=======
Indemnification Arrangements and Product Warranties
From time to time, the Company agrees to indemnify its customers against
liability if the Company's products infringe a third party's intellectual
property rights. As of April 30, 2005 the Company was not subject to any pending
litigation alleging that the Company's products infringe the intellectual
property rights of any third parties.
The Company offers a 90-day and one year warranty on various products and
services. The majority of the warranty liability that the Company has recorded
is due to the one-year warranties. The Company estimates the costs that may be
incurred under its warranties and records a liability in the amount of such
costs at the time the product is sold. Factors that affect the Company's
warranty liability include the number of units sold, historical and anticipated
rates of warranty claims and cost per claim.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and accounts receivable. The Company
maintains substantially all its cash balances to a limited number of financial
institutions. The balances are insured by the Federal Deposit Insurance
Corporation up to $100,000. At April 30, 2005 and 2004, the Company's uninsured
cash balances totaled $9,087,566 and $1,059,212 respectively. The Company
performs periodic reviews of the relative credit rating of its bank to lower its
risk. The Company's accounts receivable was limited to one customer and
subsequently was collected in full after fiscal year end.
F-46
Cryptometrics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 1 - Organization and summary of significant accounting policies
(continued):
Fair Value
The Company has a number of financial instruments, none of which is held for
trading purposes. The Company estimates that the fair value of all financial
instruments at April 30, 2005 and 2004, does not differ materially from the
aggregate carrying values of these financial instruments recorded in the
accompanying balance sheets. The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies. Considerable judgment is necessarily required in
interpreting market data to develop the estimates of fair value, and,
accordingly, the estimates are not necessarily indicative of the amounts that
the Company could realize in a current market exchange
Cash and Temporary Investments
Cash and temporary investments include all cash balances on hand and short-term,
highly liquid investments with original maturities of three months or less.
Goodwill
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations", and No. 142,
"Goodwill and Other Intangible Assets", effective for fiscal years beginning
after December 15, 2001. Under the rules, the pooling of interests method of
accounting for acquisitions is no longer allowed and goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the Statements.
The Company's goodwill arose from its purchase of the common stock of
Cryptometrics Canada and totaled $10,500,000. During the fiscal year ended April
30, 2005, the Company incurred additional costs totaling $200,000 which have
been added to the goodwill. Upon acquisition and at the years ended April 30,
2005 and 2004, the Company performed its required tests for impairment and has
determined there to be no impairment on each of those dates.
Note 2 - Acquisition
On March 9, 2004, the Company acquired Cryptometrics Canada, Inc. (formerly
known as BioDentity Systems Corporation), an Ottawa, Ontario Canada based
company that specializes in facial recognition and image analysis hardware and
software products. Pursuant to the Purchase Agreement the Company issued
1,382,957 shares of the Company's common stock and options and warrants to
purchase up to 117,043 shares of the Company's common stock at an exercise price
of $0.06 Canadian per share ($0.05 United States per share). The Company valued
these shares at $7 per share. The share price was based on other contemporaneous
equity offerings. The Company valued the options and warrants at $7.00 also as
the exercise price was virtually nil.
F-47
Cryptometrics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 3 - Inventories
Inventories are stated at the lower of standard cost (which
approximates actual cost determined on a first-in, first-out method) or market
and consisted of the following
2005 2004
-------- --------
Purchased parts and materials $102,333 $ 25,637
Finished goods, including spares 41,603 60,789
-------- --------
$143,936 $ 86,426
======== ========
Note 4 - Comprehensive Loss
Comprehensive loss for the years ended April 30, 2005 and 2004 consists of the
following:
2005 2004
----------- -----------
Net loss $(5,501,379) $(1,853,591)
Loss on currency exchange (3,938) (71,531)
----------- -----------
Net comprehensive loss $(5,505,317) $(1,925,122)
=========== ===========
The Company has not provided for income taxes for the stock options as
the likelihood of realization of the additional net operating losses is
uncertain.
Note 5 - Major Customers
The Company had two customers accounting for more than 10% of revenues in the
fiscal year ended April 30, 2004. The two customers each accounted for
approximately 29% of the annual revenues. In the fiscal year ended April 30,
2005, three customers accounted for approximately 31%, 29% and 14% of the
Company's revenues.
F-48
Cryptometrics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 6 - Foreign Sales
In geographical reporting, revenues are attributed to the geographical location
of the sales and service organizations:
Revenues 2005 2004
-------- --------
Domestic $ 0 $149,702
International (primarily Canada) 681,853 92,320
Note 7 - Commitments
The Company leases several of its facilities through noncancelable operating
leases. The Company also leases several automobiles for several of its officers
and employees. The summary of future minimum rental payments required under
operating leases in excess of one year at April 30, 2005 are as follows:
Year ending April 30,
2006 $200,616
2007 166,909
2008 166,041
2009 171,658
2010 177,276
thereafter 14,812
---------
Total $897,312
========
Note 8 - Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes using the enacted tax
rates in effect in the years in which the differences are expected to reverse.
Deferred income tax assets are comprised of the following:
April 30,
----------------------------
2005 2004
---------- ----------
Deferred tax assets:
Net operating losses $3,746,677 $1,280,623
Goodwill 4,387,000 4,305,000
Salaries 301,191 524,800
---------- ----------
Total 8,434,868 6,110,423
Less: valuation allowance 8,434,868 6,110,423
---------- ----------
$ -- $ --
========== ==========
F-49
Cryptometrics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 9 - Common stock offerings
Through a series of offerings of the Company's common stock, the Company has
raised approximately $17.5 million. These offerings were exempt from securities
registration pursuant to several different exemptions. Among other provisions,
the underwriters to the majority of these funds were granted warrants to
purchase up to 388,668 shares of the Company's common stock at an exercise price
of $7.35. The warrants are exercisable for a five-year period.
F-50
Cryptometrics, Inc.
Consolidated Balance Sheet
As at October 31, 2005
(Unaudited - All figures in United States Dollars)
CONSOLIDATED CONSOLIDATED
- ---------------------------------------------------------------------------------------------------
31-Oct-05 30-Apr-05
- ---------------------------------------------------------------------------------------------------
(unaudited) (audited)
Assets
Current Assets:
Cash and cash equivalents $ 4,736,405 $ 11,182,147
Short-term Investments 3,057,818 -
Accounts receivable 13,048 97,534
Inventory 173,591 143,936
Prepaids 82,232 72,767
Investment tax credit receivable 259,216 392,779
- ---------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 8,322,310 11,889,163
Capital Assets 697,195 585,068
Intangibles 131,062 80,340
Goodwill 10,700,000 10,700,000
- ---------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 19,850,567 $ 23,254,571
===================================================================================================
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued
liabilities $ 1,092,989 $ 1,481,584
Other current liabilities 327,268 338,363
- ---------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,420,257 1,819,947
Stockholders' Equity
Common stock 112,021 111,971
Additional paid-in capital 31,305,921 31,270,971
Accumulated deficit (12,860,757) (9,872,849)
Accumulated other comprehensive loss (126,875) (75,469)
- ---------------------------------------------------------------------------------------------------
18,430,310 21,434,624
- ---------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $ 19,850,567 $ 23,254,571
===================================================================================================
See accompanying notes to unaudited internally prepared consolidated financial
statements.
F-51
Cryptometrics, Inc.
Consolidated Statements of Operations
Six Months Ended October 31, 2005 and 2004
Six Months Ended Six Months Ended
- --------------------------------------------------------------------------------------------------------------
31-Oct-05 31-Oct-04
- --------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
Revenues $ 63,086 $ 406,026
------------ ------------
Cost and Expenses:
Cost of revenues 35,577 117,142
Research and development 981,888 833,018
Selling and marketing 1,187,801 751,253
General and administrative 1,133,803 831,434
- -------------------------------------------------------------------------------------------------------------
3,339,609 2,532,847
- -------------------------------------------------------------------------------------------------------------
Loss from operations (3,275,983) (2,126,821)
- -------------------------------------------------------------------------------------------------------------
Interest and other income, net 177,314 -
- -------------------------------------------------------------------------------------------------------------
Loss for the period $ (3,098,669) $ (2,126,821)
=============================================================================================================
Net loss per common share:
Basic $ 0.28 $ 0.25
Basic common shares outstanding 11,202,103 8,368,783
See accompanying notes to unaudited internally prepared consolidated financial
statements.
F-52
Cryptometrics and Subsidiary
Consolidated Statement of Shareholders' Equity and Comprehensive Loss
(Unaudited)
Accumulated
Common Stock Paid-in Accumulated Other Comprehensive
Shares Amount Capital Deficit Loss
------------ ------------ ------------ ------------ --------------------
Balance May 1, 2004 8,640,485 $ 86,405 $ 15,246,937 $ (4,371,470) $ (74,523)
Net loss -- -- -- (5,501,379) --
Loss on currency Exchange -- -- -- -- (946)
Sale of common stock by
Private Placements 2,556,618 25,566 16,024,034 -- --
------------ ------------ ------------ ------------ ------------
Balance April 30, 2005 11,197,103 111,971 31,270,971 (75,469)
Net loss -- -- -- (3,098,669) --
Sale of common stock by
Private Placements 5,000 50 34,950 -- --
Other Comprehensive Gain -- -- -- -- 59,355
------------ ------------ ------------ ------------ ------------
Balance October 31, 2005 11,202,103 $112,021 $ 31,305,921 $(12,971,518) $ (16,114)
============ ============ ============ ============ ============
See accompanying notes to unaudited internally prepared consolidated financial
statements.
F-53
Cryptometrics, Inc.
Consolidated Statements of Cash Flows
Six months ended October 31, 2005 and 2004
(unaudited)
Six Months Ended October 31,
----------------------------
2005 2004
------------ ------------
Cash flows from operating activities
Net loss (3,098,669) (2,126,868)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 98,713 48,554
Changes in assists and liabilities:
Accounts receivable 84,486 (230,022)
Inventories (29,655) (42,100)
Prepaid expenses and other assets (9,465) (33,365)
Other receivables 133,563 (504,323)
Accounts payable and accrued expenses (399,690) 3,560
------------ ------------
Net cash used in operating activities (3,220,717) (2,884,564)
------------ ------------
Cash flows from investing activities:
Acquisition of fixed assets (210,840) (160,405)
Short term investments (3,057,818) -
Patent application costs (50,722) (39,350)
------------ ------------
Net cash flows from investing activities (3,319,380) (199,755)
------------ ------------
Cash flows from financing activities:
Sale of common stock 35,000 2,053,797
Repayment of debt -
------------ ------------
Net cash provided by financing activities 35,000 2,053,797
------------ ------------
Net effect of currency fluctuations 59,355 94,689
------------ ------------
Net (decrease) increase in cash and cash equivalents (6,445,742) (935,833)
Cash and cash equivalents at period beginning 11,182,147 1,142,029
------------ ------------
Cash and cash equivalents at period end $ 4,736,405 $ 206,196
============ ============
Supplemental cash flow information:
Cash paid during the period for:
Interest paid $ - $ 46,303.00
============ ============
Income taxes paid $ - $ -
============ ============
See accompanying notes to unaudited internally prepared consolidated financial
statements.
F-54
Cryptometrics, Inc. and Subsidiary
Notes to Financial Statements
Note 1 - Summary of Significant Accounting Policies:
Interim Financial Information - The unaudited consolidated financial statements
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. The information furnished herein reflects
all adjustments (consisting of normal recurring accruals and adjustments) which
are, in the opinion of management, necessary to fairly present the operating
results for the respective periods. Certain information and footnote disclosures
normally presented in annual consolidated financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been omitted pursuant to such rules and regulations. The
consolidated financial statements should be read in conjunction with the
description of business and management's plan of operations. The results of
operations for the three months and six months ended October 31, 2005 are not
necessarily indicative of the results that may be expected for the year ending
April 30 2006, or for any future period.
The accounting policies followed by the Company are set forth in Note 1 to the
Company's audited financial statements included elsewhere herein.
Note 2 - Proposed Merger
In September 2005, the Company entered into a non-binding letter of intent (the
"letter of intent) with Jag Media Holdings, Inc. (Jag), pursuant to which the
Company and Jag would enter into a merger agreement under which the Company
would merge into a newly created subsidiary of Jag. In consideration of the
merger, the stockholders of the Company would acquire shares of common stock of
Jag, which would upon issuance, represent 88.1875% of the outstanding common
stock of Jag in exchange for all the Company's issued and outstanding Common
Stock.
Note 3 - Issuance of Additional Shares
In the six months ended October 31, 2005, the Company issued 5,000 shares at
$7 per share to unrelated parties.
F-55
Appendix A
Form of Amendment to Article Fourth of the Articles of Incorporation of
JAG Media Holdings, Inc.
THE PREAMBLE TO ARTICLE FOURTH
OF THE ARTICLES OF INCORPORATION OF JAG MEDIA
IS PROPOSED TO BE AMENDED BY DELETING THE FOLLOWING LANGUAGE
"The aggregate number of shares which the Corporation shall have
authority to issue is Three Hundred Million Four Hundred Forty Thousand
(300,440,000) of which: (a) Two Hundred Fifty Million (250,000,000) shares shall
be common stock, par value $0.00001 per share;"
TO BE REPLACED BY THE FOLLOWING LANGUAGE
"The aggregate number of shares which the Corporation shall have the
authority to issue is Five Hundred Fifty-Five Million Four Hundred Forty
Thousand (550,440,000) of which: (a) Five Hundred Million (500,000,000) shares
shall be common stock, par value $0.00001 per share;"
A-1
Appendix B
Form of Amendment to Article First of the Articles of Incorporation of
JAG Media Holdings, Inc.
ARTICLE FIRST
OF THE ARTICLES OF INCORPORATION OF JAG MEDIA
IS PROPOSED TO BE AMENDED BY DELETING THE FOLLOWING LANGUAGE
FIRST: The name of the Corporation is "JAG Media Holdings, Inc."
TO BE REPLACED BY THE FOLLOWING LANGUAGE
FIRST: The name of the Corporation is "Cryptometrics, Inc."
B-1
Appendix C
Merger Agreement dated as of December 27, 2005
by and among JAG Media Holdings, Inc., Cryptometrics Acquisition, Inc.,
Cryptometrics, Inc. and the Principal
Stockholders Named Therein
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
JAG MEDIA HOLDINGS, INC.,
CRYPTOMETRICS ACQUISITION, INC.
CRYPTOMETRICS, INC., AND
THE PRINCIPAL STOCKHOLDERS NAMED HEREIN
Dated as of December 27, 2005
TABLE OF CONTENTS
PAGE
ARTICLE I THE MERGER.......................................................C-2
1.1 The Merger..........................................................C-2
1.2 Closing; Effective Time.............................................C-2
1.3 Effects of the Merger...............................................C-2
1.4 Post-Merger Actions.................................................C-3
1.5 Further Assurances..................................................C-3
ARTICLE II EFFECT ON CAPITAL STOCK; SURRENDER OF CERTIFICATES AND PAYMENT...C-3
2.1 Effect on Capital Stock.............................................C-3
2.2 Exchange of Company Shares and Surrender of Stock Certificates......C-5
2.3 Distributions with Respect to Unexchanged Company Shares............C-7
2.4 No Further Ownership Rights in Company Common Stock.................C-7
2.5 Lost, Stolen or Destroyed Certificates..............................C-7
2.6 Dissenters' Rights..................................................C-8
2.7 Withholding.........................................................C-8
2.8 Company Stock Options...............................................C-8
2.9 Company Warrants....................................................C-9
2.10 Company Exchangeable Shares.........................................C-9
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE PRINCIPAL STOCKHOLDERS....C-10
3.1 Principal Stockholders' Authority Relative to the
Operative Agreements.................................................C-10
3.2 Execution; Enforceability..........................................C-10
3.3 Title to Securities of Company.....................................C-10
3.4 No Conflicts.......................................................C-10
3.5 Governmental Approvals and Filings.................................C-11
3.6 Legal Proceedings..................................................C-11
3.7 Other Negotiations; Brokers........................................C-11
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF COMPANY.......................C-12
4.1 Organization and Good Standing.....................................C-12
4.2 Capitalization.....................................................C-12
TABLE OF CONTENTS
(continued)
PAGE
4.3 Subsidiaries of Company............................................C-14
4.4 Authority and Enforceability.......................................C-15
4.5 No Conflict; Authorizations........................................C-15
4.6 Financial Statements...............................................C-16
4.7 No Undisclosed Liabilities.........................................C-17
4.8 Taxes..............................................................C-17
4.9 Compliance with Law................................................C-20
4.10 Authorizations.....................................................C-20
4.11 Title to Personal Properties.......................................C-21
4.12 Condition of Tangible Assets.......................................C-21
4.13 Real Property......................................................C-21
4.14 Intellectual Property..............................................C-22
4.15 Absence of Certain Changes or Events...............................C-26
4.16 Contracts..........................................................C-27
4.17 Litigation.........................................................C-29
4.18 Employee Benefits..................................................C-29
4.19 Labor and Employment Matters.......................................C-32
4.20 Environmental......................................................C-33
4.21 Related Party Transactions.........................................C-36
4.22 Insurance..........................................................C-36
4.23 Brokers or Finders.................................................C-36
4.24 No Illegal Payments................................................C-36
4.25 Information Supplied...............................................C-37
4.26 Antitakeover Statutes..............................................C-37
4.27 Compliance with Securities Laws....................................C-37
ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB.........C-37
5.1 Organization and Good Standing.....................................C-37
5.2 Capitalization.....................................................C-38
5.3 Subsidiaries of Parent.............................................C-39
iii
TABLE OF CONTENTS
(continued)
PAGE
5.4 Authority and Enforceability.......................................C-40
5.5 No Conflicts; Authorizations.......................................C-41
5.6 SEC Filings; Financial Statements..................................C-41
5.7 Taxes..............................................................C-42
5.8 Compliance with Law................................................C-44
5.9 Authorizations.....................................................C-44
5.10 Title to Personal Properties.......................................C-45
5.11 Condition of Tangible Assets.......................................C-45
5.12 Real Property......................................................C-45
5.13 Intellectual Property..............................................C-45
5.14 Absence of Certain Changes or Events...............................C-48
5.15 Contracts..........................................................C-49
5.16 Legal Proceedings..................................................C-51
5.17 Employee Benefits..................................................C-51
5.18 Labor and Employment Matters.......................................C-54
5.19 Environmental......................................................C-54
5.20 Interim Operations of Merger Sub...................................C-55
5.21 Related Party Transactions.........................................C-56
5.22 Insurance..........................................................C-56
5.23 Brokers or Finders.................................................C-56
5.24 No Illegal Payments................................................C-56
5.25 Information Supplied...............................................C-56
5.26 Antitakeover Statutes..............................................C-57
5.27 Compliance with Securities Laws....................................C-57
5.28 Inclusion of Subsidiaries..........................................C-57
ARTICLE VI COVENANTS RELATING TO CONDUCT OF BUSINESS.......................C-57
6.1 Conduct of Business by Company.....................................C-58
6.2 Conduct of Business by Parent......................................C-60
6.3 Exclusivity........................................................C-62
ARTICLE VII ADDITIONAL AGREEMENTS...........................................C-65
iv
TABLE OF CONTENTS
(continued)
PAGE
7.1 Proxy Statement; Registration Statement............................C-65
7.2 Other Filings and Disclosure Schedules.............................C-67
7.3 Meeting of Stockholders............................................C-67
7.4 Access to Information..............................................C-68
7.5 Consent of Company Stockholders....................................C-68
7.6 Regulatory Approvals...............................................C-68
7.7 Public Announcements...............................................C-69
7.8 Indemnification....................................................C-69
7.9 Tax Free Reorganization............................................C-70
7.10 Listing............................................................C-70
7.11 Affiliates.........................................................C-70
7.12 Consents...........................................................C-70
7.13 Notification of Certain Matters....................................C-71
7.14 Conveyance Taxes...................................................C-71
7.15 Maintenance of Registration Statements.............................C-71
7.16 Termination Prior to Effective Time................................C-71
7.17 Further Assurances.................................................C-72
ARTICLE VIII CONDITIONS TO MERGER..........................................C-72
8.1 Conditions to Each Party's Obligation to Effect the Merger.........C-72
8.2 Conditions to Obligations of Parent and Merger Sub to Effect
the Merger............................................................C-72
8.3 Conditions to Obligation of Company to Effect the Merger...........C-73
ARTICLE IX TERMINATION.....................................................C-74
9.1 Termination........................................................C-74
9.2 Effect of Termination..............................................C-76
9.3 Remedies...........................................................C-76
ARTICLE X MISCELLANEOUS...................................................C-76
10.1 Notices............................................................C-76
10.2 Survival...........................................................C-77
10.3 Amendments and Waivers.............................................C-77
v
TABLE OF CONTENTS
(continued)
PAGE
10.4 Fees and Expenses..................................................C-78
10.5 Successors and Assigns.............................................C-78
10.6 Governing Law......................................................C-78
10.7 Consent to Jurisdiction............................................C-78
10.8 Counterparts.......................................................C-79
10.9 Third Party Beneficiaries..........................................C-79
10.10 Entire Agreement...................................................C-79
10.11 Captions...........................................................C-79
10.12 Severability.......................................................C-80
10.13 Specific Performance...............................................C-80
ARTICLE XI DEFINITIONS.....................................................C-80
11.1 Definitions........................................................C-80
11.2 Other Defined Terms................................................C-82
11.3 Interpretation.....................................................C-85
Exhibits:
Exhibit A Company Voting and Lock Up Agreement
Exhibit B Certificate of Merger
Exhibit C Affiliate Agreement
Schedules:
Parent Disclosure Schedule
Company Disclosure Schedule
vi
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of December 27, 2005 (the
"AGREEMENT"), by and among JAG Media Holdings, Inc., a Nevada corporation
("PARENT"), Cryptometrics Acquisition, Inc., a Delaware corporation and a wholly
owned subsidiary of Parent ("MERGER SUB"), Cryptometrics, Inc., a Delaware
corporation (the "COMPANY") and the Principal Stockholders named herein.
Capitalized terms used in this Agreement shall have the meanings assigned to
them in Article XI or in the applicable Section of this Agreement to which
reference is made in Article XI.
WHEREAS, the respective Boards of Directors of Parent, Merger Sub and
Company deem it advisable and in the best interests of their respective
stockholders to consummate the business combination provided for herein;
WHEREAS, in furtherance thereof, the respective Boards of Directors of
Parent, Merger Sub and Company have approved this Agreement and the Merger, upon
the terms and subject to the conditions set forth in this Agreement;
WHEREAS, the Board of Directors of Parent has authorized the issuance
of shares of Parent Common Stock pursuant to the Merger;
WHEREAS, the Board of Directors of Company has adopted a resolution
approving the Merger, declaring its advisability and determined to recommend to
the stockholders of Company the adoption of this Agreement;
WHEREAS, Parent, as the sole stockholder of Merger Sub, has adopted
this Agreement;
WHEREAS, for federal income tax purposes, it is intended that the
acquisition of Company by Parent pursuant to this Agreement shall qualify as a
reorganization under the provisions of Section 368(a) of the Internal Revenue
Code of 1986 (the "CODE"); and
WHEREAS, Robert Barra and Michael A. Vitale (together, the "PRINCIPAL
STOCKHOLDERS", and each, a "PRINCIPAL STOCKHOLDER") collectively own
beneficially and of record in excess of 50% of the outstanding capital stock of
Company; and
WHEREAS, concurrently with the execution of this Agreement, and as a
condition and inducement to Parent's willingness to enter into this Agreement,
each of the Principal Stockholders of Company are entering into lock-up and
voting agreements with Parent in substantially the form attached as Exhibit A
(collectively, the "COMPANY LOCK-UP AND VOTING AGREEMENTS").
NOW, THEREFORE, in consideration of the foregoing premises and the
respective representations and warranties, covenants and agreements contained
herein, the parties hereto agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. Subject to the terms and conditions of this Agreement and the
Certificate of Merger in such form as is required by the relevant provisions of
the Delaware General Corporation Law (the "DGCL") as attached hereto as Exhibit
B, at the Effective Time, Merger Sub shall be merged with and into Company and
the separate corporate existence of Merger Sub shall thereupon cease (the
"MERGER"). As a result of the Merger, the outstanding shares of capital stock of
Company and Merger Sub shall be converted or canceled in the manner provided in
Article II of this Agreement, the separate corporate existence of Merger Sub
shall cease and Company shall be the surviving corporation following the Merger.
Merger Sub and Company are sometimes referred to herein as the "CONSTITUENT
CORPORATIONS" and Company as the surviving corporation following the Merger is
sometimes referred to herein as the "SURVIVING CORPORATION."
1.2 Closing; Effective Time. The closing of the Merger (the "CLOSING") shall
take place at the offices of Morgan, Lewis & Bockius LLP, 101 Park Avenue, New
York, New York 10178, at 10:00 a.m. on a date to be specified by the parties
which shall be no later than two (2) Business Days after satisfaction (or waiver
as provided herein) of the conditions set forth in Article VIII (other than
those conditions that by their nature will be satisfied at the Closing), unless
another time, date and/or place is agreed to in writing by the parties. The date
upon which the Closing occurs is herein referred to as the "CLOSING DATE."
Simultaneously with, or as soon as practicable following the Closing, Company,
as the surviving corporation, shall file the Certificate of Merger with the
Secretary of State of the State of Delaware as provided in Section 252(c) of the
DGCL. The Merger shall become effective at such time as the Certificate of
Merger is so filed or at such later time as is set forth in the Certificate of
Merger, if different, which time is hereinafter referred to as the "EFFECTIVE
TIME."
1.3 Effects of the Merger.
(a) At and after the Effective Time, the Merger shall have the
effects specified in the DGCL.
(b) At the Effective Time, the Certificate of Incorporation of
Company shall be the Certificate of Incorporation of the Surviving Corporation
until amended thereafter in accordance with applicable Delaware law.
(c) At the Effective Time, the Bylaws of Company shall be the Bylaws
of the Surviving Corporation until amended thereafter in accordance with
applicable Delaware law.
(d) At the Effective Time, the directors and officers of Company
immediately prior to the Effective Time shall remain the directors and officers
of the Surviving Corporation, each to hold office until their respective death,
permanent disability, resignation or removal or until their respective
successors are duly elected and qualified, all in accordance with the
Certificate of Incorporation and Bylaws of the Surviving Corporation and
applicable Law.
C-2
1.4 Post-Merger Actions. Promptly after the Effective Time:
(a) the Board of Directors of Parent will amend the Bylaws of Parent
to permit a Board of Directors of not less than one (1) nor more than twelve
(12) directors;
(b) the Board of Directors of Parent shall appoint as directors to
fill some or all of such vacancies such persons as the management of the Company
shall designate, which designees shall include a sufficient number of
independent directors to comply with the requirements of The Sarbanes-Oxley Act
of 2002 and the rules and requirements of the NASDAQ Capital Market;
(c) the officers of Parent and the directors of Parent prior to the
Effective Time shall resign as officers and directors of Parent, but not as
managers and officers of Parent's wholly-owned subsidiary, JAG Media LLC;
(d) Parent shall (i) amend Section 11 of the existing employment
agreements of such officers (the "EMPLOYMENT AGREEMENTS") to fix the payout
period on termination without cause at 12 months, (ii) amend Section 4 of the
Employment Agreement to cancel all options granted to the officers pursuant to
such section and (iii) amend Section 6 of the Employment Agreements to reduce
the number of options granted to each of the officers upon a change in control
from 1,000,000 to 750,000, which shall be exercisable immediately on a cashless
basis, with one half of such shares being subject to a lock up period of one
year from the date of the Closing;
(e) Parent shall assign the Employment Agreements to JAG Media LLC
and cause it to accept same, and such officers shall release Parent from all
liability thereunder (including salary payments) except that Parent shall remain
contractually obligated to carry out its obligations to fulfill any exercise of
options remaining under such Employment Agreements;
(f) JAG Media LLC shall terminate the employment of such officers
under the Employment Agreements without cause;
(g) the Board of Directors shall elect new officers of Parent.
1.5 Further Assurances. If, at any time after the Effective Time,
the Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments or assurances or any other acts or things are necessary,
desirable or proper (a) to vest, perfect or confirm, of record or otherwise, in
the Surviving Corporation its right, title and interest in, to or under any of
the rights, privileges, powers, franchises, properties or assets of either of
the Constituent Corporations, or (b) otherwise to carry out the purposes of this
Agreement, the Surviving Corporation and its proper officers and directors or
their designees shall be authorized to execute and deliver, in the name and on
behalf of either Constituent Corporation, all such deeds, bills of sale,
assignments and assurances and to do, in the name and on behalf of either
Constituent Corporation, all such other acts and things as may be necessary,
desirable or proper to vest, perfect or confirm the Surviving Corporation's
right, title and interest in, to and under any of the rights, privileges,
powers, franchises, properties or assets of such Constituent Corporation and
otherwise to carry out the purposes of this Agreement.
C-3
ARTICLE II
EFFECT ON CAPITAL STOCK; SURRENDER OF CERTIFICATES AND PAYMENT
2.1 Effect on Capital Stock. At the Effective Time, by virtue of the
Merger and without any action on the part of Parent, Merger Sub, Company or any
stockholder of Company (each such stockholder, a "COMPANY STOCKHOLDER"):
The holders of all shares of common stock of Company, par value $0.001
per share (the "COMPANY COMMON STOCK") (each such share of Company Common Stock,
a "COMPANY SHARE"), issued and outstanding immediately prior to the Effective
Time, including as outstanding for this purpose the total number of shares of
Company Common Stock for which outstanding exchangeable shares of the Company's
Canadian subsidiary can be exchanged ("OUTSTANDING COMPANY COMMON STOCK" and
each an "OUTSTANDING COMPANY SHARE") shall be entitled to receive shares of
fully paid and nonassessable common stock of Parent, par value $0.00001 per
share ("PARENT COMMON STOCK") equal to 7.4656 times the number of shares of
Parent Common Stock issued and outstanding at the Effective Time of the Merger,
(i) excluding all shares of Parent Common Stock held in the treasury of Parent,
and (ii) excluding all shares of Series 2 and Series 3 Class B common stock
outstanding, but (iii) including as outstanding the relevant number of shares of
Parent Company stock into which shares of Parent which are still outstanding and
can be converted (but have not yet been converted) by virtue of
recapitalizations carried out by Parent (the "MERGER CONSIDERATION").
(a) Each Outstanding Company Share shall be converted into the right
to receive and become exchangeable, as provided in Section 2.2 hereof, for the
number of shares of Parent Common Stock represented by the quotient obtained by
dividing the Merger Consideration by the total number of shares of Outstanding
Company Common Stock (the "EXCHANGE MULTIPLE"), subject to adjustment as
provided in Section 2.2(f).
(b) Each share of Company Common Stock held in Company's treasury
shares immediately prior to the Effective Time and each share owned by any
subsidiary of Company shall not represent the right to receive any Merger
Consideration, and each such share shall be canceled and retired and shall cease
to exist, and no cash, securities or other property shall be payable in respect
thereof;
(c) Each share of common stock of Merger Sub, par value $0.001 per
share, issued and outstanding immediately prior to the Effective Time shall be
converted into and become one fully paid and nonassessable share of common
stock, par value $0.001 per share, of the Surviving Corporation.
(d) Each Company Stockholder (after aggregating the fractional
shares of Parent Common Stock that would otherwise be received by such holder)
shall be entitled only to the number of shares of Parent Common Stock to which
such Company Stockholder is entitled by virtue of Sections 2.1(a) and (b) or
2.2(f) rounded down to the nearest whole number. No fractional shares of Parent
Common Stock shall be issued in connection with the Merger.
C-4
(e) Unless the value of the fractional share of Parent Common Stock
which otherwise would have been issued by virtue of the Merger to a Company
Stockholder exceeds an aggregate cash amount of One Dollar ($1.00), determined
as provided below, such Company Stockholder shall not be entitled to receive a
cash payment in lieu of a fractional share of Parent Common Stock. In the event
that the value of the fractional share of Parent Common Stock to be issued by
virtue of the Merger to a Company Stockholder exceeds One Dollar ($1.00), any
such Company Stockholder entitled to receive a fractional share of Parent Common
Stock will be entitled to receive a cash payment in lieu of such fractional
share in an amount determined by Parent to be equal to such fraction multiplied
by the arithmetic mean of the closing prices of Parent Common Stock on the Pink
Sheets LLC over the twenty (20) trading days ending three (3) trading days prior
to the Closing.
(f) If between the date of this Agreement and the Effective Time,
there shall be any stock dividend, subdivision, reclassification,
recapitalization, split, combination or exchange of shares or any similar event
with respect to Company Common Stock or Parent Common Stock, the Exchange
Multiple and the Merger Consideration and any other amounts payable pursuant to
this Agreement shall be correspondingly adjusted to the extent appropriate to
reflect such stock dividend, subdivision, reclassification, recapitalization,
split, combination or exchange of shares or similar event.
2.2 Exchange of Company Shares and Surrender of Stock Certificates.
(a) Following the execution hereof, Parent shall enter into an
agreement with Transfer Online, Inc., or such other transfer agent, bank or
trust company of recognized standing that may be designated by Parent and is
reasonably satisfactory to Company (the "EXCHANGE AGENT"). Upon Company's
receipt of Company Stockholder Approval, Parent shall deposit, or shall cause to
be deposited, with the Exchange Agent, for the benefit of Company Stockholders,
certificates representing the shares of Parent Common Stock issuable pursuant to
Section 2.1 in respect of Company Shares. In the event that any amount is
payable to any Company Stockholders pursuant to Section 2.1(e), Parent shall
also deposit with the Exchange Agent cash in an amount sufficient to make the
payments in lieu of fractional shares pursuant to Section 2.1(e). The
certificates, together with any cash in dividends or distributions with respect
thereto and any cash made available in lieu of fractional shares, are
hereinafter referred to as the "EXCHANGE FUND".
(b) As promptly as reasonably practicable after the Effective Time,
Parent shall cause the Exchange Agent to mail to each holder of record of
Company Shares a letter of transmittal and instructions (which shall be in
customary form and shall specify that delivery shall be effected, and risk of
loss and title to Company Shares shall pass, only upon proper delivery of the
certificates representing Company Shares ("CERTIFICATES") to the Exchange Agent)
for use in exchanging Company Shares for the Merger Consideration payable in
respect of such Company Shares. Upon surrender to the Exchange Agent of a
Certificate for cancellation, together with such letter of transmittal, duly
executed and completed in accordance with the instructions thereto, and such
other documents as may be reasonably required pursuant to such instructions, the
holder of such Company Shares shall be entitled to receive in exchange therefor
that number of whole shares of Parent Common Stock to which the holder thereof
is entitled pursuant to Section 2.1(a) and payment in lieu of fractional shares
which such holder is entitled to receive pursuant to Section 2.1(e) in the event
that the fractional shares of Parent Common Stock to be issued by virtue of the
Merger to Company Stockholders exceeds an aggregate cash amount of One Dollar
($1.00) and any dividends or distributions payable pursuant to Section 2.3 and
the Certificate so surrendered forthwith shall be canceled.
C-5
(c) In the event of a transfer of Company Shares that is not
registered in the transfer records of Company, shares of Parent Common Stock
issued in exchange for Company Shares pursuant to Section 2.1 may be issued to a
Person other than the Person in whose name the surrendered Certificate is
surrendered, if (i) such Certificate is properly endorsed or is otherwise in
proper form for transfer and (ii) the Person requesting such issuance pays to
the Exchange Agent any and all Taxes required as a result of the issuance to a
Person other than the registered holder of the Certificate or establishes by
evidence satisfactory to the Exchange Agent that any such Taxes have been paid
or are not payable. Until surrendered or transferred as contemplated by this
Section 2.2, each Certificate (other than Certificates representing Dissenting
Shares) shall represent at all times after the Effective Time solely the right
to receive, upon such surrender or transfer, in accordance with the terms
hereof, the Merger Consideration (together with any amounts payable pursuant to
Section 2.1(f) and/or Section 2.3) in respect of Company Common Stock
represented thereby.
(d) All shares of Parent Common Stock issued in accordance with the
terms hereof (including any cash paid in respect thereof pursuant to Section
2.1(e) and/or Section 2.3) upon surrender of the Certificates in accordance with
the terms of this Article II shall be deemed to have been paid in full
satisfaction of all rights pertaining to Company Shares theretofore represented
by Certificates. At the close of business at 5:00 pm on the day immediately
preceding the Effective Time, the stock transfer books of Company shall be
closed and there shall be no further registration of transfers of Company Shares
thereafter on the records of Company. From and after the Effective Time, Company
Stockholders shall cease to have any rights with respect to Company Shares
outstanding immediately prior to the Effective Time, except as otherwise
provided in this Agreement or by Law. On or after the Effective Time, any
Certificates presented to the Exchange Agent or Parent for any reason shall be
canceled and exchanged for the Merger Consideration provided for in Section 2.1
(and any amounts payable pursuant to Sections 2.1(f) and/or Section 2.3).
(e) Any portion of the Exchange Fund that remains undistributed to
Company Stockholders for six (6) months after the Effective Time shall be
redelivered to Parent, and any Company Stockholders who have not theretofore
complied with this Article II shall thereafter look only to Parent for the
Merger Consideration to which they are entitled pursuant to Section 2.1 (and any
amounts payable pursuant to Sections 2.1(f) and/or Section 2.3). Any portion of
the Exchange Fund remaining unclaimed by Company Stockholders as of a date that
is immediately prior to such time as such amounts would otherwise escheat to or
become property of any government entity shall, to the extent permitted by
applicable Law, become the property of Parent free and clear of any claims or
interest of any person previously entitled thereto. To the fullest extent
permitted by Law, neither Parent nor the Surviving Corporation shall be liable
to any Company Stockholder for shares of Parent Common Stock, cash or other
property delivered from the Exchange Fund to a public official pursuant to any
applicable abandoned property, escheat or similar Law.
C-6
(f) Notwithstanding anything to the contrary contained herein, and
in particular Sections 2.1(a) and this Section 2.2, Parent shall be bound by and
fulfill any contractual obligations to any limited number of shareholders of
Company who may by virtue of a contract between the Company and such shareholder
be entitled to a different (larger or smaller) number of shares of Parent Common
Stock than that prescribed by Section 2.1(a). Parent shall give special
instructions to the Exchange Agent with respect to such shareholders and shall
adjust the number of shares (up or down) to be received by all other
shareholders of the Company on a pro rata basis.
(g) Notwithstanding anything to the contrary contained herein, each
Person entitled to receive shares of Parent Company Stock under this Section 2.2
shall receive them on the condition and subject to the requirement that (A) 65%
of such shares may not be sold (but may be transferred (i) by gift to an
immediate family member, (ii) by will or intestacy or distribution or (iii) to a
trust for the benefit of the transferor or a family member) until the first
anniversary of the Closing Date and the certificates evidencing such shares
shall have a legend reflecting such restriction, and (B) the remaining 35% of
such shares may be freely sold or transferred even within the first year
following the Closing Date so long as shares of Parent Common Stock are traded
on the NASDAQ Capital Market and in the event such shares cease to be traded on
the NASDAQ Capital Market (or another U.S. market or exchange with no less
stringent listing requirements) during such first year, Parent shall have the
right to impose a stop order for the remainder of such first year on the
transfer of all such shares then held by Persons who were shareholders of the
Company as of the Closing Date.
(h) Notwithstanding anything to the contrary contained herein, no
certificates representing shares of Parent Common Stock shall be delivered to a
Person who is an "affiliate" of Company for purposes of Rule 145 under the
Securities Act of 1933 (the "SECURITIES ACT") until such Person has executed and
delivered to Parent a written agreement substantially in the form attached
hereto as Exhibit C (the "AFFILIATE AGREEMENT")
2.3 Distributions with Respect to Unexchanged Company Shares.
Notwithstanding any other provisions of this Agreement, no dividends or other
distributions on shares of Parent Common Stock shall be paid with respect to any
Company Share until such Company Share is surrendered for exchange as provided
herein. Subject to the effect of applicable Laws, following surrender of any
such Company Shares there shall be paid to the record holder of shares of Parent
Common Stock issued in exchange therefor, without interest, (a) at the time of
such surrender, the amount of dividends or other distributions with a record
date after the Effective Time theretofore payable with respect to such shares of
Parent Common Stock and not paid, less the amount of any withholding taxes which
may be required thereon, and (b) at the appropriate payment date, the amount of
dividends or other distributions with a record date after the Effective Time but
prior to surrender thereof and a payment date subsequent to surrender thereof
payable with respect to such shares of Parent Common Stock, less the amount of
any withholding taxes which may be required thereon. No Company Stockholder
shall be entitled, until the surrender of such Certificate, to vote the shares
of Parent Common Stock which such holder shall have the right to receive
pursuant to this Article II.
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2.4 No Further Ownership Rights in Company Common Stock. The payment
of the relevant portion of the Merger Consideration in respect of each Company
Share (and any amounts payable pursuant to Sections 2.1(e) and/or Section 2.3)
shall be deemed to have been issued (and paid) in full satisfaction of all
rights pertaining to each such Company Share, and there shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of Company Shares which were outstanding immediately prior to the
Effective Time. If, after the Effective Time, Certificates are presented for
transfer to the Surviving Corporation, they shall be canceled and exchanged for
certificates representing shares of Parent Common Stock in accordance with the
procedures set forth in this Article II.
2.5 Lost, Stolen or Destroyed Certificates. If any Certificate shall
have been lost, stolen or destroyed, upon the making of an affidavit of that
fact by the Person claiming such Certificate to be lost, stolen or destroyed,
and, if required by the Surviving Corporation or the Exchange Agent, the posting
by such Person of a bond, in such reasonable amount as the Surviving Corporation
or Exchange Agent may direct, as indemnity against any claim that may be made
against it with respect to such Certificate and the payment of any fee charged
by the Exchange Agent for such service, the Exchange Agent will issue in
exchange for such lost, stolen or destroyed Certificate the number of shares of
Parent Common Stock (and cash, if any) to which the holder thereof is entitled
pursuant to Sections 2.1 and 2.2.
2.6 Dissenters' Rights.
(a) Notwithstanding anything in this Agreement to the contrary, any
shares of Company Common Stock held by any Company Stockholder who shall have
demanded and not lost or withdrawn, or who shall be eligible to demand,
appraisal rights with respect to such shares of Company Common Stock in the
manner provided in the DGCL ("DISSENTING SHARES") shall not represent the right
to receive any portion of the Merger Consideration. If any Company Stockholder
shall fail to perfect or shall effectively withdraw or lose his right to
appraisal and payment under the DGCL, as the case may be, each share of Company
Common Stock held by such Company Stockholder shall thereupon, in accordance
with and subject to the provisions set forth in this Article II, represent the
right to receive its portion of the Merger Consideration.
(b) Both Company and Parent, as the case may be, shall give one
another prompt notice of any demands for appraisal received by Company or
Parent, withdrawals of such demands and any other communications received by
Company or Parent in connection with any demands for appraisal. Company may
voluntarily make any payment with respect to any such demands. Company shall
have the right to control all negotiations and proceedings with respect to
demands for appraisal, including the right to settle any such demands.
2.7 Withholding. Each of the Surviving Corporation, Parent and the
Exchange Agent shall be entitled to deduct and withhold from the consideration
payable pursuant to this Agreement to any holder of shares of Company Common
Stock or Dissenting Shares such amounts as it is required to deduct and withhold
with respect to the making of such payment under the Code or any provision of
applicable state, local or foreign Tax Law. To the extent that amounts are so
withheld by the Surviving Corporation, Parent or the Exchange Agent, as the case
may be, such withheld amounts shall be treated for all purposes of this
Agreement as having been paid to the holder of shares of Company Common Stock or
Dissenting Shares in respect of which such deduction and withholding was made by
the Surviving Corporation, Parent or the Exchange Agent, as the case may be.
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2.8 Company Stock Options. At the Effective Time, each Company Stock
Option outstanding shall, by virtue of the Merger and without any further action
on the part of Company or the holder thereof, be assumed by Parent (each, a
"REPLACEMENT OPTION"). To the extent that they replace options which qualify as
"incentive stock options," each Replacement Option will be intended to qualify
as an "incentive stock option" under the Code (although Parent makes no
representation and warranty whatsoever that such options will so qualify). Each
Replacement Option shall be subject to the same terms and conditions as the
applicable Company Stock Option it replaced, except that, provided the relevant
Company Stock Option does not otherwise provide, (a) each such Replacement
Option shall be exercisable for, and represent the right to acquire, that whole
number of shares of Parent Common Stock (rounded down to the nearest whole
share) equal to the number of shares of Company Common Stock subject to such
Company Stock Option multiplied by the Exchange Multiple, and (b) the exercise
price per share of Parent Common Stock shall be an amount equal to the exercise
price per share of the shares of Company Common Stock subject to such Company
Stock Option in effect immediately prior to the Effective Time divided by the
Exchange Multiple (the exercise price per share, as so determined, being rounded
up to the nearest full cent). Parent shall reserve for issuance a sufficient
number of shares of Parent Common Stock for delivery upon exercise of the
Replacement Options granted in accordance with this Section 2.8. "COMPANY STOCK
OPTION" means an option to purchase shares of Company Common Stock.
2.9 Company Warrants. At the Effective Time, each outstanding warrant
to purchase shares of Company Common Stock (each, a "COMPANY WARRANT") shall, to
the extent that such Company Warrant does not expire in accordance with its
terms upon consummation of the Merger, be converted into a warrant to acquire,
on the same terms and conditions as were applicable under such Company Warrant,
provided the relevant Company Warrant does not otherwise provide, that number of
shares of Parent Common Stock (rounded down to the nearest whole share) equal to
the number of shares of Company Common Stock subject to such Company Warrant
multiplied by the Exchange Multiple (such new warrant, the "REPLACEMENT
WARRANT"), at an exercise price per share (rounded up to the nearest whole cent)
equal to (y) the exercise price per share of Company Common Stock subject to
such Company Warrant divided by (z) the Exchange Multiple. Any restriction on
exercise of any Company Warrant shall continue in full force and effect and the
term, exercisability, schedule and other provisions of such Company Warrant
shall continue in full force and effect. At or prior to the Effective Time,
Company shall take all reasonable action, if any, necessary with respect to each
Company Warrant to permit the replacement of such Company Warrant by Parent
pursuant to this Section 2.9 and to ensure that holders of Company Warrants have
no rights with respect thereto greater than those specifically provided herein.
2.10 Company Exchangeable Shares. At the Effective Time, each
outstanding exchangeable share issued by Cryptometrics Canada, Inc. (or issuable
pursuant to outstanding options or warrants therefor) which is exchangeable for
Company Common Stock (each, a "COMPANY EXCHANGEABLE SHARE") shall be converted
into the right to acquire, on the same terms and conditions as were applicable
under such Company Exchangeable Share, provided the relevant Company
Exchangeable Share does not otherwise provide, that number of shares of Parent
Common Stock (rounded down to the nearest whole share) equal to the number of
shares of Company Common Stock subject to such Company Exchangeable Share
multiplied by the Exchange Multiple. Any restriction on exercise of any Company
Exchangeable Share shall continue in full force and effect and the term,
exchangeability, schedule and other provisions of such Company Exchangeable
Share shall continue in full force and effect. At or prior to the Effective
Time, Company and its Canadian subsidiary and Parent shall take all reasonable
action, if any, necessary with respect to each Company Exchangeable Share to
permit the proper modifications of such Company Exchangeable Share by Company,
its Canadian Subsidiary and Parent pursuant to this Section 2.10 and the
agreements relating to the Company Exchangeable Shares so as to ensure that
holders of Company Exchangeable Shares have no rights with respect thereto
greater or lesser than those specifically provided herein and in such
agreements.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE PRINCIPAL STOCKHOLDERS
Each of the Principal Stockholders, severally and not jointly,
represents and warrants to Parent and Merger Sub that the statements contained
in this Article III are true and correct.
3.1 Principal Stockholders' Authority Relative to the Operative
Agreements. Such Principal Stockholder has all legal right, power and capacity
to execute and deliver and to perform his obligations under this Agreement and
the Operative Agreements to which he is a party and to consummate the Merger and
the transactions contemplated hereby and thereby.
3.2 Execution; Enforceability. This Agreement and each of the Operative
Agreements to which he is a party has been duly executed and delivered by such
Principal Stockholder. This Agreement and each of such Operative Agreements to
which he is a party constitutes a legal, valid and binding obligation of such
Principal Stockholder, enforceable against such Principal Stockholder in
accordance with its terms, except as the enforceability thereof may be limited
by (i) bankruptcy, insolvency, reorganization, moratorium or other similar Laws
affecting or relating to creditors' rights generally, and (ii) the availability
of injunctive relief and other equitable remedies.
3.3 Title to Securities of Company. Such Principal Stockholder is the
record and beneficial owner of the securities of Company shown as owned by such
Principal Stockholder in the Company Lock Up and Voting Agreement, and
immediately prior to the Effective Time, such Principal Stockholder will own
such securities free and clear of all liens, claims, charges, security
interests, mortgages, pledges, easements, conditional sale or other title
retention agreements, defects in title, covenants or other restrictions of any
kind, including, any restrictions on the use, voting, transfer or other
attributes of ownership (collectively, "LIENS"), other than the rights of Parent
and Merger Sub under this Agreement. The rights of a Principal Stockholder to
transfer its securities in Company remains subject to any restrictions imposed
on such transfer by federal and/or state securities laws and regulations.
3.4 No Conflicts. The execution and delivery by such Principal
Stockholder of this Agreement and each of the Operative Agreements to which he
is a party does not, and the performance by such Principal Stockholder of his
obligations under this Agreement and such Operative Agreements and the
consummation of the transactions contemplated hereby and thereby did not, do not
and will not:
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(a) subject to obtaining the consents, approvals and actions, making
the filings and giving the notices referred to in Section 3.5 below, if any,
conflict with or result in a violation or breach of any term or provision of any
Law or Order applicable to such Principal Stockholder or any of his assets and
properties; or
(b) (i) conflict with or result in a violation or breach of, (ii)
constitute (with or without notice or lapse of time or both) a default under,
(iii) require such Principal Stockholder to obtain any consent, approval or
action of, make any filing with or give any notice to any Person as a result or
under the terms of, (iv) result in or give to any Person any right of
termination, cancellation, acceleration or modification in or with respect to,
(v) result in or give to any Person any additional rights or entitlement to
increased, additional, accelerated or guaranteed payments under, or (vi) result
in the creation or imposition of any Lien upon such Principal Stockholder or any
of his assets and properties under, any Contract to which such Principal
Stockholder is a party or by which any of his assets and properties is bound.
3.5 Governmental Approvals and Filings.
(a) No consent, approval or action of, filing with or notice
to any Governmental or Regulatory Authority on the part of such Principal
Stockholder is required in connection with the execution, delivery and
performance of this Agreement or any of the Operative Agreements to which he is
a party or the consummation of the transactions contemplated hereby and thereby.
(b) Except as disclosed in the Parent Disclosure Schedule and
with the exception of the filing by Parent of the Form S-4 Registration
Statement with the Securities and Exchange Commission (the "SEC") and such
filings required in accordance with state securities blue sky laws in connection
with the issuance of shares of Parent Common Stock pursuant to the Merger
(including any amendments or supplements thereto, the "FORM S-4 REGISTRATION
STATEMENT"), no consent, approval or action of, filing with or notice to any
Governmental or Regulatory Authority on the part of Parent is required in
connection with the execution, delivery and performance of this Agreement or any
of the Operative Documents to which Parent is a party or the consummation of the
transactions contemplated hereby and thereby.
3.6 Legal Proceedings. There are no Actions pending or, to the
knowledge of such Stockholder, threatened against, relating to or affecting
either such Principal Stockholder or any of his assets and properties which (a)
could reasonably be expected to result in the issuance of an Order restraining,
enjoining or otherwise prohibiting or making illegal any of the transactions
contemplated hereby or thereby or otherwise result in a material diminution of
the benefits contemplated by this Agreement or any of the Operative Agreements
to Parent, Merger Sub, Company or the Surviving Corporation or (b) if determined
adversely to such Principal Stockholder, could reasonably be expected to result
in (i) any injunction or other equitable relief against Parent, Merger Sub,
Company, the Surviving Corporation or such Principal Stockholder or (ii) losses
by Parent, Merger Sub, Company or the Surviving Corporation.
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3.7 Other Negotiations; Brokers. Neither such Principal Stockholder nor
any of his Affiliates (nor any investment banker, financial advisor, attorney,
accountant or other Person retained by or acting for or on behalf of either such
Principal Stockholder or any such Affiliate) (a) has entered into any agreement
that conflicts with any of the transactions contemplated hereby or (b) has
entered into any agreement or had any discussions with any third party regarding
any transaction involving such Principal Stockholder which could result in the
Surviving Corporation, Parent, Merger Sub or any general partner, limited
partner, stockholder, officer, director, employee, agent or Affiliate of any of
them being subject to any claim for liability to said third party as a result of
entering into this Agreement or the Operative Agreements or consummating the
transactions contemplated hereby and thereby. There is no investment banker,
broker, finder, financial advisor or other intermediary which has been retained
by or is authorized to act on behalf of any Principal Stockholder who is
entitled to any fee or commission in connection with the transactions
contemplated by this Agreement, except as set forth in Section 4.23. No claim
exists or will exist against the Principal Stockholders, or the Surviving
Corporation or, based on any action by the Principal Stockholders, against
Parent for payment of any "topping," "break-up" or "bust-up" fee or any similar
compensation or payment arrangement as a result of the transactions contemplated
hereby.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF COMPANY
Except as set forth in the disclosure schedule dated and delivered as
provided in Section 7.2(b) hereof by Company to Parent (the "COMPANY DISCLOSURE
SCHEDULE"), which is being concurrently delivered to Parent in connection
herewith and is designated therein as being Company Disclosure Schedule, Company
represents and warrants to Parent and Merger Sub that the statements contained
in this Article IV are true and correct. Company Disclosure Schedule shall be
arranged in paragraphs corresponding to each representation and warranty set
forth in this Article IV.
4.1 Organization and Good Standing. Company is a corporation duly
organized, validly existing and in good standing under the Laws of the
jurisdiction of its incorporation, has all requisite power to own, lease and
operate its properties and to carry on its business as now being conducted, and
is duly qualified to do business and is in good standing as a foreign
corporation in each jurisdiction in which it owns or leases property or conducts
any business so as to require such qualification, except for those jurisdictions
where the failure to be so qualified and in good standing would not reasonably
be expected to have, individually or in the aggregate, a Material Adverse Effect
on Company. Company has delivered to Parent prior to the date of this Agreement
true and complete copies of (i) its Charter Documents and (ii) all other
existing written consents and minutes of the meetings of its stockholders, its
Board of Directors and each committee of its Board of Directors held since
January 1, 2002. There are no decisions or resolutions of the stockholders,
Board of Directors or committees of the Board of Directors of Company, other
than as disclosed in the minutes and written consents provided to Parent. Such
Charter Documents are in full force and effect and Company is not in default of
any provision thereunder. "CHARTER DOCUMENTS" means, with respect to any entity,
the certificate of incorporation, the articles of incorporation, by-laws,
articles of organization, limited liability company agreement, partnership
agreement, formation agreement, joint venture agreement or other similar
organizational documents of such entity (in each case, as amended).
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4.2 Capitalization.
(a) The authorized capital stock of Company consists of 20,000,000
shares of Company Common Stock, of which 11,199,103 shares of Company Common
Stock were issued and outstanding as of July 31, 2005. All issued and
outstanding shares of Company Common Stock have been duly authorized and validly
issued, are fully paid and nonassessable, and were issued in substantial
compliance with all applicable federal, state and foreign securities Laws. No
shares of Company Common Stock are held by any Subsidiary of Company. No shares
of Company Common Stock are held in Company's treasury.
(b) Company has duly reserved 1,236,816 shares of Company Common
Stock for future issuance pursuant to Company Stock Options (650,000 shares) and
pursuant to Company Warrants (586,816 shares).
(c) Company has also duly reserved 1,500,000 shares of Company
Common Stock for future issuance upon the exchange of outstanding Company
Exchangeable Shares (1,382,957 shares already included in the outstanding shares
noted in Section 4.2(a) above) and certain options (86,038 shares) and certain
warrants (31,005 shares) to purchase such Company Exchangeable Shares.
(d) Except for (i) the shares of Company Common Stock outstanding as
of the date hereof, (ii) Company Stock Options outstanding as of the date
hereof, (iii) Company Warrants outstanding as of the date hereof and (iv) the
other options, warrants, purchase rights, subscription rights, conversion
rights, exchange rights and other Contracts that, directly or indirectly, could
require Company to issue, sell or otherwise cause to become outstanding shares
of Company Common Stock (including Company Exchangeable Shares) that are
disclosed in Schedule 4.2(d)(iv) of the Company Disclosure Schedule (the "OTHER
COMPANY PURCHASE RIGHTS"), Company does not have outstanding securities of any
kind. Except as set forth in the preceding sentence, Company is not a party to
any Contract obligating Company, directly or indirectly, to issue additional
securities. As of the Effective Time, there will be no more than an aggregate of
4,000,000 shares of Company Common Stock that are then subject to Company Stock
Options, Company Warrants or Other Company Purchase Rights.
(e) All outstanding Company Stock Options, Company Warrants and
Other Company Purchase Rights have been duly authorized and validly issued and
were issued in substantial compliance with all applicable federal, state and
foreign securities Laws. All shares of Company Common Stock subject to issuance
upon exercise, conversion and/or exchange of Company Stock Options, Company
Warrants and Other Company Purchase Rights, upon issuance in accordance with the
terms and conditions specified in the instruments pursuant to which they are
issuable, will be duly authorized, validly issued, fully paid and nonassessable.
(f) No Company Stock Option, Company Warrant or Other Company
Purchase Right will by its terms require an adjustment in connection with the
Merger, except as contemplated by this Agreement. Neither the consummation of
the transactions contemplated by this Agreement, nor any action taken or to be
taken by Company in connection with such transactions, will result in (i) any
acceleration of exercisability or vesting or lapse of restrictions (including
any right to acceleration of vesting or lapse of restrictions that is contingent
upon the occurrence of a subsequent event) in favor of any holder of Company
Stock Options or Company Warrants, (ii) any additional benefits for any holder
of Company Stock Options or Company Warrants, or (iii) the inability of Parent
after the Effective Time to exercise any right or benefit held by Company prior
to the Effective Time with respect to any Company Stock Option assumed by Parent
or any Company Warrant.
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(g) None of the shares of Company Common Stock, Company Stock
Options, Company Warrants or Other Company Purchase Rights were issued or have
been transferred in violation of, or are subject to, any preemptive rights,
rights of first offer or subscription agreements. Company is not a party to any
stockholder agreements, voting agreements, voting trusts or any such other
similar arrangements with respect to the transfer, voting or other rights
associated with its securities and to the knowledge of Company, there are no
such agreements, trusts or arrangements to which Company is not a party.
(h) Except for the repurchase at cost of the shares of Company
Common Stock from employees of Company and its subsidiaries in connection with
the termination of their employment, since January 1, 2002, Company has not
repurchased or otherwise reacquired any of its securities. The repurchase of any
such securities was duly approved and authorized by the Board of Directors and
complied in all respects with applicable Law, and Company has no liability,
contingent or otherwise, to make any payments with respect to any such
repurchased securities. There are no obligations, contingent or otherwise, of
Company to repurchase, redeem or otherwise acquire any of its securities. There
are no declared or accrued unpaid dividends with respect to any of Company's
securities.
(i) Company does not have outstanding or authorized any stock
appreciation, phantom stock, profit participation, or similar rights.
(j) Company does not have outstanding any bonds, debentures, notes
or other obligations or debt or equity securities the holders of which have the
right to vote (or convertible into, or exercisable or exchangeable for,
securities having the right to vote) on any matter, except for Company
Exchangeable Shares and Company Stock Options and Company Warrants as set forth
in 4.2(b) and (c).
(k) Since January 1, 2002 Company has not repurchased or otherwise
reacquired any of its securities. There are no obligations, contingent or
otherwise, of Company to repurchase, redeem or otherwise acquire any of its
securities. There are no declared or accrued unpaid dividends with respect to
any of Company's securities.
4.3 Subsidiaries of Company.
(a) Company Disclosure Schedule contains a true and complete list of
the Subsidiaries of Company and sets forth with respect to each such Subsidiary
the jurisdiction of formation. The outstanding shares of capital stock of each
Subsidiary of Company have been duly authorized and validly issued, are fully
paid and nonassessable and are owned by Company or another Subsidiary of Company
free and clear of all Liens.
(b) Each Subsidiary of Company is validly existing and in good
standing under the Laws of the jurisdiction of its formation, has all requisite
power to own, lease and operate its properties and to carry on its business as
now being conducted and is duly qualified to do business and is in good standing
in each jurisdiction in which it owns or leases property or conducts any
business so as to require such qualification, except for those jurisdictions
where the failure to be so qualified and in good standing would not reasonably
be expected to have, individually or in the aggregate, a Material Adverse Effect
on Company.
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(c) Other than the shares of capital stock set forth in Company
Disclosure Schedule, no Subsidiary of Company has outstanding securities of any
kind. No Subsidiary of Company is party to any Contract obligating such
Subsidiary, directly or indirectly, to issue any additional securities.
(d) Except with respect to the exchangeable securities referred to
in Section 4.2(j) above, no Subsidiary of Company has outstanding any bonds,
debentures, notes or other obligations or debt or equity securities the holders
of which have the right to vote (or convertible into, or exercisable or
exchangeable for, securities having the right to vote) on any matter.
(e) Other than the Subsidiaries set forth in Company Disclosure
Schedule, neither Company nor any Subsidiary of Company, directly or indirectly,
owns any securities or other interest in any corporation, partnership, joint
venture or other business association or entity.
(f) Except with respect to the exchangeable securities referred to
in Section 4.2(j) above, there are no obligations, contingent or otherwise, of
Company or any Subsidiary of Company to provide funds to or make an investment
(in the form of a loan, capital contribution or otherwise) in any entity. 4.4
Authority and Enforceability.
(a) Company has all necessary corporate power and authority to enter
into this Agreement and the Operative Agreements, and, subject in the case of
the consummation of the Merger to Company Stockholder Approval, to perform its
obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby. The execution and delivery by Company of this
Agreement and the Operative Agreements and the consummation by Company of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary corporate action on the part of Company, subject in the case of the
consummation of the Merger to Company Stockholder Approval. The only stockholder
approval required for the adoption of this Agreement is the delivery to Company
of written consents in favor of adoption of this Agreement from the holders of a
majority of the outstanding shares of Common Stock (the "COMPANY STOCKHOLDER
APPROVAL"). This Agreement has been duly executed and delivered by Company and,
assuming Company Stockholder Approval and due authorization, execution and
delivery by Parent and Merger Sub, constitutes the valid and binding obligation
of Company, enforceable against it in accordance with its terms, except as such
enforceability may be limited by (i) bankruptcy, insolvency, reorganization,
moratorium or other similar Laws affecting or relating to creditors' rights
generally, and (ii) the availability of injunctive relief and other equitable
remedies.
(b) The Board of Directors of Company has, by the unanimous vote of
all directors then in office, (i) approved this Agreement and the transactions
contemplated hereby, (ii) determined that the Merger is advisable and in the
best interests of Company Stockholders and (iii) resolved to recommend that
Company Stockholders adopt this Agreement and directed that this Agreement be
submitted to Company Stockholders for adoption. Such resolutions have not been
rescinded and are in full force and effect.
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4.5 No Conflict; Authorizations.
(a) The execution and delivery of this Agreement and the Operative
Agreements by Company do not, and the performance by Company of its obligations
hereunder and thereunder and the consummation by Company of the transactions
contemplated hereby and thereby (in each case, with or without the giving of
notice or lapse of time, or both) will not, directly or indirectly, (i) violate
the provisions of Company's or any of its Subsidiaries' Charter Documents, (ii)
violate or conflict with, or constitute a default, an event of default or an
event creating rights of acceleration, termination, cancellation, imposition of
additional obligations or loss of rights, or require a consent to assignment,
under any Contract (A) to which Company or any of its Subsidiaries is a party,
(B) of which Company or any of its Subsidiaries is a beneficiary or (C) by which
Company or any of its Subsidiaries or any of their respective assets is bound,
(iii) assuming compliance by Company with the matters referred to in Section
4.5(b), violate or conflict with any Law, Authorization or Order applicable to
Company or any of its Subsidiaries, or give any Governmental Entity or other
Person the right to challenge any of the transactions contemplated hereby or to
exercise any remedy, obtain any relief under or revoke or otherwise modify any
rights held under, any such Law, Authorization or Order, or (iv) result in the
creation of any Liens upon any of the assets owned or used by Company or any of
its Subsidiaries referred to in clauses (iii) and (iv) that would not reasonably
be expected to have, individually or in the aggregate, a Material Adverse Effect
on Company. Section 4.5(a) of Company Disclosure Schedule sets forth all
consents, waivers, assignments and other approvals and actions that are required
in connection with the transactions contemplated by this Agreement under any
Contract to which Company or any of its Subsidiaries is a party (collectively,
"COMPANY CONSENTS") in order to preserve all rights of, and benefits to, the
Surviving Corporation and its Subsidiaries thereunder.
(b) No Authorization or Order of, registration, declaration or
filing with, or notice to any Governmental Entity is required to be made,
obtained, performed or given to or with respect to Company or any of its
Subsidiaries in connection with the execution and delivery of this Agreement and
the consummation of the Merger, except for (i) the filing of the Form S-4
Registration Statement with the SEC in connection with the issuance of shares of
Parent Common Stock pursuant to the Merger, (ii) the filing of the Certificate
of Merger with the Secretary of State of the State of Delaware, (iii) requisite
state "Blue Sky" filings, (iv) such filings as may be required under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR ACT") and the
antitrust and competition Laws of all jurisdictions other than those of the
United States (the "OTHER ANTITRUST LAWS") and (v) such Authorizations, Orders,
registrations, declarations, filings and notices the failure to obtain or make
which would not reasonably be expected to materially impair the ability of
Company to perform its obligations under this Agreement and consummate the
Merger or to be material to Company and its Subsidiaries taken as a whole.
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4.6 Financial Statements.
(a) True and complete copies of Company's audited consolidated
financial statements consisting of the consolidated balance sheet of Company and
its Subsidiaries as at April 30 in each of the years 2004 and 2005 and the
related statements of income and retained earnings, stockholders' equity and
cash flow, for the years then ended (the "AUDITED FINANCIAL STATEMENTS"), and
unaudited consolidated financial statements consisting of the balance sheet of
Company and its Subsidiaries as at July 31, 2005 and the related statements of
income and retained earnings, stockholders' equity and cash flow for the three
(3) month period then ended (the "INTERIM FINANCIAL STATEMENTS" and together
with the Audited Financial Statements, the "FINANCIAL STATEMENTS"), are included
in Company Disclosure Schedule.
(b) The Financial Statements are true, complete and correct and have
been prepared in accordance with United States generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the periods
involved, subject, in the case of the Interim Financial Statements, to normal
year-end adjustments (the effect of which will not be materially adverse) and
the absence of notes (that, if presented, would not differ materially from those
presented in the Audited Financial Statements). The Financial Statements are
based on the books and records of Company and its Subsidiaries, and fairly
present the financial condition of Company and its Subsidiaries as of the
respective dates they were prepared and the results of the operations of Company
and its Subsidiaries for the periods indicated. The consolidated balance sheet
of Company and its Subsidiaries as of April 30, 2005 is referred to herein as
the "BALANCE SHEET" and the date thereof as the "BALANCE SHEET DATE" and the
consolidated balance sheet of Company and its Subsidiaries as of July 31, 2005
is referred to herein as the "INTERIM BALANCE SHEET" and the date thereof as the
"INTERIM BALANCE SHEET DATE." Each of Company and its Subsidiaries maintains a
standard system of accounting established and administered in accordance with
GAAP.
4.7 No Undisclosed Liabilities. Company and its Subsidiaries have no
liabilities, obligations or commitments of any nature whatsoever, asserted or
unasserted, known or unknown, absolute or contingent, accrued or unaccrued,
matured or unmatured or otherwise ("LIABILITIES"), except (a) those which are
adequately reflected or reserved against in the Balance Sheet as of the Balance
Sheet Date, and (b) those which have been incurred in the ordinary course of
business and consistent with past practice since the Balance Sheet Date and
which are not, individually or in the aggregate, material in amount.
4.8 Taxes.
(a) As used in this Agreement, the following words and terms have
the following definitions:
(i) "TAX" or "TAXES" means any and all federal, state, local, or
foreign net or gross income, gross receipts, net proceeds, sales, use, ad
valorem, value added, franchise, bank shares, withholding, payroll, employment,
excise, property, deed, stamp, alternative or add-on minimum, environmental,
profits, windfall profits, transaction, license, lease, service, service use,
occupation, severance, energy, unemployment, social security, workers'
compensation, capital, premium, and other taxes, assessments, customs, duties,
fees, levies, or other governmental charges of any nature whatever, whether
disputed or not, together with any interest, penalties, additions to tax, or
additional amounts with respect thereto.
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(ii) "TAX RETURNS" means any return, declaration, report, claim
for refund, or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment thereof.
(iii) "TAXING AUTHORITY" means any Governmental Entity having
jurisdiction with respect to any Tax.
(b) Each of Company and its Subsidiaries has duly and timely filed
all Tax Returns required to have been filed by or with respect to Company or
such Subsidiary and will duly and timely file all Tax Returns due between the
date hereof and the Closing Date. Each such Tax Return correctly and completely
reflects all liability for Taxes and all other information required to be
reported thereon. All Taxes owed by Company and each Subsidiary of Company
(whether or not shown on any Tax Return) have been timely paid (or, if due
between the date hereof and the Closing Date, will be duly and timely paid).
Each of Company and its Subsidiaries has adequately provided for, in its books
of account and related records, all liability for all unpaid Taxes, being
current Taxes not yet due and payable.
(c) Each of Company and its Subsidiaries has withheld and timely
paid all Taxes required to have been withheld and paid by it and has complied
with all information reporting and backup withholding requirements, including
maintenance of required records with respect thereto.
(d) Neither Company nor any of its Subsidiaries is the beneficiary
of any extension of time within which to file any Tax Return, nor has Company or
any of its Subsidiaries made (or had made on its behalf) any requests for such
extensions. Neither Company nor any of its Subsidiaries has waived (or is
subject to a waiver of) any statute of limitations in respect of Taxes or has
agreed to (or is subject to) any extension of time with respect to a Tax
assessment or deficiency.
(e) Company Disclosure Schedule indicates those Tax Returns that
have been audited and those Tax Returns that currently are the subject of audit.
Except as set forth in Company Disclosure Schedule there is no Action now
pending or threatened against or with respect to Company or any of its
Subsidiaries in respect of any Tax or any assessment or deficiency. There are no
liens for Taxes (other than current Taxes not yet due and payable) upon the
assets of Company. Company has made available to Parent correct and complete
copies of all federal income Tax Returns, examination reports, and statements of
deficiencies assessed against or agreed to by Company or any of its Subsidiaries
since January 1, 2003.
(f) Company Disclosure Schedule lists, as of the date of this
Agreement, all jurisdictions in which Company or any of its Subsidiaries
currently files Tax Returns. No claim has been made by an authority in a
jurisdiction where Company or any of its Subsidiaries does not file Tax Returns
that any of them is or may be subject to taxation by that jurisdiction or that
any of them must file Tax Returns.
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(g) None of the assets or properties of Company or any of its
Subsidiaries constitutes tax-exempt bond financed property or tax-exempt use
property within the meaning of Section 168 of the Code. Neither Company nor any
of its Subsidiaries is a party to any "safe harbor lease" within the meaning of
Section 168(f)(8) of the Code, as in effect prior to amendment by the Tax Equity
and Fiscal Responsibility Act of 1982, or to any "long-term contract" within the
meaning of Section 460 of the Code. Neither Company nor any of its Subsidiaries
has ever been a United States real property holding corporation within the
meaning of Section 897(c)(2) of the Code. Company is not a "foreign person"
within the meaning of Section 1445 of the Code.
(h) Neither Company nor any of its Subsidiaries has agreed to or is
required to make by reason of a change in accounting method or otherwise, or
could be required to make by reason of a proposed or threatened change in
accounting method or otherwise, any adjustment under Section 481(a) of the Code.
Neither Company nor any of its Subsidiaries has been the "distributing
corporation" (within the meaning of Section 355(c)(2) of the Code) with respect
to a transaction described in Section 355 of the Code within the 5-year period
ending as of the date of this Agreement.
(i) No Subsidiary of Company that is incorporated in a non-U.S.
jurisdiction has, or at any time has had, an investment in "United States
property" within the meaning of Section 956(c) of the Code. No Subsidiary of
Company is, or at any time has been, a passive foreign investment company within
the meaning of Section 1297 of the Code and neither Company nor any of its
Subsidiaries is a shareholder, directly or indirectly, in a passive foreign
investment company. No Subsidiary of Company that is incorporated in a non-U.S.
jurisdiction is, or at any time has been, engaged in the conduct of a trade or
business within the United States, or treated as or considered to be so engaged.
(j) Neither Company nor any of its Subsidiaries (i) has ever been a
party to any Tax allocation or sharing agreement or Tax indemnification
agreement, (ii) has ever been a member of an affiliated, consolidated, condensed
or unitary group, or (iii) has any liability for or obligation to pay Taxes of
any other Person under Treas. Reg. 1.1502-6 (or any similar provision of Tax
Law), or as transferee or successor, by contract or otherwise. Neither Company
nor any of its Subsidiaries is a party to any joint venture, partnership, or
other arrangement that is treated as a partnership for federal income tax
purposes.
(k) Neither Company nor any of its Subsidiaries will be required to
include any item of income in, or exclude any item of deduction from, taxable
income for any taxable period (or portion thereof) ending after the Effective
Time as a result of any: (i) intercompany transactions or excess loss accounts
described in Treasury regulations under Section 1502 of the Code (or any similar
provision of state, local, or foreign Tax Law), (ii) installment sale or open
transaction disposition made on or prior to the Effective Time or (iii) prepaid
amount received on or prior to the Effective Time.
(l) Company has not entered into any transaction that constitutes a
"reportable transaction" within the meaning of Treasury Regulation Section
1.6011-4(b).
(m) Company Disclosure Schedule lists each person who Company
reasonably believes is, with respect to Company or any Affiliate of Company, a
"disqualified individual" (within the meaning of Section 280G of the Code and
the Regulations thereunder).
C-19
(n) Neither Company nor, to the Knowledge of Company, any of its
Affiliates has taken or agreed to take any action (other than actions
contemplated by this Agreement) that would reasonably be expected to prevent the
Merger from constituting a "reorganization" under Section 368 of the Code.
Company is not aware of any agreement or plan to which Company or any of its
Affiliates is a party or other circumstances relating to Company or any of its
Affiliates that could reasonably be expected to prevent the Merger from so
qualifying as a "reorganization" under Section 368 of the Code.
(o) The unpaid Taxes of Company (i) did not, as of the Balance Sheet
Date and the Interim Balance Sheet Date, exceed the reserve for Tax liability
(rather than any reserve for deferred Taxes established to reflect timing
differences between book and Tax income) set forth on the face of the Balance
Sheet or the Interim Balance Sheet, respectively, (rather than in any notes
thereto) and (ii) will not exceed that reserve as adjusted for the passage of
time through the Closing Date in accordance with the past custom and practice of
Company in filing its Tax Returns. Since the Balance Sheet Date Company has not
incurred any liability for Taxes arising from extraordinary gains or losses, as
that term is used in GAAP, outside the ordinary course of business consistent
with past custom and practice.
4.9 Compliance with Law.
(a) Each of Company and its Subsidiaries has complied with each,
and is not in violation of, any applicable Law to which Company or any of its
Subsidiaries or its business, operations, assets or properties is or has been
subject, except where failure to do so would not have a Material Adverse Effect
on Company.
(b) No event has occurred and no circumstances exist that (with or
without the passage of time or the giving of notice) may result in a violation
of, conflict with or failure on the part of Company or any of its Subsidiaries
to comply with, any Law. Neither Company nor any of its Subsidiaries has
received notice regarding any such violation of, conflict with, or failure to
comply with, any Law.
4.10 Authorizations.
(a) Each of Company and its Subsidiaries owns, holds or lawfully
uses in the operation of its business all Authorizations which are necessary for
it to conduct its business as currently conducted or as proposed to be conducted
or for the ownership and use of the assets owned or used by Company or such
Subsidiary in the conduct of its business free and clear of all Liens. Such
Authorizations are valid and in full force and effect and none of such
Authorizations will be terminated or impaired or become terminable as a result
of the transactions contemplated by this Agreement. All material Authorizations
are listed in Company Disclosure Schedule.
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(b) No event has occurred and no circumstances exist that (with or
without the passage of time or the giving of notice) may result in a violation
of, conflict with, failure on the part of Company or any of its Subsidiaries to
comply with the terms of, or the revocation, withdrawal, termination,
cancellation, suspension or modification of any Authorization. Neither Company
nor any of its Subsidiaries has received notice regarding any violation of,
conflict with, failure to comply with the terms of, or any revocation,
withdrawal, termination, cancellation, suspension or modification of, any
Authorization. Neither Company nor any of its Subsidiaries is in default, nor
has Company or any of its Subsidiaries received notice of any claim of default,
with respect to any Authorization.
(c) No Person other than Company or one of its Subsidiaries owns or
has any proprietary, financial or other interest (direct or indirect) in any
Authorization which Company or any of its Subsidiaries owns, possesses or uses
in the operation of its business as now or proposed to be conducted.
4.11 Title to Personal Properties.
(a) With respect to personal properties and assets that they purport
to own, including all properties and assets reflected as owned on Company
Balance Sheet (other than inventory sold and items of obsolete equipment
disposed of in the ordinary course of business since the date thereof), Company
or one of its Subsidiaries has good and valid title to all of such properties
and assets, free and clear of all Liens other than Permitted Liens. "PERMITTED
LIENS" means, with respect to any party, (i) liens for current real or personal
property taxes not yet due and payable and with respect to which such party
maintains adequate reserves, (ii) workers', carriers' and mechanics' or other
like liens incurred in the ordinary course of business with respect to which
payment is not due and that do not impair the conduct of such party's or any of
its Subsidiaries' business in any material respect or the present or proposed
use of the affected property and (iii) liens that are immaterial in character,
amount, and extent and which do not detract from the value or interfere with the
present or proposed use of the properties they affect.
(b) With respect to personal properties and assets that are leased,
Company or one of its Subsidiaries has a valid leasehold interest in such
properties and assets and all such leases are in full force and effect and
constitute valid and binding obligations of the other party(ies) thereto.
Neither Company nor any of its Subsidiaries nor any other party thereto is in
violation of any of the terms of any such lease.
4.12 Condition of Tangible Assets. All buildings, plants, leasehold
improvements, structures, facilities, equipment and other items of tangible
property and assets which are owned, leased or used by Company or any of its
Subsidiaries are structurally sound, are in good operating condition and repair
(subject to normal wear and tear given the use and age of such assets), are
usable in the regular and ordinary course of business and conform in all
material respects to all Laws and Authorizations relating to their construction,
use and operation.
4.13 Real Property.
(a) Company Disclosure Schedule contains (i) a list of all real
property and interests in real property owned in fee by Company or any of its
Subsidiaries (the "COMPANY OWNED REAL PROPERTY"), and (ii) a list of all real
property and interests in real property leased by Company or any of its
Subsidiaries with respect to each of which the annual rental payments exceed
$50,000 (the "COMPANY LEASED REAL PROPERTY").
C-21
(b) With respect to each parcel of Company Owned Real Property,
Company or one of its Subsidiaries has good and marketable title to each such
parcel of Company Owned Real Property free and clear of all Liens, except (A)
Permitted Liens and (B) zoning and building restrictions, easements, covenants,
rights-of-way and other similar restrictions of record, none of which materially
impairs the current or proposed use of such Company Owned Real Property. There
are no outstanding options or rights of first refusal to purchase such parcel of
Company Owned Real Property, or any portion thereof or interest therein.
(c) Each lease with respect to Company Leased Real Property (each, a
"COMPANY LEASE") is in full force and effect. Neither Company nor any of its
Subsidiaries is in default under any such Company Lease and, to Company's
Knowledge, no other party thereto is in default under any such Company Lease.
4.14 Intellectual Property. The representations and warranties in this
Section 4.14 shall be true and correct except to the extent that errors and
omission therein would not have a Material Adverse Effect on the Company.
(a) As used in this Agreement, "INTELLECTUAL PROPERTY" means: (i)
inventions (whether or not patentable), trade secrets, technical data,
databases, customer lists, designs, tools, methods, processes, technology,
ideas, know-how, source code, product road maps and other proprietary
information and materials ("PROPRIETARY INFORMATION"); (ii) trademarks and
service marks (whether or not registered), trade names, logos, trade dress and
other proprietary indicia and all goodwill associated therewith; (iii)
documentation, advertising copy, marketing materials, web-sites, specifications,
mask works, drawings, graphics, databases, recordings and other works of
authorship, whether or not protected by Copyright; (iv) computer programs,
including any and all software implementations of algorithms, models and
methodologies, whether in source code or object code, design documents,
flow-charts, user manuals and training materials relating thereto and any
translations thereof (collectively, "SOFTWARE"); and (v) all forms of legal
rights and protections that may be obtained for, or may pertain to, the
Intellectual Property set forth in clauses (i) through (iv) in any country of
the world ("INTELLECTUAL PROPERTY RIGHTS"), including all letters patent, patent
applications, provisional patents, design patents, PCT filings, invention
disclosures and other rights to inventions or designs ("PATENTS"), all
registered and unregistered copyrights in both published and unpublished works
("COPYRIGHTS"), all trademarks, service marks and other proprietary indicia
(whether or not registered) ("MARKS"), trade secret rights, mask works, moral
rights or other literary property or authors rights, and all applications,
registrations, issuances, divisions, continuations, renewals, reissuances and
extensions of the foregoing.
(b) Company Disclosure Schedule lists (by name, owner and, where
applicable, registration number and jurisdiction of registration, application,
certification or filing) all Intellectual Property that is owned by Company
and/or one or more of its Subsidiaries (whether exclusively, jointly with
another Person or otherwise) ("COMPANY OWNED INTELLECTUAL PROPERTY"); provided
that Company Disclosure Schedule is not required to list items of Company Owned
Intellectual Property which are both (i) immaterial to Company and its
Subsidiaries and (ii) not registered or the subject of an application for
registration. Except as described in Company Disclosure Schedule, Company or one
of its Subsidiaries owns the entire right, title and interest to all Company
Owned Intellectual Property free and clear of all Liens.
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(c) Company Disclosure Schedule lists all licenses, sublicenses and
other Contracts ("COMPANY IN-BOUND LICENSES") pursuant to which a third party
authorizes Company or any of its Subsidiaries to use, practice any rights under,
or grant sublicenses with respect to, any Intellectual Property owned by such
third party, including the incorporation of any such Intellectual Property into
Company's or any of its Subsidiaries' products and, with respect to each Company
In-Bound License, whether Company In-Bound License is exclusive or
non-exclusive; provided, however, that Company Disclosure Schedule is not
required to list Company In-Bound Licenses that consist solely of "shrink-wrap"
and similar commercially available end-user licenses.
(d) Company Disclosure Schedule lists all licenses, sublicenses and
other Contracts ("COMPANY OUT-BOUND LICENSES") pursuant to which Company or any
of its Subsidiaries authorizes a third party to use, practice any rights under,
or grant sublicenses with respect to, any Company Owned Intellectual Property or
pursuant to which Company or any of its Subsidiaries grants rights to use or
practice any rights under any Intellectual Property owned by a third party and,
with respect to each Company Out-Bound License, whether Company Out-Bound
License is exclusive or non-exclusive.
(e) Each Company In-Bound License and each Company Out-Bound License
is in full force and effect and valid and enforceable in accordance with its
terms, except where any such failure to be in full force and effect and valid
and enforceable would not reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on Company. Neither Company nor any of its
Subsidiaries has violated any provision of, or committed or failed to perform
any act which, with or without the giving of notice or lapse of time, or both,
would constitute a default in the performance, observance or fulfillment of any
obligation, covenant, condition or other term contained in any Company In-Bound
License or Company Out-Bound License, except where any such default would not
reasonably be expected to have a Material Adverse Effect on Company, and neither
Company nor any of its Subsidiaries has given or received notice to or from any
Person relating to any such alleged or potential default that has not been
cured.
(f) Company and/or one or more of its Subsidiaries (i) exclusively
own the entire right, interest and title to all Intellectual Property that is
used in or necessary for the businesses of Company and its Subsidiaries as they
are currently conducted free and clear of Liens (including the design,
manufacture, license and sale of all products currently under development or in
production), or (ii) otherwise rightfully use or otherwise enjoy such
Intellectual Property pursuant to the terms of a valid and enforceable Company
In-Bound License that is listed in Company Disclosure Schedule or that is a
"shrink-wrap" or similar commercially available end-user license. Company Owned
Intellectual Property, together with Company's and its Subsidiaries' rights
under Company In-Bound Licenses listed in Company Disclosure Schedule or that
are "shrink-wrap" and similar commercially available end-user licenses
(collectively, the "COMPANY INTELLECTUAL PROPERTY"), constitutes all the
Intellectual Property used in or necessary for the operation of Company's and
its Subsidiaries' businesses as they are currently conducted.
C-23
(g) All registration, maintenance and renewal fees related to
Patents, Marks, Copyrights and any other certifications, filings or
registrations that are owned by Company or any of its Subsidiaries ("COMPANY
REGISTERED ITEMS") that are currently due have been paid and all documents and
certificates related to such Company Registered Items have been filed with the
relevant Governmental Entity or other authorities in the United States or
foreign jurisdictions, as the case may be, for the purposes of maintaining such
Company Registered Items. All Company Registered Items are in good standing,
held in compliance with all applicable legal requirements and enforceable by
Company and/or one or more of its Subsidiaries. All Patents that have been
issued to Company or any of its Subsidiaries are valid.
(h) Company is not aware of any challenges (or any basis therefor)
with respect to the validity or enforceability of any Company Intellectual
Property. Neither Company nor any of its Subsidiaries has taken any action or
failed to take any action that would reasonably be expected to result in the
abandonment, cancellation, forfeiture, relinquishment, invalidation, waiver or
unenforceability of any Company Intellectual Property. Company Disclosure
Schedule lists all previously held Company Registered Items that Company or any
of its Subsidiaries has abandoned, cancelled, forfeited or relinquished during
the twelve (12) months prior to the date of this Agreement.
(i) None of the products or services currently or formerly developed
manufactured, sold, distributed, provided, shipped or licensed, by Company or
any of its Subsidiaries, or which are currently under development, has infringed
or infringes upon, or otherwise unlawfully used or uses, the Intellectual
Property Rights of any third party. Neither Company nor any of its Subsidiaries,
by conducting its business as currently conducted, has infringed or infringes
upon, or otherwise unlawfully used or uses, any Intellectual Property Rights of
a third party. Neither Company nor any of its Subsidiaries has received any
communication alleging that Company or any of its Subsidiaries or any of their
respective products, services, activities or operations infringe upon or
otherwise unlawfully use any Intellectual Property Rights of a third party nor,
to Company's Knowledge, is there any basis therefor. No Action has been
instituted, or, to Company's Knowledge, threatened, relating to any Intellectual
Property formerly or currently used by Company or any of its Subsidiaries and
none of Company Intellectual Property is subject to any outstanding Order. To
Company's Knowledge, no Person has infringed or is infringing any Intellectual
Property Rights of Company or any of its Subsidiaries or has otherwise
misappropriated or is otherwise misappropriating any Company Intellectual
Property.
(j) With respect to Company's or any of its Subsidiaries'
Proprietary Information, the documentation relating thereto is current, accurate
and sufficient in detail and content to identify and explain it and to allow its
full and proper use without reliance on the special knowledge or memory of
others. Company and its Subsidiaries have taken commercially reasonable steps to
protect and preserve the confidentiality of all Proprietary Information owned by
Company or any of its Subsidiaries that is not covered by an issued Patent.
Without limiting the generality of the foregoing, the Proprietary Information of
Company and its Subsidiaries (other than Proprietary Information that is covered
by an issued Patent) is not part of the public knowledge and has not been used
or divulged for the benefit of any Person other than Company and its
Subsidiaries.
C-24
(k) All current and former employees, consultants and contractors of
Company and its Subsidiaries have executed and delivered, and are in compliance
with, enforceable agreements regarding the protection of Proprietary Information
and providing valid written assignments of all Intellectual Property conceived
or developed by such employees, consultants or contractors in connection with
their services for Company and its Subsidiaries. No current or former employee,
consultant or contractor or any other Person has any right, claim or interest to
any of Company Intellectual Property.
(l) No employee, consultant or contractor of Company or any of its
Subsidiaries has been, is or will be, by performing services for Company or such
Subsidiary, in violation of any term of any employment, invention disclosure or
assignment, confidentiality, noncompetition agreement or other restrictive
covenant or any Order as a result of such employee's, consultant's or
independent contractor's employment by Company or any Subsidiary or any services
rendered by such employee, consultant or independent contractor.
(m) The execution and delivery of this Agreement by Company does
not, and the consummation of the Merger (in each case, with or without the
giving of notice or lapse of time, or both) will not, directly or indirectly,
result in the loss or impairment of, or give rise to any right of any third
party to terminate or reprice or otherwise renegotiate any of Company's or any
of its Subsidiaries' rights to own any of its Intellectual Property or their
respective rights under any Company Out-Bound License or Company In-Bound
License, nor require the consent of any Governmental Entity or other third party
in respect of any such Intellectual Property.
(n) Software.
(i) The Software owned, or purported to be owned by Company or any
of its Subsidiaries (collectively, the "COMPANY OWNED SOFTWARE"), was either (A)
developed by employees of Company or one or more of its Subsidiaries within the
scope of their employment by Company or such Subsidiary, (B) developed by
independent contractors who have assigned all of their right, title and interest
therein to Company or one of its Subsidiaries pursuant to written agreements or
(C) otherwise acquired by Company or one of its Subsidiaries from a third party
pursuant to a written agreement in which such third party assigns all of its
right, title and interest therein. None of Company Owned Software contains any
programming code, documentation or other materials or development environments
that embody Intellectual Property Rights of any person other than Company and
its Subsidiaries, other than such materials obtained by Company and its
Subsidiaries from other Persons who make such materials generally available to
all interested Persons or end-users on standard commercial terms.
(ii) Each of Company's and its Subsidiaries' existing and
currently supported and marketed Software products performs, in all material
respects, the functions described in any agreed specifications or end-user
documentation or other information provided to customers of Company or such
Subsidiary on which such customers relied when licensing or otherwise acquiring
such products, subject only to routine bugs and errors that can be corrected
promptly by Company or such Subsidiary in the course of providing customer
support without further liability to Company or such Subsidiary, and all of the
code of such products has been developed in a manner that meets common industry
practice, including the use of regression test and release procedures. To
Company's Knowledge, each of Company's and its Subsidiaries' existing and
currently supported and marketed Software products is free of all viruses,
worms, trojan horses and material known contaminants and does not contain any
bugs, errors, or problems in each case that would substantially disrupt its
operation or have a substantial adverse impact on the operation of the Software.
C-25
(iii) Company and its Subsidiaries have taken all actions
customary in the software industry to document the Software and its operation,
such that the materials comprising the Software, including the source code and
documentation, have been written in a clear and professional manner so that they
may be understood, modified and maintained in an efficient manner by reasonably
competent programmers.
(iv) Neither Company nor any of its Subsidiaries has exported or
transmitted Software or other material in connection with Company's or such
Subsidiaries' business to any country to which such export or transmission is
restricted by any applicable Law, without first having obtained all necessary
and appropriate Authorizations.
(v) Company Owned Software is free of any disabling codes or
instructions (a "DISABLING CODE"), and any virus or other intentionally created,
undocumented contaminant (a "CONTAMINANT"), that may, or may be used to, access,
modify, delete, damage or disable any Systems or that may result in damage
thereto. Company and its Subsidiaries have taken reasonable steps and
implemented reasonable procedures to ensure that its and their internal computer
systems used in connection with Company's and its Subsidiaries' business are
free from Disabling Codes and Contaminants. The Software licensed by Company is
free of any Disabling Codes or Contaminants that may, or may be used to, access,
modify, delete, damage or disable any of the hardware, software, databases or
embedded control systems of Company or its Subsidiaries ("SYSTEMS") or that
might result in damage thereto. Company and its Subsidiaries have taken all
reasonable steps to safeguard their respective Systems and restrict unauthorized
access thereto.
(vi) No Public Software: (A) forms part of any Company
Intellectual Property; (B) was, or is, used in connection with the development
of any Company Owned Intellectual Property or any products or services developed
or provided by Company or any of its Subsidiaries; or (C) was, or is,
incorporated or distributed, in whole or in part, in conjunction with Company
Intellectual Property. "PUBLIC SOFTWARE" means any software that contains, or is
derived in any manner (in whole or in part) from, any software that is
distributed as free software, open source software or similar licensing or
distribution models, including software licensed or distributed under any of the
following licenses or distribution models, or licenses or distribution models
similar to any of the following: (i) GNU's General Public License or
Lesser/Library GPL; (ii) Mozilla Public License; (iii) Netscape Public License;
(iv) Sun Community Source/ Industry Standard License; (v) BSD License; and (vi)
Apache License.
4.15 Absence of Certain Changes or Events. Since Company Balance
Sheet Date to the date of this Agreement:
(a) there has not been a Material Adverse Effect on Company;
(b) neither Company nor any of its Subsidiaries has amended or
otherwise modified its Charter Documents;
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(c) neither Company nor any of its Subsidiaries has declared, set
aside or paid any dividend or other distribution (whether in cash, stock or
property) with respect to any of its securities;
(d) neither Company nor any of its Subsidiaries has split, combined
or reclassified any of its securities, or issued, or authorized for issuance,
any securities except as set forth on the Company Disclosure Schedule;
(e) there has not been any material damage, destruction or loss with
respect to the property and assets of Company or any of its Subsidiaries,
whether or not covered by insurance;
(f) there has not been any revaluation of Company's or any of its
Subsidiaries' assets, including writing down the value of inventory or writing
off notes or accounts receivable, other than in the ordinary course of business
consistent with past practice;
(g) neither Company nor any of its Subsidiaries has made any change
in accounting practices; and
(h) neither Company nor any of its Subsidiaries has agreed, whether
in writing or otherwise, to do any of the foregoing.
4.16 Contracts.
(a) Company Disclosure Schedule contains a complete and accurate
list of each Contract or series of related Contracts to which Company or any of
its Subsidiaries is a party or is subject, or by which any of their respective
assets are bound:
(i) for the purchase of materials, supplies, goods, services,
equipment or other assets and that involves or would reasonably be expected to
involve (A) annual payments by Company or any of its Subsidiaries of $10,000 or
more, or (B) aggregate payments by Company or any of its Subsidiaries of $10,000
or more;
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(ii) (A) for the sale by Company or any of its Subsidiaries of
materials, supplies, goods, services, equipment or other assets, and that
provides for (1) a specified annual minimum dollar sales amount by Company or
any of its Subsidiaries of $10,000 or more, or (2) aggregate payments to Company
or any of its Subsidiaries of $10,000 or more, or (B) pursuant to which Company
or any of its Subsidiaries received payments of more than $10,000 in the year
ended April 30, 2005 or expects to receive payments of more than $10,000 in the
year ending April 30, 2006;
(iii) that continues over a period of more than six (6) months
from the date hereof and provides for payments to or by Company or any of its
Subsidiaries exceeding $10,000, except for arrangements disclosed pursuant to
the preceding subparagraphs (i) and (ii);
(iv) that is an employment, consulting, termination or severance
Contract that involves or would reasonably be expected to involve the payment of
$50,000 or more by Company or any of its Subsidiaries following the date hereof,
except for any such Contract that is terminable at-will by Company or any of its
Subsidiaries without liability to Company or such Subsidiary;
(v) that is a distribution, dealer, representative or sales agency
Contract, other than Contracts entered into in the ordinary course of business
with distributors, representatives and sales agents that are cancelable without
penalty on not more than ninety (90) days' notice and does not deviate in any
material respect from Company's standard form previously provided to Parent;
(vi) that is a (A) Company Lease or (B) Contract for the lease of
personal property, in each case which provides for payments to or by Company or
any of its Subsidiaries in any one case of $75,000 or more annually or $250,000
or more over the term of such Company Lease or lease;
(vii) which provides for the indemnification by Company or any of
its Subsidiaries of any Person, the undertaking by Company or any of its
Subsidiaries to be responsible for consequential damages, or the assumption by
Company or any of its Subsidiaries of any Tax, environmental or other Liability;
(viii) that is a note, debenture, bond, equipment trust, letter of
credit, loan or other Contract for Indebtedness or lending of money (other than
to employees for travel expenses in the ordinary course of business) or Contract
for a line of credit or guarantee, pledge or undertaking of the Indebtedness of
any other Person;
(ix) for any capital expenditure or leasehold improvement in any
one case in excess of $10,000 or any such Contracts in the aggregate greater
than $100,000;
(x) that restricts or purports to restrict the right of Company or
any of its Subsidiaries to engage in any line of business, acquire any property,
develop or distribute any product or provide any service (including geographic
restrictions) or to compete with any Person or granting any exclusive
distribution rights, in any market, field or territory;
(xi) that is a partnership, joint venture, joint development or
similar Contract;
(xii) that relates to the acquisition or disposition of any
business (whether by merger, sale of stock, sale of assets or otherwise);
(xiii) that is a collective bargaining Contract or other Contract
with any labor organization, union or association; and
(xiv) that is a Contract or series of Contracts, the termination
or breach of which would reasonably be expected to have a Material Adverse
Effect on Company and not previously disclosed pursuant to this Section 4.16.
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(b) Each Contract required to be listed in Schedule 4.16 of Company
Disclosure Schedule (collectively, the "COMPANY MATERIAL CONTRACTS") is in full
force and effect and valid and enforceable in accordance with its terms, except
to the extent a failure to be in full force and effect and valid or enforceable
in accordance with its terms would not have a Material Adverse Effect on
Company.
(c) Neither Company nor any of its Subsidiaries is, and to Company's
Knowledge, no other party thereto is, in default in the performance, observance
or fulfillment of any obligation, covenant, condition or other term contained in
any Company Material Contract, and neither Company nor any of its Subsidiaries
has given or received notice to or from any Person relating to any such alleged
or potential default that has not been cured. No event has occurred which with
or without the giving of notice or lapse of time, or both, may conflict with or
result in a violation or breach of, or give any Person the right to exercise any
remedy under or accelerate the maturity or performance of, or cancel, terminate
or modify, any Company Material Contract.
(d) Company has provided accurate and complete copies of each
Company Material Contract to Parent.
(e) All Contracts other than Company Material Contracts to which
Company or any of its Subsidiaries is a party or is subject, or by which any of
their respective assets are bound (collectively, the "COMPANY MINOR CONTRACTS"),
are in all material respects valid and enforceable in accordance with their
terms. Neither Company nor any of its Subsidiaries is in default in the
performance, observance or fulfillment of any obligation, covenant or condition
contained therein, and no event has occurred which with or without the giving of
notice or lapse of time, or both, would constitute a default thereunder by
Company or any of its Subsidiaries, except in either case where any such default
or defaults could not reasonably be expected have, individually or in the
aggregate, a Material Adverse Effect on Company taken as a whole.
4.17 Litigation. There is no action, suit or proceeding, claim,
arbitration, litigation or investigation (each, an "ACTION") pending or, to
Company's Knowledge, threatened against or affecting Company or any of its
Subsidiaries that challenges or seeks to prevent, enjoin or otherwise delay the
Merger. There is no Action against any current or, to Company's Knowledge,
former director or employee of Company or any of its Subsidiaries with respect
to which Company or any of its Subsidiaries has or is reasonably likely to have
an indemnification obligation. There is no unsatisfied judgment, penalty or
award against or affecting Company or any of its Subsidiaries or any of their
respective properties or assets. There is no Order to which Company or any of
its Subsidiaries or any of their respective properties or assets is subject.
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4.18 Employee Benefits.
(a) Company Disclosure Schedule sets forth a complete and accurate
list of all Company Benefit Plans. A current, accurate and complete copy of each
Company Benefit Plan has been provided to Parent. Neither Company nor any of its
Subsidiaries has any intent or commitment to create any additional Company
Benefit Plan or amend any Company Benefit Plan. "BENEFIT PLAN" means any
"employee benefit plan" as defined in 3(3) of the Employee Retirement Income
Security Act of 1974 ("ERISA"), including any (a) nonqualified deferred
compensation or retirement plan or arrangement which is an Employee Pension
Benefit Plan (as defined in ERISA Section 3(2)), (b) qualified defined
contribution retirement plan or arrangement which is an Employee Pension Benefit
Plan, (c) qualified defined benefit retirement plan or arrangement which is an
Employee Pension Benefit Plan (including any Multiemployer Plan (as defined in
ERISA Section 3(37)), (d) Employee Welfare Benefit Plan (as defined in ERISA
Section 3(1)) or material fringe benefit plan or program, or (e) stock purchase,
stock option, severance pay, employment, change-in-control, vacation pay,
company awards, salary continuation, sick leave, excess benefit, bonus or other
incentive compensation, life insurance, or other employee benefit plan,
contract, program, policy or other arrangement, whether or not subject to ERISA.
"COMPANY BENEFIT PLAN" means any Benefit Plan which is sponsored, maintained or
contributed to by Company, any of its Subsidiaries or any Company ERISA
Affiliate, or with respect to which Company, any of its Subsidiaries or any
Company ERISA Affiliate otherwise has any present or future Liability. "COMPANY
ERISA AFFILIATE" means any entity which is a member of a "controlled group of
corporations" with, under "common control" with or a member of an "affiliated
services group" with, Company or any of its Subsidiaries, as defined in Section
414(b), (c), (m) or (o) of the Code.
(b) Each Company Benefit Plan has been and is currently administered
in compliance in all material respects with its constituent documents and with
all reporting, disclosure and other requirements of ERISA and the Code
applicable to such Company Benefit Plan. Each Company Benefit Plan that is an
Employee Pension Benefit Plan (as defined in Section 3(2) of ERISA) and which is
intended to be qualified under Section 401(a) of the Code (a "COMPANY PENSION
PLAN"), has been determined by the Internal Revenue Service to be so qualified
and no condition exists that would adversely affect any such determination. No
Company Benefit Plan is a "defined benefit plan" as defined in Section 3(35) of
ERISA.
(c) None of Company, any Subsidiary of Company, any Company ERISA
Affiliate or any trustee or agent of any Company Benefit Plan has been or is
currently engaged in any prohibited transactions as defined by Section 406 of
ERISA or Section 4975 of the Code for which an exemption is not applicable which
could subject Company, any Subsidiary of Company, any Company ERISA Affiliate or
any trustee or agent of any Company Benefit Plan to the tax or penalty imposed
by Section 4975 of the Code or Section 502 of ERISA.
(d) There is no event or condition existing which could be deemed a
"reportable event" (within the meaning of Section 4043 of ERISA) with respect to
which the thirty (30)-day notice requirement has not been waived. To Company's
Knowledge, no condition exists which could subject Company or any of its
Subsidiaries to a penalty under Section 4071 of ERISA.
(e) None of Company, any Subsidiary of Company or any Company ERISA
Affiliate is, or has been, party to any "multi-employer plan," as that term is
defined in Section 3(37) of ERISA.
(f) True and correct copies of the most recent annual report on Form
5500 and any attached schedules for each Company Benefit Plan (if any such
report was required by applicable Law) and a true and correct copy of the most
recent determination letter issued by the Internal Revenue Service for each
Company Pension Plan have been provided to Parent.
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(g) With respect to each Company Benefit Plan, there are no actions,
suits or claims (other than routine claims for benefits in the ordinary course)
pending or, to Company's Knowledge, threatened against any Company Benefit Plan,
Company, any Subsidiary of Company, any Company ERISA Affiliate or any trustee
or agent of any Company Benefit Plan.
(h) With respect to each Company Benefit Plan to which Company, any
Subsidiary of Company or any Company ERISA Affiliate is a party which
constitutes a group health plan subject to Section 4980B of the Code, each such
Company Benefit Plan complies, and in each case has complied, in all material
respects with all applicable requirements of Section 4980B of the Code.
(i) Full payment has been made of all amounts which Company, any
Subsidiary of Company or any Company ERISA Affiliate was required to have paid
as a contribution to any Company Benefit Plan as of the last day of the most
recent fiscal year of each of the Benefit Plans ended prior to the date of this
Agreement, and none of Company Benefit Plans has incurred any "accumulated
funding deficiency" (as defined in Section 302 of ERISA and Section 412 of the
Code), whether or not waived, as of the last day of the most recent fiscal year
of each such Company Benefit Plan ended prior to the date of this Agreement.
(j) Each Company Benefit Plan is, and its administration is and has
been during the six-year period preceding the date of this Agreement, in all
material respects in compliance with, and none of Company, any Subsidiary of
Company or any Company ERISA Affiliate has received any claim or notice that any
such Company Benefit Plan is not in material compliance with, all applicable
Laws and Orders and prohibited transaction exemptions, including to the extent
applicable, the requirements of ERISA.
(k) None of Company, any Subsidiary of Company and any Company ERISA
Affiliate is in default in any material respect in performing any of its
contractual obligations under any of Company Benefit Plans or any related trust
agreement or insurance contract.
(l) There are no material outstanding Liabilities of any Company
Benefit Plan other than Liabilities for benefits to be paid to participants in
any Company Benefit Plan and their beneficiaries in accordance with the terms of
such Company Benefit Plan.
(m) Subject to ERISA and the Code, each Company Benefit Plan may be
amended, modified, terminated or otherwise discontinued by Company, a Subsidiary
of Company or a Company ERISA Affiliate at any time without liability.
(n) No Company Benefit Plan other than a Company Pension Plan,
retiree medical plan or severance plan provides benefits to any individual after
termination of employment.
(o) The consummation of the Merger will not (either alone or in
conjunction with any other event) (i) entitle any current or former director,
employee, contractor or consultant of Company or any of its Subsidiaries to
severance pay, unemployment compensation or any other payment, (ii) accelerate
the time of payment or vesting, or increase the amount of compensation due to
any such director, employee, contractor or consultant, or result in the payment
of any other benefits to any Person or the forgiveness of any Indebtedness of
any Person, (iii) result in any prohibited transaction described in Section 406
of ERISA or Section 4975 of the Code for which an exemption is not available, or
(iv) result in the payment or series of payments by Company or any of its
Affiliates to any person of an "excess parachute payment" within the meaning of
Section 280G of the Code.
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(p) With respect to each Company Benefit Plan that is funded wholly
or partially through an insurance policy, all premiums required to have been
paid to date under the insurance policy have been paid, all premiums required to
be paid under the insurance policy through the Closing will have been paid on or
before the Closing and, as of the Closing, there will be no liability of
Company, any Subsidiary of Company or any Company ERISA Affiliate under any
insurance policy or ancillary agreement with respect to such insurance policy in
the nature of a retroactive rate adjustment, loss sharing arrangement or other
actual or contingent liability arising wholly or partially out of events
occurring prior to the Closing.
(q) Each Company Benefit Plan that constitutes a "welfare benefit
plan," within the meaning of Section 3(1) of ERISA, and for which contributions
are claimed by Company, any Subsidiary of Company or any Company ERISA Affiliate
as deductions under any provision of the Code, is in compliance in all material
respects with all applicable requirements pertaining to such deduction. With
respect to any welfare benefit fund (within the meaning of Section 419 of the
Code) related to a welfare benefit plan, there is no disqualified benefit
(within the meaning of Section 4976(b) of the Code) that would result in the
imposition of a tax under Section 4976(a) of the Code. All welfare benefit funds
intended to be exempt from tax under Section 501(a) of the Code have been
determined by the Internal Revenue Service to be so exempt and no event or
condition exists which would adversely affect any such determination.
(r) Company Disclosure Schedule sets forth all Company Benefit Plans
covering employees of Company or any of its Subsidiaries outside of the United
States (the "COMPANY FOREIGN PLANS"). The Foreign Plans have been operated in
accordance, and are in compliance, in all material respects with their
constituent documents and all applicable Laws. There are no material unfunded
Liabilities under or in respect of the Foreign Plans, and all contributions or
other payments required to be made to or in respect of the Foreign Plans prior
to the Closing Date have been made or will be made prior to the Closing Date.
4.19 Labor and Employment Matters.
(a) Neither Company nor any of its Subsidiaries is a party or
subject to any labor union or collective bargaining Contract. There have not
been since January 1, 2002 and there are not pending or threatened any labor
disputes, work stoppages, requests for representation, pickets, work slow-downs
due to labor disagreements or any actions or arbitrations which involve the
labor or employment relations of Company or any of its Subsidiaries. There is no
unfair labor practice, charge or complaint pending, unresolved or, to Company's
Knowledge, threatened before the National Labor Relations Board. No event has
occurred or circumstance exist that may provide the basis of any work stoppage
or other labor dispute.
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(b) Each of Company and its Subsidiaries has complied in all
material respects with each, and is not in violation in any material respect of
any, Law relating to anti-discrimination and equal employment opportunities and
there are, and have been, no material violations of any other Law respecting the
hiring, hours, wages, occupational safety and health, employment, promotion,
termination or benefits of any employee or other Person. Each of Company and its
Subsidiaries has filed all reports, information and notices required under any
Law respecting the hiring, hours, wages, occupational safety and health,
employment, promotion, termination or benefits of any employee or other Person,
and will timely file prior to Closing all such reports, information and notices
required by any Law to be given prior to Closing.
(c) Each of Company and its Subsidiaries has paid or properly
accrued in the ordinary course of business all wages and compensation due to
employees, including all vacations or vacation pay, holidays or holiday pay,
sick days or sick pay, and bonuses.
(d) Neither Company nor any of its Subsidiaries is a party to any
Contract which restricts Company or any of its Subsidiaries from relocating,
closing or terminating any of its operations or facilities or any portion
thereof. Neither Company nor any of its Subsidiaries have since January 1, 2002
effectuated a "plant closing" (as defined in the Worker Adjustment and
Retraining Notification Act of 1988 (the "WARN ACT")) or (ii) a "mass lay-off"
(as defined in the WARN Act), in either case affecting any site of employment or
facility of Company or any of its Subsidiaries, except in accordance with the
WARN Act. The consummation of the Merger will not create liability for any act
by Company or any of its Subsidiaries on or prior to the Closing Date under the
WARN Act or any other Law respecting reductions in force or the impact on
employees on plant closings or sales of businesses.
4.20 Environmental.
(a) As used in this Agreement, the following words and terms have
the following definitions:
(i) "ENVIRONMENT" means all air, surface water, groundwater, land,
including land surface or subsurface, including all fish, wildlife, biota and
all other natural resources.
(ii) "ENVIRONMENTAL ACTION" means any claim, proceeding or other
Action brought or threatened under any Environmental Law or otherwise asserting
that Company or any of its Subsidiaries has incurred Environmental Liabilities.
(iii) "ENVIRONMENTAL CLEAN-UP SITE" means any location which is
listed on the National Priorities List, the Comprehensive Environmental
Response, Compensation and Liability Information System, or on any similar state
or foreign list of sites requiring investigation or cleanup, or which is the
subject of any pending or threatened Action related to or arising from any
alleged violation of any Environmental Law, or at which there has been a
threatened or actual Release of a Hazardous Substance.
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(iv) "ENVIRONMENTAL LAWS" means any and all applicable Laws and
Authorizations issued, promulgated or entered into by any Governmental Entity
relating to the Environment, worker health and safety, preservation or
reclamation of natural resources, or to the management, handling, use,
generation, treatment, storage, transportation, disposal, manufacture,
distribution, formulation, packaging, labeling, Release or threatened Release of
or exposure to Hazardous Substances, whether now existing or subsequently
amended or enacted, including but not limited to: the Comprehensive
Environmental Response, Compensation, and Liability Act, 42 U.S.C. Section 9601
et seq. ("CERCLA"); the Federal Water Pollution Control Act, 33 U.S.C. Section
1251 et seq.; the Clean Air Act, 42 U.S.C. Section 7401 et seq.; the Toxic
Substances Control Act, 15 U.S.C. Section 2601 et seq.; the Occupational Safety
and Health Act, 29 U.S.C. Section 651 et seq.; the Emergency Planning and
Community Right-to-Know Act of 1986, 42 U.S.C. Section 11001 et seq.; the Safe
Drinking Water Act, 42 U.S.C. Section 300(f) et seq.; the Hazardous Materials
Transportation Act, 49 U.S.C. Section 1801 et seq.; the Federal Insecticide,
Fungicide and Rodenticide Act 7 U.S.C. Section 136 et seq.; the Resource
Conservation and Recovery Act of 1976 ("RCRA"), 42 U.S.C. Section 6901 et seq.;
the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq.; the Oil
Pollution Act of 1990, 33 U.S.C. Section 2701 et seq.; and any similar or
implementing state or local Law, and any non-U.S. Laws and regulations of
similar import, and all amendments or regulations promulgated thereunder; and
any common law doctrine, including but not limited to, negligence, nuisance,
trespass, personal injury, or property damage related to or arising out of the
presence, Release, or exposure to Hazardous Substances.
(v) "ENVIRONMENTAL LIABILITIES" means, with respect to any party,
Liabilities arising out of (A) the ownership or operation of the business of
such party or any of its Subsidiaries or (B) the ownership, operation or
condition of the Real Property or any other real property currently or formerly
owned, operated or leased by such party or any of its Subsidiaries, in each case
to the extent based upon or arising out of (i) Environmental Law, (ii) a failure
to obtain, maintain or comply with any Environmental Permit, (iii) a Release of
any Hazardous Substance, or (iv) the use, generation, storage, transportation,
treatment, sale or other off-site disposal of Hazardous Substances.
(vi) "ENVIRONMENTAL PERMIT" means any Authorization under
Environmental Law, and includes any and all Orders issued or entered into by a
Governmental Entity under Environmental Law.
(vii) "HAZARDOUS SUBSTANCES" means all explosive or regulated
radioactive materials or substances, hazardous or toxic materials, wastes or
chemicals, petroleum and petroleum products (including crude oil or any fraction
thereof), asbestos or asbestos containing materials, and all other materials,
chemicals or substances which are regulated by, form the basis of liability or
are defined as hazardous, extremely hazardous, toxic or words of similar import,
under any Environmental Law, including materials listed in 49 C.F.R. Section
172.101 and materials defined as hazardous pursuant to Section 101(14) of
CERCLA.
(viii) "RELEASE" means any spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching, dumping, or
disposing of Hazardous Substances into the Environment.
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(b) Each of Company and its Subsidiaries has secured, and is in
compliance in all material respects with, all Environmental Permits required in
connection with its operations and the Real Property. Each Environmental Permit,
together with the name of the Governmental Entity issuing such Environmental
Permit, is set forth in Company Disclosure Schedule. All such Environmental
Permits are valid and in full force and effect and none of such Environmental
Permits will be terminated or impaired or become terminable as a result of the
Merger. Each of Company and its Subsidiaries has been, and are currently, in
compliance in all material respects with all Environmental Laws. Neither Company
nor any of its Subsidiaries has received notice alleging that Company or any of
its Subsidiaries is not in such compliance with Environmental Laws.
(c) There are no past, pending or, to Company's Knowledge,
threatened Environmental Actions against or affecting Company or any of its
Subsidiaries, and Company is not aware of any facts or circumstances which could
be expected to form the basis for any Environmental Action against Company or
any of its Subsidiaries.
(d) Neither Company nor any of its Subsidiaries has entered into or
agreed to any Order, and neither Company nor any of its Subsidiaries is subject
to any Order, relating to compliance with any Environmental Law or to
investigation or cleanup of a Hazardous Substance under any Environmental Law.
(e) No Lien has been attached to, or asserted against, the assets,
property or rights of Company or any of its Subsidiaries pursuant to any
Environmental Law, and, to Company's Knowledge, no such Lien has been
threatened. There are no facts, circumstances or other conditions that could be
expected to give rise to any Liens on or affecting any Real Property.
(f) There has been no treatment, storage, disposal or Release of any
Hazardous Substance at, from, into, on or under any Real Property or any other
property currently or formerly owned, operated or leased by Company or any of
its Subsidiaries. No Hazardous Substances are present in, on, about or migrating
to or from any Real Property that could be expected to give rise to an
Environmental Action against Company or any of its Subsidiaries.
(g) Neither Company nor any of its Subsidiaries has received a
CERCLA 104(e) information request nor has Company or any of its Subsidiaries
been named a potentially responsible party for any National Priorities List site
under CERCLA or any site under analogous state Law. Neither Company nor any of
its Subsidiaries has received an analogous notice or request from any non-U.S.
Governmental Entity.
(h) There are no aboveground tanks or underground storage tanks on,
under or about the Real Property. Any aboveground or underground tanks
previously situated on the Real Property or any other property currently or
formerly owned, operated or leased by Company or any of its Subsidiaries have
been removed in accordance with all Environmental Laws and no residual
contamination, if any, remains at such sites in excess of applicable standards.
(i) There are no polychlorinated biphenyls ("PCBS") leaking from any
article, container or equipment on, under or about the Real Property and there
are no such articles, containers or equipment containing PCBs. There is no
asbestos containing material or lead based paint containing materials in at, on,
under or within the Real Property.
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(j) Neither Company nor any of its Subsidiaries has transported or
arranged for the treatment, storage, handling, disposal, or transportation of
any Hazardous Material to any off-site location which is an Environmental
Clean-up Site.
(k) None of the Real Property is an Environmental Clean-up Site.
(l) Company has provided to Parent true and complete copies of, or
access to, all written environmental assessment materials and reports that have
been prepared by or on behalf of Company or any of its Subsidiaries.
4.21 Related Party Transactions. There are no Contracts of any kind,
written or oral, entered into by Company or any of its Subsidiaries with, or for
the benefit of, any officer, director or stockholder of Company or, to the
Knowledge of Company, any Affiliate of any of them, except in each case, for (a)
employment agreements, indemnification agreements fringe benefits and other
compensation paid to directors, officers and employees consistent with
previously established policies (including normal merit increases in such
compensation in the ordinary course of business) and copies of which have been
provided to Parent and are listed on Company Disclosure Schedule, (b)
reimbursements of ordinary and necessary expenses incurred in connection with
their employment or service, (c) amounts paid pursuant to Company Benefit Plans
of which copies have been provided to Parent and (d) the occupancy of certain of
Company's facilities which do not provide for the payment of significant amounts
of rent. To the Knowledge of Company, none of such Persons has any material
direct or indirect ownership interest in any firm or corporation with which
Company or any of its Subsidiaries has a business relationship, or with any firm
or corporation that competes with Company or any of its Subsidiaries (other than
ownership of securities in a publicly traded company representing less than one
percent of the outstanding stock of such company). No officer or director of
Company or any of its Subsidiaries or member of his or her immediate family or
greater than 5% stockholder of Company or, to the Knowledge of Company, any
Affiliate of any of them or any employee of Company or any of its Subsidiaries
is directly or indirectly interested in any Company Material Contract.
4.22 Insurance. All insurance policies, binders of insurance and
fidelity bonds which cover Company or any of its Subsidiaries or their
respective businesses, properties, assets, directors or employees (the "COMPANY
POLICIES") are issued by an insurer that is financially sound and reputable, are
in full force and effect and are enforceable in accordance with their terms.
Such Company Policies provide adequate insurance coverage for Company and its
Subsidiaries and their respective businesses, properties, assets and employees,
and are sufficient in all material respects for compliance with all Laws and
Contracts to which Company or any of its Subsidiaries is a party or by which it
is bound. There are no material pending claims under any of such Company
Policies as to which coverage has been questioned, denied or disputed by the
insurer or in respect of which the insurer has reserved its rights.
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4.23 Brokers or Finders. Company shall indemnify and hold harmless
Parent and the officers and directors of Parent from any obligations or
liabilities to any person or entity engaged by or to whom the Company is liable
for brokerage and/or finders fees for services rendered in connection with the
Merger contemplated by this Agreement.
4.24 No Illegal Payments. None of Company, any of its Subsidiaries or,
to the Knowledge of Company, any Affiliate, officer, agent or employee thereof,
directly or indirectly, has, since inception, on behalf of or with respect to
Company or any of its Subsidiaries, (a) made any unlawful domestic or foreign
political contributions, (b) made any payment or provided services which were
not legal to make or provide or which Company, any of its Subsidiaries or any
Affiliate thereof or any such officer, employee or other Person should
reasonably have known were not legal for the payee or the recipient of such
services to receive, (c) received any payment or any services which were not
legal for the payer or the provider of such services to make or provide, (d) had
any material transactions or payments which are not recorded in its accounting
books and records or (e) had any off-book bank or cash accounts or "slush
funds."
4.25 Information Supplied. None of the information supplied or to be
supplied by or on behalf of Company for inclusion or incorporation by reference
in the Form S-4 Registration Statement to be filed with the SEC by Parent in
connection with the issuance of shares of Parent Common Stock pursuant to the
Merger will, when filed or at any time it is amended or supplemented or at the
time the Form S-4 Registration Statement becomes effective under the Securities
Act, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading.
4.26 Antitakeover Statutes. Company has taken all action necessary to
exempt the Merger, this Agreement, Company Lock-Up and Voting Agreements and the
transactions contemplated hereby and thereby from Section 203 of the DGCL.
Neither such Section nor any other anti-takeover or similar Law applies or
purports to apply to any of those transactions. No other "control share
acquisition," "fair price," "moratorium" or other anti-takeover Laws apply to
this Agreement or any of the transactions contemplated hereby.
4.27 Compliance with Securities Laws. The offering and issuance by
Company of shares of Company Common Stock, Company Stock Options and Company
Warrants and the issuance of any shares upon exercise of Company Stock Options
or Company Warrants, were made and completed in substantial compliance with all
applicable state, federal and foreign securities Laws.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Except as set forth in the disclosure schedule dated and delivered as
provided in Section 7.2(b) of the date hereof by Parent to Company (the "PARENT
DISCLOSURE SCHEDULE"), which is being concurrently delivered to Company in
connection herewith and is designated therein as being Parent Disclosure
Schedule, Parent represents and warrants to Company that the statements
contained in this Article V are true and correct. Parent Disclosure Schedule
shall be arranged in paragraphs corresponding to each representation and
warranty set forth in this Article V.
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5.1 Organization and Good Standing. Each of Parent and its Subsidiaries
is duly organized, validly existing and in good standing under the Laws of its
jurisdiction of formation. Each of Parent and its Subsidiaries is duly
qualified, licensed or admitted to do business and is in good standing in each
jurisdiction in which the ownership, use or leasing of its assets and
properties, or the conduct or nature of its business, makes such qualification,
licensing or admission necessary, except for such failures to be so qualified,
licensed or admitted and in good standing which, individually or in the
aggregate, could not be reasonably expected to have a Material Adverse Effect on
Parent.
5.2 Capitalization.
(a) The authorized capital stock of Parent consists solely of (a)
250,000,000 shares of Parent Common Stock, (b) 440,000 shares of Class B common
stock, par value $0.00001 per share, of which 400,000 shares have been
designated as Series 2 Class B common stock ("PARENT SERIES 2 CLASS B COMMON
STOCK") and 40,000 shares have been designated as Series 3 Class B Common Stock
("PARENT SERIES 3 CLASS B COMMON STOCK") and (c) 50,000,000 shares of preferred
stock, par value $0.00001 per share ("PARENT PREFERRED STOCK"). As of October
26, 2005: (i) 44,751,212 shares of Parent Common Stock were issued and
outstanding, (ii) 380,829 shares of Parent Series 2 Class B Common Stock were
issued and outstanding, (iii) 21,500 shares of Parent Series 3 Class B Common
Stock were issued and outstanding, and (iv) no shares of Parent Preferred Stock
were issued and outstanding. All of the issued and outstanding shares of Parent
Common Stock have been duly authorized and are validly issued, fully paid,
nonassessable and free of any preemptive rights with respect thereto. 6,000,000
shares of Parent Common Stock are reserved for issuance pursuant to the exercise
of outstanding stock options. Schedule 5.2 of Parent sets forth all outstanding
stock options relating to capital stock of Parent.
(b) The authorized capital stock of Merger Sub consists solely of
one thousand (1,000) shares of common stock, par value $0.001 per share ("MERGER
SUB COMMON STOCK"), of which one thousand (1,000) shares were issued and
outstanding as of the date of this Agreement and owned by and registered in the
name of Parent. All of the issued and outstanding shares of Merger Sub Common
Stock have been duly authorized and are validly issued, fully paid,
nonassessable and free of any preemptive rights with respect thereto. As of the
date hereof, no shares of Merger Sub Common Stock are reserved for issuance
pursuant to the exercise of outstanding stock options.
(c) Parent has no outstanding warrants as of the date hereof.
(d) Except for (i) the shares of Parent Common Stock outstanding as
of the date hereof determined (mutatis mutandis) as provided in Section 2.1(a),
(ii) the stock options for Parent Common Stock outstanding as of the date
hereof, and (iii) the other options, warrants, purchase rights, subscription
rights, conversion rights, exchange rights and other Contracts that, directly or
indirectly, could require Company to issue, sell or otherwise cause to become
outstanding shares of Parent Common Stock that are disclosed in Schedule 4.2 of
Parent Disclosure Schedule, except for shares issuable under puts to pay off the
Company's outstanding $2,000,000 promissory note or shares issuable upon
conversion of any convertible debenture (which may be issued in part in
satisfaction of such promissory note) with a face amount not exceeding
$2,750,000 (the "OTHER PARENT PURCHASE RIGHTS"), Company does not have
outstanding securities of any kind. Except as set forth in the preceding
sentence, Parent is not a party to any Contract obligating Parent, directly or
indirectly, to issue additional securities.
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(e) All outstanding Parent stock options and Other Parent Purchase
Rights have been duly authorized and validly issued and were issued in
substantial compliance with all applicable federal, state and foreign securities
Laws. All shares of Parent Common Stock subject to issuance upon exercise,
conversion and/or exchange of Parent stock options and Other Parent Purchase
Rights, upon issuance in accordance with the terms and conditions specified in
the instruments pursuant to which they are issuable, will be duly authorized,
validly issued, fully paid and nonassessable.
(f) No Parent stock option or Other Parent Purchase Right will by
its terms require an adjustment in connection with the Merger, except as
contemplated by this Agreement. Neither the consummation of the transactions
contemplated by this Agreement, nor any action taken or to be taken by Company
in connection with such transactions, will result in (i) any acceleration of
exercisability or vesting or lapse of restrictions (including any right to
acceleration of vesting or lapse of restrictions that is contingent upon the
occurrence of a subsequent event) in favor of any holder of Parent stock
options, (ii) any additional benefits for any holder of Parent stock options, or
(iii) the inability of Parent after the Effective Time to exercise any right or
benefit held by Parent prior to the Effective Time with respect to any Parent
stock option.
(g) None of the shares of Parent Common Stock, Parent stock options
or Other Parent Purchase Rights were issued or have been transferred in
violation of, or are subject to, any preemptive rights, rights of first offer or
subscription agreements. Parent is not a party to any stockholder agreements,
voting agreements, voting trusts or any such other similar arrangements with
respect to the transfer, voting or other rights associated with its securities
and to the knowledge of Parent, there are no such agreements, trusts or
arrangements to which Parent is not a party.
(h) There are no obligations, contingent or otherwise, of Parent to
repurchase, redeem, or otherwise acquire any of its securities. There are no
declared or accrued unpaid dividends with respect to Parent's securities, except
in connection with the Series 2 and Series 3 Class B shares of Parent.
(i) Parent does not have outstanding or authorized any stock
appreciation, phantom stock, profit participation or similar rights.
(j) Except as set forth in the Parent Disclosure Schedule, Parent
does not have any bonds, debentures, notes or other obligations or debt
securities the holders of which would have a right to vote (or convertible into,
or exercisable or exchangeable for, securities having the right to vote) on any
matter.
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5.3 Subsidiaries of Parent.
(a) Schedule 5.3 of the Parent Disclosure Schedule contains a true
and complete list of the Subsidiaries of Parent as of the date hereof and sets
forth with respect to each such Subsidiary the jurisdiction of formation. The
outstanding capital stock or membership interests of each Subsidiary of Parent
have been duly authorized and validly issued, are fully paid and nonassessable
and are owned by Parent or another Subsidiary of Parent free and clear of all
Liens.
(b) Each Subsidiary of Parent is validly existing and in good
standing under the Laws of the jurisdiction of its formation, has all requisite
power to own, lease and operate its properties and to carry on its business as
now being conducted and is duly qualified to do business and is in good standing
in each jurisdiction in which it owns or leases property or conducts any
business so as to require such qualification, except for those jurisdictions
where the failure to be so qualified and in good standing would not reasonably
be expected to have, individually or in the aggregate, a Material Adverse Effect
on Parent.
(c) Other than the shares of capital stock or membership interests
set forth in the Parent Disclosure Schedule, no Subsidiary of Parent has
outstanding securities of any kind. No Subsidiary of Parent is party to any
Contract obligating such Subsidiary, directly or indirectly, to issue any
additional securities.
(d) No Subsidiary of Parent has outstanding any bonds, debentures,
notes or other obligations or debt or equity securities the holders of which
have the right to vote (or convertible into, or exercisable or exchangeable for,
securities having the right to vote) on any matter.
(e) Other than the Subsidiaries set forth in the Parent Disclosure
Schedule, neither Parent nor any Subsidiary of Parent, directly or indirectly,
owns any securities or other interest in any corporation, partnership, joint
venture or other business association or entity.
(f) There are no obligations, contingent or otherwise, of Parent or
any Subsidiary of Parent to provide funds to or make an investment (in the form
of a loan, capital contribution or otherwise) in any entity.
5.4 Authority and Enforceability. Each of Parent and Merger Sub has
full corporate power and authority to enter into this Agreement and the
Operative Agreements to which it is a party, subject in the case of the issuance
of shares of Parent Common Stock in the Merger to Parent Stockholder Approval
and to perform its obligations hereunder and thereunder and to consummate the
Merger. The execution, delivery and performance of this Agreement and the
Operative Agreements to which it is a party by each of Parent and Merger Sub and
the consummation by each of Parent and Merger Sub of the Merger have been duly
and validly approved by their respective Board of Directors and no other
corporate proceedings on the part of Parent or its stockholders or Merger Sub or
Parent as its sole stockholder are necessary to authorize the execution,
delivery and performance of this Agreement or the Operative Agreements to which
it is a party by each of Parent and Merger Sub and the consummation by each of
Parent and Merger Sub of the Merger. The affirmative votes of the holders of a
majority of the outstanding shares of Parent Common Stock at a duly convened
meeting of the Stockholders of Parent (the "PARENT STOCKHOLDERS' MEETING") (i)
to approve the increase in the number of authorized shares of capital stock of
Parent from 250,000,000 to 500,000,000 shares (the "PARENT AUTHORIZED STOCK
INCREASE") so as to permit the issuance of the shares of Parent Common Stock
pursuant to the Merger and (ii) to approve the change of Parent's corporate name
to Cryptometrics, Inc. (the "PARENT AUTHORIZED NAME CHANGE") (the "PARENT
AUTHORIZED STOCK INCREASE" and the "PARENT AUTHORIZED NAME CHANGE" are
collectively referred to herein, from time to time as the "PARENT STOCKHOLDER
APPROVAL") are the only votes of the holders of any class of capital stock or
other security necessary in connection with the Merger. This Agreement and the
Operative Agreements to which it is a party have been duly and validly executed
and delivered by each of Parent and Merger Sub and constitute legal, valid and
binding obligations of Parent and Merger Sub enforceable against each of them in
accordance with their respective terms, except as the enforceability thereof may
be limited by (i) bankruptcy, insolvency, reorganization, moratorium or other
similar Laws affecting or relating to creditors' rights generally, and (ii) the
availability of injunctive relief and other equitable remedies.
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5.5 No Conflicts; Authorizations.
(a) The execution and delivery of this Agreement and the Operative
Agreements by Parent and Merger Sub do not, and the performance by Parent and
Merger Sub of their obligations hereunder and thereunder and the consummation by
Parent and Merger Sub of the transactions contemplated hereby and thereby will
not, (i) violate the provisions of any of the Charter Documents of Parent or any
of its Subsidiaries, (ii) violate or conflict with, or constitute a default, an
event of default or an event creating rights of acceleration, termination,
cancellation, imposition of additional obligations or loss of rights, or require
a consent to assignment, under any Contract (A) to which Parent or any of its
subsidiaries or Merger Sub is a party, (B) of which Parent or Merger Sub is a
beneficiary or (C) by which Parent or Merger Sub or any of their respective
assets is bound, (iii) assuming compliance by Parent with the matters referred
to Section 5.5(b), violate any Law applicable to Parent or Merger Sub on the
date hereof, or (iv) result in the creation of any Liens upon any of the assets
owned or used by Parent or Merger Sub, other than such violations referred to in
clauses (i), (ii) and (iii) and such Liens referred to in clause (iv) which
would not reasonably be expected, individually or in the aggregate, materially
to impair or delay the ability of Parent or Merger Sub to perform its
obligations under this Agreement and consummate the Merger or to be material to
Parent taken as a whole. Schedule 5.4(b) of Parent Disclosure Schedule sets
forth all consents, waivers, assignments and other approvals and actions that
are required in connection with the transactions contemplated by this Agreement
under any Contract to which Parent or any of its Subsidiaries is a party
(collectively, Parent or any of its Subsidiaries, "PARENT CONSENTS").
(b) No Authorization or Order of, registration, declaration or
filing with, or notice to any Governmental Entity, state or other jurisdiction
is required by or with respect to Parent or any of its Subsidiaries in
connection with the execution and delivery of this Agreement and the
consummation of the Merger, except for (i) the filing of a Form S-4 Registration
Statement with the Securities and Exchange Commission in connection with the
issuance of Parent Common Stock pursuant to the Merger, (ii) such filings as may
be required under the HSR Act and the Other Antitrust Laws, (iii) the filing of
the Certificate of Merger with the Secretary of State of Delaware, (iv) such
filings as may be required under the Securities Exchange Act of 1934, as amended
(the "EXCHANGE ACT") and the rules of the NASDAQ Capital Market, (iv) such
filings as may be required under state securities or "Blue Sky" laws, and (v)
such Authorizations, Orders, registrations, declarations, filings and notices
the failure to obtain or make which would not reasonably be expected to
materially impair the ability of Parent or Merger Sub to perform its obligations
under this Agreement and consummate the Merger or to be material to Parent taken
as a whole.
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5.6 SEC Filings; Financial Statements.
(a) Parent has made available to Company all forms, reports and
documents required to be filed by it with the SEC since August 1, 2004
(collectively, the "PARENT SEC REPORTS"). Parent SEC Reports (i) at the time
they were filed complied as to form in all material respects with the applicable
requirements of the Securities Act or the Exchange Act, as the case may be, and
(ii) did not at the time they were filed (or if amended or superseded by a
filing prior to the date of this Agreement, then on the date of such filing)
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(b) The consolidated financial statements (including, in each case,
any related notes) contained in Parent SEC Reports complied as to form in all
material respects with the applicable rules and regulations of the SEC with
respect thereto, were prepared in accordance with GAAP applied on a consistent
basis throughout the periods involved (except as may be indicated in the notes
to such financial statements or, in the case of unaudited statements, as
permitted by the SEC) and fairly presented the consolidated financial position
of Parent and its Subsidiaries as at the respective dates and the consolidated
results of its operations and cash flows for the periods indicated (subject, in
the case of the unaudited financial statements, to normal year-end recurring
adjustments).
(c) Parent and its Subsidiaries have no Liabilities except (a) those
which are adequately reflected or reserved against as noted above in the
Financial Statements included in the most recently filed Parent SEC Report, and
(b) those which have been incurred in the ordinary course of business and
consistent with past practice since the last balance sheet date therein or which
are not, individually or in the aggregate, material in amount.
5.7 Taxes.
(a) Parent (which shall for the purpose of this Section 5.7 include
its Subsidiaries) has duly and timely filed all Tax Returns required to have
been filed by or with respect to Parent and will duly and timely file all Tax
Returns due between the date hereof and the Closing Date. Each such Tax Return
correctly and completely reflects all liability for Taxes and all other
information required to be reported thereon. All Taxes owed by Parent (whether
or not shown on any Tax Return) have been timely paid (or, if due between the
date hereof and the Closing Date, will be duly and timely paid). Parent has
adequately provided for, in its books of account and related records, all
liability for all unpaid Taxes, being current Taxes not yet due and payable.
(b) Parent has withheld and timely paid all Taxes required to have
been withheld and paid by it and has complied with all information reporting and
backup withholding requirements, including maintenance of required records with
respect thereto.
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(c) Parent is not the beneficiary of any extension of time within
which to file any Tax Return, nor has Parent made (or had made on its behalf)
any requests for such extensions. Parent has not waived (or is subject to a
waiver of) any statute of limitations in respect of Taxes or has agreed to (or
is subject to) any extension of time with respect to a Tax assessment or
deficiency.
(d) Parent Disclosure Schedule indicates those Tax Returns that have
been audited and those Tax Returns that currently are the subject of audit.
Except as set forth in the Parent Disclosure Schedule there is no Action now
pending or threatened against or with respect to Parent in respect of any Tax or
any assessment or deficiency. There are no liens for Taxes (other than current
Taxes not yet due and payable) upon the assets of Parent. Parent has made
available to Company correct and complete copies of all federal income Tax
Returns, examination reports, and statements of deficiencies assessed against or
agreed to by Parent since January 1, 2003.
(e) Parent Disclosure Schedule lists, as of the date of this
Agreement, all jurisdictions in which Parent currently files Tax Returns. No
claim has been made by an authority in a jurisdiction where Parent does not file
Tax Returns that it is or may be subject to taxation by that jurisdiction or
that it must file Tax Returns.
(f) Parent has not filed consent pursuant to the collapsible
corporation provisions of Section 341(f) of the Code (or any corresponding
provisions of state, local or foreign income Tax Law). None of the assets or
properties of Parent constitutes tax-exempt bond financed property or tax-exempt
use property within the meaning of Section 168 of the Code. Parent is not a
party to any "safe harbor lease" within the meaning of Section 168(f)(8) of the
Code, as in effect prior to amendment by the Tax Equity and Fiscal
Responsibility Act of 1982, or to any "long-term contract" within the meaning of
Section 460 of the Code. Parent has never been a United States real property
holding corporation within the meaning of Section 897(c)(2) of the Code. Parent
is not is a "foreign person" within the meaning of Section 1445 of the Code.
(g) Parent has not agreed to or is required to make by reason of a
change in accounting method or otherwise, or could be required to make by reason
of a proposed or threatened change in accounting method or otherwise, any
adjustment under Section 481(a) of the Code. Parent has not been the
"distributing corporation" (within the meaning of Section 355(c)(2) of the Code)
with respect to a transaction described in Section 355 of the Code within the
5-year period ending as of the date of this Agreement. Parent has not received
(or is subject to) any ruling from any Taxing Authority or has entered into (or
is subject to) any agreement with a Taxing Authority. Parent has disclosed on
its federal income Tax Returns all positions taken therein that could give rise
to a substantial understatement of federal income Tax within the meaning of
Section 6662 of the Code.
(h) Parent (i) has never been a party to any Tax allocation or
sharing agreement or Tax indemnification agreement, (ii) has never been a member
of an affiliated, consolidated, condensed or unitary group, and (iii) does not
have any liability for or obligation to pay Taxes of any other Person under
Treas. Reg. 1.1502-6 (or any similar provision of Tax Law), or as transferee or
successor, by contract or otherwise. Parent is not a party to any joint venture,
partnership, or other arrangement that is treated as a partnership for federal
income tax purposes.
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(i) Parent will not be required to include any item of income in, or
exclude any item of deduction from, taxable income for any taxable period (or
portion thereof) ending after the Effective Time as a result of any: (i)
intercompany transactions or excess loss accounts described in Treasury
regulations under Section 1502 of the Code (or any similar provision of state,
local, or foreign Tax Law), (ii) installment sale or open transaction
disposition made on or prior to the Effective Time or (iii) prepaid amount
received on or prior to the Effective Time.
(j) Parent has not entered into any transaction that constitutes a
"reportable transaction" within the meaning of Treasury Regulation Section
1.6011-4(b).
(k) Parent Disclosure Schedule lists each person who Parent
reasonably believes is, with respect to Parent or any Affiliate of Parent, a
"disqualified individual" (within the meaning of Section 280G of the Code and
the Regulations thereunder).
(l) Parent has not taken or agreed to take any action (other than
actions contemplated by this Agreement) that would reasonably be expected to
prevent the Merger from constituting a "reorganization" under Section 368 of the
Code. Parent is not aware of any agreement or plan to which Parent is a party or
other circumstances relating to Parent that could reasonably be expected to
prevent the Merger from so qualifying as a "reorganization" under Section 368 of
the Code.
5.8 Compliance with Law.
(a) Each of Parent and its Subsidiaries has complied with each, and
is not in violation of, any applicable Law to which Parent or its business,
operations, assets or properties are or have been subject, except where failure
to do so would not have a Material Adverse Effect on Parent.
(b) No event has occurred and no circumstances exist that (with or
without the passage of time or the giving of notice) may result in a violation
of, conflict with or failure on the part of Parent or any of its Subsidiaries to
comply with, any Law. Neither Parent nor any of its Subsidiaries has received
notice regarding any such violation of, conflict with, or failure to comply
with, any Law.
5.9 Authorizations.
(a) Parent and each of its Subsidiaries owns, holds or lawfully uses
in the operation of its business all Authorizations which are necessary for it
to conduct its business as currently conducted or as proposed to be conducted or
for the ownership and use of the assets owned or used by Parent in the conduct
of its business free and clear of all Liens. Such Authorizations are valid and
in full force and effect and none of such Authorizations will be terminated or
impaired or become terminable as a result of the transactions contemplated by
this Agreement. All material Authorizations are listed in Parent Disclosure
Schedule.
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(b) No event has occurred and no circumstances exist that (with or
without the passage of time or the giving of notice) may result in a violation
of, conflict with, failure on the part of Parent or any of its Subsidiaries to
comply with the terms of, or the revocation, withdrawal, termination,
cancellation, suspension or modification of any Authorization. Parent and its
Subsidiaries have not received notice regarding any violation of, conflict with,
failure to comply with the terms of, or any revocation, withdrawal, termination,
cancellation, suspension or modification of, any Authorization. Parent is not in
default, nor has Parent received notice of any claim of default, with respect to
any Authorization.
(c) No Person other than Parent or the applicable Subsidiary owns or
has any proprietary, financial or other interest (direct or indirect) in any
Authorization which Parent owns, possesses or uses in the operation of its
business as now or proposed to be conducted.
5.10 Title to Personal Properties.
(a) With respect to personal properties and assets that they purport
to own, (other than inventory sold and items of obsolete equipment disposed of
in the ordinary course of business since the date thereof), Parent or the
applicable Subsidiary has good and valid title to all of such properties and
assets, free and clear of all Liens other than Permitted Liens.
(b) With respect to personal properties and assets that are leased
by Parent or a Subsidiary, Parent or the applicable Subsidiary which leases the
asset has a valid leasehold interest in such properties and assets and all such
leases are in full force and effect and constitute valid and binding obligations
of the other party(ies) thereto. Neither Parent nor any other party thereto is
in violation of any of the terms of any such lease.
5.11 Condition of Tangible Assets. All buildings, plants, leasehold
improvements, structures, facilities, equipment and other items of tangible
property and assets which are owned, leased or used by Parent are structurally
sound, are in good operating condition and repair (subject to normal wear and
tear given the use and age of such assets), are usable in the regular and
ordinary course of business and conform in all material respects to all Laws and
Authorizations relating to their construction, use and operation.
5.12 Real Property.
(a) Schedule 5.12 of the Parent Disclosure Schedule contains (i) a
list of all real property and interests in real property owned in fee by Parent
or a Subsidiary (the "PARENT AND SUBSIDIARY OWNED REAL PROPERTY"), and (ii) a
list of all real property and interests in real property leased by Parent or a
Subsidiary with respect to each of which the annual rental payments exceed
$50,000 (the "PARENT AND SUBSIDIARY LEASED REAL PROPERTY").
(b) With respect to each parcel of Parent and Subsidiary Owned Real
Property, Parent or the applicable Subsidiary has good and marketable title to
each such parcel of Parent and Subsidiary Owned Real Property free and clear of
all Liens, except (A) Permitted Liens and (B) zoning and building restrictions,
easements, covenants, rights-of-way and other similar restrictions of record,
none of which materially impairs the current or proposed use of such Parent or
Subsidiary Owned Real Property. There are no outstanding options or rights of
first refusal to purchase such parcel of Parent and Subsidiary Owned Real
Property, or any portion thereof or interest therein.
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(c) Each lease with respect to Parent and Subsidiary Leased Real
Property (each, a "PARENT LEASE") is in full force and effect. Parent is not in
default under any such Parent Lease and, to Parent's Knowledge, no other party
thereto is in default under any such Parent Lease.
5.13 Intellectual Property. The representations and warranties in
this Section 5.13 shall be true and correct except to the extent that errors and
omission therein would not have a Material Adverse Effect on the Parent. Each
reference to Parent in this section shall also apply to each of its Subsidiaries
separately and jointly.
(a) Parent Disclosure Schedule lists (by name, owner and, where
applicable, registration number and jurisdiction of registration, application,
certification or filing) all Intellectual Property that is owned by Parent
(whether exclusively, jointly with another Person or otherwise) ("PARENT OWNED
INTELLECTUAL PROPERTY"); provided that Parent Disclosure Schedule is not
required to list items of Parent Owned Intellectual Property which are both (i)
immaterial to Parent and (ii) not registered or the subject of an application
for registration. Except as described in Parent Disclosure Schedule, Parent owns
the entire right, title and interest to all Parent Owned Intellectual Property
free and clear of all Liens.
(b) Parent Disclosure Schedule lists all licenses, sublicenses and
other Contracts ("PARENT IN-BOUND LICENSES") pursuant to which a third party
authorizes Parent to use, practice any rights under, or grant sublicenses with
respect to, any Intellectual Property owned by such third party, including the
incorporation of any such Intellectual Property into Parent's products and, with
respect to each Parent In-Bound License, whether Parent In-Bound License is
exclusive or non-exclusive; provided, however, that Parent Disclosure Schedule
is not required to list Parent In-Bound Licenses that consist solely of
"shrink-wrap" and similar commercially available end-user licenses.
(c) Parent Disclosure Schedule lists all licenses, sublicenses and
other Contracts ("PARENT OUT-BOUND LICENSES") pursuant to which Parent
authorizes a third party to use, practice any rights under, or grant sublicenses
with respect to, any Parent Owned Intellectual Property or pursuant to which
Parent grants rights to use or practice any rights under any Intellectual
Property owned by a third party and, with respect to each Parent Out-Bound
License, whether Parent Out-Bound License is exclusive or non-exclusive.
(d) Each Parent In-Bound License and each Parent Out-Bound License
is in full force and effect and valid and enforceable in accordance with its
terms, except where any such failure to be in full force and effect and valid
and enforceable would not reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on Parent. Parent has not violated any
provision of, or committed or failed to perform any act which, with or without
the giving of notice or lapse of time, or both, would constitute a default in
the performance, observance or fulfillment of any obligation, covenant,
condition or other term contained in any Parent In-Bound License or Parent
Out-Bound License, except where any such default would not reasonably be
expected to have a Material Adverse Effect on Parent, and Parent has not given
or received notice to or from any Person relating to any such alleged or
potential default that has not been cured.
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(e) Parent (i) exclusively own the entire right, interest and title
to all Intellectual Property that is used in or necessary for the businesses of
Parent as they are currently conducted free and clear of Liens (including the
design, manufacture, license and sale of all products currently under
development or in production), or (ii) otherwise rightfully use or otherwise
enjoy such Intellectual Property pursuant to the terms of a valid and
enforceable Parent In-Bound License that is listed in Parent Disclosure Schedule
or that is a "shrink-wrap" or similar commercially available end-user license.
Parent Owned Intellectual Property, together with Parent's rights under Parent
In-Bound Licenses listed in Parent Disclosure Schedule or that are "shrink-wrap"
and similar commercially available end-user licenses (collectively, the "PARENT
INTELLECTUAL PROPERTY"), constitutes all the Intellectual Property used in or
necessary for the operation of Parent's businesses as they are currently
conducted.
(f) All registration, maintenance and renewal fees related to
Patents, Marks, Copyrights and any other certifications, filings or
registrations that are owned by Parent ("PARENT REGISTERED ITEMS") that are
currently due have been paid and all documents and certificates related to such
Parent Registered Items have been filed with the relevant Governmental Entity or
other authorities in the United States or foreign jurisdictions, as the case may
be, for the purposes of maintaining such Parent Registered Items. All Parent
Registered Items are in good standing, held in compliance with all applicable
legal requirements and enforceable by Parent. All Patents that have been issued
to Parent are valid.
(g) Parent is not aware of any challenges (or any basis therefor)
with respect to the validity or enforceability of any Parent Intellectual
Property. Parent has not taken any action or failed to take any action that
would reasonably be expected to result in the abandonment, cancellation,
forfeiture, relinquishment, invalidation, waiver or unenforceability of any
Parent Intellectual Property. Parent Disclosure Schedule lists all previously
held Parent Registered Items that Parent has abandoned, cancelled, forfeited or
relinquished during the twelve (12) months prior to the date of this Agreement.
(h) None of the products or services currently or formerly developed
manufactured, sold, distributed, provided, shipped or licensed, by Parent, or
which are currently under development, has infringed or infringes upon, or
otherwise unlawfully used or uses, the Intellectual Property Rights of any third
party. Parent, by conducting its business as currently conducted, has not
infringed or infringes upon, or otherwise unlawfully used or uses, any
Intellectual Property Rights of a third party. Parent has not received any
communication alleging that Parent or any of its products, services, activities
or operations infringe upon or otherwise unlawfully use any Intellectual
Property Rights of a third party nor, to Parent's Knowledge, is there any basis
therefor. No Action has been instituted, or, to Parent's Knowledge, threatened,
relating to any Intellectual Property formerly or currently used by Parent and
none of Parent Intellectual Property is subject to any outstanding Order. To
Parent's Knowledge, no Person has infringed or is infringing any Intellectual
Property Rights of Parent or has otherwise misappropriated or is otherwise
misappropriating any Parent Intellectual Property.
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(i) With respect to Parent's Proprietary Information, the
documentation relating thereto is current, accurate and sufficient in detail and
content to identify and explain it and to allow its full and proper use without
reliance on the special knowledge or memory of others. Parent has taken
commercially reasonable steps to protect and preserve the confidentiality of all
Proprietary Information owned by Parent that is not covered by an issued Patent.
Without limiting the generality of the foregoing, the Proprietary Information of
Parent (other than Proprietary Information that is covered by an issued Patent)
is not part of the public knowledge and has not been used or divulged for the
benefit of any Person other than Parent.
(j) All current and former employees, consultants and contractors of
Parent have executed and delivered, and are in compliance with, enforceable
agreements regarding the protection of Proprietary Information and providing
valid written assignments of all Intellectual Property conceived or developed by
such employees, consultants or contractors in connection with their services for
Parent. No current or former employee, consultant or contractor or any other
Person has any right, claim or interest to any of Parent Intellectual Property.
(k) No employee, consultant or contractor of Parent has been, is or
will be, by performing services for Parent, in violation of any term of any
employment, invention disclosure or assignment, confidentiality, noncompetition
agreement or other restrictive covenant or any Order as a result of such
employee's, consultant's or independent contractor's employment by Parent or any
services rendered by such employee, consultant or independent contractor.
(l) The execution and delivery of this Agreement by Parent does not,
and the consummation of the Merger (in each case, with or without the giving of
notice or lapse of time, or both) will not, directly or indirectly, result in
the loss or impairment of, or give rise to any right of any third party to
terminate or reprice or otherwise renegotiate any of Parent's rights to own any
of its Intellectual Property or their respective rights under any Parent
Out-Bound License or Parent In-Bound License, nor require the consent of any
Governmental Entity or other third party in respect of any such Intellectual
Property.
(m) Software.
Parent does not own the Software or purport to own any Software.
5.14 Absence of Certain Changes or Events. Since July 31, 2005 to
the date of this Agreement:
(a) there has not been a Material Adverse Effect on Parent;
(b) neither Parent nor Merger Sub has amended or otherwise modified
its Charter Documents;
(c) neither Parent nor Merger Sub has declared, set aside or paid
any dividend or other distribution (whether in cash, stock or property) with
respect to any of its securities;
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(d) neither Parent nor merger Sub has split, combined or
reclassified any of its securities, or issued, or authorized for issuance, any
securities except for the grant of options to purchase shares of Parent Common
Stock ("PARENT STOCK OPTIONS") and the issuance of shares of Parent Common Stock
upon exercise of Parent Stock Options and warrants issued by Parent, in each
case, in the ordinary course of business consistent with past practice;
(e) there has not been any material damage, destruction or loss with
respect to the property and assets of Parent, whether or not covered by
insurance;
(f) there has not been any revaluation of Parent's assets, including
writing down the value of inventory or writing off notes or accounts receivable,
other than in the ordinary course of business consistent with past practice;
(g) Parent has not made any change in accounting practices; and
(h) neither Parent nor Merger Sub has agreed, whether in writing or
otherwise, to do any of the foregoing except that Parent may with Company's
prior consent and notification to Company within two (2) Business Days
thereafter spin-off various assets to its shareholders as a dividend.
5.15 Contracts.
(a) Parent Disclosure Schedule contains a complete and accurate list
of each Contract or series of related Contracts to which Parent or any of its
Subsidiaries is a party or is subject, or by which any of their respective
assets are bound:
(i) for the purchase of materials, supplies, goods, services,
equipment or other assets and that involves or would reasonably be expected to
involve (A) annual payments by Parent of $10,000 or more, or (B) aggregate
payments by Parent of $10,000 or more;
(ii) (A) for the sale by Parent of materials, supplies, goods,
services, equipment or other assets, and that provides for (1) a specified
annual minimum dollar sales amount by Parent of $10,000 or more, or (2)
aggregate payments to Parent of $10,000 or more, or (B) pursuant to which Parent
received payments of more than $10,000 in the year ended July 31, 2005 or
expects to receive payments of more than $10,000 in the year ending July 31,
2006;
(iii) that continues over a period of more than six (6) months
from the date hereof and provides for payments to or by Parent exceeding
$10,000, except for arrangements disclosed pursuant to the preceding
subparagraphs (i) and (ii);
(iv) that is an employment, consulting, termination or severance
Contract that involves or would reasonably be expected to involve the payment of
$50,000 or more by Parent following the date hereof, except for any such
Contract that is terminable at-will by Parent without liability to Parent;
(v) that is a distribution, dealer, representative or sales agency
Contract, other than Contracts entered into in the ordinary course of business
with distributors, representatives and sales agents that are cancelable without
penalty on not more than ninety (90) days' notice and does not deviate in any
material respect from Parent's standard form previously provided by Parent;
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(vi) that is a (A) Parent Lease or (B) Contract for the lease of
personal property, in each case which provides for payments to or by Parent or
any of its Subsidiaries in any one case of $75,000 or more annually or $250,000
or more over the term of such Parent Lease or lease;
(vii) which provides for the indemnification by Parent, the
undertaking by Parent to be responsible for consequential damages, or the
assumption by Parent of any Tax, environmental or other Liability;
(viii) that is a note, debenture, bond, equipment trust, letter of
credit, loan or other Contract for Indebtedness or lending of money (other than
to employees for travel expenses in the ordinary course of business) or Contract
for a line of credit or guarantee, pledge or undertaking of the Indebtedness of
any other Person;
(ix) for any capital expenditure or leasehold improvement in any
one case in excess of $10,000 or any such Contracts in the aggregate greater
than $100,000;
(x) that restricts or purports to restrict the right of Parent to
engage in any line of business, acquire any property, develop or distribute any
product or provide any service (including geographic restrictions) or to compete
with any Person or granting any exclusive distribution rights, in any market,
field or territory;
(xi) that is a partnership, joint venture, joint development or
similar Contract;
(xii) that relates to the acquisition or disposition of any
business (whether by merger, sale of stock, sale of assets or otherwise);
(xiii) that is a collective bargaining Contract or other Contract
with any labor organization, union or association; and
(xiv) that is a Contract or series of Contracts, the termination
or breach of which would reasonably be expected to have a Material Adverse
Effect on Parent and not previously disclosed pursuant to this Section 5.15.
(b) Each Contract required to be listed in Schedule 5.15 of Parent
Disclosure Schedule (collectively, "PARENT MATERIAL CONTRACTS") is in full force
and effect and valid and enforceable in accordance with its terms, except to the
extent a failure to be in full force and effect and valid or enforceable in
accordance with its terms would not have a Material Adverse Effect on the Parent
or any of its Subsidiaries.
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(c) Parent and its Subsidiaries are not, and to Parent's Knowledge,
no other party thereto is, in default in the performance, observance or
fulfillment of any obligation, covenant, condition or other term contained in
any Parent Material Contract, and Parent has not given or received notice to or
from any Person relating to any such alleged or potential default that has not
been cured. No event has occurred which with or without the giving of notice or
lapse of time, or both, may conflict with or result in a violation or breach of,
or give any Person the right to exercise any remedy under or accelerate the
maturity or performance of, or cancel, terminate or modify, any Parent Material
Contract.
(d) Parent has provided accurate and complete copies of each Parent
Material Contract to Parent.
(e) All Contracts other than Parent Material Contracts to which
Parent or any of its Subsidiaries is a party or is subject, or by which any of
their respective assets are bound (collectively, the "PARENT MINOR CONTRACTS"),
are in all material respects valid and enforceable in accordance with their
terms. Parent is not in default in the performance, observance or fulfillment of
any obligation, covenant or condition contained therein, and no event has
occurred which with or without the giving of notice or lapse of time, or both,
would constitute a default thereunder by Parent, except in either case where any
such default or defaults could not reasonably be expected have, individually or
in the aggregate, a Material Adverse Effect on Parent taken as a whole.
5.16 Legal Proceedings. Except as disclosed in Parent Disclosure
Schedule, there are no actions or proceedings pending or, to the knowledge of
Parent, threatened against, relating to or affecting Parent or any of its
Subsidiaries or any of their assets or properties which (a) could reasonably be
expected to result in the issuance of an Order restraining, enjoining or
otherwise prohibiting or making illegal the Merger or otherwise result in a
material diminution of the benefits contemplated by this Agreement to Parent,
Merger Sub, Company or the Surviving Corporation or (b) if determined adversely
to Parent or any of its Subsidiaries, could reasonably be expected to result in
(i) any injunction or other equitable relief against Parent or any of its
Subsidiaries, Merger Sub, Company or the Surviving Corporation or (ii) losses by
Parent, Merger Sub, Company or the Surviving Corporation.
5.17 Employee Benefits.
(a) Parent Disclosure Schedule sets forth a complete and accurate
list of all Parent Benefit Plans and benefit plans to which any of Parent's
Subsidiaries is a party or otherwise bound. A current, accurate and complete
copy of each, benefit plan has been provided to the Company. Parent has no
intent or commitment to create any additional Parent Benefit Plan or amend any
Parent Benefit Plan. "PARENT BENEFIT PLAN" means any Benefit Plan which is
sponsored, maintained or contributed to by Parent or any Parent ERISA Affiliate,
or with respect to which Parent or any of its Subsidiaries or any Parent ERISA
Affiliate otherwise has any present or future Liability. "PARENT ERISA
AFFILIATE" means any entity which is a member of a "controlled group of
corporations" with, under "common control" with or a member of an "affiliated
services group" with, Parent or any of its Subsidiaries, as defined in Section
414(b), (c), (m) or (o) of the Code.
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(b) Each Parent Benefit Plan has been and is currently administered
in compliance in all material respects with its constituent documents and with
all reporting, disclosure and other requirements of ERISA and the Code
applicable to such Parent Benefit Plan. Each Parent Benefit Plan that is an
Employee Pension Benefit Plan (as defined in Section 3(2) of ERISA) and which is
intended to be qualified under Section 401(a) of the Code (a "PARENT PENSION
PLAN"), has been determined by the Internal Revenue Service to be so qualified
and no condition exists that would adversely affect any such determination. No
Parent Benefit Plan is a "defined benefit plan" as defined in Section 3(35) of
ERISA.
(c) None of Parent, any Parent ERISA Affiliate or any trustee or
agent of any Parent Benefit Plan has been or is currently engaged in any
prohibited transactions as defined by Section 406 of ERISA or Section 4975 of
the Code for which an exemption is not applicable which could subject Parent or
any Parent ERISA Affiliate or any trustee or agent of any Parent Benefit Plan to
the tax or penalty imposed by Section 4975 of the Code or Section 502 of ERISA.
(d) There is no event or condition existing which could be deemed a
"reportable event" (within the meaning of Section 4043 of ERISA) with respect to
which the thirty (30)-day notice requirement has not been waived. To Parent's
Knowledge, no condition exists which could subject Parent to a penalty under
Section 4071 of ERISA.
(e) Neither Parent nor or any Parent ERISA Affiliate is, or has
been, party to any "multi-employer plan," as that term is defined in Section
3(37) of ERISA.
(f) True and correct copies of the most recent annual report on Form
5500 and any attached schedules for each Parent Benefit Plan (if any such report
was required by applicable Law) and a true and correct copy of the most recent
determination letter issued by the Internal Revenue Service for each Parent
Pension Plan have been provided to Parent.
(g) With respect to each Parent Benefit Plan, there are no actions,
suits or claims (other than routine claims for benefits in the ordinary course)
pending or, to Parent's Knowledge, threatened against any Parent Benefit Plan,
Parent, any Parent ERISA Affiliate or any trustee or agent of any Parent Benefit
Plan.
(h) With respect to each Parent Benefit Plan to which Parent or any
Parent ERISA Affiliate is a party which constitutes a group health plan subject
to Section 4980B of the Code, each such Parent Benefit Plan complies, and in
each case has complied, in all material respects with all applicable
requirements of Section 4980B of the Code.
(i) Full payment has been made of all amounts which Parent or any
Parent ERISA Affiliate was required to have paid as a contribution to any Parent
Benefit Plan as of the last day of the most recent fiscal year of each of the
Benefit Plans ended prior to the date of this Agreement, and none of Parent
Benefit Plans has incurred any "accumulated funding deficiency" (as defined in
Section 302 of ERISA and Section 412 of the Code), whether or not waived, as of
the last day of the most recent fiscal year of each such Parent Benefit Plan
ended prior to the date of this Agreement.
(j) Each Parent Benefit Plan is, and its administration is and has
been during the six-year period preceding the date of this Agreement, in all
material respects in compliance with, and none Parent or any Parent ERISA
Affiliate has received any claim or notice that any such Parent Benefit Plan is
not in material compliance with, all applicable Laws and Orders and prohibited
transaction exemptions, including to the extent applicable, the requirements of
ERISA.
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(k) Neither Parent nor any Parent ERISA Affiliate are in default in
any material respect in performing any of its contractual obligations under any
of Parent Benefit Plans or any related trust agreement or insurance contract.
(l) There are no material outstanding Liabilities of any Parent
Benefit Plan other than Liabilities for benefits to be paid to participants in
any Parent Benefit Plan and their beneficiaries in accordance with the terms of
such Parent Benefit Plan.
(m) Subject to ERISA and the Code, each Parent Benefit Plan may be
amended, modified, terminated or otherwise discontinued by Parent or a Parent
ERISA Affiliate at any time without liability.
(n) No Parent Benefit Plan other than a Parent Pension Plan, retiree
medical plan or severance plan provides benefits to any individual after
termination of employment.
(o) The consummation of the Merger will not (either alone or in
conjunction with any other event) (i) entitle any current or former director,
employee, contractor or consultant of Parent to severance pay, unemployment
compensation or any other payment, (ii) accelerate the time of payment or
vesting, or increase the amount of compensation due to any such director,
employee, contractor or consultant, or result in the payment of any other
benefits to any Person or the forgiveness of any Indebtedness of any Person,
(iii) result in any prohibited transaction described in Section 406 of ERISA or
Section 4975 of the Code for which an exemption is not available, or (iv) result
in the payment or series of payments by Parent or any of its Affiliates to any
person of an "excess parachute payment" within the meaning of Section 280G of
the Code.
(p) With respect to each Parent Benefit Plan that is funded wholly
or partially through an insurance policy, all premiums required to have been
paid to date under the insurance policy have been paid, all premiums required to
be paid under the insurance policy through the Closing will have been paid on or
before the Closing and, as of the Closing, there will be no liability of Parent
or any Parent ERISA Affiliate under any insurance policy or ancillary agreement
with respect to such insurance policy in the nature of a retroactive rate
adjustment, loss sharing arrangement or other actual or contingent liability
arising wholly or partially out of events occurring prior to the Closing.
(q) Each Parent Benefit Plan that constitutes a "welfare benefit
plan," within the meaning of Section 3(1) of ERISA, and for which contributions
are claimed by Parent or any Parent ERISA Affiliate as deductions under any
provision of the Code, is in compliance in all material respects with all
applicable requirements pertaining to such deduction. With respect to any
welfare benefit fund (within the meaning of Section 419 of the Code) related to
a welfare benefit plan, there is no disqualified benefit (within the meaning of
Section 4976(b) of the Code) that would result in the imposition of a tax under
Section 4976(a) of the Code. All welfare benefit funds intended to be exempt
from tax under Section 501(a) of the Code have been determined by the Internal
Revenue Service to be so exempt and no event or condition exists which would
adversely affect any such determination.
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(r) Parent Disclosure Schedule sets forth all Parent Benefit Plans
covering employees of Parent outside of the United States (the "PARENT FOREIGN
PLANS"). The Foreign Plans have been operated in accordance, and are in
compliance, in all material respects with their constituent documents and all
applicable Laws. There are no material unfunded Liabilities under or in respect
of the Foreign Plans, and all contributions or other payments required to be
made to or in respect of the Foreign Plans prior to the Closing Date have been
made or will be made prior to the Closing Date.
5.18 Labor and Employment Matters.
(a) Parent is not a party or subject to any labor union or
collective bargaining Contract. There have not been since January 1, 2002 and
there are not pending or threatened any labor disputes, work stoppages, requests
for representation, pickets, work slow-downs due to labor disagreements or any
actions or arbitrations which involve the labor or employment relations of
Parent. There is no unfair labor practice, charge or complaint pending,
unresolved or, to Parent's Knowledge, threatened before the National Labor
Relations Board. No event has occurred or circumstance exist that may provide
the basis of any work stoppage or other labor dispute.
(b) Parent has complied in all material respects with each, and is
not in violation in any material respect of any, Law relating to
anti-discrimination and equal employment opportunities and there are, and have
been, no material violations of any other Law respecting the hiring, hours,
wages, occupational safety and health, employment, promotion, termination or
benefits of any employee or other Person. Parent has filed all reports,
information and notices required under any Law respecting the hiring, hours,
wages, occupational safety and health, employment, promotion, termination or
benefits of any employee or other Person, and will timely file prior to Closing
all such reports, information and notices required by any Law to be given prior
to Closing.
(c) Parent has paid or properly accrued in the ordinary course of
business all wages and compensation due to employees, including all vacations or
vacation pay, holidays or holiday pay, sick days or sick pay, and bonuses.
(d) Parent is not a party to any Contract which restricts Parent
from relocating, closing or terminating any of its operations or facilities or
any portion thereof. Parent has not, since January 1, 2002 effectuated a "plant
closing" (as defined by the WARN Act) or (ii) a "mass lay-off" (as defined in
the WARN Act), in either case affecting any site of employment or facility of
Parent, except in accordance with the WARN Act. The consummation of the Merger
will not create liability for any act by Parent on or prior to the Closing Date
under the WARN Act or any other Law respecting reductions in force or the impact
on employees on plant closings or sales of businesses.
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5.19 Environmental.
(a) Parent has secured, and is in compliance in all material
respects with, all Environmental Permits required in connection with its
operations and the Real Property. Each Environmental Permit, together with the
name of the Governmental Entity issuing such Environmental Permit, is set forth
in Parent Disclosure Schedule. All such Environmental Permits are valid and in
full force and effect and none of such Environmental Permits will be terminated
or impaired or become terminable as a result of the Merger. Parent has been, and
is currently, in compliance in all material respects with all Environmental
Laws. Parent has not received notice alleging that Parent is not in such
compliance with Environmental Laws.
(b) There are no past, pending or, to Parent's Knowledge, threatened
Environmental Actions against or affecting Parent, and Parent is not aware of
any facts or circumstances which could be expected to form the basis for any
Environmental Action against Parent.
(c) Parent has not entered into or agreed to any Order, and Parent
is not subject to any Order, relating to compliance with any Environmental Law
or to investigation or cleanup of a Hazardous Substance under any Environmental
Law.
(d) No Lien has been attached to, or asserted against, the assets,
property or rights of Parent pursuant to any Environmental Law, and, to Parent's
Knowledge, no such Lien has been threatened. There are no facts, circumstances
or other conditions that could be expected to give rise to any Liens on or
affecting any Real Property.
(e) There has been no treatment, storage, disposal or Release of any
Hazardous Substance at, from, into, on or under any Real Property or any other
property currently or formerly owned, operated or leased by Parent. No Hazardous
Substances are present in, on, about or migrating to or from any Real Property
that could be expected to give rise to an Environmental Action against Parent.
(f) Parent has not received a CERCLA 104(e) information request nor
has Parent been named a potentially responsible party for any National
Priorities List site under CERCLA or any site under analogous state Law. Parent
has not received an analogous notice or request from any non-U.S. Governmental
Entity.
(g) There are no aboveground tanks or underground storage tanks on,
under or about the Real Property. Any aboveground or underground tanks
previously situated on the Real Property or any other property currently or
formerly owned, operated or leased by Parent have been removed in accordance
with all Environmental Laws and no residual contamination, if any, remains at
such sites in excess of applicable standards.
(h) There are PCBs leaking from any article, container or equipment
on, under or about the Real Property and there are no such articles, containers
or equipment containing PCBs. There is no asbestos containing material or lead
based paint containing materials in at, on, under or within the Real Property.
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(i) Parent has not transported or arranged for the treatment,
storage, handling, disposal, or transportation of any Hazardous Material to any
off-site location which is an Environmental Clean-up Site.
(j) None of the Real Property is an Environmental Clean-up Site.
(k) Parent provided to Company true and complete copies of, or
access to, all written environmental assessment materials and reports that have
been prepared by or on behalf of Parent.
5.20 Interim Operations of Merger Sub. Merger Sub was formed solely
for the purpose of engaging in the transactions contemplated by this Agreement,
has engaged in no other business activities and has conducted its operations
only as contemplated by this Agreement.
5.21 Related Party Transactions. There are no Contracts of any kind,
written or oral, entered into by Parent with, or for the benefit of, any
officer, director or stockholder of Parent or, to the Knowledge of Parent, any
Affiliate of any of them, except in each case, for (a) employment agreements,
indemnification agreements, fringe benefits and other compensation paid to
directors, officers and employees consistent with previously established
policies (including normal merit increases in such compensation in the ordinary
course of business) and copies of which have been provided to Parent and are
listed on Parent Disclosure Schedule, (b) reimbursements of ordinary and
necessary expenses incurred in connection with their employment or service, and
(c) amounts paid pursuant to Parent Benefit Plans of which copies have been
provided to Company. To the Knowledge of Parent, none of such Persons has any
material direct or indirect ownership interest in any firm or corporation with
which Parent has a business relationship, or with any firm or corporation that
competes with Parent (other than ownership of securities in a publicly traded
company representing less than one percent of the outstanding stock of such
company). No officer or director of Parent or member of his or her immediate
family or greater than 5% stockholder of Parent or, to the Knowledge of Parent,
any Affiliate of any of them or any employee of Parent is directly or indirectly
interested in any Parent Material Contract.
5.22 Insurance. All insurance policies, binders of insurance and
fidelity bonds which cover Parent and its business, properties, assets,
directors or employees (the "PARENT POLICIES") are issued by an insurer that is
financially sound and reputable, are in full force and effect and are
enforceable in accordance with their terms. Such Parent Policies provide
adequate insurance coverage for Parent and its businesses, properties, assets
and employees, and are sufficient in all material respects for compliance with
all Laws and Contracts to which Parent is a party or by which it is bound. There
are no material pending claims under any of such Parent Policies as to which
coverage has been questioned, denied or disputed by the insurer or in respect of
which the insurer has reserved its rights.
5.23 Brokers or Finders. Parent shall indemnify and hold harmless
Company and the officers and directors of Company from any obligations or
liabilities to any person or entity engaged by or to whom the Parent is liable
for brokerage and/or finders fees for services rendered in connection with the
Merger contemplated by this Agreement.
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5.24 No Illegal Payments. Neither Parent nor, to the Knowledge of
Parent, any Affiliate, officer, agent or employee of Parent, directly or
indirectly, has, since inception, on behalf of or with respect to Parent, (a)
made any unlawful domestic or foreign political contributions, (b) made any
payment or provided services which were not legal to make or provide or which
Parent or any Affiliate thereof or any such officer, employee or other Person
should reasonably have known were not legal for the payee or the recipient of
such services to receive, (c) received any payment or any services which were
not legal for the payer or the provider of such services to make or provide, (d)
had any material transactions or payments which are not recorded in its
accounting books and records or (e) had any off-book bank or cash accounts or
"slush funds."
5.25 Information Supplied. None of the information supplied or to be
supplied by or on behalf of Parent for inclusion or incorporation by reference
in (i) the Form S-4 Registration Statement will, when filed or at any time it is
amended or supplemented or at the time the Form S-4 Registration Statement
becomes effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading or (ii) the proxy
statement (the "PROXY STATEMENT") to be used by Parent in connection with the
solicitation of votes in favor of Parent Authorized Stock Increase and Parent
Authorized Name Change will, at the date it is first mailed to the stockholders
of Parent or at the time of Parent Stockholders' Meeting, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they are made, not misleading. The Proxy
Statement and the Form S-4 Registration Statement will comply as to form in all
material respects with the requirements of the Securities Act and the Exchange
Act and the rules and regulations thereunder, except that no representation or
warranty is made by Parent with respect to information or statements with
respect to Company or any of its Subsidiaries made or incorporated by reference
therein supplied by or on behalf of Company for inclusion or incorporation by
reference in the Proxy Statement or the Form S-4 Registration Statement.
5.26 Antitakeover Statutes. No anti-takeover or similar Law binding on
Parent applies or purports to apply to the Merger, this Agreement, Company
Lock-Up and Voting Agreements and the transactions contemplated hereby. No other
"control share acquisition," "fair price," "moratorium" or other anti-takeover
Laws apply to this Agreement or any of the transactions contemplated hereby.
5.27 Compliance with Securities Laws. The offering and issuance by
Parent of shares of Parent Common Stock, Parent stock options or warrants,
Parent warrants and the issuance of any shares upon exercise of Parent stock
options or warrants, were made and completed in substantial compliance with all
applicable state, federal and foreign securities Laws.
5.28 Inclusion of Subsidiaries. All references in Sections 5.11, 5.18,
5.19, 5.21, 5.22, 5.23, 5.24, 5.25, 5.26 and 5.27 to Parent include any and all
of its Subsidiaries.
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ARTICLE VI
COVENANTS RELATING TO CONDUCT OF BUSINESS
This Article VI shall not become effective until this Agreement is no
longer subject to termination as provided for in Section 9.1(a)(i). However,
notwithstanding the preceding sentence, Parent shall notify Company and Company
shall notify Parent within two (2) Business Days after either one of them
permits, allows, or otherwise causes to occur any event prohibited by this
Article VI or with respect to which any obligation which would otherwise be
imposed upon either one of them by this Article VI shall not have been fulfilled
or is not being fulfilled. In the event that Parent decides to engage in a spin
off of assets to its shareholders as a dividend, Parent shall inform the Company
of the relevant terms and conditions of the spin off at least two (2) Business
Days prior to the consummation of the spin off.
6.1 Conduct of Business by Company.
(a) During the period from the date of this Agreement and continuing
until the earlier of the termination of this Agreement or the Effective Time,
Company shall, and it shall cause each of its Subsidiaries to:
(i) carry on its business in the usual, regular and ordinary
course in a manner consistent with past practice;
(ii) use its reasonable best efforts consistent with past
practices and policies to preserve intact its present business organization,
keep available the services of its present employees and preserve its
relationships with customers, suppliers, distributors, licensors, licensees, and
others having business dealings with it; and
(iii) use its reasonable best efforts to conduct its business in
such a manner that on the Closing Date the representations and warranties of
Company contained in this Agreement shall be true and correct, as though such
representations and warranties were made on and as of such date, and Company
shall use its reasonable best efforts to cause all of the conditions to the
obligations of Parent and Merger Sub under this Agreement to be satisfied as
soon as practicable following the date hereof.
(b) During the period from the date of this Agreement and continuing
until the earlier of the termination of this Agreement or the Effective Time,
except as expressly provided in this Agreement, Company shall not, and it shall
not permit any of its Subsidiaries to, without the prior written consent of
Parent:
(i) adopt or propose any amendment to the Charter Documents of
Company or any of its Subsidiaries;
(ii) declare, set aside or pay any dividend or other distribution
(whether in cash, stock or other property) with respect to any securities;
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(iii) issue or authorize any stock dividends or engage in any
subdivision, reclassification, recapitalization, split, combination or exchange
of shares or any similar event with respect to Company Common Stock or (B) make
any change in any issued and outstanding securities, or redeem, purchase or
otherwise acquire any securities other than the repurchase at cost from
employees of shares of Company Common Stock in connection with the termination
of their employment pursuant to Company's standard form of option/restricted
shares agreement or a cancellation of issued shares at no cost to Company;
(iv) (A) other than pursuant to a written agreement or Company
Benefit Plan disclosed in Company Disclosure Schedule in the amount required
thereunder and other than payment of bonuses and increases in salaries or wage
rates or fringe benefits to non-officer employees, contractors or consultants in
the ordinary course of business consistent with past practice, (1) modify the
compensation or benefits payable or to become payable by Company or any of its
Subsidiaries to any of its current or former directors, officers, employees,
contractors or consultants, or (2) modify any bonus, severance, termination,
pension, insurance or other employee benefit plan, payment or arrangement made
to, for or with any current or former directors, employees, contractors or
consultants of Company or any of its Subsidiaries, or (B) enter into any
employment (other than offer letters and letter agreements entered into in the
ordinary course of business consistent with past practice with employees who are
terminable "at-will"), severance or termination agreement;
(v) establish, adopt, enter into, amend or terminate any Company
Benefit Plan or any collective bargaining, thrift, compensation or other plan,
agreement, trust, fund, policy or arrangement for the benefit of any current or
former directors, employees, contractors or consultants of Company or any of its
Subsidiaries;
(vi) other than (A) sales of inventory, (B) the grant of Company
Out-Bound Licenses on a non-exclusive basis and (C) other dispositions of
property and assets that are not material, individually or in the aggregate, to
Company and its Subsidiaries, taken as a whole, in each case in the ordinary
course of business consistent with past practice, sell, lease, transfer or
assign any property or assets of Company or any of its Subsidiaries;
(vii) other than borrowings in the ordinary course of business
consistent with past practice pursuant to credit facilities existing on the date
of this Agreement or the financing of ordinary course trade payables consistent
with past practice, (A) assume, incur or guarantee any Indebtedness, other than
endorsements for collection in the ordinary course of business or (B) modify the
terms of any existing Indebtedness in any material respect;
(viii) other than Permitted Liens and Liens granted pursuant to
credit facilities existing on the date of this Agreement in connection with
borrowings permitted under subparagraph (vii), pledge or permit to become
subject to Liens any properties or assets of Company or any of its Subsidiaries;
(ix) other than travel loans or advances in the ordinary course of
business consistent with past practice, make any loans, advances or capital
contributions to, or investments in, any other Person (other than its
Subsidiaries);
(x) not cancel any debts or waive any claims or rights of
substantial value;
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(xi) other than in the ordinary course of business consistent with
past practice, (A) amend, modify or terminate, or waive, release or assign any
rights under any Company Material Contract, (B) enter into any Contract which,
if entered into prior to the date hereof, would have been required to be set
forth in Schedule 4.16 of the Company Disclosure Schedule;
(xii) acquire, or agree to acquire, from any Person any assets,
operations, business or securities or engage in, or agree to engage in, any
merger, consolidation or other business combination with any Person, except in
connection with (A) capital expenditures set forth in Schedule 6.1(b)(xii) of
Company Disclosure Schedule permitted hereunder or (B) acquisitions of inventory
and other tangible assets in the ordinary course of business consistent with
past practice;
(xiii) amend any Company Stock Option, Company Warrant or Other
Company Purchase Right or authorize cash payments in exchange for any of the
foregoing;
(xiv) make any filings or registrations, with any Governmental
Entity, except routine filings and registrations made in the ordinary course of
business;
(xv) take any actions outside the ordinary course of business;
(xvi) other than as required by GAAP (as advised by its regular
independent accounts), make any changes in its accounting methods, principles or
practices;
(xvii) make any Tax election, change its method of Tax accounting
or settle any claim relating to Taxes;
(xviii) take any action or omit to do any act within its
reasonable control which action or omission which is reasonably likely to result
in any of the conditions to the Merger not being satisfied, except as may be
required by applicable Law; or
(xix) agree, whether in writing or otherwise, to do any of the
foregoing.
6.2 Conduct of Business by Parent.
(a) During the period from the date of this Agreement and
continuing until the earlier of the termination of this Agreement or the
Effective Time, Parent shall, and it shall cause each of its Subsidiaries to
except as set forth in the Parent Disclosure Schedule:
(i) carry on its business in the usual, regular and ordinary
course in a manner consistent with past practice;
(ii) use its reasonable best efforts consistent with past
practices and policies to preserve intact its present business organization,
keep available the services of its present employees and preserve its
relationships with customers, suppliers, distributors, licensors, licensees, and
others having business dealings with; and
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(iii) use its reasonable best efforts to conduct its business in
such a manner that on the Closing Date the representations and warranties of
Parent contained in this Agreement shall be true and correct, as though such
representations and warranties were made on and as of such date, and Parent
shall use its reasonable best efforts to cause all of the conditions to the
obligations of Parent and Merger Sub under this Agreement to be satisfied as
soon as practicable following the date hereof.
(b) During the period from the date of this Agreement and
continuing until the earlier of the termination of this Agreement or the
Effective Time, except as expressly provided in this Agreement and except as set
forth in the Parent Disclosure Schedule, Parent shall not, and it shall not
permit any of its Subsidiaries to, without the prior written consent of Company:
(i) adopt or propose any amendment to the Charter Documents of
Parent or any of its Subsidiaries;
(ii) declare, set aside or pay any dividend or other distribution
(whether in cash, stock or other property) with respect to any securities;
(iii) (A) issue any stock dividends except for any spinoff or
engage in any subdivision, reclassification, recapitalization, split,
combination or exchange of shares or any similar event with respect to Parent
Common Stock between the Closing Date and the Effective Time or (B) make any
change in any issued and outstanding securities, or redeem, purchase or
otherwise acquire any securities other than the repurchase at cost from
employees of shares of Parent Common Stock in connection with the termination of
their employment pursuant to Parent's standard form of option/restricted shares
agreement or a cancellation of issued shares at no cost to Parent;
(iv) (A) other than pursuant to a written agreement in the amount
required thereunder and other than payment of bonuses and increases in salaries
or wage rates or fringe benefits to non-officer employees, contractors or
consultants in the ordinary course of business consistent with past practice,
(1) modify the compensation or benefits payable or to become payable by Parent
or any of its Subsidiaries to any of its current or former directors, officers,
employees, contractors or consultants, or (2) modify any bonus, severance,
termination, pension, insurance or other employee benefit plan, payment or
arrangement made to, for or with any current or former directors, employees,
contractors or consultants of Parent or any of its Subsidiaries, or (B) enter
into any employment (other than offer letters and letter agreements entered into
in the ordinary course of business consistent with past practice with employees
who are terminable "at-will"), severance or termination agreement;
(v) establish, adopt, enter into, amend or terminate any employee
benefit plan or any collective bargaining, thrift, compensation or other plan,
agreement, trust, fund, policy or arrangement for the benefit of any current or
former directors, employees, contractors or consultants of Parent or any of its
Subsidiaries;
(vi) other than (A) sales of inventory, (B) the grant of licenses,
sublicenses and other Contracts pursuant to which Parent or any of its
Subsidiaries authorizes a third party to use or practice any rights under, or
grant sublicenses with respect to, intellectual property owned by Parent on a
non-exclusive basis, (C) other dispositions of property and assets that are not
material, individually or in the aggregate, to Parent and its Subsidiaries,
taken as a whole, in each case in the ordinary course of business consistent
with past practice, sell, lease, transfer or assign any property or assets of
Parent or any of its Subsidiaries;
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(vii) other than borrowings in the ordinary course of business
consistent with past practice pursuant to credit facilities existing on the date
of this Agreement (including the convertible debenture under negotiation) or the
financing of ordinary course trade payables consistent with past practice, (A)
assume, incur or guarantee any Indebtedness, other than endorsements for
collection in the ordinary course of business or (B) modify the terms of any
existing Indebtedness in any material respect;
(viii) other than Permitted Liens and Liens granted pursuant to
credit facilities existing on the date of this Agreement in connection with
borrowings permitted under subparagraph (vii), pledge or permit to become
subject to Liens any properties or assets of Parent or any of its Subsidiaries;
(ix) other than travel loans or advances in the ordinary course of
business consistent with past practice, make any loans, advances or capital
contributions to, or investments in, any other Person (other than its
Subsidiaries);
(x) not cancel any debts or waive any claims or rights of
substantial value;
(xi) other than in the ordinary course of business consistent with
past practice, amend, modify or terminate or otherwise waive, release or assign
any rights under, any material Contract;
(xii) acquire, or agree to acquire, from any Person any assets,
operations, business or securities or engage in, or agree to engage in, any
merger, consolidation or other business combination with any Person, except in
connection with (A) capital expenditures set forth in Schedule 6.2(b)(xii) of
Parent Disclosure Schedule permitted hereunder or (B) acquisitions of inventory
and other tangible assets in the ordinary course of business consistent with
past practice;
(xiii) amend any stock option, warrant or other purchase right to
acquire shares of Parent Common Stock or authorize cash payments in exchange for
any of the foregoing;
(xiv) make any filings or registrations, with any Governmental
Entity, except routine filings and registrations made in the ordinary course of
business;
(xv) take any actions outside the ordinary course of business;
(xvi) other than as required by GAAP (as advised by its regular
independent accounts), make any changes in its accounting methods, principles or
practices;
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(xvii) make any Tax election, change its method of Tax accounting
or settle any claim relating to Taxes;
(xviii) take any action or omit to do any act within its
reasonable control which action or omission which is reasonably likely to result
in any of the conditions to the Merger not being satisfied, except as may be
required by applicable Law; or
(xix) agree, whether in writing or otherwise, to do any of the
foregoing.
6.3 Exclusivity.
(a) Subject to Section 6.3(b), except with respect to this
Agreement and the transactions contemplated hereby and except as set forth in
the Company Disclosure Schedule and the Parent Disclosure Schedule, each of
Company and Parent agrees that it will not, and it will use its reasonable best
efforts to cause its Subsidiaries and its and their respective directors,
officers, employees, Affiliates and other agents and representatives (including
any investment banking, legal or accounting firm retained by it or any of them
and any individual member or employee of the foregoing) (each, an "AGENT") not
to: (i) initiate, solicit, encourage or seek, directly or indirectly, any
inquiries relating to or the making or implementation of any Third Party
Proposal; (ii) engage in any negotiations concerning, or provide any information
or data to, or have any substantive discussions with, any Person relating to a
Third Party Proposal; (iii) otherwise cooperate in or facilitate any effort or
attempt to make, implement or accept a Third Party Proposal; (iv) enter into
Contract with any Person relating to a Third Party Proposal or (v) release any
third party from, or waive any provision of, any confidentiality or standstill
agreement to which it is a party. Each of Company and Parent will immediately
cease, and will cause their respective Subsidiaries and Agents immediately to
cease, any and all existing activities, discussions or negotiations with any
third parties conducted heretofore with respect to any Third Party Proposal.
"THIRD PARTY PROPOSAL" means any Contract, proposal or offer (including any
proposal or offer to the stockholders of Company or Parent, as the case may be)
with respect to a proposed or potential Acquisition Transaction. "ACQUISITION
TRANSACTION" means, with respect to Company or Parent, as the case may be, (A)
any sale, lease or other disposition, direct or indirect (and however
structured), of any business or assets of such party and/or any of its
Subsidiaries (which business or assets represent 10% or more of the consolidated
revenues, net income or assets of such party and its Subsidiaries, taken as a
whole), (B) any tender offer (including a self-tender offer) or exchange offer
that, if consummated, would result in a third party beneficially owning 10% or
more of any class of securities of such party, (C) a merger, consolidation,
share exchange, business combination, reorganization, joint venture,
recapitalization, liquidation, dissolution or other similar transaction
involving such party and/or any of its Subsidiaries (which Subsidiaries
represent 10% or more of the consolidated revenues, net income or assets of such
party and its Subsidiaries, taken as a whole), (D) the issuance, sale or other
disposition, direct or indirect (and however structured), of securities (or
securities or other rights convertible into, or exercisable or exchangeable for,
such securities) representing 10% or more of the voting power or capital stock
of such party and/or any of its Subsidiaries (which Subsidiaries represent 10%
or more of the consolidated revenues, net income or assets of such party and its
Subsidiaries, taken as a whole) or (E) any combination of the foregoing (other
than the Merger).
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(b) Notwithstanding anything to the contrary in Section 6.3(a), the
Board of Directors of Parent or Company, may furnish information to, and enter
into discussions or negotiations with, a Person who has made an unsolicited,
written, bona fide Third Party Proposal if, and only if, the Board of Directors
of Parent or Company, has (i) reasonably concluded that such Third Party
Proposal constitutes a Superior Proposal, (ii) reasonably concluded, after
receiving advice from its outside legal counsel, that, in light of such Superior
Proposal, the furnishing of such information or entering into discussions is
required to comply with its fiduciary obligations to its stockholders under
applicable Law, (iii) provided written notice to Parent or Company, as
applicable, of its intent to furnish information or enter into discussions or
negotiations with such Person at least three (3) Business Days prior to taking
any such action and (iv) obtained from such Person an executed confidentiality
agreement on terms no less favorable to Parent or Company, as the case may be,
than those contained in the Confidentiality Agreement. The Board of Directors of
Parent or Company shall furnish to Company or Parent, as applicable, all
information provided to the Person who has made the Superior Proposal to the
extent that such information has not been previously provided to Parent or
Company and shall keep Parent or Company promptly and reasonably informed as to
the status of any discussions regarding such Superior Proposal. Notwithstanding
the foregoing, no information may be furnished and no discussions may be entered
into in the event that Parent or Company has taken any actions inconsistent with
this Section 6.3. "SUPERIOR PROPOSAL" means an unsolicited written bona fide
Third Party Proposal pursuant to which a Person (or its stockholders) would own,
if consummated, all or substantially all of the outstanding capital stock of
Parent or Company (or of the surviving entity in a merger or the direct or
indirect parent of the surviving entity in a merger) or all or substantially all
the assets of Parent or Company and their Subsidiaries taken as a whole on terms
that the Board of Directors of Parent or Company determines, in its good faith
judgment, to be more favorable to Parent's or Company's stockholders from a
financial point of view than the terms of the Merger and with any financing
required to consummate the transaction contemplated by such Third Party Proposal
committed or likely, in the good faith judgment of the Board of Directors of
Parent or Company, to be obtained by such third party on a timely basis.
(c) Nothing in this Agreement shall prevent the Board of Directors
of Parent or Company from withholding, withdrawing, amending, modifying or
changing its recommendation in favor of Parent Stockholder Approval or Company
Stockholder Approval, and, in the case of a tender or exchange offer made
directly to Parent Stockholders or Company Stockholders, a recommendation that
Parent Stockholders accept the tender or exchange offer (each, a "CHANGE OF
RECOMMENDATION"), if all of the following conditions are satisfied:
(i) a Superior Proposal is made to Parent or Company and is not
withdrawn;
(ii) Parent Stockholders' Meeting has not occurred or Company has
not received the majority written consent of Company Stockholders adopting the
Merger Agreement;
(iii) Parent or Company shall have provided at least three (3)
Business Days' prior written notice (the "NOTICE PERIOD") to Company or Parent,
as the case may be, stating (A) that it has received a Superior Proposal, (B)
the terms and conditions of such Superior Proposal and the identity the Person
making such Superior Proposal and (C) that it intends to effect a Change of
Recommendation and the manner in which it intends to so;
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(iv) Neither Parent nor Company, within the Notice Period, shall
have made an offer that the Board of Directors of Parent or Company by a
majority vote determines in its good faith judgment to be at least as favorable
to such party and its stockholders as such Superior Proposal (it being agreed
that the Board of Directors of such party shall convene a meeting to consider
any such offer by the other party promptly following the receipt thereof);
(v) the Board of Directors of Parent or Company concludes in good
faith, after receiving the advice of its outside legal counsel, that, in light
of such Superior Proposal, the failure of the Board of Directors of Parent or
Company to effect a Change of Recommendation would result in a breach of its
fiduciary obligations to its stockholders under applicable Law;
(vi) Parent or Company, as the case may be, shall not have
breached any of the provisions set forth in this Section 6.3.
(d) Nothing contained in this Agreement shall prohibit Parent,
Company or their respective Boards of Directors from taking and disclosing to
their stockholders a position contemplated by Rules 14d-9 and 14e-2(a)
promulgated under the Exchange Act; provided that neither Parent nor Company
shall take a position that effects, or otherwise make any public statement that
constitutes, a Change of Recommendation unless specifically permitted pursuant
to the terms of Section 6.3(c)
ARTICLE VII
ADDITIONAL AGREEMENTS
7.1 Proxy Statement; Registration Statement.
(a) As promptly as practicable after the execution of this
Agreement, Parent with the assistance of Company shall prepare and Parent shall
file with the SEC the Proxy Statement/Prospectus relating to the solicitation of
proxies from Parent Stockholders to authorize (i) Parent Authorized Stock
Increase so as to permit the issuance of Parent Common Stock pursuant to the
Merger and (ii) Parent Authorized Name Change. Parent shall prepare and file
with the SEC the Form S-4 Registration Statement in which the Proxy Statement
shall be included as a prospectus (a) in connection with the registration under
the Securities Act of (i) the shares of Parent Common Stock to be issued to
Company Stockholders pursuant to the Merger, and (ii) the Parent Common Stock
issuable upon exercise of the options, warrants and exchangeable securities to
purchase Company Common Stock which become options, warrants and exchangeable
securities to purchase Parent Company Stock by virtue of the Merger, and (b) in
connection with the registration for resale, subject to the provisions of
Company Lock-Up and Voting Agreements, of the shares of Parent Common Stock
issued to the Principal Stockholders and any other "affiliates" (as referred to
in Section 7.11) in the Merger. Each of Company and Parent shall use its
reasonable best efforts to cause the Form S-4 Registration Statement to become
effective as promptly as practicable and, prior to the effective date of the
Form S-4 Registration Statement, Parent shall use its reasonable best efforts to
take all or any action required under any applicable federal or state securities
Laws in connection with the issuance of shares of Parent Common Stock pursuant
to the Merger. In the event that Company does not elect to pay the legal costs
described in paragraph 14 of the non-binding letter of intent referred to in
Section 10.10. This Agreement shall be terminated forthwith which shall be
deemed a termination under Article IX. Each of Company and Parent shall furnish
all information concerning itself as the other may reasonably request in
connection with such actions and the preparation of the Form S-4 Registration
Statement and Proxy Statement.
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(b) Each of Company and Parent shall give the other party and its
counsel a reasonable opportunity to review and comment on any amendment or
supplement to the Proxy Statement or Form S-4 Registration Statement prior to
filing any amendment or supplement with the SEC, and reasonable and good faith
consideration shall be given to any comments made by the other party and its
counsel. Each of Company and Parent shall (i) promptly provide the other party
and its counsel with any comments or other communications, whether written or
oral, that it or its counsel may receive from time to time from the SEC or its
staff with respect to the Proxy Statement and Form S-4 Registration Statement
promptly after receipt of those comments or other communications and (ii)
provide the other party with a reasonable opportunity to participate in the
response to those comments and to provide comments on that response (to which
reasonable and good faith consideration shall be given), including by
participating in any discussions or meetings with the SEC. Neither Company nor
Parent shall make any amendment or supplement to the Proxy Statement or the Form
S-4 Registration Statement without the approval of the other party (such
approval not to be unreasonably withheld or delayed). Each of Company and Parent
will advise the other, promptly after it receives notice thereof, of the time at
which the Form S-4 Registration Statement has become effective or any supplement
or amendment has been filed, of the issuance of any stop order, of the
suspension of the qualification of the shares of Parent Common Stock issuable
pursuant to the Merger for offering or sale in any jurisdiction.
(c) The information supplied by Company and Parent, as applicable,
for inclusion in the Form S-4 Registration Statement and the Proxy Statement
shall not, (i) at the time the Form S-4 Registration Statement is declared
effective, (ii) at the time the Proxy Statement (or any amendment thereof or
supplement thereto) is first mailed to Company Stockholders and Parent
Stockholders or (iii) at the time of Parent Stockholders' Meeting, contain any
untrue statement of a material fact or fail to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading. If,
at any time prior to the Effective Time, any event or circumstance relating to
Company and its Subsidiaries, in the case of Company, or to Parent and its
Subsidiaries, in the case of Parent, or their respective officers or directors,
should be discovered by Company or Parent that should be set forth in an
amendment or a supplement to the Form S-4 Registration Statement or Proxy
Statement so that any of such documents will not contain any untrue statement of
a material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, Company or Parent, as applicable, shall promptly inform
the other party. All documents that Parent is responsible for filing with the
SEC in connection with the Merger or the other transactions contemplated by this
Agreement will comply as to form and substance in all material respects with the
applicable requirements of the Securities Act and the Exchange Act.
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(d) Each of Company and Parent shall use its reasonable best efforts
to cause to be delivered to the other party two letters from their respective
independent accountants, one dated approximately as of the date the Form S-4
Registration Statement is declared effective and one dated approximately as of
the Closing Date, each addressed to the other party, in form and substance
reasonably satisfactory to the other party and customary in scope and substance
for comfort letters delivered by independent public accountants in connection
with registration statements on Form S-4 under the Securities Act.
(e) Each of Company and Parent shall use its reasonable best efforts
to cause to be delivered to the other party consents from their respective
independent accountants, dated the date on which the Form S-4 Registration
Statement is declared effective or a date not more than two (2) days prior to
such date, in form reasonably satisfactory to the other party and customary in
scope and substance for consents delivered by independent public accountants in
connection with registration statements on Form S-4 under the Securities Act.
7.2 Other Filings and Disclosure Schedules.
(a) As promptly as practicable after the execution of this
Agreement, Company shall assist Parent and its legal and accounting advisors in
preparing, and shall furnish Parent with such business, financial or other
information and documents as may be required to prepare any Securities Act
filings to be made by Parent with the SEC prior to or following the Effective
Time. Parent shall provide Company and its counsel with an opportunity to review
and comment on the above-referenced documents within the time periods prescribed
by the SEC prior to their submission.
(b) This subsection shall apply notwithstanding anything in this
Agreement to the contrary. Within fifteen (15) Business Days of the date hereof,
Parent and Company shall finalize their respective Disclosure Schedules and
provide same to the other, which shall have five (5) Business Days to accept or
reject such Disclosure Schedule. Unless either Parent or Company notifies the
other within such five (5) Business Day period that it rejects the other's
Disclosure Schedule, both Parent Disclosure Schedule and Company Disclosure
Schedule shall be deemed accepted and shall become part of this Agreement. If
either Parent or Company notifies the other within such five (5) Business Day
period that it rejects the other's Disclosure Schedule, Parent and Company shall
negotiate in good faith to attempt to agree on an acceptable Disclosure Schedule
or amendment to this Agreement for the succeeding ten (10) Business Days. If no
agreement is reached by the end of such ten (10) Business Day good faith
negotiation period, this Agreement shall forthwith terminate.
7.3 Meeting of Stockholders.
(a) As promptly as practicable after the Form S-4 Registration
Statement shall have become effective, Parent shall take all action necessary
under the Nevada Revised Statutes and its Charter Documents to call, convene and
hold a meeting of its stockholders to consider Parent Authorized Stock Increase
and Parent Authorized Name Change. Parent will use its reasonable best efforts
to hold Parent Stockholders' Meeting as soon as practicable after the date on
which the Form S-4 Registration Statement becomes effective. Unless there has
been a Change in Recommendation, Parent shall use its reasonable best efforts to
solicit from its stockholders proxies in favor of the approval of Parent
Authorized Stock Increase and Parent Authorized Name Change, and shall take all
other action it deems advisable to secure the vote of its stockholders required
by the Nevada Revised Statutes, to obtain such approvals.
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(b) Except to the extent expressly permitted by Section 6.3(c), (i)
the Board of Directors of Parent shall recommend that Parent Stockholders vote
in favor of Parent Authorized Stock Increase and Parent Authorized Name Change,
(ii) the Proxy Statement shall include a statement that the Board of Directors
of Parent has recommended that Parent Stockholders vote in favor of Parent
Authorized Stock Increase and Parent Authorized Name Change and (iii) neither
the Board of Directors of Parent nor any committee thereof shall effect any
Change of Recommendation; provided, however, that the foregoing shall not
prohibit the Board of Directors of Parent from fulfilling its duty of candor or
disclosure to its stockholders under applicable Law.
7.4 Access to Information. Subject to the terms of the mutual
non-disclosure agreement by and between Company and Parent dated September 22,
2004 (the "CONFIDENTIALITY AGREEMENT"), each of Company and Parent shall, and
shall cause its Subsidiaries to, afford to the other party's officers,
directors, employees, accountants, counsel and other agents ("REPRESENTATIVES")
reasonable access to its properties, assets and records during the period prior
to the Effective Time to obtain all information concerning its business as such
other party may reasonably request. Each of Company and Parent shall furnish to
the other party all such documents and copies of documents and records and
information with respect to itself and its Subsidiaries and copies of any
working papers relating thereto as the other party may reasonably request.
Nothing in this Section 7.4 shall require Company or Parent, as the case may be,
to provide any access, or to disclose any information, if permitting such access
or disclosing such information would (a) violate applicable Law, (b) violate any
of its obligations with respect to confidentiality (provided that each party
shall, upon the request of the other party, use its reasonable best efforts to
obtain the required consent of any third party to such access or disclosure), or
(c) result in the loss of attorney-client privilege (provided that each party
shall use its reasonable best efforts to allow for such access or disclosure in
a manner that does not result in a loss of attorney-client privilege). Each of
Company and Parent also will consult with the other party regarding its business
on a regular basis.
7.5 Consent of Company Stockholders.
(a) Concurrently with the execution of this Agreement, the Principal
Stockholders shall deliver to Parent a Company Lock-up and Voting Agreement
executed by each of the Principal Stockholders. As promptly as practicable after
the Form S-4 Registration Statement shall have become effective, Company shall
mail the Prospectus and the Information Statement contained in such Registration
Statement to Company Stockholders.
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(b) Except to the extent expressly permitted by Section 6.3(c) or in
connection with any termination of this Agreement permitted by its terms,
neither the Board of Directors of Company nor any committee thereof shall affect
any Change of Recommendation; provided, however, that the foregoing shall not
prohibit the Board of Directors of Company from fulfilling its duty of candor or
disclosure to its stockholders under applicable Law.
7.6 Regulatory Approvals.
(a) Each of Company, Parent and Merger Sub shall promptly apply for,
and take all reasonably necessary actions to obtain or make, as applicable, all
Authorizations, Orders, declarations and filings with, and notices to, any
Governmental Entity required to be obtained or made by it for the consummation
of the transactions contemplated hereby. Each party shall cooperate with and
promptly furnish information to the other parties necessary in connection with
any requirements imposed upon such other parties in connection with the
consummation of the Merger.
(b) Each of Company and Parent shall give the other reasonable prior
notice of any communication with, and any proposed understanding or agreement
with, any Governmental Entity regarding any Authorizations, Orders, declarations
and filings with, and notices to, any Governmental Entity, and permit the other
to review and discuss in advance, and consider in good faith the views of the
other in connection with, any proposed communication, understanding or agreement
with any Governmental Entity with respect to the Merger and the transactions
contemplated by this Agreement. Notwithstanding the foregoing, neither Company
nor Parent shall be required to nor any of their respective Affiliates shall
have any obligation to contest, administratively or in court, any ruling, order
or other action of any Governmental Entity or any other Person respecting the
transactions contemplated by this Agreement.
7.7 Public Announcements. If there is an initial press release
relating to this Agreement, it shall be a joint press release the text of which
has been agreed to by each of Parent and Company. Thereafter, each of Parent and
Company shall not issue any press release or otherwise make any public
statements with respect to this Agreement, the Merger or any of the other
transactions contemplated by this Agreement without the prior consent of the
other parties (such consent not to be unreasonably withheld or delayed);
provided that a party may, without such consent (but after prior consultation to
the extent practicable in the circumstances), issue such press releases and make
such public statements that it believes are required by applicable Law or the
rules of Over-the-Counter Bulletin Board. Notwithstanding the foregoing, a party
may make public statements in response to questions from the press, analysts and
investors and make internal announcements to employees, so long as such
statements and announcements are consistent with previous press releases or
public statements made jointly by Company and Parent and do not violate the
terms of the Confidentiality Agreement.
7.8 Indemnification.
(a) From and after the Effective Time, the Surviving Corporation
shall, to the fullest extent permitted by applicable Law, indemnify, defend and
hold harmless, and provide advancement of expenses to, each Person who is now,
or has been at any time prior to the date hereof or who becomes prior to the
Effective Time, an officer, director or employee of Company or any of its
Subsidiaries (the "INDEMNIFIED PARTIES") against all losses, claims, damages,
costs, expenses, liabilities or judgments or amounts that are paid in settlement
of or in connection with any claim or Action that is based in whole or in part
on, or arises in whole or in part out of, the fact that such Person is or was a
director, officer or employee of Company or any of its Subsidiaries, and
pertaining to any matter existing or occurring, or any acts or omissions
occurring, at or prior to the Effective Time, whether asserted or claimed prior
to, or at or after, the Effective Time (including matters, acts or omissions
occurring in connection with the approval of this Agreement and the consummation
of the transactions contemplated hereby) to the same extent such Persons are
entitled to be indemnified or have the right to advancement of expenses as of
the date of this Agreement by Company or any of its Subsidiaries pursuant to the
Charter Documents and indemnification agreements of Company and its
Subsidiaries, if any, in existence on the date hereof with any directors,
officers and employees of Company and its Subsidiaries.
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(b) This Section 7.8 is intended to be for the benefit of, and shall
be enforceable by, the Indemnified Parties and their heirs and personal
representatives and shall be binding on the Surviving Corporation and its
successors and assigns.
(c) In the event the Surviving Corporation or any of its successors
or assigns (i) consolidates with or merges into any other Person and shall not
be the continuing or surviving corporation or entity in such consolidation or
merger or (ii) transfers all or substantially all of its properties and assets
to any Person, then, and in each case, proper provision shall be made so that
the successors and assigns of the Surviving Corporation honor the
indemnification obligations set forth in this Section 7.8.
7.9 Tax Free Reorganization. Each of Company and Parent shall use their
reasonable best efforts, and shall cause their respective Subsidiaries to use
their reasonable best efforts, to take or cause to be taken any action necessary
for the Merger to qualify as a "reorganization" within the meaning of Section
368(a) of the Code. Neither Company nor Parent shall (and following the
Effective Time, Parent shall cause the Surviving Corporation not to) take any
action that would cause the Merger to fail to qualify as a "reorganization"
within the meaning of Section 368(a) of the Code. This Agreement is intended to
constitute a "plan of reorganization" within the meaning of Section 1.368-2(g)
of the income tax regulations promulgated under the Code.
7.10 Listing. Company shall use its best efforts to cause the Parent
Common Stock, including all such shares as are issuable under Article II
(including shares of Parent Common Stock issuable upon the exercise of options,
warrants and exchangeable securities), to be authorized for listing on the
NASDAQ Capital Market, upon official notice of issuance. Company shall prepare
such listing application for submission to NASDAQ promptly after execution of
this Agreement. Company shall diligently pursue such application, respond
promptly to all inquires and requests for information from NASDAQ and generally
take all such actions as are necessary to achieve a successful listing of the
Parent Common Stock in timely fashion. Parent shall cooperate with Company in
all respects requested by Company in its efforts to obtain approval of such
listing. Company shall provide Parent with a copy of its listing application
promptly upon filing and shall keep Parent informed of its discussions with
NASDAQ and all actions taken with respect to its application.
7.11 Affiliates. Not less than thirty (30) days after the day hereof,
Company shall deliver to Parent a letter identifying all Persons who, in the
judgment of Company, may be deemed at the time this Agreement is submitted for
adoption by Company Stockholders, "affiliates" of Company for purposes of Rule
145 under the Securities Act, and such list shall be updated as necessary to
reflect changes from the date thereof. Company shall use its reasonable best
efforts to cause each Person identified on such list to deliver to Parent an
Affiliate Agreement.
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7.12 Consents. Each of Company and Parent shall, and shall cause each
of their respective Subsidiaries to, use its reasonable best efforts to obtain
all Company Consents and Parent Consents, as applicable
7.13 Notification of Certain Matters. Each of Company and Parent shall
give prompt notice to the other party of any fact, event or circumstance known
to it that (a) individually or taken together with all other facts, events and
circumstances known to it, has had or could reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Company or Parent
or a Material Adverse Effect on Company and its Subsidiaries or Parent and its
Subsidiaries taken as a whole, (b) would cause or constitute a breach of any of
its representations, warranties, covenants or agreements contained herein, (c)
the failure of any condition precedent to its obligations, (d) any notice or
other communication from any third party alleging that, other than Company
Consents and Parent Consents, the consent of such third party is or may be
required in connection with the Merger, (e) any notice or other communication
from any Governmental Entity in connection with the Merger, or (f) any Actions
commenced relating to it or any of its Subsidiaries that, if pending on the date
of this Agreement, would have been required to have been disclosed pursuant to
Section 4.17 or 5.16, as applicable; provided, however, that (i) the delivery of
any notice pursuant to this Section 7.13 shall not prevent or cure any
misrepresentations, breach of warranty or breach of covenant, and (ii)
disclosure by Company or Parent shall not be deemed to amend or supplement
Company Disclosure Schedule or Parent Disclosure Schedule or constitute an
exception to any representation or warranty.
7.14 Conveyance Taxes. Each of Company and Parent shall cooperate in
the preparation, execution and filing of all returns, questionnaires,
applications or other documents regarding any real property transfer or gains,
sales, use, transfer, value added, stock transfer and stamp taxes, any transfer,
recording, registration and other fees or any similar taxes which become payable
in connection with the transactions contemplated by this Agreement that are
required or permitted to be filed on or before the Effective Time.
7.15 Maintenance of Registration Statements. The parties hereby
acknowledge that Parent currently maintains Parent 1999 Omnibus Long-Term
Incentive Plan (as amended to date, the "LTIP") pursuant to which stock options
and other stock-based incentives are issuable to employees and consultants of
Parent and that six million shares of Parent Common Stock issuable under Parent
LTIP are presently and will be registered on a Form S-8 registration statement
(the Form S-8 registration statement outstanding as of the Closing Date being
the "S-8 REGISTRATION STATEMENT"). Company agrees to cause Parent to maintain
the S-8 Registration Statement in effect following the Effective Time until the
date on which all outstanding options covered thereby have been exercised or
expired or otherwise ceased to be exercisable, subject to the issuance by the
SEC of any stop order suspending the effectiveness of the S-8 Registration
Statement, in which case, Company hereby agrees to promptly notify the persons
set forth in Schedule 7.15 of Parent Disclosure Schedule. As set forth on
Schedule 7.15 of the Parent's Disclosure Schedule, as of the date of this
Agreement, there are 1,460,000 shares of Parent Common Stock subject to stock
options under the LTIP.
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7.16 Termination Prior to Effective Time. Notwithstanding the receipt
of Parent Stockholder Approval and Company Stockholder Approval or anything in
this Agreement to the contrary, the Boards of Directors of Merger Sub and/or
Company may terminate this Agreement prior to the Effective Time in accordance
with Section 251(d) of DGCL.
7.17 Further Assurances. Upon the terms and subject to the conditions
hereof, each of the parties hereto shall execute such documents and other
instruments and take such further actions as may be reasonably required to carry
out the provisions hereof and consummate the Merger and the transactions
contemplated by this Agreement.
ARTICLE VIII
CONDITIONS TO MERGER
8.1 Conditions to Each Party's Obligation to Effect the Merger. The
obligations of Parent, Merger Sub and Company to consummate the Merger are
subject to the satisfaction on or prior to the Closing Date of the following
conditions:
(a) Parent Stockholder Approval shall have been obtained.
(b) Other than the filings provided for in Section 7.1(b) of Parent
and Company Disclosure Schedule, all Authorizations and Orders of, declarations
and filings with, and notices to any Governmental Entity required to permit the
consummation of the Merger shall have been obtained or made and shall be in full
force and effect.
(c) No temporary restraining order, preliminary or permanent
injunction or other Order preventing the consummation of the Merger shall be in
effect. No Law shall have been enacted or shall be deemed applicable to the
Merger which makes the consummation of the Merger illegal.
(d) The Form S-4 Registration Statement shall have become effective
under the Securities Act prior to the mailing of the Proxy Statement by Parent
to its stockholders, and shall not be the subject of any stop order or
proceedings seeking a stop order, Company shall have mailed the Proxy Statement
to Company Stockholders and have obtained the written consent of the majority of
Company Stockholders to this Agreement and the Merger.
(e) The shares of Parent Common Stock issuable to Company
Stockholders as provided for in Article II shall have been authorized for
listing on the NASDAQ Capital Market upon official notice of issuance.
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(f) No Action shall be pending or threatened before any court or
other Governmental Entity or before any other Person wherein an unfavorable
Order would (i) prevent consummation of the Merger, (ii) affect adversely the
right of Parent to control Company and the Subsidiaries of Company or (iii)
restrain or prohibit Parent's ownership or operation (or that of its
Subsidiaries or Affiliates) of all or any material portion of the business or
assets of the Surviving Corporation and its Subsidiaries, taken as a whole, or
compel Parent or any of its Subsidiaries or Affiliates to dispose of or hold
separate all or any material portion of the business or assets of the Surviving
Corporation and its Subsidiaries, taken as a whole, or of Parent and its
Subsidiaries, taken as a whole. No such Order shall be in effect.
8.2 Conditions to Obligations of Parent and Merger Sub to Effect the
Merger. The obligations of Parent and Merger Sub to effect the Merger are
subject to the satisfaction (or waiver by Parent in its sole discretion) on or
prior to the Closing Date of the following further conditions:
(a) Each of the representations and warranties of Company set forth
in this Agreement that is qualified by a Material Adverse Effect on Company
shall be true and correct at and as of the Closing Date as if made at and as of
the Closing Date and each of such representations and warranties that is not so
qualified shall be true and correct in all material respects at and as of the
Closing Date as if made at and as of the Closing Date, except to the extent that
such representations and warranties refer specifically to an earlier date, in
which case such representations and warranties shall have been true and correct
as of such earlier date.
(b) Each of the representations and warranties of the Principal
Stockholders set forth in this Agreement that is qualified by a Material Adverse
Effect on Company shall be true and correct at and as of the Closing Date as if
made at and as of the Closing Date and each of such representations and
warranties that is not so qualified shall be true and correct in all material
respects at and as of the Closing Date as if made at and as of the Closing Date,
except to the extent that such representations and warranties refer specifically
to an earlier date, in which case such representations and warranties shall have
been true and correct as of such earlier date.
(c) Company shall have performed, or complied with, in all material
respects all obligations required to be performed or complied with by it under
this Agreement at or prior to the Closing Date. Parent shall have received a
certificate signed on behalf of Company by a Co-Chief Executive Officer of
Company to such effect.
(d) There shall not have occurred any event, occurrence or change
that has had, or could reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on Company.
(e) Each of Parent and Merger Sub shall have received from a
Co-Chief Executive Officer of Company, certificates dated as of the Closing
Date, certifying the satisfaction of the conditions set forth in Section 8.2 of
this Agreement.
8.3 Conditions to Obligation of Company to Effect the Merger. The
obligation of Company to effect the Merger is subject to the satisfaction (or
waiver by Company in its sole discretion) on or prior to the Closing Date of the
following further conditions:
(a) Each of the representations and warranties of Parent set forth
in this Agreement that is qualified by a Material Adverse Effect on Parent shall
be true and correct at and as of the Closing Date as if made at and as of the
Closing Date and each of such representations and warranties that is not so
qualified shall be true and correct in all material respects at and as of the
Closing Date as if made at and as of the Closing Date, except to the extent that
such representations and warranties refer specifically to an earlier date, in
which case such representations and warranties shall have been true and correct
as of such earlier date.
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(b) Parent and Merger Sub shall have performed or complied with in
all material respects all obligations required to be performed or complied with
by them under this Agreement at or prior to the Closing Date. Company shall have
received a certificate signed on behalf of Parent by the Chief Executive Officer
of Parent to such effect.
(c) There shall not have occurred any event, occurrence or change
that has had, or would reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on Parent.
(d) Company shall have received from the Chief Executive Officer of
Parent, a certificate dated as of the Closing Date, certifying the satisfaction
of the conditions set forth in Section 8.3 of this Agreement.
(e) Company shall have received releases from the current executive
officers of Parent under any and all agreements they might have with the Parent
or any of its Subsidiaries, except as contemplated by Section 1.4 and except for
any and all rights of indemnification.
(f) The holders of no more than 100,000 Dissenting Shares shall be
in a position to perfect their dissenters' rights under DGCL as determined just
prior to the Effective Time.
ARTICLE IX
TERMINATION
9.1 Termination.
(a) This Agreement may be terminated and the Merger abandoned at any
time prior to the Effective Time (with any termination by Parent also being an
effective termination by Merger Sub):
(i) by either Parent or Company, without giving any reason
therefor; provided that Parent and Company may agree to terminate this provision
at any time prior to the Effective Time;
(ii) by Parent or Company if:
(A) the Merger is not consummated on or before April 15, 2006;
provided, however, that the right to terminate this Agreement under this clause
(ii)(A) shall not be available to any party whose breach of a representation,
warranty, covenant or agreement under this Agreement has been the cause of or
resulted in the failure of the Closing to occur on or before such date;
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(B) a Governmental Entity shall have issued an Order or taken
any other action, in any case having the effect of permanently restraining,
enjoining or otherwise prohibiting the Merger, which Order or other action is
final and non-appealable;
(C) Parent Stockholder Approval shall not have been obtained at
Parent Stockholders' Meeting or any adjournment or postponement thereof.
(iii) by Parent if:
(A) any condition to the obligations of Parent hereunder becomes
incapable of fulfillment other than as a result of a breach by Parent of any
covenant or agreement contained in this Agreement, and such condition is not
waived by Parent;
(B) there has been a breach by Company of any representation,
warranty, covenant or agreement contained in this Agreement or if any
representation or warranty of Company shall have become untrue, (i) in either
case such that the conditions set forth in Sections 8.2(a) or 8.2(b) would not
be satisfied and (ii) any such breach is not curable, or, if curable, is not
cured within fifteen (15) days after written notice of such breach is given to
Company by Parent;
(C) at any time prior to Parent Stockholder Approval, if (1) a
Superior Proposal is made to Parent and is not withdrawn, (2) Parent shall have
provided at least three (3) Business Days' prior written notice to Company
stating (a) that it has received a Superior Proposal, (b) the terms and
conditions of such Superior Proposal and the identity of the Person making such
Superior Proposal and (c) that it intends to terminate this Agreement, (3)
Company shall not have, within such three (3) Business Day period, made an offer
that the Board of Directors of Parent by a majority vote determines in its good
faith judgment (based on the written advice of its financial advisor) to be at
least as favorable to Parent and Parent Stockholders as such Superior Proposal
(it being agreed that the Board of Directors of Parent shall convene a meeting
to consider any such offer by Company promptly following the receipt thereof and
that Parent shall not enter into any such binding agreement during such three
Business Day period) and (4) the Board of Directors of Parent concludes in good
faith, after consultation with its outside legal counsel, that, in light of such
Superior Proposal, the failure of the Board of Directors to accept such Superior
Proposal would result in a breach of its fiduciary obligations to Parent
Stockholders under applicable Law; provided that Parent shall not have the right
to terminate this Agreement pursuant to this Section 9.1(a)(iii)(C) if Parent
has breached Section 6.3 in any material respect in connection with such
Superior Proposal.
(iv) by Company if:
(A) any condition to the obligations of Company hereunder
becomes incapable of fulfillment other than as a result of a breach by Company
of any covenant or agreement contained in this Agreement, and such condition is
not waived by Company;
(B) there has been a breach by Parent of any representation,
warranty, covenant or agreement contained in this Agreement or if any
representation or warranty of Parent shall have become untrue, (i) in either
case such that the conditions set forth in Sections 8.3(a) or 8.3(b) would not
be satisfied and (ii) any such breach is not curable, or, if curable, is not
cured within fifteen (15) days after written notice of such breach is given to
Parent by Company; or
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(C) if Parent Common Stock is not approved for listing on the
NASDAQ Capital Market on or prior to the Effective Time.
(D) at any time prior to Effective Time, if (1) a Superior
Proposal is made to Company and is not withdrawn, (2) Company shall have
provided at least three (3) Business Days' prior written notice to Parent
stating (a) that it has received a Superior Proposal, (b) the terms and
conditions of such Superior Proposal and the identity of the Person making such
Superior Proposal and (c) that it intends to terminate this Agreement, (3)
Parent shall not have, within such three (3) Business Day period, made an offer
that the Board of Directors of Company by a majority vote determines in its good
faith judgment (based on the written advice of its financial advisor) to be at
least as favorable to Company and Company Stockholders as such Superior Proposal
(it being agreed that the Board of Directors of Company shall convene a meeting
to consider any such offer by Parent promptly following the receipt thereof and
that Company shall not enter into any such binding agreement during such three
Business Day period) and (4) the Board of Directors of Company concludes in good
faith, after consultation with its outside legal counsel, that, in light of such
Superior Proposal, the failure of the Board of Directors to accept such Superior
Proposal would result in a breach of its fiduciary obligations to Company
Stockholders under applicable Law; provided that Company shall not have the
right to terminate this Agreement pursuant to this Section 9.1(a)(iv)(D) if
Company has breached Section 6.3 in any material respect in connection with such
Superior Proposal.
(b) The party desiring to terminate this Agreement pursuant to
Section 9.1(a) (ii), (iii) or (iv) shall give written notice of such termination
to the other parties hereto.
9.2 Effect of Termination. In the event of termination of this
Agreement as provided in Article IX, this Agreement shall immediately become
void and there shall be no liability or obligation on the part of Company,
Parent or Merger Sub or their respective officers, directors, stockholders or
Affiliates; provided, however, that the provisions of Section 7.7 (Public
Announcements) and Articles X and XI of this Agreement shall remain in full
force and effect and survive any termination of this Agreement. In addition,
Parent and Merger Sub shall promptly change the name of the merger sub to a name
which does not include "Cryptometrics" or any name which can be confused with
it.
9.3 Remedies. Any party terminating this Agreement pursuant to Section
9.1 shall not have the right to recover any damages sustained by such party as a
result of any breach by the other party of any representation, warranty,
covenant or agreement contained in this Agreement, except in the event of fraud.
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ARTICLE X
MISCELLANEOUS
10.1 Notices. Any notice, request, demand, waiver, consent, approval or
other communication which is required or permitted hereunder shall be in writing
and shall be deemed given: (a) on the date established by the sender as having
been delivered personally; (b) on the date delivered by a private courier as
established by the sender by evidence obtained from the courier; (c) on the date
sent by facsimile, with confirmation of transmission, if sent during normal
business hours of the recipient, if not, then on the next Business Day; or (d)
on the fifth day after the date mailed, by certified or registered mail, return
receipt requested, postage prepaid. Such communications, to be valid, must be
addressed as follows:
If to Parent or Merger Sub, to:
JAG Media Holdings, Inc.
6865 SW 18th Street, Suite B13
Boca Raton, Florida 33433
Attn: Thomas J. Mazzarisi
Facsimile: (561) 892-0821
With a required copy to:
Morgan, Lewis & Bockius LLP
101 Park Avenue
New York, New York 10178
Attn: W. Preston Tollinger, Jr., Esq.
Facsimile: (212) 309-6001
If to Company, to:
Cryptometrics, Inc.
73 Main Street
Tuckahoe, NY 10707
Attn: Robert Barra
Facsimile: (914) 337-9754
With a required copy to:
Dorf, Karlen & Stolzar, LLP
1 North Broadway, Suite 800
White Plains, New York 10543
Attn: Michael Stolzar, Esq.
Facsimile: (914) 682-0387
or to such other address or to the attention of such Person or Persons as the
recipient party has specified by prior written notice to the sending party (or
in the case of counsel, to such other readily ascertainable business address as
such counsel may hereafter maintain). If more than one method for sending notice
as set forth above is used, the earliest notice date established as set forth
above shall control.
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10.2 Survival. The representations and warranties and covenants and
agreements in this Agreement and in any certificate delivered pursuant hereto
shall terminate at the Effective Time, except that the covenants and agreements
set forth in Articles I, II, VII and this Article X shall survive the Effective
Time.
10.3 Amendments and Waivers.
(a) Any provision of this Agreement may be amended or waived if, and
only if, such amendment or waiver is in writing and is signed, in the case of an
amendment, by each party to this Agreement, or in the case of a waiver, by the
party against whom the waiver is to be effective; provided that, after approval
of the matters presented in connection with the Merger by Company Stockholders,
no amendment or waiver shall be made which by Law requires further approval by
Company Stockholders without such further approval.
(b) No failure or delay by any party in exercising any right or
privilege hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege.
(c) To the maximum extent permitted by Law, (i) no waiver that may
be given by a party shall be applicable except in the specific instance for
which it was given and (ii) no notice to or demand on one party shall be deemed
to be a waiver of any obligation of such party or the right of the party giving
such notice or demand to take further action without notice or demand.
10.4 Fees and Expenses. Except as set forth in this Section 10.4, all
fees and expenses incurred in connection with the Merger, this Agreement and the
transactions contemplated by this Agreement shall be paid by the party incurring
such fees or expenses, whether or not the Merger is consummated. Each of Company
and Parent shall bear and pay one-half of the costs and expenses incurred by
Parent, Merger Sub or Company (other than attorneys' fees, accountants' fees and
related expenses) in connection with (i) the filing, printing and mailing of the
Form S-4 Registration Statement (including financial statements and exhibits),
the Proxy Statement and any preliminary materials related thereto (including SEC
filing fees) and (ii) the filings of the notification and report forms under the
HSR Act and Other Antitrust Laws (including filing fees).
10.5 Successors and Assigns. This Agreement may not be assigned by any
party hereto without the prior written consent of the other parties; provided
that Parent or Merger Sub may assign any of their respective rights and
obligations to any direct or indirect Subsidiary of Parent. Subject to the
foregoing, all of the terms and provisions of this Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective
executors, heirs, personal representatives, successors and assigns.
10.6 Governing Law. This Agreement and the Exhibits and Schedules
hereto shall be governed by and interpreted and enforced in accordance with the
Laws of the State of New York, without giving effect to any choice of Law or
conflict of Laws rules or provisions (whether of the State of New York or any
other jurisdiction) that would cause the application of the Laws of any
jurisdiction other than the State of New York.
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10.7 Consent to Jurisdiction. Each party irrevocably submits to the
exclusive jurisdiction of (a) New York County, New York, and (b) the United
States District Court for the Southern District of New York, for the purposes of
any Action arising out of this Agreement or any transaction contemplated hereby.
Each party agrees to commence any such Action either in the United States
District Court for the Southern District of New York or if such Action may not
be brought in such court for jurisdictional reasons, in the Supreme Court
sitting in New York County (including its Appellate Division). Each party
further agrees that service of any process, summons, notice or document by U.S.
registered mail to such party's respective address set forth above shall be
effective service of process for any Action in New York with respect to any
matters to which it has submitted to jurisdiction in this Section 10.7. Each
party irrevocably and unconditionally waives any objection to the laying of
venue of any Action arising out of this Agreement or the transactions
contemplated hereby in (i) the United States District Court for the Southern
District of New York, or (ii) the Supreme Court sitting in New York County
(including its Appellate Division), and hereby further irrevocably and
unconditionally waives and agrees not to plead or claim in any such court that
any such Action brought in any such court has been brought in an inconvenient
forum. EACH PARTY HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY
ACTION (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING
TO THIS AGREEMENT OR THE ACTIONS OF SUCH PARTY IN THE NEGOTIATION,
ADMINISTRATION, PERFORMANCE AND ENFORCEMENT HEREOF.
10.8 Counterparts. This Agreement may be executed in any number of
counterparts, and any party hereto may execute any such counterpart, each of
which when executed and delivered shall be deemed to be an original and all of
which counterparts taken together shall constitute but one and the same
instrument. This Agreement shall become effective when each party hereto shall
have received a counterpart hereof signed by the other parties hereto. The
parties agree that the delivery of this Agreement may be effected by means of an
exchange of facsimile signatures with original copies to follow by mail or
courier service.
10.9 Third Party Beneficiaries. No provision of this Agreement is
intended to confer upon any Person other than the parties hereto any rights or
remedies hereunder; except that (i) in the case of Section 7.8 hereof, the
Indemnified Parties and their respective heirs, executors, administrators, legal
representatives, successors and assigns, are intended third party beneficiaries
of such section and shall have the right to enforce such section in their own
names and (ii) in the case of Section 7.15, the holders of options under Parent
LTIP and their respective heirs, executors, administrators, legal
representatives, successors and assigns, are intended third party beneficiaries
of such section and shall have the right to enforce such section in their own
names.
10.10 Entire Agreement. This Agreement and the documents, instruments
and other agreements specifically referred to herein or delivered pursuant
hereto set forth the entire understanding of the parties hereto with respect to
the Merger. All Exhibits and Schedules referred to herein are intended to be and
hereby are specifically made a part of this Agreement. Any and all previous
agreements and understandings between or among the parties regarding the subject
matter hereof, whether written or oral, are superseded by this Agreement, other
than the confidentiality provisions of the Confidentiality Agreement which shall
continue in full force and effect in accordance with their terms and other than
the provisions of paragraph 14 of the non-binding letter of intent by and
between Company and Parent, dated as of September 9, 2005.
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10.11 Captions. All captions contained in this Agreement are for
convenience of reference only, do not form a part of this Agreement and shall
not affect in any way the meaning or interpretation of this Agreement.
10.12 Severability. Any provision of this Agreement which is invalid or
unenforceable in any jurisdiction shall be ineffective to the extent of such
invalidity or unenforceability without invalidating or rendering unenforceable
the remaining provisions hereof, and any such invalidity or unenforceability in
any jurisdiction shall not invalidate or render unenforceable such provision in
any other jurisdiction.
10.13 Specific Performance. Parent and Company each agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed by them in accordance with the terms hereof and
that each party shall be entitled to specific performance of the terms hereof,
in addition to any other remedy at Law or equity.
ARTICLE XI
DEFINITIONS
11.1 Definitions. When used in this Agreement, the following terms
shall have the meanings assigned to them in this Section 11.1, or in the
applicable Section of this Agreement to which reference is made in this Section
11.1.
"AFFILIATE" means, with respect to any specified Person, any other
Person directly or indirectly controlling, controlled by or under common control
with such specified Person.
"AUTHORIZATION" means any authorization, approval, consent,
certificate, license, permit or franchise of or from any Governmental Entity or
pursuant to any Law.
"BUSINESS DAY" means a day other than a Saturday, Sunday or other day
on which banks located in New York City are authorized or required by Law to
close.
"CONTRACT" means any agreement, contract, license, lease, commitment,
arrangement or understanding, written or oral, including any sales order and
purchase order.
"GOVERNMENTAL ENTITY" means any entity or body exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to United States federal, state, local, or municipal government, foreign,
international, multinational or other government, including any department,
commission, board, agency, bureau, subdivision, instrumentality, official or
other regulatory, administrative or judicial authority thereof, and any
non-governmental regulatory body to the extent that the rules and regulations or
orders of such body have the force of Law.
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"INDEBTEDNESS" means any of the following: (a) any indebtedness for
borrowed money, (b) any obligations evidenced by bonds, debentures, notes or
other similar instruments, (c) any obligations to pay the deferred purchase
price of property or services, except trade accounts payable and other current
Liabilities arising in the ordinary course of business, (d) any obligations as
lessee under capitalized leases, (e) any indebtedness created or arising under
any conditional sale or other title retention agreement with respect to acquired
property, (f) any obligations, contingent or otherwise, under acceptance credit,
letters of credit or similar facilities and (g) any guaranty of any of the
foregoing.
"KNOWLEDGE" of a party or any similar phrase means, with respect to any
fact or matter, the actual knowledge of the directors and executive officers of
such party and each of its Subsidiaries, together with such knowledge that such
directors, executive officers and other employees could be expected to discover
after due investigation concerning the existence of the fact or matter in
question.
"LAW" means any statute, law (including common law), constitution,
treaty, ordinance, code, order, decree, judgment, rule, regulation and any other
binding requirement or determination of any Governmental Entity.
"MATERIAL ADVERSE EFFECT" means any state of facts, development, event,
circumstance, condition, occurrence or effect that, individually or taken
collectively with all other events, circumstances or effects that have occurred
prior to the date of determination of the occurrence of which, (a) is materially
adverse to the condition (financial or otherwise), business, operations or
results of operations of Company or Parent and their respective Subsidiaries
taken as a whole, (b) impairs the ability of Company or Parent to perform its
obligations hereunder or (c) delays the consummation of the Merger, other than
in the case of clause (a), any such event, circumstance, condition, occurrence
or effect arising out of any changes affecting the industry in which Company or
Parent and their respective Subsidiaries operate or any changes in general
economic conditions; provided that any such change or changes do not
disproportionately affect in any material respect Company or Parent and their
Subsidiaries, taken as a whole.
"OPERATIVE AGREEMENTS" means this Agreement, the Lock-Up and Voting
Agreements and the Affiliate Agreements.
"ORDER" means any award, injunction, judgment, decree, order, ruling,
subpoena or verdict or other decision entered, issued or rendered by any
Governmental Entity.
"PERSON" means an individual, a corporation, a partnership, a limited
liability company, a trust, an unincorporated association, a Governmental Entity
or any agency, instrumentality or political subdivision of a Governmental
Entity, or any other entity or body.
"SUBSIDIARY" or "SUBSIDIARIES" means, with respect to any party, any
Person, of which (a) such party or any Subsidiary of such party is a general
partner (excluding partnerships, the general partnership interests of which held
by such party or any Subsidiary of such party do not have a majority of the
voting interest in such partnership) or (b) at least a majority of the
securities or other interests having by their terms ordinary voting power to
elect a majority of the Board of Directors or others performing similar
functions with respect to such Person is directly or indirectly owned or
controlled by such party and/or by any one or more of its Subsidiaries.
"$" means United States dollars.
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11.2 Other Defined Terms. The following terms have the meanings
assigned to such terms in the Sections of the Agreement set forth below:
Acquisition Transaction 6.3(a)
Action 4.17
Affiliate Agreement 2.2(h)
Agent 6.3(a)
Agreement Preface
Audited Financial Statements 4.6(a)
Balance Sheet 4.6(b)
Balance Sheet Date 4.6(b)
Benefit Plan 4.18(a)
CERCLA 4.20(a)(iv)
Certificates 2.2(b)
Change of Recommendation 6.3(c)
Charter Documents 4.1
Closing 1.2
Closing Date 1.2
Code Recitals
Company Preface
Company Benefit Plan 4.18(a)
Company Broker Fee 4.23
Company Common Stock 2.1
Company Consents 4.5(a)
Company Disclosure Schedule Preamble Article IV
Company ERISA Affiliate 4.18(a)
Company Exchangeable Share 2.10
Company Foreign Plans 4.18(r)
Company In-Bound Licenses 4.14(c)
Company Intellectual Property 4.14(f)
Company Lease 4.13(c)
Company Leased Real Property 4.13(a)
Company Material Contracts 4.16(b)
Company Minor Contracts 4.16(e)
Company Out-Bound Licenses 4.14(d)
Company Owned Intellectual Property 4.14(b)
Company Owned Real Property 4.13(a)
Company Owned Software 4.14(n)
Company Pension Plan 4.18(b)
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Company Policies 4.22
Company Registered Items 4.14(g)
Company Share 2.1(a)
Company Stockholder 2.1
Company Stockholder Approval 4.4(a)
Company Stock Option 2.8
Company Lock-Up and Voting Agreements Recitals
Company Warrant 2.9
Confidentiality Agreement 7.5
Constituent Corporations 1.1
Containment 4.14(n)(v)
Copyrights 4.14(a)(v)
DGCL 1.1
Disabling Code 4.14(n)(v)
Dissenting Shares 2.6(a)
Effective Time 1.2
Environment 4.20(a)(i)
Environmental Action 4.20(a)(ii)
Environmental Clean-Up Site 4.20(a)(iii)
Environmental Laws 4.20(a)(iv)
Environmental Liabilities 4.20(a)(v)
Environmental Permit 4.20(a)(vi)
ERISA 4.18(a)
Exchange Act 5.5(b)
Exchange Agent 2.2(a)
Exchange Fund 2.2(a)
Exchange Multiple 2.1(a)
Financial Statements 4.6(a)
Form S-4 Registration Statement 3.5(b)
GAAP 4.6(b)
Hazardous Substances 4.20(a)(vii)
HSR Act 4.5(b)
Indemnified Parties 7.8
Intellectual Property 4.14(a)
Intellectual Property Rights 4.14(a)(v)
Interim Balance Sheet 4.6(b)
Interim Balance Sheet Date 4.6(b)
Interim Financial Statements 4.6(a)
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Liabilities 4.7
Liens 3.3
LTIP 7.15
Marks 4.14(a)(v)
Merger 1.1
Merger Consideration 2.1(a)
Merger Sub Preface
Merger Sub Common Stock 5.2(b)
Notice Period 6.3(c)(iii)
Other Antitrust Laws 4.5(b)
Other Company Purchase Rights 4.2(d)
Other Parent Purchase Rights 5.2(d)
Parent Preface
Parent Authorized Name Change 5.4
Parent Authorized Stock Increase 5.4
Parent Benefit Plan 5.17(a)
Parent Broker 5.23
Parent Broker Fee 5.23
Parent Common Stock 2.1
Parent Consents 5.5(a)
Parent Disclosure Schedule Preamble Article V
Parent ERISA Affiliate 5.17(a)
Parent Foreign Plans 5.17(r)
Parent Intellectual Property 5.13(e)
Parent In-Bound Licenses 5.13(b)
Parent Lease 5.12(c)
Parent and Subsidiary Leased Real Property 5.12(a)
Parent Material Contracts 5.15(b)
Parent Minor Contracts 5.15(e)
Parent Out-Bound Licenses 5.13(c)
Parent Owned Intellectual Property 5.13(a)
Parent and Subsidiary Owned Real Property 5.12(a)
Parent Pension Plan 5.17(b)
Parent Policies 5.22
Parent Preferred Stock 5.2(a)
Parent Registered Items 5.13(f)
Parent SEC Reports 5.6(a)
Parent Series 2 Class B Common Stock 5.2(a)
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Parent Series 3 Class B Common Stock 5.2(a)
Parent Stockholder Approval 5.4
Parent Stockholders' Meeting 5.4
Parent Stock Options 5.14(d)
Patents 4.14(a)(v)
PCBs 4.20(i)
Permitted Liens 4.11(a)
Principal Stockholders Recitals
Proprietary Information 4.14(a)(i)
Proxy Statement 5.25
Public Software 4.14(n)(vi)
RCRA 4.20(a)(iv)
Release 4.20(a)(viii)
Replacement Option 2.8
Replacement Warrant 2.9
Representatives 7.4
S-8 Registration Statement 7.15
SEC 3.5(b)
Securities Act 2.2(h)
Software 4.14(a)(iv)
Superior Proposal 6.3(b)
Surviving Corporation 1.1
Systems 4.14(n)(v)
Tax 4.8(a)(i)
Taxing Authority 4.8(a)(iii)
Tax Returns 4.8(a)(ii)
Third Party Proposal 6.3(a)
Outstanding Company Common Stock 2.1
Outstanding Company Common Share 2.1
WARN Act 4.19(d)
11.3 Interpretation.
(a) The meaning assigned to each term defined herein shall be
equally applicable to both the singular and the plural forms of such term and
vice versa, and words denoting either gender shall include both genders as the
context requires. Where a word or phrase is defined herein, each of its other
grammatical forms shall have a corresponding meaning.
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(b) The terms "hereof", "herein" and "herewith" and words of similar
import shall, unless otherwise stated, be construed to refer to this Agreement
as a whole and not to any particular provision of this Agreement.
(c) When a reference is made in this Agreement to an Article,
Section, paragraph, Exhibit or Schedule, such reference is to an Article,
Section, paragraph, Exhibit or Schedule to this Agreement unless otherwise
specified.
(d) The word "include", "includes", and "including" when used in
this Agreement shall be deemed to be followed by the words "without limitation",
unless otherwise specified.
(e) A reference to any party to this Agreement or any other
agreement or document shall include such party's predecessors, successors and
permitted assigns.
(f) Reference to any Law means such Law as amended, modified,
codified, replaced or reenacted, and all rules and regulations promulgated
thereunder.
(g) The parties have participated jointly in the negotiation and
drafting of this Agreement. Any rule of construction or interpretation otherwise
requiring this Agreement to be construed or interpreted against any party by
virtue of the authorship of this Agreement shall not apply to the construction
and interpretation hereof.
(h) All accounting terms used and not defined herein shall have the
respective meanings given to them under GAAP.
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IN WITNESS WHEREOF, Parent, Merger Sub and Company have caused this
Agreement to be signed by their respective officers thereunto, duly authorized,
and the Principal Stockholders have signed this Agreement, all as of the date
first written above.
JAG MEDIA HOLDINGS, INC.
By: /s/ Thomas J. Mazzarisi
---------------------------------------
Name: Thomas J. Mazzarisi
Title: Chairman & Chief Executive Officer
CRYPTOMETRICS ACQUISITION, INC.
By: /s/ Thomas J. Mazzarisi
---------------------------------------
Name: Thomas J. Mazzarisi
Title: President
CRYPTOMETRICS, INC.
By: /s/ Robert Barra
---------------------------------------
Name: Robert Barra
Title: Co-Chief Executive Officer
/s/ Robert Barra
------------------------------------------
ROBERT BARRA
/s/ Michael A. Vitale
-----------------------------------------
MICHAEL A. VITALE
Exhibit A
Company Voting and Lock Up Agreement
COMPANY VOTING AND LOCK-UP AGREEMENT
This Company Voting and Lock-Up Agreement (the "VOTING AGREEMENT") is
made as of December 27, 2005, by and among JAG Media Holdings, Inc., a Nevada
corporation ("PARENT"), Robert Barra and Michael A. Vitale, each a stockholder
(each individually, a "STOCKHOLDER" and together, the "STOCKHOLDERS") of
Cryptometrics, Inc., a Delaware corporation. (the "COMPANY").
RECITALS:
WHEREAS, concurrently with the execution and delivery of this Voting
Agreement, Parent, Cryptometrics Acquisition, Inc., a Delaware corporation and
wholly owned subsidiary of Parent ("MERGER SUB") and the Company are entering
into an Agreement and Plan of Merger of even date herewith (the "MERGER
AGREEMENT"), pursuant to which Merger Sub will be merged with and into the
Company, and the Company shall be the surviving corporation following the merger
(the "MERGER");
WHEREAS, as of the date hereof, each Stockholder is a Beneficial Owner
(as defined below) of Subject Shares (as defined below); and
WHEREAS, in order to induce Parent to enter into the Merger Agreement,
the Stockholders have agreed to enter into this Voting Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and of the
covenants and agreements set forth herein and in the Merger Agreement, and
intending to be legally bound hereby, the parties agree as follows:
1. Definitions.
(a) "BENEFICIALLY OWN" or "BENEFICIAL OWNER" with respect to any
securities means having "beneficial ownership" as determined pursuant to Rule
13d-3 under the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT").
(b) "COMPANY CAPITAL STOCK" means shares of common stock, par value
$0.001 per share, of the Company.
(c) "COMPANY OPTIONS AND OTHER RIGHTS" means options, warrants and
other rights to acquire, directly or indirectly, shares of Company Capital
Stock.
(d) "EXPIRATION DATE" means the earlier to occur of (i) the
Effective Time (as defined in the Merger Agreement) or (ii) the date on which
the Merger Agreement is terminated pursuant to its terms.
(e) "SUBJECT SHARES" means (i) all shares of Company Capital Stock
Beneficially Owned by each Stockholder as of the date of this Voting Agreement
and (ii) all additional shares of Company Capital Stock of which each
Stockholder acquires Beneficial Ownership during the period from the date of
this Voting Agreement through the Expiration Date.
2. Voting.
(a) Each Stockholder hereby agrees that, prior to the Expiration
Date, at any meeting of the stockholders of the Company, however called, and in
any written action by consent of stockholders of the Company, unless otherwise
directed in writing by Parent, each Stockholder shall cause to be counted as
present thereat for purposes of establishing a quorum and shall vote, or cause
to be voted, any and all Subject Shares Beneficially Owned by each Stockholder
as of the record date of such meeting or written consent:
(i) for the execution and delivery by the Company of the Merger
Agreement and the adoption and approval of the Merger Agreement and the terms
thereof, in favor of each of the other actions contemplated by the Merger
Agreement and in favor of any action in furtherance of any of the foregoing;
(ii) against any action or agreement that would result in a breach
of any representation, warranty, covenant or obligation of the Company in the
Merger Agreement; and
(iii) against the following actions (other than the Merger and the
transactions contemplated by the Merger Agreement): (A) any extraordinary
corporate transaction, such as a merger, consolidation or other business
combination involving the Company or any subsidiary of the Company; (B) any
sale, lease, sublease, license, sublicense or transfer of a material portion of
the rights or other assets of the Company or any subsidiary of the Company; (C)
any reorganization, recapitalization, dissolution or liquidation of the Company
or any subsidiary of the Company; (D) any change in the individuals who serve as
members of the board of directors of the Company; (E) any amendment to the
Company's certificate of incorporation or bylaws; (F) any material change in the
capitalization of the Company or the Company's corporate structure; and (G) any
other action which is intended, or could reasonably be expected, to impede,
interfere with, delay, postpone, discourage or adversely affect the Merger or
any of the other transactions contemplated by the Merger Agreement or this
Agreement.
(b) No provision contained in this Agreement shall prohibit either
Stockholder from voting in his capacity as a director of the Company in any
manner whatsoever.
(c) Prior to the Expiration Date, neither Stockholder shall enter
into any agreement or understanding with any Person requiring him to vote in his
capacity as a stockholder or give instructions in any manner inconsistent with
clause "(i)," clause "(ii)" or clause "(iii)" of this Section 2(a).
(d) Each Stockholder hereby waives and agrees not to exercise any
applicable "appraisal rights" under the Delaware General Corporation Law with
respect to the Subject Shares in connection with the Merger and the Merger
Agreement.
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3. Lock-up Agreement.
(a) In consideration of the issuance of common stock of Parent in
exchange for the Subject Shares (the "PARENT SHARES") to each of the
Stockholders pursuant to the terms of the Merger Agreement, and of other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and not withstanding any registration on the part of the Parent
Shares under the Securities Act of 1933, as amended, each Stockholder agrees
that, during the period beginning from the Effective Time (as defined in the
Merger Agreement) and continuing for one (1) year thereafter (the "RELEASE
DATE"), each Stockholder will not (a) offer, sell, contract to sell, pledge,
grant any option to purchase, make any short sale or otherwise dispose of any
Parent Shares, or (b) engage directly or indirectly in any transaction the
likely result of which would involve a transaction prohibited by clause (a),
except each case as permitted by Section 3(e) below.
(b) The foregoing restriction is expressly agreed to preclude each
of the Stockholders from engaging in any hedging or other transaction which is
designed to, or reasonably expected to lead to, or result in, a sale or
disposition of the Parent Shares even if such shares would be disposed of by
someone other than the Stockholders. Such prohibited hedging or other
transactions would include without limitation any short sale or any purchase,
sale or grant of any right (including without limitation any put or call option)
with respect to any of the Parent Shares or with respect to any security that
includes, relates to, or derives any significant part of its value from the
Parent Shares.
(c) Each Stockholder further represents and agrees that the
undersigned has not taken and will not take, directly or indirectly, any action
which is designed to or which has constituted or which might reasonably be
expected to cause or result in stabilization or manipulation of the price of any
security of Parent to facilitate the sale or resale of the Parent Shares, or
which has otherwise constituted or will constitute any prohibited bid for or
purchase of the Parent Shares or any related securities.
(d) Each Stockholder acknowledges and agrees that, pending the
Release Date, any additional Parent Shares acquired by such Stockholder upon
exercise of Replacement Stock Options (as defined in the Merger Agreement) may
not be sold or otherwise transferred notwithstanding that a registration
statement on Form S-8 or Form S-4 may be effective with respect to the exercise
of such options and the sale of Parent Shares obtained thereby.
(e) Notwithstanding the foregoing restrictions on transfer, each
Stockholder may transfer the Parent Shares (i) in an amount not to exceed 35% of
the total amount of Parent Shares received by such Stockholder pursuant to the
Merger; provided however that such Parent Shares may not be transferred unless
the Parent Shares are registered under the Securities Act of 1933, as amended,
or (ii) as transfers by will or intestacy, or (iii) to any trust for the direct
or indirect benefit of any of the Stockholder or the immediate family of such
Stockholder; provided that any such transfer shall not involve a disposition for
value. For purposes of this letter agreement, "immediate family" shall mean any
relationship by blood, marriage or adoption, not more remote than first cousin.
(f) Each of the Stockholders now has, and, except as contemplated by
the preceding paragraph (e), at all times prior to the Release Date will have,
good and marketable title to the Parent Shares still owned by him, free and
clear of all liens, encumbrances, and claims whatsoever. Each of the
Stockholders agrees and consents to the entry of stop transfer instructions with
the Company's transfer agent and registrar against the transfer of the Parent
Shares except in compliance with the foregoing restrictions in Sections 3(a) and
(e) above. Each of the Stockholders understands that the restrictions with
respect to the Parent Shares set forth herein are in addition to any other
restrictions upon transfer that may arise pursuant to any other agreement to
which either of the Stockholders is a party or under applicable securities laws.
3
4. Written Consent of Stockholders. Upon the U.S. Securities and
Exchange Commission's declaration of the effectiveness of the Registration
Statement on Form S-4 filed by Parent in connection with the Merger, each
Stockholder shall deliver to Parent a written consent in favor of the adoption
of the Merger Agreement and the Merger.
5. Representations and Warranties of Stockholder. Each Stockholder
represents and warrants to Parent as follows:
(a) As of the date of this Voting Agreement and at all times through
the Expiration Date:
(i) Such Stockholder is the Beneficial Owner (free and clear of
any encumbrances or restrictions) of the outstanding shares of Company Capital
Stock set forth under the heading "Shares of Company Capital Stock Beneficially
Owned", on the signature page hereof;
(ii) Such Stockholder is the Beneficial Owner (free and clear of
any encumbrances or restrictions) of the outstanding Company Options and Other
Rights set forth under the heading "Company Options and Other Rights
Beneficially Owned" on the signature page hereof; and
(iii) Such Stockholder does not directly or indirectly
Beneficially Own any shares of Company Capital Stock or Company Options or Other
Rights or other securities of the Company, other than the shares of Company
Capital Stock and Company Options and Other Rights set forth on the signature
page hereof.
(b) Each Stockholder has the legal capacity, power and authority to
enter into and perform all of its obligations under this Voting Agreement. This
Voting Agreement has been duly executed and delivered by such Stockholder, and
upon its execution and delivery by Parent, will constitute a legal, valid and
binding obligation of such Stockholder, enforceable against it in accordance
with its terms, except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting or
relating to creditors rights generally, and the availability of injunctive
relief and other equitable remedies.
(c) The execution, delivery and performance by each Stockholder of
this Voting Agreement will not (i) conflict with, require a consent, waiver or
approval under, or result in a breach of or default under, any of the terms of
any contract, commitment or other obligation (written or oral) to which such
Stockholder is a party or by which any of such Stockholder's assets may be
bound.
(d) No filing with, and no permit, authorization, consent or
approval of, any state or federal public body or authority is necessary for the
execution of this Voting Agreement by Stockholder and the consummation by
Stockholder of the transactions contemplated hereby.
4
6. Covenants of Stockholder. Each Stockholder covenants and agrees for
the benefit of Parent that, until the Expiration Date, such Stockholder will
not:
(a) sell, transfer, pledge, hypothecate, encumber, assign, tender or
otherwise dispose of, or enter into any contract, option or other arrangement or
understanding with respect to the sale, transfer, pledge, hypothecation,
encumbrance, assignment, tender or other disposition of, (i) any Subject Shares
or any interest therein, or (ii) any Company Options and Other Rights or any
interest therein; provided, however, that Stockholder may convert, exercise or
exchange Company Options and Other Rights into or for shares of Company Capital
Stock in which event such shares of Capital Stock shall become and be deemed
Subject Shares subject to all the terms and conditions of this Voting Agreement;
(b) acquire any shares of the stock of Parent except pursuant to
existing Company Options and Other Rights;
(c) grant any powers of attorney or proxies or consents in respect
of any of the Subject Shares, deposit any of such Subject Shares into a voting
trust, or enter into a voting agreement with respect to any of such Subject
Shares; and
(d) take any other action with respect to the Subject Shares that
would in any way restrict, limit or interfere with the performance of
Stockholder's obligations hereunder or the transactions contemplated hereby and
the Merger Agreement.
7. Adjustments; Additional Shares. In the event (a) of any stock
dividend, stock split, merger, recapitalization, reclassification, combination,
exchange of shares or the like of the capital stock of the Company on, of or
affecting the Subject Shares or (b) that Stockholder shall become the Beneficial
Owner of any additional shares of Company Capital Stock or other securities
entitling the holder thereof to vote or give consent with respect to the matters
set forth in Section 2(a), then the terms of this Voting Agreement shall apply
to the shares of Company Capital Stock or other instruments or documents held by
Stockholder immediately following the effectiveness of the events described in
clause (a) or Stockholder becoming the Beneficial Owner thereof as described in
clause (b), as though, in either case, they were Subject Shares hereunder. The
foregoing shall apply (mutatis mutandis) to the Parent Shares and Section 3 of
this Voting Agreement.
8. Amendments and Waivers. Any provision of this Voting Agreement may
be amended or waived if, and only if, such amendment or waiver is in writing and
is signed, in the case of an amendment, by each party to this Voting Agreement,
or in the case of a waiver, by the party against whom the waiver is to be
effective. No failure or delay by any party in exercising any right or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise thereof preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. To the maximum extent permitted by law,
(a) no waiver that may be given by a party shall be applicable except in the
specific instance for which it was given and (b) no notice to or demand on one
party shall be deemed to be a waiver of any obligation of such party or the
right of the party giving such notice or demand to take further action without
notice or demand.
5
9. Assignment. This Voting Agreement may not be assigned by any party
hereto without the prior written consent of the other parties. Subject to the
foregoing, all of the terms and provisions of this Voting Agreement shall inure
to the benefit of and be binding upon the parties hereto and their respective
executors, heirs, personal representatives, successors and assigns.
10. Entire Agreement. This Voting Agreement and the documents,
instruments and other agreements specifically referred to herein or delivered
pursuant hereto, set forth the entire understanding of the parties with respect
to the subject matter hereof. Any and all previous agreements and understandings
between or among the parties regarding the subject matter hereof, whether
written or oral, are superseded by this Voting Agreement.
11. Notices. Any notice, request, demand, waiver, consent, approval or
other communication which is required or permitted hereunder shall be in writing
and shall be deemed given (a) on the date established by the sender as having
been delivered personally; (b) on the date delivered by a private courier as
established by the sender by evidence obtained from the courier; (c) on the date
sent by facsimile, with confirmation of transmission, if sent during normal
business hours of the recipient, if not, then on the next business day; or (d)
on the fifth day after the date mailed, by certified or registered mail, return
receipt requested, postage prepaid. Such communications, to be valid, must be
addressed as follows:
If to Parent, to:
JAG Media Holdings, Inc.
6865 SW 18th Street, Suite B13
Boca Raton, Florida 33433
Attn: Thomas J. Mazzarisi
Facsimile: 561-892-0821
With a required copy to:
Morgan, Lewis & Bockius LLP
101 Park Avenue
New York, New York 10178
Attn: W. Preston Tollinger, Jr., Esq.
Facsimile: 212-309-6001
If to:
Robert Barra or Michael A. Vitale
c/o Cryptometrics, Inc.
73 Main Street
Tuckahoe, NY 10707
Facsimile: (914) 337-9754
6
With a required copy to:
Dorf, Karlen & Stolzar, LLP
1 North Broadway, Suite 800
White Plains, New York 10543
Attn: Michael Stolzar, Esq.
Facsimile: 914-682-0387
or to such other address or to the attention of such person or persons as the
recipient party has specified by prior written notice to the sending party (or
in the case of counsel, to such other readily ascertainable business address as
such counsel may hereafter maintain). If more than one method for sending notice
as set forth above is used, the earliest notice date established as set forth
above shall control.
12. Captions. All captions contained in this Voting Agreement are for
convenience of reference only, do not form a part of this Voting Agreement and
shall not affect in any way the meaning or interpretation of this Voting
Agreement.
13. Severability; Enforcement. Any provision of this Voting Agreement
which is invalid or unenforceable in any jurisdiction shall be ineffective to
the extent of such invalidity or unenforceability without invalidating or
rendering unenforceable the remaining provisions hereof, and any such invalidity
or unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
14. Specific Performance. Stockholder acknowledges that the agreements
contained in this Voting Agreement are an integral part of the transactions
contemplated by the Merger Agreement, and that, without these agreements, Parent
would not enter into the Merger Agreement, and acknowledges that damages would
be an inadequate remedy for any breach by Stockholder of the provisions of this
Voting Agreement. Accordingly, Stockholder agrees that Stockholder's obligations
hereunder shall be specifically enforceable and Stockholder shall not take any
action to impede the other from seeking to enforce such right of specific
performance.
7
15. Consent to Jurisdiction. Each party irrevocably submits to the
exclusive jurisdiction of (a) New York County, New York, and (b) the United
States District Court for the Southern District of New York, for the purposes of
any action, suit or proceeding arising out of this Voting Agreement or any
transaction contemplated hereby. Each party agrees to commence any such action,
suit or proceeding either in the United States District Court for the Southern
District of New York or if such action, suit or proceeding may not be brought in
such court for jurisdictional reasons, in the Supreme Court sitting in New York
County (including its Appellate Division). Each party further agrees that
service of any process, summons, notice or document by U.S. registered mail to
such party's respective address set forth above shall be effective service of
process for any action, suit or proceeding in New York with respect to any
matters to which it has submitted to jurisdiction in this Section 15. Each party
irrevocably and unconditionally waives any objection to the laying of venue of
any action, suit or proceeding arising out of this Voting Agreement or the
transactions contemplated hereby in (i) the United States District Court for the
Southern District of New York, or (ii) the Supreme Court sitting in New York
County (including its Appellate Division), and hereby further irrevocably and
unconditionally waives and agrees not to plead or claim in any such court that
any such action, suit or proceeding brought in any such court has been brought
in an inconvenient forum. EACH PARTY HEREBY IRREVOCABLY WAIVES ALL RIGHT TO
TRIAL BY JURY IN ANY ACTION (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE)
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE ACTIONS OF SUCH PARTY IN THE
NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT HEREOF.
16. Governing Law. This Voting Agreement shall be governed by and
interpreted and enforced in accordance with the laws of the State of New York,
without giving effect to any choice of law or conflict of laws rules or
provisions (whether of the State of New York or any other jurisdiction) that
would cause the application of the laws of any jurisdiction other than the State
of New York, except to the extent that the voting of the Subject Shares is
subject to the corporate law of the State of Delaware.
IN WITNESS WHEREOF, this Voting Agreement has been duly executed by the
parties hereto all as of the day and year first above written.
JAG MEDIA HOLDINGS, INC.
By:
-----------------------------
Name:
Title:
Robert Barra
---------------------------------
(Signature)
----------------------------------
Print Name
Number and class of shares of Capital Stock:
----------------------------------
----------------------------------
----------------------------------
Number of Company Options and Other Rights:
----------------------------------
----------------------------------
----------------------------------
Michael A. Vitale
----------------------------------
(Signature)
----------------------------------
Print Name
Number and class of shares of Capital Stock:
----------------------------------
----------------------------------
----------------------------------
Number of Company Options and Other Rights:
----------------------------------
----------------------------------
----------------------------------
Exhibit B
Certificate of Merger
CERTIFICATE OF MERGER
OF
CRYPTOMETRICS, INC.
AND
CRYPTOMETRICS ACQUISITION, INC.
Pursuant to Section 251 of the General Corporation Law of the State of
Delaware (the "DGCL"), Cryptometrics, Inc., a Delaware corporation, DOES HEREBY
CERTIFY that:
1. The name and jurisdiction of incorporation of each of the
constituent corporations to the merger (collectively, the "Constituent
Corporations") are as follows:
NAME JURISDICTION OF INCORPORATION
---- -----------------------------
Cryptometrics, Inc. Delaware
Cryptometrics Acquisition, Inc. Delaware
2. An Agreement and Plan of Merger, dated as of December 8, 2005 (the
"Agreement and Plan of Merger"), by and among JAG Media Holdings, Inc., a Nevada
corporation, and each of the Constituent Corporations, providing for the merger
of Cryptometrics Acquisition, Inc., with and into Cryptometrics, Inc. has been
approved, adopted, certified, executed and acknowledged by each of the
Constituent Corporations in accordance with the requirements of Sections 228 and
251 of the DGCL.
3. The name of the corporation surviving the merger is Cryptometrics,
Inc., a Delaware corporation (the "Surviving Corporation").
4. The Certificate of Incorporation of Cryptometrics, Inc., as now in
force and effect, shall continue to be the Certificate of Incorporation of the
Surviving Corporation until amended and changed pursuant to the provisions of
the DGCL.
5. The Bylaws of Cryptometrics, Inc., as now in full force and effect,
shall continue to be the Bylaws of the Surviving Corporation until amended and
changed pursuant to the provisions of the DGCL.
6. The officers and directors of Cryptometrics, Inc. immediately prior
to the filing of this Certificate of Merger with the Secretary of State of the
State of Delaware shall remain the officers and directors of the Surviving
Corporation, each to hold office until their respective death, permanent
disability, resignation or removal or until their respective successors are duly
elected and qualified, all in accordance with the Certificate of Incorporation
and Bylaws of the Surviving Corporation and the DGCL.
7. The executed Agreement and Plan of Merger is on file at an office of
the Surviving Corporation, the address of which is as follows:
Cryptometrics, Inc.
73 Main Street
Tuckahoe, New York 10707
8. A copy of the Agreement and Plan of Merger will be furnished by the
Surviving Corporation, on request and without cost, to any stockholder of either
Constituent Corporation.
9. This Certificate of Merger, and the merger provided for herein,
shall be effective immediately upon its filing with the Secretary of State of
the State of Delaware.
[Signature page follows.]
IN WITNESS WHEREOF, this Certificate of Merger has been duly executed
on January ___, 2006.
CRYPTOMETRICS, INC.
By: __________________________
Name: Robert Barra
Title: Co-Chief Executive Officer
Exhibit C
Affiliate Agreement
AFFILIATE AGREEMENT
January __, 2006
JAG Media Holdings, Inc.
6865 SW 18th Street, Suite B13
Boca Raton, Florida 33433
Ladies and Gentlemen:
The undersigned has been advised that as of the date of this letter it
may be deemed to be an "affiliate" of Cryptometrics, Inc., a Delaware
corporation (the "COMPANY"), as the term "affiliate" is defined for purposes of
paragraphs (c) and (d) of Rule 145 of the rules and regulations (the "RULES AND
REGULATIONS") of the Securities and Exchange Commission (the "COMMISSION") under
the Securities Act of 1933, as amended (the "ACT"). Pursuant to the terms of the
Agreement and Plan of Merger, dated as of December 8, 2005 (the "MERGER
AGREEMENT"), by and among JAG Media Holdings, Inc. ("PARENT"), Cryptometrics
Acquisition Corp., a wholly-owned subsidiary of Parent ("MERGER SUB") and the
Company, Merger Sub will be merged with and into the Company (the "MERGER") and
the Company, as the entity surviving the Merger, will become a wholly owned
subsidiary of Parent.
As a result of the Merger, the undersigned will receive shares of
common stock, par value $0.00001 per share, of Parent (the "PARENT COMMON
STOCK"), in exchange for common stock, par value $0.001 per share, of the
Company owned by the undersigned immediately prior to the effective time of the
Merger.
The undersigned hereby represents and warrants to, and covenants with,
Parent that in the event that it receives any Parent Common Stock as a result of
the Merger:
A. The undersigned shall not make any sale, transfer or other
disposition of the Parent Common Stock in violation of the Act or the Rules and
Regulations.
B. The undersigned has carefully read this letter, the Merger Agreement
and the Voting Agreement (defined below) and discussed the requirements of these
documents and other applicable limitations upon the undersigned's ability to
sell, transfer or otherwise dispose of the Parent Common Stock, to the extent
the undersigned deemed necessary, with his or her counsel or counsel for the
Company.
C. The undersigned has been advised that any issuance of Parent Common
Stock to him or her pursuant to the Merger has been, or will be, registered with
the Commission under the Act on a registration statement on a Form S-4. However,
the undersigned has also been advised that, since at the time the Merger was
submitted for a vote of the stockholders of the Company, (1) the undersigned may
be deemed to have been an affiliate of the Company and (2) except as set forth
in the Company Voting and Lock-Up Agreement dated as of December 8, 2005, by and
among Parent, Robert Barra and Michael A. Vitale (the "Voting Agreement"), the
undersigned may not sell, transfer or otherwise dispose of any Parent Common
Stock issued to it in the Merger unless (a) such sale, transfer or other
disposition has been registered under the Act, (b) such sale, transfer or other
disposition is made in conformity with Rule 145 (as that rule may be hereafter
amended) promulgated by the Commission under the Act, or (c) Parent shall have
received either an opinion of counsel or a "no action" letter obtained by the
undersigned from the staff of the Commission, to the effect that such sale,
transfer or other disposition is otherwise exempt from registration under the
Act.
D. The undersigned also understands that, except as set forth in the
Merger Agreement, Parent is under no obligation to register the sale, transfer
or other disposition of the Parent Common Stock by the undersigned or on his or
her behalf under the Act or to take any other action necessary in order to
comply with any available exemption from the registration requirements of the
Act. The undersigned also understands that stop transfer instructions will be
given to Parent's transfer agents with respect to the Parent Common Stock and
that there will be placed on the certificates for the Parent Common Stock issued
to the undersigned, or any substitutions therefor, a legend stating in
substance:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A
TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), APPLIES, AND MAY ONLY BE SOLD OR
OTHERWISE TRANSFERRED IN COMPLIANCE WITH THE REQUIREMENTS OF RULE 145
OR PURSUANT TO A REGISTRATION STATEMENT UNDER THE ACT OR AN EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE ACT."
E. The undersigned also understands that unless the transfer by it of
Parent Common Stock has been registered under the Act or is a sale made in
conformity with the provisions of Rule 145, Parent reserves the right to place
the following legend on the certificates issued to the undersigned's transferee:
"THE SALE OF THE SHARES REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
AND SUCH SHARES WERE ACQUIRED FROM A PERSON WHO RECEIVED THESE SHARES
IN A TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE ACT APPLIES.
THE SHARES HAVE BEEN ACQUIRED BY THE HOLDER NOT WITH A VIEW TO, OR FOR
RESALE IN CONNECTION WITH, ANY DISTRIBUTION THEREOF WITHIN THE MEANING
OF THE ACT, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED
EXCEPT PURSUANT TO A REGISTRATION STATEMENT UNDER THAT ACT OR IN
ACCORDANCE WITH AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
ACT."
F. Execution of this letter shall not be considered an admission on the
part of the undersigned that he or she is an "affiliate" of the Company as
described in the first paragraph of this letter, nor as a waiver of any rights
the undersigned may have to object to any claim that he is such an affiliate
after the date of this letter.
2
It is understood and agreed that the legends set forth in paragraphs D
and E above shall be removed by delivery of substitute certificates without any
legend if either of these legends are not required for purposes of the Act or
this letter. It is understood and agreed that these legends and the stop
transfer orders referred to above will be removed if (i) evidence or
representations satisfactory to Parent and its Transfer Agent that the Parent
Common Stock represented by the certificates are being or have been sold in a
transaction made in conformity with the provisions of Rule 145(d) (as that rule
may be hereafter amended), (ii) one year shall have elapsed from the date the
undersigned acquired the Parent Common Stock in the Merger and the provisions of
Rule 145(d)(2) are then available to the undersigned, (iii) two years shall have
elapsed from the date the undersigned acquired the Parent Common Stock in the
Merger and the provisions of Rule 145(d)(3) are then available to the
undersigned, (iv) Parent has received either an opinion of counsel or a "no
action" letter obtained by the undersigned from the staff of the Commission, to
the effect that the restrictions imposed by Rule 145 under the Act no longer
apply to the undersigned, or (v) the shares represented by the certificates
having such legend(s) are the subject of an effective registration statement
under the Act.
___________________________________
Name:
Title:
Accepted this __th day of
January, 2006 by
JAG MEDIA HOLDINGS, INC.
By: _________________________________
Name:
Title:
3
Appendix D
Excepts from Delaware General Corporation Law (Appraisal Rights)
ss. 262. Appraisal rights
(a) Any stockholder of a corporation of this State who holds shares of stock on
the date of the making of a demand pursuant to subsection (d) of this section
with respect to such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise complied with
subsection (d) of this section and who has neither voted in favor of the merger
or consolidation nor consented thereto in writing pursuant to ss. 228 of this
title shall be entitled to an appraisal by the Court of Chancery of the fair
value of the stockholder's shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or series of
stock of a constituent corporation in a merger or consolidation to be effected
pursuant to ss. 251 (other than a merger effected pursuant to ss. 251(g) of this
title), ss. 252, ss. 254, ss. 257, ss. 258, ss. 263 or ss. 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of ss. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights under
this section shall be available for the shares of any class or series of stock
of a constituent corporation if the holders thereof are required by the terms of
an agreement of merger or consolidation pursuant to ss.ss. 251, 252, 254, 257,
258, 263 and 264 of this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from such merger or
consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in respect
thereof, which shares of stock (or depository receipts in respect thereof) or
depository receipts at the effective date of the merger or consolidation will be
either listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more than 2,000
holders;
c. Cash in lieu of fractional shares or fractional depository receipts described
in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash in lieu
of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
D-1
(3) In the event all of the stock of a subsidiary Delaware corporation party to
a merger effected under ss. 253 of this title is not owned by the parent
corporation immediately prior to the merger, appraisal rights shall be available
for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsection (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of
such stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of such
stockholder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such stockholder's shares. A proxy or
vote against the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written demand
as herein provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2) If the merger or consolidation was approved pursuant to ss. 228 or ss. 253
of this title, then either a constituent corporation before the effective date
of the merger or consolidation or the surviving or resulting corporation within
10 days thereafter shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights of
the approval of the merger or consolidation and that appraisal rights are
available for any or all shares of such class or series of stock of such
constituent corporation, and shall include in such notice a copy of this
section. Such notice may, and, if given on or after the effective date of the
merger or consolidation, shall, also notify such stockholders of the effective
date of the merger or consolidation. Any stockholder entitled to appraisal
rights may, within 20 days after the date of mailing of such notice, demand in
writing from the surviving or resulting corporation the appraisal of such
holder's shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of such holder's shares. If such notice did not
notify stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders of
any class or series of stock of such constituent corporation that are entitled
to appraisal rights of the effective date of the merger or consolidation or (ii)
the surviving or resulting corporation shall send such a second notice to all
such holders on or within 10 days after such effective date; provided, however,
that if such second notice is sent more than 20 days following the sending of
the first notice, such second notice need only be sent to each stockholder who
is entitled to appraisal rights and who has demanded appraisal of such holder's
shares in accordance with this subsection. An affidavit of the secretary or
assistant secretary or of the transfer agent of the corporation that is required
to give either notice that such notice has been given shall, in the absence of
fraud, be prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each constituent
corporation may fix, in advance, a record date that shall be not more than 10
days prior to the date the notice is given, provided, that if the
D-2
notice is given on or after the effective date of the merger or consolidation,
the record date shall be such effective date. If no record date is fixed and the
notice is given prior to the effective date, the record date shall be the close
of business on the day next proceeding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation, the
surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw such
stockholder's demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the stockholders
who have complied with this section and who have become entitled to appraisal
rights. The Court may require the stockholders who have demanded an appraisal
for their shares and who hold stock represented by certificates to submit their
certificates of stock to the Register in Chancery for notation thereon of the
pendency of the appraisal proceedings; and if any stockholder fails to comply
with such direction, the Court may dismiss the proceedings as to such
stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court shall
appraise the shares, determining their fair value exclusive of any element of
value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
D-3
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares, together
with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed upon
the parties as the Court deems equitable in the circumstances. Upon application
of a stockholder, the Court may order all or a portion of the expenses incurred
by any stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorney's fees and the fees and expenses of
experts, to be charged pro rata against the value of all the shares entitled to
an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the shares of
such objecting stockholders would have been converted had they assented to the
merger or consolidation shall have the status of authorized and unissued shares
of the surviving or resulting corporation.
D-4
Appendix E
Form of Proxy
JAG MEDIA HOLDINGS, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR
THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON _______, 2006
The stockholder(s) whose signature(s) appear(s) on the reverse side of
this proxy form hereby appoint(s) Thomas J. Mazzarisi and Stephen J. Schoepfer
or either of them as proxies, with full power of substitution, and hereby
authorize(s) them to represent and vote all shares of Common Stock of JAG Media
Holdings, Inc. which the stockholder(s) would be entitled to vote on all matters
which may come before the Annual Meeting of Stockholders to be held in the law
offices of Jones Vargas located on the Twelfth Floor of 100 West Liberty Street
in Reno, Nevada at _______ Pacific Standard Time, on __________, 2006, or at any
adjournment thereof. The proxies shall vote subject to the directions indicated
on the reverse side of this card and the proxies are authorized to vote in their
discretion upon such other business as may properly come before the meeting and
any adjournments or postponements thereof. The proxies will vote as the Board of
Directors recommends where a choice is not specified.
Please complete, sign, date and mail this proxy form in the
accompanying envelope even if you intend to be present at the meeting. You may
also grant your Proxy via the Internet by following the instructions on the
reverse side of this Proxy Card.
--------------
VOTE BY INTERNET
It is fast, convenient, and your vote is immediately confirmed and posted.
Follow these four easy steps:
1. Read the accompanying Proxy Statement and Proxy Card.
2. Go to the Website. http://www.transferonline.com
3. Enter your Voter Authorization Code located on your Proxy Card above your
name.
4. Follow the instructions provided.
YOUR VOTE IS IMPORTANT.
Go to http://www.transferonline.com
-------------------
E-1
Please mark your votes as in this example: [x]
Election of Directors
1. The Board of Directors recommends a vote FOR the listed nominees.
FOR WITHHOLD
01 Thomas J. Mazzarisi |_| |_|
02 Stephen P. Schoepfer |_| |_|
Issues
2. The Board of Directors recommends a vote FOR the following proposal.
FOR AGAINST ABSTAIN
Ratification of appointment of J.H. Cohn |_| |_| |_|
LLP as auditors for the fiscal year ending
July 31, 2006
3. The Board of Directors recommends a vote FOR the following proposal.
FOR AGAINST ABSTAIN
Amendment of JAG Media's Articles of |_| |_| |_|
Incorporation to increase the
authorized capital from 250,000,000
to 500,000,000 shares of common stock, par
value $ 0.00001 per share
4. The Board of Directors recommends a vote FOR the following proposal.
FOR AGAINST ABSTAIN
Amendment of JAG Media's Articles of |_| |_| |_|
Incorporation to change JAG Media's
name to "Cryptometrics, Inc." conditioned
upon the consummation of the merger of
Cryptometrics Acquisition, Inc., a
Delaware corporation and wholly owned
subsidiary of JAG Media with and into
Cryptometrics, Inc.
5. The Board of Directors recommends a vote FOR the following proposal.
FOR AGAINST ABSTAIN
Adjourn the Annual Meeting, if necessary, |_| |_| |_|
to assure the presence of a quorum
or solicit additional proxies to approve
the foregoing proposals to amend JAG Media's
Articles of Incorporation
Please complete, sign, date and mail the enclosed Proxy in the accompanying
envelope even if you intend to be present at the Annual Meeting. Returning the
Proxy will not limit your right to vote in person or to attend the Annual
Meeting, but will ensure your representation if you cannot attend. If you hold
shares in more than one name, or if your stock is registered in more than one
way, you may receive more than one copy of the Proxy materials. If so, please
sign and return each of the Proxy Cards that you receive so that all of your
shares may be voted. The Proxy is revocable at any time prior to its use.
Signature(s) ______________________________________ Date ______________
______________________________________ Date ______________
Note: Please sign above exactly as the shares are issued. When shares are held
by joint tenants, both should sign. When signing as an attorney, executor,
administrator, trustee or guardian, please give the full title as such. If a
corporation, please sign in full corporate name by the president or other
authorized officer. If a partnership, please sign in partnership name by
authorized person.
Appendix F
CRYPTOMETRICS, INC.
EMPLOYMENT AGREEMENT
This Agreement is made as of the 1st day of May, 2005 by and between
Cryptometrics, Inc. (the "Company"), and ____________ (the "Executive").
1. Duties and Scope of Employment.
(a) Positions; Duties. During the Employment Term (as defined in
Section 2), the Company shall employ Executive as Co-Chief Executive Officer
("Co-CEO") of the Company. Executive shall report solely and directly to the
Board of Directors of the Company (the "Board") and consult with any other
person employed by the Company as a co-chief executor officer. All other
employees of the Company, other than the other Co-CEO, if any, shall report to
Executive, his Co-CEO or his designee and not directly to the Board. During the
Employment Term, Executive shall have such responsibilities, duties and
authorities as are commensurate with those of chief executive officers of public
entities of similar size, in particular, shall be, in addition to being
responsible for the operations of the Company, the chief or Co-Chief external
representative of the Company. The role and responsibilities of the Chairman of
the Company shall be limited to chairing or co-chairing the Board and mentoring
and counseling the Chief or Co-Chief Executive Officer when and as requested by
him and such other matters as the Chairman and Executive may agree, and within
thirty (30) days after the Effective Date, the By-laws of the Company shall be
amended accordingly. The Board shall, in good faith, consider Executive's advice
and recommendations, if any, in connection with any appointments or nominations
to the Board. For so long as Executive remains Chief or Co-Chief Executive
Officer of the Company, the Board will nominate Executive to the Board and, if
elected, Executive shall serve in such capacity without additional
consideration.
(b) Obligations. During the Employment Term, Executive shall devote
substantially all of his business efforts and time to the Company. Executive
agrees, during the Employment Term, not to actively engage in any other
employment, occupation or consulting activity for any direct or indirect
remuneration without the prior approval of the Board; provided, however, that
Executive may (i) serve in any capacity with any professional, community,
industry, civic, educational or charitable organization, (ii) serve as a member
of corporate boards of directors on which Executive serves on the Effective Date
and, with the consent of the Board (which consent shall not be unreasonably
withheld or delayed), other corporate boards of directors and (iii) manage his
and his family's personal investments and legal affairs so long as such
activities do not materially interfere with the discharge of Executive's duties.
2. Employment Term. The Company hereby agrees to employ Executive and
Executive hereby accepts employment hereunder, in accordance with the terms and
conditions set forth herein, commencing on the Effective Date. The period of
Executive's employment hereunder is referred to herein as the "Employment Term."
Executive and the Company understand and acknowledge that Executive's employment
with the Company constitutes "at-will" employment. Subject to the Company's
obligation to provide severance benefits as specified herein, Executive and the
Company acknowledge that this employment relationship may be terminated at any
time, upon written notice to the other party, with or without Cause or Good
Reason and for any or no cause or reason, at the option of either the Company or
Executive.
F-1
3. Compensation/Benefits. During the Employment Term, the Company shall pay
and provide Executive the following:
(a) Cash Compensation. As compensation for his services to the Company,
Executive shall receive a base salary ("Base Salary") and shall be eligible to
receive additional variable compensation. As of the Effective Date, Executive's
annualized Base Salary shall be $175,000, and his annual variable compensation
amount shall be targeted at no less than $350,000 (the "Target Bonus" which,
together with the Base Salary, shall be referred to herein as "Target Pay"),
with an opportunity to earn up to at least $656,250 in annual variable
compensation. As compensation for his services to the Company commencing one
calendar year after the Effective Date, Executive's Base Salary shall be
$225,000 and his annual variable compensation amount shall be targeted at no
less than $450,000. For years commencing thereafter, Executive's Base Salary and
Target Bonus shall be as set by the Board provided that same shall not be
reduced below the amount set for the prior year.
(b) Equity Compensation. Stock Options. The Company shall grant to the
Executive, as of the Effective Date, a non-qualified stock option (the "Stock
Option") to purchase a total of 325,000 shares of Company common stock, $.001
par value (the "Common Stock"), (or common stock of the type and number for
which the shares of the Common Stock of the Company are exchanged or converted
into, as required pursuant to Exhibit A hereto), at a per share of common stock
exercise price equal to $1.00 per share. The Stock Option is for a term of 10
years (subject to earlier termination as provided herein.) In the case of
termination by the Company without Cause, voluntary termination by Executive for
Good Reason, death or a Disability Termination, the Stock Option and any other
Company stock option then held by Executive shall remain exercisable (to the
extent vested on the date of termination) until the earlier of one year from the
employment termination date or the expiration of the option. Subject to
accelerated vesting as set forth in this Agreement, the Stock Option shall vest
and become exercisable as to 25% of the shares originally subject to the Stock
Option on each anniversary of the Effective Date, so as to be 100% vested on the
four year anniversary thereof, conditioned upon Executive's continued employment
with the Company as of each vesting date. The Stock Option shall in all respects
be subject to the terms, definitions and provisions of the attached form of
stock option agreement, a copy of which has been given to Executive, as modified
by the terms of this Agreement. The Stock Option Agreement shall be
insubstantially in the form of Exhibit A hereto.
In the event of changes in the Common Stock of the Company occurring on or
before the Effective Date but after the date of this Agreement by reason of
stock dividends, slit-ups, recapitalizations, mergers, consolidations,
combinations or exchanges of shares, separations, reorganizations or
liquidations, the number and type of shares subject to the Stock Option and the
purchase price per share shall be proportionally adjusted as set form in
subsection 3(b) hereof.
F-2
When Executive incurs tax liability in connection with the exercise of the
Stock Option or options, Executive may elect to satisfy his resulting
withholding tax obligation by having the Company retain shares of Common Stock
having a fair market value equal to the Company's minimum withholding tax
obligation.
At all times after the Effective Date, the Company shall maintain
registrations on Form S-8 or another applicable form so that the Common Stock
issued upon exercise of the Stock Option or other options or other equity awards
are immediately saleable by Executive on the public market (subject to the
non-registration limitations of applicable laws).
(c) Employee Benefits. Executive shall, to the extent eligible, be
entitled to participate at a level commensurate with his position in all
employee benefit welfare and retirement plans and programs, as well as equity
plans, provided by the Company to its senior executives in accordance with the
terms thereof as in effect from time to time.
(d) Perquisites. The Company shall provide to Executive, at the Company's
cost, all perquisites which other senior executives of the Company are entitled
to receive and such other perquisites which are suitable to the character of
Executive's position with the Company and adequate for the performance of his
duties hereunder.
(e) Business and Entertainment Expenses. Upon submission of appropriate
documentation in accordance with its policies in effect from time to time, the
Company shall pay or reimburse Executive for all business expenses which
Executive incurs in performing his duties under this Agreement, including, but
not limited to, travel, entertainment, professional dues and subscriptions, and
all dues, fees, and expenses associated with membership in various professional,
business, and civic associations and societies in which Executive participates
in accordance with the Company's policies in effect from time to time.
(f) Flexible Time Off. Executive shall be entitled to paid time off in
accordance with the standard written policies of the Company with regard to
senior executives, but in no event less than twenty-five (25) days, per calendar
year.
4. Termination of Employment.
(a) Death or Disability. The Company may terminate Executive's employment
for disability in the event Executive has been unable to perform his material
duties hereunder for six (6) consecutive months because of physical or mental
incapacity by giving Executive notice of such termination while such continuing
incapacity continues (a "Disability Termination"). Executive's employment shall
automatically terminate on Executive's death. In the event Executive's
employment with the Company terminates during the Employment Term by reason of
Executive's death or a Disability Termination, then upon the date of such
termination, (i) the Stock Option and all other stock option or equity grants to
Executive shall vest in full so as to become fully exercisable, (ii) the Company
shall promptly pay and provide Executive (or in the event of Executive's death,
Executive's estate) (A) any unpaid Base Salary through the date of termination
and any accrued vacation, (B) any unpaid bonus accrued with respect to the
fiscal year ending on or preceding the date of termination, (C) reimbursement
for any unreimbursed expenses incurred through the date of termination and (D)
all other payments, benefits or fringe benefits to which Executive may be
entitled subject to and in accordance with, the terms of any applicable
compensation arrangement or benefit, equity or fringe benefit plan or program or
grant and amounts which may become due under Sections 6, 9 and 10 hereof
(collectively, items under (ii) are referred to as "Accrued Benefits"), and
(iii) the Company shall pay to Executive at the time other senior executives are
paid under any Variable Pay Plan or cash bonus or long term incentive plan, a
pro- rata bonus equal to the amount Executive would have received if employment
continued (without any discretionary cutback) multiplied by a fraction where the
numerator is the number of days in each respective bonus period prior to
Executive's termination and the denominator is the number of days in the bonus
period (the "Prorated Bonus").
F-3
(b) Termination for Cause. The Company may terminate Executive's
employment for Cause. In the event that Executive's employment with the Company
is terminated during the Employment Term by the Company for Cause, Executive
shall not be entitled to any additional payments or benefits hereunder, other
than Accrued Benefits (including, but not limited to, any then vested Stock
Option, or other stock options or equity grants). For the purposes of this
Agreement, "Cause" shall mean (i) the willful failure by Executive to attempt to
substantially perform his duties with the Company (other than any such failure
resulting from his incapacity due to physical or mental impairment), unless any
such failure is corrected within thirty (30) days following written notice by
the Board that specifically identifies the manner in which the Board believes
Executive has substantially not attempted to materially perform his duties or
(ii) the willful gross misconduct by Executive with regard to the Company that
is materially injurious to the Company. No act, or failure to act, by Executive
shall be "willful" unless committed without good faith and without a reasonable
belief that the act or omission was in the best interest of the Company. No
event shall be deemed the basis for Cause unless Executive is terminated
therefor within sixty (60) days after such event is known to the Executive's
Co-CEO, or, if there is no Co-CEO, known to the Chairman of any committee of or
of the Board.
Notwithstanding the foregoing, Executive shall not be deemed to have been
terminated for Cause without (i) advance written notice provided to Executive
not less than fourteen (14) days prior to the date of termination setting forth
the Company's intention to consider terminating Executive and including a
statement of the proposed date of termination and the specific detailed basis
for such consideration of termination for Cause, (ii) an opportunity of
Executive, together with his counsel, to be heard before the Board at least ten
(10) days after the giving of such notice and prior to the proposed date of
termination, (iii) a duly adopted resolution of the Board stating that in
accordance with the provisions of the next to the last sentence of this
paragraph (b), that the actions of Executive constituted Cause and the basis
thereof, and (iv) a written determination provided by the Board setting forth
the acts and omissions that form the basis of such termination of employment.
Any determination by the Board hereunder shall be made by the affirmative vote
of at least a two-thirds (2/3) majority of all of the members of the Board
(other than Executive). Any purported termination of employment of Executive by
the Company which does not meet each and every substantive and procedural
requirement of this paragraph (b) shall be treated for all purposes under this
Agreement as a termination of employment without Cause.
F-4
(c) Voluntary Termination for Good Reason; Involuntary Termination Other
Than for Cause. Executive may terminate his employment for Good Reason at any
time within one hundred eighty (180) days after the occurrence of the Good
Reason event by written notice to the Company. If Executive's employment with
the Company is voluntarily terminated by Executive for "Good Reason" or is
involuntarily terminated by the Company other than for "Cause", then, subject to
Executive executing and not revoking the Release Agreement attached hereto as
Exhibit B (other than with respect to subsections 4(c)(i) and (vii) below), the
Company shall pay or provide Executive with the following:
(i) any Accrued Benefits;
(ii) the Prorated Bonus;
(iii) a severance amount equal to two (2) times Executive's then
Target Pay, payable in substantially equal installments over 24 months in
accordance with the Company's standard payroll practice; provided, however, that
(i) if Executive competes with the Company or materially violates Sections 7(c)
or (d) hereof, any severance payments due thereafter shall cease and be
forfeited as of the commencement of such competition, (ii) in the event of a
Change of Control after such termination, the unpaid portion of such severance
amount, if any, shall be paid to Executive in full in a single lump sum cash
payment within fifteen (15) business days following such Change of Control, and
(iii) if such termination occurs in contemplation of, at the time of, or within
two (2) years after a Change of Control, Executive shall instead be entitled to
a lump sum cash payment within fifteen (15) business days after delivery of the
aforesaid release equal to three (3) times the sum of (A) Executive's then Base
Salary and (B) the higher of (x) Executive's then current Target Pay and (y) the
highest variable pay and annual incentive bonus received by Executive for the
two (2) fiscal years last ending prior to such termination. For purposes of this
Section 4(c)(iii), "competition" shall mean engaging in any business that
materially competes with the Company.
(iv) to the extent eligible on the date of termination, continued
participation, at no additional after tax cost to Executive than Executive would
have as an employee, in all welfare plans until two (2) years after the date of
termination; provided, however, that if such termination occurs within two (2)
years after a Change of Control, Executive shall be entitled to continued
participation in all welfare plans for three (3) years rather than two (2)
years. In the event Executive obtains other employment that offers substantially
similar or improved benefits, as to any particular welfare plan, such
continuation of coverage by the Company for such benefits under such plan shall
immediately cease. To the extent such coverage cannot be provided under the
Company's welfare benefit plans without jeopardizing the tax status of such
plans, for underwriting reasons or because of the tax impact on Executive, the
Company shall pay Executive an amount such that Executive can purchase such
benefits separately at no greater after tax cost to Executive than Executive
would have had if the benefits were provided to Executive as an employee;
F-5
(v) in the event such termination occurs in contemplation of, at the
time of, or within two (2) years after a Change of Control, three (3) additional
years of service and compensation credit (at Executive's then compensation
level) for benefit purposes under any defined benefit type retirement plan,
including but not limited to any tax-qualified retirement plan and any excess
benefit retirement plan if then in effect, and, if Executive is not eligible to
receive benefits under any such plan on the date of termination, two (2)
additional years of age for determining eligibility to receive such benefits,
provided that benefits under any such plan will not commence until Executive
actually attains the required distribution age under the plan or Executive's
spouse qualifies for death benefits under such plan and further provided that,
with regard to any plan qualified under Section 401(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), the additional amounts may be provided on
a nonqualified plan basis.
(vi) full vesting of 50% of Executive's unvested Stock Option and each
traunche of each other grant of stock options or other equity awards, provided
that if such termination takes place in contemplation of, at the time of, or
within two (2) years after a Change of Control, Executive shall be entitled to
full vesting of the Stock Option and all other stock options and equity awards;
(vii) outplacement services at a level commensurate with Executive's
position, including use of an executive office and secretary, for a period of
one (1) year commencing on Executive's date of termination but in no event
extending beyond the date on which Executive commences other full time
employment.
For the purposes of this Agreement "Good Reason" means, without the
express written consent of Executive, the occurrence of any of the following
events: (i) any reduction or diminution (except temporarily during any period of
disability) in Executive's titles or positions, any material diminution in
Executive's authority, duties or responsibilities with the Company (it being
acknowledged that, in the event any entity becomes the owner (directly or
indirectly) of more than 35% of the Common Stock, it shall be Good Reason if
Executive is not the Chief or Co-Chief Executive Officer of such entity); (ii) a
breach by the Company of any material provision of this Agreement, including,
but not limited to, a breach of the Company's obligation under Section 1(a), any
reduction, (other than a reduction (not to exceed ten percent (10%)) that
applies, in equal percentages, to all U.S. officers (within the meaning of
Section 16 of the Securities Exchange Act of 1934, as amended) of the Company),
in Executive's Base Salary or any material failure to timely pay any part of
Executive's compensation (including, without limitation, Base Salary, annualized
Target Pay and bonus) or to materially provide in the aggregate the level of
benefits contemplated herein; (iii) the failure of the Company to obtain and
deliver to Executive a satisfactory written agreement from any successor to the
Company to assume and agree to perform this Agreement in accordance with Section
8 hereof; or (iv) the removal of Executive from the Board or the failure to
elect him thereto when the Board is subsequently subject to re-election.
F-6
(d) Without Good Reason. Executive may terminate his employment at any
time without Good Reason by written notice to the Company. In the event that
Executive's employment with the Company is terminated during the Employment Term
by Executive without Good Reason, Executive shall not be entitled to any
additional payments or benefits hereunder, other than Accrued Benefits
(including, but not limited to, any then vested Stock Option or other stock
options or equity grants).
(e) No Mitigation/No Offset. Executive shall not be required to seek other
employment or otherwise mitigate the value of any severance benefits
contemplated by this Agreement, nor shall any such benefits be reduced by any
earnings or benefits that Executive may receive from any other source. The
amounts payable hereunder shall not be subject to setoff, counterclaim,
recoupment, defense or other right which the Company may have against Executive
or others.
5. Change of Control Vesting Acceleration. In the event of a "Change of
"Control" (as defined below), on the date of such Change of Control 50% of any
remaining unvested shares subject to the Stock Option and of each tranche of
each other stock option or equity award shall be immediately vested. Following
such partial acceleration of the Stock Option or each tranche of each other
stock option or equity award, the remaining unvested shares of such Stock Option
or tranche shall continue to vest as otherwise provided in the grant.
For the purposes of this Agreement, "Change of Control" is defined as:
(a) Any "person", other than one of the current Co-CEO's of the Company
(as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act
of 1934, as amended) becomes the "beneficial owner" (as defined in Rule 13d-3
under said Act), directly or indirectly, of securities of the Company
representing 35% or more of the total voting power represented by the Company's
then outstanding voting securities; or
(b) A change in the composition of the Board occurring within a two-year
period, as a result of which fewer than a majority of the directors are
Incumbent Directors. "Incumbent Directors" shall mean directors who either (i)
are directors of the Company as of the date hereof or (ii) are elected, or
nominated for election, to the Board with the affirmative votes of at least a
majority of the Incumbent Directors at the time of such election or nomination
(but shall not include an individual whose election or nomination is in
connection with an actual or threatened proxy contest relating to the election
of directors to the Company); or
(c) The consummation of 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) at least 50% of the total voting
power represented by the voting securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation; or
(d) The consummation of the sale or disposition by the Company of all or
substantially all of the Company's assets; or
(e) The approval by the stockholders of the Company of a plan of complete
liquidation of the Company.
F-7
6. Golden Parachute Excise Tax Gross-Up.
(a) In the event that Executive shall become entitled to payments and/or
benefits provided by this Agreement or any other amounts in the "nature of
compensation" (whether pursuant to the terms of this Agreement or any other
plan, arrangement or agreement with the Company, any person whose actions result
in a change of ownership or effective control covered by Section 280G(b)(2) of
the Code or any person affiliated with the Company or such person) as a result
of such change in ownership or effective control (collectively the "Company
Payments"), and such Company Payments will be subject to the tax (the "Excise
Tax") imposed by Section 4999 of the Code (and any similar tax that may
hereafter be imposed by any taxing authority) the Company shall pay to Executive
at the time specified in paragraph (d) below an additional amount (the "Gross-up
Payment") such that the net amount retained by Executive, after deduction of any
Excise Tax on the Company Payments and any U.S. federal, state, and/or local
income or payroll tax upon the Gross-up Payment provided for by this paragraph
(a), but before deduction for any U.S. federal, state, and local income or
payroll tax on the Company Payments, shall be equal to the Company Payments.
(b) For purposes of determining whether any of the Company Payments and
Gross-up Payments (collectively the "Total Payments") will be subject to the
Excise Tax and the amount of such Excise Tax, (i) the Total Payments shall be
treated as "parachute payments" within the meaning of Section 280G(b)(2) of the
Code, and all "parachute payments" in excess of the "base amount" (as defined
under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise
Tax, unless and except to the extent that, in the opinion of the Company's
independent certified public accountants appointed prior to any change in
ownership (as defined under Section 280G(b)(2) of the Code) or tax counsel
selected by such accountants (the "Accountants") such Total Payments (in whole
or in part) either do not constitute "parachute payments," represent reasonable
compensation for services actually rendered within the meaning of Section
280G(b)(4) of the Code in excess of the "base amount" or are otherwise not
subject to the Excise Tax, and (ii) the value of any non-cash benefits or any
deferred payment or benefit shall be determined by the Accountants in accordance
with the principles of Section 280G of the Code.
(c) For purposes of determining the amount of the Gross-up Payment,
Executive shall be deemed to pay U.S. federal income taxes at the highest
marginal rate of U.S. federal income taxation in the calendar year in which the
Gross-up Payment is to be made and state and local income taxes at the highest
marginal rate of taxation in the state and locality of Executive's residence for
the calendar year in which the Company Payment is to be made, net of the maximum
reduction in U.S. federal income taxes which could be obtained from deduction of
such state and local taxes if paid in such year. In the event that the Excise
Tax is subsequently determined by the Accountants to be less than the amount
taken into account hereunder at the time the Gross-up Payment is made, Executive
shall repay to the Company, at the time that the amount of such reduction in
Excise Tax is finally determined, the portion of the prior Gross-up Payment
attributable to such reduction (plus the portion of the Gross-up Payment
attributable to the Excise Tax and U.S. federal, state and local income tax
imposed on the portion of the Gross-up Payment being repaid by Executive if such
repayment results in a reduction in Excise Tax or a U.S. federal, state and
local income tax deduction), plus interest on the amount of such repayment at
the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the
foregoing, in the event any portion of the Gross-up Payment to be refunded to
the Company has been paid to any U.S. federal, state and local tax authority,
repayment thereof (and related amounts) shall not be required until actual
refund or credit of such portion has been made to Executive, and interest
payable to the Company shall not exceed the interest received or credited to
Executive by such tax authority for the period it held such portion. Executive
and the Company shall mutually agree upon the course of action to be pursued
(and the method of allocating the expense thereof) if Executive's claim for
refund or credit is denied.
F-8
In the event that the Excise Tax is later determined by the Accountant or
the Internal Revenue Service to exceed the amount taken into account hereunder
at the time the Gross-up Payment is made (including by reason of any payment the
existence or amount of which cannot be determined at the time of the Gross-up
Payment), the Company shall make an additional Gross-up Payment in respect of
such excess (plus any interest or penalties payable with respect to such excess)
at the time that the amount of such excess is finally determined.
(d) The Gross-up Payment or portion thereof provided for in paragraph (c)
above shall be paid not later than the thirtieth (30th) day following an event
occurring which subjects Executive to the Excise Tax; provided, however, that if
the amount of such Gross-up Payment or portion thereof cannot be finally
determined on or before such day, the Company shall pay to Executive on such day
an estimate, as determined in good faith by the Accountant, of the minimum
amount of such payments and shall pay the remainder of such payments (together
with interest at the rate provided in Section 1274(b)(2)(B) of the Code),
subject to further payments pursuant to paragraph (c) hereof, as soon as the
amount thereof can reasonably be determined, but in no event later than the
ninetieth (90th) day after the occurrence of the event subjecting Executive to
the Excise Tax. In the event that the amount of the estimated payments exceeds
the amount subsequently determined to have been due, such excess shall
constitute a loan by the Company to Executive, payable on the fifth (5th) day
after demand by the Company (together with interest at the rate provided in
Section 1274(b)(2)(B) of the Code).
(e) In the event of any controversy with the Internal Revenue Service (or
other taxing authority) with regard to the Excise Tax, Executive shall permit
the Company to control issues related to the Excise Tax (at its expense),
provided that such issues do not potentially materially adversely affect
Executive, but Executive shall control any other issues. In the event the issues
are interrelated, Executive and the Company shall in good faith cooperate so as
not to jeopardize resolution of either issue, but if the parties cannot agree
Executive shall make the final determination with regard to the issues. In the
event of any conference with any taxing authority as to the Excise Tax or
associated income taxes, Executive shall permit the representative of the
Company to accompany Executive, and Executive and Executive's representative
shall cooperate with the Company and its representative.
(f) The Company shall be responsible for all charges of the Accountant.
F-9
(g) The Company and Executive shall promptly deliver to each other copies
of any written communications, and summaries of any verbal communications, with
any taxing authority regarding the Excise Tax covered by this Section 6.
7. Non-Compete; Non-Solicit.
(a) The parties hereto recognize that Executive's services are special and
unique and that the level of compensation and the provisions herein for
compensation under Section 3 are partly in consideration of and conditioned upon
Executive's not competing with the Company, and that Executive's covenant not to
compete or solicit as set forth in this Section 7 during and after employment is
essential to protect the business and good will of the Company.
(b) Executive agrees that during the term of employment with the Company
and for a period of twenty-four (24) months thereafter (the "Covenant Period"),
Executive shall not render services for any of the up to three (3) organizations
designated by the Board in a writing delivered to Executive within thirty (30)
days after the Effective Date (the "Prohibited List"). The Prohibited List may
be changed by the Board from time to time (but there may never be more than
three (3) entities listed) by written notice to Executive, such notice to be
effective only if Executive's commencement of rendering services for such entity
is ninety (90) or more days after the giving of such notice. The scope of the
non-competition clause under any equity plan, benefit plan or other plan,
agreement or arrangement of the Company shall not be deemed to prohibit
Executive's actions or, except as provided in Section 4(c) of this Agreement or
pursuant to a provision in a Company plan or grant agreement that precludes
future vesting or exercisability at the time competition is entered into, serve
as a basis for any reduction or forfeiture of benefits or payments thereunder
unless such actions violate this Section 7(b) of this Agreement.
(c) During the Covenant Period, Executive shall not, directly or
indirectly, disrupt, damage or interfere with the operation or business of the
Company by soliciting or recruiting its employees for Executive or others, but
the foregoing shall not prevent Executive from giving references.
(d) Executive agrees that the Company would suffer an irreparable injury
if Executive was to breach the covenants contained in Sections 7(b) or (c) and
that the Company would by reason of such breach or threatened breach be entitled
to injunctive relief in a court of competent jurisdiction and Executive hereby
stipulates to the entering of such injunctive relief prohibiting Executive from
engaging in such breach.
(e) If any of the restrictions contained in this Section 7 shall be deemed
to be unenforceable by reason of the extent, duration or geographical scope or
other provisions thereof, then the parties hereto contemplate that the court
shall reduce such extent, duration, geographical scope or other provision hereof
and enforce this Section 7 in its reduced form for all purposes in the manner
contemplated hereby.
F-10
8. Assignment. This Agreement shall be binding upon and inure to the benefit
of (a) the heirs, beneficiaries, executors and legal representatives of
Executive upon Executive's death and (b) any successor of the Company, provided
that any successor shall within ten (10) days of such assumption deliver to
Executive a written assumption in a form reasonably acceptable to Executive. Any
such successor of the Company shall be deemed substituted for the Company under
the terms of this Agreement for all purposes. As used herein, "successor" shall
mean any person, firm, corporation or other business entity which at any time,
whether by purchase, merger or otherwise, directly or indirectly acquires all or
substantially all of the assets or business of the Company. Notwithstanding such
assignment, the Company shall remain, with such successor, jointly and severally
liable for all of its obligations hereunder. This Agreement may not otherwise be
assigned by the Company.
None of the rights of Executive to receive any form of compensation
payable pursuant to this Agreement shall be assignable or transferable except
through a testamentary disposition or by the laws of descent and distribution
upon the death of Executive or as provided in Section 18 hereof. Any attempted
assignment, transfer, conveyance or other disposition (other than as aforesaid)
of any interest in the rights of Executive to receive any form of compensation
hereunder shall be null and void; provided, however, that notwithstanding the
foregoing, Executive shall be allowed to transfer vested shares subject to the
Stock Option or other stock options or equity awards and vested Restricted Stock
consistent with the rules for transfers to "family members" as defined in
Securities Act Form S-8.
9. Liability Insurance.
(a) The Company shall cover Executive under directors and officers
liability insurance both during and, while potential liability exists, after the
Employment Term in the same amount and to the same extent, if any, as the
Company covers its other officers and directors.
(b) The Company shall during and after the Employment Term indemnify and
hold harmless Executive to the fullest extent permitted by applicable law with
regard to actions or inactions taken by Executive in the performance of his
duties as an officer, director and employee of the Company and its affiliates or
as a fiduciary of any benefit plan of the Company and its affiliates.
10. Payment of Legal Fees. The Company shall pay Executive's reasonable legal
and financial consulting fees and costs associated with entering into this
Agreement.
11. Notices. All notices, requests, demands and other communications called
for hereunder shall be in writing and shall be deemed given if (a) delivered
personally or by facsimile, (b) one (1) day after being sent by Federal Express
or a similar commercial overnight service, or (c) three (3) days after being
mailed by registered or certified mail, return receipt requested, prepaid and
addressed to the parties or their successors in interest at the following
addresses, or at such other addresses as the parties may designate by written
notice in the manner aforesaid:
If to the Company: Cryptometrics, Inc.
199 Read Avenue
Crestwood, NY 10707
Attn: Co-CEO other than Executives
If to Executive: at the last residential address known by
the Company.
F-11
12. Severability. In the event that any provision hereof becomes or is
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision.
13. Entire Agreement. This Agreement represents the entire agreement and
understanding between the Company and Executive concerning Executive's
employment relationship with the Company, and supersedes and replaces any and
all prior agreements and understandings concerning Executive's employment
relationship with the Company entered into prior to the date hereof but not any
written agreements entered into simultaneous with this Agreement or thereafter.
14. Arbitration.
(a) Agreement. The Company and Executive agree that any dispute or
controversy arising out of, relating to, or in connection with this Agreement,
or the interpretation, validity, construction, performance, breach, or
termination thereof shall be settled by binding arbitration to be held in White
Plains, New York or such other location agreed by the parties hereto, in
accordance with the National Rules for the Resolution of Employment Disputes
then in effect of the American Arbitration Association. The arbitrator may grant
injunctions or other relief in such dispute or controversy. The decision of the
arbitrator shall be final, conclusive and binding on the parties to the
arbitration. Judgment may be entered on the arbitrator's decision in any court
having jurisdiction.
(b) Governing Law. The arbitrators shall apply New York law to the merits
of dispute or claim, without reference to rules of conflicts of law. Executive
and the Company hereby expressly consent to the personal jurisdiction of the
state and federal courts located in New York for any action or proceeding
arising from or relating to this Agreement or relating to any arbitration in
which the parties are participants.
(c) Costs and Fees of Arbitration. Executive shall pay the initial
arbitration filing fee (not to exceed $200), and the Company shall pay the
remaining costs and expenses of such arbitration (unless Executive requests that
each party pay one-half of the costs and expenses of such arbitration or unless
otherwise required by law). Unless otherwise required by law or pursuant to an
award by the arbitrator, the Company and Executive shall each pay separately its
or his counsel fees and expenses. Notwithstanding the foregoing, the arbitrator
may, but need not, award the prevailing party in any dispute its or his legal
fees and expenses.
16. No Oral Modification, Cancellation or Discharge. This Agreement may only
be amended, canceled or discharged in writing signed by Executive and an
executive officer of the Company.
17. Survivorship. The respective rights and obligations of Company and
Executive hereunder shall survive any termination of Executive's employment
hereunder to the extent necessary for the preservation of such rights and
obligations.
F-12
18. Beneficiaries. Executive shall be entitled, to the extent permitted under
any applicable law, to select and change the beneficiary or beneficiaries to
receive any compensation or benefit payable hereunder upon his death by giving
the Company written notice thereof. If Executive dies, severance then due or
other amounts due hereunder shall be paid to his designated beneficiary or
beneficiaries or, if none are designated or none survive Executive, his estate.
19. Withholding. The Company shall be entitled to withhold, or cause to be
withheld, any amount of federal, state, city or other withholding taxes required
by law with respect to payments made to Executive in connection with his
employment hereunder.
20. Governing Law. This Agreement shall be governed by the laws of the State
of New York, without reference to rules of conflicts of law.
21. Effective Date. This Agreement is effective on the earlier to occur of the
date on which a public offering for cash of the common stock of the Company
(other than an offering of common stock pursuant to a stock option plan for the
benefit of the employees of the Company) registered pursuant to the Securities
Act of 1933, as amended, and the regulations thereunder closes or the closing
date of a transaction in which the Company merges into or consolidates with
another company and the Common Stock of the Company is exchanged for the common
stock of another company which is registered pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended. The date on which this Agreement is
effective is referred to herein as the "Effective Date". This Agreement shall be
null and void if the Effective Date shall not have occurred on or before
September 30, 2011.
22. Counterparts. This Agreement may be executed in counterparts, and each
counterpart when so executed shall have the same force and effect as an original
and shall constitute an effective, binding agreement on the part of each of the
undersigned, and such counterparts together will constitute one instrument.
IN WITNESS WHEREOF, the undersigned have executed this Agreement:
CRYPTOMETRICS, INC.
By: ______________________________
EXECUTIVE
_________________________________
Address:
_________________________________
_________________________________
F-13
Exhibit A
Form of
OPTION AGREEMENT
Option Agreement dated __________________, 200__ between ____________, an
individual person having an address at _________________________, (the
"Optionee") and Cryptometrics, Inc., a Delaware corporation having an address at
199 Read Avenue, Crestwood, New York 10707 (the "Grantor").
For good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the Grantor desires to grant to Optionee the right to
purchase up to an aggregate of 325,000 shares (the "Option Shares") of the
Common Stock of Cryptometrics, Inc., a Delaware corporation, par value $.001 per
share (the "Stock") on the terms and conditions hereinafter provided.
NOW, THEREFORE, the parties hereto agree as follows:
1. Grant of Option: The Grantor hereby grants to the Optionee the option to
purchase up to an aggregate of 325,000 shares (the "Option Shares") of the Stock
(such number being subject to adjustment as provided in paragraph 5 hereof) on
the terms and conditions set forth herein (the "Option").
2. Exerciseability of the Option. Subject to accelerated vesting as set
forth in the Employment Agreement between the Grantor and the Grantee made as of
the first day of May, 2005 (the "Employment Agreement"), the Stock Option shall
vest as to 25% of the shares originally subject to it on each anniversary of the
date of this Stock Option Agreement, so as to be 100% vested on the fourth
anniversary thereof. Each such installment shall be cumulative, but each
exercise must encompass at least one installment or 100 shares, whichever is
less. In the event the Grantee's exercise includes a fractional share, the
Corporation will not be required to issue a fractional share but will pay the
Grantee in cash the value of such fraction. All unexercised rights shall lapse
and forever terminate after the expiration of ten years from the date of this
Agreement. The Optionee or its designated successors or assigns may exercise the
Option in whole or in part at any time after the date hereof during the term of
the Option set forth in paragraph 2 hereof.
F-14
3. Term. Subject to earlier termination as set forth in the Employment
Agreement, the unexercised portion of the Option shall automatically and without
notice terminate and become null and void at 12:00 a.m. New York time on the
tenth (10th) anniversary of the date hereof.
4. Purchase Price. The purchase price of the Option Shares shall be $.01 per
share.
5. Adjustments Upon Changes in Capitalization. In the event of changes in the
Stock by reason of stock dividends, split-ups, recapitalizations, mergers,
consolidations, combinations or exchanges of shares, separations,
reorganizations, or liquidation occurring after or as of the date hereof, the
number of Option Shares and the purchase price for the Option Shares shall be
proportionately adjusted.
6. Method of Exercising Option. Subject to the terms and conditions of this
option Agreement, the Option may be exercised by written notice to the Grantor,
at its address stated above or such other location as may, from time to time, be
designated by the Grantor by written notice to Optionee. Such notice of exercise
shall state the election to exercise the Option and the number of Option Shares
that are being purchased pursuant to the Option, the Optionee's address and
shall be signed by the Optionee. Such notice shall be accompanied by payment of
the full purchase price of such Option Shares. Payment of such purchase price
shall be made by check payable to the order of the Grantor. The Grantor shall
deliver a certificate, or certificates, representing such Option Shares promptly
after the notice of exercise and payment shall have been received.
7. Binding Effect. This instrument shall be binding upon and inure to the
benefit of the parties and their respective successors and assigns.
F-15
8. Counterparts. This Agreement may be executed in counterparts, and each
counterpart shall have the same force and effect as an original and shall
constitute an effective, binding agreement on the part of each of the
undersigned, and such counterparts together will constitute one instrument.
To signify their agreement to the foregoing, the parties have executed
this instrument.
_____________________________
, Optionee
Attest: Cryptometrics, Inc., Grantor
By: _______________________ By:_____________________________
, Secretary
F-16
EXHIBIT B
RELEASE OF CLAIMS AGREEMENT
This Release of Claims Agreement ("Agreement") is made by and between
Cryptometrics, Inc. (the "Company") and _______________________ ("Executive").
WHEREAS, ________________________ was employed by the Company;
WHEREAS, the Company and Executive have entered into an Employment
Agreement made as of May 1, 2005 (the "Employment Agreement").
NOW THEREFORE, in consideration of the mutual promises made herein, the
Company and Executive (collectively referred to as "the Parties") hereby agree
as follows:
1. Termination. Executive's employment from the Company terminated on
________________.
2. Consideration. Subject to and in consideration of Executive's release
of claims as provided herein, the Company has agreed to pay Executive certain
benefits as set forth in the Employment Agreement.
3. Payment of Salary. Executive acknowledges and represents that the
Company has paid all salary, wages, bonuses, accrued vacation, commissions and
any and all other benefits due to Executive, except ___________________________.
4. Release of Claims. Executive agrees that the foregoing consideration
represents settlement in full of all outstanding obligations owed to Executive
by the Company. Executive, on behalf of himself, and his respective heirs,
family members, executors and assigns, hereby fully and forever releases the
Company and its past, present and future officers, agents, directors,
Executives, investors, shareholders, administrators, affiliates, divisions,
subsidiaries, parents, predecessor and successor corporations, and assigns,
from, and agrees not to sue or otherwise institute or cause to be instituted any
legal or administrative proceedings concerning any claim, duty, obligation or
cause of action relating to any matters of any kind, whether presently known or
unknown suspected or unsuspected, that he may possess arising from any
omissions, acts or facts that have occurred up until and including the Effective
Date of this Agreement including, without limitation,
(a) any and all claims relating to or arising from Executive's
employment relationship with the Company and the termination of that
relationship;
(b) any and all claims relating to, or arising from, Executive's right
to purchase, or actual purchase of shares of stock of the Company, including,
without limitation, any claims for fraud, misrepresentation, breach of fiduciary
duty, breach of duty under applicable state corporate law, and securities fraud
under any state of federal law:
(c) any and all claims for wrongful discharge of employment;
termination in violation of public policy; discrimination; breach of contract,
both express and implied; breach of a covenant of good faith and fair dealing,
both express and implied; promissory estoppel; negligent or intentional
infliction of emotional distress; negligent or intentional misrepresentation;
negligent or intentional interference with contract or prospective economic
advantage; unfair business practices; defamation; libel; slander; negligence;
personal injury; assault; battery; invasion of privacy; false imprisonment; and
conversion;
F-17
(d) any and all claims for violation of any federal, state or
municipal statute, including, but not limited to, Title VII of the Civil Rights
Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment
Act of 1967, the Americans with Disabilities Act of 1990, the Fair Labor
Standards Act, the Executive Retirement Income Security Act of 1974, The Worker
Adjustment and Retraining Notification Act, the California Fair Employment and
Housing Act, and Labor Code section 201, et seq. and section 970, et seq. and
all amendments to each such Act as well as the regulations issued thereunder;
(e) any and all claims for violation of the federal, or any state,
constitution;
(f) any and all claims arising out of any other laws and regulations
relating to employment or employment discrimination; and
(g) any and all claims for attorneys' fees and costs.
Executive agrees that the release set forth in this section shall be remain in
effect in all respects as a complete general release as to the matters released.
This release does not extend to any obligations under the Employment Agreement
that survive termination of Executive's employment with the Company or any
obligations incurred under this Agreement.
Notwithstanding the foregoing, this Release shall not cover Executive's rights
to payments and benefits under Section 4(c) of the Employment Agreement,
Executive's rights under Section 4(e), 6.9 or 14 of the Employment Agreement,
Executive's rights to indemnification under the By-laws or Certificate of
Incorporation of the Company or any other rights to indemnification or
Executive's rights with regard to any equity or stock option granted or under
any benefit plan.
5. Acknowledgement of Waiver of Claims under ADEA. Executive acknowledges
that he is waiving and releasing any rights he may have under the Age
Discrimination in Employment Act of 1967 ("ADEA") and that this waiver and
release is knowing and voluntary. Executive and the Company agree that this
waiver and release does not apply to any rights or claims that may arise under
the ADEA after the Effective Date of this Agreement. Executive acknowledges that
the consideration given for this waiver and release Agreement is in addition to
anything of value to which Executive was already entitled. Executive further
acknowledges that he has been advised by this writing that (a) he should consult
with an attorney prior to executing this Agreement; (b) he has at least
twenty-one (21) days within which to consider this Agreement; (c) he has seven
(7) days following the executing of this Agreement by the parties to revoke the
Agreement; and (d) this Agreement shall not be effective until the revocation
period has expired. Any revocation should be in writing and delivered to the
Company at Cryptometrics, Inc., 199 Read Avenue, Valhalla, New York 10595, by
close of business on the seventh day from the date that Executive signs this
Agreement.
F-18
6. No Pending or Future Lawsuits. Executive represents that he has no
lawsuits, claims, or actions pending in his name, or on behalf of any other
person or entity, against the Company or any other person or entity referred to
herein. Executive also represents that he does not intend to bring any claims on
his own behalf or on behalf of any other person or entity against the Company or
any other person or entity referred to herein with regard to matters released
hereunder.
7. Costs. The Parties shall each bear their own costs, expert fees,
attorneys' fees and other fees incurred in connection with this Agreement.
8. Authority. Executive represents and warrants that he has the capacity
to act on his own behalf and on behalf of all who might claim through him to
bind them to the terms and conditions of this Agreement.
9. No Representations. Executive represents that he has had the
opportunity to consult with an attorney, and has carefully read and understands
the scope and effect of the provisions of this Agreement. Neither party has
relied upon any representations or statements made by the other party hereto
which are not specifically set forth in this Agreement.
10. Severability. In the event that any provision hereof becomes or is
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision.
11. Entire Agreement. This Agreement and the Employment Agreement and the
agreements and plans referenced therein represent the entire agreement and
understanding between the Company and Executive concerning Executive's
separation from the Company, and supersede and replace and all prior agreements
and understandings concerning Executive's relationship with the Company and his
compensation by the Company. This Agreement may only be amended in writing
signed by Executive and an executive officer of the Company.
12. Governing Law. This Agreement shall be governed by the internal
substantive laws, but not the choice of law rules, of the State of New York.
13. Effective Date. This Agreement is effective eight (8) days after it
has been signed by both Parties.
14. Counterparts. This Agreement may be executed in counterparts, and each
counterpart when so executed shall have the same force and effect as an original
and shall constitute an effective, binding agreement on the part of each of the
undersigned, and such counterparts together will constitute one instrument.
15. Voluntary Execution of Agreement. This Agreement is executed
voluntarily and without any duress or undue influence on the part or behalf of
the Parties hereto, with the full intent of releasing all claims. The Parties
acknowledge that:
(a) They have read this Agreement;
F-19
(b) They have been represented in the preparation, negotiation, and
execution of this Agreement by legal counsel of their own choice or that they
have voluntarily declined to seek such counsel;
(c) They understand the terms and consequences of this Agreement and
of the releases it contains;
(d) They are fully aware of the legal and binding effect of the
Agreement.
IN WITNESS WHEREOF, the Parties have executed this Agreement on the
respective dates set forth below.
CRYPTOMETRICS, INC.
Dated: _________, ____ By______________________
________________________, an
Individual
Dated: ________, ____ ________________________
F-20
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 78.751 of Chapter 78 of the Nevada Revised Statutes and JAG
Media's Bylaws contain provisions for indemnification of officers and directors
of JAG Media and in certain cases employees and other persons. JAG Media's
Bylaws provide that JAG Media will indemnify any person who was or is a party or
is threatened to be made a party to any proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of JAG
Media) by reason of the fact that such person is or was a director, trustee,
officer, employee or agent of JAG Media, or is or was serving at the request of
JAG Media as a director, trustee, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgment, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of JAG Media, and with respect to any criminal action or proceeding,
had no reasonable cause to believe such person's conduct was unlawful.
In accordance with JAG Media's Bylaws, the termination of any action,
suit or proceeding by judgment, order, settlement, conviction, or upon a plea of
nolo contendere or its equivalent, will not, of itself, create a presumption
that the person did not act in good faith and in a manner which such person
reasonably believed to be in or not opposed to the best interests of JAG Media,
and with respect to any criminal action proceeding, had reasonable cause to
believe that such person's conduct was unlawful.
JAG Media's Bylaws also provide that JAG Media will indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of JAG Media
to procure a judgment in JAG Media's favor by reason of the fact that such
person is or was a director, trustee, officer, employee or agent of JAG Media,
or is or was serving at the request of JAG Media as a director, trustee,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorney's fees) and
amount paid in settlement actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit if such person
acted in good faith and in a manner such person reasonably believed to be in or
not opposed to the best interests of JAG Media, and, with respect to amounts
paid in settlement, the settlement of the suit or action was in the best
interests of JAG Media. No indemnification will be made, however, in respect of
any claim, issue or matter as to which such person has been adjudged to be
liable for gross negligence or willful misconduct in the performance of such
person's duty to JAG Media unless and only to the extent that, the court in
which such action or suit was brought determines upon application that, despite
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses as such court deems proper. The termination of any
action or suit by judgment or settlement will not, of itself, create a
presumption that the person did not act in good faith and in a manner which such
person reasonably believed to be in or not opposed to the best interests JAG
Media.
To the extent that a director, trustee, officer, employee or agent of
JAG Media has been successful on the merits or otherwise, in whole or in part in
defense of any action, suit or proceeding made by a third party or JAG Media,
such person will be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection with such claims.
II-1
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
Exhibit No. Description
- ------------- ---------------------------------------------------------
2.1 Agreement and Plan of Reorganization dated March 16, 1999
between Professional Perceptions, Inc. (now known as
JagNotes.com Inc.); Harold Kaufman, Jr., an officer,
director and principal stockholder thereof; NewJag, Inc.;
and the stockholders of NewJag, Inc. (1)
2.2 Agreement and Plan of Merger dated as of July 29, 1999 by
and among JagNotes, Inc., a New Jersey corporation, and
JagNotes.com, Inc., a Nevada corporation. (2)
2.3 Agreement and Plan of Merger by and among JAG Media
Holdings, Inc., Cryptometrics Acquisition, Inc. and
Cryptometrics, Inc. dated as of December 27, 2005 (31)
3.1 Articles of Incorporation of JAG Media, as amended. (2)
3.2 Certificate of Amendment to Articles of Incorporation of
JAG Media as filed with the Secretary of State of the
State of Nevada on April 8, 2002. (9)
3.3 Certificate of Amendment to Articles of Incorporation as
filed with the Secretary of State of the State of Nevada
on March 1, 2005. (27)
3.4 Certificate of Designation of the Series 2 Class B Common
Stock. (16)
3.5 Certificate of Designation of the Series 3 Class B Common
Stock. (19)
3.6 Certificate of Amendment to Articles of Incorporation of
JAG Media as filed with the Secretary of State of the
State of Nevada on June 4, 2004. (24)
3.7 Bylaws of JAG Media. (2)
3.8 Amendment to Bylaws of JAG Media. (13)
3.9 Amendment to Bylaws of JAG Media. (27)
4.1 Stock Option to acquire 500,000 shares of Common Stock
granted to Strategic Growth International, Inc. on March
14, 2000. (3)
4.2 Promissory Note, dated April 1, 2002 in the amount of
$200,000 issued to Thomas J. Mazzarisi. (9)
4.3 Promissory Note, dated April 1, 2002 in the amount of
$200,000 issued to Stephen J. Schoepfer. (9)
4.4 Amendment, dated June 26, 2002, to Promissory Note, dated
April 1, 2002 in the amount of $200,000 issued to Thomas
J. Mazzarisi. (10)
4.5 Amendment, dated June 26, 2002, to Promissory Note, dated
April 1, 2002 in the amount of $200,000 issued to Stephen
J. Schoepfer. (10)
4.6 Amendment, dated August 15, 2002, to Promissory Note,
dated April 1, 2002 in the amount of $200,000 issued to
Thomas J. Mazzarisi. (11)
4.7 Amendment, dated August 15, 2002, to Promissory Note,
dated April 1, 2002 in the amount of $200,000 issued to
Stephen J. Schoepfer. (11)
4.8 Amendment, dated January 31, 2003 to Promissory Note,
dated April 1, 2002 in the amount of $200,000 issued to
Thomas J. Mazzarisi. (15)
4.9 Amendment, dated January 31, 2003, to Promissory Note,
dated April 1, 2002 in the amount of $200,000 issued to
Stephen J. Schoepfer. (15)
4.10 Amendment, dated March 31, 2003, to Promissory Note,
dated April 1, 2002 in the amount of $200,000 issued to
Thomas J. Mazzarisi. (17)
4.11 Amendment, dated March 31, 2003, to Promissory Note,
dated April 1, 2002 in the amount of $200,000 issued to
Stephen J. Schoepfer. (17)
4.12 Amendment, dated October 14, 2003, to Promissory Note,
dated April 1, 2002 in the amount of $200,000 issued to
Thomas J. Mazzarisi. (18)
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4.13 Amendment, dated October 14, 2003, to Promissory Note,
dated April 1, 2002 in the amount of $200,000 issued to
Stephen J. Schoepfer. (18)
4.14 Amendment, dated December 12, 2003, to Promissory Note,
dated April 1, 2002 in the amount of $200,000 issued to
Thomas J. Mazzarisi. (20)
4.15 Amendment, dated December 12, 2003, to Promissory Note,
dated April 1, 2002 in the amount of $200,000 issued to
Stephen J. Schoepfer. (20)
4.16 Amendment, dated as of January 31, 2004, to Promissory
Note, dated April 1, 2002 in the amount of $200,000
issued to Thomas J. Mazzarisi. (22)
4.17 Amendment, dated as of January 31, 2004, to Promissory
Note, dated April 1, 2002 in the amount of $200,000
issued to Stephen J. Schoepfer. (22)
4.18 Form of Common Stock Certificate. (31)
4.19 Form of Series 2 Class B Stock Certificate. (31)
5.1 * Opinion of Jones Vargas
8.1 * Tax Opinion of Morgan, Lewis & Bockius LLP
10.1 Amended and Restated Employment Agreement, dated August
31, 2001, by and between Thomas J. Mazzarisi and JAG
Media. (6)
10.2 Amended and Restated Employment Agreement, dated August
31, 2001, by and between Stephen J. Schoepfer and JAG
Media. (6)
10.3 Amendment to Amended and Restated Employment Agreement,
dated as of November 3, 2005, by and between JAG Media
and Thomas J. Mazzarisi. (31)
10.4 Amendment to Amended and Restated Employment Agreement,
dated as of November 3, 2005, by and between JAG Media
and Stephen J. Schoepfer. (31)
10.5 Equity Line Purchase Agreement dated as of April 9, 2002,
by and between JAG Media and Cornell Capital Partners,
L.P. (8)
10.6 Registration Rights Agreement, dated as of April 9, 2002,
by and among JAG Media, Cornell Capital Partners, L.P.,
and Westrock Advisors, Inc. (8)
10.7 Placement Agent Agreement, dated as of April 9, 2002, by
and among JAG Media, Cornell Capital Partners, L.P., and
Westrock Advisors, Inc. (8)
10.8 Waiver of Section 5.5 of Equity Line Purchase Agreement,
dated June 18, 2002, executed by Cornell Capital
Partners, L.P. (10)
10.9 Consulting Agreement, dated June 12, 2002, between JAG
Media and Walsh Organization, Inc. (18)
10.10 Power of Attorney and Contingent Fee Contract, dated June
14, 2002, among JAG Media, Gary Valinoti and the Law Firm
of O'Quinn, Laminack & Pirtle. (18)
10.11 Subscription Agreement, dated December 10, 2002, between
JAG Media and Bay Point Investment Partners LLC. (12)
10.12 Placement Agent Agreement, dated December 10, 2002,
between JAG Media and RMC 1 Capital Markets, Inc. (12)
10.13 Placement Agent Agreement, dated as of June 19, 2003,
between JAG Media and RMC 1 Capital Markets, Inc., as
amended on August 12, 2003. (18)
10.14 Subscription Agreement, dated as of June 19, 2003,
between JAG Media and Bay Point Investment Partners LLC,
as amended on August 12, 2003. (19)
10.15 Asset Purchase Agreement dated August 12, 2003 by and
among JAG Media, Vertex Interactive, Inc., XeQute
Solutions PLC and XeQute Solutions, Inc. (19)
10.16 Subscription Agreement, dated as of September 25, 2003,
between JAG Media and Kuekenhof Equity Fund L.P. (19)
10.17 Finder's Fee Agreement, dated as of January 5, 2004,
between JAG Media and Flow Capital Advisors, Inc. (21)
10.18 Separation Agreement, dated April 2, 2004, between JAG
Media and Gary Valinoti. (23)
10.19 Letter Agreement, dated July 8, 2004, amending the Equity
Line Purchase Agreement, dated as of April 9, 2002, by
and between JAG Media and Cornell Capital Partners, L.P.
(25)
II-3
10.20 Letter Agreement, dated July 21, 2004, amending the
Equity Line Purchase Agreement, dated as of April 9,
2002, by and between JAG Media and Cornell Capital
Partners, L.P. (25)
10.21 Business Sale Agreement dated November 24, 2004, by and
among TComm Limited, TComm (UK) Limited and JAG Media.
(26)
10.22 Promissory Note, dated January 25, 2005 by and between
Cornell Capital Partners, L.P. and JAG Media. (28)
10.23 Letter Agreement, dated August 5, 2005, extending
maturity date of Promissory Note dated January 25, 2005,
by and between JAG Media and Cornell Capital Partners.
(29)
10.24 Company Voting and Lock Up Agreement dated as of December
27, 2005 by and among JAG Media, Robert Barra, Michael
Vitale and Cryptometrics, Inc. (32)
10.25* Affiliate Agreement dated as of December 27, 2005 by and
between JAG Media and Robert Barra
10.26* Affiliate Agreement dated as of December 27, 2005 by and
between JAG Media and Michael A. Vitale
10.27* Affiliate Agreement dated as of December 27, 2005 by and
between JAG Media and Joel Shaw
21.1 Subsidiaries of JAG Media. (31)
23.1** Consent of J.H. Cohn LLP.
23.2** Consent of Seligson & Giannattasio, LLP.
23.3* Consent of Jones Vargas (Included in Opinion of Jones
Vargas)
23.4* Consent of Morgan, Lewis & Bockius LLP (Included in
Opinion of Morgan, Lewis & Bockius LLP)
99.1 Articles of Merger of JagNotes, Inc. into JagNotes.com,
Inc. dated July 29, 1999 (including Certificate of
Correction related thereto.) (2)
99.2 Letter of Intent, dated January 17, 2004, by and among
JAG Media, Great Eastern Securities, Inc. and the
stockholders of Great Eastern Securities, Inc. (21)
99.3 Letter of Intent, dated September 9, 2005, by and among
Cryptometrics, Inc. and JAG Media. (30)
* To be filed by amendment.
**Filed herewith.
(1) Incorporated by reference to JAG Media's Registration Statement on Form
SB-2 filed on July 30, 1999.
(2) Incorporated by reference to Amendment No. 1 to JAG Media's
Registration Statement on Form SB-2 filed on September 30, 1999.
(3) Incorporated by reference to JAG Media's Quarterly Report on Form
10-QSB filed on June 16, 2000.
(4) Incorporated by reference to Post-Effective Amendment No. 2 to JAG
Media's Registration Statement on Form SB-2 filed on June 22, 2000.
(5) Incorporated by reference to JAG Media's Quarterly Report on Form
10-QSB filed on December 20, 2000.
(6) Incorporated by reference to Amendment No. 1 to JAG Media's
Registration Statement on Form SB-2 filed on September 26, 2001.
(7) Incorporated by reference to JAG Media's Registration Statement on Form
S-8 filed on May 1, 2002.
(8) Incorporated by reference to JAG Media's Registration Statement on Form
SB-2 filed on May 7, 2002.
(9) Incorporated by reference to JAG Media's Form 8-K filed on April 17,
2002.
II-4
(10) Incorporated by reference to Amendment No. 2 to JAG Media's
Registration Statement on Form SB-2 filed on August 2, 2002.
(11) Incorporated by reference to JAG Media's Annual Report on Form 10-KSB
filed on November 13, 2002.
(12) Incorporated by reference to JAG Media's Registration Statement on Form
SB-2 filed on January 9, 2003.
(13) Incorporated by reference to JAG Media's Current Report on Form 8-K
filed on January 27, 2003
(14) Incorporated by reference to JAG Media's Current Report on Form 8-K
filed on February 18, 2003.
(15) Incorporated by reference to Amendment No. 1 to JAG Media's
Registration Statement on Form SB-2 filed on February 24, 2003.
(16) Incorporated by reference to JAG Media's Registration Statement on Form
8-A filed on April 10, 2003.
(17) Incorporated by reference to JAG Media's Quarterly Report on Form
10-QSB filed June 16, 2003.
(18) Incorporated by reference to JAG Media's Annual Report on Form 10-KSB
filed on November 13, 2003
(19) Incorporated by reference to JAG Media's Current Report on Form 8-K
filed on August 13, 2003.
(20) Incorporated by reference to JAG Media's Quarterly Report on Form
10-QSB filed on December 19, 2003.
(21) Incorporated by reference to JAG Media's Current Report on Form 8-K
filed on January 20, 2004.
(22) Incorporated by reference to JAG Media's Quarterly Report on Form
10-QSB filed on March 22, 2004.
(23) Incorporated by reference to JAG Media's Current Report on Form 8-K
filed on April 5, 2004.
(24) Incorporated by reference to JAG Media's Registration Statement on Form
8-A filed May 26, 2004.
(25) Incorporated by reference to JAG Media's Registration Statement on Form
SB-2 filed on August 6, 2004.
(26) Incorporated by reference to JAG Media's Quarterly Report on Form
10-QSB filed on December 20, 2004.
(27) Incorporated by reference to JAG Media's Current Report on Form 8-K
filed on March 7, 2005.
(28) Incorporated by reference to JAG Media's Current Report on Form 8-K
filed on February 3, 2005.
(29) Incorporated by reference to JAG Media's Current Report on Form 8-K
filed on August 9, 2005.
(30) Incorporated by reference to JAG Media's Current Report on Form 8-K
filed on September 14, 2005.
(31) Incorporated by reference to JAG Media's Annual Report on Form 10-KSB
filed on November 8, 2005.
(32) Incorporated by reference to JAG Media's Current Report on Form 8-K
filed on December 30, 2005
(b) Financial Statement Schedules.
Schedules are omitted because they either are not required or are not
applicable or because equivalent information has been included in the financial
statements, the notes thereto or elsewhere herein.
II-5
(c) Reports, Opinions and Appraisals.
No independent investment bank or other professional has been retained
to issue an opinion with respect to the fairness of the exchange ratio of JAG
Media Common Stock and Cryptometrics Common Stock to either JAG Media
stockholders or Cryptometrics stockholders. The ratio was reached through
negotiation by the two companies and was found fair to the stockholders of JAG
Media solely by its Board of Directors and fair to the stockholders of
Cryptometrics solely by its Board of Directors.
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in the Registration Statement 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.
The undersigned Registrant undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
The Registrant undertakes that every prospectus: (i) that is filed
pursuant to the preceding paragraph, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part of
an amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment 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.
Each prospectus filed pursuant to Rule 424(b) shall be deemed to be
part of and included in the Registration Statement as of the date it is first
used after effectiveness. Provided, however, that no statement made in a
registration statement or prospectus that is part of the Registration Statement
or made in a document incorporated or deemed incorporated by reference into the
Registration Statement or prospectus that is part of the Registration Statement
will, as to a purchaser with a time of contract of sale prior to such first use,
supersede or modify any statement that was made in the Registration Statement or
prospectus that was part of the Registration Statement or made in any such
document immediately prior to such date of first use.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to 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 SEC 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 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.
II-6
(c) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-7
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 New York City, State of
New York, on January 13, 2006.
JAG MEDIA HOLDINGS, INC.
By: /s/ Thomas J. Mazzarisi
-----------------------------------
Name: Thomas J. Mazzarisi
Title: Chairman of the Board and Chief
Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers
and directors of JAG Media Holdings, Inc. hereby constitutes and appoints Thomas
J. Mazzarisi, his attorney-in-fact and agent, with full power of substitution
and resubstitution for him in any and all capacities, to sign any or all
amendments or post-effective amendments to this Registration Statement, and to
file the same, with exhibits thereto and other documents in connection therewith
or in connection with the registration of the shares of common stock under the
Securities Act of 1933, with the Securities and Exchange Commission, granting
unto such attorney-in-fact and agent full power and authority to do and perform
each and every act and thing requisite and necessary in connection with such
matters as fully to all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that such attorney-in-fact and agent or his
substitute may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
Name Title Date
- ---- ----- ----
/s/ Thomas J. Mazzarisi Chairman of the Board, Chief January 13, 2006
- ------------------------ Executive Officer & General
Thomas J. Mazzarisi Counsel
/s/ Stephen J. Schoepfer President, Chief Operating January 13, 2006
- ------------------------ Officer, Chief Financial Officer
Stephen J. Schoepfer Secretary & Director
II-8